Abdulmohsin Al Omran: The Modernization of the Financial Technology | SALT Talks #95

“Like any business, you have to try things, but in the digital world, you need to fail early, fail fast, and learn, and adopt technology allows you to maneuver very quickly.”

Abdulmohsin Al Omran is the founder and Chief Executive Officer of The Family Office Co. BSC(c) (“The Family Office”), and Chairman of the Board of Petiole Asset Management AG, the investment arm of The Family Office, based in Zurich, Switzerland.

Born into one of the oldest families in Riyadh, Al Omran set out from an early age to gain experience in different areas of finance with an eye on moving his country’s economy into the 21st century. Despite having 25% of the world’s oil reserves, Saudi Arabia is transitioning towards a more diversified economy that sees data as the new oil. “If I wanted to renew my passport or my driving license… I could do all this digitally … the private sector including the banks are trying to catch with what the government has been doing in the last five years.”

The next stage in Middle East development will center on the rapid modernization of the financial technology space and sovereign wealth funds made of diverse and strategic investment portfolios. This new approach is guided by the four C’s: Commitment, Client, Culture and Cost.

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SPEAKER

Abdulmohsin Al Omran

Founder & Chief Executive Officer

The Family Office

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. SALT Talks are a digital interview series that we launched during this work from home period with leading investors, creators and thinkers.

John Darsie: (00:27)
And what we're really trying to do on these SALT Talks is replicate the experience that we provide at our global SALT conferences which our guest today has been to several of those. And what we're trying to do at those conferences and on these SALT Talks is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future.

John Darsie: (00:49)
And we're very excited today to welcome Abdulmohsin Omran to SALT Talks. Abdulmohsin is the founder and Chief Executive Officer of The Family Office and the Chairman of the Board of Petiole Asset Management, which is the investment arm of The Family Office, which is based in Zurich, Switzerland. And The Family Office is an asset management company that has an increasingly digital focus, which is something that we're going to talk about today.

John Darsie: (01:14)
Prior to founding The Family Office in 2004, Abdulmohsin was part of the private wealth management team at Goldman Sachs in London. He started his career at Gulf International Bank in 1988, after which he worked in reputable financial institutions, such as the Saudi International Bank, Riyadh Bank, and Investcorp. Abdulmohsin holds a degree in Industrial Management with a Finance major from King Fahd University of Petroleum and Minerals, and an MBA from the City University in London.

John Darsie: (01:43)
He's coming to us today from beautiful Manama, Bahrain, somewhere Anthony and I have been several times over the last few years, but Abdulmohsin is also a Saudi national, so we also have great relationships in the kingdom. So looking forward to talking about the growth of industry, and the financial industry in particular, in the region, and also the exciting things that are going on at The Family Office.

John Darsie: (02:05)
Just a reminder, if you have any questions for Abdulmohsin during today's SALT Talk, you can enter them in the Q&A box at the bottom of your video screen. And hosting today's talk is Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, a global alternative investment firm. Anthony is also the chairman of SALT. And I will say, Anthony is in a little bit better mood than he was about 10 hours ago. So we're looking forward to seeing his smiling face here this morning. I won't comment further on that, but Anthony, I'll turn it over to you for the interview.

Anthony Scaramucci: (02:33)
First of all, for those of you that are listening, John Darsie has zero political judgment and zero political instincts. But enough about the feud between me and John Darsie, which started about 10:30 last night. I mean, we'll discuss it later on another SALT Talk. Abdulmohsin, where are you beaming in from? Bahrain? Where are you right now?

Abdulmohsin Al Omran: (02:54)
Yes. I'm out of our office in Bahrain.

Anthony Scaramucci: (02:58)
So Abdulmohsin, before we get started on your business and your professional career, I want to talk a little bit about the way you grew up, where you grew up, what got you into this business, why did you come into this business, and tell us something about your personal story.

Abdulmohsin Al Omran: (03:17)
Sure. I'm originally from Saudi Arabia. I grew up there. I did all my education-

Anthony Scaramucci: (03:25)
In Riyadh, Abdulmohsin?

Abdulmohsin Al Omran: (03:27)
Yes. I grew up in Riyadh. Our family is one of the oldest families in Riyadh. We are about 1500 people today, in Riyadh. And I did my high school in Riyadh, and then I moved to the Eastern Province, King Fahd University of Petroleum and Minerals and studied there. Then the bridge was being built to Bahrain and Bahrain, being the financial center in the eighties, and still an important financial center in the region. I took the opportunity to come to Bahrain.

Anthony Scaramucci: (04:01)
[crosstalk 00:04:01] I'm going to stop you there if you don't mind, because you're talking about a bridge being built by rain. So explain that Bahrain is effectively an Island, in the Arabian Gulf, and it is not too far, obviously off the coast of Saudi Arabia. And so this bridge was built to connect the two countries,

Abdulmohsin Al Omran: (04:21)
Correct, 1986.

Anthony Scaramucci: (04:24)
And this unleashed a lot of capital deployment for the Bahrainis. And it helped the Saudis as well. Explain that if you don't mind, because we have a lot of people beaming in from the United States that may not understand that relationship.

Abdulmohsin Al Omran: (04:38)
Sure. Bahrain and Saudi Arabia are part of the GCC, the Gulf council, where they are all one family. Honestly they are very close to [inaudible 00:04:53] into marriage with having two tribal [economic 00:04:57] support each other. So during the times of King Fahd, King Fahd gave the orders to build a bridge with Sheikh Isa who was the father of the current King, Hamad. And that was a very important strategic move to tighten the relationship between the two countries and allow Bahrain to be closer to the most important country in the region, which is Saudi Arabia, as you all know.

Anthony Scaramucci: (05:28)
And so now you're getting your career started. How did you end up in financial services?

Abdulmohsin Al Omran: (05:34)
Well, it's interesting. In 1988, I was sent to a firm. Maybe a lot of people don't know that firm when I mention it, a firm called Manufactures Hanover to New York. So I went to the city and got my training, corporate finance and credit analysis. Then once I got back to Bahrain, I managed to work at the clue department and I was asked to join the bond portfolio investments during the [inaudible 00:06:06] invasion of Kuwait. And from there, I got exposed to the investment world and then I moved to in different positions and different banks. And then I ended up with most important alternatives from that time, which was the pioneer of private equity distribution. And this region that was Investcorp became a partner. And as I was about to start up my own business, I got a call from Goldman Sachs. I joined Goldman Sachs for about three years. And then I said I'll go back and establish a wealth management platform. Lack of creativity, I chose The Family Office as a name.

Anthony Scaramucci: (06:47)
No, it's a great name. And it's obvious you've built an amazing brand in the region. And again, just for the people on the call, Manufacturers Hanover Bank was a great commercial bank in the United States, merged with Chase. Chase, eventually merged with Bank One and J.P. Morgan to create the colossal JP Morgan Chase that we have today. And so-

Abdulmohsin Al Omran: (07:12)
And Chemical.

Anthony Scaramucci: (07:14)
And Chemical. That's correct. And chemical bank. And so I left out one of the other big banks that was consolidated. Interestingly enough, Abdulmohsin, as you know, all of those banks were Goldman Sachs clients back in the day. Guys like John Darsie, of course, don't remember these names, but you and I are old enough to remember these names. So let me ask you this question. You're at Goldman Sachs, Goldman Sachs was still a partnership. And so tell us a little bit about the vintage era of Goldman Sachs prior to its public offer.

Abdulmohsin Al Omran: (07:49)
No, actually I was there during the time, once a post, they went public. So I joined Goldman in 2002 until 2004.

Anthony Scaramucci: (07:59)
Okay. My bad. I thought you got there in '98. So I apologize for that. So let me rephrase the question then. You were there just after the public offering, tell us about what Goldman was like 17 or 18 years ago.

Abdulmohsin Al Omran: (08:12)
Well, Goldman, as you know, it's a big tribe, very competitive, very focused on results. So I've learned a lot. Rubbed my shoulders with the smartest people in the family. Learned to be much more commercial. I've always said Goldman helped me to monetize my career. The thinking, the drive, the creativity setting up higher results oriented really made a big difference for me. And more importantly, as you know, the Goldman and the [XCOR 00:08:51] , the network, is something not to be matched.

Anthony Scaramucci: (08:56)
So let's segue into geo politics for one second.

Abdulmohsin Al Omran: (09:03)
I will ask one to know about geopolitics.

Anthony Scaramucci: (09:06)
Yeah. Well, okay. We can talk about that too, if you want. But I want to talk about the region, the Middle East. MENA. Middle East, North Africa, Saudi, Bahrain. Where you see the future, and what do you think is happening in the region? And I'll give a little bit of an editorial comment I'm having now with your help travel to Saudi Arabia many times now, I see a country that's embarking upon massive reform and massive possibilities for economic growth away from oil. And so I'm wondering if you can comment on that.

Abdulmohsin Al Omran: (09:43)
Sure. For those people who don't know Saudi Arabia, Saudi Arabia in terms of size is about two thirds of Western Europe. So from a geography, it is an important big place in the Middle East. Our neighbors are Iran from one side Iraq, Kuwait and the South Yemen. Across the Red Sea, we have South Sudan, Egypt, Jordan on the North with close proximity to Israel as well. So when you have all those neighbors, you need to make sure that you are friends with everybody and have the stability. So Saudi Arabia had always played the role of the stable leadership have, as we all know, every country experience, external internal issues, but Saudi have always managed to any of these issues very wisely and continue to ensure a very stable country.

Abdulmohsin Al Omran: (10:57)
And with the main focus on developing its own nationals. Saudi Arabia has 70% of its population today below the age of 14. Prince Hamad bin Salman vision of 2030 is spot on. He's addressing what are the needs of those people in 2030 and everything that is happening today is around what will be needed in 2030 by this young population. This young population is very important because they are very tech savvy. I'll give you an example, 500 times have studied in the United States or graduated from United state universities in the last 15 or 16 units.

Anthony Scaramucci: (11:47)
Well, I was going to tag on a question because I just think it's a fascinating thing and more so for the Americans that are listening in. Saudi oil reserves are approximately 25% of the world's oil reserves. Is that fair to say?

Abdulmohsin Al Omran: (12:07)
Sorry.

Anthony Scaramucci: (12:11)
No, I'm saying the Saudi oil reserves are approximately 25% of the world's oil reserves.

Abdulmohsin Al Omran: (12:17)
Correct.

Anthony Scaramucci: (12:17)
Okay. And yet the country is in transition away from oil. And the tech industry, as an example is saying that data is the new oil. And so I would like to get your thoughts on that as it relates to the country, Saudi Arabia, but then also tie it into the family office, your business, some of the things you're doing in terms of a massively changing the landscape for technology interface in financial services.

Abdulmohsin Al Omran: (12:45)
Let me give you an example, how advanced the Saudi government moved in terms of technology. If I wanted to renew my passport or my driving license, or I wanted to give a permit for a friend or drivers to take my car from Saudi Arabia to Bahrain, I could do all this digitally today. The Saudi government is so advanced and I have heard specialists go on and say, Saudi government, is more advanced than even the Singaporean government. And very few people understand that. And this has been a huge initiative by the Saudi government to ensure that [the wilderness 00:13:52] and this is the one of very few times that the government has really leapfrog the private sector and the technology side. Now the private sector, including the banks, are trying to do a catch up with what the government have been doing in the last five years.

Anthony Scaramucci: (13:54)
Well, tell us about the future of financial services in your mind and what your vision is for wealthy individuals in the region and how you plan to help them and how you plan to use technology to help them.

Abdulmohsin Al Omran: (14:08)
So onto me, you remember your days at Goldman, even my days at Goldman, we would never have thought that ETFs would replace algorithm trading would replace a lot of the brokerage business. Who would have ever thought the [Tropin 00:14:26] held over. E-Trade another, almost trading at zero cost. This is something that is happening today. And we will see a huge acceleration in the whole financial services industry in the coming five years. I used to think two years ago, I thought in 10 years. Today, I think it's five years if not three years. The rationalization of the industry is going to take place. We have an important inflection point. Our region is no different. People would like to get financial simplification of their lives. So anyone who would provide that financial simplification of their financial life is going to be a winner.

Abdulmohsin Al Omran: (15:15)
Today, there are a lot of individual FinTech companies that have addressed parts of the financial complexities. But there has to be yet someone to be able to put this together all the way from current account, which is digital banking to our consumer loans, to mortgages, to investments, pledging your investment for further investments for those people who want to do marketing trading and so on. Credit card, producing your taxes, your income statement and balance sheet. Can you imagine just going to one place and all that is done for you? I think we'll see this in less than five years.

Anthony Scaramucci: (16:00)
Well, I think it's amazing, which is why I wanted to bring it up to you. I'm personally blown away by the rapid modernization, if I'm even pronouncing it right. The modernity, if you will. I see Darsie laughing at me pronouncing modernization. Okay.

John Darsie: (16:20)
It's almost like you didn't get much sleep yester night. It's modernization.

Anthony Scaramucci: (16:23)
Okay. Let me, I got a [inaudible 00:16:26] and I just have to fix my eye while I'm talking to you. But the entrepreneurship, the modernity and the country, because I can't pronounce modernization because I'm exhausted. Let's talk a little bit about those two things. And how has the region been successful in creating this new technology ecosystem?

Abdulmohsin Al Omran: (16:47)
Well, as I said, the governments in this region have focused into how do they improve the quality of lives of people in these countries. While other countries around us have spent most of their money on weapons or financing the wrong people, our countries have really invested in its own nation. And we have seen the sovereign wealth funds building very important strategic portfolios that will enable us to continue doing that. In addition, it has taken the lead, as I said, in creating a platform that makes it easier for businesses to do that. So I'll give you an example. By the end of this month, we will be able to onboard clients in Saudi Arabia, all digitally with seven clicks. Can you imagine the whole KYC is done digitally?

Anthony Scaramucci: (17:46)
Well? Yeah. I mean to me, it's fascinating before I turn it over to John, because we've got a ton of questions coming in from the audience participation. I want to ask you about NEOM and what your thoughts are there. And just for our American listeners, NEOM is a brand new project from Prince MBS, talking about building a $600 billion city, sort of in the Northeast quadrant up alongside the red sea in Saudi Arabia. This would be a city of the future. And it would be a city that I think would transform Saudi Arabia for that matter. And I just wondered if you could give us your thoughts and opinion on that and where you see that development going.

Abdulmohsin Al Omran: (18:32)
Yeah. You know, for most people, when they hear these projects, they think it's a [Samanage 00:18:40] for us. It isn't because we do, we did live what happened in this region. I'll give you an example about 70 miles away from where I'm sitting today, there a city called Jubail. So if you went there in the seventies, it's just dessert next to the sea. Today, Jubail is the world largest petrochemical complex in the world with that produces about 8% of the petrochemicals in the world. Okay. [inaudible 00:19:17] which is the largest oil exporter. So no one can imagine what takes place over the 20, 30 years and this future. So NEOM it's a tragic location. The vision of Prince Hamad bin Salman is going to be realized. Are we going to realize it few years earlier? A few years later? I don't know, but it will happen. I assure you. I've seen a lot of visions in this region, I've got executed, and these are going to be a game changer for the region.

Anthony Scaramucci: (19:55)
My last question, before I turn it over to John, the UAE and Bahrain, as well as Saudi Arabia have maintained a very good relation with the United States, but they are also increasingly looking to the East to develop good commercial ties to China. What do you, in the middle East, see the position of the middle East, I should say, what do you see it in terms of the evolving world order and how would you like to see it?

Abdulmohsin Al Omran: (20:24)
Well, in 2005, so it was my first time to go to China. And I visited with our dear friend, David Dusk. In 2007, I took 30 of my investors to China. And then we repeated the stroke twice in 2009, 2010. And all of them said, wow, all this has taken place without us seeing. I remember took them to [10 cents as 00:20:25] an example with [inaudible 00:20:54] as well. And everybody thought it's expensive and they'd missed it.

Abdulmohsin Al Omran: (20:58)
But look where we are today compared to 2010, that the whole Asia, not only China, we all know it's going to be the growing part of the world. That doesn't mean that we are turning our back to the West. We are educated in the West. Most of our nations are educated in the West and understand the West well. So we'll continue those relationships for sure. But if you look at how Saudi Arabia has always been, as I said to you has been always creating stability and everything that does Saudi Arabia is the custodian of the two Holy mosques, which is for Islam. And Islam, our greeting is Asalaam-Alaikum, may peace be on you.

Abdulmohsin Al Omran: (21:45)
So Saudi Arabia tries to always be in peace with itself, with everyone [inaudible 00:21:51] but ensuring that it is not going to be a victim or any nation. For any company, you will never rely on one supplier. You always have to diversify its portfolio, or its relationships, especially given the Asian proximity, the pilgrims bring a lot of Asians for the last thousand 400 years plus to Mecca. So the familiarity of the Asian continent is something that we do understand. We might not understand the language, but most of them speak English. We speak English and understanding the culture and the proximity is very important for us.

Anthony Scaramucci: (22:39)
Okay. Well, I appreciate you coming on Abdulmohsin. I'm looking forward to the pandemic ending so I can get back to Bahrain and eat and cut with you. That was the last time I was there, frankly. I was with your son in that amazing restaurant. I'm going to turn it over to John Darsie so that he can ask some questions from the audience. And I apologize for mispronouncing modernization, but I haven't slept in 24 hours. There's a small thing going on in the U S right now that I happened to have been involved in the last six months. So go ahead, Darcy, start pronouncing the things appropriately. Okay, go ahead.

Abdulmohsin Al Omran: (23:18)
I doubt you'll sleep tonight.

Anthony Scaramucci: (23:20)
Yeah, no, it's going to be another interesting night although I'm very confident in the outcome now for a number of different things that I've learned today. I do believe that the vice-president will be the 46th president by January 20th. And I think that'll be good for the world actually. And it'll also calm things down. And, but that's for another topic that's for another day, Mr. Abdulmohsin. Go ahead, John. I, you got a ton of questions. Go ahead, fire me.

John Darsie: (23:47)
Absolutely. It was great eating at cut and Manama. Also, Riyadh, home to a lot of beautiful restaurants, beautiful Italian restaurants. We have some great meals recently in Riyadh, and I think people would be blown away going to both of those cities, Manama and Riyadh, just to see how quickly things are growing and modernizing as well as Abu Dhabi and Dubai, which obviously we have a great friendship there and had our conference most recently at SALTS, Abu Dhabi. And you spoke at SALTS Abu Dhabi, and you run a great panel with Abdallah Obeikan. And he's a leading thinker in the fields of digitization, digital transformation. You guys had a great conversation. I would encourage people to go on our YouTube channel and check it out if they haven't seen that talk. But one thing you talked about is the importance in this industry of scaling fast and failing fast. What are the benefits of taking a more aggressive approach to digitization and modernization of your systems? Even if it leads to failure in the initial phase?

Abdulmohsin Al Omran: (24:48)
Yeah. Like any business, you have to try things, but in the digital world, you need to fail early, fail fast and learn and adopt technology allows you to maneuver very quickly. The skill sets that are available, whether from design, whether from coding, the data science, et cetera, enables you to adjust and move to the next level. So we are, I wouldn't say we have done, but we have really made the big progress in our, in both [Javanese, 00:25:28] our digitalization, [ Jordan, 00:25:34] and the digital transformation. Both projects are going very well. And I expect that by mid next year, we will be in a very unique position with our offering or our ability to service our clients much more than we do today.

John Darsie: (25:53)
One thing you talked about in that panel at SALTS Abu Dhabi was the importance and the challenge of creating a culture of innovation and a technology forward type of culture within your firm. What are the things that you've done at the Family Office to allow yourself to build that type of culture? And how do you think it's benefited your work?

Abdulmohsin Al Omran: (26:16)
The culture is one of the four Cs. I always say, when you buy a diamond you look at the four Cs. and in order to have a perfect digital transformation, you need to have the four Cs. The first C is you get the commitments from the board and the management. And that is one of the most difficult things to do. [inaudible 00:26:37] Number two, you need to be client focused. Everything you're doing is not anymore about the firm. It's much more about what the client needs. What are the client's pin points? How can I make their life much easier to do things? Number three is the culture, which is the most difficult thing in the whole journey and the culture you need to start early, you need to educate your team. You need to train them in a workshop.

Abdulmohsin Al Omran: (27:08)
You need to get them to take courses. And through this process, which would take an average firm, if they are lucky, they do it properly, two years. And if you do it well, you will know who is in your firm are going to be continuing with you and who are the wise who will decide most likely themselves, that this is not for them. And they would like to go and work in a much more traditional, slower base industries or style of management. So that is really the most difficult from everything that I have read and may have experienced.

Abdulmohsin Al Omran: (27:45)
You need to expect that about 50% of your team are going to make it. And 50%, they're not going to make it over two to three years. So they will be replaced. You will not need to replace the 50% because what digitalization, digital transformation, you would have gained some efficiencies that will enable you to operate at the higher multiples of scale, with lower number of people. The new 25 people that sent, let's say that you would bring in to replace the 50% that went out are going to come with a completely different way of thinking, operating. If you come to our office, you will see that people are putting stickers on the walls or post-its. They are writing on glass windows. It's a different environment.

John Darsie: (28:41)
It's like a mini Google type of environment.

Abdulmohsin Al Omran: (28:43)
Absolutely. So you have to accept that and you need to try to weave the old culture with the new culture. A lot of times make a mistake with developing a separate digital business, not being integrated with the original business, but that's the most difficult thing. The fourth C is going to be the cost. A lot of times, things that through digitization and digital transformation, costs is going to go down. Absolutely not. You will have to invest your costs will actually go up as a dollar amount, but once you really make it, you are going to get much more number of clients, which would make the cost per client, way lower. And very few people understand this.

John Darsie: (29:34)
So I recently got a demo of your wealth management platform. It's fascinating. And I understand you have a new launch coming up potentially early next year. Is that something you guys are talking about publicly and where do you see the firm going in the next five or 10 years? We have an audience question from [mats 00:29:51] talking about that. What you see the firm doing in the next five to 10 years?

Abdulmohsin Al Omran: (29:54)
As I said before, the world is going to be much more connected. There are a lot of great FinTech companies out there that could not scale. They could not have the clients, but they really have unique products. So what we are doing, we are preparing ourselves to plug and play with some of those 10 tech that have an age. So they would generate revenue, but not of the very high cost us and our clients, but adding them together as a puzzle, we'll give you a beautiful picture. If, that is the simplification of it. Another thing is the ability to connect with the bigger firms, whether it's BlackRock, whether it's fidelity or E-Trade and so on. And allowing the clients to access a lot of those funds almost at zero cost. And that's going to be big game changer in the coming five years.

John Darsie: (30:52)
So Anthony talked a little bit earlier about how the kingdom of Saudi Arabia has invested a lot through the public investment fund and other entities to build a technology portfolio, but also build a technology ecosystem in Riyadh, in Jeddah and other places as well. Can you comment on sort of the maturity of the venture capital industry in the kingdom and the access to financing for early stage projects that exists not just in the kingdom and Riyadh, but also in, in Bahrain and the region as well?

Abdulmohsin Al Omran: (31:24)
Yeah, the Saudi government has not only encouraged, but also have been funding, giving all the help to the small startups, setting up funds and encouraging the banks, encouraging investors and this and those startups. If you look at the time, span, things have moved extremely fast in this region. If you look at Kareem, for example, have been acquired by over. So there are a lot of successful... Tuk had been acquired by Amazon. So there have been a lot of great examples that have really motivated a lot of the youth that got educated in computer science and business and finance to really venture and take the risk. We all know that this is not easy. The failure rate is very high, but the fact that there is appetite to take risk supported by the governments creating FinTech hubs. Bahrain recently announced 973 technology hub. [inaudible 00:00:32:35]. So nobody has that.Abu Dhabi is having now another one, Saudi been having it. So this is going to really mushroom. I believe about the coming 10 years.

John Darsie: (32:46)
It's very exciting for us. You know, we've spent an increasing amount of time in the region, in the UAE and Bahrain and in Saudi. And just to reiterate what we talked about earlier, I've been blown away by the amount of entrepreneurial spirit that's emerging among young people in the region. And we think it's going to be an area of growth around the world. You look around Europe, you look around the United States. The world is sort of starved of growth and with the demographics and the amount of entrepreneurship in the region, we think it's going to be a continued area of growth. So we're very excited to work with you and work with others around the region to grow our presence and grow awareness of what's going on in the region. So Abdulmohsin, we're going to leave it there. Thank you so much. Anthony, do you have a final word for Abdulmohsin before we let him go?

Anthony Scaramucci: (33:33)
Well, I know that John wants to wear that head dress someday Abdulmohsin, but you and I have been friends for two decades. And so I'm going to insist that under no circumstances is he allowed to do that. Okay. I want him to continue his life with that hilly billy hair, with that center part that makes him look like Ichabod Crane. Okay. So no head dress for him. Okay. Is that an agreement you and I have before I sign off?

Abdulmohsin Al Omran: (33:58)
Well, the reason I, one of the reasons I have this is I didn't have his hair, so I have to cover it up.

John Darsie: (34:05)
Thank you, Abdulmohsin. Anthony was hurting my feelings and you say cold man.

Anthony Scaramucci: (34:09)
That is too politically correct for me, especially coming from Bahrain. Well, God bless you. Congratulations on this great business that you've built. And John and I are looking forward to the prospect of potentially doing many more SALTS conferences in the region. You were an amazing partner to our event in Abu Dhabi. And so we're looking forward to having you do that for us in the region, in the future, once the pandemic ends.

Abdulmohsin Al Omran: (34:35)
Thank you. [inaudible 00:34:40].

Anthony Scaramucci: (34:38)
See you soon.

Abdulmohsin Al Omran: (34:39)
Thank you. Bye now.

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“If you're great at something, you'll figure it out and you'll adapt your lifestyle to something that you're passionate about.”

Deven Parekh joined Insight Partners in 2000, and has been a Managing Director with the firm since 2002. He also manages the firm’s largest investment team, doing deals across the spectrum of venture, growth, and later-stage leveraged transactions.

Heading into the pandemic, investment from Insight Partners was expected to slow down, but that ultimately was not the case. Technology investments have proven resilient in the age of COVID as it becomes even more integral in socially-distant environments. Major companies and industries had to compress 6-7 years of e-commerce investment into six months in order to meet the pandemic-induced demand. “I think what people underestimate is how much they touch software in their lives.”

With the continued upward trend of AI and data collection/analysis required, tech sectors like software will see huge growth. Predicting a 15% a year compound as an industry, expect to see category winners grow more than that, resulting in more companies at half a trillion- or trillion-dollar market caps.

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SPEAKER

Deven Parekh

Managing Director

Insight Partners

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series that we launched during this work from home period with leading investors, creators and thinkers. What we're really trying to do during these SALT Talks is replicate the experience that we provide at our global conferences, the SALT Conference. And what we're trying to do at those conferences and on these talks is to provide a window into the mind of subject matter experts, as well as to provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to welcome Deven Parekh to SALT Talks.

John Darsie: (00:52)
Deven joined Insight Partners, which is a leading global private equity and venture capital firm in 2000, and has been a managing director with the firm since 2002. He also manages the firm's largest investment team, doing deals across the spectrum of venture, growth and late stage leveraged transactions. As head of Insight Partners, Deven manages investments in application software, data and consumer internet businesses globally, having actively worked with investments in Europe, Israel, China, Latin America and Russia. Deven has led 68 deals at Insight, deploying 4.3 billion in capital to date, with 38 exits averaging gross multiple returns of 2.6 times.

John Darsie: (01:38)
Deven sits currently on 16 portfolio company board of directors and advises many other CEOs more informally. In addition to his investment work, Deven has been a leader and a vocal advocate for diversity, equity and inclusion. He's been a primary driver of initiatives and thought leadership programs within Insight, promoting female and minority leadership across Insight's portfolio and the larger software and investment ecosystems.

John Darsie: (02:05)
I would also note that Deven has appeared on numerous industry award lists, including the Forbes Midas list several times, the list of Top 100 venture capitalists by CB Insights. And he also won an award from the Venture Capital 100 for his investments in 2014 in Twitter and Chegg. Just a reminder, if you have any questions for Deven during today's SALT Talk, you can enter them in the Q&A box at the bottom of your screen on Zoom. And hosting today's talk is Anthony Scaramucci, the Founder and Managing Partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. And with that I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:44)
John, thank you for wearing your sports jacket today. Deven, of course you don't have to wear one but I came with the suit and tie. Does everybody know that? Now I may be wearing the suit and tie from the waist up. But we'll leave that up the Zoom and the pandemic. Deven, tell us something about your career that we couldn't learn on Wikipedia?

Deven Parekh: (03:06)
The thing I would tell you is I don't ever expected to be sitting here talking to you talking about technology.

Anthony Scaramucci: (03:12)
Oh, man. Well, of course not. I mean and by the way, we're still trying to figure out why you accepted the invitation. But we can ask your psychiatrist that later. I mean, but tell us something. Why did you go in this direction?

Deven Parekh: (03:23)
Well, I actually started out, I started out in college studying biochemistry, and I had a full intention of being a doctor, probably doing an M.D. Ph.D. and going to research. I mean, that was kind of my plan. And I think at the end of the day, I'm sitting here talking to you because I was impatient. I ended up with a bunch of roommates who were economics majors or Wharton majors. I figured one was going to be a 12 year path to starting my career, one was going to be a lot shorter path to starting my career. So I ended up transferring to Wharton out of the College of Arts and Sciences and ended up going to business. And I started my career at Blackstone and went from there to a merchant banking boutique called Berenson and my company and then joined Insight in 2000.

Anthony Scaramucci: (04:15)
So we find our way though, right? I mean, that's more or less we're making a plan and then things happen to us so we go in different directions, but you strike me as somebody that really loves what you're doing. And so we have a lot of young people that join these SALT Talks. And so what would you say to them about your personal odyssey to getting to where your passion is, and what would your advice be to them?

Deven Parekh: (04:39)
Well, I'll start by just giving the advice I give my own kids. I've got a 17 year old and a 20 year old and my simple advice to them is find something that doesn't feel like work. And if it doesn't feel like work, you'll probably be great at it. And they obviously have the question of what are the careers where I can make enough money and my answer to that is if you're great at something, you'll figure it out and you'll adapt your lifestyle to something that you're passionate about. So that one to me is the most important.

Deven Parekh: (05:09)
But then the second really is I think you have to, well you have to have a plan. Understand that plans are adaptable. And when opportunities come across your path that maybe don't fit within the plan, but that are compelling, that kind of call you, go for it. And you can always course correct. And as I go back and look at my career, those were the things, the ones where I kind of jumped on something that wasn't part of the plan. That really worked out well.

Anthony Scaramucci: (05:41)
So you have an interesting model. I mean, the Insight Partners, it sort of looks this way to me, and I'm sure you'll agree with me, it looks like it's a hybrid between private equity and venture capital. And it seems like it's a blended structure. Can you tell us how that works, what the benefits are of that and how you guys decided to go in that direction?

Deven Parekh: (06:02)
Yes. So if you look at when Insight was founded back in 1995, our strategy was really focusing on at the time, these terms that we use today like scale up didn't really exist. We called it then was expansion stage software. So what do we mean by that? What we meant was, companies, they weren't just ideas. There was a product, there was an entrepreneur. And most importantly, there were customers, and expansion stage capital was to take that kind of fundamental product, so there's some product market fit that existed. And the capital is really going to kind of then expand the company through investment, sales, marketing, potentially acquisitions.

Deven Parekh: (06:43)
And so you're taking kind of base technology risk off the table. You're taking some level of adoption risk off the table, because you already had customers. And you're really taking primarily kind of execution risk. Now back in 1995, when Insight was founded, there were not lots of profitable software companies. There were a few but not many. And so most of the capital kind of went in to, as I said, make incremental investments in the business.

Deven Parekh: (07:10)
But fast forward to 2020 and we'll go more into this later. But software is an incredibly powerful model with very high margins. And so what we basically said is that, once we decided that all we were going to do is software as a firm, we basically said we wanted to be able to serve the full continuum, from kind of the early growth company, all the way to really mature profitable companies. And so we've kind of taken our approach where we have a sourcing team of close to 50 people that are basically looking for the best software companies globally, proactively reaching out to them. We have an investment team that kind of finds the best companies. And our approach is to go to them and say, "Listen, we don't care whether you want to sell 10% of the company, you want to sell 90% of the company, or you want to sell something, you want to have something in between. You're a great business, we love your market, you've got a great team, we want to find a way to work together.", not have an approach that we only do control deals or only do minority deals, we want to be in great companies.

Deven Parekh: (08:14)
And then lastly, we have a 70 person operating group that kind of is really able to work with companies, not to run them because our model is not to go in and we want to back great entrepreneurs. What that operating team really does is share best practices, because what we view ourselves as good at is pattern recognition. What works over here, how do we apply it over there? And that team's role is really to play that. We can go into any one of those in more detail. But that's really the approach we're taking.

Anthony Scaramucci: (08:45)
And it's working out amazingly. But now we're dealing with a COVID-19 pandemic. And so has this changed anything about the business Deven, from your perspective? Has your investment philosophy changed, the deployment of capital? What's different today in the post COVID-19 portal?

Deven Parekh: (09:05)
Well, like all of us, we walked out of the office one day in March and haven't really been back since. And I think if you had asked us at the end of March, I spoke to our LPs at the beginning of April, I told them that they should expect significant pressure on valuations. They should probably expect significant decline in our investment pace and that we didn't really have a lot more visibility to be able to offer but given that we're likely going to see the largest economic contraction since the Great Depression, it was hard to assume that it was going to be anything but challenging conditions for the next nine months. And here we sit in November, and that's really not the way it played out. Tech has been extraordinarily resilient. We've done 27 deals since COVID. We've deployed as much capital this year as we deployed last year, and so everything about what's happened, and we can talk about why that is, but anything, everything about what I would have predicted at the end of March hasn't really played out that way.

Anthony Scaramucci: (10:19)
So tell us about that, because I think that's another big point about life and adapting, and things are happening that you don't expect. Certainly none of us thought that we would be in a global pandemic, perhaps you did. I thought it was unlikely that someday we might have a pandemic, but I didn't think it was going to be imminent and it came upon us, in my opinion very quickly, caused all of us to make some adaptations to our business. Obviously, I would love to be doing this with you in a live event, a live SALT event, which hopefully someday we'll be able to... exactly, so hopefully, someday we'll be able to do that. So go through that thought process, go through the machinations, the adapt and pivot and also then explain how you identify that in good leaders in the companies that you're investing.

Deven Parekh: (11:05)
Look, I start by saying this, some of the pre-COVID just a general comment, and we'll talk about COVID. But I think what people underestimate is the impact how much they touch software in their lives. So you use your iPhone as your alarm clock, that's software. You get up and you ask your Alexa the weather, that's software. You get into your car and you put something in a navigation system, that's software. The average car today has 10,000 more lines of code than a Boeing 737 software code. You go to the bank to get money out of the ATM machine, that's software. You show up at the office and do your thing. This is pre-COVID. That's software. You come home and you watch something on Netflix, the recommendation engine, that's AI software. I can keep going. But the point is that the amount of consumption that's driven by software, it just continues to go up.

Deven Parekh: (12:02)
Now let's talk about COVID. So what happened in COVID? And I'll use two industries as examples. So banking. About 50% of consumers used online banking pre-COVID. Within a month of COVID, 73% were using online banking and of those 73%, 75% said, the ones who are first time users said they would continue to use it post-COVID. Grocery 30% of people used online grocery pre-COVID. 63%, by the way, I'm surprised it's not even higher, but 60% use online grocery post-COVID. And again, 75% of those people said that they were going to continue to do that.

Deven Parekh: (12:47)
So what does that mean? Well, what it means is well, if you were to use a New York example, which won't be relevant to others maybe outside of New York, FreshDirect, well you already had an online platform and you were good at doing online delivery. But what's really happened and what's driven so much incremental spend is, if you are Walmart, you took probably four or five years of e-commerce investment and compressed it into like six months, five months, four months, because you now realized that your primary channel was probably going to be online, not the store.

Deven Parekh: (13:29)
If you were a bank, Anthony was not going to a branch anymore. And so really what happened is it wasn't the Etrades of the world that needed to make that change, because they already had online channels. But all the incumbents had to fundamentally, they're all thinking about online, they're all thinking about having a great experience, but they realized it was from being part of their experience to becoming the primary experience.

Deven Parekh: (13:55)
And what does all that require? It requires a massive investment in software. So who was the beneficiary of that were these enterprise software companies who basically were providing the tech platforms required for these companies do that. And then the last example I'll use, obviously just collaboration and communication. So we did walk out of the office in March, I am stunned at how seamless it's been. We can talk about what maybe some of the things that aren't happening, but it's been remarkably seamless, because of things like Zoom. Zoom's and ow worth $150 billion. We were joking about Zoom earlier. I'd rather be Zoom than GE for that reason, and wiser-

Anthony Scaramucci: (14:34)
Just for our listeners and viewers out there, John Darsie compared me to GE, and he told Deven that he was Zoom. I just want to make sure everybody understands that that's going to be something I'll be talking about with my therapist.

John Darsie: (14:47)
I can confirm that.

Anthony Scaramucci: (14:49)
Yeah, that was a brutal example. Deven, it's phenomenal what you're saying. I got two follow up questions. So you said everything's seamless, a few things are missing. What are the few things in your mind that are missing?

Deven Parekh: (15:05)
Well, I'll just use Insight as the example. I already gave you the stats. We're getting the deals done, right? But first of all, we're now investing significant amount of capital without having met people in person. Now you say, "Well, how important is that?" Well, the honest answer is, I can't tell you for a couple years how important it was. Maybe it's a false negative or false positive to think you have to meet people. But in the work context, we've onboarded, I think 20 or 25 employees since COVID. I've never met any of them in person. I've interviewed some of them on Zoom, but I've never met any of them in person.

Deven Parekh: (15:42)
The bigger challenge for them is going to be mentoring. So if you're a junior person at an organization, what used to happen, we're having a negotiation on a deal. I'd say, "Hey, John. I want you to jump in my office and listen in on the call." That's not happening anymore because everything is structured. So either somebody's invited to a Zoom meeting or they're not invited to a Zoom meeting. So you are losing, I think that collaboration, the mentoring of the junior folks, and then I think, look, not meeting people works fine when things are going great. But I think whether it's in business and politics or whatever it might be, personal relationships matter a lot. And when you have a problem, you need that reservoir of goodwill to get to that problem.

Anthony Scaramucci: (16:27)
I will say I agree with that. We lost business during the pandemic. And I'm absolutely confident had we been able to have face to face meetings with those various people, and some of the stuff got lost in translation. And some of it got lost in the haze of what was going on in the early part of the pandemic. But listen, I own that and we move on, we learn to adapt and pivot. But if I had the opportunity to meet with people face to face, I think it would have been a better outcome for both parties. I think when you're in a misinformation situation in a crisis, you can create a lose-lose if you're not careful. So it's always always caution, and offering up more communication to each other.

Anthony Scaramucci: (17:07)
You're a big thinker, you're a great executer, you built an incredibly successful business, congratulations on all that. But you are also a super big thinker and a visionary. And I know you've looked at this before so I have to ask this question. If you look at the top 10 companies in the United States, GE is a good example, in 2000, that would have been a top 10 company in the United States. And then a decade later, it's slipping. And two decades later, it's no longer a top 10 company. And lo and behold, we have other top 10 companies. There are a few private companies right now that could be those types of moonshots over the next 10 years. What do you think those companies are? What sectors of the economy? Where is the puck going in the world of tech and in your space?

Deven Parekh: (17:56)
Look, I think that there's, I would say, it would almost be impossible for us to predict which ones it will be. That being said, I think if you think about, data and age, if you think about AI, and I'll come back to your question, but if you think about AI, which I think is going to be an incredibly important, will continue to importantly trend. Data is kind of the oil of AI, right? So without data, you can't really do. I mean, you train AI using data. And so companies understand that. And they're kind of capturing kind of more and more data. And I think that the analytical platforms to help analyze that data are incredibly important. A good example of that might be Snowflake, that just went public recently. We're not investors in that, I will just disclose.

Deven Parekh: (18:47)
And so I think that the power of compounding is incredibly important. And I was reminded of that the other day. So if you compound a business at 20% a year for 20 years, it's 39x, right? Now, if you look at two actual examples, ServiceNow compounded for the last 10 years at 50%. Shopify compounded at the last 10 years at 80%. And so when you think about these companies today, like the Amazons, and the Facebooks and the Alibabas, that are anywhere from 500, Microsoft $500 billion to $1.5 trillion market caps. And again, five years ago, if we were doing this interview, and you said, "Oh, there's maybe three or four of these companies that would be north of $1 trillion market cap." I think most people would say there's no way that's happening.

Deven Parekh: (19:40)
I think what everybody underpriced is the power of compounding. And it's not so much the power of compounding because you can learn that in pretty basic finance. It's the durability of that compounding. And I think that what everybody, including investors like us, didn't necessarily believe that these businesses could compound for as long as they have. So you could have made 62 times your money in the public markets just buying Salesforce at the IPO and not selling. Very few people did. Because along the way, you would have read research reports that said it's massively overvalued. It's massively overvalued. It's a short. And really only one thing happened. It just kept rolling.

Deven Parekh: (20:21)
And so what I see and I'm not answering your direct question by giving you the names, but what I see is that you've got so many sub sectors in tech, and particularly in software, where you can see these categories compound, total category compound at 15% a year. Now you'll have winners, they'll compound even north of that. So I think if you go out 10 or 15 years, you're going to see a lot more companies with market caps that are $500 billion and $1 trillion in the space. Tech's already 28% of total market cap. And by the way, that dirty little secret in the market, the market's great, the market's great. The reality is software's up 33%, financials are down 21%, real estate's down 5%. The S&P is up 3%, 3.5%, but this 28% has really driven a lot of the market.

Anthony Scaramucci: (21:13)
So I mean, you bring up a really good question, because how do you see through that? How do you see through that fog? Research reports, valuation? How do you teach an investor your own clients, yourself, your team, to stay disciplined and stay in something? Look at the returns you would have had if you just bought Amazon as an example from the IPO. What do you say to people regarding that?

Deven Parekh: (21:42)
We've made, but number one question we get from both existing LPs and prospective LPs is are valuations stretched? We've been getting the same question for five years. By the way, it's not always easy to answer that question. Because anytime you look at something, and you look at it, and you say, "Well, it's the most expensive it's been in 10 years.", the easy answer's to say, "Therefore, it must be overvalued." But that isn't necessarily true if it continues to compound for 15% for the next 10 years. The question is figuring out how. We've made plenty of mistakes over time of distributing stocks too early, selling companies too early. I think what we try to spend most of our time on today, and I would far from claim that we've perfected it. We probably make more mistakes on this than almost anything else is really trying to figure out sustainable growth. Not okay, did it grow 100% this year? But what can it grow at for 10 years? What can it grow at for 15 years?

Deven Parekh: (22:48)
And that's what we spend a lot of time on and we look at who are the incumbents in that space. What does their product quality look like? How much disruption can happen? But in my view, the best markets aren't disruptor markets. The best markets are where you're creating a new market. That being said, it's also the hardest. It's the hardest thing to figure out. So I always like to use examples of companies who are not investors but I'll use Uber as a great example. When we looked at Uber, we had a chance to invest in one of the early rounds. Still very expensive, we passed and we pass for a very simple reason. We did an analysis that said the size of the New York and San Francisco cab market, what is it?

Deven Parekh: (23:28)
And we did a calculation, and they were looking for a valuation that was like six times the size of the market. I said, "Well, this is two cities, we're going to pay six times a market. How can you ever make money on this investment?" Except we missed something really, really fundamental, which is that when you change the way people consume that service, and you put it on their phone in San Francisco where cab service had been historically very, very bad, you totally change the demand curve.

Deven Parekh: (23:55)
So now, the size of the markets today in those two markets is 10 or 12 times what it was when we looked at that investment. We missed that. We looked at existing market and said we're just going to take existing market and move it to us, as opposed to this massive new market that can get created the we can own a significant portion of. So what we try to do and we make lots of mistakes, that being a great one, great example of one rather, is try to really be thoughtful about how a market might evolve over time. I don't know if that answers your question.

Anthony Scaramucci: (24:30)
I think it's an amazing message. Because you're basically saying, look, we're going to make mistakes, we'll miss things. But if we stay in our bandwidth and in our discipline, we're going to hit the target more often than not, and that's basically the lesson.

Deven Parekh: (24:41)
What I say is, "Guys, we're going to make mistakes. Let's try not to make the same mistake twice." Let's make new mistakes. And I think it's important to make mistakes. Just try to avoid them the second time.

Anthony Scaramucci: (24:54)
I'm going to shift gears because the irrepressible John Darsie is going to come on. We've got tons of audience participation and we want to allow the audience to engage with you as well. I want to shift gears into one of the big facts of our time that we're living in, something I'm always worried about and I'm sure that you're thinking about and I'd like to get your great mind on this topic. We watch a city like New York suffer higher homelessness, people defecating on the street. We see what's going on in San Francisco, and some of the other great cities of the United States. And I'm wondering what your thoughts are about that. And I'm wondering about what seems to be happening more than ever before is a separation between the haves and have nots. What are your thoughts on that? And what do you think we can do?

Deven Parekh: (25:47)
Well, we're probably veering away from tech. I think that look, I agree with you. I think that if you want to see the impact of wealth concentration, people should go back and read about the French Revolution, it doesn't really end well if you're sitting at the top of the heap. So how do we change that? I think that the challenge we have as a country and I don't even think this is a political comment one way or the other, is we're way too short term oriented. And if we're going to change the game on what you're talking about, it's going to start first with educational opportunity.

Deven Parekh: (26:24)
That's how you change the game. And we have to make sure that we are giving, look, I view myself as incredibly lucky. I got access to great education. My family was able to afford that great education, I didn't have to work during college. I could spend all my time studying, put myself into this career. My dad was an immigrant, and I was very lucky. There's thousands of people out there that are just as smart, if not smarter, who just didn't get that same set of opportunities. And so for me, it's long term investment in kind of education is really the long term antidote. Obviously, there's things you can do around tax policy to change things in the short term. I don't know that they change the long term game. And so there's certainly changes in tax policy.

Anthony Scaramucci: (27:15)
Give me one example, and then we'll turn it over to John. What's an example of tax policy?

Deven Parekh: (27:20)
Oh look, I mean the ones that people are talking about. Certainly one, the simple one is an increase in ordinary income tax rates, the other would be elimination of the capital gains tax rate. And that's one which is very controversial. But one could make an argument that, and I'm a beneficiary of that capital gains tax rate. The flip side is, if you think about this, you could say, "Well, one is a tax on labor. Why is a tax on labor so much different than the tax on capital?" And if you wanted to change wealth concentration over time, you would bring those rates closer together. I mean that's a very rational economic argument. Obviously, there are lots of people on the other side of that. There's pros and cons from a policy standpoint, but that's certainly one policy prescription, if you were trying to address the issue you're talking about.

Anthony Scaramucci: (28:18)
One last question. Deven, if you could be anything other than what you are right now in this lifetime, what would it be? And I'll tell you this, I would want to be the starting first baseman for the Mets. And so that was never going to happen to me due to my size and skill and my athleticism. I'm stuck here at SkyBridge. But what would it be?

Deven Parekh: (28:37)
I remember when my son was in sixth or seventh grade, he told me he decided he was going to go to Georgia Tech. And I said, "Well, why are you going to go to Georgia Tech?" And the baseball player that he loved, who was a Yankee player at the time and got to Georgia Tech. I said, "Caden, the odds of you being the first Indian baseball player are pretty low. I'm not going to pick sports." And look, I actually truly have and still have a passion for science. So I think if I weren't doing, I want to do something I love and I love what I do. But I also think I could have loved being a doctor. And I think if it was not this, it would be medicine.

Anthony Scaramucci: (29:17)
I think it's a very honest answer. And again, I think it's another refreshment for the younger people that are listening. Pick something you really love. The first job that I had, unfortunately, was in real estate investment banking. I was terrible at it. I got fired from it. See, John Kelly wasn't the first person to fire me. I was fired before that. And the reason I was fired was I stunk at the job. Had I just gone into something that I really liked, I would have been able to have succeeded from the get go. And so it's just a learning lesson for people. I'm going to turn it over to Darsie, who's about to be fired because he called me GE. But we'll let you enjoy him for the next 15 minutes as he asks you these questions.

Deven Parekh: (29:57)
Great. Thanks, Anthony.

John Darsie: (29:58)
Deven, it's a pleasure to have you on. There's a concept that you speak and write about a lot called the scale up phase for a tech company. I want to talk a little bit more about that. Basically, your thesis is that we call companies startups for way too long. And there's actually a key phase that comes after that startup phase. Could you tell us more about that scale up concept and what the implications of that are? And also, is there a role for governments to play in supporting those scale ups as well?

Deven Parekh: (30:29)
Yeah, so let's hit the first part. So we talked earlier about kind of the stages that we invest at. And when I think about a startup, and I think startup, as you rightly pointed out, there are companies, I mean, you'll read a Wall Street Journal article about a company with $150 million of revenue. It's a Silicon Valley startup. That's really not a Silicon Valley startup. What we think about when we think about scale up is that you really feel good that product market fit has been established.

Deven Parekh: (30:57)
So what do I mean by that? If I talk to 10 customers, they say, "I buy this product for this reason, and it works for this reason really, really well." And do you use it for this? Maybe not. Do you use it for that? Maybe not. But for this thing, I really like it, and I'm going to probably buy more of it. So you've really established product market fit. Now there are companies, including companies that I have investment in that have revenues, but they don't really have product market fit. What does that mean? I call five customers, I get five different answers of why they bought the product. That's fine, because you got some revenue, but it doesn't really scale up. which goes to what your point? Why doesn't it scale up?

Deven Parekh: (31:33)
Well, if you have five different reasons you bought a company, what exactly is a marketing strategy for the business? How do you actually figure out what customers to target? And what's the right skill set for the people to go do that marketing and that selling? Just use sales and marketing as an example. So in a true scale up company, you've got product market fit. Generally, you've got a management team. The management team might not be fully formed to take it to the next level. And really, the investment at that point is figuring out how to make it scalable, which is why you're saying scale up. And so what does that typically mean? Well, it means how do you really figure out taking, how do you increase sales at the same or better unit cost? If I bring it down to the crux, I'm oversimplifying to keep the answer short. How do you do that? And that's one of the reasons we have the onsite team, which is run by my partner, Hilary Gosher, is to really have a true understanding of each functional area of a scale up organization, what are the best practices? And that's why our entire organization is built to really focus on companies that are at that phase.

John Darsie: (32:51)
So we have a lot of participants on these SALT Talks at our SALT conferences. We've also hosted SALT conferences internationally, in Singapore, in Tokyo, in Abu Dhabi. And we've been blown away by the emergence of entrepreneurialism and technology ecosystems outside the United States. India is another great example. We have a lot of Indian constituents that come to our international conferences as well. What are trends that we're seeing in terms of foreign or international venture capital that U.S. investors may not be aware of?

Deven Parekh: (33:24)
Just to make sure I understand the question, do you mean as it relates to U.S. firms investing internationally? Or do you mean in terms of international firms investing in the U.S.? I just want to make sure I get that.

John Darsie: (33:33)
I'm talking about U.S. investors or investors from around the world investing in local tech ecosystems around the world. So for example, you're having to see a company like Google sort of wave the white flag in India and invest in Reliance Industries, because of sort of a tech nationalism or digital decolonization, and you're seeing tech ecosystem springing up in different areas of the world? Is that something that you guys are observing or how are you investing based on the globalization of tech?

Deven Parekh: (34:00)
Yes, let me separate the two things. There's the strategics, who put the flag up because they have to, because you have to have a relationship with the local government. And there's certain countries like India and China where there's just a reason why you have to do that. So that's one category. But let me address, that's not really our category. So let me address the other category. Look, the world on tech has really gotten flat, to use somebody else's title, and it used to be that we saw great entrepreneurs, we'd see great companies, but we didn't necessarily always have, we didn't always have the quality of management that we would find here. And people will be like, "Oh, it's Silicon Valley, the best management's in Silicon Valley."

Deven Parekh: (34:42)
We're increasingly finding great management everywhere in the world. And then the other interesting thing is, where do you find great tech? Well, you can find great tech anywhere. So we've got, I think now, a couple billion dollars invested in Israel, and Israel has probably become one of our most active geographies. There's fantastic tech talent in Israel. It used to be people are only around areas like security. But now it's across lots of different areas but we've invested in a lot in Israel. We've invested in Australia. We've invested in pretty much around the world.

Deven Parekh: (35:15)
The areas, the two markets we've probably been less active in, though recently, we've done a bunch of investments in China, have been India and China. And this is for a very simple reason. They have a very robust local venture capital ecosystem. So if the deals getting to Deven, there's probably 47 people who said no already. And I don't have the local network in those countries to kind of talk to the temp, like in the U.S., if I get a company come in the door, there's probably 10 people I can call to make an assessment. I don't really have that same network in those places. But I think that that's going to continue to happen. Berlin's another, Germany, we have lots of investments in Germany. We're very, very active in Europe. And the market is getting more competitive, in that it used to be that one of the benefits for us was we're willing to kind of go anywhere. The problem is so is everybody else now. So we run into a lot of the same competition no matter where we go.

John Darsie: (36:12)
So Anthony asked a question earlier about income inequality and ways that you would solve it. And I want to sort of ask that question through a different lens, focusing on tech and data. And there's that existential question about whether technology is going to be our doom or be our savior. And so the technology has obviously maybe displaced some jobs, and it's changed our society and harmed labor in certain ways. But there's also plenty of ways how tech and data can help solve those problems as well. How do we ensure that tech and data are a force for good? And how can they also be part of sort of this push for social inclusion, economic inclusion factors as well?

Deven Parekh: (36:52)
Well look, I think when you think about tech and data and you think about kind of public policy, the interesting contrast would be the U.S. and China. So if you do any reading on AI, what you would find is that a lot of AI applications are more advanced in China. But why? Well, one, they have a lot more people and two, the people's comfort with their data being, maybe it's not comfort, but their willingness to let their data be shared, it's not optional. And we have a much higher standard of what we believe for privacy as a society. And that's not a value judgment, pro or negative to China or the U.S. But what it does do, it allows a country to build a comparative advantage in certain areas. So if you wanted to build self driving cars, China probably has more data than we do. They've actually built cities with entire parts of the city. They're structured for self driving cars, so they can collect kind of more data.

Deven Parekh: (37:57)
I think there's lots of social implications around self driving, there are safety implications. But when you get to things like privacy, and you get to security applications, so can I walk you through a building and take a picture of my face, identify who I am, and take action based on that, or people are aware that in China that they have these effectively social scores for every citizen. And these are things that obviously would not be acceptable in the U.S.

Deven Parekh: (38:26)
I think in any one of these constructs, data can be used in a positive way. So most people would say that if we could and the interesting thing about self driving cars, just to use that example for a second is that it's when a self driving car kills a person, like it happened in Arizona with Uber, seven, five or six states shut down self driving car testing. And yet, that same day, probably 20 or 30 people were killed by a drunk driver. And you would probably 80% reduce that with self driving cars.

Deven Parekh: (38:59)
So the interesting thing with all these from a policy standpoint, or if you remember when the two Boeing flights because of software flaw, which is horrible, crashed, and you had hundreds of lives lost. There was an outcry that was disproportionate relative to what happens when the same thing happens because of pilot error. And so there is a societal acceptance that needs to happen around these things, which is really, really complicated. And certain societies are going to do it by fiat. China, this is what we're doing, and others are going to progress over time. It just takes time for societies to kind of get used to these changes.

John Darsie: (39:46)
So you're no stranger to public service. You served on the board of OPIC, which is the Overseas Private Investment Corporation for those who aren't familiar. You're on the advisory board of the U.S. Export Import Bank, which is somewhere where China has sort of leapfrogged the United States in terms of how they use these types of organizations to drive investment. And you are also on the FCC Advisory Council. So if you can wave a magic wand from a policy perspective or a regulatory solution to drive more investment into the types of companies that can improve quality of life in the United States or other elements of our society, what would that policy solution be?

Deven Parekh: (40:26)
I don't know that there is an easy, I mean I've thought a lot about this. I don't know that there's an easy policy prescription. And one of the things, look, I think one of the things you're seeing right now is an increased, going the other way, is probably an increased interest on the part of Washington to regulate the tech industry. And some of that is I think that, and this is a personal opinion, but some of that is the tech industry's fault. I think for too long a time, the tech industry's kind of taken this view of we're out here doing good, kind of saving the world, just kind of leave us alone. You don't need to worry about us. We're making it easy for you to find information and we're doing all these great things.

Deven Parekh: (41:10)
And we took a very arrogant view as an industry, I mean towards government. And we're seeing the backlash of that right now. And I think like every industry, some regulatory oversight can make sense. And then the one that I think, I don't really think it matters who gets elected next week. I think as it relates to, for example social platforms, there's likely going to be more regulatory focus today than there was before.

Deven Parekh: (41:44)
So I don't think, I think the odds of the government putting a policy in that's going to significantly change the rate of adoption or the curve around tech is pretty low. What I go back to though, and to your point is, there's still this massive digital divide, and COVID really, really brought it out.

Deven Parekh: (42:06)
So biggest issue in my home when everybody was home for school is how come we don't have the one gigabyte thing so that we're all streaming faster, right? Well, what happened, where on the other hand, what's happening is you have people who have one laptop at home or one computer at home, and they have two or three kids. And so this digital divide is, which is only going to get exacerbated in the world we're in today, we really need to fix. And there needs to be a massive investment on the part of government, in my view, to fix that, by making broadband available everywhere.

Deven Parekh: (42:48)
It's crazy to me that living in a country that's as rich as ours, that's supposed to be the envy of the world, that we have so many people who don't have availability, the internet access. I mean, I remember when I was on vacation in Africa, I had better data on my phone in Africa and I can tease Anthony, than certainly in the Hamptons.

John Darsie: (43:16)
Yeah, absolutely.

Deven Parekh: (43:17)
And that's true, I say facetiously, but there's a much more fundamental kind of issue. And if I would focus on something right now, I wouldn't focus on the government trying to come up with a regulation or a rule that's going to help the tech industry. I think that's likely not going to work. What they can do is things like this, and making technology available, making broadband accessible, so that everybody can have access to the same tools that everybody on this call has access to, that's powerful, because you know what? Somewhere, there's a kid who should be watching this right now and watching all the SALT Talks and getting educated in all these issues. And they can't. Why? Because they don't have a laptop with a broadband connection. That's a travesty.

John Darsie: (44:03)
Yeah, when people think about infrastructure investment in the United States, they think about fixing roads and making our airport terminals look better and making trains go faster, but really it's the digital infrastructure that's in the biggest need updating. And we had a speaker on SALT Talks about a month or so ago talking about Chattanooga, Tennessee. They had a very smart, forward thinking Chamber of Commerce that said, "You know what? Let's just give ourselves a really fast internet. Let's give ourselves gigabit speed internet and see what happens." And what happened was you had tech companies that flocked to Chattanooga who were able to leverage the speed of the internet and the quality of the tech infrastructure to start building companies and processing data in ways that you couldn't if you didn't have that same type of tech forward approach. But Deven, we're going to leave it there. We're so grateful for your time and grateful for you joining us on SALT Talks. Anthony, you want to have a final word for Deven?

Anthony Scaramucci: (44:56)
No, listen, it's a brilliant conversation and congratulations on an amazing career. I think you left a lot of things for younger people on this call as well as seasoned investors to think about when they're running their portfolios or thinking about investing. Are you raising another fund now, Deven, by any chance or no?

Deven Parekh: (45:17)
We closed our last fund in March.

John Darsie: (45:21)
Good shout out, Anthony.

Anthony Scaramucci: (45:23)
No, I'm saying that for promotion, but I'm a very shy, reserved person. I have a lot of introverted aspects t my personality.

Deven Parekh: (45:33)
I think if you look up shy in the dictionary, there's a picture of you.

Anthony Scaramucci: (45:35)
There is. It's right there next to me and several other luminaries of shyness, but I just say I wanted to bring it up because you're the type of person that's going to make a fortune for people in the future and I wish you great success and thank you for joining us on SALT Talks.

Deven Parekh: (45:52)
Anthony, John. Thanks so much. That was a lot of fun.

John Darsie: (45:53)
Thank you, Deven.

Winston Ma: The Global Digital Economy | SALT Talks #90

“It is estimated that [sovereign funds] have $30 trillion under management, so they have enormous power in the capital markets… that's why it is important for the capital markets to get to understand this group.”

Winston Ma is an investor, attorney, author, and adjunct professor in the global digital economy. He is one of a small number of native Chinese who have worked as investment professionals and practicing capital markets attorneys in both the United States and China. Most recently, he was Managing Director and Head of North America Office for China Investment Corporation (CIC), China’s sovereign wealth fund, for 10 years. Prior to that, Ma served as the deputy head of equity capital markets at Barclays Capital, a vice president at J.P. Morgan investment banking, and a corporate lawyer at Davis Polk & Wardwell LLP.

Hedge funds and asset managers typically get most of the spotlight from the media when it comes to large investment groups. In reality, sovereign funds play massive roles in the capital markets, yet are under-discussed and not fully understood relative to their importance.

“They are the LP investors in many of the hedge funds; they are the deal-making people which engage the investment banks and they're typically the mother of the funds.”

Sovereign funds have historically been more passive in their investing, but have become much more active. Even more recently, funds have shifted away from traditional asset classes like real estate to venture. This shift to venture is a higher risk, higher reward investment profile and has offered a large pool of available venture capital in places like Silicon Valley.

LISTEN AND SUBSCRIBE

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SPEAKER

Winston Ma

Former Managing Director

China Investment Corporation (CIC)

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone and welcome back to Salt Talks. My name is Rachel pether and I'm a senior advisor to SkyBridge Capital based in Abu Dhabi, as well as being the MC result. Thought Leadership Forum and networking platform that encompasses business technology and politics. Now as many of you know, Salt Talk is a series of digital interviews with some of the world's foremost investors, creators and thinkers. And what we're really trying to do here is, provide our audience a window into the mind of subject matter experts. The subject for today's talk is going to be on sovereign wealth funds and venture capital investing. And who better to discuss these topics with Ben Winston Ma, who is the former Managing Director at the China Investment Corporation, one of China's sovereign wealth funds.

Rachel Pether: (00:56)
He spent 10 years as the MJ and Head of North America for the CIC, and was a founding member of the CIA's private equity department, and also the Special Investment Department, direct investor. He is the author of China's Mobile Economy, the Digital Silk Road, China's AI Big Bang, and investing in China. He also has two new books coming out this year, actually, one later this week, which we'll go into more detail on later. In 2013, Winston was selected as a Young Global Leader at the World Economic Forum. He has multiple degrees, and he has served as an adjunct professor at a number of world class universities. As always, if you have any questions for Winston, just enter them in the Q&A section of your screen. And with that, Winston, welcome to sell talks.

Winston Ma: (01:46)
Yeah, thanks for having me, Rachel.

Rachel Pether: (01:50)
It's such a pleasure to have you with us today once so now you are you're an investor, you're an attorney, You're an author, and you're obviously also a professor in the global digital economy. So maybe we just start by you telling me a bit more about your personal background.

Winston Ma: (02:07)
In 1997, I received a scholarship from NYU Law School. So I came to New York, which started my Wall Street career. First, as a lawyer at the Davis Polk, and then after B-School, I joined JP Morgan, for Equity Capital Markets, convertibles and derivatives. 2007, Barclays Capital, started US equity business and they hired me to start their business. And they also in the same year, CSE was set up to manage a portion of China's sovereign wealth the trillion dollar foreign reserve. So starting from the beginning of 2008, I moved back to China to become an investment professional to manage a portion of the country's wealth.

Winston Ma: (03:00)
Between the 10 years at CIC, I also spent four years in Toronto, Canada for CSE North America office actually for the first time, CIC had overseen the office, and they picked Toronto for the North America presence. That was sort of my 20 years in the capital markets. 10 years on Wall Street, working on global capital and China opportunities. And then, last 10 years I was with CIC that was more like China capital and global investments. Right? And I moved back last year to back to the capital markets, it seems life has its own way of circling around, and the rhymes in different time is not that interesting [crosstalk 00:03:50]

Rachel Pether: (03:52)
Definitely, and so with over this 10 years of experience, I do want to sort of maybe take a step back and start with the why. So, you have a great deal of experience with the sovereign wealth fund world and your time at the CIC. Why is this group of investors increasingly important for the capital market players?

Winston Ma: (04:14)
Yeah, to put this into context, right, here's a quick question, who holds the power in the financial markets? To many people the answer probably would be, the large investment banks, the big asset managers and the hedge funds because they are often in the Media Spotlight, right? But this new group of sovereign funds, I would say because this concept includes the sovereign wealth funds, includes the public pension funds, as well as the investment arms of many central banks. And this group of investors have huge amount of capital, it is estimated that they have $30 billion, sorry trillion dollars actually, $30 trillion on the management.

Winston Ma: (05:00)
So they have enormous power in the financial market. And to put this again into the contest, right, they are actually the enablers of the players in the media every day. They are the LP investors in many of the hedge funds. And they are the deal making people which engage the investment banks and certainly, they're typically the mother of the funds, or many asset managers, just starting from their large size of capital, they are super, super important to this capital markets. But they are still very little known. And that's why it is important for the capital markets to get to understand this group.

Rachel Pether: (05:47)
Interesting, and last time I saw you was actually in Austin, and we were at a sovereign wealth fund conference and I pretty much just sit here in my apartment, and you've actually gone and written two books, and one of them is about this digital economy at the hunt for unicorns, how the funds are reshaping investments in the digital economy. Can you tell me more what we can expect from less than how that 30 trillion of investment capital plays into the digital economy?

Winston Ma: (06:19)
Sure, the big background of this is, these sovereign funds used to be very passive and behind the scene, and in recent years they've become, many become much more active and direct in the capital markets. And they started with the traditional asset classes, like infrastructures or real estate or the general p industries. And in more recent years, they made this leap forward into the venture investing, which used to be viewed as drastically different from institutional investing, right, because venture investing is very specialized. And it's tends to be very early stage and small ticket size. And they are, they take times and they are a high risk, high return, which is very different from the typical risk profile, right. That the institutional investors look for.

Winston Ma: (07:28)
So it's in this kind of context, we come to see the sovereign funds become the new power for venture capitalists, and they naturally bring change to the traditional play of venture investing and Silicon Valley. So the way to think about their difference is in the following ways. Firstly, obviously the large size, they have trillions of dollars under management just individually right for some largest players. So their average equity check is very large, very different from the typical VC investment. And secondly, they are much more long term, fewer IPO of tech companies compared to many years ago. Right. And there's a third aspect is, they are called sovereign investors, so they inevitably they have this government connections. So in the middle of this geopolitical tensions around tech competition, inevitably, they're caught up in the global tensions, which is also different from the typical VC fund.

Rachel Pether: (08:37)
Yeah, so she let's pick up on each of those points that you just mentioned, the first one being about the large ticket size, and

Winston Ma: (08:45)
exactly

Rachel Pether: (08:45)
how big daddy, and if you look at the SoftBank Vision Fund, right.

Winston Ma: (08:49)
Exactly

Rachel Pether: (08:49)
100 billion dollars, 60 billion from two Middle Eastern investors. So, can you elaborate a bit more on actually how the sovereign wealth funds access this venture capital, and maybe also specifically on how the vision fund has impacted this landscape?

Winston Ma: (09:08)
Yeah, the vision fund is a great example of this big ticket size of the sovereign funds. Because the overall theme of vision fund can be summarized by two words, right, think big. I think that's sort of the motto from Masayoshi Son, think big. So, from the unicorn side, I think that means the startup masters, think big in terms of develop their business and become the leading company in their respective sector, right. I think that's what Masayoshi Son was preaching. And then from correspondingly from the investment perspective, that means they are ready to write a very big check, right?

Winston Ma: (09:55)
So in a sense, they are not only the unicorn hunters, but they also they can be viewed as unicorn feeders. Yeah, obviously if you didn't find a fitting that built, but a lot of other sovereign funds are also in that category, right? The best example of that probably is head of financial, the upcoming IPO of the fintech arm of Alibaba. Now they of course, they're looking for a 200 billion plus valuation for IPO, that's a large number. But even before this IPO two years ago, when they had the private round of financing, they got to 100 because they got to 150 billion valuation. To a large extent thanks to many sovereign funds investing during that that round which includes the Singapore sovereign funds of Temasek and the GIC.

Winston Ma: (10:49)
And even some less known sovereign funds, like the Malaysia is khazanah. And also, guys from the patient world, such as CPPIB Canadian patients. And of course before that 150 billing round CIC and China's Social Security fund another sovereign investment vehicles of China, were already investors in enter financial years ago, right. So, these big ticket investments from the same investors definitely created these unprecedented valuation of unicorns. That's the Think of Big Site, right. And the consequences, now we have too many of the unicorns. It's 2013, when the word unicorn was created, there were 38 unicorns across the world. And by 2020, by the data end of 2019, globally there are more than 400 unicorns, that means during the seven, eight years, seven years actually, we had a tenfold increase of the number of unicorns, and I would say just think big from sovereign funds. A tree is a major reason for that.

Rachel Pether: (12:15)
And don't you think that's for myself actuating as these unicorns are often the market leaders and extremely well capitalized. That's almost a self fulfilling prophecy. And that sort of thing. Like you get a startup, $500 million to build a business, they're going to crush the competition. They have similar teams and other resources.

Winston Ma: (12:41)
I think the word similar is the key, Rachel, because in some way unicorns are hunted, they are manufactured. Once people see the formula of well, two unicorns a lot of smart people began to industrialize that manufacturing chain of unicorns, right. It's not only in Silicon Valley, but also in China. And it's not only China in the US, but also other innovation hubs in the world, such as India, right. The typical ingredients of a unicorn is online service, based on online service on internet platforms, promoted by social media, right, and partnership with existing giants, who have large user traffic.

Winston Ma: (13:36)
And of course, on top of that as you mentioned, right is taking the venture money and subsidize users to generate more traffic and attention. Right. So, this is the time of this time to come to reflect a tree. There's this global downturn, this pandemic, right. And this global tensions all the headwinds are ravaging the hurt. When you take a closer look at the hurt some are pretty troublesome, some already took on too much fat they can now race, some are beautiful show, not for the race and some are even worse, they already got sick from their own issues, like we work that kind of situation, right? So, you need like, you have to kind of see a doctor. So this is a very interesting time to revisit this hurt[crosstalk 00:14:41]. They have to be kind of active investor even more quickly, to take on the unicorns more directly and in a more involved way.

Rachel Pether: (14:55)
Yeah, I think that's a great point on the case studies and I'd love to dive a bit in front We work later on, and then how might be excess capital played into that equation. But one of the points you mentioned was this long term investment piece. We actually had Russ and I know that you're friends with as well from the hedge fund. And he was on yesterday talking about how countries can and should use their wealth to invest more domestically and potentially, especially given the current pandemic impacting local economies. How do you see that playing out? And what are your views on investing in the hometown?

Winston Ma: (15:39)
Yes, that's a great, great point very relevant in the post COVID global economic recovery. The background of this is even before pandemic, a lot of the sovereign funds already have multiple objectives, on one hand they seek financial returns, at the same time they are also trying to use their investments to help their domestic economic development. And in the Middle East the guys you mentioned are probably the best examples, certainly, when they put a 60 billion in vision fund, they're not only looking for financial investments, right. But also they want to transform their economies from fossil fuel based into more innovation based economy, right.

Winston Ma: (16:29)
And we're seeing more and more like this for example, in Africa, right, you see more sovereign funds are being they are being created, to better manage their resources money, and use them to finance their economic transformation, especially the digital transformation. Right. So I think the way we put this into historic context where it can be like this, during the last, after the last financial crisis, 2008 lots of countries have used the sovereign funds or mobilized sovereign funds to invest new infrastructure as a catalyst for economic recovery. Right. And let's say 12 years later, 2020, for the post COVID recovery, it's quite natural that the countries would do similar things, but I think they will focus more on the digital ecosystem, to your economy ecosystem, and the digital infrastructure.

Winston Ma: (17:33)
Obviously the world is still lack of more toll roads and highways and utility grid, right. But at the same time to be competitive in the upcoming digital economy the emerging markets, I would argue, have even more important need for more digital infrastructures, data centers, fiber connectivities, and even just the basic internet connectivity, so that, globally about the three billion people who do not have the internet connectivity can be part of the digital ecosystem. That can bring some growth catalyst to the world economy. So I can imagine, just like during the last crisis the government funds have used a sovereign capital to invest in infrastructure to promote growth. Now, we may see more sovereign funds, putting money into digital economy, as the new growth engine post to call it.

Rachel Pether: (18:46)
Yeah, no, that's a great point. As you mentioned, we are seeing that in the Middle East, particularly, as well, you've placed a lot of emphasis on this word sovereign. And obviously, they are represented 100% owned by sovereign nations. How do you see the tension? Because we spoke about China, US tech investment is also kind of at the forefront of the geopolitical battle rail, as well. So could you maybe explain how that technology battle sort of plays into that geopolitical tension?

Winston Ma: (19:22)
Yes, the technology is the front line of every index, right. And it's no exception for the sovereign funds. But to some extent it's kind of just coincidence of time. But it played out in the broader context. What I mean by this is the sovereign funds are obviously becoming active investors and direct investors in technology. So from the historical context, it's a natural extension, right? They started as passive investor, and they become the random Investors in the asset classes they're familiar with, like infrastructure in a real estate and a graduate they extend into every sectors they are interested. So they become this new venture capitalist.

Winston Ma: (20:15)
So this is the historical context. But let's say the current attention is we were just talking about the historical development. But the current attention is that technology is viewed as a strategic assets of a country. Right. like the data, like advanced technology these are viewed as strategic assets, and even national security by all nations. Right. So it's just interesting to see this collision at a time that all the sovereign funds are becoming actively invested in the tech sector, and they recognize that tech investments can be a useful tool for their own economic development. On the other hand, right, there's a host countries, the countries that are receiving the capital investment, become more alert or become more conscious of the value of technology, and they are increasing their regulations and scrutiny, right, of such foreign investments. And I think that's sort of the context of this collision we're seeing today

Rachel Pether: (21:33)
I guess you mean, TikTok in the current debates in the US a great example of that data and the information.

Winston Ma: (21:49)
Exactly, TikTok probably the best example of this. It's really not surprising to you, it's a main case for my upcoming book, right, into the title of The Hunt for Unicorn, hasami investments, change the future of digital economy. So what I meant by that is, TikTok represents a very important case study for all the stakeholders in this. One, entry. First of all, it's a very positive story, because a TikTok represents a growth story during pandemic, right? Because of the pandemic TIKTOK during the first half of 2020, was the second most downloaded app in the world. And of course you know what's the number one, right, this is Zoom? So after Zoom, TikTok was most downloaded. So it shows you that even with the pandemic, there are still growth areas, right.

Winston Ma: (22:54)
So there are still new opportunities coming up, which means this hunt for unicorn story will continue. That's number one, very pod. The second aspect of this uniqueness of the TikTok cases is that it may give us useful reference in terms of cross border data management, because except for the US company, Apple, TikTok and its parent company ByteDance is the only company in the world that has large number of users in both US and China. They have Chinese users and US users in respective territory each shoe is more than 100 Millions, which is unique trick. So, this is the first case of governments to work out a scheme that can handle a company that has data in different countries. Like Google does not have a presence in China. So Google doesn't have this issue. Facebook is not in China, Facebook doesn't have that issue. Alibaba is very big in China, but Alibaba is not very big in the US. Right.

Winston Ma: (24:16)
But TikTok and ByteDance is unique in the sense that it has users in both countries, and no matter what kind of the term sheet come out, it will be a very useful reference to understand how governments kind of going to work out. And then the third aspect of the TikTOK cases is there's real money on the line. Right? Because if there's no solution and right now the US is saying, you mus sell, you must sell TikTok to US companies, because it's national security of the US, right. And a Chinese saying we were going to manage the sale of the algorithm, because this is the national security of China. Right? So if I tell you, as a former GEO lawyer banker investor, it's not very easy to please do governments at the same time, right. So if you don't have a good term sheet, if you don't have a solution, then TikTok must be shut down. And it's Then the 50 billion valuation people put to TikTok work will go just like that. So there's real money on the line in the context of the TikTok case.

Rachel Pether: (25:33)
Do you actually say that as a risk that it could just be shut down? If they can't come to a conclusion?

Winston Ma: (25:40)
Maybe, because if you don't have a solution like, who eventually hold the algorithm. And who will manage and control the user data? Right. And just to highlight the complexity remind you that the algorithm has been trained by data from both sides. So in a sense that the China algorithm was trained by the US user data. So it's not very easy to come up with a rationale to give this thing up, women need the King Solomon, to give us some wisdom about this.

Rachel Pether: (26:30)
I guess as you say, it's a very interesting case study. Because normally, when you look at China and the US digital economy, it's quite bifurcated, right? So you have, Amazon, you have Alibaba. And I guess this is a true case that I also want to briefly touch on because you've been looking at this area for a while you published China's Mobile Economy a few years ago on that and looked at sort of the world changing digital transformation in China. Back then, why was an inflection points on the internet in China, and maybe also talk about how today's geopolitical tensions is applying to that?

Winston Ma: (27:12)
Yeah, sure the book of China's Mobile Economy was written in 2016, published in 2016. And that was sort of the fastest growth time of China's mobile internet. That was certainly a huge inflection point for China's internet, because overnight, people go mobile. Right. So, that's the beginning of this mobile only age. What I mean, mobile only me. I mean, for many Chinese people, their first time to be connected to the internet, is the time they have a smartphone. They never had a PC, they never had a landline phone. But with the smartphone, all of a sudden, they have a phone, and it also they have the internet.

Winston Ma: (27:59)
And that's a very big thing because in just a few years, China become this largest mobile internet population in the world with more than 900 million people that's almost like the combined population of the US and Europe right. So that's a huge, huge growth during just this few years. Now the development of the internet industry of that time can be referred to as copied to China. CTC Copy to China, which means the first generation of Chinese tech companies had their start as copycat versions of Western size. In a cell phone, Alibaba was viewed as the Chinese version of eBay, at the very beginning, Alibaba and then it added alipay so you say that's eBay plus PayPal, or Weibo it was viewed as Chinese version of Twitter, and Tencent may be viewed as Chinese version of Facebook plus messenger, right.

Winston Ma: (29:19)
That's the general perception during that time, right. Now what's interesting is after this period of growth, China's innovation ecosystem has entered into the second face, this face in many areas actually, China has become a trendsetter instead of a trend-follower in the mobile economy for example, TikTok is very good example. Right? It started this phenomenon of short video, and then Facebook is adding similar features to its empire. Right. So, this face you can refer to China copy PCC, right. And of course there's a short video just for the teenagers, but the doubt version of this is in the last couple years, like China was mostly doing the ketchup relating to smartphones and The 4G network and in and the mobile internet economy. But with last few years of development, China has become a equally interesting Innovation Center just like the Silicon Valley of the US.

Winston Ma: (30:38)
Right? So what do you see is, the big data from the 900 million users have become the base for AI and big data analytics. The large internet platforms in China become the infrastructure for next generation startups. And of course during that process, a huge millions of college students become entrepreneurs, college graduates. So I think in new summary, essentially, what we're seeing is, in theory, the 4G, the age of 4G, and the smartphone, China had proved its catch up. And now, as we enter into the age of 5G, China is becoming a equally important innovation centers, and in many areas, China is competing with the US head to head and to your question about geopolitical tension context. And I think that's the link to the geopolitical tensions. Because years ago, it was a follower. Now, it is a competator.

Rachel Pether: (31:48)
Yeah, that's a great point less likely to be threatened by someone else by just following what you're doing. And actually, we have a number of audience questions that have come in, and they're all quite heavy, meaty questions, so I am going to go through them. We have time. So again, thank you, as always, for your question. Again, he's asked what do you think so we had is really on giving his perspective that China and the western market are developing bifurcated internet standards? And are there different approaches to say the development of AI? And maybe you could also talk about what you mentioned about how China's market size plays into that, and just that maybe give them an advantage? In this area with 900? Or over a billion users?

Winston Ma: (32:37)
Yes, specific AI right I think what's, what's really makes China different is the government come up with a comprehensive policy and agenda to set for its development phase, development paths the trigger point was 2017, when Google's AI machine beat a Chinese player in the go chess game, which proved that AI is way let's say smarter than human players. Right. And that sort of triggered China's rush into AI. And of course every country is talking about AI. But what's really unique about Chinese it comes from the central government, as well as the private sectors, it's the central government level, since we're talking about sovereign funds today what's remarkable is, it came up with a top level kind of vision that by 2030 in just like 12 years from that game, China will become the world's leading AI superpower.

Winston Ma: (33:55)
Right. And then from there the different ministries come up with different kind of industry guidelines. So, for example, the NDRC come up with rules relating to AI champions setting standards for different AI industries, for example, autonomous vehicles, or the education ministry, where come up with guidelines set up, I think the plan was to have more than 100 majors on AI, at different universities, so on so forth, right. So what's really sets China apart is this common efforts and the common vision and the government resources to be put into this effort and of course the size of the market, 900 million users united by the same language, same culture and the same mobile payment means a lot of activities, internet platform every day, which left a tremendous amount of data and they organized the data on these internet platform that can be used to train AI algorithms, right. So to some extent the flexible policy for flexible regulation on data is also a helpful fact during the early years of AI

Rachel Pether: (35:32)
Yeah, and we actually have another audience question, which was kind of builds on these internet giants and China. Edsger Alonzo, it would be great to get your thoughts on the future of Tencent and Alibaba, given that they've seemed to extend their reach into asset management, media, logistics, and then also taking stakes and other companies that are quite forward looking themselves as venture capitalists investors. So how do you see this company[inaudible 00:36:01]

Winston Ma: (36:03)
So I think, to answer this question, I will start by saying if there's anything that's in agreement, by US and China governments, it's in the regulation of the Big Tech. There's not too many things that China and the US government agree in these days, but it seems like they have pretty much consensus on regulating the Big Tech. Right, so forth. So let's use anti financial for the first example. Right, for anti financial? It's the financial arm of Alibaba and of course we all know, right. As we're all in the financial market, we all know, the financial sector is always heavily regulated. And in the early years as I mentioned earlier, right, China takes more flexible approach to regulation. So in the early years, Alibaba enjoys super growth because there's very relaxed environment. But as we speak, in 2020, we start seeing more and more regulation. And more and more regulation of this sector.

Winston Ma: (37:16)
And also more and more risk alert as from the regulators. So for example, this China's central bank starts to warn about this system, systemic risk of financial lending platform, right, because you when they use internet data then they can do remote lending without the need of collateral. So this may be a maybe a risk to the financial system, according to the central bank. Right. And, of course, the central bank, plus the minister commerce in they are looking at an antitrust issue and financial and related internet system. And most recently very funny theory in IPO. Right the China's securities regulators they talk on end because, and to use the mutual funds on their own platform to sell their IPO shares, which triggered China intense review.

Winston Ma: (38:20)
So you can see these regulations are coming up. And of course in the US, you also see antitrust pressure on these internet giants going up in and also you have this to prick attention related, Big Tech regulation, right? Because enter financial entry, according to media reports, last couple days, is being watched by US as the potential target for crackdown in the US. So, I think probably the most pragmatic or practical way to view to think about the prospect of guys like Alibaba and Ant Financial and Tencent is to have a realistic prediction of their future growth. They will still have growth, because they are the momentum is just tremendous. But the regulators are taking our action so we should have more, let's say, realistic projection for their future growth.

Rachel Pether: (39:36)
Yeah, that's a great point. And we've actually had a couple of questions coming in. And we haven't even touched on this yet. And it is quite a big topic, but on the China's One Belt, One Road initiative. How do you think like, what's the long term perspective by the sovereign wealth funds, sort of efforts to benefit society such as China's and business for the One Belt, One Road, I guess, in addition to the physical infrastructure and the digital infrastructure? And we've also had a question saying how important was sovereign wealth funds be driving securitization of the now almost 800 billion and One Belt One Road loans

Winston Ma: (40:23)
Sorry, yeah securitization of 100 million projects

Rachel Pether: (40:29)
Of the loans associated with One Belt One Road.

Winston Ma: (40:35)
Interesting, yeah. Honestly, I haven't really put too much thought about this securitization thing. In general when you have a sovereign credit, you don't have to worry too much of that. But I think the potential solution of this credit issue along One Belt One Road project, a tree may come from the sovereign wealth funds of those local countries, what I mean by that is the local sovereign wealth funds can be a great partner for China capital, with respect to One Belt One Road projects in those countries. They because when they are part of the game, they bring the local credit into the mix, and they may even sort of use this credit support to engage more institutional investors in the mix, more capital markets institutional investors into the mix that may provide a better solution to the credit issue.

Winston Ma: (41:52)
And I think that going forward, we may see more Digital Belt Road, and actually the term for that as Digital Silk Road, this digital prom of one belt one road, and which means down the road we may see more nimble investments. Of course, you will still have similar infrastructure projects let's say internet connectivity infrastructures, right? Or the smartphone network or the satellite towers and so forth. But there will be more investments, let's say in the ecosystem, let's say mobile payment, right, let's say ecommerce platform so I suppose Which means they are not necessarily as capital intensive, as the traditional Belt and Road, that people relate to me because most of the time people relate Belt and Road into Toros highways and steak like a state and utility grid, a type of infrastructures, right. But in the going forward in the digital economy, that the digital economy ecosystem, in this kind of like, soft connectivity is just as important. And we may see like, a more kind of private equity type of investment as compared to the traditional infrastructure investments, Yeah.

Rachel Pether: (43:22)
Yeah, absolutely. Digital and physical infrastructure. We are over time, but I did want to just make sure I answered those audience questions, although we do still have some outstanding time. Sorry about that. But I know we've spoken about geopolitical tension and your upcoming book is actually called potential war, but I do always like to end on an optimistic note. So maybe talk a bit more about that. While we can hope for even though the title of your book is, The DigitaL War.

Winston Ma: (43:57)
Yeah, my other book is titled The Digital War, how China's tech power, shapes the future of AI blockchain and the cyberspace. I certainly think that the interconnectivity of the countries not only in the digital cyberspace, but also in a kind of real economy will still keep us working together and find the synergies. And again if we look at the IPO of Ant financial as an example certainly they have existing investors from all over the world and for the IPO. Guess who the underwriters they're the Wall Street investment banks, right. And for lots of the distribution, I can bet you that a lot will go to US institutional investors, even though they will be listed in Hong Kong and Shanghai right now, Nasdaq, partly because of the tension. But you can still see different levels of connectivities between the two countries. So I'm still positive

Rachel Pether: (44:59)
Well some people always came to collaborate when there's a commercial upside.

Winston Ma: (45:05)
Exactly, Money Matters.

Rachel Pether: (45:08)
Yeah, quite right. Well, we are we're actually not out of time. We're slightly over time, but I just wanted to thank you so much. It's been a pleasure. As always, I really appreciate you giving up your time to speak to us today.

Winston Ma: (45:21)
Yes, thank you very much, Rachel. Thanks for having me on the show talk.

Marty Chavez: How Tech is Transforming the Financial Industry | SALT Talks #88

“The software has so much knowledge of markets, and data, and models, and risk, and positions, and trades that anything you could want to know about the markets and about our risk, you can just ask the software.”

R. Martin (“Marty”) Chavez is widely renowned as a trailblazer and leader who revolutionized the way that capital moves and works on Wall Street. Most recently, Marty served in a variety of senior roles at Goldman Sachs, including Chief Information Officer, Chief Financial Officer, and global co-head of the firm’s Securities Division. Chavez began his long and illustrious career breaking from tradition as an openly gay Latino working on Wall Street, an industry that had not yet earned a reputation as widely accepting.

In the 1980s, Goldman Sachs made one of its most important decisions in its company’s history when Lloyd Blankfein helped develop a computer-generated risk management system by integrating computer scientists and IT professionals with the trading desk. Chavez was the 12th member of this new age team, named SecDB, developing software that revolutionized Goldman’s ability to process data and inform risk management. “You can ask the software to run trillions of ‘what if's, hypothetical's, what if dollar-yen moves here, what if the fed does this to interest rates?’ And then you can start to ask, ‘Well, how much money would we make or lose?’"

Chavez is now applying the AI technology and ideas he helped develop in finance to the life sciences, his original passion. This includes a company that has created a digital microscope designed to outline cells and their tissue specimen to identify potentially cancerous properties.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Marty Chavez

Chief Information Officer

Goldman Sachs (2014-2017)

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone. And welcome back to SALT Talks. My name is John Darsie, I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance technology and public policy. SALT Talks are a digital interview series that we launched during the pandemic with leading investors, creators, and thinkers. And what we're trying to do during these SALT Talks is replicate the type of experience that we provide at our global conference series, the SALT Conference, which we unfortunately had to postpone in the wake of the pandemic, but are looking forward to resuming in 2021. And what we're really trying to do at the conferences and on the SALT Talks is to provide a window into the mind of subject matter experts, as well as to provide a platform for what we think are big ideas that are shaping the future.

John Darsie: (00:51)
And we're very excited today to welcome Marty Chavez to SALT Talks. Marty is widely renowned as a trailblazer and a leader who turned the Wall Street trading business into a software business, revolutionizing the way that capital moves and the way that capital works. Most recently Marty served in a variety of senior roles at Goldman Sachs, including Chief Information Officer, Chief Financial Officer, and the global co-head of the firm's securities division. Marty was also a partner and a member of the Goldman Sachs management committee. Marty has achieved singular acclaim in the financial services industry for his work on SecDB, an early platform that transformed the trading business into a software business. He's also known for bringing the front and back offices together.

John Darsie: (01:35)
Far from the stereotype of a banker, Marty is a disruptor at heart, and he was among the most senior Latinos on Wall Street during his time at Goldman, as well as the most senior openly gay executive at Goldman Sachs. In 2016 a New York Times profile describe Marty and his departure in sensibility from the button-down partners of Goldman LOR. Prior to joining Goldman Sachs, Marty was the CEO and the co-founder of Kiodex, which was acquired by SunGard in 2004. And he was also the Chief Technology Officer and co-founder of Quorum Software Systems. He holds an A.B magna cum laude in biochemical sciences and an S.M in computer science from Harvard and a PhD in medical information sciences from Stanford, specializing in architectures and algorithms for probabilistic expert systems.

John Darsie: (02:26)
So Anthony, our moderator today, Anthony Scaramucci, the founder and managing partner of SkyBridge Capital, he overlaps a little bit in terms of Harvard and Goldman Sachs with Marty. But I would say they took slightly different paths. I don't know if Anthony has his degree in biochemical sciences or that long architecture is algorithms and probabilistic expert systems, but he's a pretty smart guy and we're looking forward to a conversation between Anthony and Marty. And reminder, Anthony is also the chairman of SALT, Anthony with that, I'm going to turn it over to you for the interview.

Anthony Scaramucci: (02:57)
Marty, after he blasted me with H.R. McMaster, reminded everybody that I got fired after 11 days and McMaster threw me a farewell party just right at the Adam's apple with the karate chap, he's bringing up the fact that you are way smarter than me, right? And the reason he's doing this is because I threatened to fire him last time. And of course it was a hollow and very shallow threat, Marty. And so now here we are again, we're stuck with him [crosstalk 00:03:24] the next 45 minutes. So I'm sorry about that, Marty, but you know what, what can we do? We got to get millennial traffic on SALT Talk and so John is our millennial magnet.

Marty Chavez: (03:35)
Okay. Seems to be working.

Anthony Scaramucci: (03:37)
It's great to have you on. And in all seriousness, you are a true pioneer and you've done many things for our industry. But also, the way you've lived your life and your openness is to me, it's a very gratifying thing. And so I'm usually appreciative of you joining us, but I want to talk about your personal and professional background because, why did you go into investment banking, how did you lead there? And when you were a kid, did you think you were going to go in that direction? And if you didn't think you were going to go in that direction, what direction did you think you were going to go in?

Marty Chavez: (04:12)
Well, actually, paradoxically, the only reason I ended up on Wall Street is because it was not part of my plan. And what I mean by that is as college class of 85, and I remember in my graduating class, it seemed like almost everybody was going to Wall Street, if they weren't going into consulting. And well, something happened in October of 1987, and there are so few people from the class of 85 on Wall Street as a result. And so I took a different path. I'm a computer scientist, and I'm really just a computer geek and always interested in applying computer math software modeling analytics to real-world problems and I've been interested in a lot of different real-world problems. And my first job was actually assigned at the times, it was when I was in prep school and it was a summer job at the Air Force Weapons Laboratory. And I was writing Fortran programs to simulate explosions of neutron bombs. That was sort of a thing you could do in New Mexico at that time.

Marty Chavez: (05:23)
Turns out the math is pretty much the same math used all over the place, including on Wall Street for modelings, [inaudible 00:05:30] partial differential equations. So who knew that would eventually be useful, but I went off in a different direction. I studied biochem in college simply because one of my professors said, "The future of life sciences is computational," which seems obvious today. It was not obvious in 1981. So I was at Stanford Medical School, and I was doing this MD-PhD program and doing some work on machine learning, early work, early groups of people saying, "Hey, can we get machines to figure out how to do diagnosis of sick people just like doctors do?"

Marty Chavez: (06:10)
The problem though, the scope and the complexity of problems in medicine are so much greater than what the computers were able to do at that time. So my PhD research was, well, can we get approximate answers really fast with the low compute power we've got, but it honestly, wasn't really working. And that time, the early nineties is now we look back and we say, "That was a nuclear winter of AI and machine learning." We stopped using the term AI because what we were able to do was so far away from the aspirations of artificial intelligence, it was almost an embarrassment. So in the middle of that, a Wall Street firm that I had never heard of, told the head hunter, "Go to Silicon Valley and give us a list of entrepreneurs in Silicon Valley with PhDs from Stanford in computer science and ship them in for an interview."

Marty Chavez: (07:11)
And so I thought it was a joke. I thought it was taking this bank really scamming them for a free trip to New York, hanging out with my college roommates, see shows, have a good time go to an interview. And so I went to the interview and one thing led to another, and a week later I moved to New York and that's how I got on Wall Street, entirely serendipitous. I had the background they were looking for but I had no idea what my background was going to lead to, it just happened.

Anthony Scaramucci: (07:43)
That was a fascinating story, and you started in J. Aron and if I remember correctly from your bio, and so you know Lloyd and Gary who are personal friends of mine.

Marty Chavez: (07:54)
Since I was a kid.

Anthony Scaramucci: (07:54)
Like Tim O'Neill, who moved on [crosstalk 00:07:56] Goldman geography, but I want to take you back to those days. I joined Goldman in 1989, and I can't remember the Chief Technology Officer, I think his first name was Rick, but I can't remember his last name.

Marty Chavez: (08:08)
Taking me back. I wouldn't be even remembered back then.

Anthony Scaramucci: (08:11)
Okay. But there was something that happened in the mid eighties at Goldman, where they made a mainframe decision that they felt was the incorrect one.

Marty Chavez: (08:21)
Yes.

Anthony Scaramucci: (08:21)
Do you remember this part of the story?

Marty Chavez: (08:23)
Yeah, I do remember.

Anthony Scaramucci: (08:24)
And so I think they chose digital when they probably should have chosen IBM and gone with the more robust and so there was a big technology commotion. And the reason I'm bringing this up is that I still feel it's 30 years later or 35 years later from that decision and C-suite people still have a problem in technology in terms of understanding where to go, why to go where to go. And so what would you say to those people that are listening in to us right now about what you've learned in your career and how to guide people that are not as technologically proficient as you are, but have to make these really big macro decisions for their companies?

Marty Chavez: (09:06)
Well, I think that everyone can learn a lot from [inaudible 00:09:11]. So what happened in response to the episode you described is that Lloyd and the other J. Aron partners effectively began seceding from the IT decisions of the firm. And you'll know, Anthony, that J. Aron had just become a part of Goldman Sachs a few years earlier. So it always had this independent streak and Lloyd would go to the IT division of Goldman Sachs and he'd say, "I want a risk management system." And they go and do a bunch of work for a year and then they'd be very excited. And they'd presents what they had done to Lloyd and you know Lloyd so I'll paraphrase. He said, "This is not at all what I had in mind." Though he might've said it more vigorously and they kept going back and forth.

Marty Chavez: (10:04)
And so Lloyd had what today I think is one of the most brilliant brainwaves that any leader has ever had and he is not a computer scientist or mathematician. He said, "The problem is we have this far away IT division, and they do their thing and they know a lot about computers. But over here on the trading floor, I got a different reality and different problems. I know a lot about trading and I don't know about computers. We're talking past each other, we're speaking different languages, we are not communicating. So when I say, I want a risk management system, I know what I have in mind, but they're not hearing me and they're looking for functional specification, but I don't know how to write functional specifications. And so this is going to go on forever, it's nobody's fault.

Marty Chavez: (10:53)
So Lloyd's thought was, once he had the awareness, he said, "Well, what am I going to do about it? I'm going to go across the river to where you find computer geeks." And in those days, you went to Bell Labs, close to New York, cross the river. And he said, "I'm going to get my very own computer geek and I'm going to put that person in the chair next to me. And I'm going to treat him really well, like a professional on the trading desk, even though he is not at all like the salespeople and the traders. And I'm going to order the salespeople and the traders to work with him and listen to him, and I'm going to run everything by him. And we're going to do that and see how it works."

Marty Chavez: (11:32)
Well, that's the guy, Armen Avanessians, he's still at Goldman, he hired me. He's the one who said, "Hey, what we need here is a piece of software that becomes the trading business. The software has so much knowledge of markets, and data, and models, and risk, and positions, and trades that anything you could want to know about the markets and about our risk, you can just ask the software. You can ask the software what it is right now, but with software, you can do something that you can't do anywhere else. You can ask the software to run trillions of what if's, hypothetical's, what if dollar-yen moves here, what if the fed does this to interest rates?" And then you can start to ask, "Well, how much money would we make or lose?"

Marty Chavez: (12:17)
So this was Armen's brainwaves in response to Lloyd's. And then Armen says, "Well, I got to go shopping for computer scientists and Stanford, Silicon Valley seems like a good place to get them." And then that is the SecDB project. So I just had the incredible fortune of being an early person in this group, which Armen called strategists are strat for short. I was maybe the 12th person and now it's several thousand. And having people like that and bringing them into your business and not treating them as tech support, "Can you help me turn my computer on and off?" But, "We've got some problems in this business on the scientific process. As partners, let's collaborate on solving them." When you invite computer scientists, data scientists, machine learning people, into your business, and you treat them as first-class citizens, you get an amazing result. And that would be my counsel to any leader, you do not need to be a computer scientist to run that playbook.

Anthony Scaramucci: (13:23)
Well, I think it's great advice and it's basically to be less intimidated and be more communicative, I think is the real thing. I mean, sometimes people do to their insecurities and the fact that they're intimidated, they overshoot, or they try to pretend that they know more than they do as well. So I think you're giving really good advice to C-suite people. Let's talk about AI for a second, because I'd like to get your thoughts on AI philosophically. The brain right now, the human brain is probably learning more quickly than a computer at this point. Is that fair to say, or not necessarily true at this point?

Marty Chavez: (14:01)
Anthony, there are some things that human brains do really, really fast, and the computers are making progress, but they're still not where human brains are. So let's say you're a human being evolving on the savanna, and you're looking for predators on the horizon.

Anthony Scaramucci: (14:24)
Pay attention Darsie. This is you by the way, that you're evolving on the savanna. So pay attention, Darsie, okay? I think we're going to get a few shots in, Chavez. I mean, after the way he started this thing. Okay. So we're back on the savanna, we're all evolving together. Go ahead.

Marty Chavez: (14:39)
And we're watching out for predators. Human beings and human brains are really, really fast at predator detection, do I stay here or do I run? And that's something that computers are getting very much better at very, very fast. But then here's something that human brains are actually pretty terrible at. So no matter how smart you are, if I asked you to multiply two, 10 digit numbers, any $10 calculator is going to be faster and more reliable than any human being by a really long shot. So human brains just work in very, very different ways and there's been a lot of research, right? We seem to have a cognitive system that makes very fast decisions using a lot of approximations and guesses and pattern matching based on experience that helped us avoid getting eaten by predators.

Marty Chavez: (15:34)
And we have a much more complex system that is mathematically based, where we can reason about how to make correct decisions under uncertainty and that system, however, is not instinctual. It gets amazing answers, but it's slow. And the answers will often be different from the answers our gut gives us and understanding the difference between those two is super important.

Anthony Scaramucci: (15:59)
So then the follow-up question is an obvious one. When does that sort of stuff converge between the human and the computer?

Marty Chavez: (16:08)
Yes. So we don't know, there's a lot of opinions. I I'll say a couple of things, first of all, there's something incredibly powerful about anything, you know this is from finance, anything that compounds, compounded growth over time is exponential. And it might seem really, really slow, 2%, 3% growth, but you look at it over 20 and 50 years and it starts being extraordinary, right? And so something like Moore's Law, which says compute power is increasing exponentially. Well, back in the fifties, it didn't seem so great, seemed to be going pretty slowly. But now we're onto the proverbial second half of the chess board where you've been doubling, and doubling, and doubling, and suddenly it's starting to be really meaningful. And so computers are getting so much faster and they've been doing it for a long time and we don't really see any end in sight.

Marty Chavez: (17:12)
And so it seems like at a certain point, they'll just be enough computing power that you could simulate a human brain. You could simulate all of those neurons spirally. And so that will be one way that you get automatic or artificial general intelligence, that seems like it's going to happen. Who knows when? But one thing is very important to say, is that there's been a breakthrough and we're really seeing the fruits of that breakthrough in these last 10 years. Here's the breakthrough. If you can take a problem and you can frame it in the following way, "Here are a billion examples of my problem." Let's say my problem is recognizing whether there's a cat in this picture, right? Here's a billion images and human beings for some reason, love talking about cats and posting pictures of their cats on the internet. So we got lots of pictures out there on the internet.

Anthony Scaramucci: (18:10)
Wasn't the internet invented for that thought, Marty? [crosstalk 00:18:16] and so forth, right?

Marty Chavez: (18:19)
Well, as silly as the example is, it's really powerful because there's billions of images out there on the internet. And people have said, "Hey, look at my cat." And so now a computer can look at all these images and say, "Oh, a human being has told us, 'These 500 million images contain a cat, these 500 million images do not.'" If you can frame a problem that way it's been labeled so that these ones are cats, these ones are not cats. Using techniques that are standard deep leaning, we can train up a deep learning network and we can give it a new image that it's never seen before and ask, "Is this a cat?" And it will give us a highly reliable answer.

Marty Chavez: (19:00)
But it's gone beyond that, Anthony in that now you can show it an image of a cat. It'll tell you how many cats there are, where they are, what breed of cat, how old the cat is like, it'll tell you an awful lot by looking at the image. Now, that is amazing because now think of some real problems like translating from one language to another. If we have out there on the internet, billions of documents that have been translated from English to all these other languages, we can shove them into a neural net and it can now translate between languages. So any problem that can be framed in that way, the techniques we have now are so amazing that they're going to be better than any human being at that problem.

Marty Chavez: (19:45)
But here's the punchline. A lot of things that we do, and our having general intelligence, we don't think can be framed in that way. There is no sample set of a billion cats and a billion not cats. And because that doesn't exist, these techniques don't work. And for us to really have artificial general intelligence, we're going to need another big breakthrough. And if that breakthrough has happened in some lab somewhere, I'm not aware of it.

Anthony Scaramucci: (20:16)
But it's a fascinating discussion. And so ultimately, and I'm sort of leading you, but I'd like to get your opinion. You're optimistic about future innovation and you're optimistic about the unleashing of the prosperity that that will afford human beings in civilization.

Marty Chavez: (20:34)
Absolutely. Yes, sir.

Anthony Scaramucci: (20:35)
And so then the secondary question is, well, we have to figure out a way to make sure that there's some level of equal distribution so that it just doesn't become some top heavy, would that be fair logic?

Marty Chavez: (20:44)
I agree 100%, I think with these exponential technologies, you see a power law behavior in the distribution of wealth, right? So we're all familiar with the bell curve, right? There's people certain height, that's the median, finding someone who's three feet above the median height is going to be surpassingly rare, essentially zero probability. But wealth to your point is not distributed that way, almost no matter who you are, there's someone who's 10 times richer, right? Eventually you get to Jeff Bezos, but the people who are just sort of unfathomably richer than everybody else. And it seems that these exponential technologies are increasing that winner takes all dynamic.

Marty Chavez: (21:33)
So I am a huge advocate. We have to do something about this because while these technologies will make the planet better and will make life better, they pose many problems. There's existential problems about work, what will we need human beings to do? And about retraining people whose jobs go away, not so much because they've gone to China or India, but because they've gone to computers and robots. And how do we retrain them for new things and how do we do that in a timeframe where society doesn't break down? And so I am a firm proponent that there will always be interesting things for human beings to do and human beings are always better than machines at doing. I don't see that changing, but during any 10 to 20 year period, you can have some huge dislocations. So I'm all in when it comes to universal basic income, what would that actually look like, how do we get it done? Those are the hard questions.

Anthony Scaramucci: (22:38)
Right. And also a package of, I think you and I probably share a similar faith you and I. I did Andrew Yang's podcast and I am a believer in UBI, but I would also say I am a believer in uneven outcomes, Marty, but I want there to be more equal opportunity. Because I was a product of the good public school system and two blue collar parents that didn't go to college. But without that good public school system, I couldn't have catapulted into Tufts and Harvard and ultimately to Goldman Sachs. And so we recognize some of our success in life is providential, but it would be nice if we could come up with the right policies, not necessarily left or right policies, but the right policies that could flatten that playing field.

Anthony Scaramucci: (23:21)
But one thing that human beings are not great at, Marty, and maybe machines can help us with this is that we have this narrative going between socialism and capitalism and there stark narratives. And perhaps there's something more subtle in between that we can synthesize and make people understand that you can have unlimited outcomes, but you need some base level of equal opportunity. But that's for day and another SALT Talk. I want to go back to what you're doing right now and how you have used all of this wonderful life experience that you have to do what you're doing today. Tell us what you're doing.

Marty Chavez: (23:59)
Well, if you wait long enough, all kinds of amazing things happen. So I took essentially a 25, maybe more, 25 year call it detour, away from the life sciences and computation and life sciences, the intersection of those two things. And with the progress of software and technology and chips getting faster, that 25 years has been amazing. And so problems that we couldn't begin to solve in 1990 now look like they might be solvable, maybe not today, but we can see a path. And so almost everything that I'm doing these days is at that intersection of computation and life sciences, can we take a scientific process that is often, for instance, in the case of discovering new medicines, also a business process. And can we do to that process, what I and many of us at Goldman worked on for the trading business?

Marty Chavez: (25:07)
Turns out that the trading business, as hard as it was, is actually a really easy problem to solve compared to say, simulating a human organism or a human population. How many things do you need to know about a foreign exchange forward trade, two currencies, the exchange rate, the delivery date, party A, party B, you've now fully specified it. Imagine what it would take to fully specify a human being or even a single cell inside a human being. Well, the computers have made so much progress that you can actually begin to tackle these problems. And so I'm advising working with an array of companies and they are doing fascinating things.

Marty Chavez: (25:52)
I'll give you a couple of examples, paige.ai, as the first board I joined after I retired from Goldman. And I had heard about it from my friend, Jim Pryor, a legendary investor who was their first investor. And here's what they're doing, think of it as creating a new microscope to give to pathologists, except this microscope is digital. And this microscope has the unbelievable property that it outlines cells that you're looking at in the tissue specimen and says, "I think these cells are cancerous and here's the cancer I think these cells represent. And here's the treatment protocol that I would recommend." Not replacing the pathologist, but a second set of eyes on the problem with amazing results.

Marty Chavez: (26:44)
Another company, I'll give you an example of, Recursion in Salt Lake City, doing amazing things where they are building up a library of images of cells, and we're talking vast numbers of images. And here's what the cell looks like by itself. And now if we perturbed the cell a little bit with some molecule there might be a drug candidate or a [inaudible 00:27:09] with a CRISPR mutation, change its genetic code a little bit. Here's what the cell looks like now. And we're capturing how the cells metabolism changes, and we're doing this over and over again, and then we're throwing machine learning at it. And so we're then using the models that come out of this process to guide drug discovery.

Marty Chavez: (27:31)
So drug discovery has mostly been throw a million molecules at a cell and see what they do. And then eventually scale it up to mice and eventually human clinical trials, very expensive, very high failure rate. If we can do anything in software to fail earlier say, "Stop, don't even run any more experiments here, that's not going to work." And to find more promising candidates earlier, this would transform drug discovery. So those are the kinds of things I'm working on.

Anthony Scaramucci: (28:01)
Well, it's fascinating. I'm thrilled that we have you and your mind working on these things for all of us. I want to switch the topic abruptly. John's going to come in here in a second and ask the questions. We've got lots of questions in the queue. I want to talk about digital currency for a second, because you have a view there, you have a philosophical opinion there. And just wondering what you think of crypto currency, the ongoing digitization trends that's impacting us, there's also an EOS coin. Some of us don't even know what that is, myself included. And I was wondering if you could talk a little bit about that and what your opinions are in crypto.

Marty Chavez: (28:40)
I love talking about crypto. I worked on some of the techniques, some of these cryptographic techniques when I was a grad student and they're powerful and they're fascinating. And when I first heard about Bitcoin, I got really excited because actually Bitcoin is a solution to an old problem in computer science. It's called the Byzantine Generals Problem, but it's really an old problem of, we've got a noisy world full of unreliable information and disloyal people. In the face of that, how do all the loyal people come to a decision, how do we all agree on something? Well, this is the core of what the Bitcoin protocol does, which is how do we all agree that this is a real transaction where party A sent this many Bitcoin to party B, that that is what the blockchain does.

Marty Chavez: (29:38)
And so when I first heard about Bitcoin, I thought, "Okay, is super incredibly interesting. I got to get really up to speed on this because I can see all kinds of applications." But immediately the skeptical part of me sets in. So I've got two huge skepticisms that remain, though I'm open of course, to changing my view with new data. Here's one part of skepticism, these techniques to achieve fault tolerance agreement, like agree in the face of 50% of the network being hacked, they're very expensive, right? I did an analysis for a class I taught at Stanford and I remember at the time I taught the class in February. The amount of electricity consumed by all the Bitcoin mining ratings was equal to the entire energy consumption of Switzerland, right?

Marty Chavez: (30:31)
So just running the Bitcoin protocol, that is very expensive. And so I wonder, do you really need that kind of super expensive computation for most applications or is this maybe a kind of overkill? That's one skepticism? The second skepticism is I have never believed for one split second that Bitcoin or Libra or any of these things is going to replace the US dollar. I think that is an absolutely preposterous idea. And the reason for that, is really when you think of what money is, right? Money fundamentally, especially fiat money and legal tender, all relate to something very deep and political philosophy.

Marty Chavez: (31:18)
Which is, if we are in the boundaries of the US and I owe you a dollar, and I give you a dollar bill which says, "This note is legal tender for all debts public and private." And you reject it. It doesn't matter whether you accept or reject my dollar bill. My debt is forgiven, it's extinguished. I tendered the bill to you, doesn't matter if you accept it, the debt is gone. And the US backs that extinguishment with its monopoly on the use of force within its boundaries. It can put people in jail for not paying its taxes, it can seize their property, right? That is something that's not going away anytime soon. And so the idea that Bitcoin and a bunch of people running computers would just replace the sovereign seems to me like something that's not happening in our short-term reality, or even the medium or long-term.

Marty Chavez: (32:08)
So those are my skepticisms. But can we take the US dollar and use the techniques being developed here in digital assets such as Bitcoin, and continue the dematerialization of the dollar. It's already mostly electronic, right? We've got these paper bills, but most dollars are not represented that way, they're in bank accounts. And we can talk about what bank accounts are, right? That digital journey of the US dollar has been going on since the 1950s, my view is it will continue and it will adopt all of these techniques. And you will have a digital US dollar. You would have heard about it during the pandemic. There were discussions in the Congress that were super exciting.

Marty Chavez: (32:54)
"Hey, we're going to order the Federal Reserve to create a digital US dollar. And then we're going to distribute the stimulus money directly to Americans with this new digital US dollar." It is a fantastic idea. But when I read that I thought, "Okay, I'll sit down and I'll code up a digital US dollar over the weekend. Yeah right, like that's going to happen." It's a vast project, you don't order the Federal Reserve to get on it this week, right? It's something that will evolve, my view, must evolve to stay competitive with the Yuan. The Chinese are very aggressively turning that into a digital asset. I think we absolutely have to, as a matter of sovereign might and wealth and diplomatic policy and maintaining the dollar as the global reserve currency, it must digitize, it must become a cryptocurrency itself.

Anthony Scaramucci: (33:45)
And what is EOS?

Marty Chavez: (33:46)
So EOS is a company I've known about. It's a coin [inaudible 00:33:52] associated with a company called Block.One. And I've known the founders of Block.One for a few years, one of their investors is a friend of mine for many years. And so I've always followed with interest what they're doing. And yes, they have this currency, but what they're most excited about is building distributed applications for finance, for social media that are based on this currency and also creating a new fabric for computing, where you can do very complicated, distributed calculations across millions of machines and do them reliably even if the computers are going up and down and the communication links are failing. I think that technology of a distributed global computer is super important and I'm happy to work on that with them as well.

Anthony Scaramucci: (34:45)
Well, fascinating stuff, Marty. I'm going to turn it over to John. He's got questions from our audience and we really appreciate you being on today.

Marty Chavez: (34:53)
Sure. Thank you, Anthony.

Anthony Scaramucci: (34:55)
[crosstalk 00:34:55] Don't be asking about the skateboard, okay? I know you're thinking of the skateboard Darsie. Just stick to the facts, okay?

John Darsie: (35:02)
We're going to have to do an entirely separate SALT Talk about the idea of a blockchain US dollar digital currency. Because, I think that's a fascinating topic. And like you mentioned, it's something that China has announced their intentions to aggressively digitize their currency. It's almost already digitized on an app like WeChat where people are exchanging currency in an app that is the dominant app in China, despite that currency not technically being the sovereign currency, so it's a fascinating topic. I want to switch gears a little bit. So there's a problem on Wall Street as there are in a lot of industries and it's a diversity problem.

John Darsie: (35:38)
And you are a Latino, you're an openly gay man, so you occupy a very rarefied space on Wall Street. How did that experience shape your time? You're working at Goldman and on Wall Street, is Wall Street a friendly place to work for someone who is openly gay and someone who might not fit the archetype of what the average worker at one of these banks look like, and how much did you fight yourself trying to blend in versus being yourself and being openly representing your identity within the firm?

Marty Chavez: (36:10)
So I had a bit of an unusual story, which is I came from Silicon Valley to Wall Street in 93. As I mentioned to Anthony, I really wasn't planning a career on Wall Street, I was looking for a free trip to New York. And I was out in Silicon Valley at the time and I remember going to venture capitalists meetings with my co-founder and he would actually tell me to kind of do it up a little bit, "Go ahead and wear that Queer Nation t-shirt to the meeting, I'll think that's cool." And so here I have a Wall Street and I didn't know anything about Wall Street. I'd only heard that it had a reputation for being homophobic. So they put the offer in front of me instead of saying, "Yeah, this is great." I was just silent and I was silent because I'm thinking, "Wow, am I going to go back into the closet just for a different job, I don't really need or want this job, particularly I'm happy in Silicon Valley."

Marty Chavez: (37:11)
And so as I sat there, I just blurted it out to the gentlemen who was hiring me, "I think I need to tell you that I'm gay." And this was 1993. Suffice it to say that that kind of experience had never happened to him and I'm not sure it had ever happened to anywhere in Wall Street back in 93. And so he didn't know what to say. And so all he could think of to say was, "Hey, do you have a boyfriend?" Which is, I think maybe not the response you would have in 2020, but I took that to mean, "Well, this must be a gay friendly place." I think it would have been more accurate for me to have concluded that this was a place that didn't care if I was straight or gay, it just cared that I was good at math and software. And for me, that has always been enough, for me personally.

Marty Chavez: (38:09)
I don't want anybody to do anything special for me, but neither do I want my being me to be a liability. And if it is a liability, I'll go somewhere else. Now that kind of open-mindedness over the years became more sophisticated at Goldman Sachs and elsewhere. And we began to understand that diversity of your workforce was like diversification of your portfolio. The only free lunch available, you get a different perspective. You avoid missing things by making it a place where lots of people want to come. So Wall Street has definitely made that evolution. I've always been almost always the only one or two of people like me in the room. And been super fortunate that I had a lot of straight white Jewish males who were my mentors and brought my career along at every step of the way.

Marty Chavez: (39:12)
If I had been waiting for a Latin mentor or an LGBT mentor, or God forbid, one who was both Latin and LGBT, I'd still be out there waiting. My philosophy from growing up, and this is something my mother drummed into our skulls, growing up in Albuquerque, New Mexico where Hispanics were the majority by numbers, but not the majority in any way by economic clout. And my mom would say, "You're Hispanic. You'll have to work twice as hard to get half as far. So no moping about that, you better get busy." And so that while it's rather brutal advice and wouldn't be for everybody, and it's unfortunate that someone has to give it, I'm grateful to her for that as well.

John Darsie: (40:03)
Well, it's a really inspiring story and I have to give Anthony credit too. He's made SkyBridge a place that is very much like that. We have several openly gay members of our workforce and he's worked very hard on LGBTQ issues. And I think he's part of the solution as well. And I think for you, you've now created that role model for people who, whether it's a non-traditional path or a traditional path to Wall Street that young Latinos, young-

Anthony Scaramucci: (40:29)
Nice speed you've got, Marty. See how he's buttering me up. [inaudible 00:40:31].

John Darsie: (40:31)
I do have to give Anthony credit.

Anthony Scaramucci: (40:35)
He took the ballpoint pen and stabbed it into my jugular as we started, but now he's foaming and... keep going Darsie.

John Darsie: (40:43)
I got to make sure I keep my job. We opened this in a very rocky fashion, right?

Marty Chavez: (40:48)
I understand that.

John Darsie: (40:49)
But it's just an inspirational story. And hopefully you've become that role model for a lot of young people who-

Anthony Scaramucci: (40:55)
But in all seriousness to Marty, it is truly inspirational. And so I've always believed that life, liberty and pursuit of happiness, maybe they thought it was supposed to be for just straight people, but it's not, it's for everybody. And you are a living example of that and a role model for that. And one of the things I worked on with vice president Biden a few years ago, actually was in Davos, expanding the human rights about sexual preference not just the United States, but around the world. So we're making progress, thank God. And it's because of people like you willing to be out there taking a stand.

Marty Chavez: (41:31)
Well, I'd like to say I was some kind of a hero, for me it was really more pragmatic than that. I just thought, I'm not going to go backwards in my life. I hated being in the closet and I'm not going to do that. So it was almost a kind of expedience, but I guess it doesn't matter however-

Anthony Scaramucci: (41:48)
No, I think you're not giving yourself enough credit because we're both contemporaries. And I know a lot of my friends, I'm born in 1964. A lot of my friends born in the sixties had great difficulty opening up, particularly if they grew up in a Latino community, or an Italian community where the parents are very Roman Catholic, okay, and there's a lot of blocking and block-headed thinking that goes on. So it took a lot of risks. You deserve the credit for being the role model that you are. Go ahead, John. I know you spoke-

Marty Chavez: (42:20)
And 64 was a good year. Anyway, I was born in 64 too.

Anthony Scaramucci: (42:23)
Were you? Yeah. So see, there you go. See that's a-

John Darsie: (42:25)
Now he's going to get into an astrology thing with you.

Anthony Scaramucci: (42:29)
It was a great year, okay? Go ahead, Darsie, continue.

John Darsie: (42:34)
All right. I want to talk about the pandemic for a moment. So you've now shifted back into maybe what was your original passion in life sciences, but you pay attention to tech trends across a wide spectrum of industries. What do you think the pandemic in terms of long-term consequences or results of the pandemic that are here to stay in terms of digital trends and the way we think about work, think about living. What trends do you think have been accelerated by the pandemic that are here and that people particularly investors, for example, should pay close attention to?

Marty Chavez: (43:07)
Sure. So I think my view would almost at this point, be the consensus view or the emerging consensus view, but maybe I got to it a bit ahead of time. But the idea is that the pandemic with all its terrible cataclysmic consequences has in the sense of a chemistry reaction, it's a catalyst. It isn't making things happen that it was just not sensible for them to happen, it's speeding up in a dramatic way, things that were already happening, but they might've been happening too slowly for us to really observe them, right? And there's some aphorism about 10 decades of progress in 10 months, right, and then you have other decades where it seems like nothing happens. Well, we've had one of those 10 months, 10 decade kind of periods. And so I don't know where all this is going to go to shake out, but there's a few things that I'm highly confident about.

Marty Chavez: (44:09)
First, the digitization of finance, right? The idea that we have these little pieces of paper that we still write things on, right, or little pieces of paper that say US Federal Reserve Note on them. It's so cute, it's so quaint. It's kind of ridiculous, right? And think of all the things that we write on little pieces of paper, here's a particularly horrible example. If you've ever bought an apartment, you know how many pieces of paper come together for that, right? So all of those things are going away. I had some experiences during the pandemic of people requiring notarized documents and everything that we had to go through to cause a document, a physical document to be notarized in the depths of a pandemic, right? So, that's changing.

Marty Chavez: (45:00)
And we're just going to look at all these cumbersome workflows that have lots of paper steps and lots of manual intervention and anything that doesn't need to be there like, why are you swiping a card? That is also kind of silly and quaint and signing some piece of paper even more so. So you can see all those things as gone. And it's just a matter of months. I think another thing that you're seeing iS some restrictions that no longer made any sense. So for instance, if you're a pathologist in a clinic or hospital, there's been a requirement you have to be in a clinic or a hospital. They're looking at your microscope, looking at those slides, but you know what? No, you don't like, who said that, right? There just weren't the tools.

Marty Chavez: (45:48)
So one of the interesting things that Paige, which I mentioned to you has been doing is, in the process of constructing this AI and machine learning enabled technology that spots cancer cells, you can make the entire workflow of a pathologist go digital. No need to be in a lab, no need to have a microscope, no need to be in any particular place. So this trend of telemedicine, maybe you could just have a Zoom with your doctor and stick out your tongue, that's happening and there's not going to be going back. There'll be some things that you still have to be present for but there's a ton of things that you don't, and those are not coming back.

Marty Chavez: (46:31)
And people are working really hard on making those kinds of unnecessary in-person interactions go away. The really big question, which we don't have the answer on is, what will happen to the office? Now I'm a computer scientist, I'm an engineer. I've been building virtual communities since I was 10. I do occasionally like being in a physical space with people, but actually I'm more productive at work if I'm not surrounded by people bugging me. And so going virtual for me, I've just told everybody who wants to do some kind of collaboration with me, "I'm all in. And think of me as a permanently virtual person." There will be times when we get together, but I'm in boards meetings and people say, "Oh, this would be so much better if it were in person, I can't wait to go back to the way things were."

Marty Chavez: (47:30)
And I will always say, "You know what? I am very interested to hear that it's, you think it would be better for you if it were in person, I'm totally fine. This is great for me. I didn't have to travel across the pond to be in this meeting and I'm loving that." Right? So I think we're going to see the same thing happening with the world of work. There's going to be a regular cadence where people want to get together in an office or something that maybe looks a little bit like an office. But I don't think it's going to be 9:00 to 5:00, Monday through Friday, that is a relic of the industrial revolution and that rigid construct is going away. It will be replaced by something much more flexible and will vary by role and will vary over time. And we don't know exactly what that's going to look like, but we're starting to see the outlines.

John Darsie: (48:21)
Well, I think that's a fascinating masterclass in where we're headed. And I think Anthony and I have experienced that. We have young kids at home, it's been nice to be able to spend time with your family. You go into the office a couple of days a week, and then you feel like I can be just as productive at home and so it becomes more of a blended life. But you have so many great answers to so many great questions. You're not just a nerdy computer scientist, you understand the social elements of all this. You talked about universal basic income. You worked on Wall Street, so you understand the money part of it and you're a civically engaged type of person.

John Darsie: (48:51)
Do you ever see yourself? And I'm hoping the answer is yes. But do you ever see yourself serving in an appointed position or an elective office down the road, if vice president Biden wins, Anthony's going to be calling his future Chief of Staff and telling him that, "You got to call Marty Chavez to digitize the dollar and fix a lot of other problems we have." But is that something that you've thought about and want to do?

Marty Chavez: (49:14)
If asked to do something that I could be effective at, given that constraint, that I'm a mostly virtual guy, right? Then-

John Darsie: (49:25)
The government should be the same way. It's like if they can't sit down in the same room, they can't pass the stimulus bill. They want to send everybody $1,200 checks. And that becomes a big ordeal when you could digitize the whole thing and it could happen in an instant.

Marty Chavez: (49:36)
I would be up for something that didn't require me to move and something where this combination sort of weird intersection of experiences and skills that I've had would be useful. I'd have to think hard about it.

John Darsie: (49:53)
I was trying to think of what job would be the best fit for you. And then one came to mind and it was president of the United States.

Marty Chavez: (50:01)
Yeah. I think you have to move to Washington for that one.

John Darsie: (50:04)
Yeah, maybe not. Maybe in five or eight years, whatever it may be, maybe that'll change and we can have more digital president Chavez.

Marty Chavez: (50:12)
Yeah. Well, you're very kind. And I do believe in giving back, I don't know exactly what forms that will take over time. For me, it's mostly been philanthropic I'm president of the Harvard Board of Overseers this year, and that's something I'm really passionate about. But you never know where where the path will take us.

John Darsie: (50:35)
So we say that we would like to have our guests back in the future on a lot of shows, but this is one, we actually mean it. I feel like we could talk about so many different topics for such greater length, but it was great to have you on, we even went into overtime a little bit here. But thank you so much for joining us. It was a pleasure, Anthony, you have any final words for Marty before we go.

Anthony Scaramucci: (50:52)
Yeah, because I mean, you just blew us up on every other guests that came on [inaudible 00:50:56].

John Darsie: (50:56)
I didn't say which ones I was lying about.

Anthony Scaramucci: (51:00)
Now we got to call every person that came on to SALT Talks, "No, we really did mean that we [inaudible 00:51:03]." It's okay, [inaudible 00:51:09], we're surviving the pandemic. Marty, great to have you on, it's a real pleasure. And I hope and we both really do mean this, hope we can get you at one of our live events at some point.

Marty Chavez: (51:20)
That would be fun. And like a cryptocurrency thing, that I'd definitely say yes to that if it ever makes sense [crosstalk 00:51:26].

Anthony Scaramucci: (51:26)
Well, we certainly want to do that as well. And wish you the best of luck with what you're doing and hopefully we can connect soon.

Marty Chavez: (51:33)
All right. Thank you.

Anthony Scaramucci: (51:34)
Thank you for joining SALT Talk.

Marty Chavez: (51:35)
Be well. My pleasure. Take care.

Dr. Finian Tan: The Future of Deep Tech | SALT Talks #85

“If you want to create a circle of life for venture capital, you need every single part of it, and you need the country to have the political will to do this, and the capital and the R&D spend, and they must be in the right R&D environment.”

Dr. Finian Tan founded Vickers Venture Partners in 2005 with four partners, and has grown Vickers into a top-performing, global deep-tech firm with $3B under management across six funds and co-investments. Vickers invests in early-stage companies with technical solutions to solve large, global problems. Finian was Deputy Secretary of Trade and Industry for the Singapore government.

Serving as Deputy Secretary of Trade and Industry at 34, a major project was turning Singapore into a Silicon Valley for Asia. Creating that ecosystem is difficult and similar to building a national park that develops a natural self-sustaining circle of life; it cannot be artificially maintained. This effort sought to use venture capital, work hubs and regulations to allow start-ups to thrive in Singapore. “If you want to create a circle of life for venture capital, you need every single part of it, and you need the country to have the political will to do this, and the capital and the R&D spend, and they must be in the right R&D environment.”

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SPEAKER

Dr. Finian Tan

Founder & Chairman

Vickers Venture Partners

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone, and welcome back to SALT Talks. I'm Rachel Pether and I'm a senior advisor to SkyBridge Capital, a global alternative investments firm, as well as being the MC for SALT, a thought leadership forum and networking platform that encompasses business, technology, and politics.

Rachel Pether: (00:26)
SALT Talks is a series of digital interviews with some of the world's foremost investors, creators and thinkers. Actually, our guest today is really a combination of all three. Just as we do at our global SALT events, we aim to empower really big, important ideas and provide our audience a window into the mind of subject matter experts. Today I'm very excited to be welcoming Doctor Finian Tan to SALT Talks.

Rachel Pether: (00:54)
Finian founded Vickers Venture Partners in 2005 with four partners, and he's growing the company to become a three billion dollar, top performing, global deep tech firm. They invest in early stage companies with technical solutions to solve large global problems, and one of them happens to be, spoiler alert, a T-cell-based vaccination platform that can be designed for COVID-19. Before starting Vickers, Finian was a managing director at Draper Fisher Jurvetson as a founding partner of its Asian Pacific operations, he led the investment into Baidu and remained its largest backer until IPO. Prior to this. Finian was deputy secretary of trade and industry for the Singapore government. He received his doctor in philosophy and master of philosophy in engineering from Cambridge, and he received his BAC in engineering from the University of Glasgow. Finian, it's a real pleasure having you with us today.

Dr. Finian Tan: (01:57)
Thank you very much for having me, Rachel.

Rachel Pether: (02:01)
You're a difficult one because I just want to talk about so many things. I want to talk about your role with the Singapore government, your investment into Baidu, the work that you're doing with Vickers Financial Partners, and obviously, go into more detail about the COVID vaccine. But before we get into some of these in detail, tell me a little bit more about your personal story.

Dr. Finian Tan: (02:23)
I was with Goldman Sachs in 1996. I was based in Singapore and then London and New York. I was in charge of trading for Asia for a company called J. Aron, which was part of Goldman Sachs. Running Asia from New York wasn't good, so I decided to come back to Asia; I chose Singapore. I'm a Singaporean. In '96 I came back and as soon as I got back, I was approached and asked to serve in the administration as the deputy secretary in the ministry of trade and industry. It was a change to serve my country. I was then a young man of 34. Couldn't quite say no, so I became deputy secretary. Part of my role was to help make Singapore into a Silicon Valley for Asia.

Dr. Finian Tan: (03:11)
As some of you will know, Singapore's per capita income is pretty high. It's about the same as the US. The next stage of growth is entrepreneurship and innovation driven. It was natural for them to want to give me this task. I made three recommendations. One was the setting up of a billion dollar fund to jumpstart venture capital. The second was the setting up of a physical science hub, where people can live, work, play, study. The third was an interministry community to change rules and regulations to allow startups to thrive.

Dr. Finian Tan: (03:47)
With the government approved all three and made me the chairman of all three, and that started my life in venture. I kind of love adventure.

Rachel Pether: (03:57)
You have obviously been very successful as a venture capitalist as well, and we can touch on that shortly, but you mentioned that Singapore was aiming to become the next Silicon Valley, and I know many cities around the world have this aim and do you think that's a reasonable aim to have? Can you just create it using capital? I'd love to know your views on that.

Dr. Finian Tan: (04:31)
Well, many cities and countries have tried it with varying success. It's very difficult to do because you have to create an entire ecosystem and creating an ecosystem is never easy. For example, if you wanted to create a cougar national park, that's very hard to do because it's not like a zoo where you bring animals in and you feed them. In a cougar national park situation, you would have to allow them to feed on their own, so you have to have the grass, the earthworms, the rabbits, the deer, and then the predators, and the whole thing needs to go through the circle of life, and it needs to be self-sustaining. No matter what you do, there will be gaps. There will be gaps where you have to feed some groups in order to keep them alive for a while, and eventually, you reach a self-sustaining cycle of life.

Dr. Finian Tan: (05:30)
In most countries, it's just too difficult to do. You have to feed everyone, just like the zoo, where you have to feed all the animals and so you can import all the animals will eat. But if you want to create a circle of life for venture capital, you need every single part of it, and you need the country to have the political will to do this, and the capital and the R&D spend, and they must be in the right R&D environment. It must have the right stage of growth. I think if any country could do it, Singapore probably is in a good place, but it's not quite there yet.

Rachel Pether: (06:08)
That's great. I love that analogy of comparing it to a zoo or an actual ecosystem like the cougar national park. Is that really where your love of venture was born? Maybe you could tell me a little bit about that part of your journey as well and really getting this passion for venture capital and early stage companies.

Dr. Finian Tan: (06:34)
Venture is really a blend of financial and tech. I had a really good finance trade at Goldman and since I did my PhD in engineering at Cambridge, I am a tech guy. It was a nice combination of two skills. That's why I decided that what's I'm going to be. I joined a firm called Draper Fisher Jurvetson ePlant Ventures. They're pretty well known. DFJ is well known for Tesla, SpaceX, [inaudible 00:07:04], but at that time they were well known for Hotmail and Skype. I joined them as as founding partner for Asia and my first investment was a small company at that time called Baidu, which, as you know, become the Google of China. We took a very large stake in the company. We became the largest shareholder of the company in the IPO, so when Baidu listed in 2005, it was an extremely successful IPO. In fact, it still holds the record of the best performing IPO in [inaudible 00:07:38] history. That was very good. I had a lot of publicity. Appeared on front covers on magazines including Forbes. They called me the Baidu backer. With that behind me, I decided to start my own fund, and that's how Vickers was born.

Rachel Pether: (07:54)
What made you believe in Baidu at such an early stage? What was it about the company and its story and its prospects for growth?

Dr. Finian Tan: (08:06)
The year 2000 was a very difficult time because it was the first time that the internet came to the floor and there were thousands of companies. In fact, anything that had three Ws in front or had .com would shoot through the roof. They were worth billions on air. It was difficult to discern what would work and what wouldn't.

Dr. Finian Tan: (08:32)
I decided to, in my book, draw a line in the middle, put what I understood for sure would happen on the left, and on the right put things that I was still a little unsure about. The right side started filling up. [inaudible 00:08:48], InfoSpace, Yahoo, Amazon, eBay. I wasn't sure about the business models because they were all burning cash just for eyeballs.

Dr. Finian Tan: (09:01)
It started filling up, I stopped, and then I said, "What do I know for sure about the world?" Number one, I knew that China would grow. I was absolutely confident that that would happen. Number two, I knew that the internet would grow. That's it. I asked myself, "What could I invest in that will surely make money in these two things that I felt would happen for sure happen?" I concluded it would be the operating system of the internet in China. But what's the operating system of the internet? Is it Cisco? Is it the Explorer? I concluded that it was search because that's what everybody does. I asked the team, "What do we know about search?" Not very much.

Dr. Finian Tan: (09:56)
We went out, we spoke to all the incumbents, we spoke to all the customers of search, we spoke to all the companies that have come to the DFJ family. We spoke to those people that have gone outside of the DFJ family. After about a month or so, we huddled together and we decided that Baidu was the one that really stuck out, like a tall puppy. The reason was because search is very objective. It's speed and relevance, and you could measure. Baidu had a new architecture which was very related to how many people search for a particular item and click on it. It was linked to search results rather than using a directory. We felt that was the best. It was like a magnitude button, so we decided to invest in Baidu.

Rachel Pether: (10:53)
Fabulous. I think that appreciation and love of data has also carried into Vickers Venture Partners. I would love to know more about that because I think your offering is so unique here, even just we were talking before about the number of founding partners that are actually doctors. Tell me a bit more about Vickers Venture Partners and the focus on deep tech as well.

Dr. Finian Tan: (11:20)
We didn't start out that way. We started as more or less a general list VC, always drawing the line in the middle and asking ourselves what do we know and what we don't know, then trying to invest in core areas.

Dr. Finian Tan: (11:37)
But we were industry agnostic. We would invest in fintech, games, eCommerce, all sorts. After a while, we realized that we were very good at some parts of our business and not as good in some. We decided to split risk into three buckets. One is technology; does it work? IP, are you in the lead? Is there going to be a monopoly? And third, the market. Will people buy your product? We were not so good at guessing the market. I can't even guess what my wife likes, let alone my children, et cetera, let alone seven billion people. We only knew what we liked, personally, and sometimes we tend to extend that erroneously. But we were pretty good at intellectually guessing whether a tech would work, especially if it was our field of interest.

Dr. Finian Tan: (12:40)
We decided to take only one risk rather than three and we focused it only on the tech. Will it work? Market must be known and ready before we would look at it. We don't take IT risk. You have to own the IP. You have to be in the lad. After we did that, our performance really skyrocketed. Our home run pool increased from 28% to 50%. Our failure rate dropped from initially it was 34%, and then dropped to 20, and now, including core investments, is about 6%. That's when we started climbing up the ranks and today we have about three billion under management across seven offices globally.

Rachel Pether: (13:24)
Fantastic. Does this approach mean that you're more highly concentrated, like it's more of a high conviction approach, I guess, than some other venture capital firms?

Dr. Finian Tan: (13:37)
We're very different. Let me give you a few examples. When I talk about tech risk and I talk about not taking market risk, it requires some elaborations. People often wonder what kind of deals will not have market risk. Everybody has market risk. All companies have market risk. Not quite. I'll give you an example. Let's take a cure for cancer. If you actually had a cure for cancer, the number of patients per year is known, but incidence rate is known and mortality is known and morbidity is known, the prevalence is known. Everything is known. The only thing that's unknown is will the drug get FDA approval, how efficacious is it, how toxic will it be? That's a risk we are willing to take; it's a calculated risk. It's nicer when we reduce the risk to one bucket, and then we focus on building strengths in that bucket. That's why we have so many PhDs and doctors, because we double down on what we were good at, and cut out all the other noise.

Dr. Finian Tan: (14:42)
In most other venture capitalist investment committee meetings, the IC meetings would be very noisy. What do I mean by noise? One buy brings an eCommerce company, one guy brings a bike sharing, a ride hailing, game company, social network, and one tech company. For us, it's easy. Ride hailing out, eCommerce out, logistic out, game company out, social network out. Tech, okay, that's interesting. We would strip that future. We've decided we'll take the tech risk and we've decided that we will only do holy grail type breakthroughs. Breakthroughs that are so impactful that it will change the world and it will have a paradigm shift that will basically make everybody change the way they look at this particular problem. If it's a holy grail breakthrough that's still a dream, that's still risky. If it's a hold grail breakthrough that's already been made and everybody knows about it, it would be too expensive. We focus on a small goldilocks zone, where it's a holy grail breakthrough that has actually already been made, but requires the last push with data to convince everyone of this new paradigm shift. That's the only thing we do. As a result, out of the 5,000 views that we receive, in the past, maybe 4,000 would qualify. Today, less than 100.

Rachel Pether: (16:19)
That's a very easy filtering and screening mechanism, isn't it? I do want to talk, you mentioned cure for cancer, obviously, that's a very nice analogous to a vaccine for COVID, but I did just have an audience question come in, which is relevant to what you've just said. It was that if the market is ready for a company's products, i.e., if the market risk is known, does it often mean that your companies are in late stage when it comes to investments?

Dr. Finian Tan: (16:50)
Not necessarily, because if it's too late, then it's too expensive for us, so it would come under the second bucket. It's typically the third bucket, which is the goldilocks zone, where it's a breakthrough. Breakthrough in our view that has already been made. But people don't get belief. The reason why they don't get belief is because they haven't dug deep enough.

Dr. Finian Tan: (17:14)
Let me give you an example. We have a company called ROWDC. They have a biodegradable plastic alternative. In order to be an alternative to single use, disposable plastic, you need to meet three criteria. Number one, you need to be as cheap as plastic. Number two, it must feel like plastic and have all the material properties, waterproofness, high temperature, et cetera. Number three, it must be biodegradable. We had been hunting high and low forever and we found many, many companies that met two, but not three. Finally, we came across one company that could do all three. This was the only company that we could find, but they only had a small plant for 250 tons, so they had to scale from 250 tons to 25,000 tons. There was an apparent prototyping risk, and as a result, many VCs were holding back, unsure how risky this was. We rolled up our sleeves, went to the company, and in the midst of our due diligence, we found that the company had already tested their microbes in this big, full scale tank of 25,000 tons factory that we'll be using. They manually pull out all the microbes and the nutrients and they grew the material manually, which means the microbiology has already been tested.

Dr. Finian Tan: (18:50)
What's the rest? The rest are movement of oil through pumps, centrifuges and pipes. This is an old academic study. It's 100 year old subject. You learned it in flu dynamics. I've moved such oils in the refinery at Shell where I used to work before. Ten times larger. We could calculate it to the decimal. Actually, if you come to think of it, since it's a mixture of engineering and microbiology and both of them would work, one plus one would be two, so we felt that this is a breakthrough that had already been made. We invested, the company then started increasing its scale and talking to customers, and today it's almost a unicorn. They just closed a Series B round, it's a staple round with B1 and B2. After the milestones are hit in a few months, they will be a unicorn. We invested in the tens of millions just because we were I guess conscientious enough to immediately fly and dig deep instead of being affected by noise.

Dr. Finian Tan: (20:06)
If you had six companies to look at, one was a social network, one was ride hailing, one is going to be Twitter, one is going to be the next Angry Birds, and then you have a tech company that looks a bit risky, the priorities are different. For us, we drop everything, but the only thing we're looking at, we fly there tomorrow, and we roll up our sleeves and if it's the holy grail breakthrough that has already been achieved but just needs a little bit of push, that's the one we want.

Rachel Pether: (20:36)
Excellent. I guess that deep knowledge of the company really derisks the investment for you, doesn't it, because you have-

Dr. Finian Tan: (20:42)
Absolutely.

Rachel Pether: (20:45)
... so much. You mentioned you work on things or you look at investments where the market is known, the market is huge. Obviously, we would be remiss not to talk about the work that you're currently doing in the COVID vaccine development space. One of the companies that you're focused on within Vickers Venture Partners is Emergex. Let's please share with the audience the work that you're doing here, because it's really quite phenomenal.

Dr. Finian Tan: (21:15)
Yeah. This pandemic is affecting all of us, and everybody must be asking the question, "When will life return to normal?" Like, really normal. With parties and stadium events and rock concerts and going to clubs and not wearing a mask and not social distancing any more. That can only come from a vaccine that can eradicate the virus. When I saw "eradicate," I mean like smallpox or yellow fever or polio, where the virus disappears, or SARS-1. It cannot be the flu vaccine kind of efficacy because the flu is still with us, and COVID-19 is much more lethal than the flu. If all the protection you get is similar to the flu vaccine, which, by the way, is only 10% to 60% efficacious, life will not return to normal.

Dr. Finian Tan: (22:15)
Dr. Fauci was just interviewed recently and he said that if the vaccine is only 50% efficacious, we will still be wearing masks, we will still be social distancing, and unfortunately, the technology that's being employed by all the lead horses in the race, because there are, by the way, 177 companies to be racing to the vaccine finish line. 167 of them are working on antibody approaches, which are very similar to the flu vaccine. All of them working on the surface protein. The virus has a spike; everybody's trying to mimic the spike. I don't think that it's going to result in an eradicating vaccine. It will reduce mortality, it will reduce morbidity, it will reduce transmission, but life ain't going to return to normal until we have an eradicating vaccine.

Dr. Finian Tan: (23:11)
I mentioned yellow fever, smallpox, polio, et cetera. They were eradicated because they induce T-cell responses, not just antibody responses. Thankfully, there are 10 of us working on T-cell vaccines and I think Emergex has a very good shot at it, maybe the best shot at coming up with an eradicating vaccine, maybe seven, eight months from today.

Rachel Pether: (23:41)
Wow, that's a timeline we can all look to with some optimism. You mentioned 167 out of 177 are working on the antibody vaccines. What are some of the disadvantages of this? Do you think it will create a false sense of security almost, or do you see this more as a stop gap until we have something that can actually eradicate the virus?

Dr. Finian Tan: (24:15)
Let me explain the difference between antibodies and T-cells. When the virus enters the human body, it starts with moving in the fluids, through the lymphatic and the blood. Viruses are a small little bugger with little spikes. They will encounter antibodies in the human blood, in the human lymphatic system. Antibodies are little Y-shaped things that exist in the human body and we have all types of antibodies for every single virus that we have ever encountered and will probably ever encounter. We have antibodies for them, but not very much of each type.

Dr. Finian Tan: (24:55)
Let's say we get virus X. Virus X enters the human body and through the blood it will encounter some antibodies, which don't fit. One of them will fit, and that's called the antibody X. It will fit virus X like a lock and a key. Once it fits the surface of the virus, it will then say, "Oh, I need to neutralize this and I need to build memory for this." They will then start to build the army, which will take seven or 10 days, so that you have an army of antibodies that will neutralize these virus X. What the vaccine tries to do is the vaccine tries to look like virus X, but without the toxicity. They would copy the surface and typically, since it binds to the spike, they just have to copy the spike; they don't have to copy the whole virus. The Y only joins with the spike. It binds with the spike. That's what everybody's doing, 166 of them, designing vaccines that look like the spike of the virus.

Dr. Finian Tan: (26:01)
Using different technology, some of them, they take an adenovirus and then they use peptides to make the spike, and then they build it with carbohydrates. Some other people use inactivated coronaviruses, which already has a spike. Some of them are using MRNA, messenger RNA, which basically hijacks the manufacturing part of the cell to produce the vaccine, trying to mimic the spike again.

Dr. Finian Tan: (26:29)
Antibodies really focus on the surface of the virus and try to mimic the surface of the virus. What happens if a virus escapes an antibody and enters a cell? That's disaster, because if it escapes the shield of antibodies and enters the cell, it will then do two things. It will start to multiply frantically and build thousands of itself using the manufacturing capacity of our cell. The other thing that happens is the cell will try to kill the virus, and it will chop up the virus into little bits of viruses. These bits are then displayed outside the cell and become an antigen-presenting cell, and you have these little bits of virus outside of the cell. That says that I'm foreign. Our T-cells will then come and destroy them based on recognizing the little bits of the virus. Only a few T-cells, actually one type of T-cell, will recognize one type of bits of virus, and that T-cell will then clone itself and make armies, just like the antibodies did, so that when they see infected cell, then they recognize all these little bits, they will kill it.

Dr. Finian Tan: (27:49)
Killing infected cells is so crucial because infected cells are a factory that produces more and more of the virus, and it is the infected cells that cause the symptoms. Imagine if the lung cell was infected, then you can't breathe. If other parts of your body gets infected, that part of the body will not work very well, and you get puss, you get liquids, and you get pneumonia, et cetera. So you have to destroy infected cells to prevent the factory. You have to destroy the factory from making clones.

Dr. Finian Tan: (28:24)
If you wanted to induce T-cells, you have to mimic an infected cell. You don't mimic the virus. I just said, what does an infected cell look like? An infected cell has little bits of virus parts stuck to it. You don't have to copy the whole cell; you just need to copy the viral parts. This viral parts, they don't really come primarily from the surface of the virus. They come from the insides of the virus, because there's more volume than surface area. I'll give you an example. When you eat meat, not many pieces of meat have skin because it doesn't have the surface. It's the insides. The intestines don't have skin, the liver, the heart, the stomach, and all the flesh does not have skin. You have to copy the steaks of the virus rather than the horn of the cow. The steaks of the virus does not look anything like the face of the cow or the horns of the cow. Antibody approach just copies the horn of the cow, and we are copying the steaks that a cut-up virus looks like.

Dr. Finian Tan: (29:38)
What are the 10 of us doing that is different? I think that most of the people doing T-cell vaccines today are kind of intelligently guessing what it will look like. They use AI, they us computers to predict how the virus will be cut up by an infected cell. Maybe you will have the nuclear capsid which is like the intestines of the virus, and some people say it comes from the flesh. It maybe is 30%, 20%, 10% of the three different parts because that's what happened to flu, that's what happened with SARS-1, et cetera, and they used computer prediction.

Dr. Finian Tan: (30:19)
Emergex has decided to do something different. They decided to do it from first principles. What we did was we infected all the human supertypes; there are six supertypes in the world that covers 98% of all blood types, and we see what happens when these supertypes infected cells, what sort of bits of virus are displayed. We collected all of them and we did a mass spectrometry. Today, we are the first in the world to announce that we now have the library of peptides that expresses all the supertypes in the world, 98% supertypes of the world, and what the viral parts will look like. We're now in a good position to produce a vaccine that looks exactly like an infected cell, so we're very optimistic that it's going to work, and work very well.

Rachel Pether: (31:27)
That's very refreshing to hear. I think it's fascinating what you're talking about, mimicking the infected cell. How would that work in terms of mutations or COVID-19 different strands, because those T-cell-

Dr. Finian Tan: (31:45)
Very good question. Because it's mostly internal proteins ... Generally when viruses mutate ... I'll give you an example. If somebody wants to disguise themself so the police doesn't recognize it, it doesn't change his liver. It just changes its face, wear a hat, shave. Generally, surface proteins mutate and internal proteins don't mutate so much. Since we are mostly internal proteins, we can cope with mutation, and because of that, the efficacy of T-cell vaccines last 30 years, the efficacy of the flu vaccine waned 16% per month, mainly because of the mutation of the surface protein. We are talking about a potential T-cell vaccine that will be a single shot and will last for 30 years, and can protect us from every serotype of this disease.

Rachel Pether: (32:51)
We have one question that's come in from the audience on this, and we actually have about a dozen other questions that have come in, but I do want to ask one final question on the vaccines. When you talk about efficacy and when you say 50% efficacy, does this mean you would reduce the symptoms, or does it just mean that in 50% of the cases it's actually effective at all?

Dr. Finian Tan: (33:19)
We don't know, but what we know is it would ... the thing that causes an infection to become a disease, two things: One, it's viral load, and two is viral diversity. That pushes it past the bottleneck and then becomes a serious disease. If the antibodies can reduce viral load and reduce diversity, that's good for that person, but it tends to encourage escape mutants. For example, if you have antibody X and virus X comes in, then it's docked and then it mutates into virus Y. That's the one that goes out and infects somebody else. Suddenly, it doesn't work anymore for the other person, but it worked for you because ... time is the most important.

Dr. Finian Tan: (34:22)
The human body will produce its own T-cells and it will also produce its own antibodies and it's the best defense. The trouble is time. Because it takes a while to build the army, sometimes a person gets overcome by the disease and dies. Sometimes he gets very sick before he recovers. Sometimes it's asymptomatic because viral load and diversity wasn't very great, and you had the time for the defense to be built. The key about our T-cell vaccine is we have the army of T-cells on day zero. It might not give you complete immunity, it will not stop the infection, but it stops the disease and converts the disease into something that's asymptomatic or clinically no disease, or very light disease. That gives you the time for your body's own defense to grow its antibodies and to grow other types of T-cells to defend against this virus.

Dr. Finian Tan: (35:30)
In fact, our vaccine is a combination of T-cell vaccine that builds T-cells on day zero, and then, when the infection comes, the infection becomes the boost. It's the prime plus boost strategy. It's like when you get a booster shot of a vaccine. You get the primed T-cell and then the infection is actually a boost that brings all the other defenses. Together, it gives you real complete immunity.

Rachel Pether: (36:03)
With Emergex and the work you're doing, that is obviously a company that has huge global impact. It could potentially touch every one of us. Is impact a particular focus area for you?

Dr. Finian Tan: (36:17)
Well, we don't go out to make an impact, but because our criteria is a holy grail type breakthrough, it naturally implies an impact, and generally would be a very impactful company if we achieve success. There's some risk, technological risk, and by the way, when I say our failure rate is 6%, that's measured by dollars and not number of companies. Number of companies is larger than that, but we don't put more money after that so if it doesn't work out, we don't put more money in as a result. In dollar terms, our failure rate is only 6%. In terms of numbers of companies, it's larger. We don't always succeed, we don't always spot them right. Sometimes we encounter risk that we didn't foresee, but generally, really, really good. I think more than two-thirds of the time we're correct.

Dr. Finian Tan: (37:15)
We're very excited about Emergex, not just because we believe we can potentially produce a neuritic aiding vaccine, but also because of how quickly we can manufacture it. Because of our delivery mechanism, we can one day put it on the microneedle patch that could potentially be put on your arm for a minute, self-administered, no coaching required because it's an inanimate material that we're using. Instead of using a live virus as the carrier, we are using a particle that's stable and room temperature. It's very exciting. It will take us months to produce for the world, and it's so easy because you don't need somebody to administer it. You don't need a syringe, you don't need refrigeration, et cetera.

Dr. Finian Tan: (38:12)
Our first clinical trials will be with a microneedle syringe, but as we improve this, we can theoretically put it on a micropatch or a bandaid.

Rachel Pether: (38:24)
That's incredible. I think that lack of cold chain is also, just that speed for getting it to market, not requiring cold chain, and takes off that logistical burden as well, so that's pretty exciting.

Dr. Finian Tan: (38:37)
Some of the vaccines that are currently going to clinical trials require minus 80 degrees Centigrade to store, and that's a logistical nightmare.

Rachel Pether: (38:52)
Yep. That's very cold. As someone who lives in Abu Dhabi, I can only appreciate how cold that is. We just have a couple of minutes left, and we do still have so many questions that have come in. For any audience questions that we haven't had time to get to, please do just let one of the SALT team know and I'm sure Dr. Finian would be happy to answer them. I would like to end on maybe a softer question for you, Dr. Finian. Maybe you could share with the audience what is one of the early lessons that you learned when you ventured out on your own.

Dr. Finian Tan: (39:34)
The biggest lesson was, because of success sometimes you think that you're pretty good at this, and then realize that you're actually not so good at this part of it, but you were good on the other side. That took a while. We had some tough times. Companies fail. Later, looking to data, we realized and managed to pinpoint why we were making mistakes. We were going into a territory that we were not necessarily the best at: trying to guess the market. We're not good at crystal ball gazing. Some people are pretty good at that, but not us. We're boring tech guys and we like to take our time and go through the nitty gritty of tech, almost like doing a PhD itself, trying to figure out and learning about a particular topic. For example, we had to dig in very deep into immunology to understand the difference between antibodies and T-cells, and the difference between using computers to predict and using prospects for us. Why do RNA viruses mutate? How do they mutate? How do you solve the problem? Why is the flu vaccine a wrong approach? They took a lot of time and a lot of rolling up of the sleeves.

Dr. Finian Tan: (41:01)
We continue to make mistakes and we continue to miss good ones. That's the nature of the game. The beauty of venture capitalists, you don't need to be right all the time, but when you're right, you're really right. Is today worth maybe 1,500 times more than when I first invested. We're listing a company now in China that's 110x from where we invested it. In seven months, we could get an approval for Emergex, and if we do, this will be another 150, 200x type return, so even more. The bioplastic is another very, very interesting company.

Dr. Finian Tan: (41:43)
Recently, about a year now, we invested in a company in Calgary that has a geothermal solution to green energy. As you know, geothermal is the greenest of all green energy. That's super exciting. It's called Eavor and they have found a way to reduce geothermal prices by a factor of 10. Geothermal, the earth is always hot, and I don't know if you know this but the center of the earth is as hot as the surface of the sun.

Rachel Pether: (42:19)
I did not know that.

Dr. Finian Tan: (42:24)
It's always hot, so it's not like solar, where it's hot in the day, cool at night. It's not like wind; sometimes windy, sometimes not windy. It's not like hydroelectric, which destroys the environment. This is always hot, so it can be baseload and you don't see anything because it's all underground. The surface can be a nice beach, it can be a property that you build houses on. It's like you're using the earth as a battery. In fact, it's an earth battery and it's nuclear powered because that's how the earth is kept warm, through nuclear.

Rachel Pether: (43:03)
The projects that you're working on, for lack of a better description, they really blow my mind. It's been such a pleasure speaking to you today, and I'd love to have you come on in maybe another six months or so to give us a progress report on how you're going with Emergex, but from my side, thank you so much for your time today, Dr. Finian.

Dr. Finian Tan: (43:23)
Thank you.

Rachel Pether: (43:23)
It's been a real pleasure talking to you.

Noah Kerner: Micro-Investing & Robo-Investing | SALT Talks #83

“I feel like, why spend your time on something that's not noble in pursuit if you have the opportunity to do that?”

Noah Kerner is CEO of Acorns, financial technology and financial services company specializing in micro-investing and robo-investing. Born in New York City, Kerner got involved with Acorns two months after launch as an adviser, investor, board director and then CEO. He is a 4X entrepreneur, Co-author of Chasing Cool with the former CEO of Barneys, and former DJ for Jennifer Lopez.

Acting on a lifelong mission to level the playing field in a world of haves and have-nots, Acorns was founded to bring tools of wealth creation to everyone. The goal is to make it easy to save and invest even small amounts of money, where typically investment tools are reserved for the financial elites. Acorns has an initiative focused on opening children’s investment accounts, highlighting the importance and value of early, compounding growth. It also seeks to offer investment education to prevent less experienced investors from overreacting to short-term market swings. “The market swings every day. It's in the red, the blue, black. It's impossible to stay calm and make rational decisions… great investors stay the course.”

Acorns Job Finder is the latest product launched by the company. Income is the most important aspect in people’s financial lives and serves as the basis of investment, so Acorns is now helping customers find a wide-range of job opportunities, made especially important during the pandemic.

LISTEN AND SUBSCRIBE

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SPEAKER

Noah Kerner

Chief Executive Officer

Acorns

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT Talks, if you haven't tuned into any of our series yet, is a digital interview series that we launched during the pandemic with leading investors, creators and thinkers. Our guest today is another one that merges those three topics, and we're very excited to have a wide-ranging conversation with him.

John Darsie: (00:37)
SALT Talks, what we're really trying to do with this series is replicate the experience that we provide at our global conference series, the SALT Conference. That's to provide a window into the mind of subject-matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. We're very excited today to welcome Noah Kerner to SALT Talks. Noah is the CEO of the micro-investing app, Acorns, and he's the co-founder of the shareholder rights startup, Say. His background is very colorful and diverse.

John Darsie: (01:08)
He's a four times entrepreneur. He's the co-author of Chasing Cool, and the former CEO of Barneys and also a former DJ. Noah built the leading creative agency for the young adult market, which was called Noise. Before being acquired by Engine, Noise developed hundreds of products and marketing campaigns for this generation. Including Facebook's first application, the first credit card to reward responsibility rather than spending for Chase, Vice's music website called Noisey, and the top-branded game in the app store.

John Darsie: (01:39)
Noah's been recognized as one of Billboard Magazine's Top 30 under 30, one of Adweek's Top 20 under 40, and Fast Company's one of their innovation agents and impact council members. Also, as a judge for the Webby Awards. He has also advised and invested in a variety of fast-growing startups, including WeWork, where he served as the chief strategy and marketing officer from 2013 to 2014. He's passionate about educating today's youth as well. He's lectured on entrepreneurism, FinTech and media at NYU, at UCLA, at Stanford and Columbia.

John Darsie: (02:16)
He currently serves on the board of VH1's Save The Music Foundation. Noah is a graduate of Cornell University, where he studied psychology and economics. I believe today he's coming to us from the beautiful Berkshires. Hosting today's talk is Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. With that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:42)
John, thank you. Noah, it's great to have you on. Thanks so much for joining us and congratulations on everything thus far. The cool thing about you, Noah, is you're just getting started, so I have no doubt that the next decade and the next two or three decades, you're even going to be more sensational than the last few. Congratulations. Let's go back to what motivates Noah Kerner. Go ahead. Where did you get all of this great energy, passion, innovation?

Noah Kerner: (03:12)
Someone told me, not that long ago, to write down your purpose, which I thought was a ridiculous ask, but I did it anyway. I sat down and just wrote what came out of me. What came out was, level the playing field. Then it is like look back in your life through the lens of that. Because for me, it was this organic process of like, "Okay. Level the playing field." I went all the way back to my childhood. I grew up in the East Village in New York, much like you. I was a public school kid.

Noah Kerner: (03:41)
I grew up around kids that didn't have a lot, but I had this weird dichotomy in my life where in the day I was with all these kids who didn't have a lot and at night, I was playing tennis with the wealthiest kids in Manhattan. That was every day going back and forth, back and forth. Then for high school, switched. Private high school by the day. I got turntables at 14, slightly terrified my parents and became immersed in hip hop and started doing hip hop nightclubs at 16. It was like by the day wealthiest kids in Manhattan, at night, grittiest nightclubs in the city.

Noah Kerner: (04:12)
That was the beginning of my life going in between these worlds and understanding the haves, the have-nots. I got to travel the whole country as a young person touring as a DJ actually, so I saw what was happening and how people were living. I felt like, "Huh, maybe it's time to dedicate myself to helping to bridge that divide. If I have the opportunity to do that, that would be a good use of my time."

Anthony Scaramucci: (04:38)
Okay. That was sensational. You got a great book. You have a great memoir in you, but I want to go on this a little further before we get into Acorn. When you say level the playing field, the way I understand it is you want people who are in the have-not category to have an equal opportunity, or at least to get closer to the starting line that other people have. What private high school did you go to?

Noah Kerner: (05:01)
Fieldston.

Anthony Scaramucci: (05:02)
Okay. There are wealthy people at Fieldston. There were probably some less wealthy people, but mostly wealthy people, so there was a divide. We know there is a great divide in the country, but what is that impulse, Noah. Go a little deeper. I'm not your shrink, but trust me, I'm a lot cheaper than a shrink. Go a little deeper for me. Tell me why that impulse and why that purpose?

Noah Kerner: (05:28)
Well, I think it's painful to watch. I think as a person, if you have any sense of empathy to see the way that this divide exists, it's just painful to watch. I don't know if I can combine my professional life and that sense of purpose, that's really good. To give a little more context. My father worked in banking for many years, but he was actually in the philanthropic side of banking. He was technically the first corporate social responsibility officer. He used to give the bank's money away to community development projects, but at the time, it was not a core part of the DNA of the bank.

Noah Kerner: (06:05)
It was because of the Community Reinvestment Act that they had to give the money back. I also saw this, working for these big banks, doing philanthropic stuff, but that wasn't really part of the DNA so I just always saw these gaps. That's the best way I can say it. I feel like, why spend your time on something that's not noble in pursuit if you have the opportunity to do that?

Anthony Scaramucci: (06:33)
I've got to ask you a question because this is just curious. You've been on both sides of it. You've been with the haves and you've been with the have-nots, but the have-nots are just as smart as the haves. Am I right or wrong? I mean, in my neighborhood, I mean, I was sitting up at Harvard Law School. I'm like, "Okay. I know you guys think you're all great with the blue and Brooks Brothers outfit on, but there were kids in my neighborhood that are as smart as you guys, if not smarter. They just didn't have the advantages." Do you feel that way?

Noah Kerner: (07:02)
And happier actually. I felt that way a lot. Yeah. I-

Anthony Scaramucci: (07:06)
Yeah. Possibly happier. Yeah. Why happier, do you think?

Noah Kerner: (07:12)
That's a good question. Maybe more freedom somehow. I don't know. I always felt more comfortable on that side. You know?

Anthony Scaramucci: (07:24)
Yeah. Well, listen, I've been on both sides, so I'll give you my view of it. It's not necessarily more freedom, but it's less expectation. If your dad is a crane operator, like my dad was, my parents thought I was going to Hartford Law School. When they took the map out, they were like, "Okay. We're going to Connecticut?" I'm like, "No, we're going back up to Boston. It down the block from Tufts." My parents didn't know any better, so if you don't have the expectation then there's a little bit of a relaxation to that.

Anthony Scaramucci: (07:54)
I felt a lot of people that I went to law school with were so fearful of failing because of what they needed to 'live up to' that they were pressurized. There's dilemmas on all sides. I appreciate that. I appreciate where you're coming from. You built an amazing business. Let's talk about Acorns now because it fits into your life plan and it fits into who you are as a guy. It's a brilliant idea. For those of us that don't know a lot about Acorns ... I do, but there's lots of listeners that may not. Tell us about Acorns. Tell us why you initialized it. Tell us how's it going so far?

Noah Kerner: (08:30)
Yeah. To get back to the leveling the playing field, at the highest level it's really about putting the tools of wealth making in everyone else's hands. That's like you asked the question, why shouldn't everybody have access to these things that have been reserved for the rarefied? That doesn't make sense. At the most basic level, Acorns makes it really, really easy to save and invest small amounts of money for the future. Then we also layer on top financial literacy as an integrated function inside the product. We've opened up over 8 million accounts in the U.S..

Noah Kerner: (09:01)
The customer base is really that it's the everyday American almost exclusively, and the product is designed that way. Functionally, we have a bunch of products inside. Like we help you round up your spare change, automatically invest the spare change into a diversified portfolio. You can set up a retirement account. It's the easiest way to set up a retirement account. Automatically contribute by the day, the week, the month. We have a kid's investment account, so if you just started a family, you can easily set up a kid's investment account.

Noah Kerner: (09:32)
Then we built out a banking product that helps you. Well, our goal is to get people to spend less, save and invest more. It all comes back to us for how do we help people maximize their saving and investing potential?

Anthony Scaramucci: (09:49)
You've attracted a very interesting investor list. You've got Dwayne Johnson, The Rock, Dany Garcia, you've got Jennifer Lopez, you have Ashton Kutcher. How did you get these people?

Noah Kerner: (10:04)
Probably mostly from former lives. You know what I mean? Getting back to the beginning of the story, just navigating these different worlds, music, entertainment, hip hop, whatever. I think the common thread for all of them is that they connect to the storyline. Like Dwayne Johnson is perfect. His company, Seven Bucks Productions, he started because he had seven bucks in his pocket. His story is the acorns to oak story. Our brand is all about, how do we help people move from being tiny acorns to mighty oaks? All those people share that. Jenny from the block, that whole storyline is the same.

Anthony Scaramucci: (10:43)
Well, I mean, I want to emphasize this because we got a lot of young people that listen to these SALT Talks. You kept your relationships, you didn't transact with your relationships. You made them holistic and you made them symmetrical so these people wanted to come with you in your life. It's not like you were just operating as a DJ, that was over, hasta la vista. You kept in close touch with everybody. The point is, no matter what's going on in your life, you could, as an example, work in the White House for 11 days, get your ass fired after 11 days.

Anthony Scaramucci: (11:16)
That could be a bad thing, but it could also be elements of good where now you've bonded with General Kelly who fired you, become personal friends.

Noah Kerner: (11:22)
Right.

Anthony Scaramucci: (11:23)
You see what I'm saying? There's a big lesson to people that you got to keep your relationships because these people have clearly helped you, but you've also helped them because you've built this amazing company. Now, let's talk about the transaction. I go to the store. I'm a member of Acorn. I go to the store, I buy something, it's $4.15. What does your app enable me to do?

Noah Kerner: (11:47)
We round it up to $5. The 85 cents automatically gets invested into a diversified portfolio of ETFs, so like thousands of stocks and bonds.

Anthony Scaramucci: (11:55)
That hits my Credit Corp or how does it round up?

Noah Kerner: (11:59)
It pulls it from your bank account.

Anthony Scaramucci: (12:01)
I got it.

Noah Kerner: (12:02)
As part of registration, you link your bank account. That becomes your funding source. We see your spending, and then we pull the spare change and invest it for you from your bank account automatically.

Anthony Scaramucci: (12:12)
Okay. All right. It's a brilliant idea. You've got companies out there that are known as robo-advisors, companies like Betterment or Stash or Robinhood, so how do you differentiate from them?

Noah Kerner: (12:25)
Yeah. To be honest, we don't really think about competition. I like the idea of blazing a path and leaving a trail. We pioneered micro-investing. We pioneered bringing financial literacy and education together in the product. We pioneered getting brands to invest in you for shopping with them. We move in our own way and we move forward in our own way and don't really look right and left necessarily. I'd say from the customer vantage point, the key thing to understand about Acorns is the customer we serve, the simplicity of it, the way it helps you grow and grow wealth and the number of tools we provide to help you unlock your potential.

Anthony Scaramucci: (13:13)
Tell us about Acorns Early. What does that mean? What's Acorns Early?

Noah Kerner: (13:17)
It's a kid's investment account, so parents can automatically set up investment accounts for their kids, as many kids as you have. You set up a recurring contribution and it just automatically invests into the kids' future for you. If you're an Acorns customer, it's pretty much 30 to 60 seconds to set it up. It just works like magic. You can see that we have a graph called the potential graph so you can see what that money can become through compounding over time, which I'm sure everybody here knows, but that's when your money grows on top of itself.

Noah Kerner: (13:46)
We have financial literacy for families. Then we have brand partners that are family-oriented and invest in you when you participate with them.

Anthony Scaramucci: (13:57)
It's amazing and it's also a reminder to people the earlier that you start investing, the more value there is in the compounding. You can give small amounts of money at an early age, end up with way more money than if you start out with large amounts of money at a later age. I think you're taking advantage of that for people and you're also explaining that to them, so there's a lot of wisdom in what you're doing. The COVID-19 has complicated investing. What is Acorns Grow and how is Acorns helping its users understand the opportunities of long-term investing in the COVID-19 landscape, Noah?

Noah Kerner: (14:35)
Yeah. Grow is our education product, and it started out of this idea that when you're an investor and you read the news, you're going to make bad decisions. The difference in this space between news and education, I think is really critically important, right? News is the world's coming to an end. The market's crashing every day. The market swings every day. It's in the red, the blue, black. It's impossible to stay calm and make rational decisions when you watch this. Education for us is providing information to our customers that helps them.

Noah Kerner: (15:13)
When the market goes down, you know this, that's the worst time to pull your money out. If you're not super sophisticated about this, and you're paying attention to the news, you're going to pull your money out because you're going to panic. My parents did that two or three times and probably lost 200/300% on their money. Our messages to the customers are, great investors stick with it, great investors stay the course. If you look back in time throughout history, every downturn has ended in an upturn. That kind of information is much more useful than the market went down a thousand points today. The world's coming to a fucking end. You know?

Anthony Scaramucci: (15:47)
Yeah. Well, I mean, I agree with you. I mean, we had Morgan Housel, who wrote the book Psychology of Money. What ends up happening is people get so emotionally charged about their money they do the exact opposite thing that they should do. It's based on the fight or flight response and most people have a flight response when it's their money because it's their life savings. They get very, very worked up about it. Also, they lose some confidence in the system so they think, "Okay. That number that I'm looking at on CNBC for that stock is just a number. It's not reflective of an underlying business."

Anthony Scaramucci: (16:23)
It's super important for people to be aware of that. You have become a very well-known enterprise. I mean, everybody knows about Acorns. Millennials, generation X and Z up into the old fogies like me. How did you do that? How did you get the proliferation of your brand?

Noah Kerner: (16:45)
Starting with, and I think this gets lost a lot, but a real focus on product and product quality and making sure the product is good so people talk about it and refer it. I mean, the majority of our growth comes from organic and referral growth. We focus a lot on things like NPS, which is net promoter score. How likely are your customers to refer your product to a friend? Making the experience great. From a marketing perspective, we have partnerships with everybody from The Rock to brands. We do a lot of press. We do search engine optimization.

Noah Kerner: (17:14)
We have our content publication, Grow, that gets a couple million uniques a month. It's a pretty holistic approach, but at the most basic level is thinking about how to make a great product experience so people love it and talk about it.

Anthony Scaramucci: (17:28)
All right. You're doing something pretty gigantic today, right? You're launching Acorns Jobs Finder, is that correct?

Noah Kerner: (17:35)
Yeah.

Anthony Scaramucci: (17:35)
All right. That's pretty huge. Okay. Mazel tov. Congratulations. Okay. Now, what are we doing with Acorns Jobs Finder? Tell our delegates about it.

Noah Kerner: (17:44)
Yeah. It comes back to the leveling the playing field thing and also, I think trying to be timely. I can't sleep at night when I think about what's happening right now and how much unemployment there is and all the statistics around how much people are struggling. There are pre-COVID and COVID reasons for why we did it and why we did it now. If you think about the banking industry at large, and we do that, just what are the gaps, right? Ask questions. Why doesn't the banking industry help people with income when income is the most important part of your financial life? This just seems like a weird gap in financial services.

Noah Kerner: (18:24)
We said, "Look, we help people save and invest money. To do that, we have to help people earn more money. If you can earn more money, you have the potential to save and invest more money." That was pre-COVID logic. COVID logic for why we did it now is obviously you know the statistics around labor and unemployment. This is a really tough time so we wanted to deliver millions of job opportunities, remote jobs, side gigs, part-time, full-time to our customers and say, "Look, there's a lot of opportunities."

Noah Kerner: (18:54)
There's a lot of interesting statistics around side gigs for example when you see the huge uptake in side gig activity during COVID. It turns out a lot of people don't know what type of side gigs there are, how to find them and what to choose. We said, "Let's bring this to bear inside of our product and bring these opportunities in a really important time."

Anthony Scaramucci: (19:17)
Let's talk about the pandemic. You said that you're having some sleepless nights. Are you having some sleepless nights related to the pandemic?

Noah Kerner: (19:24)
I have sleepless nights because it's hard for me given what we do to digest what's happening to people in the country. I mean, I obviously have some sleepless nights because of some of the activity happening in the world and in the country. Mostly it's if you're as immersed in this problem as I am, and we are as a company, it's very hard to sleep when you see these statistics. 70% of Americans not having a thousand dollar emergency fund. Our statistics show that the average American wants 75,000 to feel financially comfortable.

Noah Kerner: (20:00)
That's a pretty big, enormous gap that is not going to magically get filled. Unless we're helping people earn more, unless we're helping people save and invest for the future, unless we're helping people spend less so they can save and invest more, it's going to be very, very difficult to move into the future.

Anthony Scaramucci: (20:19)
Well, listen, I join you in having the sleepless nights. The reason I'm asking you is there are a lot of nights in the last six months where I've lost sleep because of all the stuff going on. The political ramifications of what's going on, the healthcare ramifications, the fact that we have this dystopian information, disinformation out there, worries me, but you're talking about the income divide. Let's address that for a second. Why do you think that that has happened to the extent that it has happened? It seems you could really trace it back to the last 40 years, Noah. Why do you think that that's happened?

Noah Kerner: (20:56)
Well, pretty much flat middle-class wages, rising debts. It's really I think-

Anthony Scaramucci: (21:04)
Okay. Let's address that. Why are the middle-class wages flat?

Noah Kerner: (21:07)
Well, there's a lot of reasons for why middle-class wages are flat, but I think when you ... By the way, one of them is when you look at payroll inside companies, a lot of the wages are going to healthcare costs and things like this. There's a lot of reasons. Combine that with the rising debts, and looks like this, and the rise of personal loans and credit card, credit card debt, and the increase in that, you get into a really difficult cycle that we're in. Unless it starts to go like this, I think we're going to be in a very difficult-

Anthony Scaramucci: (21:38)
Okay. CEO wages are going like this though, right? No?

Noah Kerner: (21:42)
Absolutely.

Anthony Scaramucci: (21:43)
Okay. You get CEO wages going like this, everyone else's wages going like that, that's going to cause some tension and anxiety and possible anger in a society, right?

Noah Kerner: (21:52)
A hundred percent.

Anthony Scaramucci: (21:54)
What do you think has happened then? Have we lost our noblesse oblige in the society? Are we catch as catch can where just everybody's out for themselves in an Ayn Rand kind of a way? Or we don't have the fabric knitting and stitching or social contract tighter together? What do you think is happening?

Noah Kerner: (22:16)
That's a really deep subject and obviously there's a lot to say on this. When I think about what I do and back to what I view as purpose and the idea of trying to level the playing field, if you think about banking, as an example, just look at credit cards and how the credit card industry works. You and I get credit card points and rewards paid for by the debt of other people who don't have a lot of money. I don't like using hackneyed phrases, but the system in many ways is rigged to enable people who have money to make more money and people who don't have money to go deeper into debt.

Noah Kerner: (22:56)
I think if you think about investing, even right now there's this whole range of savings products that have been pushed over the last couple of years, with a 1.5% interest rate, saving, saving, saving, saving. Well, you can't save your way to wealth. You can't even save your way past inflation. I think it's information. I think it's education. I think there's not enough people working to level the playing field and actually giving a shit about that. I think when people start making money and they get here, you don't want to come down from that position. People seem to ... It's actually always been a surprising thing to me.

Noah Kerner: (23:33)
Any modicum of success for me is incredibly humbling, but I meet a lot of people who get more successful and seem to lose sight of ... So it's a strange phenomenon. I think there's a lot. I think there's psychology. There's socio-economic forces, macroeconomic forces. There's a whole series of range of forces.

Anthony Scaramucci: (23:57)
Yeah. Look, I tell my conservative friends, "I got it. I understand that the rich want to get richer and I'm all for unlimited outcomes, but you got to be very, very careful because if you break the society and we disassociate the super wealthy from regular people, you will have an upheaval." It's just, unfortunately, that happens. You got to study five or 6,000 years of history. You are way better off figuring out a way to help your neighbor. Otherwise, you're going to be ending up living in a bob-wired security compound, sitting in your McMansion with your family while your neighbors are suffering.

Anthony Scaramucci: (24:34)
I'm not exactly sure if there's a social good to that. I don't understand why having 10% less and your neighbor doing better, isn't better for you overall, holistically. That's a whole longer-term philosophical discussion. Where is it ... Before I turn it over to John Darsie who's dying to ask you questions, and we got tons of questions in the queue, where is Acorns five years from now, Noah?

Noah Kerner: (24:59)
Our vision is to build a financial wellness system that helps everyday Americans save and invest every day. That's our stated vision. I'm sorry. What that means is there are many things you do in your financial life that impact your ability to save and invest, spending, earning, borrowing, literacy, all those things. We want to help you maximize all of that around saving and investing so you have as much saving and investing potential as you possibly can. In the next five years, Acorns will be much more of a system of products that work together. That's one.

Noah Kerner: (25:31)
We're already the largest subscription service in U.S. consumer finance. By the way, the subscription pricing model is also really important to the concepts we've been talking about, which is when you think about the way people are charged fees in banking, most of it is surprise and most of it is variable. Overdraft fees, minimum balance fees, all these things that pop up out of nowhere. Our thought is let's bring a very predictable, simple, transparent pricing model to this category and say, "It's $1 a month, $3 a month, $5 a month, whatever, here's what you pay. Here's what you get."

Noah Kerner: (26:04)
We have an ambition of a hundred million everyday Americans saving and investing every day. It's a pretty lofty ambition and ideal, but I think if we could achieve that, that would help to make a dent in the fabric of society. Also, literacy levels. Really, really getting people more financially literate and focusing on getting our customers, learning about all the things they need to learn about with their money. I think it's a travesty that financial literacy is not part of the core education, because how do you get dropped off into the world not knowing how to do your taxes? That doesn't make any sense to me?

Anthony Scaramucci: (26:39)
Look, you preach to the converted. Have you read The Richest Man in Babylon by George Clason?

Noah Kerner: (26:44)
I haven't. Tell me about it.

Anthony Scaramucci: (26:46)
Yeah. I want to recommend it to you because your whole business model is basically based on that. I read the book when I was 14. It had a big impact on me, but the central thesis of the book is if you want to get to independent wealth, you have to pay yourself first. If you have a cable bill and you have an electric bill, that's all fine and dandy, but whether it's $5, $10, a hundred dollars every month, you have a bill to yourself which goes into a savings account, or goes into a stock market account.

Anthony Scaramucci: (27:16)
I've been doing this since I was 14 years old, and it did have a dramatic impact in terms of developing the good habits of savings, which you are trying to do for so many Americans as people around the world. I'm going to turn it over to John Darsie, but Noah, I've enjoyed the conversation. I was your therapist there for about 10 minutes so I will send you a side bill and we can round that up into my Acorn account, okay?

Noah Kerner: (27:40)
You got it.

Anthony Scaramucci: (27:41)
All right. Thank you. Go ahead, John.

John Darsie: (27:43)
All right. Now, for the normal part of the session where Anthony is not acting like your shrink. What's interesting to me, and Anthony talked about this earlier, is how you've differentiated yourself from other FinTech players in the space focusing on investing. To me, the power in Acorns, and comment on this, if you will, is reinforcing positive habits. He talked about, we did a SALT Talk several weeks ago with Morgan Housel who wrote The Psychology of Money and writes a lot about that exact topic on his blog regularly as well.

John Darsie: (28:15)
How much of the platform is about reinforcing the right habits in terms of when you spend money, you should also be saving money and investing money? How have you guys thought about the investor psychology piece of this business?

Noah Kerner: (28:27)
Yeah. It's a good question. I mean, a lot of our customers have not saved or invested before, so what we find there's this ... And we talk to a lot of our customers. We get this feedback. There's this sense of hope and confidence that happens with discovering the product, and more importantly, the fact that you can actually save and invest money. The way the product functions is that there are a lot of ways to contribute really regularly.

Noah Kerner: (28:49)
You come back to the product, you see it happening right in front of your eyes and that from a conditioning perspective is really important because as you know, the act of saving and investing is just complicated. It's out of reach. It's just hard to do, so if we can make it easy to do, but also show you that it's happening right in front of you, we like to say celebrating growth and milestones, that helps people begin and it helps people build the confidence to be able to continue doing it. It's very much a conditioning.

Noah Kerner: (29:21)
I like the idea of, and ask the question, can we make saving addictive? Because there's a lot of addictive shit out there. There's a lot of addictive platforms that aren't necessarily good for you. If you could take those mechanisms and apply them to something that's really good for you, that's wonderful.

John Darsie: (29:38)
Right. Yeah. There's a great book called Nudge about that exact thing. Is that the same way that big tech companies use all of their research and AI capabilities to nudge people into behaviors that benefit the company, what if we as a public good started creating nudges into the right behaviors that actually makes people healthier and wealthier and happier?

Noah Kerner: (29:59)
Yeah. Richard Thaler is an advisor to the company. Very familiar. I love that book, but that's exactly it. By the way, the other side of this, and the other side of money for most people, probably all of us in different moments and different times, not all of us, but a lot of us, there's a lot of shame and embarrassment tied up in it. It's hard to talk about if you're struggling, you don't want to talk about it. The fact that you can find this place where little by little, it adds up, it builds a sense of hope. I think that emotional component is important because there's a lack of hope. There's a desperation in struggling with money. A hundred percent.

John Darsie: (30:45)
Yeah. No. It's definitely something that people are very reticent to talk about even within their own families. Talk a little bit more about Acorns Grow. We have a couple of questions about what's your long-term vision and mission for educating today's youth and our population in general, about financial literacy? How can we use technology to further pepper people with just these small stories about how you pay your taxes, how you understand the different taxes that you eventually are going to have to pay?

John Darsie: (31:13)
You see people like athletes coming into college football programs and going to play professional sports that buy a $2 million house without understanding the basics around property taxes and income taxes and understanding personal budgets. How are you going to use technology the way you've done with Acorns, the core product, from a Grow perspective to educate people?

Noah Kerner: (31:34)
Yeah. The best thing to understand is that the core product involves education. We don't think of education as a side thing. There is a separate website we have called Grow, but the education is part of the product. The way we think about it ... And by the way, we have not delivered on this yet. We will. Educating at the moment of decision-making is the way to crack this. It's very hard to get people to read content. It's very hard to get people to remember. It's harder. Richard Thaler will tell you, you could get someone to read something, but forget about trying to get them to remember it.

Noah Kerner: (32:07)
You've got to educate at the moment of decision-making. What that means in our world is product and education come together in one experience. Education is not branded entertainment. It's not over here. It's here. There are things that we'll do for you. Like we automate investing, but there are things you need to know as an investor to make good decisions. We can't automate the act of you not taking your money out of the market when it goes down. You have to know that that's a bad decision.

Noah Kerner: (32:35)
We have to educate at the moment of decision-making so that you are constantly reminded of every downturn ends in an upturn, every downturn ends in an upturn, every downturn ... This kind of stuff. We don't make it hard to pull your money out because we don't believe in that. You should be able to withdraw. It's free. It should be easy, but it's not a good idea to withdraw unless you really, really need the money.

John Darsie: (32:57)
Have you guys done any studies around the behavior of Acorns' investors relative to the general public in terms about how they react to periods of market volatility?

Noah Kerner: (33:08)
We have actually. First of all, during the pandemic, and this is not the case, historically, we've seen really high retention rates. There's a bunch of factors, but we attribute that in part to the constant barrage of education and information, making sure these customers have this. We've also run test controls during market dips to see what happens when we don't educate people, versus when we do, and there's a much better behavior among people who get educated through those periods. I think we like to have our hand held during those moments.

Noah Kerner: (33:40)
I'm sure when you talk to your parents or anybody who's ... Even I go ... I mean, I have financial planners. I freak out too. When things are sideways, I'll get them on the phone and they'll be like, "Okay." It's kind of embarrassing because of what I do, but I'll get them on the phone and I'll be like, "I mean, this one, are you sure? This one's different." You have to hold people's hands. Everybody has anxiety. Even the people with the most experience doing this, you still have moments of anxiety.

John Darsie: (34:15)
Yeah. We've had plenty of financial advisors on SALT Talks talking about that exact thing, is that their job is part investment manager, but the larger part of it is psychologists for their clients and reassuring them during periods of volatility to stay the course.

Noah Kerner: (34:29)
Yeah. I wish I had my conversations with my guys recorded because it would be hysterical.

John Darsie: (34:33)
Book recommendations [inaudible 00:34:34].

Noah Kerner: (34:35)
What'd you say?

John Darsie: (34:35)
Sorry.

Noah Kerner: (34:36)
Yeah.

John Darsie: (34:36)
We have a question about book recommendations. Anthony mentioned The Richest Man in Babylon, which is a great book. Do you have any authors, whether it's books or bloggers or anyone that you read frequently that help shape your worldview or any book recommendations that you're reading right now?

Noah Kerner: (34:53)
Well, as it relates to this stuff and behavioral economics and money, I actually am a huge Thaler fan not, so Nudge and Misbehaving and those books, I think are great.

John Darsie: (35:01)
All right.

Noah Kerner: (35:01)
As it relates to life, I'm a Churchill fan. I like to read biographies and I think The Last Lion, that series is one of the great series from an inspiration perspective. Like you said, this is as much about courage to move through difficult times as it is about technical knowledge. Man, nobody had more cards to move through a difficult time than Churchill. His great lines run through my head all the time, never, ever, ever, ever, ever give up. We'll fight in the hills, we'll fight in the streets.

Noah Kerner: (35:33)
Just that mentality, the optimist sees the opportunity in every challenge, the pessimist sees the challenge in every opportunity. Just all those reminders of stay courageous.

John Darsie: (35:46)
Well, our director of sales at SkyBridge is a massive Churchill fan. He's also British so he fashions himself as a modern-day Churchill, so I get to hear a lot of Churchillian quotes and everything every morning. In the middle of the pandemic was no different as we confronted all the issues that everyone in the world and in our country and in our industry faced during that time period.

Noah Kerner: (36:06)
Here's a good pandemic joke.

John Darsie: (36:08)
All right. Leave us with a nice Churchill quote to get everybody inspired as they leave today.

Noah Kerner: (36:13)
When you're going through hell, keep going.

John Darsie: (36:15)
There you go. Keep investing in your Acorns account because the compounding won't stop. Noah, thanks so much for joining us. Anthony, you have a final word for Noah before we let him go?

Anthony Scaramucci: (36:26)
No. Noah, I loved it. I hope we can get you back on. I'm looking forward to the future with you because even though you've already built an oak, I think that oak is going to turn into a redwood or sequoia. I'd like to figure out a way to invest me some money in Noah actually.

Noah Kerner: (36:41)
Okay.

Anthony Scaramucci: (36:41)
God bless you. Okay. We wish you great success.

Noah Kerner: (36:44)
Thank you.

Anthony Scaramucci: (36:45)
Keep up the great work for everybody.

Noah Kerner: (36:46)
Thanks Anthony. Take care.

Matt Salloway: AR, VR & Artificial Intelligence | SALT Talks #71

“We want to be able to invest in companies that can change the world.“

Matt Salloway is an international business executive, venture capitalist, investor and attorney. He serves as the Chief Executive Officer of GSI Ventures, a top 50 Global Family Office, with a focus on venture capital and portfolio market expansion into the MENA region.

GSI Ventures stands for Growth, Sustainability, and Integrity – pillars that drive the firm’s investment philosophy. GSI deploys capital through a diversified investment approach across a variety of cross-border asset classes, while serving as a reliable partner that seeks to make sustainable and impactful allocations. His strategy also looks to the US for next-generation technology, where it can be grown and subsequently introduced to GSI Ventures’ home country of the Kingdom of Saudi Arabia. This is in lock step with Saudi Vision 2030, a strategic framework to reduce the Kingdom’s dependence on oil and diversify its economy.

Matt is also the Co-Founder and Managing Partner of SIP Global Partners (“SIP”), an independent, cross-border venture capital firm anchored by a top global corporate. Based in Japan, the US, and the Middle East, SIP targets market-expansion and value-add investments in high-growth US technology startups. It invests primarily in US companies driving the "Global Connected Economy" in sectors such as AR/VR/XR, artificial intelligence, machine learning, edge computing, digital media, network infrastructure (5G) and enterprise software. Matt is also a film producer.

LISTEN AND SUBSCRIBE

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SPEAKER

Matt Salloway

Chief Executive Officer

GSI Ventures

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone and welcome back to SALT Talks. I'm Rachel Pether. I'm a senior advisor to SkyBridge Capital, a global alternative investments firm, as well as being the emcee for SALT, a thought leadership forum and networking platform that encompasses business, finance and politics. SALT Talks is a series of digital interviews where we speak to some of the world's foremost investors, creators and thinkers. And just as we do at our global SALT events, which, unfortunately, we haven't been able to do this year, we aim to empower really big important ideas and provide our audience a window into the mind of subject matter experts.

Rachel Pether: (00:47)
Today, I'm very excited to be welcoming Matt Salloway to SALT Talks. Matt's the CEO of GSI Ventures, which is a top 50 Global Family Office that focuses on venture capital and business development or company expansion into the MENA region. He's also the co-founder and managing partner of SIP Global Partners, an international venture firm with offices in New York and Tokyo. Previously, Matt was the founder and managing partner of Salloway Law Group, an international law firm based in Manhattan, and he's also worked as a consultant with McKinsey and a research associate at Harvard Business School. And if that's not enough, Matt is also a successful film producer, with some of his credits including The Butler, starring Oprah Winfrey and Forest Whitaker; The Ides of March, starring George Clooney and Ryan Gosling; and The War With Grandpa, which actually opens in the U.S. this week, starring Robert DeNiro.

Rachel Pether: (01:44)
Just a quick reminder. If you have any questions for Matt during today's session, just enter them in the Q&A box on your Zoom screen. And with that, Matt, welcome to SALT Talks.

Matt Salloway: (01:55)
Thank you, Rachel. It's a pleasure to be here and so thankful for the opportunity.

Rachel Pether: (02:01)
No, we're very happy that you're joining us today. And we have so many subjects that we could go into, because you do wear a number of hats, but I'd really like to start with GSI Ventures, which is the Family Office that you run for a prominent Saudi. So, maybe you could tell me a bit about your journey and what took you to the Kingdom originally.

Matt Salloway: (02:24)
Sure, I'd be happy to. Just as background, I grew up in Boston, so spent most of my life there before moving to New York, where I've been living for about 16 years. Again, as you mentioned, trained as an attorney and then now got into what I am doing. And GSI is really a single family office that's focused on managing the assets and the affairs for this family. GSI stands for Growth, Sustainability and Integrity. Those are our core pillars and values that we live by. For me, getting into Saudi Arabia was sort of a very fortuitous experience. I was an attorney before, as I mentioned, and I started at a firm called O'Melveny & Myers, where I was working... Mostly corporate law, doing private equity and mergers and acquisitions, venture capital.

Matt Salloway: (03:21)
In 2004, when I started, it was really one of the most active times in the private equity market, with leveraged buyouts. I was representing companies like Apollo and JP Morgan Partners, and it was really great training ground. But for me, I really wanted to get into counseling, advising, guiding, really serving as a personal advisor that could help clients meet their goals. And being at a large firm was great training for me, but it wasn't necessarily where I wanted to spend the rest of my career. So, I ended up launching my own law firm, which I've now transitioned into doing the Family Office, but the law firm was really focused on helping high net worths, international families, companies, meet their goals.

Matt Salloway: (04:07)
And I actually had a great-uncle who was a very successful prominent lawyer in a small town in the United States and I used to hear stories about how he really added so much value to the lives of his clients and I wanted to replicate that. That was sort of the same type of thing that I wanted to do, and obviously New York City is a much, much larger, bigger place than a small town, but I wanted to provide that same type of guidance and counsel and I was fortunate to start working with clients in that world and started representing a lot of international families, and one of which still with today. A wonderful family, very humble, very sophisticated, but shares the same values, and I was just excited to get that opportunity to start working together.

Rachel Pether: (04:58)
So, let's take that acronym that you just mentioned, GSI. The growth, the sustainability and the integrity. What does that actually mean in practice? So, what types of investments are you looking at? And maybe you can also talk about the growth aspect, particularly in Saudi Arabia.

Matt Salloway: (05:16)
Sure. So, we started the Family Office in 2016. So, we've been evolving, as has the world been, and especially in Saudi, you see a lot of the changes that are occurring. But primarily, the goal of the Family Office is to manage the affairs of the family, to have the right portfolio allocation focused on capital growth, obviously capital preservation, and having the right diversification strategy, because as you may know, a lot of families in the Middle East and even internationally sometimes do get very concentrated in one part of the world or one asset class, and being fortunate to be based in the United States, a lot of our focus and my focus is helping to find the right opportunities globally and especially in the States and Europe, where we can really diversify the portfolio.

Matt Salloway: (06:06)
So, growth, sustainability are the core pillars of the Family Office. So, growth obviously is a very clear path and most Family Offices share that same vision. They want to make sure that the capital is going in the right direction. A lot of families get bogged down in spending patterns and also, again, concentration in areas that may be too [inaudible 00:06:30] liquid or not provide the right balance, and as we see in the economy, things change. It can change very quickly and you need to make sure you have the right balance in place.

Matt Salloway: (06:39)
Sustainability, integrity are also very core pillars. Integrity, I'll start with first. That's just a foundational aspect of how we do business, the people we want to work with, really sort of the way we want to have that reputation of being the right partners and the right investors. Sustainability is important as a long term goal. We've done some... Although we're mostly focused on our portfolio and our... Growing sort of that, those buckets, we're also focused on impact investing and we've participated in a... Couple years ago, a class at Harvard that brought together some of the largest international families in the world with two professors there, and we've wanted to be somewhat of a catalyst for that philosophy in the region, telling people that it is important to consider ways that you can use your resources to do good for the world and make a difference. It's not all about the bottom line. Although that is very important, it's nice to have some buckets where you can have impact on your society and the global marketplace, as try to do at GSI.

Rachel Pether: (07:53)
I'd love to come back to that point on impact later, and also sort of weave that into the work that you're doing on the film side. But you mention the concentrated portfolios, and one thing I've noticed in the Middle East is there is a huge home bias here, right? So, a lot of people are investing in the region. And I know that part of your mandate is also to bring companies to the Middle East, so how do you balance that between sort of the diversified portfolio but also not having so much of a home bias? How do you manage those two pieces?

Matt Salloway: (08:26)
Yeah, it's a great question. I think the way that we look at our investing is somewhat of a strategic. So, when we invest into technology, and specifically in the United States, we look for ways that we can take that technology as a strategic partner and grow it into the region. So, there's somewhat of a... It's, in a way, a great way to improve our investment chances because we have great infrastructure in the region, and to be able to take an investment that we think is best in class and then introduce it into a country like Saudi Arabia, which is a difficult market to penetrate unless you have on-the-ground resources, and be able to bring the best in class technology into the country, which is very much aligned with what they're trying to do in Vision 2030, which I know we'll probably talk about a little later.

Matt Salloway: (09:19)
But we want to be able to invest in companies that can change the world, and that's been a big focus of GSI. It's been a big focus of SIP, of investing in the next generation of world class transformational technology. And that technology is not only a good investment, but it also can improve the economy of the countries that we're trying to grow in. It can add jobs. It can improve the quality of life. It can make a real difference in the region, and that's how we see ourselves as somewhat of a strategic partner, where we're not necessarily overlooking the home country where we want to have a lot of influence and connectivity. But it also is a way that we can diversify our investing and get access to best in class technology because there's also an interest in growing those companies globally.

Rachel Pether: (10:16)
You mention SIP, which is one of the other hats that you wear, SIP Global Partners, and that's tied to the Japanese institutions. What do you see happening with Japan with regards to technology and are you bringing some of those into Saudi Arabia as well?

Matt Salloway: (10:34)
Sure. So, SIP was founded about a year ago to specifically address what we saw was the opportunity in Japan. Now, historically, Japan has been a leader in innovation and technology. In the 1970s, 1980s, I remember as a kid having the Panasonic television, the Sony Walkmans, these very sleekly designed and the hardware was really innovative. That has changed over time in Japan and you really haven't seen significant amount of innovation coming out of Japan in the last 20 to 25 years. So, why is that? I mean, it's hard to understand because Japan is the third largest economy. Japan has a very sophisticated workforce. Japan has just as much intellectual property as other countries. It's a stable democracy. So, why are they not innovating at the same extent? [inaudible 00:11:36] Excuse me.

Matt Salloway: (11:36)
And the reason, at least in what I've heard and what I've seen, spending a lot of time there, is that, first of all, there's a culture that's somewhat risk-averse and it's better to not fail than to succeed, in a sense. I mean, that's somewhat of a underpinning philosophy. I personally, as an American, have lived by the Teddy Roosevelt, who used to say, "Far better is it to dare mighty things even though checkered by failure than to dwell in the perpetual twilight that knows not victory or defeat." That's how a lot of Americans live. We'll take risks. And a lot of other countries too. But Japan is a little bit more risk-averse.

Matt Salloway: (12:17)
So, all that being said, that is starting to change and evolve in a positive way. So, I'll give you just a couple of statistics. There's a university called Keio University in Japan which was the university that gave the country the most entrepreneurs. So, if you were going to go into a start-up, you normally would graduate from Keio, not the University of Tokyo. So, I think 10, 15 years ago, 30% of the entrepreneurs were coming out of Keio and maybe 2% were coming out of University of Tokyo in that realm. That has actually switched in recent years. So now, University of Tokyo is producing a lot more entrepreneurs that are going into start-up companies.

Matt Salloway: (13:03)
So, as that's starting to shift and as you're starting to see more money being put into venture capital domestically in Japan, there is starting to be more of a focus on innovation and technology. Part of that is focused on the essential need for them to innovate because of the aging problem. Japan has, I think... The median age is 48 years old. It's the second oldest demographic in the world. As the country continues to age, there is going to be an impact on the economy. So, there is a real need for the country to start innovation and that's where we believe there's an opportunity for us to come in as SIP.

Matt Salloway: (13:49)
We are an independent venture capital cross-border technology company. Japan has mostly corporate venture capital investors. Fifty percent of the money that's going into Japanese technology is coming from CVC, corporate venture capitals, in Japan. So, as an independent venture fund, which we are, we believe that there's a strong opportunity to bring best in class technology, which the country's hungry for, which the country needs, from other places like where we're based in the United States, into the country where we have a very strong infrastructure and connectivity.

Matt Salloway: (14:26)
So, that's a bit long-winded, but a bit about our thesis into Japan, where the opportunity is, how things are now starting to evolve. And we're very excited about what we're doing there and the future of Japan's growth and innovation.

Rachel Pether: (14:43)
Yeah, that's really interesting points that you made on the demographic side as well, because I guess when you look to the decades when they were strong, the seventies, the eighties, the nineties, the median age was much lower then. So, I wonder if that sort of plays into the cultural aspect as well. But it sounds like, from what you're saying, you are now seeing a new wave of entrepreneurs that aren't so scared about failing.

Matt Salloway: (15:08)
Yeah. [crosstalk 00:15:09] It's changing slowly and I would caution... Even though [inaudible 00:15:13] again, my opinions. But as COVID has come in unexpectedly, it may slow a bit, but we are seeing people leaving and going into start-ups because in Japan, it was very accepted to just go to a large corporate and spend your entire career there. It was very stable. It's prestigious. It's safe. So, you go and you work for a conglomerate and you spend your career there. But now, it's becoming more accepted and you're seeing a lot of changes that are happening. Slowly, but it's occurring.

Rachel Pether: (15:46)
Yeah. They were the sort of ultimate salary man, wasn't it?

Matt Salloway: (15:51)
Yes.

Rachel Pether: (15:52)
Your job for life kind of aspect. I also wanted to... Talked about Saudi and Japan and maybe go a bit deeper into geopolitics. We actually had... I don't know if you saw the SALT Talk. We had Dr. Kai-Fu Lee on a previous SALT Talk and he was talking about artificial intelligence and how China and the U.S. were the clear front-runners in terms of an aggregate score, which is research plus implementation plus monetization. How do you see the tensions...? You know, you're on the ground in the U.S. How do you see the tensions between America and China as it relates to AI? And I guess that's part of the broader question about how geopolitics sort of intersects with venture capital?

Matt Salloway: (16:39)
Yeah. It's a great question and we see it every day playing out with news flashes and... I guess let me take the geopolitical question. The way that we see it is really there's a bifurcation in the world in terms of how countries are making alliances. And they're not necessarily strict formal alliances. They're more loose. But if you want to look at it... And I'm giving generalizations here... Look at it from a broad perspective, you've got China, Russia, Iran, Pakistan, all sort of on one side of the world. And then you've got... And again, broad generalizations. You've got the United States, Japan, Saudi Arabia, Europe, Israel. You've got sort of this sort of loose affiliation and that sort of relates to inward and outward investment flows, intellectual property, transfers and exchanges, knowledge transfers. It really relates to a lot of various aspects of business and collaboration.

Matt Salloway: (17:47)
So, I think, number one, with China and seeing what's happened with Firma and the changes... I mean, we've seen, statistically, tremendous change from the United States investing in China. I think... Again, I'm trying to recall numbers, but I think it was 20 billion was invested a number of years ago into China. Now, it was five billion most recently. And same with Chinese investment into United States has really, has had to decrease. So, there's now opportunities for other people and other players to step up. Number one, we see Japan as a very interesting country that could fill some of that gap. And again, that's why we're very bullish and very involved in Japan, so Japan can now start investing more into the United States. There's also the opportunity for the U.S. to invest into Japan. Again, very large... Third largest economy. Very stable country in terms of government, democracy. Very, sort of, sophisticated workforce.

Matt Salloway: (18:50)
The other thing I would mention is Israel. And with the Abraham Accords, which was a recent piece of agreement between the United... I'm sorry. Between Israel and the United Arab Emirates, where you are, Rachel, as well as Bahrain. I think it's a tremendous opportunity for growth in the Middle East. Israel, just taking a step back, is really the size of New Jersey. So, it's a small, small country. It has nine million people. It's 72 years old. It's a relatively young country, but statistically, per capita, it has the most venture capital technology and start-ups in the world and we've seen some tremendous technologies come out of Israel. You've seen Waze, the navigation technology. There's a mobile [inaudible 00:19:47], the recent huge acquisition that happened for autonomous driving. There's a company called PillCam, which is a medical technology, which you take the pill and it can video your diagnostics for health care. EXO, there's an exoskeleton company which can help people without limbs walk.

Matt Salloway: (20:12)
There's... And just, historically speaking, as a side note, instant messaging came out of Israel. The zip drive, the SanDisk zip drives came out of Israel. Operating systems for Microsoft. So, it's a really tremendous place, and I think having now this collaboration together between countries will be significant for the future of development of the venture capital ecosystem.

Rachel Pether: (20:40)
And so, when you're looking at some of these cross-border transactions, particularly bringing some of the verticals into Saudi Arabia, what are some of the top three verticals that you're looking at in terms of inward and into Saudi?

Matt Salloway: (20:55)
So, I guess let me... I don't know, again, in terms of the viewers, if they know a lot about Saudi Arabia, and I didn't speak about it and I'd love to give a little context to answer that question. So, Saudi Arabia has historically... There's... To give people a little background on Vision 2030, which was created a number of years ago, which was focused on finding ways to diversify the kingdom away from oil assets, to make sure the economy could sustain. So, Vision 2030 had all these reforms and goals, some very aspirational, but tremendous plan for the country and the future. As part of that, we're seeing a lot of the impact of those plans and goals and government support.

Matt Salloway: (21:52)
So, I want to talk, I think, about two areas that I see as being the most areas of... Which answers this question in terms of verticals, of growth in Saudi Arabia. I think the first is technology venture capital and the second is entertainment and tourism. I'm generalizing and grouping these together. But if you look at venture capital and technology... So, Saudi Arabia was never... In recent years, was not a start-up hub, but it's starting to become a start-up hub. In recent years, it's become the number three most active economy in MENA in terms of venture capital investing and technology, behind the Emirates and Egypt. So, it's starting to see a little bit more growth trajectory in that area, and that's interesting because Saudi Arabia is the largest economy in the Middle East and it has, I think, 70% of the population is under the age of 30 or 35. So, very young demographic. People that are very technologically advanced and with the government really supporting technology and entrepreneurs.

Matt Salloway: (23:14)
PIF created the large... One of the largest [inaudible 00:23:17] funds, [inaudible 00:23:18] that's putting close to a billion dollars or over a billion dollars, I think, into local, regional start-ups. The Saudi Venture Capital Company, SVC, was created with $750 million to invest into the region. So, there's a lot of government assistance that's being helped and pushed to encourage start-ups and technology and we're seeing the results. So, I think in 2020, there was 95 million invested in Saudi start-ups, which, with COVID and some of the just world events, that's incredible. That's the largest ever, a tremendous increase. I think in 2015 it was seven million. So, you see a really big shift.

Matt Salloway: (24:03)
In terms of the industries in technology and venture capital that we're seeing, I'd say there's a few. The first is e-commerce. That's been a very active area. A company called Jahez, which is a grocery delivery company... They recently had one of their largest rounds, this year. I think it was around $36 million, or they've raised 36 million for the company. Another company and area that we're seeing growth in Saudi is education technology. There's a company called Noon, which is... Noon Academy, which raised $13 million recently, which is a online educational company. There's a lot with financial technology, e-payments and digital payments and e-wallets, those types of things, that the country is focusing on. Cybersecurity is another area that the country is focusing on.

Matt Salloway: (24:58)
So, those are some of the areas in technology and venture capital. We as a venture capital firm are also a beneficiary of some of the government initiatives. The government set up, through SAGIA, which is the Saudi Arabia General Investment Authority, a venture initiative where it's trying to attract the best global venture funds into Saudi Arabia, and we recently were granted, as part of that program, to get a license and be involved. So, technology, venture capital, those areas are really growing significantly.

Matt Salloway: (25:35)
The other area, very quickly, is the entertainment and tourism. So, I'm sure... I don't know if most of the viewers have been to Saudi, but historically, it was very hard. You had to get the right visa. Even myself, I had to have a special visa. They created a system where 49 countries around the world can now visit Saudi Arabia as a tourist for 90 days. And you can get this very easily and quickly online. So, there's a real focus on bringing people into the country.

Matt Salloway: (26:06)
On the other side, there's a focus on keeping people in the country. And Saudi Arabians... Having worked with families there for the last 10 years, people travel. A lot of the country spends time in Europe and the United States and Dubai, so they spend a lot of money elsewhere. The government is focused on trying to keep the people in Saudi longer during the year and spend more money, spend more of their earnings in the actual country. So, there's been a huge focus on tourism and entertainment. As examples, the country opened movie theaters. Thirty-five year moratorium was on movie theaters in the country. Now there's movie theaters. There's now live music. When I was there, there were live music concerts. The WWE signed a 10-year deal with the government, so they're bringing in very well-known players. Formula One was there recently. They're building a live music hall. So, there's a tremendous amount of progress, I'd say, in that space.

Matt Salloway: (27:09)
One last point. Seasons, which is the sort of large malls and shopping areas that have been created all across the country, are a result of the government and getting people... And I've been to the Seasons a few times. Bringing the best restaurants, the best stores, into the country and subsidized significantly by the government. But you walk around and people are very happy they're able to get some of the food and products that they used to get in Europe and the United States. They can now get it in Saudi. So, it's a really exciting time and there's a lot of change and progress.

Rachel Pether: (27:46)
No, I completely agree. I've only been going there for a couple of years, but on every successive trip, you notice at least 4,000 things that have changed from the last time. Conveniently, you talk about opening movie theaters, which is a very nice segue way to another piece that I want to talk to you about. We've had a lot of audience questions come in as well, so I'll go to those in a minute. But I want to pivot from the use of technology to do good to looking at film and how that can positively affect society. I did mention, but I'm going to mention again, that you have some pretty impressive movie credits on The Butler, The Ides of March and The War With Grandpa.

Rachel Pether: (28:27)
So, what led to your interest in film, because this seems to me quite separate from the Family Office [inaudible 00:28:34] things. So, I'd love to know more about what brought that into your life.

Matt Salloway: (28:39)
Sure. So, for me, film has always been a tremendous vehicle and medium to inspire people, to educate them, to change the world, in a sense, in some small ways. So, I've always been very passionate about film. In some ways, it's like venture capital from an investment perspective and looking at investment structures. And being a lawyer, when I started my firm, I was doing a lot in film in terms of distribution, film finance, representing people in the business. But it's a really incredible area to influence society. And as an example, The Butler, which we made with Forest Whitaker and Oprah Winfrey, was a true story about a butler who served for seven presidents in the United States. And the story is really a journey through the civil rights movement, culminating with Barack Obama becoming president.

Matt Salloway: (29:38)
And my mother... A lot of what I do has also been influenced by my family, and my mother was quite involved in the civil rights movement in the United States. My parents are also very involved in philanthropy. My grandmother started a nonprofit in the 1950s with some other women in Boston, helping mentally ill, homeless people, battered women. My parents actually now run that same organization in their retirement, all volunteer. So, I was raised with some of those values of wanting to have impact and make a difference, and that's part of what drives me. It drives me, obviously, in the Family Office. It drives me in the venture fund and it drives me across the board in film. All of these are ways that we can make a difference. Obviously, still being successful as a business person and meeting our business goals, but having positive impact on the people, on the world, on a society that we're interacting with.

Matt Salloway: (30:37)
So, that's the way, for me, film has been really an amazing vehicle for that. We have a bunch of other projects that are coming out. In addition, War with Grandpa, as you said, is starting on Friday. It's coming out across the United States. It's a heartwarming family comedy with Robert DeNiro, Uma Thurman, Rob Riggle, Christopher Walken, Jane Seymour. It's directed by the SpongeBob creator. So, it's a really, really wonderful story that's based on children's book about a grandfather that moves back in with his daughter and her family, and he takes his grandson's room and they start a bit of a war against each other. And we're excited for that to be released.

Matt Salloway: (31:22)
We're also working on a film that's called Worth, which is the story of Ken Feinberg, who was the 9/11 special master and really had to determine the value of human life. He was entrusted by President Bush and Congress in awarding monies to 9/11 victims' families, and he had to go through the process of interacting with families to figure out what was the value of that human life that was lost, which was a tremendous... Tremendous story, which we hope to release next year on the 20th anniversary of 9/11. And then we're working on a couple other projects. One is the story of the first female White House journalist, Connie Lawn, as well as a sequel to Dances With Wolves that we're excited about.

Matt Salloway: (32:10)
So, again, very broad and diverse, but a nice balance of opportunities that really make a difference, hopefully, in the world.

Rachel Pether: (32:22)
That's fabulous, and I think The War With Grandpa, probably many people have experienced that during COVID, haven't they? I know I would say 50% of the people I know have moved back in with their parents or somehow the family's been consolidated again. So, I'm sure that will resonate with a lot of people.

Rachel Pether: (32:40)
We have had so many questions coming in from the audience, so I am going to address them now. Broadly, they sort of fall into film and venture capital, so I'll start with some of the venture capital focused questions. In your opinion, what makes a unicorn, given that you see these deals all over the world?

Matt Salloway: (32:59)
Yeah, it's a great question, and obviously the... It's the Holy Grail for what venture capitalists look for. I think I read a statistic that unicorns... Your chances of becoming a unicorn are... Out of five million start-up investments, three become unicorns. So, it's very, very competitive and obviously that's what we aspire to. I think there's a couple... There's probably two points I'd make. The first is I've always believed in timing being a huge part of life, of business, and I don't know if a lot of the viewers know Wayne Gretzky, but he was really one of the most famous professional hockey players, professional athletes. And he used to say that, "I skate to where the puck is going, not to where the puck has been." And I think that's a huge part of becoming a successful start-up, is knowing where technology is going and being able to follow your instincts and follow the data to make that decision.

Matt Salloway: (33:59)
I think the second part of that is... And I've created a silly acronym for the way I think about unicorns. It's an investment that I don't want to miss, M-I-S-S. And that stands for really four things. One, management. So, who are the people that are going to be driving this opportunity? For me, I've invested, as a fund and as a Family Office, in people that we have longstanding relationships with. One of our portfolio companies is someone I've known for 20 years and he's one of the most successful venture capitalists in the United States. But he knows how to start a company. He knows how to also bring it to fruition. It's not just about having a great idea. It's being able to execute. So, it's the management team.

Matt Salloway: (34:49)
"I" stands for integrity. We talked about this earlier, but it's all about your reputation. It's all about trusting the people you're investing in. There's so much that you are putting into as investors in private equity, hedge funds, venture capital. You're entrusting your resources to other people and we've seen a lot of people get burned. We've seen there are a lot of unethical and unscrupulous people, so you really have to do the best you can to trust who you're working with. And it's about that belief in who you're partnering with.

Matt Salloway: (35:26)
"S" and "S," the last two. "S" is sales. So, having the right sales strategy. You can have a phenomenal idea, but it doesn't mean that you're going to be able to sell it. And there's a lot of reasons how you sell. But you have to be passionate in the way you sell. You have to have the right people, the right connections, the right strategy. And then, the last thing is size, and I think you can have a great idea that you can sell, but it has to be sold to the right size, a sizeable market, in order for it to be a unicorn and to be profitable.

Matt Salloway: (35:57)
So, you have to have those, I think, those factors. Those are the four factors that I look for when I'm thinking about a unicorn.

Rachel Pether: (36:06)
Excellent. Thank you. I think that's the lawyer in you creating acronyms for everything, but it's good that you've got it in a structure. And we've got a question from Ken and I'm going to read out his name because he's such a great SALT Talk supporter, so thank you for your question, Ken Lustig. Matt, what are some of the ways that you help your portfolio companies develop opportunities for their products or technologies in Saudi Arabia? Can you give some tangible examples on that?

Matt Salloway: (36:35)
Sure. I think it ranges from a variety of alliances and partnerships. The first is the most basic, which is saying, "Look, you want to grow into Saudi. Let us give you some advice. Let us introduce you to the right people, the people that we think are knowledgeable in this space. Let us be a resource for you." Then it can get a little bit more active where we'll help set up an office and create a somewhat of a joint venture or partnership where we will help create the operations to manage this business. And again, it depends on the sectors, it depends... This is a broad answer, but our goal is to really open up access to a marketplace that is quite significant and also very difficult to get into. They're now changing and attracting a lot of foreign investment and people... It's becoming easier to do business in Saudi, but you still really need on the ground assistance.

Matt Salloway: (37:45)
And we see the same thing, obviously, in Japan. We see Japan as a springboard, also, to the rest of Asia. So, if a company can grow into Saudi, if it can grow into Japan, it can then also start growing into the rest of the region, which is also significant. And the same... Same is the case for the Middle East. There's a lot of opportunities throughout MENA for growth, depending on your technology company and product.

Rachel Pether: (38:15)
And you did touch on, before, the Abraham Accord and the relationships there between UAE and Bahrain. Do you think there's opportunities to look forward to there within Saudi as well, with some easing of diplomatic tensions? And how do you see that sort of Saudi/Israel partnership evolving?

Matt Salloway: (38:35)
Sure. I mean, it's... Look, this is only my personal perspective. I have no inside information. But it sounds, from what I've read and what I've seen, that there's a real growth in collaboration and it sounds like, hopefully, optimistically. For me, the more countries that can be allied and doing business together, the better it is for the entire world for us to grow the right kinds of technology. But from what I've heard... And I think there was an interview with one of the members of the royal family recently, talking about Israel and the technology. I read it online on one of the... It was Bloomberg or one of the other news outlets. So, I think that there's continuing to be a greater dialogue. Also, with Iran and some of the controversies and the complexity of the region, I think there's more reasons for countries to be closer in partnership and working together. So, I'm optimistic. I think it looks like there are other countries that are also in the region that might... Oman, that may follow as well. So, it's a really interesting story to watch.

Rachel Pether: (39:55)
Excellent. Thanks [inaudible 00:39:56] so much for that. And we've got a quick question on Japan as well. The way you're... When you're looking at the Japanese venture capital system, are you seeing it concentrated in certain areas, maybe such as automation? And if yes, could you give some specific examples of what you're seeing there?

Matt Salloway: (40:16)
Yeah. I mean, it's a really interesting question. I think there are a couple areas where there is a strong area of growth. Cybersecurity is one area where I think... Where we've actually had... My partners in Japan have brought companies, great technologies, into the region. Cybersecurity was also very important for the Olympics, which didn't happen, but the government was very focused on finding and creating best in class technology practices in the country. So, cyber's one area. I would say aging, digital. For the aging problem, there's a digital health care component. So, because you don't have enough people to care for the aging population demographic, there's a lot of advances that are happening in digital health which relates to AI, being able to create... I know that I read about some products that were helping care for the elderly, which there may be some automation in there, that are being developed.

Matt Salloway: (41:27)
So, I think the country is... It's still very strong in robotics. It's still very strong in automation, in infrastructure. The bullet train, obviously one of the most advanced technologies, which has been around for a while. But I think they're starting now to broaden and to get... To have interest in best in class technologies globally that are outside of their traditional scope, and that's where... Again, where we've come in as SIP. My two partners in Japan are... One of them has been in Japan for many, many years. He was the CEO of a start-up that became public. He was the first foreign hire in Netscape. His father was actually the first venture capitalist in Japan. He brought the LP system into Japan in the seventies and co-founded JAFCO, which is a very storied institution.

Matt Salloway: (42:21)
So, we have a lot of expertise on the ground there from a venture capital start-up perspective and we're also anchored by one of the largest corporates in Japan that wanted access to technology. So, with all of sort of our expertise there, we believe we're very poised to bring a lot of diversity and interests into this massive market.

Rachel Pether: (42:45)
Can you give me some examples of some of the portfolio companies that SIP has invested in to date?

Matt Salloway: (42:52)
Sure. So, we have four companies, three that we have officially announced and one we're announcing later this month. But we've tried to focus on early growth stage, Series A, Series B, companies that are globally focused, and we believe that we get access to a lot of these companies not only because I talked about integrity and our reputation and our capital, but because a lot of the founders want access to these massive markets. So, we're getting the best in class access to deal flow, to best in class technology.

Matt Salloway: (43:29)
So, the companies that we've invested in... One is a company called Croquet, which is a web infrastructure. It's an operating system, co-founded actually by Alan Kay, who was the father of the personal computer. He was Steve Jobs' mentor. And it's now being run by David Smith, the former CIO of Lockheed Martin. Company's fascinating. We were... We have a board seat. We're one of the first investors in this company now, in this version of the company. We also have an investment in a company called Parallel Wireless, which is a 5G technology co-founded by Steve Papa, who is a multi-unicorn founder. I actually met him when I was... That year I spent at Harvard Business School. Got to know Steve and have kept a relationship. He founded Endeca, which he sold to Oracle for over a billion dollars. He's one of the founders of Toast, another unicorn. Really fantastic venture capital investor and also operator.

Matt Salloway: (44:30)
We also are an investor in a company called Fable, which is a animation design tool which we're very excited about. And the fourth company, which we'll release more later this month, is an AR technology that was 300 times oversubscribed. It was a very competitive investment. We led that round and it's really by one of... Co-founded by one of the top gaming technologists in the world.

Rachel Pether: (45:03)
Incredible. And on the SIP and also, I guess, GSI as well, we've had a few questions coming in. I'm going to group them together. Sorry everybody. But we've had a few questions coming in on the co-investment and syndication and LP front. How do you normally structure your deals and how do you go about finding other LPs and co-investment club deal partners, etc.?

Matt Salloway: (45:28)
Well, we... You know, we look for... We have been blessed to really create a large... A very strong network of Family Offices and investors. Some strategic, some that are people who are operators or have access to strategic partnerships which are quite attractive. But we've been blessed, having built, I think, a strong reputation. As Warren Buffett likes to say, I think it takes 20 years to build a reputation and 20 seconds to ruin it, which we've... Number one, not only because it's the right thing to do, which is really what drives us being good partners, having integrity, being reliable... And it's why we've had such a great strong network and co-investment partners. But it's also about your reputation and once you lose that, that's all you really have.

Rachel Pether: (46:27)
Yeah. You've shared a number of really great quotes during this discussion, but that one from Buffett was definitely a good one. We are over time, but I really like this question, so I'm going to take an executive decision and ask it to you anyway. Are you ever going to make a science fiction movie and combine your knowledge of film production and technology? And if so, which science fiction movie would you want to remake?

Matt Salloway: (46:56)
Wow. That's a fantastic question. So, the answer is hopefully one day. I think some of the technologies that we're seeing could be quite relevant in the cinematic world. I would say that there's actually a film that we're currently developing which is a strong AI technology-based film, which is just completely fortuitous. But we're actually developing this film currently with two partners, and it's a fascinating story and it does leverage cutting edge technology. So, I think that this will be an area where I will marry sort of my knowledge and connectivity in the cutting edge technology to the filmmaking world.

Rachel Pether: (47:47)
Excellent. Well, thank you so much, Matt. It's been a pleasure speaking to you today. I knew it would be just as much fun as ever, so thanks so much for your time and sharing your insights with us.

Matt Salloway: (48:00)
Thank you, Rachel. It's been an honor to be with you and I'm so thankful for the opportunity.

Russell Read: Transformative Technologies & Infrastructure | SALT Talks #67

“The Middle East is not just a source of capital, but it can be a destination as well. And that's really in terms of big ideas, I think the transformation we're going to be seeing in this side of the world…is going to be coming onto their radar screen in a big way.”

Russell Read is Group Managing Partner for the C Change Group of investment funds, companies, and advisors, dedicated to materially transforming the production, distribution, and consumption of natural resources around the globe. In addition, Dr. Read serves as Senior Advisor to MSCI with respect to crafting solutions for the global asset owner community. Prior to C Change, he was Chief Investment Officer (CIO) of the Alaska Permanent Fund Corporation, the Gulf Investment Corporation (GIC), and the California Public Employees’ Retirement System (CalPERS).

The Middle East has long been off the radar of investors, but that is changing a rapid way. The potential stems from more than just the sovereign wealth funds, but also in large part due to its geographical centrality to the emerging world. It is set to play a major role as both a source of capital and as a destination. “I look at UAE and Abu Dhabi as the financial and logistical center for an emerging region.”

Sovereign wealth funds have come a long way in the last ten years. A big shift occurred as result of the 2008 financial crisis where sovereign wealth funds provided tremendous support to the financial system and the global financial capital markets.

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SPEAKER

Russell Read

Group Managing Partner

C Change Group

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:07)
Hi everyone, and welcome back to SALT Talks. My name is Rachel Pether. I'm a senior advisor at SkyBridge Capital, a global alternative investment firm, as well as being the MC for SALT, a thought leadership forum and networking platform that encompasses business, finance, and politics. SALT Talks as a series of digital interviews with the world's foremost investors, creators and thinkers. Just as we do at our global SALT events, we aim to empower really big, important ideas and provide our audience a window into the mind of subject matter experts. Today, I'm very excited that we have a subject matter expert with us, Dr. Russell Read.

Rachel Pether: (00:49)
Russell is the group managing partner for the C Change Group of investment funds, companies and advisors dedicated to transforming the production, distribution, and consumption of natural resources around the globe. Russell also serves as a senior advisor to MSCI. Prior to C Change, Russell has been the CIO of not one but three major asset owners, the Alaska Permanent Fund Corporation, the Gulf Investment Corporation, and CalPERS. He served as chairman of the investors' committee of the president's working group on financial markets under treasury secretary Henry Paulson, and he's also been recognized by Institutional Investor as one of the world's most effective chief executives. Dr. Read has multiple degrees, and he received both his masters in economics and doctorate in political economy from Stanford University, Russell, welcome to SALT Talks.

Dr. Russel Read: (01:45)
Great to be here, Rachel.

Rachel Pether: (01:48)
Now this conversation could go in so many different directions, because I know you have experience in sovereign wealth funds, pension funds, natural resources, sustainability, but I'm going to try and focus on institutional asset owners today. Before I do that, perhaps you could just tell me a bit more about your personal background, and how you ended up back here in the Middle East.

Dr. Russel Read: (02:12)
So the Middle East is a particularly important place, but not for the reasons that many people think. Of course, when the investment community thinks of the Middle East, they oftentimes think of the sovereign wealth funds. And that's certainly part of the story, but what they don't think about is the geography and the centrality of the Middle East. And in particular, the way I look at it is UAE and Abu Dhabi as the financial and logistical center for an emerging region. And that emerging region that people don't really think about we call MEASA region, the Middle East, Africa, Southern Asia. And it's encompasses about half of the world's humanity. So this is interesting, because it's half the world's humanity, it's a disproportionate amount of its growth. It's the major consumption story for the world. And yet it's really off the radar screens for institutional investors.

Dr. Russel Read: (03:22)
So the Middle East is not just a source of capital, but it can be a destination as well. And that's really in terms of big ideas, I think the transformation we're going to be seeing in part is that this side of the world that investors have really shied away from, oftentimes for good reasons, is going to be coming onto their radar screen in a big way.

Rachel Pether: (03:48)
Although I must admit your background doesn't look like you're in the Middle East, but we know the truth. You've had the luxury of working with both an established pension fund, CalPERS and also one of the world's most respected sovereign wealth funds, the Alaska Permanent Fund. Before we go deeper and to their asset allocation, perhaps you could talk a bit about some of the key differences in approach between the two.

Dr. Russel Read: (04:15)
So sovereign funds and pension funds share some real similarities, but there are also some real key differences that people don't necessarily realize. One of them is linked to the nature of sovereign wealth funds themselves. And that is they are artifacts of national wealth, or in the US are state sovereign wealth funds, but that gives them a different status. For instance, when it comes to currencies, an agreement that was reached just a few years ago was that sovereign wealth funds would generally be treated as the same as the monetary authority of that country when it came to foreign currency conversion. So this is important. For instance, if you think of China, the way that currencies work an institutional investor has some work to do to repatriate their investments to their currency out of China. But that's not the case with a sovereign wealth fund.

Dr. Russel Read: (05:25)
So sovereign wealth fund has the currency convertibility of the monetary authority of that country. So they generally can convert currencies, for instance in a place like China, at all times and on shore. This is a very different set of circumstances. It also generally relates to the access to fixed income markets, to local fixed income markets, besides the structural feature of being a sovereign fund associated with the monetary authority, there's also a difference in the liabilities. Of course, all too often when it comes to investment funds, the investment teams think about their investments, but they don't necessarily focus on what they're investing for. This has happens all too often. But the liability difference is pretty dramatic. And with sovereign funds, they can have very, very longterm liabilities or obligations eventually to the state. Generally the sovereign wealth funds are more global in their character. They are longer term in their character. So in general, the asset liability management problem does not bite nearly as closely.

Dr. Russel Read: (06:52)
So the sovereign wealth funds have really come of age, particularly in the last 10 years. There was also a very important change I should mention that occurred before the global financial crisis versus after the global financial crisis. And in many ways, before the global financial crisis, there was a sort of a suspicion about sovereign wealth funds, and would they be good actors? Would they be positive in terms of their contribution to the international capital markets? Or would they be sort of a tool of statecraft? So there was real concern about this, particularly from the United States.

Dr. Russel Read: (07:38)
And so that was before the global financial crisis. Global financial crisis hits, and opinions changed completely. What happened in the global financial crisis is that the sovereign wealth funds were an unambiguous source of stability in the financial system and the global financial capital markets. And that was unexpected. So they went from being viewed with suspicion to being absolutely critical to the health of the global financial system. So I would say that the acceptance of sovereign wealth funds globally as sort of the investment partners of choice, that has really taken root. So for doing international partnerships, for being welcomed by host countries and by the financial community, sovereign wealth funds are now in a wonderful position. Even better, I think, than the standing of most pension funds.

Rachel Pether: (08:47)
I think that's a great point that you raise about perceptions. I know in the global financial crisis, they really came in as your most white knights, didn't they? Particularly with some of the banks, we saw that with the Middle East, we saw that with Barclays and Citi taking on a lot of Middle East money to help them through the crisis. Do you think that sovereign wealth funds are considered smart money in the world of investing? It's okay to just have capital, but do you think they're also seen as savvy investors? And maybe you could talk about that from a perception point of view as well.

Dr. Russel Read: (09:23)
Well, I think they are viewed as smart money. Now, there is a range of sovereign wealth funds, of course. The largest sovereign wealth funds have taken a very interesting role that's quite different than what exists among pension funds. Pension funds are largely allocators. They do some direct investments depending on the size and nature of the pension fund, but they're allocators first. Sovereign wealth funds, particularly the largest sovereign wealth funds, have become direct investors in a very significant way. Now that's true among the largest sovereign wealth funds, but it's very significant. They are significant direct investors, as some of the largest investment management firms are.

Dr. Russel Read: (10:13)
So that role from being what they used to be, they used to be largely allocators like the pension funds, but that has changed. The role of the sovereign fund and the largest of the pension funds to become co-investors, direct investors, changes the dynamic fundamentally with the investment management community.

Dr. Russel Read: (10:37)
And it's not just about the management of fees, it's that the sovereign wealth funds can add significant teams and they become potentially excellent partners for some strategic investments in areas like infrastructure, for instance, that require significant amounts of capital.

Rachel Pether: (10:58)
So in line with that smart money angle, and certainly one thing that we're seeing the sovereign wealth fund community has been this huge push towards partnerships, and often with other sovereign wealth funds. Where are you seeing some of the greatest innovations in that space? Because the two that I'm thinking of actually both involved the Alaska Permanent Fund. So perhaps you could talk us through an example of a transaction or a deal that you worked on there.

Dr. Russel Read: (11:25)
So one of the biggest transformations and points of enthusiasm, I think is that the shift from being an allocator to being a direct investor and co-investor has another potentiality that's really promising. And we pursued these from an Alaskan perspective. And that is that we can retain, the sovereign funds and other pensions can not just be allocators among investment managers, but they can take a more proactive role. They can have a thematic approach, where they interview and hire investment managers to conduct certain mandates.

Dr. Russel Read: (12:11)
We did this in two significant ways from Alaska. One was we partnered with other pools of capital from in the Middle East and in Europe and in Asia to form what's called capital constellation. Capital constellation is intended to take talented, promising private equity teams and give them their foundational mandates, and also take a strategic stake in their in their enterprises. So instead of... The idea is that it would catalyze and accelerate the success of those private equity investment teams. And we wanted to participate also in the strategic benefits of being an owner with that.

Dr. Russel Read: (13:08)
So we pooled our capital together. Note the difference, we weren't just being sold to. We engaged the investment management community as a collection of funds, that we were not going to manage those strategic investments directly, but we were going to pool our capital together and act in a concerted way. I think historically, that was really quite different. Namely, the asset owners did not act in concert. So I think the ability for asset owners to increasingly want to work together, and not necessarily look to dis intermediate the investment management community, but to direct them into the themes, into the geographies that are of most interest to them. So that's a very different role, and we find that the investment management community has really welcomed that type of engagement.

Dr. Russel Read: (14:08)
Second thing that we did is we launched into an engagement for related to equities in the markets comprised of the MEASA country. So Middle East, Africa and Southern Asia. This was something that we were looking to take advantage of in terms of the fast growth in these economies. So again, we were leading sort of the charge about inclusion, which countries could be investible, which stocks could be investible within those markets. And it was a way that we saw of capturing the high growth of those countries. You know, we have an interesting challenge, which is that global growth and this is abstracting from the current COVID crisis, but absent that in general, worldwide growth has been reasonably good. But the interesting part is that the growth is shifting, and the growth is shifting from sort of the OECD markets to, particularly to the MEASA region. So there's this question, if growth is shifting to these other parts of the world, how do we capture those returns? Because if you don't make the adaptation, you face the prospect of considerably lower long-term returns in your established markets.

Rachel Pether: (15:48)
There's so many parts to what you just said that I'd like to pick up on. So the first piece that you raised, the capital constellation, and you spoke about being an active investor, this obviously leads into ESG because you can have more of a say in the companies that you're investing in. How do you see that playing out in the asset owner community? Because I know CalPERS, for example, has been very proactive on this front. Is this something that you've seen a shift towards more, more of this activism?

Dr. Russel Read: (16:24)
It is. And I think the ESG lens is one of the most important changes, really over a very recent period, and that recent periods over the past, say 24 months. And I want to contrast with a difference that I saw. There was a nascent ESG investment effort prior to the global financial crisis in '08, '09. And what happened there is that the global financial crisis acted to defer interest in ESG investing. There was a kind of a view that the house is on fire in institutional plans, and we have other fish to fry. So ESG considerations will come later.

Dr. Russel Read: (17:22)
Now what we've had, including with the COVID crisis, is the opposite reaction. It is not that the initiatives related to environmental, social, and governance investing have diminished, they've actually increased in importance. So it's been a fundamentally different response. And we see this as a real opportunity. And it's an opportunity that is also aligned with a challenge. And that challenge is related to the utilization of natural resources. And it's related to some real environmental challenges. Of course, we hear about global warming. That is not the only challenge that is out there. The global plastics problem looms as a very large problem as well. Chronic shortages of water. And from an investment standpoint, this creates an opportunity. In fact, without galvanizing capital into attractive investment opportunities, those ESG problems will not be solved.

Rachel Pether: (18:31)
And Russell, who was leading that charge pre-financial crisis on the ESG front? Was that being driven from a regulatory perspective, or was it being spearheaded by the sovereign funds themselves?

Dr. Russel Read: (18:43)
I think pensions and sovereigns together have both played a disproportionately important role. The rise of ESG investing has been even relatively recent in terms of being done at scale. But the first manifestation of this really at scale is with existing publicly traded equities. So the idea that has appealed to many funds is, for instance, having perhaps a portfolio of stocks, a large portfolio of stocks that has the same risk and return factors as a market cap weighted index, except with a lower carbon footprint. That's sort of an example. If you wanted to have the essential performance of market cap weighted indexes, but wanted to have less a footprint, then you could manifest that in your stock portfolio. I think the bigger challenge is, and what will ultimately be more important, will be the private markets.

Dr. Russel Read: (19:52)
The private markets is where institutional investors can actually lead to direct transformation in the global consumption story, in the global natural resources story, and in the global environmental story. So that is looming as a very big opportunity, and it's one in which the emerging markets, particularly the MEASA region, loom disproportionately large. MEASA region accounts for almost a hundred percent of the prospective population growth of the planet over the course of the coming decades. So 60% of that would be in Africa. So along with that population growth is the consumption growth story. So we have a challenge, because we have a region that is going to account for a disproportionate amount of some of the most compelling potential investment themes. And it's sort of off the radar screen of our traditional investment community.

Rachel Pether: (21:03)
I'd love to pick up more on some of the points that you talk about with regards to the growth and consumption story. And you also spoke about projects being investible. So if you just hone in on the G part of that ESG equation and the governance, how do you approach the lack of transparency or the perceived lack of transparency in some of these emerging markets, where it can be difficult to access data in some cases?

Dr. Russel Read: (21:33)
So this is a big issue but it's an issue which the solving of it becomes part of the attractiveness of the market. So what do you have in the emerging markets in general? Governance is a challenge, but some of the most promising companies in the world actually are born out of the emerging markets. We think of Saudi Aramco as an example in which governance can actually be quite good on a corporate level. But what we see is the important role of the public markets. So the public markets themselves instill a discipline and transparency. If you're going to be publicly traded, in order to be credible with global investors, you have to be transparent. You have to be auditable. And so the inclusion of enterprises in the global capital markets is inherently a disciplining tool. So we've seen a dramatic improvement in governance as the countries and as the companies become part of the capital markets.

Dr. Russel Read: (23:02)
We also see the importance of transitions from private market investments to public market investments. Why are public market investments interesting? In part also because they provide a path to liquidity. So if you're investing in a place like Africa in the private markets, which can be very promising, we need to be able to think of an exit or find an exit path. And this is even more important in the emerging markets than it is in the OECD, where you also have to think about what your exit is going to be when it comes to the private markets. But unlike the OECD, in the emerging markets, you cannot necessarily count on a strategic exit. You have to be able to see a path in general toward becoming publicly traded. So there are some very important features here.

Dr. Russel Read: (24:00)
There was a choice that Aramco had between listing in London, listing in New York, and they ended up listing in Saudi Arabia. And this was an important choice, because it also signaled something very fundamentally different, that it wasn't that you had the list in a major market to be credible. You can actually list in your local market, and that that would be helpful for the development of your local and regional economies. So I think that that choice of Saudi Aramco, that list in Saudi Arabia was a particularly important signal to the emerging markets in general.

Rachel Pether: (24:46)
It was almost like saying, "Yes, we are good enough," in some ways, wasn't it? Like, "Yes, we are just as good as a New York Stock Exchange or a London Stock Exchange."

Dr. Russel Read: (24:56)
If they chose a different path, if they had listed in London or New York first, it would have given a very different signal, not just to Saudi Arabia, but across the emerging markets, that to emerging companies, if that you had to list, you would have... It would have sent a signal that if you want to be taken seriously as an investment to the global capital markets, you have to list in London or New York or Hong Kong. So I believe that that was a pivotal decision, not just for Aramco, but for the emerging markets.

Rachel Pether: (25:32)
And you talk about just picking up a little bit more on the investible side of the equation, we've discussed the transparency piece, but with regards to the MEASA region, and you're talking about these large asset owners that need to deploy multi-millions of dollars, are there actually projects of scale for them in the private markets? And particularly ones that actually incorporate all of these ESG factors?

Dr. Russel Read: (25:58)
So this is one of the important challenges. From a big picture perspective, is there the need for capital in places like Africa? And of course the answer is yes. However, and the however is an important thing, the number and scale of bankable projects is limited. Does Africa need a trillion dollars in infrastructure investment? Sure it does. Are there a trillion dollars of investible bankable projects? Not in the near term. So how do we bridge this gap? How do we create, how do we help with establishing a pathway toward bankable projects? And here there are some important lessons about what are sort of the key needs and opportunities. And we're seeing some of the answers with, for instance, the digital economy, that Africa is proving to be an excellent source of growth for the digital economy.

Dr. Russel Read: (27:08)
So if you go to a place like Kenya, it's surprising how ubiquitous are smartphones and how advanced the applications are, in many ways have skipped traditional infrastructure development. Kenya is a middle income country by global standards. It is not a poor country by world bank standards anymore. And you can of see a different development path. I think that the infrastructure needs associated with energy and communications are leading the path toward bankable projects. And those are proving to be pretty straightforward from a governance perspective as well. So I think in addition to that, logistics, the African logistics problem looms as a very, very interesting opportunity. Along with that will be the role of distributed energy. Africa will not have an established grid system such as we have in North America and in Europe, they won't want to do it. Given how vast the continent is, it is going to require a distributed energy system. And that's a pretty exciting opportunity as well for new technology.

Dr. Russel Read: (28:29)
So what we have is we have many great technologies being born out of places like Silicon Valley and MIT and in Europe and Australia, but some of the best applications and scalability of these technologies won't be in places like the United States, it'll be in places like the MEASA region. India is kind of a great case in point. What's the the incremental energy need in India? It's a lot greater than any place in Europe or North America.

Rachel Pether: (29:04)
Yeah, that's a great point, all technology has to solve a need or a gap, and I guess the need or the gap is typically much larger when you look at these emerging markets. You can make so much more of an impact with such a small change in the lifestyle or the technology.

Dr. Russel Read: (29:27)
And I think what it leads to also is that those sorts of investments, many of the infrastructure investments in North America or in Europe, can be commoditized in a that it limits or puts a ceiling on what the potential returns are. That is different than in a high growth region like the MEASA region. So commoditized returns can convey a low degree of risk, but also a low degree of potential return. And I think the growth prospects of capturing infrastructure opportunities in the emerging markets, particularly in the MEASA region, are one of the great things we're going to be seeing.

Rachel Pether: (30:16)
Fantastic. Thanks, Russell. And we've had a number of questions coming in from the audience, and broadly you can group these into the MEASA region and ESG. So I'll just start with one of the ESG questions. First from the Tesco pension fund, he asked to what extent do we all have the same dreams and objectives around ESG, but because of inconsistent approaches, we're not pulling in the same direction?

Dr. Russel Read: (30:43)
Well, it's a perfectly good insight. What we're absolutely seeing is that institutional investors have become much more sensitized to ESG concerns, but they have very different conceptions of what that means, and it can be vastly different. Now, that being said, there are a few big themes that are reasonably consistent among many of those investors. Clearly climate change is one of the big themes. So that is one where there's a critical mass of institutional investors that can pursue not only a configuration of public market stock portfolio investments, but also private market investments. Some of the other themes that are emerging, and they don't have to... They can make a big difference without having to scoop up the majority of investors. And I think for instance, take a look at smart cities and consumption related opportunities in Africa, how Africa now accounts for about a trillion dollars in consumer purchases. A trillion dollar consumer sector is actually meaningful. It's one of the great opportunities. And that is where a critical mass of investors doesn't have to be the majority of investors.

Dr. Russel Read: (32:27)
So I think that there will be for investors, institutional investors that can identify and develop the bankable opportunities in these high growth regions, that is going to be the antidote to potentially slower growth in the OECD.

Rachel Pether: (32:44)
That's actually a really great segue into another question that's come in on China's role in the MEASA region. Obviously, China is moving through with the One Belt One Road and the new Silk Road. This will lead to indebtedness of many countries in the MEASA region. How are you seeing that playing out, particularly because many of the investments are on the infrastructure front? Maybe you could give your views on the One Belt One Road initiative.

Dr. Russel Read: (33:15)
Well, my view is that overall, this is a positive. It's not without its issues, as you point out, there is a level of indebtedness with a number of the African countries, which has led a number of those countries to become cautious. But I view it in a completely healthy way. Is Africa in general better off because of the commitments from China? Unambiguously, yes, it is. If they did not have those investment commitments from China, the economic growth prospects of the continent would not be the same as they are today. And it's probably reached a pretty healthy state, namely, African countries are now being much more judicious about the types of capital and conditions under which they accept investment. So they need investment, want investment, and China has been unambiguously helpful, but they are no longer simply accepting investments with lots of strings attached without doing their own due diligence. So I think it's actually reached a very healthy state. And so this is a pretty exciting part of the story, but China has been an important piece in this whole puzzle.

Rachel Pether: (34:44)
Is China included in your MEASA strategy, or is that, that's outward you're looking at more of the high growth, younger demographic countries in the region?

Dr. Russel Read: (34:55)
When we look at the MEASA region as an investible geography, we think of it as everything but China and the Belt and Road initiative. And in many ways, it's what people historically have thought about related to the emerging markets. China is no longer a high population growth country. It's likely to be declining in population. Interestingly enough, today China, India, and Africa have the same population. They each have 1.4 billion people. This is a very interesting crossroads. However, the future of those three geographies, China, India, and Africa is going to be quite different. China will have a declining population, whereas India will be increasing to a projected 1.75 billion at its peak. Africa is expected to have a population by the end of the century of 4.3 billion people. So this is a very different trajectory from having the same population base as today.

Dr. Russel Read: (36:12)
And so some of the things that we like to think about with the emerging markets are high population growth, are high economic growth, high consumption growth. Growth is what we like to think about related to the emerging markets. And that's not necessarily what we think about with China. We think about that with the MEASA region.

Rachel Pether: (36:33)
We actually had a guest on SALT Talks last week from the Hong Kong Monetary Association. He made the comment that China will grow old before it becomes rich. So I guess that plays into your growth story.

Rachel Pether: (36:46)
And we have one final question to finish on. You speak very passionately about collaboration and this partnership approach. And when you're looking at some of the infrastructure needs in Africa, many of them are actually Pan-Africa. So if you're particularly looking at physical infrastructure like roads and train tracks and things like that, what would be your advice to the African nations in terms of collaborating with each other on these projects? What would be some of your, I guess, key rationales for collaborating together?

Dr. Russel Read: (37:31)
So I think you're exactly right that the collaboration among African economies is likely to be particularly important. And it's not just trade zones, it's logistics. When I think of some of the great challenges in Africa to creating bankable, investible projects, oftentimes they fall short because of logistics. You're going to have countries with high populations with something on the order of a single major road. And so how is the logistics problem going to be solved? And then part the logistics problem is going to be linked to energy and the digital economy. And I think that's going to be an interesting thing, that the logistics problem in Africa is likely to be solved different than how it was solved in North America and in Europe. So I think the digital economy is shaping up to be an important force in actually helping to solve logistics issues. It doesn't mean you won't still need more traditional roads and other sorts of things, but the optimization of the logistics, I think, is something that crosses borders and requires cooperation among the countries.

Dr. Russel Read: (38:55)
And there's a big benefit to it. You can see it particularly in sectors such as agriculture, where throughout much of the Sub-Sahara, 30 to 50% of crops rot in the fields. That is an informational problem along with a logistics problem, and both can be solved in part through better technology.

Rachel Pether: (39:18)
Fabulous. Well, thanks, Russell. I mean, it's been a pleasure speaking to you as always, really appreciate you giving your time and covering so many topics. I thank you so much for joining us today.

Dr. Russel Read: (39:29)
Thank you, Rachel.

Lawrence Rocks: The Green Revolution & Robotics | SALT Talks #63

“The Green Revolution will not happen without robotics.“

Dr. Lawrence Rocks received his Master of Science in Chemistry from Purdue University, and his Doctor of Science from Technische Hochschule Vienna, where he wrote his doctoral thesis in German in the field of analytical chemistry. He authored two books, The Energy Crisis (1972) and Developing Your Chemistry Fundamentals and Fuels for Tomorrow, with the former proving influential in creating the United States Department of Energy.

In the immediate future, our dependency on oil will remain constant. Technology needs to advance around extraction and storage before we can look at dialing down our consumption. However, oil and natural gas will likely never fully go away. Instead, we’ll learn how to use both more efficiently and only for industries that truly require the resource.

As for solar and wind power, these two potential resources are being approached the wrong way. Wind farms need large areas to operate, as well as a reliable source of energy. A collaborative between the United States, Canada and Mexico to install turbines offshore along the length of our collective boarders could solve for unpredictable winds and high real estate costs.

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SPEAKER

Lawrence Rocks

President

Lawrence Rocks Associates

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. SALT Talks is a digital interview series that we started during this work from home period, with the world's leading and the foremost investors, creators and thinkers and what we're trying to do with these SALT Talks is replicate the experience that we provide at our global SALT conference series, which is to empower big important ideas that are shaping the future, as well as provide our audience a window into the mind of subject matter experts and we're very excited today to welcome a legend in the field of chemistry to SALT Talks and that is Dr. Lawrence Rocks and conducting today's interview is Anthony Scaramucci, the founder and managing partner of SkyBridge, as well as the chairman of SALT and with that, I'll turn it over to you, Anthony, for the interview.

Anthony Scaramucci: (00:57)
John, thank you. Dr. Rocks, I'm beaming in today from beautiful Venice Beach, California, so I'm trying to dress like a millennial. I'm competing with John Darsie for likes so, hope you'll forgive me for my attire. You look great by the way. Let's get into your background sir. Why did you decide to become a chemist? Where did you grow up and what motivated you to take this arc to your career?

Dr. Lawrence Rocks: (01:24)
I grew up in New York City and at the age of 12, our class in elementary school had a science project, so I elected to try to make a telescope from available lenses, a long focal plane lens and a very small microscope piece and I put together a telescope that actually could see a moon of Jupiter, so I was very excited to see Jupiter as a disk and a little tiny spot, which was a moon and I couldn't wait to tell the class about it, which I don't know how it went over, but I enjoyed it very much and that sort of started me on a path of interest in astronomy and science and chemistry. They come together, especially my interest in latter years with health and the environment. The environment is a tremendous area, encompassing so many different things that you can go a million different directions in it, chemical, astronomy, climate and so forth. So, I'm focused on matters dealing with health and the environment.

Anthony Scaramucci: (02:36)
Oh. You published in 1973, a paper called The Energy Crisis and it influenced the creation of The Department of Energy under the Carter Administration. What was the book about, sir? Why did you feel it was so important at that time to have a unified national energy policy?

Dr. Lawrence Rocks: (02:56)
Well, at that time there was a looming shortage of gasoline and oil, exacerbated by an embargo on this country and I thought that energy would be a very critical issue. It was very difficult to get the book published. The publisher sent the manuscript to various universities and professors in a variety of very big named schools said, "Energy will never be a story. Don't bother with it." But I persisted with my partner, Richard Runyon, he's now deceased and we did manage to get it published at Crown and sure enough, energy became quite a story and is still a story. It's just lingering. It pops up here and there with wind power, solar, nuclear and so forth, but that was my basic motivation that this is a story that's good for a lifetime or more.

Anthony Scaramucci: (04:00)
You think that oil, sir, is still a national security issue for our reliance on it?

Dr. Lawrence Rocks: (04:07)
Yes, I do. I think that oil of course, the technology of drilling hasn't improved, so that the old method of measuring reserves, oil recovered before the drilling is slightly old-fashioned, but it's still an important measure, but we've got wean ourselves a little bit off oil, which brings up a very tricky question. Many people are saying, "We've got to end the fossil fuel era." Which I don't think is at all practical or meaningful, but we've got to simply reduce and use oil more wisely and our natural gas. So, I have thought of strategies over the last almost 50 years now since the book. I can't believe it's that long, but the strategies that seem to be most appealing are so encompassed in so called green revolution, but how to harness the wind and sunshine, that's the problem and I think they're being harnessed all wrong now.

Dr. Lawrence Rocks: (05:21)
What we need to harness the wind is a North American Offshore Wind Alliance with Canada and Mexico. Why, because the stretch offshore Canada through America through Mexico, the wind is always strong somewhere. So, you wouldn't need much backup, East Coast, West Coast. It's a regional issue. If you pick one area, the wind is erratic. The wind is erratic all over the world, but when you add them all up, a stretcher like that of six, 7,000 miles, the wind is reliable because it's always blowing strongly somewhere and another reason is that wind on land, the real estate is against you. I mean, T. Boone Pickens had a company called Mesa Energy, building windmills up the central part of the US and the company went bankrupt. The wind power for a 1,000 megawatts of wind, which is typical power plant, that's installed capacity.

Dr. Lawrence Rocks: (06:25)
It's stacked up and the wind doesn't blow, but for a 1,000 megawatts installed capacity, you might need 20 or 30 square miles and 500 windmills. The real estate is against you, but offshore the real estate is not against you, but to compensate for that big area you need, I think robotics. So, one of my themes I believe in passionately is that the green revolution will not happen without robotic assistance to monitor the security and minor repair thousands of windmills stretching from Alaska, all the way to Southern Mexico. The potential wind power would give us all the electric energy we need, but then that's a power grid problem between nations and we need cooperation I think.

Anthony Scaramucci: (07:22)
So, let's talk about that for a second. So you're saying, at least for the immediate future, we're going to always have some reliance on oil and you'd like to bring it down. So, let me ask you about the green new deal, which has been proposed by some people on the left. What's your opinion of the green new deal.

Dr. Lawrence Rocks: (07:48)
I'm not familiar with the details, but if we're to say oil and natural gas, we've got to also harness sunshine, but I believe it's being harnessed the wrong way. Solar electricity has not worked in 40 years and I don't think it's going to work in the next 40 years except on an extremely local basis, highly subsidized and my reasons are that the solar panels convert sunlight into electricity in a PN junction, which wears out with time, because of atomic migration. So, the solar cell is not eternal. It may lose 50% of its power in 20 or 30 years. It's got to be replaced. You need a large area. So, how to harness sunshine, solar architecture. If homes and buildings were designed to absorb sunlight in the winter and shield them from sunlight in the summer, the energy saved would be very important, by oil, gas and electric power. We've got a harness sunshine first as solar architecture, second as electricity if possible.

Anthony Scaramucci: (09:03)
What is your view of what's going on now with the climate? Are you a believer in climate change sir, based on the science or what's your view?

Dr. Lawrence Rocks: (09:15)
Oh yes. So, I think climate change is way beyond theoretical idea. Global warming and with [crosstalk 00:09:24].

Anthony Scaramucci: (09:25)
It's manmade, man and woman made. It's being created by the emission of all the CO2?

Dr. Lawrence Rocks: (09:31)
Well, it does. That is a very complicated story. Nature has its own cycle. Drilling into Arctic ice and measuring the isotopes of oxygen 16 to 18 shows that in the last 400,000 years we've had about five ice ages. The way the earth has behaved, apparently from oxygen isotope per measurements, 50,000 or 60,000 years of very cold weather compared to what we know and then, 10 or 20,000 years of a warm spell, which we're in now. So, we've had five such cycles long before people were here, long before industrial revolution, but some unknown reasons there was that pattern revealed by isotopic chemistry in the polar caps.

Dr. Lawrence Rocks: (10:27)
Now, where are we now? According to that rhythm, we're about 1,000 years overdue for an ice age. However, right now there's a problem of global warming, because we're in a relatively one period may be coming out of it. Where does mankind come in? Well, we're contributing to carbon dioxide and methane, but there is a very big disconnect here, which is why I propose Weather Station Moon and here is the disconnect, in the last 50 years, carbon dioxide has risen in the atmosphere at least 50%, but temperature on the Kelvin scale has not. It's gone up maybe 1%. We are experiencing more carbon dioxide and more methane in the atmosphere and more unstable weather, stronger wind and stronger hurricanes, very unstable weather patterns and yet the global temperature doesn't seem to have risen. Maybe it's hard to measure.

Dr. Lawrence Rocks: (11:36)
So, my concept is weather Station Moon, an unmanned telescopic station on the moon to take a look at the earth in the infrared to get its true overall temperature and you could also pinpoint areas telescopically. So you could get pinpoint temperature and global temperature and secondly, to look at the cloud cover not just visibly, to see if it's increasing or not, but in the ultra violent to see if there's more silicates up there. The silicates would reflect sunlight and cause the earth to get cloudier and colder, the so-called albedo effect. So, a cloudy earth would be a colder earth. How do we measure it? Well, Albany satellites gets some idea, but we need a total global picture of the earth and the only way to get it, I think is from the moon.

Anthony Scaramucci: (12:39)
So are we doomed at our current projection? Some people are saying that they were in an average retrievable position or do you think it is retrievable?

Dr. Lawrence Rocks: (12:52)
Well, I think it's very erratic. It's almost like the stock market up and down. There was a little miniature ice age in Northern Europe, 1590 to 1640, well-documented in literature and paintings known as the Little Ice Age. So, that could be a forerunner of the fact that we're on a slope toward another ice age, but that might be a 100 or a 1,000 years from now. The isotopic record indicates we're overdue for an ice age for whatever the reasons are, but for the moment it looks like global warming, it looks like polar caps are melting, seas may be rising and people will be moving inland and Northward in the Northern hemisphere, inland and Southward in the Southern hemisphere, but who knows at what rate? Now, along comes the COVID virus and that's accelerating everything.

Dr. Lawrence Rocks: (13:53)
So, there's a gradual trend, hard to detect inward and northward in the Northern hemisphere, but COVID has now accelerated everything. We can see satellite cities, more telecommunications. I think the trend is not going to end. It's just going to be erratic and it may extend way past our lifetime, children, grandchildren and so forth, but I think the future is this inland and upward Northward movement. More satellite states, more telecommunications as we're doing right now and more short trip airline travel and I also think that if we do the North America wind lines properly and have sufficient electricity, more electric vehicles, I think the electric vehicle future is very, very bright with the movement going on now, if we take care of the power grid, which we're not doing.

Dr. Lawrence Rocks: (14:59)
The electric power grid in this country is not being properly monitored, it's got to be expanded for remote sources and it's got to be monitored. For example, in California, had we had in place drones take a careful look at the power grid, we'd see that in certain places there was tree overgrowth. Now, that's not anyone administration's fault, that's just a fact of nature. So, with robotic surveillance of drones, we would see that and maybe be able to correct some of it, but the high temperatures in California are quite a mystery.

Anthony Scaramucci: (15:46)
But you would say that the wildfires and the hurricanes are coming from the climate change and the global warming, or you think there's just a natural phenomenon? How would you assess that?

Dr. Lawrence Rocks: (15:57)
There is global warming and it's triggering off something that's very unstable. For example, a few weeks ago, we had a dust storm from the Sahara desert traveling all the way to the Gulf of Mexico. Now, with a weather station moon, you could monitor that very clearly and it would really look like something on a nightly TV and it's happened before and right now, the fire is in California, the dust has reach Europe. You can detect it, you can almost see it. During the dust bowl of the 1930s in this country, dust was picked up in New York city from the far West. Now, had we had a weather station moon way back then you could really follow that. So, what I'm saying is that the immediate trend is global warming and maybe in the future, I don't know, a 100 years, a 1,000 years from now a freezing trend, because we've had these cycles for the last 400,000 years.

Dr. Lawrence Rocks: (17:08)
Well, we've got to monitor the situation now in terms of the total earth and parts of the earth, see from the moon you can get from infrared light, the total temperature of the earth. If you try to piecemeal it together, it's very hot and it leads to a lot of controversy and we can get the total cloud cover, the percent, the reflectivity of the earth. So, we need the earth's total temperature as well as pinpoint area temperature, total cloud cover, as well as pinpoint cloud cover, wind speed and it relates to weather forecasting and the famous problem of North hemisphere, Southern hemisphere air exchange, which now has come to light with the COVID virus. The experts are saying well, in South America when they're having their winter, the virus seems to spread and when we get all winter we're probably in for a spread of the virus up here. So, predicting weather pattern, sees the weather patterns would help. I don't know how much, but I think it would help in predicting virus outbreak.

Anthony Scaramucci: (18:26)
Doc, John Darsie, we're getting a lot of questions piling up from the audience so, I'm going to let John Darsie cut in here and ask you a few questions from people that are thinking about these big issues.

Dr. Lawrence Rocks: (18:39)
Sure.

John Darsie: (18:40)
So, I'm going to start on a more lighthearted issue and then we'll get back into the deeper issues, but you're a renowned chemist and you've applied your knowledge and chemistry across a variety of different subject matters, starting with energy in the 70s, as we talked about, including public health, but you've also done work in sports and I think it's really interesting, the work you've done with St. Louis Cardinals Shortstop, Paul DeJong, regarding different experiments about optimizing bat speed and launch angles and thing in baseball. Talk about the research you've done in the baseball world. You were honored by Topps and given your own baseball card, which was a first for a chemist, but talk a little bit about the work you've done and what you've learned about how to optimize performance in baseball.

Dr. Lawrence Rocks: (19:25)
Well, what Paul and I did was, we hit a baseball and looked at its bounce and cooled it and looked at its bounce and sort of studied the elasticity of the surface of a baseball with respect to temperature. Elastic materials tend to get brittle at low temperature. They lose their bounce and at very high temperature, they tend to get so off. They lose their bounce. So, if a typical elastane and this is in optimal temperature of a day of elasticity, like an automobile tyre, it's got its own range, a baseball has its own range, seems to be most flexible around 70 degrees. Different materials will have their own ideal flexibility temperature range and that was done in a hope of encouraging school children to do their own experiments and that's what the program with Topps is all about, helping school children realize that you can do experiments. You don't need sophisticated scientific equipment, economic status is not that big a hindrance, that children can play around and do something of a scientific nature.

John Darsie: (20:44)
So, we have another question again, switching gears back to the solar energy piece, and we have a couple of questions that I'm going to combine into one and that's about, what are the best storage systems that we need to meet peak energy demand as we transition to more erratic sources of energy and do we have the infrastructure in place to build a better smart grid on top of existing infrastructure? Or do we need to completely overhaul our energy grid to prepare ourselves for the future?

Dr. Lawrence Rocks: (21:15)
I think energy storage is a tremendous problem and there isn't any simple answer to it. So, what I'm taking is that what we need, is to somehow harness the internal source of power, sunshine and wind and then have a backup, but battery backup has never proved economic on a bare scale for nation's power grid. So, for my concept of North American Offshore Wind Alliance, I envision a small nuclear backup, small nuclear power plants. The old nuclear power plants, 1000 megawatts, they have too many problems, heat loss, it's been going on for years, but the smaller power plants as you'd find on a submarine or an aircraft carrier, don't have the heat loss problems because they're smaller. So, we need small nuclear power as a backup and for decades I've been saying, "Go small, go, small."

Dr. Lawrence Rocks: (22:18)
Utilities have been saying, "Not economical, not economical." The Gates foundation has funded research in what's called a Traveling Wave Nuclear Reactor. If fuel rods are moved about so that the plant doesn't have to be refueled more than once every 20 years, they think, theoretically speaking, it's being built right now in China. Why is something funded by the Gates Foundation being built in China? Because of the red tape in this country. Maybe red tape is a bad expression. People are leery of nuclear power and rightly so, because the power plants are too big. They're melting down. They're not cooling off. I mean, if you boil a potato in water and take it out of the water, it stays hot a long time, but a piece of potato cools right off. So, my answer to nuclear power is go small and the nuclear waste has to be buried in nickel steel containers, offshore in the ocean by robotic submarine. People are aghast at that.

Dr. Lawrence Rocks: (23:31)
Burying nuclear waste on land is never going to work, because the radioactivity dies off, it takes at least a thousand years. You can't have multi-generations of people adhering to safety protocols for a 1,000 years. That's not going to happen. There's no societal mechanism for that. It's almost as if in the days of Julius Caesar, there were rules about burying nuclear waste and we're adhering to them today. The waste material has to be buried in a place where it's inaccessible and perfectly harmless and that's nickel steel containers, they don't rust in salty water, buried deep in the ocean floor by robotic submarines, there will be no problem.

Dr. Lawrence Rocks: (24:23)
Now, we can opt not to have nuclear backup and the question is, what is the backup, since the wind will always be somewhat erratic? And the only answer I can think of is extend the wind system. In other words, they're filled with some way to tap the entire earth. It's always windy somewhere, but then we'd have to be sharing electricity around the world. So I foresee regionalism. Where we are, the region would be Canada and the United States and Mexico go offshore and you don't have a real estate problem, hook up all the windmills in one giant power grid, three nations are involved and work out the rules of sharing power, that they see as the only way to avoid the fact that people are leery of nuclear power and secondly, battery systems don't work.

John Darsie: (25:24)
In terms of burying nuclear waste at sea, would that have any adverse effect on the marine ecosystem?

Dr. Lawrence Rocks: (25:30)
None. None whatsoever. The nickel steel propellers of the Titanic in all these years haven't rusted. The steel cylinders won't rust at the ocean floor, they're inaccessible even if anyone were to try and dig them up, there's nothing you could do with them. The radioactivity will decay significantly in 1,000 years, completely in 2000. If you put it on land, there'll always be a problem with security of that land site, always and for example, the Yucca mountain project failed. Why, because there could be an earthquake and the canisters could fracture and material could make its way through the fractured earth, but in the deep ocean basin who's in the ocean floor, that's impossible.

John Darsie: (26:27)
So I'm going to call you after the SALT Talk about starting a business to create these robot submarines that we can bury the nuclear waste with Dr. Rocks. So, just look out on your phone. I'm going to give you a call. Another question we have people following up about wind energy. So, a couple of the common criticisms of wind energy are, the effect they have on birds and animals in those ecosystems, as well as disposing of the wind turbine blades. So, the blades are massive in size, obviously after they complete their useful life. They're buried in landfills, but they're so large that they obviously create a ton of waste. Are those concerns that you think make wind energy less attractive, or do you think those are just hurdles that we have to overcome?

Dr. Lawrence Rocks: (27:15)
I think those concerns are real, but I think they're small compared to the real estate problem. A typical power plant, whether it be nuclear, gas, or oil or coal is about 1,000 megawatts. 1,000 megawatts on land, you need about 20 to 30 square miles and maybe 500 windmills. That's a lot of land area. Think of the real estate. Just think of how impossible that would be in New York City. That would be ridiculous. One power plant replaced by 30 square miles of windmills? It's a real estate problem as what happened with the T. Boone Pickens and his company Mesa Energy. It didn't work. It's not an engineering problem, it's real estate, it's economic. The best place for wind is the offshore. Now we need a big area, so, we'll have to go to a big area. So, I think the biggest stumbling block to harnessing wind is almost political. Canada, the United States and Mexico must cooperate.

Dr. Lawrence Rocks: (28:32)
Now, years ago when I was doing work on the book, The Energy Crisis, I had an idea that the gas being flared off in the Gulf of Mexico flagged as being wasted, could be harnessed and piped, that the United States and Mexico should join up and tap that natural gas and pipe it and it was an idea. It never saw the light of day. The economics, the politics involved, what happened was the countries at the Middle East, ExxonMobil, lowered the price of oil. That killed that project. You see, there's a lot of competitiveness going on. One industry will lower prices to put another one out of business. I know that the windmills, they have a hypnotic effect. It's an interesting phenomenon, 60 cycles a second seems to induce ecolepsy in a very small percentage of people. So, that's a problem. Bird migration, that's another problem.

Dr. Lawrence Rocks: (29:49)
I don't want to trivialize them. I just think that they're way behind the biggest problem, which is economic, the land area. It's just too large to put on land, got to get it offshore. Down now that way you've harnessed wind, by harnessing sunshine, all the projects being funded are solar electricity. That's the hardest way to go. The easiest, the best is solar architecture, because the solar architecture will last forever. I mean, as long as the home of the building, whereas solar panels will definitely wear out. Atomic migration happens at the PN junction. It's a natural phenomenon like water evaporating. So, whatever solar cell you invent, atomic migration will blur it and make it useless in whatever 10, 20, 30, 40, 50 years, it will go down in efficiency. Solar electricity is economically disadvantaged. It sounds beautiful, I love it, but it's economically disadvantaged. Solar architecture is the way to go.

John Darsie: (31:04)
And we have another question about nuclear energy and nuclear fusion is sort of the holy grail of nuclear energy and there's been people that have tried over the years to create a nuclear fusion reaction for the sake of producing energy. Do you think we'll ever get to the point of creating a fusion reaction to create energy, because if we do, obviously it would solve a lot of problems if you can do it safely, but what are your thoughts on that?

Dr. Lawrence Rocks: (31:30)
It would. Theoretically it would solve a lot of problems. The Russians pioneered a design called Tokamak. It's a tunnel, a magnetic tunnel to confine plasma and in this country, we've pioneered Laser fusion. Pallets of deuterium, little glass pallets are hit by laser light from all directions. The problem with thermonuclear energy is that once you get ignition, it's so hot, it is just tried temperature. It seems to destroy the very container it's in. So, I don't know about thermonuclear fusion, I think it's very theoretical at the moment. It's way off in the distance, I don't see any thermonuclear electric power plants in my lifetime, or I don't know how it's ever going to be done if at all.

Dr. Lawrence Rocks: (32:32)
I think the way to go is standard nuclear, the way the Navy did it. Small nuclear power plants. Now, the utilities will say, "Well, that's not very economical." And my answer is, "You're right." It's less economical than one big plant, but what if one big plant melts down, how economical is that? Like three mile Island or [GMA 00:32:56] in Japan or the Russian power plant, that's not economical at all. That's what stopped nuclear power, the danger of a large plant overheating. If you have a small plant, it won't overheat.

John Darsie: (33:11)
What about geothermal energy? We have a question from our audience. They mentioned Yellowstone as somewhere that's somewhat central that could be potentially used as a source of clean energy. Do you think geothermal energy has a larger future in the United States and around the world?

Dr. Lawrence Rocks: (33:28)
I'm not sure about it. The power plants that I read about seem to admit to sulfur deposits, wherever there's geothermal energy. It seems to be gases off gases from the hot lava down below and they're usually associated with the air pollution, a lot of off gases and there also could be a problem with earthquake production and I just think it's too limited.

John Darsie: (33:58)
Well, Dr. Rocks, thanks so much for joining us today. I want to kick it back to Anthony if he has a final word for you, but we appreciate you coming on in and you're a legend.

Dr. Lawrence Rocks: (34:06)
Oh. Thank you. I appreciate. Thank you.

Anthony Scaramucci: (34:07)
Before we leave, I want to talk about your legendary baseball status Doc. The shortstop on the St. Louis Cardinals, Paul DeJong, attributes a lot of your insights to his prowess on the field. Tell us a little bit about that. You said to me something a few months ago about ligaments, which I've never forgotten. I'd like you to share that with our audience and tell us how you ended up getting your own baseball card.

Dr. Lawrence Rocks: (34:38)
Well, the story is muscle versus ligament. Muscles produce energy, ligaments produce power. Power is energy per unit time. It's the snap. It's like a bow and arrow. That you just stretch the wood and release it and release the string and it snaps back. So, the muscles are providing energy to the tendons, the tendons stretch then they snap back and as we age, tendons get more crystalline, less amorphous. They get more brittle, they could get strong.

Anthony Scaramucci: (35:14)
Are you listening to that Darsie? Your time's going to come. Okay? Are you listening to that?

John Darsie: (35:18)
It's already come and[crosstalk 00:35:19].

Anthony Scaramucci: (35:19)
Dr. Rocks and I are already dealing with that Darsie. Pay attention.

John Darsie: (35:22)
I already had a knee replacement.

Anthony Scaramucci: (35:24)
So go back to the crystalline. Go ahead. What happens Doc?

Dr. Lawrence Rocks: (35:27)
The best gymnasts are teenagers and then in your twenties, you'll lose that and certainly in your thirties, but it's a well-known phenomenon with tendons and ligaments, that as we age they become more crystalline and less amorphous, almost like the automobile tyre industry has this problem, that the rubber has got to be amorphous enough to be flexible and crystalline enough to be strong. So, the weightlifter is developing strong tendons, more crystalline nature in the proteins, less amorphous, less flexibility, so they're strong, but they're less flexible. So, the discussions I had with Paul is that there's got to be a balance and I have no idea what it is for any one individual, it's an aging process, but there is a balance between being very strong and not being flexible enough to hit a baseball or being very flexible and not being very strong. So, it's got to be a balance. So, I think the way the athletes tell it to me, too much weightlifting is not good. You get strong lifting weights but you don't get better at hitting a ball.

John Darsie: (36:50)
I mean that's Tom Brady. You're preaching Tom Brady's philosophy there. At his age and he's the oldest quarterback in the NFL and one of the oldest that has ever played at a high level in the NFL and he talks a lot about flexibility and pliability versus trying to get stronger and it's helped him extend his career.

Anthony Scaramucci: (37:07)
He uses a lot of band work, right? He doesn't really use weights, right? He just uses bands mostly. Right?

Dr. Lawrence Rocks: (37:14)
That's one of the things that Paul and I have discussed and the other thing I've discussed is, what level of air pollution. This COVID virus, they're cleaning facilities, right? You can over-clean. I mean, you can have so much cleaning around that it affects the lungs and some of the chemicals interact with each other, which is a subject that goes, I think unnoticed. For example, cleaning fluids that have fluoride and cleaning fluids that have acetic acid, if you mix them, you get trace amounts of fluoroacetic acid, which can cause scarring of lung tissue. So, one of the phenomena I'd like to study, like to get into it more deeply is low level air pollution.

Dr. Lawrence Rocks: (38:04)
How it can take the edge off an athlete, a little bit of carbon monoxide, or a little bit of cleaning fluid, or a little bit of ozone. Let us say that it's reducing oxygen transfer in the lungs by 2% hypothetically speaking. So, you've got 2% less energy, hypothetically speaking. So you hit a baseball 400 feet. What's 2% of 400 feet, eight feet. That could be the difference between a home run or a ball court and the running track. See for a non-athlete like me, you wouldn't even see the difference, but for an athlete where the edge counts, I think one or 2% loss of power, loss of breathing, loss of oxygen transfer makes a big difference.

Anthony Scaramucci: (38:57)
So Doc, what would you recommend instead of the cleaners? Get these air filtration systems?

Dr. Lawrence Rocks: (39:04)
Yes. Filtration and also air it out.

Anthony Scaramucci: (39:07)
Like open the window?

Dr. Lawrence Rocks: (39:09)
Right. Ventilation.

Anthony Scaramucci: (39:10)
Right.

Dr. Lawrence Rocks: (39:12)
The cleaning fluids do their job in minutes, but the excess can linger for hours.

Anthony Scaramucci: (39:18)
Right. So open-

John Darsie: (39:19)
If I'm in the car with Anthony I'll make sure to follow that advice.

Anthony Scaramucci: (39:23)
I would never let him in the car Doc given his habits, his hygiene habits, that's fake news. He's never been in the car with me. Okay? God only knows what he does in his own house. There's a reason why the bookshelves are green behind him, Doc, just so you know. Okay? All right, before we let you go, tell us about the Topps baseball card. We all want to hear about this.

Dr. Lawrence Rocks: (39:47)
Well, I feel very honored that Topps made a baseball card for me and for Paul, for our work with the projects that might interest children in science. I think it should work to interest children to do things of a scientific nature. It's quite an honor. I hope I can live up to it.

Anthony Scaramucci: (40:18)
All right. You look great in the card. I love it. Well, we appreciate having you on and I want to turn it back to John, where he's going to talk about some upcoming SALT conferences and hopefully we get you back soon after the election and talk about the direction of the environment, the economy, and all things related to chemistry, but thank you so much for coming on today, Doc.

Dr. Lawrence Rocks: (40:39)
Anthony, I can't thank you enough. Just for me, this is a great opportunity. I appreciate it so much.

Anthony Scaramucci: (40:44)
Well, I want your message out there. I just think it's super important. Let's turn it back to John. I think we got the best of him, particularly when I said that the bookcase was green for a reason, Doc. I think we really nailed him. Go ahead Darsie.

John Darsie: (40:57)
Anthony's jokes always hit hard, but thanks everybody for joining us today on the SALT talks with Dr. Rocks.

Morgan Housel: "The Psychology of Money" | SALT Talks #62

“Writing is the best way to crystallize the vague thoughts you have in your head.“

Morgan Housel is a partner at The Collaborative Fund, a venture capital firm focused on providing seed and early stage funding to technology companies, and a former columnist at The Motley Fool and The Wall Street Journal. He is the author of the new book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.

Investors should be writing out their ideas more frequently. When you’re writing, ideas that may have seemed logical and fantastical in your mind may actually turn out to be disjointed and nonsensical. Only through the logic-inducing process of writing can investors make more sound financial decisions.

There is also no one-size-fits-all description of a successful investor. However, two principles govern their potential for success: patience and the ability to put up with uncertainty. In finance, soft skills like these often get swept under the rug because they’re immediately measurable in charts or returns.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Morgan Housel

Partner

The Collaborative Fund

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. And today we're intersecting all that with psychology as well and we're very excited for today's SALT talk. SALT Talks is a series of digital interviews that we launched during the work from home period, with the world's foremost investors, creators and thinkers. And what we're trying to do during these SALT Talks is replicate the type of experience that we provide at our SALT conference series. And that's really to provide a platform for what we think are big, important ideas that are shaping the future, as well as provide our audience a window into the mind of subject matter experts. And we're very excited today to welcome Morgan Housel to SALT Talks. Morgan, today is a partner at the Collaborative Fund, which is a venture capital fund, and he's a long time former columnist at The Motley Fool, as well as the Wall Street Journal.

John Darsie: (01:00)
And I personally, I know Anthony has been reading his work for years in those outlets, and it's great that he finally wrote a fantastic book to bring his work to an even larger audience. And he's the two time winner of the best in business award from the Society of American Business Writers and winner of the New York Times Sidney award, and a two-time finalist for the Gerald Loeb award for distinguished business and financial journalism. His new book, as I mentioned, is called The Psychology of Money. It came out September 8th and he's on a variety of different bestseller lists. And we were talking before we went live, we're hoping that once all the votes are counted, that his book will be on the New York Times bestseller list in short order. But it's a fantastic book, very easy to read and he distills a lot of great anecdotes down into key lessons that you can teach your children or teach yourself, whether you're an amateur investor or a professional investor, frankly, about how to be a better investor and how to put the right priorities around creating wealth.

John Darsie: (01:57)
Just a reminder, if you have any questions for Morgan during today's SALT Talk, you can enter them in the Q and A box at the bottom of your video screen. And conducting today's interview is Anthony Scaramucci, who's the founder and managing partner of SkyBridge Capital, a global alternative investment firm, as well as the chairman of SALT. And with that, we'll turn it over to Anthony for the interview. Anthony today is in the lovely Beverly Hills Hotel and not in his normal environment and so we're going to give them a very low room rating, but Anthony, go ahead and take it away.

Anthony Scaramucci: (02:25)
And my head, all of a sudden didn't become 400 times the size of yours and Morgan's, but that's fine. Morgan, welcome to SALT Talks. I have to tell you that I do a lot of reading, obviously in finance and read a ton of books on finance, but your book, The Psychology of Money is by far the best one I have read about literally the psychology of money. So I've been handing it out to people, you should be very proud of your work, by the way, we think it's a phenomenal book. And so I want to get into the book in a second, but I want to talk a bit about you and how you got to where you are. So go ahead, tell our delegation about your career arc.

Morgan Housel: (03:07)
Well first, yeah, thank you for having me, Anthony, thank you for those kind thoughts about the book. How did I get here? I think like a lot of careers, it wasn't planned. I never had a plan to become a financial writer in the slightest. If you go back to my time in college, around the mid 2000's, I wanted to go into investment banking, that was all I wanted to do. My plan was A, B and C was to become an investment banker. A lot of young people in the mid 2000's wanted to do that, investment banking was the peak of financial prestige. From my view in my early '20's, that was where the money and the power was, that's what I wanted to do. I got an investment banking internship my junior year and day one and not only day one, I would say the first hour of walking in there, it was clear to me that this is not for me.

Morgan Housel: (03:48)
The culture of investment banking was such a turnoff to me. And I'm 100% for hard work, but it was not hard work, it was just a hazing atmosphere where it wasn't about your productivity or what kind of value can you add, it was just let me beat the crap out of you because someone beat the crap out of me during my career. It was so unappealing to me. So then I got a job in private equity. This was still, I was a junior in college. I got an internship and I love private equity. I thought it was great, great mix between business and finance. The culture was so much more aligned with what I wanted. And this was the summer of 2007 and then the whole global economy hit the fan.

Morgan Housel: (04:25)
And my plan was to stick around in private equity, but the firm basically said, they relied on borrowing a ton of money to make the deals work, everything froze solid, so it was, "Hey, we're not going to have a full time position for you after college." So I needed to do something else. And I had a friend who was a writer for The Motley Fool at the time and he said, "Hey, you should apply to become a Motley Fool writer, you are interested in finances. Let's do it." I had no writing background whatsoever, I'd never written anything about investing before, even though I was interested in it. And so I thought I would do that for three months or six months before I found another private equity job. And I ended up staying for 10 years and just fell in love with the process of writing.

Morgan Housel: (04:59)
I think no matter what field you're in, writing is really important because writing is not just about getting your thoughts across to other people, it's not just about communicating. Writing is the best way to crystallize the vague thoughts you have in your head. These vague ideas that you have about whatever your field is, whether it's finance or politics or anything else, you have these gut feelings, until you are forced to write them on paper, those gut feelings just float around, they're not making a lot of sense. But once you're forced to put them on the paper, you really realize that either A, your thoughts suddenly make a lot more sense than they did when they were gut feelings or B, when you put them onto paper, you realize that your thoughts look ridiculous. When they were gut feelings in your head, you could run with them and say, "This is okay." But sometimes you put them into words you say, "Ah, that makes no sense whatsoever."

Morgan Housel: (05:44)
So I fell in love with the process of writing. It was not part of the plan, I just stumbled across it haphazardly, but we're now 14 years into this. So I joined Collaborative Fund four and a half years ago. It's a venture capital private equity firm, but my sole job there is to write and speak about the intersection of investing history and behavioral finance. I like to learn about the history of how people think about risk and opportunity and greed and fear in finance and what we can learn about that for ourselves to become better investors and better with dealing with money in general.

Anthony Scaramucci: (06:15)
Well, in reading your fantastic book, and it's a great introduction to everything that we're talking about, but in reading your book, it struck me that there were two things going on. You were trying to explain to people how to become a successful investor, but then also how to develop a healthy relationship with money, which is something I'm still trying to do, frankly. I think a lot of us have that difficulty. And so let's break it up for our listeners, how do you become a successful investor Morgan?

Morgan Housel: (06:47)
Well, to me, it's different for everyone and how I invest is very different from how I know you invest, which is going to be different for everyone. So there's no one size fits all prescription. But to me, the foundation of good investing, the most common denominator across all investing strategies is two things. You need to be patient and you need to put up with uncertainty. That's it. Very simple, very basic, it's not blowing anyone's minds, but that's the common denominator. There's always a cost of admission in investing. You can do very well in markets, no matter what your strategy is, but nothing is free. Of course, nothing good in the world is free, nothing worthwhile is free, everything has a cost. And the cost of admission in investing is a combination of patience, which is where you get compounding and dealing with uncertainty and volatility, which is what markets make you put up with.

Morgan Housel: (07:29)
I think that those two things are easy to overlook and it's easy to not view them as a cost because most costs have a dollar figure on it. [inaudible 00:07:37], if you get a hotel in Los Angeles, there's a dollar figure on it. But the cost of volatility is much more nuanced. And it's very easy and intuitive, I think, in investing to view volatility and patience as a fee or pardon me, as a fine for doing something wrong, your portfolio declined 10% and you screwed up, you did something wrong. And look, for some strategies, that might be the case. But very often, if you are dealing with volatility and your portfolio declines 10%, let's just say, that's not a fine, that is a fee. It's the cost of admission for what you need to put forth, enable to do well over time.

Morgan Housel: (08:11)
So I think that's how people become good investors. It's difficult to do that because it's not necessarily analytical. We can't just summarize patience in a chart or in a formula. So people who are very analytically smart and you got your PhD from MIT, does not have any correlation with whether you're actually going to be patient. So these soft skills in finance often get swept under the rug because they're so different from how we are usually taught finance in terms of an academic field where it's something closer to physics that is governed by clean formulas and charts and data, we can measure things with precision. The softer side of investing is not necessarily there. So I think that's the common denominator of how people can become good investors. I know it's not blowing anyone's mind, but that's the point. The simplicity of these things makes easy to ignore. So I actually think when I explain these things, it is the most sophisticated and educated investors who need to be reminded of these things, that the most important things are the things that are easiest for the educated people to ignore and overlook.

Anthony Scaramucci: (09:09)
Well, I mean, you bring this up in the book and I want you to address it. There's emotion involved. The rational actors seem to do best, but it turns out that we're really not that rational, particularly when it comes to money. And if I take $10,000 of my money and I put it into a stock and it drops 25%, that may be the best time to buy it, but now I'm in a panic. And it's not like women's apparel that goes on sale at a department store or chopped meat in the supermarket. When stuff goes on sale, Morgan, people panic, and they have a tendency to sell bottoms and buy tops. So you write about it in the book, explain why people do that and explain what your recommendations are to prevent them from doing that.

Morgan Housel: (09:55)
I think it's very easy to personalize what's going on in markets, even if markets are a giant thing where tens or hundreds of millions of people are participating. It's so easy to say, "Look, if I buy it and it goes up, that's because I'm smart. And if I buy stock, it goes down, that's because I'm stupid. I made a mistake." They personalize what's going on in the market, even if the market does not know who you are, doesn't care who you are, has no correlation with the decisions that you made by and large. So I think that's largely why we do it. In a way that if we're talking about math, long division is not emotional, it's just a formula, you do it, sometimes you're wrong, but you don't get emotional about it. Whereas our personal net worth, this is not just our ability to retire and send our kids to school, this is the scorecard for how we're doing in life by and large, particularly for some people.

Morgan Housel: (10:41)
It's not necessarily going to affect your day to day wellbeing, but it's a scorecard for how you're doing and you take it personally. If your portfolio's down 20%, that means that my worth to the world, my intelligence is down 20%, is how it's typically viewed. I think to the greatest extent, back to what I was saying earlier, if you can view volatility as the cost of admission, this is the price that you are paying, if you're going to go out and buy a fancy car, there's a price to that and you know it, and you know the price is worth it because you get a nice car in return. If you can view volatility as more of a fee that is worth paying, rather than a fine, a signal that you screwed up, that to me, is the biggest way that you could move the needle towards a healthier relationship with the investing side with money.

Morgan Housel: (11:20)
And we also have to address this thing too, where money is emotional, it's not just the investing returns, it's people's relationship with money. And it doesn't matter how wealthy you are, this is true for the deca-billionaires of the world. That how satisfied you are with your money, how well you think you're doing with your money, it's just the gap between what you have and what your expectations are. And if people's expectations grow in lockstep with their net worth over time, or if their expectations grow faster than their net worth over time, it doesn't matter how wealthy you become, you're always going to feel like you're running on a treadmill. That too, I don't think will blow anyone's mind, but it's the most pervasive issue with money that we have over time.

Morgan Housel: (11:57)
Look, if you were to look at the average median American, the median American's income adjusted for inflation has roughly doubled since the 1950s, just for inflation, median income. But we view the 1950's as the golden era of middle class prosperity, even though we are twice as rich, adjusted for inflation at the median level than we were then. I think a lot of the reason that is, is because expectations in the United States have grown faster than people's incomes. And look, there's been a lot of stagnation across middle incomes in the last 20 or 30 years, of course, but so much of the expectations in terms of what a middle class family should have and how they should live, have grown faster than incomes over time. Just one way to summarize that is that the median square footage of a new American house, has increased from about 900 square feet to 2,500 square feet. So that's just expectations rising faster than income and that's true at every single income level, no matter how wealthy you are, successful you are.

Anthony Scaramucci: (12:54)
Well, unfortunately the plate at the diner, Morgan, has also expanded, so we've got that issue going on as well. You got a lot of great anecdotes in the book and some of them are related to common mistakes that people make with their money. I was wondering if you could, I don't want to steal the thunder of the book, but just share one or two of them that you think are compelling to explain what the commonalities are in terms of how people miscue money.

Morgan Housel: (13:24)
Sure. I mean, here's one from the book that's always stuck with me and the story has nothing to do with investing, but this will all come back around to a good investing lesson, I hope. Back before antibiotics, if you got syphilis, the main treatment for treating syphilis was to actually-

Anthony Scaramucci: (13:40)
John, are you paying attention to this, John? Let me just make sure-

Morgan Housel: (13:44)
I knew this is going to go somewhere like that.

Anthony Scaramucci: (13:45)
All right. John pay attention, he's speaking directly to you, John. Okay, just go ahead, let me go back to active speaker. I'm sorry. Go ahead.

Morgan Housel: (13:54)
The main treatment for syphilis was to inject you with a low end strain of malaria. That was how you were treated for it. And the reason was because injecting yourself with malaria and intentionally giving yourself malaria, would trigger a very high fever. You get a fever of 104 that would last for a week, and the fever would kill the syphilis. Which is just to say that we have known for a long time, that fevers play a very key role in fighting infection. That used to be how we actually treated illness, was to trigger fevers in you. And look, we don't do that anymore because now we have antibiotics, thank God. But there's this interesting thing where we know that fevers are beneficial. Fever is a good thing. Fever is a sign that your body is fighting a thing you're trying to get rid of.

Morgan Housel: (14:32)
But what's interesting in the modern world, is that no one, including doctors, views a fever as anything other than a nuisance. And if you get a fever, you should take Tylenol right away, get rid of that damn thing, get it out of here, even if it's a beneficial thing that is helping you get better. Why is that? Why do we try to get rid of something that is beneficial? To me, the best explanation is just because fevers suck. They hurt. They're miserable. Let's just sit under the covers shivering. So even if it is helpful, even if it's rational to want a fever, it's not reasonable. And if there's a pill that can help me get rid of it right away, give me that pill, I'm going to take it 10 times out of 10.

Morgan Housel: (15:05)
Which is just this explanation that there are things in life that are rational, that makes sense on paper, that makes sense in a spreadsheet, but they're not reasonable. They're not reasonable because no one wants to be uncomfortable in the world. And I think that is also true for investing. There are a lot of things in investing that makes sense on paper, that are rational, all the numbers line up, but they're not reasonable for people to have. And aiming to be just reasonable with your money instead of coldly rational, is, I think, a better guideposts for most people, regardless of how wealthy you are in terms of making decisions with your money. Let me give you one example. There's a well known home bias in investing, where people in the United States, only own American companies, people in Germany, only own German companies, et cetera. You own the company, you own the stocks based off of where you live, based off your own local state, your local neighborhood.

Morgan Housel: (15:51)
There's no reason to think that that is a rational thing to do with your money. The idea that the best companies to own happen to be the ones located nearest to your house, it's ridiculous. There's no ration to that. But it's actually a pretty reasonable thing to do. If taking the leap of faith of investing your net worth into companies that you are more familiar with, if that helps you to take the leap of faith that you need to be a longterm patient investor, to feel comfortable with your investments, then it's a very reasonable thing to do, even if it's not rational.

Morgan Housel: (16:18)
There are other things like paying your mortgage off, which is the most ridiculous thing you could do with your money right now, because you can get a 30 year fixed rate mortgage for 2.9%. But it's a pretty reasonable thing to do if it gives you an added sense of safety, security, it helps you sleep at night. It actually makes you happier with your money, helps you tuck your kids in bed and say, "Hey, we're going to be okay. No one can take this away from us." Even if you can't justify it on paper, in a spreadsheet, there are things like that that I think are actually wonderful things to do with your money, because they're the most reasonable things you can do, even if they're not rational.

Anthony Scaramucci: (16:49)
Talk about the hamster trail. And what do I mean by that? You're up on that hamster, circulating, you're always trying to catch the person ahead of you and you have that wanting for more, that expectation that you're talking about. When I was a kid, I grew up with no money, now by the grace of God and some hard work, I've lived a good part of the American dream, but you always have that pressure on you. And then conversely, and I know a lot of people that grew up the way I did, you always are staring at your bank account and you're wondering ... Chris Rock had like this great line, Morgan. He was like, "I'm in this beautiful house in Alpine, New Jersey, but I have a bag packed by the front door because I'm waiting for somebody to knock on the door and say that the house really isn't mine and I have to leave." It was something I really related to as a blue collar kid.

Anthony Scaramucci: (17:36)
So explain that because I think you do a great job of that in the book. How do you get off the hamster trail? How do you accept your wealth and social status? How do you immobilize your ego, if you will?

Morgan Housel: (17:48)
I think there's two of this. One, we have to recognize that the hamster wheel is actually what makes the economy work. The fact that virtually none of us, no matter how much we have, the fact that it doesn't feel like enough is what gets us waking up in the morning and going out and trying to make the world better, build new businesses and keep going. So in one sense, it's phenomenal. If everyone wants their net worth to hit a million dollars, if everyone quit working, the economy would go nowhere of course, we wouldn't have anything. So in one sense, it's good, we shouldn't fight against it. At the individual level, I think if you're trying to manage your expectations, managing your ego, to me, the biggest revelation for me is realizing how little people actually care or think about the stuff that you have.

Morgan Housel: (18:25)
No one is thinking about you, no one is thinking about your image, no one is talking about the cars you have or the house you have, more than you are. I use this example in the book, when I was in college, I was a valet at a really nice hotel in Los Angeles. And I realized that, look, if someone drove into the hotel, driving a Ferrari, I would never look at the driver and think, "Wow, I want to be you. You're cool." What I would think is, "Wow, if I was sitting in the car, people would think I'm cool." I never thought about the driver, I thought of myself in the drivers seat.

Anthony Scaramucci: (18:54)
That's because they weren't in a Rolls Royce though, Morgan. What if they were in a Rolls Royce?

Morgan Housel: (18:58)
Well, then that's a different story.

Anthony Scaramucci: (18:59)
I'm kidding, I'm kidding.

Morgan Housel: (19:00)
Look, I never, and this is true to today, I never think about the person driving the car, I think what people would think about me if I was driving the car. And that fundamental irony is just driving home the point that no one thinks about you more than you. And once you could really grasp that, it's a difficult thing to do, but once you grasp that, then I think it goes a long way in keeping your ego in check. And for me, it's also been, well, okay, if the Ferrari is not what I want and look, for me, it actually is, I love cars, this is not a plea to live like a monk. But if that's not what I wanted, what am I going to do with my money? To me, it's always been using money to control my time, control my schedule, doing what I want, when I want, with whom I want, for as long as I want to, that is going to give me a lasting level of happiness and joy with my money, more than almost anything material will. So that's what I want to use my money for.

Morgan Housel: (19:53)
Once you realize that people don't care about you as much as you do, but being able to control your calendar, being able to wake up every morning and say, "I can do whatever the hell I want to do today." That is going to give you way more happiness than driving the Ferrari will. Then that, to me, has been how I've personally tried to keep my ego in check, but it's the hardest thing in the world. It's so natural to think that if you just have X dollars more, then your happiness is going to rise by the same amount, or if you have X dollars more, then you'll finally feel satisfied, that's the most common, natural feeling in the world to the level of wealth that you have.

Morgan Housel: (20:22)
That's so difficult to fight against, even if we know it's important, because again, your only ability to be happy with money is just a gap between what you have and what you expect. So we always talk about how can we grow our wealth? How can we grow our income? And of course that's important, but we also need to focus on how can we maintain our expectations because if we don't, then it's never going to feel like enough.

Anthony Scaramucci: (20:41)
So I have one last question for you before I turn it over to John Darsie because we have a lot of questions from the audience filling the queue. And this is related again to something in the book. Is there an evolutionary perspective on why people are easily swayed by pessimism, pessimistic views of the world, when history is actually showing the very opposite, that we've had steady progress, yes, bumps and scrapes along the way, but if you look at a stock chart or evolution or medical technology, it seems like there's a steady progress upward. Why are we so pessimistic?

Morgan Housel: (21:16)
I think there's two reasons why that is, why pessimism is so seductive, even if we know historically that optimism is a better bet. Why does that pessimism usually sound like someone trying to help you? If you read a pessimistic book, a pessimistic headline, it's warning you, "Hey, there's a danger in your life and I'm trying to help you so you don't get hurt." It sounds like someone trying to help you, so you're much more willing to say, "Oh, I should listen to this person." Whereas, optimism often sounds like a sales pitch, "Hey, you can make a lot of money on the stock. There's this big reward down the street." It makes it sound like someone's trying to pull your leg. So I think we are naturally inclined to just be more skeptical of the optimistic views and pay more attention to the pessimism, the pessimistic views.

Morgan Housel: (21:53)
The other reason is that there are lots of overnight tragedies. Things can fall apart in an instant. Things break overnight. COVID-19 September, 11th, for example. But there's almost never overnight miracles. Progress, even though it's more powerful than the setbacks that we've had, much more powerful, we've had so much growth over time, the progress happens slowly. It happens incrementally, 2% per year, which if you compound that over time, is extraordinary, but the setbacks happen overnight. So since setbacks happen so quickly, we can't ignore them. They're in our face, they're in the headlines blaring, what happened today, what happened yesterday. Whereas, the progress is much slower burn over time, even if it's more powerful. So I think that's why, if you have any sense of history, you should be an optimist over time, over a long period of time, but it's so common to get pulled into the allure of pessimism.

Morgan Housel: (22:43)
To me, this has always been from just a practical standpoint of how to deal with this, has always been save like a pessimist and invest like an optimist. I want to save like a pessimist because I know that things are going to hit the fan every month, every year, the world is going to break once a decade because that's always what's happened over the course of history. But I'm an optimist in the long run because I know that people are going to solve problems, figure things out, companies will be profitable and it will accrue to me as an investor. So it's just that Barbara Bell approach to thinking about the future of the world.

Anthony Scaramucci: (23:10)
Very good, Morgan. Let's turn it over to John. He's got lots of questions from our audience.

John Darsie: (23:15)
Including the audience of me. I have questions for you, Morgan. As I mentioned, I've read you over the years and you did a great job in the book of taking a lot of your writings and distilling it down. And you talk a lot about compounding in your regular writings and in the book and about how time is really your most important weapon as an investor and you use the example of Jim Simons versus Warren Buffett. Could you go into more depth about that anecdote in your book, it crystallized in my mind and I think it crystallizes in other people's minds about the value time and compounding and investing.

Morgan Housel: (23:48)
So here's what's really interesting about Buffett. So he's 90 years old, he's worth about $90 billion today. If you look at the trajectory of his life, 95% of Buffett's net worth came after his 55th birthday, the majority of his money has come in his elderly years. And even if you were to say, after age 70, way more than half of his net worth came after age 70, which is just how compounding works. Compounding is always a thing where the gains in early years look minuscule and then a medium years they get big and then in the later years they just explode to something extraordinary.

Morgan Housel: (24:19)
So I use this hypothetical example in the book, Buffett started investing when he was 11 and now he's 90. Let's say hypothetically, he was like a normal person and he started investing at age 25 and he retired at age 65, like a normal person. And let's assume that he earned the same average annual returns, 22% per year, during that period. What would his net worth be if that were the case hypothetically? It's not 90 billion, it's 12 million, that his net worth would be. If Buffett retired at age 65 like a normal person, you would have never heard of him. He would never have become a household name, he would have been a successful investor. But the reason that he is so successful in dollar terms is specifically tied to the amount of time he has been investing for.

Morgan Housel: (24:57)
And I use the example of Jim Simons of Renaissance Technology, whose average annual returns are triple what Buffett's are. The average annual returns of the medallion fund are over 60% per year. So he is, on an annualized basis, way more successful than Buffett, but Buffett is much richer than Jim Simons just because he's been doing it for so much longer. And I use this ridiculous example and I'm warning you that it's a ridiculous example to say, let's say if Jim Simons had earned his 60% annual returns for as long as Buffett had been investing for, let's say Jim Simons started investing at age 11 and continues through age 90 and earned a 60% returns. What would his net worth be hypothetically? And the ridiculous answer is something like 60 quintillion dollars, it's something absurd that's hard to even wrap your head around.

Morgan Housel: (25:46)
So I think compounding, even if you are a smart, mathematically minded person, it's just not intuitive. It's not intuitive to think that 95% of Warren Buffett's net worth would come in his elderly years. Even if you understand compounding, you can explain it to a five year old, it's never intuitive how it works. And so I think someone like Buffett, is he a great investor? Of course, period. But his skill is investing, but his secret is just time. The secret that explains his net worth is just the amount of time he has been investing for. And that's true for all of us as well. It's not comfortable to hear that if you're already 70 or 80 years old, but we have to realize where the gains come from, is less about what we're doing in any given year, even our average returns over our life and more of just how long we've been doing it for. That's true for people, it's true for investing, it's true for companies, it's true for nations, it's true for careers, that time is really where you get the big leaps in outcome.

John Darsie: (26:38)
I think it was Bill Gates that said, you'd be hard pressed to accomplish much a year, but over 10 years, you'd be surprised at what you can accomplish. That's been attributed to multiple people, but I think the same thing applies in investing.

Morgan Housel: (26:50)
And Buffett would say, you'd be surprised what you can do in 70 years. That's where the ridiculous gains come from. And there's so many people who, like I mentioned, there are 2000 books on Amazon that are devoted to how did Warren Buffett do this. And they go into grand detail about moats and business models and how he thinks about markets and economies. And to me, it's always been, you can explain Buffett's success and I'm generalizing here, but I think this is generally true, you can explain the majority of his success pretty simply. He's a pretty good private equity fund investor, who doesn't charge fees and he's been doing it for 70 years. That's how you explain Buffett. That's where it comes from. If you were to compare his returns against another fund that charges two and 20 and has been doing it for five years, of course, Buffett's going to blow them out of the water, just because of those simple things. But those explanations, they're too simple for people to take seriously and they're often not intuitive.

John Darsie: (27:39)
And he and Charlie Munger, had a third partner early in their business career, that you don't hear anything about. Why is it that you don't hear anything about that third partner?

Morgan Housel: (27:48)
So everyone knows about Buffett and Munger, they've become household names. But if you go back to the 1970's, there was a third guy in that group named Rick Guerin. And Rick Guerin was just as involved with Warren and Charlie in terms of doing deals for Berkshire Hathaway, he was part of the crew. They talk about when they bought See's Candy, Rick Guerin was the one interviewing the CEO of See's Candy, he was part of the Berkshire crew and you don't hear about him anymore. And what happened, from what I understand, speaking with different people who had heard the story from Buffett, is that in the 1970's, Rick Guerin used a lot of margin and when the stock market collapsed in the 1970's, he got wiped out.

Morgan Housel: (28:29)
And the way that Buffett explained this to a hedge fund manager named [inaudible 00:28:33], who told me this story, was that Warren and Charlie always knew they were going to be rich. They knew it was going to happen, so they weren't in a hurry. They were not in a hurry to get rich. They saw it as inevitable, so why rush it. Whereas he said Rick Guerin was a little bit more in a hurry, he wanted to get rich fast, so he used a lot of leverage to get there. And that was his undoing, so to speak. So he's still around, he's still investing, just not with the success that Warren and Charlie had, he didn't become a multi-billionaire like they did. Which to me, it just gets back to investing, how it really works, it's just a matter of time. And if you're trying to speed that time up, if you're trying to cheat the system and say, "Well, look, I don't want to wait 30 years. I want to get those returns in the next two or three years." That's the opening line of a lot of horror stories in finance.

John Darsie: (29:21)
You're also a big advocate, both in your personal investing and explaining things through data, of dollar cost averaging, both from a long-term returns perspective, as well as a psychological perspective. Anthony was talking about the relationship between fear and greed and there's always, and we've all experienced it if you've ever invested capital in markets, there's that twinge of regret you get when you don't pick a bottom and when you sell something before it tops. You say, "Man, if I had just waited a couple more weeks to get in." I think probably people felt this in March as well, either buying the dip early and with that big drawdown we saw as a result of the pandemic and then as the markets run away in the subsequent months. But why is dollar cost averaging so important from a psychological perspective, to keep you invested in markets and how does it help determine returns over time?

Morgan Housel: (30:08)
I think there's two parts of it. One is just having humility in our ability to forecast and 2020 is probably the best example of that. If you go back to January, no one of course was saying, "We're going to have a pandemic that's going to shut down the global economy and crash the stock market by March." And if you go back to March, no one was saying, "Stocks are going to surge to new all time highs by August." If 2020 has not made you humble about our ability to figure out what's going to happen next in markets, I don't think anything will. So there's that element to it. There's also just a sense of, if you understand the emotional side of investing, that we are likely to make the worst decisions at the worst possible time, then any way that you can systematize your investments and rather than saying, "Okay, I'm going to invest when the stock market does this, when I think the economy is going to do this next."

Morgan Housel: (30:50)
If you're going to say, "Look, I'm going to invest the same amount of money on the same day of every month, regardless of what's happening in the economy or in the stock market," and just systematize it like that. Then you have fewer knobs to fiddle with, fewer levers to pull, fewer just booby traps to screw you up over time, you're going a long way to take the emotion out of the equation. Not 100% because even if you have a dollar cost averaging strategy, you can break it at any time. So it's not a fail safe, but I think anything you can do in investing for professionals or individuals, anything you can do to try to remove the emotions from it, to the extent that you can, is going to pay off over long periods of time.

Morgan Housel: (31:27)
There's this other element to me too, that I write in the book and I'm pretty open about this, I'm mostly a passive investor. And look, does that mean that I don't think that people can outperform the market? No. Does that mean that I don't think people can pick the best stocks or that there are talented hedge fund managers? No, not whatsoever. But if you look at the statistics for, let's say, actively managed mutual funds, over a period of time, 90% will underperform. And that statistic has usually been used as an indictment against the industry, that 90% trail their benchmarks, that means the industry is failing. I've never viewed it that way at all, I view it as that's how it should be. What world do you live in, in which you would expect the majority of people trying to become stupendously rich in the stock market are able to do it?

Morgan Housel: (32:12)
There's no other area in life where that's the case. Think about what percentage of college athletes make it to the pros? I don't know the figure, but it's probably like 2%. Let's say it's something like that. No one would say college athletics are a scam, college athletics are failing because only 2% make it to the pros. People just know, making it to the pros should be extremely hard and if you get there, it's because you're the tippity top of your class. I view actively managed investing as the same way, it should hard, the majority of people should fail at it. So that's why I think to me, dollar cost averaging in a more passive approach, is often viewed as a very conservative form of investing. But if I have a high degree of certainty that over a period of time, I'm going to end up in the top decile of all investors, it doesn't look that conservative to me. So that's where the hands off, taking the emotions out of it, is actually a way that I think you can make yourself an above average investor.

John Darsie: (33:05)
So your advice based on the data, would be that people are better off as passive investors, as opposed to trying to be stock pickers. I remember there was a study that was done by a brokerage house, I can't remember which one it was, about which accounts perform best over the long term. And what they found was they found a group of accounts that were performing above average relative to the rest of their audience and the people, once they distilled it down, it was actually people that had died that hadn't serviced their accounts and their accounts had been invested passively for a long period of time, without anybody making emotional decisions. I thought it just crystallized in my mind, the themes that you're talking about.

Morgan Housel: (33:45)
And one tweak I would make on your comments is that it's not necessarily my advice, it is what works for me, given my goals, given my risk tolerance. I know if I can do that strategy and hold it for the next 50 years, I'll be able to achieve every financial goal that I have and then some. But look, it's completely different if you are a pension, a foundation, if you are a hedge fund manager, you have different goals, different risk tolerance. This is different for everyone. So that to me, is one of the biggest pieces of advice that I have in the book, is that people do different things with their money and it's not because we disagree with each other, most of the time that's not the case. It's because we all have a different view of the world, we've seen a different side of the world, we have different goals, different risk tolerances and just the idea that rational, educated people can and do disagree in investing.

Morgan Housel: (34:29)
So I would say that's what works for me, but I also know there are people for whom they can not look themselves in the mirror in the morning, if that's how they invested, or they would not achieve their goals and their risk tolerance is if that's how they invested. So it's different for everyone.

John Darsie: (34:40)
Yeah. Ultimately you have to marry the two themes that Anthony mentioned earlier, developing a healthy relationship with money, with how do I, within that framework, develop strong returns as an investor. And you can't de-link those two items, they're inexorably linked, and you have to marry them together for your own personal happiness and psychology.

Morgan Housel: (35:02)
Right. And that changes over the course of people's lives as well. I'm 36, so writing this book today, are there going to be things that I disagree about in 20 years if I go back and read it? Probably. There are going to be things that I've learned in life, I'm going to have different goals, my kids will be moved out, everything is going to change. So the idea of being a long term thinker and being committed to an idea, but also being open minded to the idea that not only the world changes, but people change, people's own goals and values, what they want out of life, changes too. It means we're all going to keep making different decisions with our money, not just rebalancing into different assets, but just a completely different view of how we think the world works over time.

Morgan Housel: (35:39)
Almost no one has a fully formed view of how the economy and the stock market works when they graduate college, that they're going to stick with for the rest of their career. We're all just learning how this works. And as 2020 showed us, big fundamental assumptions that we have about the world, can be completely thrown out the window on a moment's notice, like happened this year. So of course we just have to be flexible with our views over time and it makes the, pound the table, this is how the world works, this is how we should always do it, we just have to be a little bit more flexible than that, I think.

John Darsie: (36:10)
Switching gears a little bit and talk about your writing process. So you talked earlier in the talk about how important it is for people to get their ideas down on paper and it might take ideas that are bouncing around in your brain and allowing you to crystallize them in a productive way by writing. How did you start writing? How did you develop such a passion for writing? What's your process for writing? I think there's a lot of people, I do some writing as well, so a lot of people experience writer's block or they sit down and they have a hard time getting started, but if they regularly wrote things down, it would help them achieve some clarity in their thoughts. What's your process? How would you recommend to people starting a process of writing for their own benefit?

Morgan Housel: (36:50)
Here's two things, it took me a long time to learn these, but these have been the most important realizations I've had as a writer. One is that writer's block, which happens to everyone, is usually a reflection of your ideas, it doesn't reflect your ability to write. If you get writer's block it's because your idea is bad, 99% of the time that's true. Good ideas are very easy to write for everyone, bad ideas are very hard to write for everyone. So if you find yourself stuck in the writing process, I would not examine your writing ability, I would examine your core thesis of whatever you're writing about. That's almost always the case for me. And whenever I'm writing and I get stuck on something, I try as hard to be as honest with myself as I can and say, "Do I just need to abandon this idea?" If I can't figure out a way to say it, that's probably because what I'm trying to say, doesn't make sense.

Morgan Housel: (37:36)
The second thing that's been helpful for me, is for me, when I write I'm writing for an audience of one, I'm writing for myself. I call it selfish writing, this idea that I only want to write things that I myself am personally interested in. I'm not trying to say, who's the audience, what are they going to be interested in? I only want to write stuff, almost like a diary sense of, this is for me. And I take that as a leap of faith, that if I'm interested in something, other people will as well.

Morgan Housel: (38:01)
Because if you do that, there's two things that come from it. One is you're always going to do your best work when you're actually genuinely passionate and interested in what you're writing and I'm not being forced to write this idea or because I think someone else might think it's cool, but I think this topic is cool, so I love researching it, I love writing it. That's when you do your best work. The other thing is when you're writing it, since I'm writing it for myself, I'm always asking myself, "Does this sentence add anything? Do I personally get anything out of that sentence or this paragraph?" And a lot of the time the answer is no, so take it out. If I'm writing for myself, then I'm only going write things that are benefiting me as a reader. So I think just viewing it through that lens has been very helpful for me.

John Darsie: (38:42)
Fantastic. Morgan, thanks so much for joining us. We'd recommend everybody who's on the talk, if you haven't already, go out and buy his book, Psychology of Money. I know Anthony ordered it for our entire office, we're investment professionals, but I think both he and I are attracted to the simplicity of your writing, the simplicity of your ideas. Again, not as advice, but for people to understand, based on history, what has helped people succeed in driving investment returns and what's helped people succeed in terms of developing a healthy relationship with their money. Anthony, do you have any final words for Morgan?

Anthony Scaramucci: (39:13)
Just Morgan, thanks for joining us. And I'm just encouraging the young people, we get a tremendous amount of young people on these SALT Talks, please go out and get Morgan's book. Read it, take notes, and it'll be infinitely beneficial to you in your investing career. Morgan, thank you very much for coming on with us.

Morgan Housel: (39:35)
Thank you so much for having me. This has been fun. Thank you.

Anthony Scaramucci: (39:38)
What else have we got coming up John?

John Darsie: (39:38)
Thanks for putting up with all of Anthony's immature antics as well Morgan, we appreciate that.

Morgan Housel: (39:44)
That's part of the package.

Anthony Scaramucci: (39:47)
We only talked about syphilis, we didn't talk about the White House and what Sarah Huckabee said about me, we just talked about syphilis, not a big deal.

Badr Al Olama: What's Next for Aerospace? | SALT Talks #56

“It doesn’t matter how industrialized your country is: when it comes to Mother Nature, the impact is holistic.“

Badr Al Olama is the Executive Director of Aerospace for Mubadala Investment Company, a global investment company with a mandate to create sustainable financial returns for Abu Dhabi. He oversees key portfolio assets including Strata Manufacturing, where he served as Chief Executive Officer at the age of 32, and Nibras Al Ain Aerospace Park, a development supporting the establishment of a sustainable aerospace industry in the Emirate.

“It took an act of God, a real force majeure event, to make us all want to stay at home.” Prior to COVID-19, scientists warned that the world was past the point of no return with climate change. The pandemic showed us what was possible through a coordinated, concentrated effort to change the way we live our lives. GMIS, the Global Manufacturing and Industrialization Summit established in 2015, is now relevant as ever in its pursuit to harness the Fourth Industrial Revolution’s transformation of manufacturing to the regeneration of the global economy.

The Mohammed Bin Rashid Initiative for Global Prosperity, a GMIS initiative, is pushing its parent organization’s goals even further. TruTrade, a winner of the Global Prosperity’s Cohort I, sources markets, sets prices and pays rural small-scale farmers in Africa using mobile money. Runners up included StixFresh, a company developing technology to reduce food waste via all-natural and safe methods.

LISTEN AND SUBSCRIBE

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SPEAKER

Badr Al Olama

Executive Director of Aerospace

Mubadala Investment Company

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi, everyone. Welcome back to SALT Talks. My name is Rachel Pether. I'm a senior advisor to SkyBridge, a global alternative investment firm, as well as the MC for SALT, a global thought leadership forum and networking platform encompaning finance, technology and politics. SALT Talks is a series of digital interviews with the world's foremost thinkers, creators and investors. Just as we do at our global SALT events, we aim to empower big, important ideas and provide our audience a window into the minds of subject matter experts. We are very excited today to welcome Badr Al-Olama to SALT Talks. Badr is the head of Mubadala Aerospace, where he oversees key portfolio assets including Strata Manufacturing and Nibras Al Ain Aerospace Park. Nominated as a young global leader for the Middle East and North Africa by the World Economic Forum, Badr heads the organizing committee for the world's first Global Manufacturing and Industrialization Summit, GMIS, a joint initiative between the UAE government and the United Nations Industrial Development Organization. Badr is the chairman of Sanad Group, Sanad Aerotech, Sanad Capital, Sanad Powertech and Strata, and is a board member of the UAE Space Agency as well as a member of the UAE Ministerial Council, focused on the Fourth Industrial Revolution. If you have any questions for Badr during today's talk, please just enter them in the Q&A box at the bottom of your video screen. And with that, Badr, welcome to SALT Talks.

Badr Al Olama: (01:43)
Thank you for having me, Rachel.

Rachel Pether: (01:46)
We have a lot to discuss today. But before we get to that, I'd like you to tell me a bit more about your personal journey. I know that you started your career as a lawyer, but have you always been interested in aerospace and technology?

Badr Al Olama: (02:00)
No. I mean, I started off as a lawyer and I practiced for two years before I went to Harvard Law School. By the time, Harvard was an incredible experience. I met incredible people, listened to great professors that were sort of subject matter experts in everything that I did. Just before I graduated, I got an opportunity to actually join Mubadala in Abu Dhabi. By the time I joined, this was sort of a career shift, right? I met, at the time, with one of our senior leadership members who told me very simply, he said, "Look Badr, you're going to come here. We don't want you as a lawyer. We want you to start thinking about project development and business development and finance." So I just started from scratch, right?

Badr Al Olama: (02:42)
I did my CFA Level One. They mapped up my career pretty sort of profile, that I would start working on a project, I would run the project, and then eventually I would come back and work on another project. And if you look at sort of my career trajectory, that's exactly what happened. I worked on Strata, which is an aircraft parts component manufacturer in the Emirate of Abu Dhabi. I became the CEO at age 32. I run that business for about six years before coming back and managing the portfolio for aerospace. So I didn't really pick that I wanted to do aerospace, but one thing was for sure that I would enjoy innovation, I enjoyed manufacturing, I enjoyed new things. The experience that I had between being a lawyer and joining Mubadala, actually gave me that opportunity.

Rachel Pether: (03:30)
I mean, you don't look a day over 35, so that's also impressive. I do want to speak a little bit more about Mubadala, but also focus on innovation in the aerospace and manufacturing sectors. I know that you hosted GMIS earlier this month, and you launched something called the Green Chain Initiative, which I thought was really interesting crowdsourcing platform using blockchain technologies. Can you tell me a bit more about that and maybe about the rationale behind it?

Badr Al Olama: (03:58)
Sure. Let me start off by just giving a background about what GMIS is. I mean, GMIS was established in 2015. It was established really to be a platform that can actually bridge between governments, private sector, civil society, to shape the future of manufacturing. And this is during the time that we all hear a lot about the fourth industrial revolution. Our first summit happened in Abu Dhabi in 2017. The next one happened in Russia in 2019 and the third one, which was supposed to happen in Hanover, Germany, because of COVID, we had the choice to make. Either we postpone, or we decide to go virtual, right? You can't really be preaching the power of 4IR, and not go virtual. So we decided to go virtual on this one. What I wanted to say about sort of GMIS as a platform, we didn't want to make it a sort of a talking shop. It was great that people were coming together, talking about the future of manufacturing. You listen to heads of state, you listen to CEOs. We wanted to make sure that we could leave a legacy.

Badr Al Olama: (05:00)
So in 2017, we launched the Making Prosperity Initiative, which was named after the UAE vice-president, prime minister and ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum. In 2019, obviously listening to President Putin speak about nature inspired technologies that will be less resource intensive and more eco-friendly, we launched the President's Challenge, which was about crowdsourcing research papers on nature's biotechnology. And taking things on the same sort of track, that's where we came up with the Green Chain Initiative. The Green Chain Initiative is about developing green supply chains that would basically crowdsource renewable energy projects, that would power manufacturing facilities and potentially mine cryptocurrencies. So it's very inclusive, it's very sustainable. And I say inclusive because it doesn't matter if you are from a fossil rich country or a renewable energy rich country, it's about the entire world. It's about decarbonizing industry. It's about using 4IR for global good. It's about clean energy, something that's super important to our world today. And it's about social responsibility, something that both Germany and the UAE have demonstrated in action, not just by words.

Rachel Pether: (06:14)
So tell me more about the mining for cryptocurrencies. That's part of the initiative as well.

Badr Al Olama: (06:22)
I got a lot of questions about that, and a lot of people got excited about that. But think about it in simple format, right? Companies that are going to be investing in either greening their facilities or greening their products, need to be rewarded somehow. So our thought process behind it was, when we develop or crowdsource these renewable energy projects in different parts of the world, any excess energy, potentially can be used to mine cryptos. Those cryptos can eventually either upgrade infrastructure for stuff like hydrogen. They could convert fossil-based facilities to actually adopt more environmentally friendly technologies, and they could actually be used to purchase products. But in essence, I'm very optimistic about it because I really think that the Green Chain Initiative has a genuine opportunity to tackle climate change. It's disruptive, and it's transformative. It's exactly what you need in terms of actually tackling climate change, something disruptive and something transformative.

Rachel Pether: (07:20)
And I love the way it was launched. Manufacturing some of this, as you say, a sustainability summit or something like that, it just shows that the integration between the two. You actually briefly touched on the Prosperity Initiative or the Prosperity Challenge. Can you tell me a bit more about that initiative? Because I think you've announced some of the winners for that recently as well.

Badr Al Olama: (07:45)
Well, let me tell you a story. I mean, back in 2018 when we first launched our first cohort on it, one of the four challenges that we launched and basically... Let me start off. The Making Prosperity Initiative is about developing an open innovation platform, where we're trying to create a maker community that will solve problems that are related to the sustainable development goals of the United Nations. So back in 2018, two years ago, we launched our first cohort. And one of the challenges of the first cohort, was to do with sustainable cities. The challenge was specifically finding solutions that can stop or prevent the spread of an infectious disease or a pandemic. Talk about foresight, right? Fast forward to 2020 today, some of the solutions that actually came out of the submission of the 2018 challenges, are actually on the ground today. They're trying to figure out ways to map out where the spread of the disease is happening, in which community. They've come up with rapid tests. So that was all on our first cohort.

Badr Al Olama: (08:47)
The second cohort, we said, "We need to take it a step further." What we did is we launched four different challenges. One had to do with healthy and sustainable food, peace and justice, inclusive trade, and of course, climate change. So what ended up happening when we posted those four challenges based on the track record that we got on the first cohort, we got over 3,400 solutions, from almost 150 different countries. And the interesting part was, that one out of five solutions, came from the developing world. In the developing world, where you see a lot of these problems, actually a lot of the solutions exist, but you don't have the communication going on between them. What was exciting was that we worked with MIT Solve and we worked with 47 different subject matter expert judges to not just identify the four winners, and the winners were based on scalability, on impact, on feasibility, but this time, we wanted to take four disruptive runner-ups and link them up with global organizations for mentorship and guidance. And we're developing another program with the University of Cambridge. So you see that not only as, let's say, GMIS is bringing the world together and acting as a bridge and trying to communicate about the future of manufacturing, we want to leave an impact that's on the ground, that's real and that makes a considerable difference to people's lives.

Rachel Pether: (10:11)
And can you talk me through some of the examples from that? So one of the solutions that you're planning to take further through this network and the mentorship program.

Badr Al Olama: (10:22)
I mean, let me give you one of that. One of the winners was a startup called ColdHubs in Nigeria. And what ColdHubs does, it's a solar-powered cold storage solution, which stores the produce that is obviously created by the farmers in the rural world, so in pretty much in Nigeria. The concept behind it which was so interesting is that one fridge can support an entire neighborhood, without the use of electricity, just by using solar power. But the disruptive one that I'd like to talk about, is a company called Stixfresh. And this is basically a sticker that is put around produce, maybe an apple, whatever kind of fruit, and it slows down the spoilage process. So it keeps fruit fresh longer. I mean, these are kind of the disruptive things that we're... It's not something that we created, it exists. We're putting the spotlight on it so that the world knows that there are innovative ideas that can actually provide solutions to some of our biggest problems.

Rachel Pether: (11:24)
And I also want to talk a bit more about how the pandemic has impacted your role in Mubadala Aerospace too. How have you seen the activities over the past few months, sort of highlight the need for such an agenda or such an urgency?

Badr Al Olama: (11:41)
That's a very good question. Look, just before the pandemic sort of disrupted everybody's lives, we were causing so much damage to the environment that we were even being told that this damage is irreversible. We are on a crash course towards destroying the entire world. Even if the entire forces of our world came together, let's talk about all the governments agreeing and saying, "We need to put people at home to make them stop traveling by cars or by planes," it's not going to be possible, right? I said this before and I keep repeating it, it took an act of God, a real force measure type of event, to make us all want to stay at home. And what did you see out of that? Clear skies, cleaner air, even wildlife coming back.

Badr Al Olama: (12:28)
And you start thinking about the sync. At one point in time, eventually, this pandemic is going to end. And we're going to ask ourselves, what did we learn about this? And I want to say that, one thing we learned for sure, it doesn't matter how rich or poor your country is. It doesn't matter how industrialized or underdeveloped your country is. When it comes to mother nature, the impact is holistic, right, and it's very forceful and it's pretty much unpredictable. So again, I go back to the sort of my upbeat and my optimism about the Green Chain Initiative. I'm so optimistic about it because I really feel that this could be that one step forward where the youth of this generation can actually start working on the Green Chain Initiative, because they are the ones that are going to remember always that this pandemic almost stole away their future. We cannot put ourselves in the situation ever again.

Rachel Pether: (13:26)
I guess now the honours is on us to make sure we maintain the, I guess, environmental advancements that have happened over this short pandemic period, and not revert so quickly to, I guess, the old life that we used to live in terms of-

Badr Al Olama: (13:42)
100% technology, Rachel. We should be embracing technology as a means to saying, if technology can do so many great things for us, why can't we use technology in our sort of, let's say, our mission to tackle climate change?

Rachel Pether: (13:57)
Absolutely. Another area that was obviously quite impacted through the pandemic was aerospace, where you're the head for Mubadala. How have your portfolio companies responded to COVID-19? Have you been able to adapt your business models accordingly?

Badr Al Olama: (14:15)
Well, mixed feelings there. I'm heartbroken for what's going on with aerospace at the moment. It's a very sort of sad story, but one thing we should never forget is that unless our world finds a better way for me to travel, let's say, to where you are at the moment in Switzerland, or to New York, there is no other way except by going through air or by through going through an airplane, right? You're not going to go by boat, you're not going to go by road. You're going to go by airplane. The fact is, airplanes are here to stay. Now, what I did when this whole thing started unfolding, and I was reading in the newspapers, it was going from bad to worse, I got sort of the three CEOs, the three main CEOs that I have. The CEO of Strata, which makes aircraft parts, the CEO of Sanad Aerotech, which actually maintains engines for the airlines, and the CEO of Sanad Capital, which actually leases spare engines and spare components to the airlines.

Badr Al Olama: (15:10)
And I told them upfront, "Guys, we need to hope for the best, but we need to plan for the worst. And I do see the worst coming." This is probably in around the February-March timeline. One thing that I'm very proud of, is that all three CEOs have managed their businesses through this crisis in a super professional way. They've managed to sort of rework their business model. They've managed to stay close to their customers and their suppliers. And more importantly, they've managed their liquidity in a way that sustains this business over the longterm. One of our businesses, Strata Manufacturing that makes aircraft parts, actually repurposed the workforce to start producing essential N95 masks. Now, think about this. Countries were banning the export of N95 masks. Countries were banning the export of the equipment that could make N95 masks. Even the material that was going in that N95 mask, countries were saying, "No, sorry. We're going to keep everything in-house. You go figure yourself out, right?"

Badr Al Olama: (16:11)
And as sad as the situation that the world couldn't work together to help each other, because... The UAE is not that far off, but think about cases like Africa that were probably suffering as a result of this pandemic spread. True partnership always prevails. What happened here is we stepped in with Honeywell, with the Chinese government who also supported us in getting the equipment, in getting the material, in getting the capabilities, so that we could produce the N95 masks in the UAE. And guess what? The UAE started exporting these N95 masks to other countries as well, because we're not going to ban it on other countries. And we exported to Japan and the United Kingdom. Think about that, right? The UAE is now a net exporter, as opposed to just consuming those N95 masks, off something that was so critical and so essential during the pandemic

Rachel Pether: (17:00)
And in such a short turnaround time too. I mean, I imagine it was quite difficult to change the whole manufacturing and production line.

Badr Al Olama: (17:09)
We actually added the production line and it was in 30 days. It took 30 days of, I'll tell you, sleepless nights, a lot of pressure from the leadership. But like I said, Honeywell, and the support of the Chinese government, truly prevailed in a situation where we were vulnerable and they stepped in and they supported us in actually making this happen for our economy and for our people, to make them feel safe.

Rachel Pether: (17:33)
That's fabulous. I really liked that story. And just sticking with aerospace as well, you could argue that the holy grail for aerospace, well, at this point in time, anyway I know it's ever evolving, is the race for Mars. The UAE had its historic first mission to Mars, a successful liftoff in Japan a couple of months ago. Why is it so important for the UAE?

Badr Al Olama: (18:00)
Let me start off by saying, maybe the holy grail for space is the Mars Mission. The holy grail for aerospace is probably flying green and cutting those CO2 emissions and hopefully one day, all of us can fly in an airplane that is either fueled by batteries or by fuel cells. I mean, that's pretty much the future. But going back to the Mars Mission, I mean, think about it, the UAE is a very young country, very large ambitions, one of three countries that launched the Mars Mission, the US and China being the other two, during the worst year ever that is plagued with just a disruption that's going on with the pandemic. And to be able to actually get that Mars Mission successfully launched, was a feat in itself, right? And that just proves the point. Where there is a will, there is a way. I think that was the first learning that we got out of it. The second learning that came out of it was, when we started letting the whole aspect of what this Mars Mission was about, settling, going and trying to understand the environment around Mars, trying to understand the weather patterns, trying to figure out why is it losing hydrogen or oxygen, and then sharing all those findings with the space community, that is truly a reflection of the UAE DNA. We are willing and ready to work with anyone for the greater good of humanity.

Rachel Pether: (19:20)
And as a UAE citizen, how did you feel when the Hope Probe was launched?

Badr Al Olama: (19:26)
Personally, I mean, I felt very proud. I felt very proud. I felt more determined to do hopefully better things for my own country. But it also kind of reminded me about some of the big milestones that the company I work for, Mubadala, established for both Abu Dhabi and the UAE. It reminded me about when we first established the aircraft parts component manufacturer. The first in the region, in Abu Dhabi. It reminded me about the three satellites that we launched through YahSat. It reminded me about the world class hospital that we established in Abu Dhabi with Cleveland clinic. I mean, these game changing initiatives that Mubadala established for Abu Dhabi, are just examples of how impactful we have been over the past at least 15 years since I've been with the company. And you know what's interesting, Rachel? In my personal belief, this is just the beginning. Why do I say this is just the beginning? Because we are planning today for the next 50 years of achievements.

Rachel Pether: (20:24)
Yeah, certainly one thing that's always impressed me about Mubadala has been, they've always managed to maintain this entrepreneurial spirit regardless of the actual size of the company. And as you mentioned, you've had so many milestones in your 15 career already. And actually I'd like to tie that back into something you mentioned that the holy grail for the aerospace would actually be to fly green. Is that something that you're working on? I guess, does that kind of form part of the Green Chain Initiative as well?

Badr Al Olama: (20:54)
I mean, from an investment perspective, we're always looking at new opportunities. And I do think that the new opportunity in aerospace is going to be the disruption that could be caused as a result of actually going green on inches. Now, do I really think that we're going to find a solution on flying electric very soon on commercial platforms? Maybe not, but there is a middle step here. Biofuels, and you see what Etihad is doing with Boeing and what else have been developed through biofuels and it's flying at least cleaner fuels in its planes. And I think that is sort of a stepping stone towards going electric. Electric will come. I do believe it will come in the form of fuel cells through potentially harnessing the power of hydrogen, but it's a few years away. We need to make it again, commercially viable before we start rolling it out in a big way. But it may find its way on smaller aircrafts.

Rachel Pether: (21:42)
So do you think that something with regards to the manufacturing of aircraft parts, do you think one day there might be an area that you're looking to invest in or develop would be the battery storage and the battery capabilities?

Badr Al Olama: (21:58)
I mean, the whole concept of battery manufacturing and assembling the pack, is going to become a regionalized business. You cannot depend on one country to provide a solution for the rest of the world. And at this moment in time, China is the biggest supplier in the entire world for batteries. So I do think it will be regionalized and I do sincerely hope that Abu Dhabi and the UAE will take a first mover advantage in terms of batteries. It is the future. It's a given fact. It's going on cars, it will eventually go on trains, it will eventually go on planes, and it's a fact that we all have to accept and it's better for the world, right? Like I said, clean energy, a green world, is good for all of us and makes sure that whatever great life that we all had in this age, is going to continue for the future generations. And that's what we need as a responsibility to sustain for our children and their children.

Rachel Pether: (22:56)
We've just had a question coming from the audience that relates to that, so I do want to pick that up. With regards to the changes that you've had with Strata and converting or adding the manufacturing of the N95 masks, do you think this is something that's here to stay or is this just a temporary kind of fix throughout this pandemic period?

Badr Al Olama: (23:21)
No, absolutely not. I mean, one thing that I do think that the UAE did very well and especially Mubadala, when we started incubating these projects in country, the first thing we focused on was investing in people. Today, Strata has the capability to manufacture very complex, very strategically important components on aircrafts, being parts on the wing and parts on the tail, so where the flag is, right? That same capability can be repurposed 10 times round to do other things. Things that are important to our economy, things that are important to society, things that are important to the world. And I think that more and more, we are going to go towards the Fourth Industrial Revolution where 3D printing is going to start playing a bigger role in aircraft component manufacturing. We did 3D printed component that went on Etihad, on one of the Boeing 777s. We did this in partnership with Siemens. And I do think that capability will be further developed over time because you just can't continue manufacturing things the same way going forward. It has to be smarter, and it has to be quicker, and it has to be cheaper.

Rachel Pether: (24:29)
And is 3D printing something that you've seen an uptick in use of within aerospace industry?

Badr Al Olama: (24:39)
Actually, the aerospace industry as we were saying before, is one of the most conservative industries that you'll ever deal with unfortunately. It's as sophisticated as those planes look like. The people that work on those planes, and this is something that's very good because you can ensure safety on those aircrafts, they tend to be very conservative. But from that perspective, 3D printing is a force that you cannot prevent or you cannot stop. The question is, how fast can you integrate it into your supply chain? I think the UAE has a fair chance to make that move. I think the UAE is better positioned than a lot of other countries to be a key player in 3D printing components than a lot of other countries around the world. So I'm hoping that we will be working closer with Boeing and Airbus, to actually start evolving our capabilities into 3D printing.

Rachel Pether: (25:27)
Yeah, there's definitely some advantages that come with being a younger country or a younger company, and maybe not having so many legacy issues to deal with in that regard. I know that as part of Mubadala's mandate and ethos, that knowledge transfer is really important to you. On the sort of gender balance or gender diversity side, how have you seen sort of the rise or the incorporation of female engineers and technicians within aerospace, given that it's a really highly technical area?

Badr Al Olama: (26:05)
Going back to about 2008-2009 when we first started on Strata, and we said that we're going to be establishing the first and the only, let's say, manufacturer of aircraft components in the region, I was skeptical to think, first of all, that we would be lucky enough to get a large population of UAE nationals to join. And then obviously my skepticism would have said, maybe not so many women, but probably quite a few men. When I look at Strata today, we have more than half of the workforce are UAE nationals. So they're UAE citizens. Out of those UAE citizens, nine out of 10 are women. Actually, the workforce in Strata is led, driven, delivered, challenged by women. And I can bet with anyone in the industry that there is no other manufacturer of aircraft components that has such a high concentration of women that are driving the manufacturing facility.

Badr Al Olama: (27:05)
And you know what, Rachel? I used to joke around about this. Every time the senior leadership of men that were out of the factory, may be in an air show or traveling around the world on business trips, there were no problems in that workforce. There was no problems in the facility. It was running smooth seamlessly. Every time we came back, we created the issues. "No, this is not right, or that's not working perfectly well." But whenever we were not there, it was working perfectly well. And to give you a testimony that we are doing something right, that is being appreciated globally, Airbus and Boeing have given us more work to do since we established that facility in 2008-2009. We've actually grown in terms of commitment from both Airbus and Boeing, as a result to show that we're delivering high quality components, on time, no issues and we do it without headache, without creating problems or issues to the supply chain.

Rachel Pether: (28:03)
You know better, that's because women are excellent multitaskers. So you're very lucky that most of the people on your team are female. We're now getting quite a lot of questions coming in from the audience. So I do just want to ask one of them now, because it relates to some of the new sectors or new areas that you're looking in. We've got one air firefighting is now critical in the world and the old CL-415 is really outdated. Is this another sector that Mubadala is looking into?

Badr Al Olama: (28:33)
From our perspective, again, we look at things from an investment perspective. So as long as there is, number one, let's say a decent and acceptable rate of return that's coming from an opportunity, that's our first sort of criteria. Then we will start looking into it seriously to actually consider whether or not we should invest abroad or invest in the UAE. Investing in the UAE, as important as it is to us, as important as it is to our Abu Dhabi Economic Vision 2030, might not necessarily be conducive for investment opportunity. Now, going to the point about that specific platform, I do think that the future of aircraft, or let's say aircraft manufacturing, probably is going to go down the UAV side. By finding cargo drone solutions, by finding these sort of merging innovation or technology with traditional forms of what the aircraft was supposed to do in terms of cargo or in terms of passenger transportation.

Badr Al Olama: (29:32)
I struggle to see sort of a business plan or a business case that could actually work in the lines of actually firefighting. In reality, we should actually try to solve what we say is, solve the cause of the problem, as opposed to trying to solve it after the problem happens. The issues that you have on forests and different parts of the world, there is another problem that's happening and that's global warming. So if we were to put our time and effort into doing something, not that I'm saying that we shouldn't do firefighting platforms or aircrafts, we should really try to tackle the issue of climate change. That's the root cause of the problem that we're facing with respect to forest fires in the Amazon, or let's say, in the West Coast in the US or even Australia.

Rachel Pether: (30:16)
Well, I guess that's one thing that you're looking to tackle with the Green Chain Initiative, isn't it?

Badr Al Olama: (30:21)
Absolutely.

Rachel Pether: (30:21)
How we can sort of counteract some of these issues around global warming.

Badr Al Olama: (30:25)
And that's not the only mirror, Rachel, to be fair. The UAE took the steps in terms of sustainability and the degree in economy, way back when Masdar was created, right? I even remember when people were saying, "Why is a country that produces fossil fuel, petroleum or oil, going into an area that is actually promoting, let's say, something that would cannibalize your own business, into renewables and solar power?" I mean, why not, right? It's the same question that came up when they were asking, "Why is the UAE doing a global initiative on manufacturing when you're such a young country?" Why not? "Why is the UAE making aircraft component parts when you don't even manufacture aircraft?" Why not? I think taking that aspect of why not, is really what has shown the world that we have been successful every and each single time that we've made those investment decisions.

Rachel Pether: (31:18)
It's funny that you bring up Masdar. I actually went there for the first time in about five years, just a couple of months ago and I was really impressed at how far that's grown. As you say, 10, 15 years ago, everyone was asking, "Well, why would the UAE be looking into this?" So, yeah, it's a great achievement for the UAE and for Mubadala. Another question which also relates to potential future capabilities or capacities in Mubadala, as lightweight parts are in demand and many other transport areas, do you think you can expand and use your capacities and capabilities in those areas, well, for the global market?

Badr Al Olama: (32:00)
Absolutely. I mean, the capabilities is not just on the aspect of manufacturing that we've invested in. Mubadala, across the entire portfolio, like I said, the number one thing that they did was invest in people. They've invested in me, right? I would have never been able to imagine at 32, that I'll be running an aircraft component factory that would be competing against the rest of the world. And the fact is, there are many other people within our organization that Mubadala has taken active steps and investing in building up their capability. Because each one you invest in, can create 10 other people like themselves. And I do think that there is no restriction whatsoever. If the UAE is heart-set, as we have seen on the Mars Mission, if we have a clear vision, we put up a clear mission, and we are very determined as a country to achieve on all our ambitions, we go all the way. And time and again, whether it was Mubadala, whether it was the Mars Hope Probe Mission, whether it was anything else, we have seen this happen time and again.

Rachel Pether: (33:01)
Now, you have answered a lot of sort of difficult and technical questions, Olama. We have 10 minutes left. So I'd actually like to ask you two softer questions that have come in from the audience. One is, you have achieved so much in your life already. What are the skills that you advise people in their 20s to be equipped with going forward?

Badr Al Olama: (33:23)
Honestly, it's having empathy. Having an emotional appreciation for people that you will be working with, that eventually one day you will be leading. It's not individuals like myself that actually create the successful results. It's the team around me. And I always tell people this, when they tell me that, "Wow, GMIS has achieved so much," or "Strata has achieved so much." I just say that I've been very fortunate in my life. That I've had a good group of people around me, that are really delivering some great results and it's reflecting on me. But the reality, it's not me. It's this group of people around me. So having this empathy and having an understanding of how to get the best out of your relationships with people and how to manage a group of people towards achieving a certain vision, that sort of understanding and empathy and emotional intelligence, is really the determining factor between being a manager and being a leader, if you know what I mean. We all want to become leaders, but not everyone is going to be successful if they don't have the emotional intelligence of actually knowing how to lead a group of people.

Rachel Pether: (34:31)
And I guess further to that point, who or what inspires you in terms of leadership?

Badr Al Olama: (34:39)
That's a difficult question to ask, but I'll share a story. And it's a very interesting story because it doesn't point the finger at one individual, but to a system. In 2015, as I said, when we started GMIS, and this was something that came up from our Global Agenda Council on the Future of Manufacturing, which was being organized by the World Economic Forum. Sort of the idea was coming together and it was talking about, we need to create a platform, bring the world together, talk about the future of manufacturing. And I really saw an opportunity here for the UAE. So I took this to my direct manager who was heading aerospace at the time, Homaid Al Shimmari. And I told him, "Boss, this is something that could change the world. And I do think that the UAE has a fair chance in making this move." He took me to our group CEO, Khaldoon Al Mubarak. He put me in front of Khaldoon. I took Khaldoon through the story saying, "This is what it is. It's about the Fourth Industrial Revolution." Back in 2015, before people started talking about the Fourth Industrial Revolution in a big way.

Badr Al Olama: (35:46)
And you know what? Khaldoon said after I finished the pitch, he said, "Badr, what can I do more to make you successful in driving this forward?" Look, anyone else, both bosses, right? My direct manager and the group CEO, could have said, "You're getting distracted. You're doing something different from aerospace. You're going on a completely different area. Focus on your business. Focus on what we're paying you to do." And both of them actually gave me the opportunity. And not only the opportunity, but offered their support in giving me the chance to actually make something successful. So whatever GMIS is, besides the fact that I give credit to my team, it's the fact that I had very good leadership from the very beginning that made GMIS a success today.

Rachel Pether: (36:34)
That's an excellent story and I can definitely resonate with that. And I know it wasn't just a political answer. I know it really did come from the heart. Just closing question then, can you tell me, within the ministry that you work for or on the Fourth Industrial Revolution, what most excites you in that space at the moment? And also a very broad topic, but maybe pick sort of one or two key things.

Badr Al Olama: (37:01)
Honestly, I'm really, super excited with the whole concept of co-creation using open innovation as a platform. I'm very excited about 3D printing and I'm just as excited about when it comes to artificial intelligence. Using artificial intelligence for predictive maintenance, for different applications. I mean, that ministerial council, which was... I'm no longer a member. I was a member when it was first created in 2017. The whole intention was to be able to, let me say, stimulate the knowledge about all these different technologies within our economy, within our businesses, within our government framework. And I can say from 2017 until today, look around you, we have a minister for artificial intelligence. The same minister is actually looking into the digital economy. We have a minister just appointed to look into sciences and advanced technology. We have a university, the Mohammed bin Zayed University for Artificial Intelligence. I mean, things have just progressed as a result of creating that ministerial committee. And honestly, like I said, the next 50 years are going to be much more exciting than the previous 50 years, that I at least spent 40 of them working on.

Rachel Pether: (38:17)
Badr, thank you so much. We have a couple of minutes left and I think it's great to end on such a positive note. So thank you so much for your time and your empathy and your humility and sharing your time with us today. It's been a pleasure talking to you as in our old day.

Badr Al Olama: (38:33)
Thank you for having me, Rachel. I appreciate it.

Fintech Is Growing & Here's Why | SALT Talks #54

“Leveraging data and technology to create access can change the future.“

Michael Weisz is the Founder & President of Yieldstreet, an alternative investment platform focused on generating passive income streams for investors. Gil Mandelzis is the Founder & Chief Executive Officer of Capitolis, the leading SaaS platform driving financial resource optimization for capital markets.

“What is the power of capital and how can you use it to change the world?” Correcting income disparity has the potential to improve countless life and create new opportunity. But what true innovation has happened in financial services over the past decade? “Not a whole lot: payments and distribution.”

Post-financial crisis, we are seeing fewer, larger banks with more constraints on their capital, meaning there is abundant independent capital seeking out returns. With this comes the need for regulation, something that separates FinTech from other industries like ride sharing.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKERS

Michael Weisz

Founder & President

Yieldstreet

FULL BIO

Gil Mandelzis

Founder & Chief Executive Officer

Capitolis

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. And this is a landmark SALT Talk today. I'm broadcasting live for the first time in 2020 from SkyBridge HQ here in Manhattan, contrary to popular belief. Manhattan is still here. It's not the wasteland that many people conveyed to me that it is. And it's great to be back in the office. We're going to start slowly getting back to normal here at SkyBridge and SALT. So it's great to be here. And obviously I have a new background here for those who have been recurring listeners.

John Darsie: (00:48)
But SALT Talks are a series of digital interviews we've been doing during this work from home period. That was some of the world's foremost investors, creators and thinkers. What we're really trying to do is replicate the experience that we provide at our global SALT conference series, which is to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to welcome two FinTech entrepreneurs, who are definitely shaping the future of the financial industry, as well as the technology world.

John Darsie: (01:19)
That's Michael Weisz and Gil Mandelzis to SALT Talks. Michael is the founder and the president of Yieldstreet. He's responsible for Yieldstreet's investment strategy and originator network, and has overseen more than 900 million in transactions over the course of his career. He began his career at a $1.2 billion, New York based credit fund, working his way up to vice president before co-founding his own fund in 2013. During his 10 years on the institutional side of the business, he grew frustrated that access to superior wealth creation opportunities, it wasn't quite as accessible to the individual investor.

John Darsie: (01:57)
In 2015, with that in mind, he teamed up with Milind Mehere to create Yieldstreet, which democratizes access to the alternative investment world. Gil is the founder and CEO of Capitolis, which is a leading software as a service platform, driving financial resource optimization for capital markets. He's an award winning serial entrepreneur and industry executive in the FinTech space with a successful record of creating disruptive products and companies and leading them through global scaling. Prior to Capitolis, Gil was the CEO of EBS BrokerTec, which is NEX Group, formerly ICAP, it's the foreign exchange and fixed income electronic markets business.

John Darsie: (02:40)
He served as a member of ICAP'S global executive management group, and before EBS BrokerTec, he was the CEO of Traiana, which was a post-trade processing company he founded in 2000. Traiana was featured in a Kellogg Business School business case study that was written about Gil. He was also a member of the New York Federal Reserves Foreign Exchange Committee, the Bank of England's Joint Standing Committee and the Bank of Canada's Foreign Exchange Committee. Just a reminder, if you have any questions for Gil or Michael during today's SALT Talk, you can enter them in the Q&A box at the bottom of your video screen within the Zoom window. And hosting today's interview will be Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, as well as the chairman of SALT. And with that, I'll turn it over to Anthony.

Antony Scaramucci: (03:28)
Okay, well, I just want to thank the Academy for giving me the room Raider award on this particular SALT Congress. Your three room Raiders look terrible. I think mine looks great. This is the first time that I actually beat John Darsie. So I just would like to thank my mom and dad and other members of the room Raider Academy. But Gil, let's go to you first. Okay, Gil well, you have this amazing career and how did you get it started? Tell us a little bit about the family you grew up in and how you took this trajectory with your life?

Gil Mandelzis: (04:02)
Yeah. Thank you. Thanks for having me. I grew up in Israel and I grew up to a very, I would say, culturally minded and socialist family. And my calling was actually to be a professor of sociology. I started thinking very early on about society structures and what is the right structure. And I started making myself all the way from Max, from Max all the way to capitalism, which is where ultimately I landed as a society structure that is very compelling. And therefore was very attracted to the capital of capitalism, which is the US. And came here and became a FinTech entrepreneur. That was way before FinTech was hot.

Gil Mandelzis: (05:00)
Actually FinTech in 2000 was, it wasn't a term, but financial technology was actually a really bad word. If you wanted to raise money from venture capital, especially in the Silicon Valley back then, financial technology was the last thing you wanted to say. But my focus was, and still is on, if capitalism is important, capital markets make capitalism available or possible. And the structure and the infrastructure for this market is something that is very near and dear to my heart. So I think a lot about global market infrastructure, global market structure, and how to make it more robust and how to introduce innovation that is going to push the agenda further.

Antony Scaramucci: (05:39)
Well, before I get to Michael and just a quick answer, give me a short answer to this. Our capitalist model is under siege. There's a lot of income disparity, and it seems like people that I grew up with, Michael, aren't doing as well as they used to. I grew up in this aspirational blue collar family. Most of those families now are economically desperational. Is that a byproduct of capitalism? Or is that something we can fix?

Gil Mandelzis: (06:06)
Well, I think it's both. I don't think capitalism is perfect by any means. And I think there are a lot of things that are broken and should be fixed, but I would also say that working from within capitalism on improving it, is probably a better solution than just throwing the baby.

Antony Scaramucci: (06:27)
[inaudible 00:06:27] you, and I agree on that. Michael let's turn over to you and the famous Yieldstreet. So what happened there? How'd you get this thing going? What did your parents think you were going to be when you were growing up and how did you end up here?

Michael Weisz: (06:43)
All right. I'm a native New Yorker, grew up on Long Island to a nice, quiet, nice area.

Antony Scaramucci: (06:52)
What town? We're going to do Italian, Jewish geography for people that don't live on Long Island. So good. What town?

Michael Weisz: (06:57)
Here we go. I grew up in a town called Lawrence, which is in the Five Towns.

Antony Scaramucci: (07:01)
You grew in the Five Towns? Okay. Sure. I used to hang out in oceanside at that Nathan's when I was a kid. My uncle owned that motorcycle shop in port Washington. We used to go down to Nathan's for those Tuesday night events.

Michael Weisz: (07:14)
That's like our backyard.

Antony Scaramucci: (07:16)
Which always brought the cops, but that's a whole other topic. Okay. Go ahead. So you're growing up in Lawrence, your parents think you're going to be what?

Michael Weisz: (07:24)
My parents think I'm going to probably be like a doctor or a lawyer, good Jewish family.

Antony Scaramucci: (07:29)
[crosstalk 00:07:29] good, of course.

Michael Weisz: (07:31)
Thank you. I appreciate it. The truth is-

Antony Scaramucci: (07:33)
Darsie's parents thought he was going to be a banker, trust me, they thought he was going to look like the guy in the Monopoly board, but you two were [crosstalk 00:07:42]-

Michael Weisz: (07:42)
We were both terrible disappointment.

Antony Scaramucci: (07:43)
The other one was a doctor. I was supposed to be landscaping your yards, just so everybody's clear. And look at us now, we're all here on this SALT Talk. All right. Go ahead, so what happened?

Michael Weisz: (07:55)
I got enamored by the financial markets, like trying to understand what risk means even as a young kid, and how investor appetite works and where people put their money and how markets change. I'll be honest and say that when I thought I was enamored by it, I had no idea what it actually meant, but it was interesting to me. And growing up as a kid that would spend some time in the city and cut school to jump on the LIRR and go hang out, the energy that was in New York City and seeing all these huge buildings in Wall Street, really had me very interested.

Michael Weisz: (08:28)
As I started my career, I started to think about, what really is the power of capital? How can you use capital to change the world? Is it by investing and helping create jobs? By supporting entrepreneurs to get ahead, you talk about wealth disparity, income disparity, those are topics that are always been incredibly interesting to me. And we should jump into that. And then on the other side of that is how do you help people achieve those financial ambitions? And how do you use your skillset, your ability, and the broader capital in the investment market to make a bigger difference? And that's really what got me into being excited about financial markets and investing overall.

Michael Weisz: (09:07)
Yieldstreet was the next generation. I started out doing some regular, I would say, run of the mill asset based lending, nothing too exciting, supply chain financing, receivable financing, et cetera. And what I quickly learned was that inefficiency in certain subsets of the market can often lead you to have more attractive yield. And what ultimately became front and center to me was that, the income disparity that's really going on is as a result of education, jobs and that lack of access. And leveraging data and technology to create access can really change the future and help people get to their financial ambitions. And that's really how YieldStreet got started. That's what I've gotten incredibly excited about. And that's what led me here today.

Antony Scaramucci: (09:59)
Well, first of all, congratulations, amazing career for both of you guys. But on Michael, I want to ask a little bit about the role of technology in the pre-COVID environment, and how does it look now in the post-COVID environment based on your commercial experience?

Michael Weisz: (10:18)
The front half of that question is pretty broad. I'm going to dig into it a little bit. I think that we could all agree that technology has brought our lives to a whole different place. And we see it evolving year over year. If you think about basic interactions with your financial wellbeing, whether it's your trading stock or your interactions with your retirement accounts, with your credit card, how you go about getting a mortgage, et cetera. We've seen a tremendous amount of advancements in technology. I think the question really is like, what real innovation have we seen? And as people talk about FinTech. So as I think about FinTech, it's really the partnership between traditional financial services and technology to enable something even better, a better experience, better access, better outcome.

Michael Weisz: (11:10)
When you really take the time to think about where has true innovation happened in financial services, it's not a whole lot. It's happened in the payments space and it's happened in the distribution space, but finding more websites to identify investors, to borrow money more, or to find a better credit card or a better mortgage supplier is not true innovation. I think that what you're seeing over the last number of years pre-COVID is this buildup and acceptance of technology, and how it's enabled banks and other financial companies to advance and to make progress and to streamline things, to make the business more efficient.

Michael Weisz: (11:51)
What you're seeing now, and what we'll talk about over the next couple of years is having real true innovation. And I think that COVID has systematically changed a lot of our behavior and it's impacted the financial services market as well. And I'm happy to comment on that whenever you're ready.

Antony Scaramucci: (12:11)
Yeah. Well, let me just fire Gil in here because we're creating a technological asset management salad. So let me just ask Gil to dovetail off of that. So the banks have obviously turned to technology to improve their relationship with the asset management community. Tell us how they've done that, and tell us where you think that trend's going? And then I have a question for both of you that will synthesize where you both are.

Gil Mandelzis: (12:36)
Yeah. If I just take a step back for a second, just to where we're coming from, basically, we're trying to bring and borrow a lot of the sharing economy, network economies, Allah, Uber, Airbnb, and otherwise into the capital markets world, with the basic premise that says that on the back of the financial crisis, A, we have fewer banks. B, these banks, they used to have basically unlimited amounts of capital, and that was the lowest cost of capital that is out there. The regulator is on the back of the financial crisis, changed the game. And to a certain extent rewrote the industrial logic of what is a bank. And very wisely have done that. Not through a hard and fast Volcker rule, but actually through the economics such actually the bigger you get, the more expensive your capital is you could do less things off balance sheet, et cetera, et cetera.

Gil Mandelzis: (13:36)
What happens is 10 years later, and it's only going to grow over time. We have fewer banks, global banks with massive infrastructures and capabilities, with more and more constraints on their capital and their cost of capital. And you have actually much more money out there looking for returns, many more asset managers that are managing significantly more capital and are looking for those services. And there you have a basic tension in the market. So the asset managers can no longer just come to the banks and say, "I want you to do this for me." And the banks are just going to say yes, because the equation has changed. So it has to become a much more collaborative model of understanding the supply and demand, the cost of capital. What does it cost for the bank to service me, et cetera?

Gil Mandelzis: (14:30)
Banks can no longer, obviously if you're a Blackstone or obviously if you're SkyBridge or if you're a PIMCO or BlackRock, you could get any service you want from the large banks. But when you're talking about asset manager number 10,000, without technology, and without scale. Without technology that would allow the scale, it's impossible to service those clients and to provide them what they need. It's a much more collaborative effort between them. Sometimes the banks are suppliers. Sometimes, actually the banks are going to be consumers of the asset managers, and you have to provide those platforms that are going to allow them to collaborate.

Antony Scaramucci: (15:08)
Makes total sense. It's obviously the intersection where everything's happening. So this is a question I have for both of you. I want you to envision where we are five years from now, in terms of technological efficiencies, and then in terms of product design. Let's start with you, Michael. You guys have laid out where we were and where we are now, but I guess the question is where are we going?

Michael Weisz: (15:37)
Sure. I think, let's zoom out for a second and just focus from a very practical perspective, what is the business? What do we do? And then what's happening around us in the industry? So very simply put Yieldstreet's mission is to help millions of people get a road to financial independence. And we do that by providing them access to what we believe are best in class institutional grade, alternative investments. Our customers are two sides. On one hand, you have the investors. So you have 200 plus 1,000 individual investors, high net worth, et cetera. On the other side, you have institutions, banks, hedge fund managers, lenders, et cetera, that are looking for a strategic capital partner.

Michael Weisz: (16:20)
What Yieldstreet essentially provides the supply side. So the deal side, the investment opportunity side is what I like to refer to as distribution infrastructure. And in what we will talk about that in what we provide to the retail side is a new wealth management tools, wealth creation tool. So very simply put, my partners and my team at Yieldstreet, are we just a special breed of genius? No, not at all, not even close, is we were able to recognize how it changed in a regulatory environment and a change in the capabilities of technology can create incredible efficiency, ease of use the digitally native solution. And you can leverage the masses to create financial equality.

Michael Weisz: (17:09)
When Yieldstreet takes on $100 million deal and makes that available fractionally to investors of all different sizes, it is now participating in the same type of deals that your founder, or your capital would, or banks or hedge funds or et cetera. So what we've been able to do is leverage-

Antony Scaramucci: (17:27)
Are you be worried about the risks though? I want you to keep going, but so I'm a retail investor. I may not understand the things that the institutional guys are. Are you worried about that democratization?

Michael Weisz: (17:40)
Yes and no. So currently our current user base is exclusively accredited investors with the exception of 140 act fund. That is a heavily diversified product. I think that, if you take a comparative analysis, Anthony, people who don't have access to the types of investments that you make or that we make are investing their money often in far more risky products. So think about penny stocks, biotech companies, whatever ticker they hear in a bar or on the train, as opposed to the types of investments that we're doing are secure debt. There's real estate backing it. There are other assets. Are there risks? Of course there are. Are there going to be challenges? Of course, there will be.

Michael Weisz: (18:24)
We all experience them as we get to a certain scale, but in the last six years, even less, Yieldstreet has funded a billion foreign loans paid out over 600 million bucks. We've had our fair share of setbacks like every other manager, but that's what we're here for. And that's what we get paid for, so you get paid for. So I think the key is, for YieldStreet to continue to deliver quality education, really trying to explain to people in our content, what are the risks, how to understand them and to explain to them what that process looks like. Will everybody always completely understand it? I don't know. I think they do. I think they're accredited. I think they're sophisticated people. They read it. Will people be upset when something doesn't go the way they want it to? They always are, but that's not going to be any different than your institutional investors or our investors.

Antony Scaramucci: (19:13)
What do you think, Gil? What's the future look like to you?

Gil Mandelzis: (19:17)
I think first of all, I totally buy into Michael's vision and mission and the great work that Yieldstreet's doing. From our perspective, we're doing very similar things, but only at the institutional level. So if you think about democratizing access to opportunities that did not exist before, at the core of our vision sits what we call the lean bank. So you think about the JP Morgan, Citi, a State Street, Bank of America, they will have to, they already have to, and will continue to have to be much leaner from a use of capital, efficiency of capital and financial resources, for their day-to-day operations.

Gil Mandelzis: (19:56)
What we're doing is two things. The first thing is we're identifying all kinds of unnecessary positions, offsetting positions that they have on their books, and we're helping to eliminate them. And that happens now in trillions of dollars every month. And the world is huge. Like every segment we're looking at is trillions of dollars of opportunities, basically almost like free money that can be eliminated and has huge impact on the capital efficiency of the trading relationship.

Gil Mandelzis: (20:25)
The next thing we do is where you cannot compress it, can you now outsource it or partner with participants just like at YieldStreet they will go to the accredited investor, we would go with a Citibank position and offer an asset manager. And it could be any asset manager, we're just dealing with institutional investors to now be the financing partner of the large bank. And obviously we're looking here, like in the first month that we've done the last issuance, we're getting close to a billion dollars and the numbers are ginormous in this space, but basically allowing the balance sheet of banks, and allowing the financing of banks in a large part to now be democratized to the asset managers on the planet that have plenty of cash, but are looking for yield. And will never have the infrastructure and the capabilities that at JP Morgan, Citi or others have.

Gil Mandelzis: (21:26)
The investment that exists in for an equity prime broker or for a foreign exchange platform, this is billions, if not tens of billions of dollars that was invested by the banks, you cannot replicate that. Their distribution, you cannot replicate that. By the way, from a compliance and regulatory perspective, you cannot replicate the capabilities that they have. What they're missing is capital or the cheapest source of capital that exists elsewhere in the world and is abundant. Bring those together and everybody wins. It's good for the banks. It's good for people with capital. It's good for the clients. And from a regulatory perspective and market structure perspective, this is exactly what the regulators want. Because it's a safe market, but also we're bringing more capital that is diversified into the market.

Antony Scaramucci: (22:14)
So Michael, you listening, this is a former socialist that speaks about capitalism with the appropriate zealotry of a converted person. So mazel talk on that.

Michael Weisz: (22:26)
[crosstalk 00:22:26] tastes, but Anthony, if you don't mind, I was thinking about as Gil was talking about two things that you were saying. So one, we start off earlier, you made a passionate commentary about the wealth disconnect in America. And that is a real issue. And then talk all about-

Antony Scaramucci: (22:47)
It's fueling all of this anger, and nationalism, and tribalism and everything, but yes, go ahead.

Michael Weisz: (22:52)
There's obviously different levels of that. Poverty is a separate story. And then there's the blue collar, which is where you started. And I know that story all too well. And the problem is that if people don't have the ability to get ahead and to make more money and have their money work for them, then they're all going to end up at that same place. And that's really, what's causing this disparity. People who can afford to get above their expenses and to have their money work for them, have way more opportunities that's ahead of them. And everyone else falls below the line. And so when you take that and you take the question about the risk to retail. I was thinking about two things.

Michael Weisz: (23:29)
Number one, if you look at... and I was looking for it if I had my slide, but I think it's just going to be too cumbersome to find it and projected. But we used to talk about this slide in the earlier days of YieldStreet, where if you look at the general population of Americans with the ages of 1880, and you look at their financial path, their journey over that, over that period of years, what you find is in the first set of years, call it 18 to late 20s, most people have a ton of debt. They have a lot of student debt, all that other stuff. In their 30s, they start to make a little money. They hit some stability, they have less debt. They have more appropriate debt, whether it's a mortgage, et cetera. And then as they get older and older, they start to invest be it their IRA stocks, bonds, et cetera.

Michael Weisz: (24:13)
The average entrance for an individual into alternatives was 65 years old. 65 years old. That doesn't give you a tremendous amount of time to build that up. Because of the technology and our capabilities Yieldstreet's average customer age is 42. That's a huge, huge number of years to get people to have that earnings working for them. The second thing I would say is, I think it's important that we ask ourselves like, hey, why hasn't alternatives been appropriately distributed to retail in the right way at the right field level? And the answer isn't that it's not, of course it is. All these banks, all these guys are packaging up and distributing it through FAAs, the Edward Jones of the world, the Charles Schwabs of the world. They're getting the same paper. They're just getting a three to 500 basis points, three to 600 basis, point less because of every partner in the middle who has to be paid a fee for that distribution. So there's the wrap fee, the distribution fee, the banker's fee, et cetera.

Michael Weisz: (25:09)
What we're able to see now, is disintermediating some of those costs, some of that process is delivering that value net to the investor. I think the question is over time, how will product design, so the actual investment product design evolve to make it better, safer, less risky, et cetera, for investors? Or at least give them the choice to select different risk barometers. So are they going to pick binary investments? Are they going to pick fund level investments? Are they going to pick something with liquidity? Are they going to pick something without liquidity? I think that's really what we have to think about more and less so about, hey, if it's a $500 million deal and you're getting $100 million allocation and delivering that same trade to retail, isn't that potentially a better risk reward opportunity than some of the other alternatives where they have?

Gil Mandelzis: (26:02)
Yeah. If I may, I just follow up on structure. First of all, I'm a glass 95% full kind of a guy. I just want a couple of optimistic points here that I'd like to highlight. First of all, 12 years ago, the entire global financial system almost collapsed, like we're on the verge of a collapse. And I do think that all the regulators that were part of and governments that were part of saving the system, they should all get medals for the work that they've done. And in truly saving the system, and by the way, all of the taxpayers, all the world had to, in many places in the world, had to bail out the banks.

Gil Mandelzis: (26:47)
And I think that 10 to 12 years later, first of all, we need to acknowledge that we're in a completely different place, and look at what just happened in COVID with all of this horrific, totally unexpected, not just human suffering, but everything was happening to the economy. We are not talking about any bank or any meaningful financial institution that's anywhere near a problem. And the system was operating in full throttle. And I think that that is an amazing achievement that we should all feel good about. And we should make sure that we're continuously, every improvement, YieldStreet and Capitolis and others, we're basically all standing on the shoulders of giants. And those giants are providing this infrastructure that operates, it works. And I think that we're in much better place and we need to make sure that that system continues to operate.

Gil Mandelzis: (27:46)
So that's the first thing. I think there's a lot to celebrate, but obviously on the back of those changes, structural changes will have to happen. If you think about the big changes that have occurred in the past, deregulation of the telecom industry, if you think about the invention of the internet, if you think about the invention of the iPhone or GPS for that matter, those things led to massive changes and those massive changes will come in the financial system as well, especially in the capital markets in the B2B world in the years to come.

Gil Mandelzis: (28:17)
The last thing I just want to say is, I'm a very proud citizen of Israel. I'm also very proud citizen of the US, and that has been very good to me. And I just want to caution us that while the system is not perfect here, I have to say as an immigrant and as somebody who lives here all day long, but I travel abroad, I think there's still a lot to be proud of. And there's a lot of good things in the system, and what you're doing, Michael is amazing and there's a lot of work to do to improve. But I think our starting point is fantastic. And this is still the place where, most nations will be looking up to and will want to come here. With all the criticism and everything that we have to improve, I'd still rather have this conversation out of my office in New York city than elsewhere.

Antony Scaramucci: (29:09)
Well, you and I totally agree with that. I think there's an amazing future for the country, but if we can calm down some of the emotional unrest and some of the racial tension by creating a fair system-

Gil Mandelzis: (29:23)
100%.

Antony Scaramucci: (29:24)
For me, I'm all about uneven outcomes. I loved seeing the wealth that you guys have created and the value that it's in society, but I am really for equal opportunity because we didn't control our parents or location of our birth or anything about our lives until we got here. And if we could just create a better platform of equal opportunity, it'll dial down some of this tension, but you don't need to hear all my politics. We have to turn it over to John Darsie, John moneybags Dorsil, who's got a ton of questions for you from the audience and has a very terrible background in the SkyBridge offices, getting a zero out of 10-

John Darsie: (30:05)
It's your company, Anthony.

Antony Scaramucci: (30:08)
The room Raider judges are piping in, zero out of 10. Why don't you put a printer behind you or something like that, just to spruce things up a little bit.

John Darsie: (30:16)
I'll bring a stapler in next time. I think it'll add a little ambience.

Antony Scaramucci: (30:19)
Go ahead, John. I know you got questions, your audience.

John Darsie: (30:22)
Yeah. The first question we have is around regulation and about... and we'll start with Gil, the sociologist. This is how the question was framed. Do you think financial institutional regulators have in tandem kept up with FinTech's growth in terms of understanding its risks, its applications, its benefits, and how has that impacted the growth of the industry and how will it continue to impact the growth of the industry?

Gil Mandelzis: (30:49)
Yeah, I think it's tricky. Look, when you're innovating is a very easy thing. I come up with an idea and I just going to do it. But if you're a regulator, there is much more to think about, and I had the honor and the pleasure of dealing with many of the regulators globally, they're thoughtful, they're trying to stay up to speed, but they're just, the regulators there's so much that's happening and until it reaches their radar screen and they really understand, and they understand all the implications, et cetera. So the short answer is, for the important things, I think that the answer is absolutely. Yes. If you were to talk about and if you look at the reaction of regulators over time, for instance, to cryptocurrencies, they definitely have had a very thoughtful and have a very thoughtful approach and they're keeping a close eye on it.

Gil Mandelzis: (31:43)
And at the time when there was a lot of noise around high frequency trading and flash boys and all of that. And so big movements and big things that are happening from a FinTech perspective, the regulators are definitely getting educated. They're thinking about these things and I have not observed them stifling innovation by any means. But in the end of the day, FinTech is very important and it's very different not to minimize other industries, but it's very different to hailing a cab or staying in somebody's hotel. We're talking about the trust in the system. We're talking about sovereignty of nations, this is what we're talking about. You could talk about fairness and society, but for this, one of the things that you absolutely have to have is a trustworthy financial system.

Gil Mandelzis: (32:41)
So we want the regulators to be thoughtful. We want to work in tandem and responsibly with them. And I think that for the big thing so far, they have not been stifling innovation, but they have been thoughtful and where necessary, they have been also proactive in their approach. So overall, I think that they've been very good in the various branches of the regulators.

John Darsie: (33:10)
Michael, I want to go to you with a different question. Another audience question. Obviously the pandemic has put a strain on a lot of different financial assets. Do you think that there is any sort of private capital bubble that exists? And how do you build products within the YieldStreet ecosystem to factor in your views on financial markets and areas that might be overheated?

Michael Weisz: (33:35)
Great question. I think that in many ways, even more applicable pre-COVID, so leading into COVID, there's just a tremendous amount of money available in the system and yields were being compressed across the board. You see it in the leverage loan market, you see it in the private capital markets, you see it venture, you're seeing it now in the SPAC market. There's definitely a lot of money out there to be invested. I would say a few things. One is, we talk about investments and the investment ecosystem as like, a specific area it's not, it's enormous. So you've got to think about an asset class level at an industry level and a sizing level. So for example, when you look at, let's look at the public markets for a second, just because they can give us a better analysis with leverage loan market.

Michael Weisz: (34:27)
The top 100 names have all rebounded significantly from where they were in March, but the SMEs in the leveraged loan market, because there's less efficiency of capital, there's far more opportunity there with technically dislocated pricing. You have the same thing in the capital markets. You have a significant number of players that are licking their wounds to some extent, and working through their portfolios and understanding what's going on and how COVID it's impacting. I was on a call this morning with our investment heads and the guy who runs a real estate business, Mitch Rosen was telling me about some of the feedback he had from some of the real estate bridge lenders out in the market.

Michael Weisz: (35:04)
He quoted five names that haven't written a deal since February. They have a tremendous amount of dry powder. They have other areas to focus on whether it's faults or other credits in their book. So there is always going to be opportunity. I actually think contrary to the notion of a bubble that right now, non-bank lenders are really in an amazing seat. There is still concern around the market as to how much credit to extend to small and medium sized businesses to your 200, $501 billion shop. And that means that non-bank lenders and platforms like Yieldstreet can access better quality risks at better pricing.

Michael Weisz: (35:43)
I see daily now that when you think back to early March and late February, where we were pricing transactions, you're 100, close to even sometimes 150 or 200 basis points above that. We just launched a deal as part of roughly $100 million syndicate to a two plus billion dollar revenue business. It's a six month trade with a 10% annualized yield investors. B minus B3 company. Candidly, we wouldn't have seen that deal six months ago or eight months ago. There would have been way too many players doing that same deal at 6%. So do I think there's a bubble in certain asset classes? Yes. Do I think that it's affecting opportunity? No, I think there's better opportunity now.

Michael Weisz: (36:25)
The risks are going to be different across the board, depending on what asset class you're looking to invest in and where you sit in the capital structure and what the underlying collateral is. But I think the time to invest in debt and technically dislocated distress, meaning in areas where there's a lack of efficiency in capital is now, is what we saw in 2009 and 10, I think it's going to be fantastic timing.

Gil Mandelzis: (36:48)
I would say John, on same questions just on the institutional side from our perspective, definitely. I don't know that there's a bubble, but there is basically infinite amounts of capital in the world just looking desperately for yield. And you're looking at, issuances in Europe, in negative yield. We've issued and we've seen our clients issue it unbelievably low rates historically, and even through COVID and where it moved a little bit. It basically bounced back and plus some over a very short period of time. So that's why we're so excited because we know that the origination capacity of the large banks to such investors, is basically infinite. We're talking about trillions of dollars of new investment opportunities.

Gil Mandelzis: (37:43)
We know that the capital is there looking for returns and ideally we'll be able to make those meet. So, hence we don't think it's a bubble because there are true destinations. You don't need something to artificially inflate in value because there is real value there. And there's effectively infinite supply if you're able to structure it right. And to present the right opportunities. But there is, we see it everywhere. We see it in venture capital. We see in every institutional asset class, there is just tons of capital looking for you.

John Darsie: (38:16)
I want to leave you guys both with a question about just the future of the financial industry. You talked Michael about the value of disintermediation and how that cost savings is passed along to the end investor. And that's obviously a positive thing for the investor themselves, but it's also going to lead probably to job losses on Wall Street, and the wealth management industry potentially shrinking as technology enables investors to have more direct access to these products that have typically lived in a more opaque environment, behind a wall of a bank or a wealth management shop, what do you think ultimately happens to the wealth management industry, the financial industry from a banking perspective? Gil, you can comment on that.

John Darsie: (38:59)
Where do we ultimately end up? It feels like now you have these FinTech companies that are disrupting. You also have banks that are trying to use technology to make themselves more efficient. What's the ultimate destination for the banking industry?, for the wealth management industry, and the financial industry as a whole when Fintech becomes mature? We'll start with Michael on that one.

Michael Weisz: (39:21)
A loaded question, I'm just trying to synthesize it a bit. So I think, a lot of people talk about job loss as a result of innovation technology. I challenge that, I think you look back in history, especially right before COVID we were at our lowest unemployment rate in decades, if not ever. And we have more innovation and more technology than we've had before. So I think that jobs shift, profession shifts, things change, society adapts, people do different things. So I wouldn't go right away and say that, hey, just because Tesla's out there, Ford's no longer can exist. All of a sudden Tesla's got enormous employee base. So people still need human output and human productivity to help us move forward.

Michael Weisz: (40:07)
Yieldstreet is growing rapidly. We have over 100 people now and we're going to keep growing. I would argue with that respectfully for a moment, more broadly, I think the notion that FinTech companies are going to pound their chest and Goldman Sachs and Citibank and JP Morgan are going to disappear is ridiculous. Frankly. I think the bigger question is to understand what is the consumer journey today and where does it have to go? And what I mean by that is, if I was in my office now I would pull out of my drawer. I always keep, two cell phones in my office. And I ask people, 15, 20 years ago, what was your favorite phone? And it's either a Nokia or StarTec. And when you look back then, I remember like what we were striving for every time a new Nokia came out was a smaller phone, as long as my fingers could play snake.

Michael Weisz: (41:00)
We went from a Startec to a V-phone tab, even smaller, and now our iPhones are getting bigger and bigger. So there's something more behind that. What is that? I think as a consumer, we were seeking task based efficiency. We wanted each thing in our life to perform as efficiently as possible. So my phone is just going to make phone calls and have text messages. My Palm pilot is going to have my contact thing and whatever else I had in there, my Blackberry is going to handle my emails and my BBM messenger. And today we don't seek task-based efficiency. We seek utility as consumers. We want to do as many things as possible with as few things as possible. And so when you think about the way you experience other areas in your life, shopping, Amazon, et cetera, we look to do as much as we can in one place.

Michael Weisz: (41:47)
If I asked most of the people on this call, how do you track your PA? It would be, "I have one to three banks. I trade in this many places. I have this many managers, I do this, this, that, and the other." That is not an efficient way than 2020 and 2021, we should be managing your money. So the consumer journey has to become much more inclusive, much more efficient, digitally native. And I, as a consumer, have to feel that I'm getting the best options available to me at my fingertips. So if I want to invest in bonds, I want to be able to get them direct and cheap or the best way possible. If I want to invest in alts, in venture and PE, why can't I just, because I don't have $10 million. I can't come into your fund? That doesn't make sense anymore because technology is an equalizer.

Michael Weisz: (42:32)
So what I think ultimately happens is like any other industry, you're going to go through a phase and that phase is going to be now. Okay. When we started at the top of the call, I said, there wasn't a tremendous amount of innovation in FinTech. So if you look at 2000, so our 2010 to 2020, and you look at the number of IPOs, unicorn IPOs for tech companies. There are only two in the financial services world. Two, none are in wealth management. They're both in like debt creation. So when you think about where our world is going, for those of you who track our industry, CB Insights has this list of the top two 50 FinTechs. There are many companies there that are now coming to the cost of a unicorn status are real scale. So I believe that 2020 to 2030 is a golden age of FinTech in 2010 to 2020 was the golden age of tech.

Michael Weisz: (43:26)
But we're going to see a tremendous amount of change now, you're going to have the survival of the fittest, especially as it relates to COVID, a lot of people are going to have run out of cash and not going to be able to keep growing and building. And so what you'll see here are a couple of guys who can come out and really build incredible businesses that are going to be your equivalent of your Facebooks and your Teslas and your Uber's. You're going to see a lot of acquisitions where banks are really going to partner with different players and start to utilize that technology and partner with and appreciate distribution infrastructure.

Michael Weisz: (43:53)
In my world, that's going to be appreciating a new investor dynamic that they've been chasing for a long time, getting closer to retail, getting more diversification, cheaper cost of capital, longer duration capital, and Gil's world, it's going to be, how do we connect deposit wealthy and deposit poor banks? How do we make capital markets more efficient? How do players at all levels able to get access much more efficiently? That's what I think the future holds, sorry, if it was a little long, but it was pretty loaded question.

John Darsie: (44:20)
That's great. The future is long. Gil, how about you?

Gil Mandelzis: (44:24)
Yeah. Look, I think the one thing that existed pre COVID and was accelerated on the back of COVID is software indeed is eating the world. And you will have more technology, you'll have more automation and that technology will enable further democraticization and collaboration and so on and so forth. Which means not the banks are going to disappear. They won't disappear. And I would never bet against JP Morgan, Citi or State Street or Morgan Stanley or others, but I do think that in their current form, they will have to, and they have been evolving. And look at Morgan Stanley's acquisition of E-Trade and look at State Street acquisition of Charles River development and so on and so forth, banks are becoming technology themselves. And by the way, we talk a lot about the disruptive nature of FinTech plaid, obviously amazing innovation. Where is it now? It's part of visa.

Gil Mandelzis: (45:24)
I think that if we think long term, what's happening is further digitization and transformation of the market to a much more open, connected, collaborative technology driven markets all over the world, it's a good thing that ultimately is going to make the markets better, it's going to create jobs, but certain jobs definitely will go away and others are going to grow. I think that overall, that's the big thing. Banks are going to be a huge part of it. There's going to be room for many other companies that will collaborate with the banks that are going to be acquired by the banks. But in the B2B space, I think you're going to find less that are going to compete with the banks because servicing the large asset managers, the largest corporates in the world, the level of regulation, technology, connectivity, global presence that you need to have, membership in exchanges and so on and so forth. That is too complex, I think and too expensive for FinTech to buy.

Gil Mandelzis: (46:25)
This is where you do need the global banks. They have a huge and very important role to play, they'll be there forever, but they're going to be different. And I think that they themselves are basically going to become more and more technology companies. They will become FinTechs themselves more and more than have been already, but we're going to see that more and more. Together with a much broader and collaborative ecosystem of FinTechs and independent companies that work with them, work in collaboration with them, et cetera. So the banks themselves are becoming platforms and FinTechs themselves.

John Darsie: (47:01)
Well, fantastic. Thank you both so much for joining us. We hope to have you in person at one of our future SALT conferences. I know Michael was in Las Vegas last year. We were talking about [crosstalk 00:47:11] maybe we'll have you in Abu Dhabi. You guys are both, you are from Israel and I know Michael visits Israel. Maybe it's a great time to get you guys to Abu Dhabi given the recent Israel UAP [crosstalk 00:47:24] fosters some great innovation cross border.

Michael Weisz: (47:27)
I was there not too long ago. It's a beautiful place. I'll tell you this. You won't have to twist my arm.

John Darsie: (47:31)
All right. I agree with you. Anthony, you got a final word.

Antony Scaramucci: (47:35)
Just, it was a great conversation, guys. Thank you. And we'll definitely get out there and hopefully back to Vegas and we'll see you guys soon. And since you're both in the city, we'll give you a tour of our office, to our better parts of our office. Not necessarily the spot where John's sitting, but I'll show you the good stuff.

John Darsie: (47:54)
Anthony didn't want me to infect his beautiful corner office. So he put me in the broom closet [crosstalk 00:47:59] SALT Talk.

Antony Scaramucci: (47:59)
Stay out of my office. I'm going to spray you with mace. You're going to look like Joe Pesci at Home Alone, if you open the door to my office. Okay. Stay out of my office. Guys thank you again.

Michael Weisz: (48:11)
Thank you. Take care.

Ed Roman: Enterprise Software in a Remote World | SALT Talks #52

“Founders are essentially trying to change the world and build products that create innovation in society.“

Ed Roman is the Managing Director of Hack VC, a Silicon Valley venture capital firm, with the mission of democratizing access to top start-ups for investors. He is also the Founder of hack.summit(), the world’s largest blockchain event, which aims to support technology non-profits.

Silicon Valley is headed in the direction of creating information technology companies, and companies with technical founders are where the best investments may be found. More broadly, B2B software companies have the highest degree of predictability: individual consumers have relatively small budgets, whereas businesses may be drawing from large annual budgets with fewer restrictions.

Hiring and investing during the COVID-19 pandemic may seem counter-intuitive, but tech unicorns like Slack, Square and GitHub we use today were borne out of crises. “The greatest challenge start-ups face is finding the right people.” Hire at a time when top-tier talent is most readily available.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Ed Roman

Managing Director

Hack VC

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone. Welcome back to SALT TALKS. My name is John Darsie. I'm the Managing Director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. The SALT TALKS are a digital interview series that we started during this work from home period with leading investors, creators, and thinkers. And what we're really trying to do during the SALT TALK series is replicate the experience that we provided at our SALT conference global series, which is to provide a platform for what we think are big ideas that are shaping the future, and also provide a window in the mind of subject matter experts for our community. And we're very excited to welcome Ed Roman to SALT TALKS to give a presentation and have a conversation about the state of venture capital investing in a post Covid world. And I think it will be a fascinating and very educational talk for everybody participating today.

John Darsie: (00:56)
Ed is the Managing Director of Hack VC, which is a Silicon Valley based venture capital firm. His mission is to democratize access to top Silicon Valley startups for investors. He has a decade of venture capital experience and as a shareholder and for startups worth over 1,000,000,000 and 17 startups worth over $100 million. Ed is also a bestselling author. And he's been the Chief Executive Officer of three companies with two exits. So he's a founder as well prior to going into the venture capital world. A reminder, if you have any questions for Ed during today's talk, you can enter them in the Q&A box at the bottom of your video screen on zoom. And hosting today's talk before Ed launches into a presentation about the future of venture capital investing in the post Covid world is going to be Anthony Scaramucci. Anthony is the founder and managing partner of SkyBridge, which is a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony to kick off the interview.

Anthony Scaramucci: (01:54)
Thank you. Ed it's great to be on with you and congratulations on an amazing career. John and I are super excited to expose our delegates if you will, to your presentation, because I think you are right at the intersection of where today's present means to our future. And it's such a great optimistic story as well, Ed. So I'm super excited about all of that. But before we get into that, I think it's important for everyone to just lay out a framework of you, tell us something about you that we couldn't find on your Wikipedia page.

Ed Roman: (02:29)
Sure. And by the way, it's great to meet all of you and thanks everyone for attending today. Anthony, it's a privilege to be in your company and to have this conversation with you. I'm a big fan of SkyBridge and all your work in the past. So thanks for the opportunity.

Anthony Scaramucci: (02:40)
Always I appreciate it. Thanks Ed.

Ed Roman: (02:43)
So, yeah. So maybe one thing that you might not read up on Wikipedia about me is that when I first started investing, which is probably about 10 years ago now, in the initial stages basically I didn't have access to a lot of the best investments. And I started off in Austin, Texas as an entrepreneur basically just advising start ups. Just trying to help them out because it is very natural as a CEO to start advising other companies. And when you start advising companies, they ask you to invest in them.

Ed Roman: (03:09)
So I became an angel investor, like a lot of other CEOs do. And like a lot of other CEOs, my very first few investments were losing investments. So I lost money as an investor when I first started out as an investor. And what I didn't realize at the time was that a lot of the best startups were being cherry picked by some of the top Silicon Valley VCs. So that's how I got my start as an investor and went on a 10 year journey to help address that problem and taught other investors to solve that problem, basically. So that's the Genesis for how I for sure started off on this.

Anthony Scaramucci: (03:41)
And it's an amazing story, but you had a game that you developed called Ghostfire Games.

Ed Roman: (03:47)
That's right.

Anthony Scaramucci: (03:47)
So you were in the gaming business and you were in the software programming business for games. How did you make the transition from that into venture capital?

Ed Roman: (03:57)
It was very organic. So basically my mission originally when I was creating this video game company was to help overweight gamers around the world to lose weight playing video games, by tricking them into playing video games and having them exercise as a byproduct of playing that game. So you might remember Nintendo Wii system that came out a decade or so ago. So that system has a motion sensing controllers, you can actually lose weight playing video games on those controllers.

Ed Roman: (04:24)
So my mission was if I can show these gamers a fun game to play, what if they could lose weight as a byproduct of playing that? So we created that game. We created some great games that got great reviews. And I started off as an engineer. I was a programmer and I learned business over time. So I was fortunate to have started three companies that have had a couple of exits and that organically led to me becoming an investor over time. Startups just asked me to help advise them. And then that led to me then becoming an investor in them. And then that's what started my path to become a venture capitalist eventually.

Anthony Scaramucci: (04:57)
What do you like about startups? We know that there's an exciting element to that and you're sifting for unicorns. We know there's a lot of failure in startups as well. And so what attracted you to startups and what's your competitive edge in identifying a winner?

Ed Roman: (05:13)
It's a great question. What's attractive about startups is that the founders of these companies are essentially trying to change the world and are building products that create innovation in society. And we benefit from that by being around people like that, it actually up-levels who we are as human beings. Because think about the character traits of being an entrepreneur, you have to be driven, motivated, hardworking, hopefully you're honest, passionate about what you're doing. That's the kind of people that I want in my life.

Ed Roman: (05:42)
I have a theory that if I can surround myself with people like that, that up-levels who I am as a human being. Because I learned from that, you are a product of who you surround yourself with. The five closest people that you surround yourself with. So I have the privilege of being on a monthly phone call with dozens of startups that we've invested in. And I learn from them, they learn from me and if I can give back and help them to avoid some of the mistakes that I made when I was an entrepreneur, that's a win for me in my life. That means I could be helping a startup to avoid creating waste and maybe shaving months off their progress timeline. That could be substantial in terms of the impact that start ups can makes to society.

Anthony Scaramucci: (06:20)
I actually think that is a perfect segue Ed into your presentation. But before you go there, John, do you have any quick follow up questions before we turn over to Ed's presentation?

John Darsie: (06:32)
I have a question about the Hack summit, which we've talked a little bit about Ed prior to coming on the talk, it's a programming event that attracts tens of thousands of attendees providing free technical education on blockchain and coding nonprofits and things of that nature. What is the future of programming? We hear a lot about programming boot camps and the need to retrain our workforce. How have you found success in combining your philanthropic and business endeavors in that field of coding and getting more people into coding?

Ed Roman: (07:03)
That's a great question. So actually it's something that we'll talk about in a little bit, but the quick preview here is that there's a shortage in America right now of one million software developers. And yet there's some substantial layoffs that have been happening in this country, and there's a lot of folks who are out of work and yet there still is that shortage of software developers. And so this is one of the problems we're trying to address here with our online educational event, basically. So we are essentially helping startups to find great programmers. And that essentially is what's allowing us to get allocations in these over contested and financing rounds.

Ed Roman: (07:36)
So we think the future of where Silicon Valley is headed is in a software categories and information technology, technology companies like Zoom that we're using today for this event. And that's basically what we're investing in. Is the next generation of companies like Zoom and that's built by programmers. So we think that technical founders are really where you want to be from an early stage investment perspective. You look at companies like Dropbox, for example. Dropbox was started by Drew Houston, which is a solo founder, who's an MIT engineer who built a company worth billions of dollars. And we think there's going to be many more companies like Dropbox in the future that become large and valuable that come out of all parts of the country and all parts of the world.

John Darsie: (08:18)
Well, it's fascinating Ed, we're going to turn it over to you to give us a presentation on the present and the future of venture capital in this post Covid environment. And we're looking forward to the presentation. And then following your presentation, we'll get to audience questions. We already have a few that have been emailed in. So we're looking forward to that portion as well, but we'll kick it over to you to share your screen and give us the presentation.

Ed Roman: (08:38)
Great. So here's a little about me and my bio. So I've been investing now for about 10 years. Learned the hard way and made a lot of mistakes when I was early in my career, have gotten better over time. And now we've been fortunate enough to be investor in four companies worth over a billion dollars and 17 of them worth over a million dollars. I've written a book on programming and that gives me a technical background to help evaluate some of these startups. And we also manage to syndicate of family offices that we help invest in startups. So we're helping families get access to some of the best startups in Silicon Valley. And I started in Cornell. That's what my background, I have a computer science degree from Cornell.

Ed Roman: (09:17)
So let's talk a little bit about how technology companies are fairing in this post Covid environment. We're going to start with the public markets. I'm going to show you some data about how public market companies are doing, then we're going to transition to private market companies. So as you probably noticed, we're having quite a bit of a run on the stock market recently. The NASDAQ is at all time highs and there's been a little bit of bouncing in the last few days, but it still has recovered quite nicely from it's Covid debt.

Ed Roman: (09:43)
And if you look at the Dow Jones, the New York Stock Exchange, those indices haven't quite fared as well as the NASDAQ. And one of the reasons behind this is because of software companies. Because of IT software companies. So you've look at companies like Okta and Zoom and Amazon Web Services, which is the cloud hosting, and Microsoft, which is also very cloud-based and Apple. These are some of the companies that are leading the charge in terms of the stock market recovery. Which surprised a lot of investors. A lot of investors didn't think that we'd have a recovery this quickly and it's being led by tech and software.

Ed Roman: (10:16)
So what's interesting here is that a lot folks are wondering, "Is this sustainable?" Like, "Can we actually continue to see the tech companies continue to thrive?" And, "Or is this another .com bubble burst like we saw 20 years ago, which I lived through." So we pulled some data here from William Blair. And this is data as of 2017. And this data shows which sectors were performing relative to other sectors back in 2017. And what's interesting to hear is that IT was actually the number one performing asset class against any asset class that includes materials, and gold, and crude oil. And this is all pre Covid. So there is historical evidence here that even before Covid that IT was an interesting category. And why is that? Why is IT software such an interesting investment category. I personally like it, and there's a reason why I like it. It's because first of all, you're selling software.

Ed Roman: (11:07)
So software is one of those products where it's a 100% margin. Where there's no cost of goods sold. You don't need to actually build a product. There's no product recalls. It's not a onetime purchase. You're subscribing to a service, like Netflix or Dropbox or Slack. You're actually getting a recurring subscription, which means there's predictability to the business. Which means, let's say your sales force is ineffective at selling software next year, you can still probably make around the same revenue next year that you earned this year. Because of the recurring nature of the software.

Ed Roman: (11:40)
And the fact that the software is fairly sticky. So we actually like B-to-B software. We think B-to-B software, business-to-business software is the category that has that most predictability. And the reason is because businesses are wasteful. They tend to spend a lot of money on things that come from large budgets that they have. And you compare that to consumers, consumers have much smaller budgets. They tend to be a bit more flaky than businesses.

Ed Roman: (12:04)
So Zoom, for example, which we're using today will be a good example of a B2B software company, and that has thrived in the pandemic. So that's how we look at public markets and why we think IT is interesting. Now let's transition to Silicon Valley and private markets and look at how things are changing here. So the first question we have to ask ourselves is, is Silicon Valley even an interesting category to be looking at from an investment perspective post pandemic.

Ed Roman: (12:29)
And what we did was we looked at it back in time and we looked at, what did it look like in the previous crisis? So we had a crisis back in 2008, 2009 in the financial crisis. And if you look at all these companies here, Slack, Nutanix, SendGrid, Square, Yammer, PagerDuty, Stripe, Twilio, CLOUDFLARE, and GitHub, what do they all have in common? The interesting thing that they all have in common is that they're all IT software companies and they're all unicorns. They're all worth over a billion dollars. And they were all started during the 2008 to 2009 financial crisis.

Ed Roman: (13:02)
So if investors were not investing during that time, they would have lost out on those opportunities. So we actually think that a crisis is actually a pretty good time to start a company. And there's a few reasons for this. One of the reasons is that it's easier for companies to hire great talent. So there's been a lot of layoffs recently in this country. And a lot of folks are looking for work, which means it's easier to build a team and assemble a team during a crisis because talent is more available. One of the biggest challenges that our startups have is finding qualified team members to help them build their companies. And as soon as the crisis hit, that actually became the opposite.

Ed Roman: (13:38)
Our startups had many more job applications than they had had in the past because of the crisis. So that makes it easier. And there's also less competition when acquiring customers. So a lot of businesses are not doing advertising right now. You look at traditional businesses like gyms and spas and hotels. A lot of them are not really advertising much because of the pandemic. So that opens up the opportunity for you to acquire customers more cheaply. You can even buy competitors more cheaply in case some of your competitors are struggling.

Ed Roman: (14:07)
So when we talk to entrepreneurs and they're thinking about starting a company, we're generally encouraging them to take that risk and to do it now, because we think that in the midst of chaos, there's always opportunity. There's always ways to make money and to build something that changes the world. But the caveat here is you have to be in the right sector. So you can't just start a company in any sector because a lot of these sectors are going to be challenging.

Ed Roman: (14:29)
And this is the quick snapshot of how we think the sectors compare between the challenging sectors and the sectors that are seeing a Covid tailwind. Meaning, the sectors that are actually benefiting from the pandemics. On the left hand side of the challenging segments here, and a lot of them are obvious like transportation, hotels, sports, fitness facilities, spas. Those are the obvious ones. Those are businesses that are physically closed, or people are not traveling, et cetera.

Ed Roman: (14:54)
Then there are some that are less obvious like apparel and luxury goods. You might not necessarily want to invest in buying that fancy watch or that diamond necklace, if you're not really going out as much. There's not a lot of opportunity to show that off. So that's a challenging segment right now. Online dating is also challenging because how do you get to go out with other people and go on a date in the pandemic? So some of these are less obvious than others, but then in the tailwind category, you've got companies that are doing online education.

Ed Roman: (15:21)
So teaching you to learn from home, video conferencing and virtual event technologies, as well as some things that are a little bit less obvious, like video games in virtual reality. People have more time on their hands right now, and they can't really go out as much. So they have to entertain themselves from home. And so those are the types of companies that we're seeing in Silicon Valley that are now, what a lot of VCs are looking at as interesting categories to invest in. Some of the companies that are doing really well right now in Silicon Valley are the next generations of companies that you see in publicly traded markets, but they're now being invested privately by these VCs. And we'll talk about those in just a second here.

Ed Roman: (15:59)
So here's some data that also backs this up. So what you're seeing here in this chart is layoffs in Silicon Valley in spring of 2020, this is a layoff's chart. This is how many jobs are being lost among the startups in Silicon Valley. And at the top of this chart, you'll see retail, travel, fitness, real estate, those categories are having more layoffs. And then at the very bottom of this chart, you're seeing IT having the fewest layoffs. So this again, supports what we talked about earlier about IT, software being like a Covid resistant category that a lot of VCs are excited about right now.

Ed Roman: (16:33)
And a lot of those companies are being highly contested by VCs because they're in that category of digital transformation, which a lot of businesses are going through right now because of the pandemic. So let's go through a few examples of what are some of the trendy startups in Silicon Valley that are thriving post pandemic. The first one is called Standard.ai. And Standard.ai is AI powered autonomous checkout. So what this means is, it is a service that retrofits a grocery store, like a Walmart, for example, or Kroger's and gives them the ability to have consumers buy groceries by just walking into the store, picking a grocery off of the shelf, and then literally walking out of the store without ever interacting with a human being.

Ed Roman: (17:20)
So the idea here is that it's using cameras in the sky to detect what items you're actually picking off the shelf. There's cameras that are built in the ceiling of these businesses. And they use artificial intelligence and computer vision to detect what items you are picking off the shelf. And then on a mobile application on your phone, that's when you get charged for this. So the idea here, the vision for this company is, "Let's actually reduce the cost of food in this country." Because by having a store that runs more efficiently with fewer cashiers, you actually can drive the prices of food down for consumers and really help consumers get access to food at cheaper prices.

Ed Roman: (17:56)
So it's one of those businesses that is helping the consumer to get access to food more cheaply, but it's also a fantastic business because you're helping the bottom lines of these grocery stores. You can even do things like detecting security. So what if someone pulls a knife out of their bag? What if someone tries to steal from the store? Well, you can actually detect that with the cameras in the sky. So there's a lot of potential for this technologies going... This has been kind of a 50X multiple in just two years as one of the hotter Silicon Valley startups right now.

Ed Roman: (18:26)
Here's another example, this is one that's directly benefiting from what's happened in the last few months, is Medina's health. So Medinas Health is a marketplace for hospitals to find much needed medical equipment. So let's say you're a hospital and you're trying to get access to very important surgery equipment and medical supplies, things like that. Medinas Health helps you find that equipment. And then once the pandemic hit, all these hospitals became very desperate to find masks and ventilators and gloves, because those were in very high demand once the pandemic hit.

Ed Roman: (19:05)
And then Medinas Health serviced that demand. So they helped these hospitals locate those ventilators, those masks. And you could see their revenue has pretty much been on a tear since the pandemic hit as a result of that. So this is a great example of a company that's doing good for the world. They're helping people, they're helping hospitals to source ventilators and masks. And they're also a great investment. They're also a profitable company. So that's why we're pretty bullish on these guys. And they grew five X just during Covid in terms of their revenue. So it's been a pretty substantial run for them.

Ed Roman: (19:37)
Here's another example of a company that's doing well in Silicon Valley called Crowdcast. So Crowdcast is like the next generation of Zoom. That's one way to think about it. It's a technology that allows you to host virtual events. So Zoom is more for these little, very informal sessions that we're doing here. We're just a few people chatting. Crowdcast takes that to the next level, they said, "What if we wanted to have 50,000 people together at a virtual event all at once? And let's make a next generation experience around them."

Ed Roman: (20:05)
So Crowdcast has done no marketing at all, and you can see here their run rate has grown again, 3.7 X in about three months, just as a function of the pandemic. Because a lot of folks are not able to attend conferences anymore. And conference organizers are now reinventing their conferences as virtual conferences. So Crowdcast is servicing that demand. There's one last example I'll give you. So as many of you may know traditional education that's in-person education is challenging right now. A lot of colleges and trade schools are closing their doors and they're turning students away. They're turning to online education, and this is also happening at the consumer level.

Ed Roman: (20:48)
A lot of consumers who learned skills at traditional businesses can't do that anymore. So for example, learning to dance is something that a lot of folks cannot do anymore because you can't take dance lessons from an instructor because it's not safe. Because you have to get very close to that dance instructor. And so a lot of the dance studios are closed now. So this company Steezy is a Silicon Valley company that's disrupting that. And they have online dance lessons where you can learn to dance from home. And this is street dancing. This is dancing where you can do it by yourself. There is no partner in this, so it doesn't require that you get near anybody else.

Ed Roman: (21:22)
And again, this company is on a tear due to the pandemic. So they've grown five X in the last year or so. Just as a function of Covid being a tailwind for their business. So these are some examples of companies that are benefiting right now and that are in that attractive category. Now, the other thing to think about is that there's some Silicon Valley companies that are not doing so well right now. That are in some of the challenging sectors and Airbnb and Lime bike are two examples of that.

Ed Roman: (21:48)
So Airbnb unfortunately had to slash their evaluation from 35 billion to 18 billion. So it's about a 50% reduction in their evaluation. And Lime bike, which is the e-scooter company, they had to reduce their evaluation from 2.4 billion to only 400 million. So that was an 80% reduction for Lime bike when they pulled their scooters off the street. And unfortunately this is having an impact on Silicon Valley. The impact this is having is that lead stage venture firms may have invested at too high evaluations into these companies.

Ed Roman: (22:19)
And they're needing to pour more money into these companies to keep them alive during the pandemic, which means they have less capital available to make new investments. So what that means for the other VCs, for the rest of us is that there's less competition. There's fewer VCs making new investments because a lot of capital is being allocated to save these "struggling Covid companies". Which means that if you are investing in new companies right now, if you are a VC that is writing checks, you're able to negotiate pretty well on price. You're able to actually negotiate on valuation because there's fewer options that startups have to raise from.

Ed Roman: (22:53)
So we think that investing in a pandemic is actually pretty good timing from a venture perspective. And this is some data that supports this. So this data comes from my friend, Tomasz Tunguz at Redpoint. And you can see here that the number of rounds of funding have been steadily decreasing. And this data is relevant as of July of 2020. So you can see here, the number of seed rounds, series A rounds, series B and series C rounds have all dropped precipitously especially in the last six months or so due to the pandemic. What's interesting here though is, this next chart shows you that the number of the sizes of those rounds have actually increased.

Ed Roman: (23:31)
So we're actually seeing bigger rounds, but we're seeing fewer of those rounds. And the reason why this is happening is that a few companies are doing really well right now, like the ones we saw earlier. And investors are dog piling on those deals. And they're putting more money into those companies because they're winning companies in the pandemic. And so that's why the round sizes are going up, even though the number of rounds are going down.

Ed Roman: (23:54)
So let's talk a little bit about social responsibility of venture capital. Something that I admire about SALT and about Anthony is that you guys have a very big focus on social responsibility and charity parody, and we do as well. So this is an interesting fact here. So if you look back in 1978, the most common job in America back in 1978, who would have guessed it's actually a secretary. Is the most common job in America back in 1978. This is about 40 years ago now. Number two, being a farmer back in 1978. And what's interesting here is if you fast forward about 40 years, this is what it looked like in 2014.

Ed Roman: (24:29)
So this is about six years old, but still relevant. And look what happened. Secretary is barely on the map anymore. And now truck driver is the number one most common job in America. It's truck driver actually. And the thing that I worry about is that these truck drivers may in the future have their jobs threatened by VCs in Silicon Valley because of self driving trucks. Autonomous trucks could be threatening to this workforce down the road. And what are we going to do about that? I think we have a social responsibility to think about this. It's not just about making money. It's also about addressing the societal change that's being caused here.

Ed Roman: (25:06)
So right now, unfortunately, this according to CNBC, that 47.2% of Americans are currently out of work because of Covid-19 and many of those jobs are not coming back right now. And this is because the companies are filing for bankruptcy. We've had a lot of local businesses in San Francisco shutter their doors permanently. Because of the pandemic. And yet, and this addresses your question earlier John, is that there's a shortage of one million programmers in this country right now. And unfortunately, most Americans are not skilled to fill those roles.

Ed Roman: (25:36)
So a lot of the people who are losing their jobs cannot fill those roles? So the small way that we're trying to address this is we aim to educate the world on the craft of software development to re-skill a lot of these workers, that way they can take some of these jobs. And we do this through our basic a global virtual event that educates folks on the craft of software development. And then what we do is we then place those programmers at our startups. So we have a service called Hack jobs that all of you can check out, which connects startups with programmers. And that also benefits us as a venture firm because we're able to credibly tell the startups that we have access to these programmers and that solves their biggest problem. And that earns us allocations in their rounds.

Ed Roman: (26:18)
That's one of the ways that we're able to fight our way into some of the better deals in Silicon Valley. So it's a good example of how you can marry social responsibility with economic upside and have the two together. Why do you have to pick one or the other? Can't you build a business that has both economic upside, but also social responsibility? And so we're big fans of that model. In fact, at our events we make no money on the events. All the proceeds go to charity, raise money for organizations like Code for America, women who code, girls who code, those are the folks who benefit from our events. We're not lining our pockets with them.

Ed Roman: (26:49)
So that's how we think about the world. So the last section here, before we go back to our fireside chat is what are some tips and advice for, "How do you earn returns in early stage venture capital while reducing risk?" So let's just get real here and talk about the positives and the trade-offs with venture capital. So one of the positives of venture capital is that it's a very patient way to earn strong returns. So if you're patient about it, if you can wait 10 years or so then the rewards can be substantial, but it's a long-term buy and hold strategy. This is not the type of asset where you'll get immediate liquidity. It's for people who are able to be patient and earn those returns, and are accessing equities that are unavailable to most investors.

Ed Roman: (27:31)
So a lot of these Silicon Valley deals are behind closed doors. You have to know the right people in Silicon Valley, you have to be a Silicon Valley insider to get access to them. And if you can get into them, it's usually quite lucrative. And the reason for this is because you're accessing an asset class that most people don't have access to. So on public markets, everyone has access to those equities. And for me, I like to play the game of accessing equities that other people don't have access to. So that's where I think it gets interesting with venture capital. And there are potential for out-sized returns in venture capital. So this is again, a very rare situation.

Ed Roman: (28:08)
But with Uber, if you were able to invest in Uber's very first fundraising round, you would have made 3,100 extra money on that investment. You have turned $10,000 into $31 million had you invested in an Uber's very first round. Now, again, that's very rare. You have to be very lucky to get into an Uber, but it is possible. And it also offers diversification against other asset classes. So if you're building a portfolio of real estate and public stocks, this is a way to hedge against those a little bit. And they're also helping to change the world. You're helping entrepreneurs to do good things.

Ed Roman: (28:42)
Those are just some of the positive venture capital. But then there's some challenges. One of the challenges is that, it's very volatile and it can be risky. So if you're investing in venture capital, there is a high variance, the asset class. And it's less predictable than other asset classes. And you need to be in the right funds. And a lot of the right funds are oversubscribed, unfortunately. So you look at funds like Sequoia capital and Floodgate, and Andreessen Horowitz. A lot of these funds are not accepting additional capital right now because there's so much demand to invest in those funds. Those are some of the challenges. So the way that we think about this is, "Let's look at how these different venture funds compare."

Ed Roman: (29:19)
So on average, a smaller venture fund will outperform a larger venture fund. This data comes from Preqin and you can see here that, as a fund size of around a hundred million, that's where you're getting the best returns as an investor. On average of course, there's always exceptions here. But then as the fund size gets larger, the returns on average start to drop. And the reason for this is because the investors have to invest bigger and bigger checks at later and later stages. And that can hurt the returns a little bit for the fund.

Ed Roman: (29:50)
Here's another interesting graph for you. So it turns out that most of the unicorns are only held by only 36% of the VC. So basically just about a third of the VC hold most of the unicorns. So again, illustrating why you need to be in the right funds. It's one of those asset classes where if you can get into the right funds and you have that access, then you can do very well for yourself. But if you can't, then you probably shouldn't be playing the game at all because it's a very easy way to lose a lot of money if you're not careful about it. And this is some data that shows that. So this data shows different venture funds based on top quartile versus bottom quartile.

Ed Roman: (30:26)
So on average, over the last decade or so the best venture funds, the top quartile have performed at a 19.45% return. Whereas the bottom quartile funds have only had a 4% return. So this is not true in other asset classes. So if you look at real estate and other asset classes, you don't see this huge disparity between the top quartile and the bottom quartile. And we're not even talking top decile or bottom decile here. We're just talking quartiles here. So again, illustrating why you need to be in the right fund.

Ed Roman: (30:57)
So in summary, these are some of the challenges. Venture capital is volatile, any VC could underperform in any given year, and you can invest in a large number of VCs and that can help reduce the volatility. But then picking a VC firm is tricky. You have to be able to due diligence them. The top VC partners can change firms all the time and funds have gone larger. That hurts returns. And access is hard, the best venture firms can be oversubscribed.

Ed Roman: (31:21)
So in summary, what I'll just tell you is what we're doing to help address this problem, because this is something that I'm passionate about is how do we solve this problem? And so what I've been on a mission for the last decade or so is essentially to transform the asset class of venture capital. And so basically what is a better asset class? So what we're basically doing is creating a new asset class out of venture capital through a diversified Silicon Valley fund.

Ed Roman: (31:44)
And what we basically do is we write small checks in to startups and then we build ownership over time, over multiple checks, and that reduces some of the risk. And to this diversified fund, it's not as concentrated. So it's more predictable. We're basically turning venture capital into a more predictable asset class through a larger portfolio. And our goal is to basically aim to access the top 10% or so of these early stage startups. And we invest alongside some of the top VCs at early stages before they get access to them and they mark it up at higher valuation.

Ed Roman: (32:17)
So we're trying to get an early at these low stages and we're investing in Covid-19 tailwind companies like the next Zoom, et cetera. We're focused on IT software. So we've been doing this now for about a decade now, and we have four companies worth over a billion dollars and 17 of them worth over a hundred million. So that's what we're up to and there's other solutions to this as well. So if you're a family office out there and you're looking to invest directly into startups, you can also apply some of these principles to a direct investment strategy.

Ed Roman: (32:47)
So for example, if you were to be investing in companies yourselves, I would encourage you to maybe write small checks into these companies to seek diversification. Maybe have a portfolio of 30 or 40 companies. Don't bet it all on just one company, and that should help you to shield from isolation. So you can emulate a little bit of what we're doing on your own as well. So that's it. If you have any questions you can email me. My email address here is ed@hack-vc.com. And I'd love to take audience questions [inaudible 00:33:15] the fireside chat. So thanks for listening to me today.

John Darsie: (33:18)
Absolutely. Thanks so much, Ed. That was a great presentation. I have some questions and I know we have some audience questions that have both been emailed in, and then we have some that have been posted in the Q&A box. Reminder, anyone watching, if you want to ask Ed a question, you can enter it into the Q&A box at the bottom of your video screen on the Zoom window. And we will answer it as long as it's appropriate and relevant. But I have a question to start things off. So I think it was a very interesting slide you had up. You had Airbnb and Lime bike talking about how you've had some short term disruptions in companies that have really compelling long-term stories.

John Darsie: (33:52)
And I saw some data a couple of days ago about Airbnb is having a massive resurgence in its revenue and bookings. Whereas hotel chains like Marriott are still suffering in the Covid environment. What you're seeing is a phenomenon where people are looking to get out of some major metropolitan areas and rent potentially rural cabins or other properties. How do you go about identifying what is the baby and what is the bath water? And are there other examples that you have of companies that are suffering in the short term, but it just provides a great entry long-term. Is that a quantitative process or a qualitative process that you go through? And what are some other examples that you're seeing about separating long-term opportunity from short-term pain?

Ed Roman: (34:36)
That's a great question, John. So, in general, we have seen that there's a trend right now towards essentially migrating away from the cities. So, in Silicon Valley in San Francisco, right now, the rents here have dropped by about 10% because a lot of workers have realized we can work remotely. You don't necessarily have to go to an office anymore. Even you John were telling me before our talk today that it's about an hour and 15 minute commute each way for you in New York city to get to and from work. And that may not make a lot of sense for a lot of workers. So what a lot of employers like Facebook and Google and other companies like that are doing and Twitter for example, is they are actually allowing permanently their workers to work remotely where they don't actually have to be in the city anymore. And that's opening up the opportunity for workers to do what I call maximizing the virtual office, which means if you work at a company like that, you could theoretically work anywhere in the world.

Ed Roman: (35:29)
Now, some places are more realistic than others. Like if you work somewhere in some Island in the Atlantic ocean, you might have a time zone issue collaborating with your employer because maybe there's very different time zones between the two of you. So I think staying within the same hemisphere makes a lot of sense. Now I do believe that that is going to be a somewhat temporary phenomenon. So what we're predicting will happen is that once the pandemic starts to wane and once the vaccines are ready and once they're distributed and manufactured, which by the way will take a while to do all that. It's not going to be a V-shape recovery, but once that all happens, then there's going to be a resurgence of cities, where people start to return to cities.

Ed Roman: (36:08)
But it's not going to be 100%. So what's happening here is that people are finally opening up their eyes to the idea of a virtual office and how that could be beneficial to workers. In fact, for all three companies that I've run as CEO for the last 20 years, all three of them have been virtual offices. So I've learned a lot about how to run a virtual office myself and learned a lot of lessons about how to do it the wrong way and how to do it the right way. And a lot of companies are going to have to learn those lessons over the next few years. So I think it's going to be a hybrid. You're going to have some companies that allow virtual offices and some that don't and some will be open to a mix of both. And so we do believe that the cities will still have a permanent function and that companies will be returning here. So that's a great question, John.

John Darsie: (36:49)
Yeah. From a SkyBridge, just to editorialize on my end briefly. From a SkyBridge standpoint, I went into the city yesterday for the first time. I live on long Island, like you said, it's about an hour and 15 each way for me. So two and a half hours of commuting every day. I went into the city yesterday. It was nice to be back in the office, but by the end of the day, I said... Given the time that I spent commuting I was on calls and things while I was commuting. I said, "This isn't necessarily the best use of my time. It's definitely valuable to be there at least a couple of days a week, but I envisioned myself working remotely and maximizing my time in a remote environment.

John Darsie: (37:21)
And also from an event perspective, you talked about Crowdcast. We actually have an audience question about this that we can segue into. But from an event perspective, we always had our SALT conference was virtually 100% an in person event. People gathered in Las Vegas about 2000 people every year, fantastic networking in a very insulated environment. We view those events going forward as being hybrid, even in a post Covid two, three, four, five years down the line of having a digital element built into the in person gathering. So Crowdcast, we have an audience question about Crowdcast and Steezy. Do you see those businesses continuing to grow after the Covid environment that we're in? Or do you think growth might slow or what's your forecast for those types of companies after we get clear of this pandemic?

Ed Roman: (38:05)
That's a great question. So, we do believe that these companies that are doing really well based on the pandemic, they're not going to see the organic growth levels that they are seeing today just because of the pandemic. So Crowdcast has done no marketing. They have grown five X just because of the pandemic, off no marketing. Now we don't think they're going to get all that free growth without investing in marketing going forward. So we think that in the future, they're going to need to invest more to cause their own growth on their own without the pandemic.

Ed Roman: (38:38)
But we do believe that there is going to be a permanent need and value for having virtual events. For the reasons that you and I talked about, which is that a lot of folks are now open minded to the idea of a virtual event. The idea of a virtual conference a year ago would have been unthinkable for a lot of conference organizers. And a lot of folks like virtual events, "Do those even work and do I even get value out of that?" And now since it's the only way we can do business, now folks are open minded to it and they're seeing, "Wow, I actually can get value out of a virtual event."

Ed Roman: (39:06)
So we've been doing these now for six years. We run the largest program or event in history, which is virtual. And we've been believers in this for a while. So we've been hopeful that folks would embrace virtual events now for six years. And now they finally are out of necessity. So we think it's going to be a component but not the only answer going forward. We think it's going to be a mix of both. And so for companies like Crowdcast and Steezy that are having this huge tailwind, and we think that the tailwind will eventually subside and they're going to have to cause their own growth.

Ed Roman: (39:35)
But this does a lot of benefit for them anyway. It de-risks their next fundraising round, their traction goes up quite a bit, they're less dependent on investors. They need to raise less capital from VCs because they can get profitable very quickly. And by the way, both those companies are profitable, which is very rare. You look at all these publicly traded companies, they are.... How many IPOs do we see these days for profitable companies? There aren't that many of them.

John Darsie: (40:00)
[crosstalk 00:40:00] is a great example of that. They lose what? Over $500 million a year.

Ed Roman: (40:04)
That's right. So there is a hand full, but most of them are not. And Silicon Valley has this reputation of turning out these publicly traded companies that are unprofitable. And here we have companies that have even raised their series A, that are profitable, coming out of Silicon Valley. So this is a new generation of companies that we think are self sustainable and the pandemic has been helping them in that regard.

John Darsie: (40:25)
So the next question, Steve Case is somebody who was at our SALT conference in 2019 in Las Vegas. He did a SALT TALK a few months ago. He's a big proponent of this concept of the Rise of the Rest, which is that there's going to be... Even pre Covid, He was preaching this. That there's going to be a wave of entrepreneurship and capital that flows to second tier cities in the US basically non Silicon Valley and to a certain extent non New York. So he's helping to invest in a lot of those companies. He has a bus tour that goes around and does a startup competition, pitch competition.

John Darsie: (40:58)
When you look geographically at startups, do you have a bias towards different places? We have an audience member who's asking whether you look at startups in, for example, the Atlanta or Southeast Georgia area. You talked about the Hack summit that you do that helps companies identify and hire coding talent, and you have the hack jobs platform as well. How do you think about companies geographically? And do you agree with cases, narrative that there's going to be a wave of entrepreneurship outside of these hubs, like San Francisco?

Ed Roman: (41:28)
And that's a great question, John. And thanks for asking that, David. So over the last five years or so, I have been trying to help startups fundraise from other VCs. In addition to ourselves who we believe have merit that are not based in the US and not based in Silicon Valley. And as you get further and further away from Silicon Valley, it can get more challenging. So to be realistic, the reason why this is challenging is because most of the VCs are in Silicon Valley and they preferred to not have to travel for their board meetings, because they have families and they're trying to manage their time and they don't want to be on flights their entire lives.

Ed Roman: (42:04)
They'd rather just have a good family life. So that bias causes other VCs to essentially deprioritize startups that are not based in Silicon Valley. Now that rhetoric has been changing over the last five years or so. So what I'm seeing now is that because of additional competition in the VC industry, because there's a lot more VC firms now than there used to be, the VCs are having to get more creative around, "How do I actually win the best deals?"

Ed Roman: (42:32)
And a lot of the best deals are not in Silicon Valley right now. So you look at Salt Lake City, Utah, for example. There was a largest SAS exit in history, in Salt Lake City, Utah, which was $8 billion that came out of there. Where SAP made an acquisition out of that area. And then Pluralsight, which I was a board observer on also based in Salt Lake City, that IPO-ed for 4.5 billion. So Salt Lake City is an up and coming center now. And most VCs have some strategy or presence now in Salt Lake City. New York City is another good example of that. Los Angeles is another good example of that. So there are certain hubs that are now popular from a VC perspective, and it's easier to raise the next round of funding if you invest in a company that's in those sectors. Because other VCs want to invest in those geographies.

Ed Roman: (43:20)
So it's almost like, by having empathy and by investing in the geographies that other VCs want to invest in, you're actually de-risking in the next round of funding for the startup. And that helps de-risk the investments. So now with the pandemic though, a lot of that is changing. So VCs are now taking their meetings over Zoom, and they're a lot more open to where the startups are located. So we think there's going to be a lot more optionality in terms of where your company is based. And now we're seeing fully virtual distributed teams raising their rounds of funding. So it's going to be interesting to see what happens?

John Darsie: (43:50)
You talked in the opening with Anthony about early in your career, you were frustrated by a lack of access. You felt like you were missing out on a lot of great investment opportunities because you couldn't get access to those. A ton of competition in Silicon Valley. Especially when you talk about those big firms that you mentioned earlier, that get access to all the top deals and crowd out potentially some other investors. How were you able to get into the top startups, given all the competition in the market? And we have a question from an audience member, Chris, what are other ways to solve that access problem other than getting invested at the very early seed stage?

Ed Roman: (44:22)
That's a great question. So, basically here's our strategy. So what we do is we partner with other venture firms. So we partner with firms like Sequoia, like Bain Capital Ventures, like Floodgate, these oversubscribed funds. We have alliances with them. And our business model is that we invest very small checks into those companies at very early stages. And by investing a small check, it doesn't threaten these other VCs business models that are happy to allow us to join for a small check because their whole goal is to write a very large check into these companies and we're enabling them to do that. So what we do is we help them find the best deals. We are literally giving away all of our best deals to our friends who are other VC firms to allow them to lead these rounds. And we're co-investing for small checks. And the reason why we're doing this is because we are transforming the asset class of venture capital into a more predictable asset class through diversification.

Ed Roman: (45:15)
So by having a larger portfolio of these small chunks, that's what creates consistency in the returns. That's what allows us to take the volatility out of venture capital. So we actually don't desire to write these giant checks. We're happy to write a modest check. And then if the company is performing well, then we reinvest in future rounds. We build this position over several checks. So it's almost like we're dollar cost averaging our way into this investment. And by taking this position, it allows other venture firms to essentially be open kimono with us about getting us access to some of their best deals.

Ed Roman: (45:47)
So we're able to invest in companies that the general public generally can't access because those other venture funds are oversubscribed and we're able to access them for that reason. And then the last part of this is that the CEOs themselves are demanding that we invest in their companies. Because we have access to all these engineers because we run this large program or conference. You have to have empathy for the CEO also, they're the ultimate decision maker about whether you get into these companies. And by solving their biggest problem of hiring engineers, they're generally pitching us to take their money. No matter how many term sheets they have, no matter how hot the deal is. We're almost always able to get a small allocation for ourselves because that value add is so important for the CEOs.

John Darsie: (46:29)
We have another audience question, you mentioned the idea of investing in startups outside of Silicon Valley and also even outside the United States. And we have a specific question about India. And India I know it's a hot place for technology entrepreneurship right now. There's several companies, Google just invested a significant amount of money in the Jio platforms based in India. But do you have a specific view on startups that operate in India and are there any other international markets that are of keen interest to you?

Ed Roman: (47:00)
So we do invest in India as well as South America. LATAM is a big focus for us as well. We think that there's opportunities to essentially clone Silicon Valley companies in those geographies. One of the biggest risks you take as an investor is how do you risk what's called product market fit? Meaning how do you prove or disprove the hypothesis around your business model? And that's one of the biggest risks that an investor takes. So if you have a business model that you know works, where you know it's a good business model and it's been proven in the US and if you clone that business model in other geography, then you're taking away that product market fit risk. You know the business model will work. It's just a question of execution at that point, "Is this a good team? Can they execute?" And you can diligence that as part of the investment process, by doing reference checks on the founders and by looking at their past work. People who tend to do well in life tend to repeat that success and do well multiple times.

Ed Roman: (47:53)
So we tend to look for what is the history of success that these folks have? Are they winners in life in general. And that predicts whether they will be successful with these companies. So that is one thing that can make it more straightforward to invest in international markets. And we believe that valuations are also more attractive there, because if you look at the publicly traded markets in places like Latin America or other parts of the world, the public markets are not as healthy as the US. So the US publicly traded markets are very healthy compared to like Latin America, for example.

Ed Roman: (48:26)
And the valuation multiples that you see in Latin America are much lower than the US for the same company. If you were to IPO a company in the US versus Latin, you're going to see a much lower multiple on revenue on that publicly traded company in LATAM because the markets aren't as hot there as here. So what that means, you've got to be careful from a valuation perspective. You have to come in at a low valuation and give a little bit of a discount to the valuation, because they're in Latin America. And as long as you bake that into your Math, it can be very lucrative.

John Darsie: (48:57)
We have another audience question. This was actually one of my questions as well. So at SkyBridge, we deal with a lot of families. Family offices are pretty much our largest constituency of clients. And a lot of times when we bring whether it's hedge funds or venture capital funds to these families, some of them have a preference to invest deal by deal, as opposed to in funds, what are the advantages and disadvantages of investing in a venture capital fund versus trying to invest in deal by deal? And what are some common mistakes you see investors make when they're trying to invent themselves deal by deal in terms of due diligence and company's selection?

Ed Roman: (49:33)
That's a great question. So let me answer the second part of your question first. So we actually have a PDF file that we made that gives a bunch of tips for how to avoid making mistakes when you're doing your own investments, deal by deal. And I'm happy to email that to anyone in the audience that wants to hear about this. I'll just type out my email address here. It's ed@hack-vc.com. If you send me an email, I will send you this PDF file. It's called Angel Investing Tips, and it contains a plethora of best practices that I've learned, the mistakes I've made as an investor over the years, crystallized into a PDF document for you to review.

Ed Roman: (50:09)
Then the other part of your question was, how do you judge the difference between deal by deal versus funds and how do I know which is best and what are the trade offs between the two of them? So we offer both at our venture firms. We do both deal by deal and fund investments through our venture fund, to our LPs. And we do find that investors like to choose their own deal. There's something sexy about being able to pick a company and to have some intuition about whether that company is going to succeed. Because everyone comes from different walks of life.

Ed Roman: (50:42)
Everyone has different life experiences, and you personally may have some intuition about a company that other investors don't have. So why can't you pick your own deals? And so there is a trend right now towards doing that, where families are getting more and more comfortable picking their own deals. The caution that I'll give you is that most family offices suffer from what's called adverse selection. Adverse selection means the deals they're seeing are the ones that have already been picked over by the top VCs. And this is the problem that we're actually trying to solve at our venture firm. Because this is a problem that I experienced because I have my own family office. I had an exit 20 years ago, and I started a family office and lo and behold, I got access to a bunch of deals that other VCs didn't want. And that was problematic for me.

Ed Roman: (51:23)
And that's why I went on this journey to help solve for that. So the way you can avoid that, one way you can avoid that is to partner up with a VC firm. And there's many of them we're one of them, but there's plenty of others too, that you can partner with. Where maybe they can be a second set of eyes for you to help you vet a deal. That way you have a professional that's looking at the deal with you to maybe assist you a little bit on due diligence and to maybe help you out with deal flow. Now, the one caution I'll give you is that, and this is something that VCs are pretty famous for and a lot of families don't realize this is that, sometimes what a VC will do is they'll invest in a company.

Ed Roman: (51:54)
And then if the company under-performs they'll then offer that deal to their family offices, to essentially give the company more runaway to help them have more dry powder to turn it into a good company. And guess what? Those are some of the bottom performing companies in their portfolio. The best ones, are able to raise on their own. They don't even need family offices to raise from them. I would look at your own deal flow from a perspective of what is called a jaded eye. Meaning I'll be cautious about your own deal flow, make sure that you have good counsel, a good venture firm you can work with to be a neutral second set of eyes on this deal. And that can help you avoid some of the losses. Investing in funds gives you what's called a fund level protection. Meaning if you invest in a fund you're investing in a basket of companies and the winners and losers offset each other. So the [inaudible 00:52:40] doesn't make any profits, any carried interest unless the whole fund performs.

Ed Roman: (52:46)
So that means that there's accountability for performance. You don't enjoy that if you invest deal by deal. So if you're doing your own deals, the winners and losers, don't offset each other from a profits perspective. If someone is sourcing a deal in there, they're taking a profits interest on that. They're getting a deal by deal profits interest, which is a very good deal for them. So that's why I would be a little bit cautious. It is sexy to invest in your own deals. And we think it's a good thing, but you've just got to be very careful about it. And email me, I'll give you my Angel Investing Tips to help you navigate that.

John Darsie: (53:15)
Fantastic. I think you might get the sexier returns, as you mentioned sometime, and maybe it has an element of excitement to it trying to pick over deals. But you might settle for a slightly lower return, but with significantly less risk in a fund structure. We have another question from Chris talking about SPAC. So we had Chamath Palihapitiya from Social Capital on he's become the face of this surge in SPAC, Special Purpose Acquisition Companies that provide basically a back door for companies to go public versus a traditional IPO. Do you think SPAC will become a more widely used tool? And what is your general opinion of SPAC? Is it a byproduct of the overheating potentially of the private capital world or what's your general opinion of SPAC? And do you think they'll continue to be a popular substitute for traditional IPOs?

Ed Roman: (54:06)
That's a great question. So I will caution the audience that I am not an expert in SPAC. I'm more of an expert on venture capital, but I will do my best to answer. So my understanding is that there's about 110 SPACs right now that are competing to essentially acquire a company and effectively IPO with them. And the value of that SPAC is that you're not just getting access to IPO and giving yourself liquidity, but you're also saving on the fees that the brokerages will charge you. And that's a lot of savings right there. That buffer that you're saving from not having to go through a wall street broker, that's money that you're leaving on the table as an investor, if you go through a traditional IPO. And the other value of a SPAC is that you're actually able to do a primary fundraise for your company as part of the liquidity, which is also attractive because IPO company is basically a fundraising event. You're raising money for your company, so SPACs have that value.

Ed Roman: (54:58)
So those are some of the benefits of SPAC. But then there's also some trade offs and some downsides as well. So we think that there's going to be a mix. We think that the future is going to be a mix of both SPACs and IPOs. I think one thing that hasn't been discussed too much is that there is this emotional benefit that an entrepreneur gets from ringing the bell on wall street. There's something that's very proud about actually going through an IPO that people just want to experience in their lives. So I think that the demand from IPO is going to go away just because of the ego factor of doing that process. Of saying, "IPO-ed a company." A lot of entrepreneurs just want to say that regardless of the process. And a lot of people just aren't up to speed on SPACs. They're not as familiar with it, and they may not be comfortable doing the SPAC because it's a newer instrument and the IPO is the more traditional instrument. So we think it's going to be a mix going forward. And we think there's room for both of them.

John Darsie: (55:49)
I think we could talk for two more hours easily given all the audience questions and questions that I have for you, but we'll wrap it up just with one more quick follow up on that. And it's a meta question about public markets versus private markets. So obviously you see public tech companies are performing very well prior to that, private technology companies were extremely hot, private equity and venture capital were very much the hot dot and you're talking about different ways to go public. Is there really a strong need for a lot of these private companies to go public or private markets developing with such maturity that you're going to just continue to see some large companies remain private for long periods of time and potentially never go public.

Ed Roman: (56:29)
That's a great question. Yeah. So, the trend that we're seeing is companies are taking longer and longer to go public. And a lot of folks are realizing like, "Why would I even want to go public? What is the benefit of going public?" And the most common answer is, "It's a way to reward the employees who are breaking their backs building your company." Because you're offering them liquidity, you're offering the opportunity to sell their shares to other parties. And there are other ways you can achieve that. You can do a secondary offering on private markets. You can have some of the employees cash out that way, but that's harder to orchestrate for a large number of employees.

Ed Roman: (57:02)
So an IPO is a more elegant way to do that. There's a lot of trade offs, so there's a lot of negativity to going public. Like for example, you may have activist shareholders that try to take over your company and you may have lawsuits that happen from class action lawsuits. Because let's say, Elon Musk puts out a tweet that says that there's a good chance he'll get some financing and doesn't happen. That happened in the last year or so.

Ed Roman: (57:27)
And there was a bunch of class action lawsuits that result from things like that, which you have to deal with. So it's all this nonsense you have to deal with as a company because you're under public scrutiny. So it takes about a year or so to just prepare to go public in terms of getting your books in order and all that stuff. I've been through this process before when I was a board observer at Pluralsight and it's nontrivial to go through that process. So a lot of folks just want to avoid that pain and the potential fear of the public scrutiny. So they'll remain private for a while. But then there's this pressure from the employees to cash out. And the VCs also want to cash out. The VCs want to... A venture fund is only intended to last for 10 to 12 years.

Ed Roman: (58:06)
So once that timer expires, at that point you're obligated to produce a return for your investors. You can do that through a secondary sale. You don't need to go IPO, but an IPO is a nice way to do that as well. So there's some of the trade offs. So we think that people are wising up to the fact that you can now have what's called a second class of shares. Like Mark Zuckerberg has this for Facebook, where he can't be removed as CEO because his voting shares have more votes than other shares. So things like that, if you're a really, really hot company, you can do that. Only the best companies can do that, that can elude some of the fears around going public for some of these companies. So it's going to be a mix and every entrepreneur is going to make their own decision. And we think is going to be interesting to see what happens going forward.

John Darsie: (58:49)
Well, thanks so much for joining us. It was really educational, both for people that are in the industry, who might've learned something more from your presentation and also for people who are less knowledgeable about the venture capital world. I think your presentation was fantastic. And again, I think we could do another hour without blinking, but we'll have to have you back on and definitely have you back at one of our future in person, SALT conferences. And maybe we'll use Crowdcast to make it a hybrid event. Congratulations on all your success with some of those investments that you mentioned.

Ed Roman: (59:18)
Thanks, John. And the audience, thanks for tuning in. Again, if you have questions, just email me ed@hack-vc.com take care.

Jim McKelvey: Co-Founder of Square & Author of "The Innovation Stack" | SALT Talks #42

“Entrepreneurs are in the business of solving problems that have never been solved before.”

Jim McKelvey is the Co-Founder of Square and Author of The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time. Jim had the idea to start Square when he couldn’t take a customer’s credit card at his glassblowing studio. Square would go on to survive a major challenge from Amazon due to its Innovation Stack.

“If you put yourself in a situation where the only solution is to create something new, then you need to understand that the process of innovation is different.” An Innovation Stack is a series of interlocking inventions. While individual elements cannot be viewed individually, the entire Stack fails if one block is missing. We are surrounded by hundreds of examples, but we don’t consider them innovative because they serve as the basis for entire industries.

Jim co-founded the non-profit LaunchCode to provide people with nontraditional backgrounds free education and job placement opportunities in tech.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Jim McKelvey

Co-Founder

Square

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:09)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy, and interestingly our guest today is going to be able to cover pretty much all of those three pillars of SALT. The SALT Talks are a series of digital interviews that we started during this work from home period and are going to continue even after hopefully we kick this virus that provides our audience a window into the minds of subject matter experts who are leading investors, creators, and thinkers. What we're also trying to do during these SALT Talks is provide a platform for what we think are big ideas that are changing the future.

John Darsie: (00:49)
Today we're very excited to welcome Jim McKelvey to SALT Talks. Jim is a serial entrepreneur, an inventor, a philanthropist, an artist, an author, and a glassblower as well, which I'm sure we'll get to during the talk, and he's the author of a book called The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time, which I would highly recommend for those that are entrepreneurs or looking to build a business. Jim is the co-founder of Square, and he also served as the chairman of the board until 2010, and he still serves on the board of directors. Square has been one of the big success stories in the tech industry over the last decade. In 2011, Jim's iconic card reader design was included in the Museum of Modern Art. Jim founded Invisibly, which is an ambitious product to rewire the economics of online content in 2016, and he's also the deputy chair of the St. Louis Federal Reserve.

John Darsie: (01:44)
If you have any questions for Jim during today's SALT Talk, a reminder, you can enter them in the Q&A box at the bottom of your video screen. Conducting today's interview will be Anthony Scaramucci who's the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony's also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:03)
Well, Jim, it's great to have you. I've got to hold up your book. I love the cover. The Innovation Stack, just holding that up for everybody, Building an Unbeatable Business One Crazy Idea at a Time. You probably think John Darsie's sane and I'm crazy, but I just assure you, when this is over, you'll realize it's the exact opposite. Okay? He's the one that's nuts, not me.

Anthony Scaramucci: (02:26)
But I want to go to you. The book is great. We're recommending it to everybody. I'm holding it up. Right after college, you graduated from Washington University, amazing school in St. Louis. You had a degree in economics and computer science, and you had authored two computer programming textbooks. How do we get there to glassblowing artist? Tell me what happened here. Tell me the evolution of Jim McKelvey.

Jim McKelvey: (02:52)
It can be explained by basically bad planning, or in my case no planning. I graduated with these two degrees, took a job with a startup run by a crook. I was too clueless to realize that the guy was a crook. Right? Sometimes you work for a guy-

Anthony Scaramucci: (03:07)
Sometimes that happens. You can work for a crook, and you can be clueless about it. That does happen to people. I have empathy.

Jim McKelvey: (03:15)
Sometimes it happens.

Anthony Scaramucci: (03:17)
And, Darsie, don't be looking at me. Okay? I'm talking about other people, Darsie. Okay? Go ahead, James.

John Darsie: (03:22)
Of course. You would never make a bad decision like that.

Anthony Scaramucci: (03:26)
I've made my series of bad decisions. Sometimes I'm a little bit too gullible, Jim. But go ahead. I'm sorry.

Jim McKelvey: (03:32)
So, I ended up in this situation, and I realized what was happening one day, and so I went and I quit. I was like, "Oh, this guy's screwing everybody he deals with." My number's going to come up next. So, I went in, and I just quit. I didn't have another gig lined up. I didn't have another job. So, I woke up the next morning. I was like, "Oh crap, how am I going to pay the rent?" and the answer was I thought, well, maybe I could sell my glass work, because I was doing glass ... I had just taken one year at college, but I was TA for the college, and I had access to the studio. So, I went in, and I thought I could make some work and sell it, and it just turns out that I couldn't, because my work sucked.

Jim McKelvey: (04:14)
But it's amazing how good you can get at something if you say, "This is what I've got to do." Right? So, within six months I was making a really good income, and I've just stuck with it ever since. As a matter of fact, I'm heading to the studio this afternoon. I've been a glass blower for 30 years. Well, it was a great business, and now it's a great hobby.

Anthony Scaramucci: (04:40)
All right. Well, before that you co-founded Square with Jack Dorsey who's also the founder of Twitter. So, tell us a little bit about that. You lost $2,000 on the sale at your studio apparently, and I want to hear that origin story. How did it all come together? How did Jack find you, you find him, and how did you get this amazing business started?

Jim McKelvey: (05:07)
Right after I became a glass blower, this was 1989, I started another company, which I still have today. As a matter of fact, that's when I met Jack. I hired Jack when he was a 15-year-old kid. His mother was our I wouldn't say drug dealer, but she would sell us-

Anthony Scaramucci: (05:27)
You could say drug dealer. It's okay. [crosstalk 00:05:29]

Jim McKelvey: (05:28)
So, we bought from Marsha Dorsey chocolate-covered espresso beans which, before ritalin was readily available ... They're basically putting it into the water supply now. But back in the early '90s, if you wanted to stay awake, you munched on coffee beans, covered in chocolate. We bought piles of this stuff from Marsha. We found out her son liked computers. We worked with computers. So, this 15-year-old kid shows up, and that was Jack. He's an amazing guy. He did a great amount of work for us. We became friends.

Jim McKelvey: (06:02)
And sort of 20 years later, I guess it was 15 years later, he had started Twitter, gotten kicked out of Twitter, and was back in St. Louis for Christmas. We started talking, and Jack said, "Hey, why don't you come out and start a new company with me?" I was like, "Great. What do you want to do?" And he said, "Well, I don't know. What do you want to do?" So, we went back and forth. Neither one of us had an idea. But then I was in my studio-

Anthony Scaramucci: (06:27)
Next time you guys are going to start a company, can you invite John and I to the lunch table? We would be interested. I'm just letting you know. That would be great.

Jim McKelvey: (06:33)
It wasn't a very posh thing. We were having this conversation in my studio. I mean, Jack was a nobody. I was basically an artist. So, it wasn't this big thing. But I was there, trying to sell a piece of glass, and the truth of the matter was it was this piece of glass that I hated. It was ugly as ... Just terrible. And this lady was going to pay me like two grand for this thing, and I lost the sale because I couldn't take an Amex card, and I was pissed.

Jim McKelvey: (07:03)
It was a phone sale, and I was talking to her on one of these things, and I looked at this thing. My attitude towards this device is it turns into anything I want. Right? It becomes a phone, a TV. It becomes a map. It becomes anything. This thing should turn into whatever I want, but it wouldn't turn into a credit card machine, which was what I wanted to turn it into. So, I called Jack up in California, and I was like, "Hey. We should turn iPhones into credit card machines." That was the idea behind Square. Didn't know if it was going to work, but turns out it was a pretty good idea.

Anthony Scaramucci: (07:41)
Well, not a good idea; it was an amazing idea, because you had a seam in the marketplace where credit card companies ... I don't want to use the word gouging, but let's use the word gouging. Okay? They were really taking a vig off of these small businesses. So, you interceded and you closed the gap for them. That was a huge benefit to small businesses. Is that fair to say?

Jim McKelvey: (08:04)
Oh, a ton. A ton. What I discovered in starting Square was that the lower part of the market paid most of the fees. The little guys got screwed way bigger. I actually ran the math, and it was ... If you calculate the profit that you make on a transaction at Walmart versus the profit that you make on a transaction at a small company, it's 45 times higher. So, the little firms are paying almost 50 times as much as the big ones are, which is unconscionable.

Anthony Scaramucci: (08:37)
Just for all of our viewers and listeners, that is a huge competitive disadvantage. We're going to have the author of Monopolize on. I believe that's next week. Is that not right, John Darsie?

John Darsie: (08:47)
Yeah. It's on Monday, David Dayen, the author of Monopolize, talking about big tech monopolies.

Anthony Scaramucci: (08:52)
Yeah. So, what happens is if you're Walmart, you can squeeze down the credit card company, but if you're mom and pop in St. Louis on a local main street, you cannot. See, you guys came in and helped them split the seam, which is a great, great thing for the country.

Jim McKelvey: (09:08)
Yeah, yeah. It turned out to be a really great thing, and then interestingly enough, and this is actually the reason that I wrote the book, was three years later we got attacked by Amazon, one of the big monopoly companies. I try not to knock Amazon too much when I'm trying to sell a book, but, look, the fact is, when Amazon attacks a startup, the startup dies. And Amazon copied our product, undercut our price by 30%, and everyone expected Square to just get wiped out. Amazingly-

Anthony Scaramucci: (09:42)
So, how did you survive? How did you survive that?

Jim McKelvey: (09:46)
Well, that's the funny thing. We didn't do anything differently. We looked at all the stuff that we were doing, and we were doing everything for a good reason. So, we didn't change anything. We didn't even lower our price. Then we sort of fought Amazon for about a year, and then Amazon gave up. When they gave up, they mailed one of these little Square readers to all their former customers. So, I've got to say, out of respect for Amazon, when they quit, they quit in a sort of admirable way. They were sort of gracious in defeat. But I couldn't explain what happened. The amazing thing to me was why did we beat Amazon, because if you look at the history of companies, this doesn't happen. Startups don't survive this. And somehow we did.

Jim McKelvey: (10:37)
So, I was happy we won, but I couldn't figure out an explanation. I basically started researching, because I get obsessed with problems. I started looking for other companies that this had happened to, and it turns out, if you look back in time, there are literally hundreds of examples of the same thing having happened throughout time. So, when I saw this pattern, I was like, "Oh my god. This is really interesting." But the problem with doing historical research is you can really delude yourself into thinking you're right, because you can cherry-pick your examples, and then you're like, "Oh, I've proven that the sky is always red." Well, no, it's not, but you're just taking your photos at the sunset after dust's in the air or something.

Jim McKelvey: (11:25)
So, I took all my research ... It was funny, because I'd done all this historical research, so basically I was studying dead people, and I needed to find somebody who was alive. So, I called Herb Kelleher who's the founder of Southwest Airlines. I called up Herb, and I-

Anthony Scaramucci: (11:40)
Legendary entrepreneur.

Jim McKelvey: (11:42)
He's phenomenal. Dearly miss the guy. But I flew down to Dallas, I took all my research to Herb, and I said, "Herb, I think what happened at Square is another example of what happened at Southwest. What do you think?" Then I just shut up and let the man talk. And he got really excited, and he told me a bunch of stuff that was exactly the same things that happened to us. And I said, "Okay, here are 15 other companies where I've seen the same pattern," and he's like, "This is exactly right." He says, "I've never heard it explained this way." He's like, "You need to go write this. You need to go write a book." So, Herb Kelleher was the one that basically convinced me to write a book, but I didn't want to write a normal book, because I hate business books. I mean, I see your bookshelf back there. Man, I almost feel sorry for you, because a lot of these things are just disastrous, boring tomes.

Anthony Scaramucci: (12:39)
You mean the books behind me you feel sorry about? Is that what you're saying?

Jim McKelvey: (12:42)
If you've read all of them. I'm looking at a few of them, and I won't sort of out some of the authors-

Anthony Scaramucci: (12:46)
Pick out one that you dislike, go ahead, that you feel sorry about me. Okay? There's the beautiful wife though. Right? You like that. Those aren't bad, right? But which book on the shelf you don't like? Go ahead.

Jim McKelvey: (12:59)
Edison.

Anthony Scaramucci: (13:00)
Edison. I couldn't get through that book, by the way. Okay? [crosstalk 00:13:04]

Jim McKelvey: (13:05)
I got that as a gift.

Anthony Scaramucci: (13:06)
Yeah, couldn't get through it. And by the way, since Edmund Morris wrote the Reagan book, Dutch, he's gone downhill in my mind. But somebody sent me that book. Somebody sent me this book though. This book is pretty terrific.

Jim McKelvey: (13:21)
So, what they should have sent you was this. My original book was a graphic novel.

Anthony Scaramucci: (13:27)
Oh, okay.

Jim McKelvey: (13:27)
The whole thing was cartoons.

Anthony Scaramucci: (13:30)
Yeah. I need that. I need that. [crosstalk 00:13:32]

Jim McKelvey: (13:31)
I'm surprised they didn't send it. I'm sorry, man. I'll send you one.

Anthony Scaramucci: (13:34)
All right. I need one of those. But let's talk about this though, because this is an ingenious revelation. And if somebody can actually read this and understand this, their business is going to get a lot better. So, tell the people that are queued in here right now what this is about. What's the central thesis of The Innovation Stack?

Jim McKelvey: (13:58)
The central thesis is that there is a difference between doing something that's never been done and copying. And that sounds pretty obvious, but it wasn't obvious to me over 20 years, because I was always going to business conferences and reading books and talking to experts whose problems never seemed to be like the problems I was having. And the problems I was having were typically the problems you have when you're doing something that's never been done before, and that's different from doing a business where there's a trade show and they're experts and they're consultants, and they're things that are known to work.

Jim McKelvey: (14:32)
The reason I think I was ignorant for all these years was because the word entrepreneur today means business person. So, if you start a company, if you start a coffee shop, we call you an entrepreneur. If you start a dentist office, well, if you open it, you're the entrepreneur. You start an accounting firm. Anything that you do to start a business, we say entrepreneur. But that's not why the word was originally used.

Jim McKelvey: (15:00)
The original use of the word, and I had to go back into linguistic history to figure this out ... The original use of the word meant somebody who was crazy doing something that has never been done and might not work. So, the Wright brothers trying to fly for the first time. They were entrepreneurs, because if you look at the history of aviation, at least from the early days, there was a lot of death and burning and mangled flesh. So, if you were one of those guys who was trying to fly when humans had not figured it out, you were an entrepreneur.

Jim McKelvey: (15:33)
It's a totally different set of rules if you're not copying, and copying, I'm not knocking copying. I try to copy everything. I try to never do anything original unless I have to. It's sort of the last resort. But if you're trying to solve a problem that's never been solved before, then you've got to think differently, and the process of thinking differently is one that we don't even discuss, because literally, Anthony, the English language doesn't have a word for it. And when I realized this, I was like, "Oh my god. It explains all these problems I was having." So, that was the genesis of the book.

Jim McKelvey: (16:12)
Then I wrote it as a graphic novel. It was supposed to be a cartoon. I showed it to Herb. Herb hated the idea of being portrayed as a cartoon character, so he said ... I was really surprised at this, because Herb had a great sense of humor, but he basically said, "Look, if you're going to make this as a cartoon, leave me out." So, I rewrote the book basically as text out of respect for this man.

Jim McKelvey: (16:35)
But the fundamental idea in The Innovation Stack is that, if you put yourself in a situation where the only solution is to create something new, then you better understand that the process of invention is different, that it's not usually one or two single things. It's probably 12 or 14 or 20 different things that you're going to have to do differently. Those things themselves are going to influence each other, which causes this giant mess. And this becomes what I call an innovation stack.

Jim McKelvey: (17:09)
If you look at the history of companies who've dominated their industries, at the beginning of every industry, there's one of these innovation stacks. Now, it doesn't happen that often, because most businesses are copies of other businesses, but when it does happen, things get really interesting and really different, and that's what I wrote about.

Anthony Scaramucci: (17:29)
Well, but I also think that there's a lot in here about how you have to adapt to your environment. Right? So, your plans for Square, they didn't go perfectly.

Jim McKelvey: (17:42)
No.

Anthony Scaramucci: (17:42)
You had to make changes. You had [inaudible 00:17:44] So, give us a few examples of your plans making contact with the enemy and competition and what you had to do to innovate and switch up that stack.

Jim McKelvey: (17:57)
Great example. So, we decided to connect our little Square reader through the headphone jack. So, it was going to plug in through ... I've got one of the last phones with a headphone jack. I've got a little Samsung here. But this is how we decided it'd connect, which Apple didn't want you to do. Apple wanted you to connect through their dock connector, which at the time was like this inch-long thing. We were sort of violating the iPhone by plugging in through the headphone jack, which nobody had done before, and we were sure it was going to piss off Apple. So, our great strategy was to get Steve Jobs to cover us. Right? So, Jack got in touch with Steve. That was not easy, because Steve was very ill. But Steve agreed to meet with us. Now, this was 2009, 2010. Steve, he was pretty sick, but-

Anthony Scaramucci: (18:57)
Well, he died in 2011, so, yeah, he was having a hard time. He had just probably gotten his liver transplant, right?

Jim McKelvey: (19:01)
He had just gotten his liver transplant. He wasn't seeing too many people, but we got an audience with Steve. I was terrified, because I was the guy that built all the hardware. So, Jack was writing the software; I was the guy that physically had to build this thing. Okay? If you know anything about Steve Jobs, you know that he was a design zealot. I mean, he didn't have any furniture in his house, because he couldn't find anything that was good enough.

Anthony Scaramucci: (19:26)
Right. He drove Laurene crazy. I mean, Walter Isaacson writes about it in the book. He couldn't buy a couch, the poor guy.

Jim McKelvey: (19:34)
No, no. If it wasn't perfect, Steven wouldn't touch it. Right? You would hand Steve a pen [inaudible 00:19:39] Yeah. So, I'm the hardware guy, and I've got to put a piece of hardware in front of Steve Jobs. I'm freaking out. I'm just freaking out. So, I'm a good copier. I'm like, "Okay. I need to steal Steve's own idea." I go to the Apple store, and I look at the Macintoshes. The Macs were all these sort of brushed aluminum, just sort of pill shaped.

Anthony Scaramucci: (20:06)
I'm looking at one right now. I'm touching it.

Jim McKelvey: (20:08)
Yeah. There you go. Oh yeah, the Mac. Right? So, I was like, "Okay, Steve likes aluminum." So, I go, I get a block of aluminum, and I'm milling the first Square reader out a block of solid aluminum, shove all the electronics in there, test the thing out. I'd been awake for two days. It works. I get it to work. Fly out to see Jack, hand it to my ... Because Jack's the one who's actually going to do the meeting. I hand it to Jack. It doesn't work.

Anthony Scaramucci: (20:45)
Oh god.

Jim McKelvey: (20:45)
He hands it back to me. I'm like, "No, no, no, man. Look, it works, it works, it works." Then [inaudible 00:20:51] And I've got to show you with a credit card what's going on here. I've got a credit card here. I'll try not to show my credit card number to the whole world. But what was happening was, as Jack was swiping it, he was holding it like this to keep it from rotating, because the thing spins. Right? So, Jack would swipe like that, and it would never work. When I swipe, I go like this. So, I don't touch the thing. Well, aluminum is an electrical conductor, and on an iPhone this is not the grounding plug, this is the grounding plug. So, I was basically making an open circuit. It was effectively a heart monitor-

Anthony Scaramucci: (21:37)
Got it.

Jim McKelvey: (21:37)
... because when Jack touched it, the thing shorted out, picked up his heartbeat, and totally ruined the signal. Okay. This before a demo with Steve Jobs. I've totally made something that looks cool and doesn't function.

Anthony Scaramucci: (21:51)
Got it.

Jim McKelvey: (21:52)
The good news is ... Well, there were sort of good and bad news. I think we were lucky. The meeting got canceled, because Steve got sick again. So, we didn't actually have to do the meeting. And I've built them out of plastic ever since. But, look, that's just ... I mean, I could tell you-

Anthony Scaramucci: (22:11)
But when you eventually got to the meeting, he probably loved the design, right? Because it looks like the old iPod, the small iPod, the mini iPod.

Jim McKelvey: (22:19)
Steve never saw it.

Anthony Scaramucci: (22:20)
Oh, he never saw it? Okay.

Jim McKelvey: (22:21)
Steve never saw it. He got ill. He canceled the meeting. We actually showed that first prototype to Mike Bloomberg, because we had another meeting with him, but ... Actually, I think we may have been saved by the fact that we didn't meet with Steve, because the funny thing was we were expecting Apple's lawyers to just tear us apart. What was funny was that Steve was such a powerful force at Apple that I believe the fact that we even had a meeting with him was enough protection that the lawyers weren't going to attack us. So, just getting on his calendar was probably what saved us, but, again, I don't know.

Anthony Scaramucci: (23:04)
So, mission accomplished. I have to turn it over to John Darsie, because we have tremendous audience engagement. But before I do, I want to ask you one more question related to where you are going, because I think you are a polymath and you are a genius, and I want to hear about another contribution that you are going to make to our civilization. What is it going to be? And it could be glassblowing. That's totally fine. But I see something else in your future, and I want you to tell us what it is.

Jim McKelvey: (23:41)
So, I've got three things I'm working on right now. One is actually in the studio. I'm going in today. I'm making another set of ... I'm trying to make a cool rocks glass. I've been spending a lot of time drinking lately. You know, pandemic. And I just realized that I didn't like the glasses I was drinking out of. So, I'm going to go and try to make an object. I haven't made a consumer object in 15 years, so I'm going to go in and see if that'll work. Don't get your hopes up for that one.

Anthony Scaramucci: (24:13)
All right. Well, that's number one. You said there's three. So, what are the other two?

Jim McKelvey: (24:17)
The second is a project called Invisibly. Basically the economics of content are broken, and I think that's fixable if we can get micropayments working. That's a bunch of gobbledygook that nobody should understand. Here's the basic problem that every human has. You are not allowed right now to pay more for good stuff and less for bad stuff online, because most online content is either subscription or advertising supported. There's no way to pay more for good and less for bad. The problem with that is it's not all free. Right? Content isn't free. You pay for content essentially with your attention. But because your attention doesn't have this signal built in whether or not you like the stuff, crap gets the same price as quality. And unfortunately, that's-

Anthony Scaramucci: (25:09)
Makes sense.

Jim McKelvey: (25:10)
Yeah. That doesn't work. So, what I'd like to do when I go out is signal to the world that, if I spend 20 bucks on a hamburger this afternoon, I'm basically telling the world to kill more cows and build more slaughterhouses. If I go out and spend five bucks on a Beyond Burger, that's going to be a different vote, and that's how the economy works. But it doesn't work online, and it doesn't work for a bunch of reasons.

Jim McKelvey: (25:40)
So, anyway, I sat down with a bunch of economists at the Fed. We figured out how to fix this. The problem is it requires micropayments to work, and, if you know anything about the history of micropayments, they've never worked. Everyone's had the idea. Nobody's ever gotten it working. So, I'm working on that. That one, that's a long shot, but if Invisibly works, it's going to meaningfully improve people's control over their eyeballs, which I think is a good thing for the world.

Jim McKelvey: (26:07)
The other thing that I'm doing right now is a project called LaunchCode, and LaunchCode is something we started about seven years ago. It's a free class in programming. So, the deal with LaunchCode is you show up, we don't charge you anything, we give you free education, and then you get a job, and we get you a market rate job. And we've been training thousands of people. That's sort of a ... It's a nonprofit, but it's solving the talent gap in programming. So, those are sort of my three big focuses.

Anthony Scaramucci: (26:38)
Awesome. Well, go ahead, Mr. Darsie. We've got a ton of questions for you.

Jim McKelvey: (26:42)
Cool.

Anthony Scaramucci: (26:43)
I'm holding up the book one more time, The Innovation Stack. Everybody should be reading this book. By the way, I'm getting texts from Jack Oliver. He says hi, by the way, so I'll just throw that out there.

Jim McKelvey: (26:55)
Oh. I talked to Jack last week. All right. Jack, Jack, Jack.

Anthony Scaramucci: (26:59)
He says you're a genius, but we sort of already know that. But go ahead, Darsie.

John Darsie: (27:02)
Yeah. I have a followup question about Invisibly. How much of this idea was born in the last several years? There's been a lot written about how a lot of these journalistic outlets have gone behind paywalls, and we want to make sure that journalists get paid for their work. That seems to be the most sustainable business model for a newspaper outlet that's publishing online, for example. But then you have a lot of disinformation that's out there, and it's free. So, what's happening is a lot of people who don't have the means to have subscriptions to The Washington Post, The New York Times, The Wall Street Journal, The Financial Times, they're instead consuming ... I'm not going to name these disinformation outlets and give them that platform, but a lot of people are consuming stuff on Facebook and social networks that's out there for free. How much of that idea is born out of the desire to make sure that people are consuming the right information rather than disinformation?

Jim McKelvey: (27:52)
There's sort of two questions there. I'm going to take them both. The first is you named three of the five subscription models that work in the English language: Financial Times, Washington Post, Wall Street Journal, New York Times, and The Economist. If it's not one of those five paywalls, it's ad supported or losing a ton of money. Okay? Although those a five great information sources, I as a consumer want to be able to read stuff from all sorts of different sources. Right now, none of those sources are making money. So, subscription is not going to save everybody, because you just as a consumer are not going to have 40 subscriptions, but over the course of a year I'm probably going to want information from 40 different places. So, we really need to figure out a way to ... It would be like me saying, "Okay, pick five chain restaurants you're going to eat at for the rest of your life." You kind of go, "Well-"

John Darsie: (28:45)
Right. Does this apply to streaming outlets as well? Not to interrupt your missive, but I feel like the same thing is developing with these streaming outlets is that now everyone's unplugging from cable, but there's 15 streaming companies out there and you have to subscribe to all of them to get the content you want. Could a micropayment system work for digital video content as well?

Jim McKelvey: (29:05)
It works in theory, John, but it's really hard to set up, and we haven't figured out how to turn that corner yet. I've burned $30 million so far, and I have got nothing significant to show for it. The only thing I've got to show for it, which actually is significant, is I've got a survey to ... Part of our tech ... We just started playing with politics. I can call elections now. I can literally survey and get within a point of the final vote total. It's amazing. Actually, that's one of the reasons I was talking to Jack Oliver last week. But the politicians are all over us, because we've got this tech now. But that's not what the company's about. It's just this weird quirk. But if you need to call an election, let me know. And I'm sorry. I forgot the other part of your question.

John Darsie: (29:58)
It was about how much of this idea was born out of this disinformation, the amount of free disinformation that exists out there on the internet today.

Jim McKelvey: (30:06)
Oh, yeah. Yeah, yeah, yeah. Disinformation. So, it was not born out of that, but I will give you a really interesting piece of insider information that only the ad tech people know, and that is, if you take one of those readers from one of those five expensive publications you've mentioned ... Okay. So, this is somebody who's got enough money to spend 100 bucks a year subscribing to some content source. Okay. Now, let's take the value of that person's eyeballs as an advertisee versus somebody who reads something that is laughably fake news. Okay? Whose eyeballs are worth more per second? You want to take a guess?

John Darsie: (30:52)
I would think the person who's willing to pay for the subscriptions.

Jim McKelvey: (30:55)
Yeah. Most people make that conclusion. You're not only wrong; you're wrong by a factor of 10.

Anthony Scaramucci: (31:00)
Oh, I love the way he's sticking it to you, Darsie. Keep going, Jim. I'm going to turn my camera off. Hold on. You guys can just talk together. All right. I'm down. My camera's down, Darsie. Go ahead, McKelvey.

Jim McKelvey: (31:14)
There you go. No, no, no. I mean, it's the same conclusion I'd make, which is why I think this is so ... So, it turns out that, if you are so gullible that you believe the fake news sites, your value as a sucker for whatever product they're advertising is 10X. I can prove this. I've seen the numbers. You get more money if your audience is the sort of person who believes unquestionably or unquestioningly the content. The critical thinkers, the people who ask the questions, we're not worth that much as a set of eyeballs. But if you're gullible enough to think you should shove your IRA into gold or ... I don't know what they're advertising now. I don't see a lot of that stuff. But I've seen the data. It's chilling.

John Darsie: (32:09)
There's a case study in that today. There was an indictment in New York City about a crowdfunding campaign to build the wall on the southern border where they preyed on zealots to crowdfund the building of the wall, because the government was stalling on building the wall. And you have four individuals, one of which is very familiar to Anthony, who have been now indicted, because they were preying on the exact people that you were talking about.

Jim McKelvey: (32:38)
It's so sad. I have to say, preying on the trust of others is abhorrent. And I wish I had a solution for that. I will tell you that Invisibly does not. The only thing we're able to do, if our system works, and it doesn't work yet, is to give consumers the ability to pay more for good stuff and less for bad stuff and to control how their eyeballs are being bought and sold, because right now your eyeballs are being bought and sold a thousand times a day without your knowledge or consent. So, we're going to give you that control.

Jim McKelvey: (33:15)
What we can't do is make you exercise that in a thoughtful way. So, let me use an analogy with food, because people understand food. What I want to do is change the model, which is currently ... Here's the model that your intellectual food is being created under. We're never going to make much money for it, so we're going to pay the absolute least amount for our ingredients and sell it to you at a fixed price. So, that's the equivalent of saying every lunch in New York City costs 10 bucks. And you say, "Oh, great. 10 bucks. I'll eat a fancy restaurant." No, you won't, because the fancy restaurant just closed, because they can't put the food on the table for 10 bucks a plate. So, all you're going to be is fed the cheapest crap that they can get their 10 bucks from, and that's the model that we're living in with content.

Jim McKelvey: (34:12)
So, in our system, it's like the economy today. You'll have cheap options, you'll have expensive options. If you choose the expensive options, that's great. But if you choose the cheap options, that's also great. The interesting thing though is that we want to have the consumers exercising this choice in a way that's responsible, but we're not going to tell them what to eat. So, the analogy here is, look, you can go out and have a healthy meal. You can go out and have a meal that cumulatively will kill you. That's your choice. So, I'm not going to tell you what content's good, what content's bad, what's fake news, what's real news. We're not going to get into any of that. We're just going to reflect the value that the consumers see back in the price, but it's [crosstalk 00:35:01]

John Darsie: (35:01)
We could talk about Invisibly all day, I think. I want to pivot a little bit back to innovation stacks for a minute.

Jim McKelvey: (35:06)
Cool.

John Darsie: (35:06)
You talk about how Square ultimately prevailing against Amazon in this space is an example of an innovation stack. Are there any other prominent examples in today's business world of innovation stacks? I can think of one potentially with Tesla, now the market cap of Tesla having encompassed the entire automotive industry. But are there any others that provide an example for people of what innovation stacks are?

Jim McKelvey: (35:30)
Well, there are dozens, but let's take your example. Tesla's a great example, because Tesla didn't copy all the other car companies. Right? All the other companies were doing basically internal combustion engines, and when they did try to build electric, they build these sort of glorified golf carts. I don't know if you've ever seen an EV1, but the GM ... I mean, GM built Tesla to market with an electric vehicle by a decade, and yet it was such a ... I mean, they just got it wrong. I think it was because, in the world of General Motors, working on the electric car is like punishment. Like, if you're a bad engineer, they make you ... Like, "Oh, we're going to send you to the Russian Front or make you work on the EV1s. You can make a golf cart that slows down when you go up a hill."

Jim McKelvey: (36:24)
But Tesla, what they did was not just one, two, three things. They've probably got an innovation stack that's 40 or 50 things long. Now, I don't work at Tesla. I've met Elon Musk a sum total of five minutes in my life. So, it wasn't like he and I got deep on anything. But even from the outside, you could look at the way they're packing the batteries, the way they're putting capacitors in front of the batteries, the software, the way the car drives, the way it unlocks, the way they deliver the car, the way they sell the car, the Tesla dealership network. Oh, wait a second. You're not buying this from Scaramucci Auto.

John Darsie: (37:07)
No, it makes sense. I think it's happening a lot in the financial industry as well.

Anthony Scaramucci: (37:09)
That would be a hot car, McKelvey. That could be our next business, you and me. Okay?

Jim McKelvey: (37:12)
I'd do it.

John Darsie: (37:12)
You would have a lot of-

Anthony Scaramucci: (37:14)
It would have an '80s feel, and there would be a lot of ostentation to that car. Okay? I just want to make sure you guys know that.

Jim McKelvey: (37:22)
I think David Lee Roth is available.

John Darsie: (37:26)
Well, it's happening a lot in the financial industry as well, where you're seeing people from the tech world come and attack problems that are traditionally financial industry problems, and they're thinking about them in a different way. It's allowing them to re-engineer these systems without preconceived notions of the conventions that have existed in the past.

Jim McKelvey: (37:45)
Look, here's the whole point of the book. I'll save you from having to buy it now. And that is innovation is this thing we all talk about, but it's really hard and really unpleasant and probably should be the last resort. I'm not preaching innovation. I'm not sitting here going, "Look, this is what you should do." I'm a big believer in copying solutions, except that it doesn't always work. When people find themselves in a situation where there's an unsolved problem that they can't copy solution that, almost everybody stops. And I still feel that urge to quit as well.

Jim McKelvey: (38:22)
But when I was writing the book, I had this person in mind, and I always think about her, because she's super competent. She's intelligent, hardworking. She's got all those qualities for somebody you would say, "Oh boy. This person could be doing great things." And she does do great things, but she only does great things when she has permission to do it, i.e. a degree or a credential or somebody saying, "Oh, you're qualified to now work on this project." And when she encounters a problem that has not been solved before, she says, "Oh, I can't do this," and I'm like, "Wait a second. No, no, no. You can." And we had this conversation. She's like, "Well, I'm not qualified to do that." I was like, "Look, nobody's ever done this. You can be qualified."

Jim McKelvey: (39:02)
So, today, all right, I'm going to fly a plane today. I'm going to get in a plane. I've literally got a freaking book here that I've got to sit here and read on the Garmin G1000, because they just put a new ... Everyone's going to hate me now. But I've got to read this stupid book, okay? And then I've got to go take all these tests, because today if you want to get in a plane and fly a plane, you'd better be qualified. Great. That's the way it should be. Orville Wright who gets in the Wright Flyer-

Anthony Scaramucci: (39:36)
I've got to interrupt you there, because you're talking to capitalists, fellow capitalists. I love the fact that you have your own plane, okay? I want everybody to have their own plane. I want them to read The Innovation Stack so they can figure out how to buy their own plane. Okay? All right. But keep going, okay? This is great.

Jim McKelvey: (39:52)
So, the point is if you want to get in and pilot a plane today, you get qualified, you get trained, you get certificated, you pee in a cup. You're good to go. The Wright brothers could not be qualified to fly the first plane. Nobody is qualified the first time. You build the first anything in the world, I don't care what it is, you're not qualified.

Anthony Scaramucci: (40:15)
Well said.

Jim McKelvey: (40:16)
Nobody's qualified. You don't get credentials and permission and diplomas and little badges until it's become something that humanity has already solved. So, if you want to spend your whole life limited to the world of already solved problems, then you're going to have a great life. Nobody's going to give you any shit. Nobody's going to sit there and tease you or tell you you're stupid or call you crazy. But unfortunately, the world's never going to move forward unless some of us sort of step off the edge and usually fall, but sometimes we end up pushing the frontier of what humans can do a little bit further, and that's innovation. It's unpleasant, and it's something we don't talk about because we don't even have the words, but it's something that I think is desperately necessary.

Jim McKelvey: (41:08)
I mean, the reason I wrote a book, which by the way is hell ... Writing a book for three years is ... Well, it's rewriting the book. You write the book, and then you rewrite it and rewrite it and rewrite it, rewrite it until it becomes readable. But the reason I put myself through this is it's the only way I could possibly think of to get more people off the bench. So, the reason I want people to read the thing ... I don't necessarily want them to buy it. You can steal it. I'm sure there's a Tor copy of my book out there. But if you get the idea that at some point in your life you may encounter something where all of your training, all of your credentials stop being relevant, and you don't necessarily have to stop moving at that point. If we can get a few more people moving [crosstalk 00:41:54]

Anthony Scaramucci: (41:53)
I think it's brilliant. I just want to ... As a public service announcement for Penguin Publishing, buy the book. It's worth every bit of the $22 that you've got to spend on it.

John Darsie: (42:06)
I want to leave you with one last question, Jim, and it's a followup to what you're saying about how we need to get people off the bench. So, we had a great conversation at our SALT Conference in 2019 between Mark Cuban and Steve Case on the idea that entrepreneurial success can be found outside of Silicon Valley. There's this bubbling up of entrepreneurial zest that exists in the American heartland. You live in St. Louis. Other areas of the country, other areas of the world, frankly. Mark Cuban has invested a lot outside of Silicon Valley. Steve has a fund called the Rise of the Rest fund, dedicated to funding entrepreneurs outside of Silicon Valley. You launched LaunchCode, which is a nonprofit to try to get people from nontraditional backgrounds free education and job placement opportunities in tech. So, how do we tap into that entrepreneurial spirit that exists in parts of the country but they might not have access to capital or expertise or the confidence they need to go out and truly innovate?

Jim McKelvey: (43:03)
I might get in a lot of trouble for saying this. I've never seen a problem with access to capital. Okay? So, I've got a VC fund. I get pitched all the time, which is by the way a horrible business, because you just ... People lie to you professionally. Your job is basically to have these people lie to you all day long. It's gruesome. But I hear people talk about "Oh, I don't have any capital." It's like, well, maybe your idea is a little messed up, or maybe you didn't do enough work. The investments that we make, we're fighting off other investors. These elbows are sharp for a reason. So, I don't see that.

Jim McKelvey: (43:44)
But what I do see is a sort of clubbiness to tech entrepreneurship, which has historically persisted in the Bay Area and to a lesser extent New York and a few other cities around the world. And the cool thing about a pandemic is that it is all now coming apart, this club that the rich belong to, which is the club of New York or the club of San Francisco. And, by the way, if you don't think you have to be rich to live in San Francisco and have a normal life, go check rents there. I've got engineers earning well into six figures that have five roommates. That's how expensive San Francisco has become.

Jim McKelvey: (44:29)
If you're a normal person and you have the skills but you don't have the financial ability to move to a coast ... Maybe you've got a parent you've got to take care of or maybe you've got some other that prevent you from just upping and moving. Well, we're breaking these clubs up. I mean, right now we're ... I mean, I guess we should all be sitting in a room together, but we're not. We're Zooming. And there's some lag over the video and a few other problems like that, but we've basically pulled it off. Right? And I don't know where you are, and I don't know where Anthony is. Actually, I'm assuming it's a bunker somewhere.

Anthony Scaramucci: (45:09)
I'm in a heavily fortified bunker with shitty books behind me, but it's so far so good-

Jim McKelvey: (45:14)
That Edison book is going to save his life.

Anthony Scaramucci: (45:15)
... because my wife is still allowing to stay here. I mean, once in a while she throws food in through the door, but I'm fine. I'm fine.

Jim McKelvey: (45:23)
The sheer density of the writing is going to be the thing that protects your head from the blast. In this twist of irony, you will be saved. I'll have to eat all my words. God, I hope that wasn't published by Penguin.

Jim McKelvey: (45:36)
But, anyway, the point is it doesn't matter as much. So, cities like St. Louis where it's pretty pleasant to live and we've got great health care and great schools, and houses are really nice and cheap. I mean, hell, we'll give you a house in certain parts of town. It's opening up talent to more opportunity, and I think that's what we need. So, I love what Steve is doing. The Rise of the Rest is fantastic. His bus came through here. I was on it and spoke at the events. I love what Steve is doing.

Jim McKelvey: (46:13)
I think we're just going to see that, not because it's a good thing to do or we're being nice to Ohio or anything like that. It's just because, look, greed is a good thing to harness, and greed is smiling on lower cost, higher quality of life cities. As long the town is here and it can move remotely, maybe live in St. Louis. It's a great city. Or whatever you think is a great city. Pick what you like and move there.

Anthony Scaramucci: (46:50)
You should know, because people are texting. We're getting questions and answers. Jim, you're a phenomenal guy, and you've left an amazing impression on our delegates. So, I would love to get you back.

Jim McKelvey: (47:04)
Anytime. This has been super fun. I love it.

Anthony Scaramucci: (47:05)
You've got to do me a favor though. You've got to be careful flying the plan, man, because you're holding up the operational manual there. And I'm not saying I wouldn't get in the plan with you. I would definitely put Darsie in the plane with you first though. I'd just like to try it out with Darsie before I take a ride with you. But I want you back on our show so we can talk about where the future is going. You're going to be a big part of it. I have no doubt about that. So, we've very grateful to have you on.

Jim McKelvey: (47:30)
Anytime. This has been super fun. You guys ask great questions. This is fun. Yeah. Thank you.

Anthony Scaramucci: (47:37)
All right. Well, God bless. We're going to turn it back to John Darsie. He usually does the happy recap. Go ahead, Mr. Darsie.

John Darsie: (47:44)
Well, I'm very excited to see your progress with Invisibly.

Anthony Scaramucci: (47:46)
We didn't make one comment about George Washington. McKelvey, look at what this guy thinks of himself with the George Washington portraits. I mean, I know I have shitty books, but look at this this guy. Look at this [crosstalk 00:47:53]

John Darsie: (47:53)
I try to create a background that lives up to Anthony's bookshelf.

Anthony Scaramucci: (47:56)
Darsie, at night, he walks around with that wig on. Okay? I've heard that from his wife, by the way. Go ahead, John.

Jim McKelvey: (48:01)
I need a wig. That's a good idea.

John Darsie: (48:04)
Well, Jim, thanks so much for joining us. Thanks everybody for tuning in. I highly recommend Jim's book. It will hopefully either help you take that leap into entrepreneurship or decide that that journey's a little bit too painful for you, and I think Jim provides both of those perspectives in a great way in The Innovation Stack.

Alan Patricof: Longevity & the Future of Aging | SALT Talks #35

“You don't see many 60-year-olds walking in from financings into a venture capital firm. It just doesn't happen… I actually read three studies, which said that 60 year old entrepreneurs were twice as successful in starting up businesses as those who are 30.”

With a 50-plus year career in venture capital, Alan Patricof has been instrumental in growing the venture capital field from a base of high net-worth individuals to its position today with broad institutional backing, as well as playing a key role in the essential legislative initiatives that have guided its evolution. Alan founded Apax Partners, leading global private equity advisory firm, and co-founded Greycroft, venture capital firm focusing on investments in the internet and mobile markets.

When investing venture capital, there are often not a lot of numbers to go off of. This often requires evaluating the people running the business, their past work and the team they bring on as the surest indicator of a company’s success. With the responsibility of investing in companies with other people’s money, an emphasis on bottom line should be maintained instead of simply focus on revenue growth. “At some point a company has to have a bottom line, and a lot of companies have lost sight of that today.”

Having lived alongside a loved one in need of extensive at-home medical care and recognizing the massive need to address chronic diseases that older Americans face, Prime Time Partners was formed. Venture capital will be targeted towards entrepreneurs over 60 in order to support start-ups addressing the later-in-life costs, an age group and industry relatively neglected up to this point.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Alan Patricof

Co-Founder

Greycroft

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:08)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT Talks are a digital interview series we've been doing during the work from home period, to provide our audience a window into the minds of subject matter experts who are leading investors, creators, and thinkers. Our goal with these talks is also to provide a platform for what we think are big, exciting, world-changing ideas as well as great investment opportunities. And we're extremely excited today to welcome Alan Patricof to SALT Talks. With a 50 plus year career in venture capital, Alan Patricof has been instrumental in growing the venture capital field from a base of high net worth individuals to its position today, which has broad institutional backing, as well as playing a key role in the essential legislative initiatives that have guided its evolution.

John Darsie: (01:04)
Alan founded APAX Partners, a leading global private equity advisory firm, and then he co-founded Greycroft later on, which is a venture capital firm focusing on investments in the internet and mobile markets. His latest venture, as he's calling his third act, is a company called Primetime Partners, which is a seed and early stage venture capital fund, investing in companies transforming the underserved and trillion dollar global sector of the aging population. He's helped build and foster the growth of numerous major global companies, including among others American Online, we had Steve Case in an earlier SALT Talk, Office Depot, Cadence Systems, Cellular Communications Incorporated, Apple Computer, which you may have heard of, Four Systems, NTL, Interlinks, Audible, Axios, and Wondery. We're very excited to learn more about his next chapter with Primetime Partners, as we mentioned, in what Alan refers to as the silver tsunami.

John Darsie: (02:02)
A reminder to our audience today, if you have any questions for the great Alan Patricof, enter them in the Q and A box at the bottom of your video screen. Conducting today's interview will be Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. With that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:24)
Alan, it's great to have you on. We really appreciate the time you're taking today. People get mad at me, my son in particular, when I ask these background questions, but I actually don't care because I find them fascinating. What is something we could learn about your background that's not on Wikipedia, it's not something that's been written about you, maybe it's something about your parents, maybe it's something about the way you grew up, maybe it was the realization that you made that you were going to go into this story career of entrepreneurship?

Alan Patricof: (02:57)
What do people not know about me? I don't know. I guess from a very young age, I really was entrepreneurial in my own way. I mean, I was brought up in a middle class background on the West Side of New York. I'd say lower middle class. We didn't have servants, we traveled by bus and subway. I didn't know what a taxi was until I was out of college. Family trips were all by car, not by planes. I sold the Saturday Evening Post standing by the 103rd street subway stop, with one of those bags around my shoulder at age six or seven. And during the war I sold war bonds, I collected scrap and newspapers for the war effort. So I would say those were probably good indications that I was a hustler from very, very early on.

Alan Patricof: (03:54)
And when I went to school, I went to Ohio State, not because I really intended to go to Ohio State. I got there by accident. I almost went to Brandeis, but I panicked when Brandeis was in its second or third year. And I went to one of those preliminary college interviews. And when I walked in, everybody had black hats and long beards and long black coats. And I said this wasn't right for me. Of course, Brandeis is a totally different place today, but in those days, it was very, very ethnic. And I just came home, put a label on my trunk. In those days you had a trunk, you didn't have a suitcase. It was Railway Express, Railroad Express which became American Express. But in those days, it was the way you shipped everything around was not in the Amazon cartons, but in trunks.

Alan Patricof: (04:55)
And I sent my trunk out to Columbus, Ohio. Next day, got in the car and went out to Columbus. And even while I was at Columbus, I sold ties. I sold favors. I wrote for the Columbus Citizen. I did a market research for the Brown Shoe Company. So I guess you'd say I started at a very early age trying, like many of us, probably like you. You had to do something to supplement your family's income, which was limited. I'll finish with the background. When I tell you when I came to New York, I had no job. There was no recruitment effort at Ohio State. If there was one, it was at Harvard, Yale, and Princeton, it certainly wasn't at Ohio State for undergraduate. So my alternatives were going to Caterpillar Tractor in Des Plains, Illinois, as I recall, or the National Bank of Detroit, or to go work for AID down in Brazil.

Alan Patricof: (06:01)
And at the last second I said, "I gotta go home." And I don't think I would have made it at Caterpillar. And I went to New York and the way I got a job was I walked Wall Street. Because I knew I wanted to be on Wall Street, and I walked the street literally. And those days you would get into the building, which you couldn't do today. It's a joke. And I would go into an elevator, to the top floor, go to the secretary, open the door and say, "Any jobs available?" That's honestly how I did it. And I'd go from the top floor down to the bottom floor. I started at 110 Wall Street, and fortunately I got a job on the 35th floor of 63 Wall Street with a great firm. So that's how it all started. From there, it's been one great success after another, I have to say,

Anthony Scaramucci: (06:56)
Well, it's an amazing story. I think it's one of the reasons why we like each other so much. I had a paper route, was making $35 a week at age 11. I was giving 20 to my mom and I was keeping 15 for myself. And my first job coming out of Tufts was at One Wall Street. So I had the same idea you did.

Alan Patricof: (07:15)
The other end of the street.

Anthony Scaramucci: (07:17)
I went to the Irving Trust building. I rode up to the 28th floor and there was a law firm there called Hughes, Hubbard and Reed. It was named after Charles Evans Hughes. And I asked them for a job that summer, and they put me in the paralegal area. So we have a lot in common that way.

Alan Patricof: (07:33)
And what was my first salary, because believe it or not, people don't realize, you can go to Social Security and ask for a printout of every year and what you contributed to Social Security. So my first year was 1955. I made $55 a week. So that was $2,700 a year or whatever.

Anthony Scaramucci: (07:54)
Well I was more fancy pants than you. The guy offered me $8 an hour, Alan. Being who I am, I said, "Could you make it 10?" He goes, "What are you, crazy?" I said, "Yeah, please. I need the money."

Alan Patricof: (08:06)
That was good money.

Anthony Scaramucci: (08:06)
I had to pay off all that school debt. What's that? That was good money in 1986. You know, I worked on the Continental Airlines merger with People's Express. I spent the whole summer of 1986 in that office working on that merger. But I want to go to your-

Alan Patricof: (08:23)
Was Freddie Laker around then?

Anthony Scaramucci: (08:24)
Yes, absolutely. Yeah.

Alan Patricof: (08:27)
I remember meeting with Freddie Laker, going out to his hangar out in New Jersey, big cavernous hanger. For those who remember, Freddie Laker was like the guy who really started cheap travel.

Anthony Scaramucci: (08:38)
He really started the whole concept of mass transit in the air. And Frank Lorenzo, you may remember Frank, he's living up in Nantucket now, he was running Continental Airlines at the time, and he bought People's Express, which is the reason why United airlines has all those hubs over in Newark. [crosstalk 00:08:56]

Alan Patricof: (08:56)
So I remember my famous story with Freddie Laker, was I went to meet him at his corner office. And I said something, somehow we got into the idea of board meetings and he said, "Well, I have board meetings." He said, "I'll show you how I have a board meeting." He goes out into the hallway, a long... Remember it was a hangar. And he calls out whatever his partners one, and I won't do it, he screams out, "Hey, Hey, Jimmy," and Jimmy comes out the other end of the hall. He said, "Let's have a board meeting." I always remembered that. That was Laker airlines board meetings were in the hallway [crosstalk 00:09:33]

Anthony Scaramucci: (09:33)
There you go. The true symbol of entrepreneurship. Right? It's an amazing story. So you're one of the pioneers. I mean, you've had this amazing life and you've always been able to see around a corner. So take us back to the early part of your career, venture capital, private equity. What were you thinking in those early days about directionally where you were going in your career and that industry specific?

Alan Patricof: (09:59)
Well, my father had once said, when my father was a stockbroker in his later career, the only real guidance he gave me, he says, "Always be a buyer, not a seller of investments." In other words, not be a stock broker was really what he was saying. So my career has always pretty much been on the buy side. I mean, I worked for a development capital firm. I worked for an investment counseling firm, as they were called then, like Scutter Stevenson Clark or Fidelity is today much bigger than private management. And then I went and ran a family's money. And then I worked for a guy, Ben Hidaman and Mickey Newman. Mickey Newman was the son of Jerry Newman. Jerry Newman was the partner of Ray Newman, who was the great professor at Columbia who wrote the famous book that everybody in Wall Street, if they haven't read, should read. And I'm shocked at the number of people today who haven't read it. He worked for one of the firms I have which is called Security Analysis by Graham and Dodd, I think a first edition is worth, you have to pay $3,000 to $5,000 to get the first edition, but the firm was Graham Newman. And I was involved with that.

Alan Patricof: (11:16)
And I had a lot of experience with families and I saw that families manage their big portfolios of stocks. You know, we talked about the Whitney's and the Rockefeller's and the Phipps is, and many, many other families that you wouldn't have heard of, including the family I worked for, which was the Godeson family who made their fortune in the paper business. And they would do private investments, but they didn't know what they were doing. Someone, Andre Maeir, who was head of Lazard, or Gus Levy, who was head of Goldman Sachs, or John Lowe from Lowe Rhoads would call up and say, "I'm putting you in for $500,000 in this, or I'm putting you in for a million in this or 200 of that." It was an old boys kind of club, and family offices were putting up money for that. And we did our share and I was the one, because I loved that, that became the person who ran that file drawer with all these private investments.

Alan Patricof: (12:12)
And it was while I was there that we made an investment in New York Magazine and we made an investment in another company called Datascope Corporation. New York Magazine, I had the tender age of 30 something, became president arbiter from Low Rhoads was chairman. Clay Felker was the key guy who built the built New York Magazine. And we started a company and I got the taste of really what it was like to be on the frontline of running a business. And in the case of Datascope, it was a medical electronics company, which we started with $50,000 on a kitchen table, with a very clever technology for cardiac monitoring. And I said, "This is much more interesting than buying IBM and General Motors and The National Paper Stock." And having it go up or down two or three or five points in a day, and no one could really tell you except some psychological event that happened. Some extraneous events someplace in the world would affect that price. I also went that time into a firm called Lynn Broadcasting, on behalf of Central National. So I said, "There's really a business out there to manage high net worth families private investments who aren't like the Phipps, or the Whitneys, or the Rockefeller's who had their own private investment activities.

Alan Patricof: (13:44)
And so I started a business in 1970 called Alan Patricof Associates, which became APAX many years later, we changed the name to Alan Patricof Associates International, because we were in 12 countries at that point. And started managing investments for private families, of their non-public securities on a very modest basis. I forget, I think I was at a retainer at $25,000 a year and the carry was 10%, not 20. And that gradually grew and got bigger. And eventually we started taking institutions, and got bigger and bigger. Our first one was two and a half million. And when I left APAX, there's no exact date, because I was in APEX's office until about 2008 or '09 physically, but I decided around 2002 after the bubble, that we had become too much of a private equity firm, we'd gotten so big. Our last one had been, I think, 10 billion. From two and a half million to 10 billion. We weren't doing the same kind of investments. So I spent three years helping the World Bank pro bono and the IFC, and looking at small and medium sized enterprise development around the world, primarily in Africa.

Alan Patricof: (15:15)
So I probably traveled to a lot of countries. And around 2006, I said, "This is not satisfying enough for me." I was 71 or 72. I said, "I want to go back in the venture capital business, pure venture capital." And I started Grey Croft, which is a pure venture capital firm. We are not a private equity firm. So far. The temptation is enormous to get bigger and bigger, Grey Croft is now in it's... I started out with a small fund, 75 million, which was small. And our most recent fund, we really kept ourselves constricted. So it will be under 300 million, which may sound large, but it's really small for the way funds have grown. We could be a lot, lot, lot larger. We've had six funds and three growth funds, which takes the second phase after the early stage A and B rounds. But I've been consistent and sticking with private investing companies that were early stages in their development, whether they were startups or growth rounds. Been an exciting career, I have to say.

Anthony Scaramucci: (16:29)
Yeah. Amen. And I think your career is just getting started. We're going to go to the silver tsunami here in a second, but I want to ask this question before I go in that direction. You have this wonderful knack. It's one thing to read a PowerPoint presentation or a business idea, but it's another thing to understand that you have a management team that can intersect with that idea and execute the idea. So we have a lot of young people on this SALT Talk listening. What are some of those qualitative and quantitative factors and gut instinct that you bring to the table, to see that opportunity at such an early stage in the business process?

Alan Patricof: (17:10)
Well, in all fairness, in the venture, that pure venture are and the startup area, you really don't have a lot of numbers to go from. There's a little bit of this. I mean, you can't avoid it. So it has to be based less on numbers and more on the people. And we've learned consistently that people who start businesses, who have been in previous businesses that are similar and that have left them to do something similar, and more importantly, have attracted people from that previous activity to join them, is a very high indicator of success. Because those are the people, they know more about this leadership than we could possibly know. And they're betting with their careers, as we're investing with our money, which is fungible to a great extent, except for what we have invested in our own funds, is other people's money.

Alan Patricof: (18:11)
And while it hurts and we are fiduciaries, somehow that's a very high predictability of success. And the second is someone who really understands the economics of the business that they're going into, even though they can't prove it at that point, but they understand that they have to make a profit. At some point a company has to have a bottom line, and a lot of companies have lost sight of that today, but if you just start out with a theory that all you have to do is build revenues and they will come, I don't think that makes sense. I think people have to understand the factors that go into making a bottom line profit, and how long that will take, and how much capital that would take, I think is a critical aspect.

Alan Patricof: (19:04)
I think understanding the market they're going into, not what we call, they use the word Tam, the total address market, but they think of the total address market as being that big, instead of thinking of it as this big, which is the real market they're going after. I think someone who really understands the size of the market they're going into themselves. So if you take those combinations of people, product, market, and are you investing on a risk reward rate of relationship that justifies taking the risk? And I say all of this, because it's very important at the beginning, and the beginning, you don't have as many answers or proof points in that point that I brought up, but most critically, when you go to the follow-on rounds, this is where it really becomes important, I think it's very, very important to have the discipline to say, "Did the people develop as I expected? Did the product make progress at the timeframe that they said it was going to make? Is the market that I thought was there, is it really there? Or has it been taken away by someone else who beat us to the punch? And is the round we're going into, does it justify a potential reward based on comparables, the risk we're taking and making that financial investment?"

Alan Patricof: (20:49)
And I think, in my opinion, that unfortunately today we have too many companies out there, and I'm not going to name them, because everybody knows them, that have gone along through multiple, multiple rounds of financing, and are not yet near profitability. And yet can continue to generate ,raise new capital, that do not exercise that discipline of understanding that at some point, shareholder capital cannot totally finance a company forever. At some point it's where are the emperor's clothes?

Anthony Scaramucci: (21:32)
Right. Well, I think it's well said. I want to switch over to Prime Time Partners, which is your new venture capital firm. And obviously it's targeting older Americans, early stage startups. You're calling it the silver tsunami, which I guess no one's getting their hair dyed like me, obviously, because why would you call it the silver tsunami if you had hair dye involved. But what is the investment thesis of Prime Time? And why are you doing this now?

Alan Patricof: (22:03)
Don't tell me you normally have my color hair.

Anthony Scaramucci: (22:06)
My hair's whiter than your hair actually.

Alan Patricof: (22:08)
Oh my god.

Anthony Scaramucci: (22:09)
But it looks terrible on television. I told Sean... Look at Sean Hannity. Now he's got so much snow on the roof. I told him, "Come on." But I mean, you look very distinguished with that hair. I still have that baby face.

Alan Patricof: (22:21)
My barber once, about 15, 20 years ago, tried to talk me into lightening it. I said, "Once you start, you can't stop. I mean, it's impossible. It's only going to go one way." So I gave up.

Anthony Scaramucci: (22:33)
I'm going the way of Joan Rivers. Let's just put it that way, but I want to go back to silver tsunami.

Alan Patricof: (22:38)
I want to go more than you do. Let me say, I have never, in my 50 years in this business have been more excited about anything I have done. I came to this, honestly, because my wife has Alzheimer's and she's had it for 11 years. And the last three years have been pretty brutal in a sense of 24 hour caregivers. And she's lost all the functions that people have. She's still at home. She'll be at home until the end.

Anthony Scaramucci: (23:06)
I'm sorry about that.

Alan Patricof: (23:08)
Yeah. But during that process, I have gotten to know what problems are for people with chronic diseases. I've gotten to meet a lot of doctors, how to modalities and looked at a lot of technologies and looked at all the support structures you need from the standpoint of caregiving, the standpoint of feeding, standpoint of changing your house around, all those things.

Alan Patricof: (23:33)
And they're not just for people with chronic diseases, although God knows there are plenty of those around, not just with Alzheimer's, with all other kinds of diseases, whether it's hip replacements, having repair, or you see the people around with walkers and wheelchairs, they're not just Alzheimer's victims. But people in general getting older and what maybe some of your 211 people on this call don't realize it, the fastest growing segment of the population today are the people over 60. In this country, in China, in Japan and in Europe, not in the Middle East. And these people all need different things than they did when they were part of the millennial generation.

Alan Patricof: (24:23)
And there's been, ironically, while it's the fastest, and I think it's like 24% of the population, but they're the fastest growing part. I don't want to be [inaudible 00:24:36] but I believe less than 10% of the marketing dollars is spent against this segment of the population, which actually has the most money to spend on products and services and everything else you can think of. And they've been neglected honestly. By the same token, venture capitalists, we're all terrific people, but you don't see many 60 year olds walking in from financings into a venture capital firm. It just doesn't happen. As I looked at this market and I also read more than one study. I actually read three studies, which said that 60 year old entrepreneurs were twice as successful in starting up businesses as those who are 30. And that really shook me. These were not just statements. These were full academic studies, and you can refute it or not, but they exist and you can get ahold of them yourself.

Alan Patricof: (25:30)
And the reason was, someone at 60 has a lot bigger Rolodex. He has more battle scars, or she, has more battle scars. They know more about the industries, they have more contacts, and in my opinion, if they want to start a company that's in the similar business and they have the energy that I have, and they want to do it again, they are a darn good bet at putting money behind them, because they know where to find the people to work for them. They know where to find the customers. They have the relationship with the customers. The probability of their success... And it's logical, but people have not thought that way. They'd rather back, including me and Gray Croft and APAX. We'd rather back the 22 year old, who has no Rolodex, who has no experience of the business, but has lots of fire in their eyes and excitement and attracts a lot of other young people, and a lot of them are successful. But the fact is that older people are successful.

Alan Patricof: (26:34)
So I had been thinking about this, and my son came to me in November. And he said, "You know dad, Abby Levy," who was the founding president of Thrive Global, which was Arianna Huffington is her latest company after the Huffington post, which I was an investor in it. And I was an investor in Thrive Global. Abby was there for two years and she left. I was very, very disappointed. She went to Soul Cycle, and I didn't keep in touch with her except to see her. She stayed on the board and I see her at board meetings, but we never talked about anything. And my son came to me. He said, "You know Dad, Abby has been spending the last year focusing on this wellness and aging population. She's got all this, what you're doing, but she's going to do something about it."

Alan Patricof: (27:27)
So we got together two days later and together with a firm on the New York Stock Exchange called Welltower, which owns 1600 senior living facilities. They became the strategic partner, which all it meant was they would try out ideas that we might find, in one of their homes where, because they were looking for innovation and they became in effect our partner with no economics, just purely interested in what might come out of it for a fund like ours. And we said, "Let's go for it." And we were all ready to raise money in January and COVID hit. And we sat around and in May we said, "Let's go for it now, whether or not there's COVID." And in 45 days we raised, we filed with over 30 million.

Alan Patricof: (28:21)
And in the course of the last couple of weeks, we've had a bunch more investors who proactively have contacted us and we've tapped it out. It's going to be a small fund, but I will tell you, we have a pipeline now of 80 companies, we've invested in four, and people don't realize this. And I'm hoping to be more venture firms started up in this area, because there are a lot of people around who got lots of good ideas, whether it's a nutrition. Now we're not investing in pharmaceuticals or drugs or senior housing, but all the products and services, you just don't think of the things that change as people get older. And if Anthony is going to live, I'm going to live to 114. Anyone on this program who knows me, knows that I've been saying this for 10 years.

Anthony Scaramucci: (29:10)
I had that as the under for you Patricof.

Alan Patricof: (29:10)
People say 150? I said, "No, you made a mistake. It's 114. I'm not changing." It was based on a speech I'd heard it at Mount Sinai about 10 or 15 years ago, about the probability that age gets offset by all the things that happen during life. And I just heard recently that they are now saying that you could live to 120, but I'm not changing. 114. Well, if you're going to live to 114 or 100, read the obituaries every day, notice all the people who were over a hundred, who are living. Those people are going to need the lots. There are going to be lots more of them, who are going to need lots of different things. And they are going to need new companies to create, to service them. I mean, a company just got sold yesterday called Rebundo, which got sold for $17 billion to Teladoc or tele... One of the tele-medicine companies.

Alan Patricof: (30:13)
Which is in the food area of feeding older people. You see on television every day, A Place For Mom. I don't know how big it is, but it's big. There are all kinds of ideas happening and I am totally excited. Abby and I are having a great time. We're recruiting. If anyone has healthcare or venture experience, we're looking for someone right now with a principal or senior associate role. It's a wide open field. I mean, we have been able to find two or three other small venture firms. We want to be the leader in this field. And by doing the way we did it, announcing the fund on an embargoed basis on July, whatever it was, two weeks ago, we ended up with coverage in every media major stories.

Alan Patricof: (31:10)
We intended to do that. And I intended to do just what I'm doing now, to get on a soap box and say, I'm 85. If I could start my third business at 85, I started my second business at 72. There's no reason why other people can't. So we're hoping we're going to invest in product services, technology. And in parallel, if we can find some older entrepreneurs, older, meaning they want to start a second career, 55, 60, 65. We'd like to find a few of those that don't have to be servicing the older community, but they want to do the same thing again. And they have the energy and brains to do it.

Anthony Scaramucci: (31:54)
Well, we know it's going to be successful. We wish you a great success. I want to turn it over to my colleague, John Darsie. We've got a ton of questions that are populating. And so go ahead, John. Let's take some questions from the audience.

John Darsie: (32:08)
Thank you, Anthony. And maybe you have a business idea, Anthony. I know you're in the senior citizen category, so maybe you have a couple of new business ideas you might want to launch.

Anthony Scaramucci: (32:16)
Well, mine are all going to be in beauty and Botox, John, okay? Go ahead.

Alan Patricof: (32:21)
Well, it can be done, Anthony. Don't think those aren't categories.

Anthony Scaramucci: (32:25)
Trust me. I'm a big consumer, Mr. Patricof. I'm a big consumer.

John Darsie: (32:31)
Well, Alan. Thanks again for joining us. We had a couple of questions about, you've had some commentary recently regarding the big tech giants and how they're sort of utilities that are in need of some form of regulation. There's a great book out recently by David Day, and who's actually speaking on SALT talks next week, called Monopolize that covers this exact subject. Can you talk further about these recent congressional hearings that we've seen and also your views on big tech and how we allow them to grow and innovate, but we don't allow them to be destructive in a way that some monopolies have been throughout the course of American history?

Alan Patricof: (33:04)
Well, I'm glad I have this opportunity. I have spoken out the past year on this subject and I'm sure you've read the book Zucked, which was by someone venture business who had been at Facebook and invested in Facebook and profited from it, but told the reality. Let's face the reality, the four companies under attack if you will, Facebook, Google, Amazon, and Apple is thrown in there, have accumulated an enormous amount of data. And every time they make an acquisition, they get more data. And that data is very, very valuable. It knows that all of us are right now on the SALT conference light on Zoom. It knows when you're going to be buying something, when you're selling something, what you're reading, what sites you're going up to. And they have been able to use that in a, I hate the word use the word monopolistic, but in a fashion that has given them a substantial advantage over anyone who wants to compete with them.

Alan Patricof: (34:25)
And we've all heard the argument from particularly Google, but Facebook as well of saying... And Amazon where you can put your product, they're handling third party sellers, but the fact is they've come out with their own products that compete with these sellers. They have the ability to give priority listing to it. They have the ability to control the ad market now. I mean, I don't know. Those on this line have had companies where overnight Google will change the algorithm. And all of a sudden your traffic go down by 10 or 20%.

Alan Patricof: (35:05)
When I grew up, I grew up with a basis that if someone had control over something, where you could not avoid it, that's called a utility. I mean, that's why utilities are regulated. That's why the railroads are regulated. That's why the phone companies were regulated. That's why we had monopoly laws in the late 1800's and the early 1900's. And I'm not antiquated, but those laws applied to people who are combining oils, steel frames to raise prices. And they monopolized industries. Today, we have a different kind of monopoly, it's data. And there has to be found a way to make this data available on a ubiquitous basis, in my opinion, so that everybody has access to it. And if it's accumulated by someone, they're entitled to make money from that data but making it available and create a more level playing field. If not their data accumulation builds up by the nanosecond.

Alan Patricof: (36:15)
And it's inevitable that these companies have to get stronger and stronger and stronger as they stay alive. And they can use every argument in the book. I think that, I'm encouraged by the congressional hearings now that, I never can pronounce his name Seciligo who's a Congressman I think from Rhode Island, who has led the fight, and done very well at it, by the way. He had the four Kings in a couple of weeks ago for a hearing. I mean, it's ridiculous to have a five-hour hearing for this subject, but that's what was allocated. There's a lot of work that's been done in the background. There are committees that have informed their non-profits, the Open Market Institute which was originally run by Sarah Miller and now has spun off into another activity, and her successor is doing a great job of preparing position papers.

Alan Patricof: (37:22)
I think it is appropriate that the government is looking into this. There's no other way we're going to come out with answers. I am not speaking out in favor of breaking off the companies. I honestly, I think it's a very tough job at this point. But every day, you know, we saw yesterday Fitbit's being bought, more data. I saw Facebook bought a company called Brainwaves, now they're going to have control of the brain. We don't have enough elements of our eyes and touch and everything else. So I want to make one disclaimer, I do not think that any of these people that we're referring to, so [inaudible 00:38:13] or Mark Zuckerberg, or certainly not Steve Jobs when he was there had any thought about being monopolous, about controlling, power. It's an inexorable growth where they're allowed to buy 50, 60 companies and combine the benefits of some of these companies. And it all gets down to data.

Alan Patricof: (38:39)
Take away the data from them, put it in a data repository and let everybody bid on it. And it'll be a different business, I think. And it's hard to make this argument, because everybody likes to get faster, cheaper. And you know, when you have an Amazon package in front of your door every day, who doesn't like to get it that way. And if we have a discussion here before we got on the phone, Anthony asked me about someone, whether he was alive or dead and I couldn't quite get to it. But what do I do? I go to Google. I mean, that's where it is. I mean, they've got 92% of the search traffic. So when you have that dependence on one thing, that is, in my opinion, a utility, and if you're a utility, you should be regulated.

Anthony Scaramucci: (39:28)
So I want to follow up on that comment you made about Amazon, and we've had a couple of our tech speakers, Steve Case, Chamath Palihapitiya talk about how technology is improving the world, but it's also creating a deflationary supercycle, whereby goods and services are cheaper, but it's also cannibalizing jobs for low and middle income Americans. Could you talk about that a little bit? Do you agree with them and what do you think the long term impact is?

Alan Patricof: (39:52)
Absolutely. Absolutely. I mean, why do you think all these retail stores are going out of business? I mean, they can't compete. It's impossible, they can't compete with the pricing, and as Amazon proved, they didn't have to make money for a long time because shareholders kept beating them with money, and they fed them to the point where they were able to put a lot of other people out of business with their low prices. And prices are not quite as low as they used to be, and they've got their formulas of knowing how to price merchandise. Those are tough people to compete against, both for selling hands and selling merchandise, and for delivery.

Anthony Scaramucci: (40:36)
We have a few questions about what-

Alan Patricof: (40:38)
Like for Apple, it's a tollbooth for an app.

Anthony Scaramucci: (40:41)
Yep.

Alan Patricof: (40:42)
You want to go through the tollbooth, that's it.

Anthony Scaramucci: (40:45)
An increasing percentage of their profits are coming from their services sector and they're trying to keep people captive in that ecosystem.

Alan Patricof: (40:52)
Right, and of course Amazon was able to start AWS. I mean, just another nail in the coffin.

Anthony Scaramucci: (41:02)
So we have several questions from members of our Asian audience about whether you look at that market at all, silver e-shoppers, especially in the Asian markets are very strong. And are you seeing commerce solutions that are tailored to that market? And part of that question that I'm combining into one, is Japan has an older population, China has things like a mandated retirement ages, where very successful executives who are then going to have extra time and money on their hands. Are you looking at the Asian markets at all? Or is this more of a US based play?

Alan Patricof: (41:34)
We're the new guy on the block, we're trying to build a position for ourselves in the industry. I will say that one of the companies we looked at, which was early on, has been in the sensing area, which is a key area, remote sensing for conditions that exist in senior living facilities or at home. And this particular company was a US company, but was selling in Japan because the healthcare reimbursement for this type of activity was so much greater, because the demands were so much greater in Japan than here. We would be certainly open to any other country investment that fit our criteria, although we are both in New York, both in our homes on Zoom. We're more likely to have a portfolio that has a preponderance of US companies. But I definitely would not leave out the possibility of having a European investment or a Japanese investment. Even possibly a Chinese investment. But we would certainly only do that with a partner, we would not do that on our own.

Anthony Scaramucci: (42:49)
Alan, we're going to leave you with one last question. It is a political one if you don't mind. I know you've been very active in the Democratic party. What are your thoughts on a Biden presidency? Again, I don't want to make it overly political, but I'm just curious. Because of your wisdom and your life experience, a Biden president, is he good for the market? Is he good for venture capital?

Alan Patricof: (43:16)
You know Anthony, you and I have had a very nice relationship since we met at the Florida convention, I don't know, 20 years ago now, I can't even count the years. And I have been a strong Democratic supporter. I have got to believe that Joe Biden is going to be good for the economy. I've got to believe he's going to be good for the country. I believe, I can't avoid being political, I believe that things that have been done to our Democratic system in these last several years have been so devastating. We're at an accelerated pace, I am deathly concerned with the November to January period this year of what further damage can be done. I believe that Joe Biden is solid. I know him. I've known him for a long time.

Anthony Scaramucci: (44:21)
You think Joe Biden will win this?

Alan Patricof: (44:25)
You're not allowed to be overly confident, but I'm convinced that the country in general, based on everything I read and see, is getting to the position that I am, that we can't continue with a Trump presidency for another four years or we're going to decimate all the institutions we've got. Let me give you an example. When a new administration takes over, you have normally 4,000 positions to fill that are political positions, from cabinet level down to Schedule C employees. People don't realize that. I don't know the facts, but my sense is that no more than half or two thirds of those positions had ever been filled.

Anthony Scaramucci: (45:18)
It's about two thirds, yep.

Alan Patricof: (45:20)
By the Trump... [inaudible 00:45:22] is not wrong. And of those two third, how many of them have been changed multiple times due to resignations or firings? A new administration coming in has an enormous challenge to, in effect, fill those positions, and fill them with adequate people and for those who haven't been in government before, to get trained with a [inaudible 00:45:49] who really perhaps is in a position to train other people. It's going to be an amazing challenge, but I want to finish this political thing with one thing.

Alan Patricof: (46:01)
The market doesn't like surprises. I have been shocked by the market we've had in the last three or four years under Donald Trump, because it has been a good market, good stock market, in the face of daily surprises, and that confounds me. Because investors like to plan, they like to be able to project, they want consistency. I believe in a Biden presidency, we're not going to have an irascible person who you just don't know what's going to happen when you open up the papers or listen to the [inaudible 00:46:43] overnight, and I think that stability of he and the kind of people he'll have around him. I know the big concern on Wall Street is tax rates. I read the op-ed this past week about the specific, concern about the income rate going up to the levels that they're talking about. I believe that's why we have a Congress, I think everything will be moderated, I think the people who have made extraordinary amounts of money recognize that they probably have got tax benefits that were excessive in view of the world where it's at today, and income inequality and all the other issues in the world.

Alan Patricof: (47:33)
Most people I know who have been successful financially have a sense of responsibility, are not totally selfish and believe there's got to be fairness in the system. If fairness also brings a more equanimity to the populace, if we have people who feel that things are fair, there's an equal playing field, I think that will permeate itself down to every level. And I think there will be more concern for care giving. One of the things about Joe's program is his Cares Act, which he wants people having to care for their elderly parents, having to care for their children, all the issues that are really front and center, and I don't mean to bring it back to Primetime, but certainly going to, I'd hope, benefit Primetime in a way. It has nothing to do with it, but I think it [inaudible 00:48:35] well for people being concerned about their parents. I mean you're concerned about your parents today, everybody on this line is. The ones who are older are concerned about themselves.

Anthony Scaramucci: (48:47)
Amen. Listen, we got to look after each other. Alan you had an amazing career, you're a great friend, you're a great American, we didn't get a chance to go into all of your charitable giving, which has also been amazing, and it's a great honor for me to have you in my life and thank you for sharing your time. You have to accept my invitation to come back, because I understand that you have written a book which is about, somewhat of a memoir, but also somewhat of an emotion about what you see in the country and our lives today, and so you have to promise me you'll come back so we can talk about that book when it's done.

Alan Patricof: (49:25)
As soon as the publisher agrees to publishes it.

Anthony Scaramucci: (49:27)
Agreed. All right. Well, amen. Okay, well that's a deal, and stay safe and healthy, and I look forward to watching your third [inaudible 00:49:36] success unfold.

Alan Patricof: (49:37)
And meeting up in person at your favorite club.

Anthony Scaramucci: (49:40)
Yeah, amen. Exactly. Got to get back into the city you and me.

Eric Daimler: AI, Robotics & Consciousness | SALT Talks #24

“Just because Artificial Intelligence can solve problems doesn’t mean that every problem will be solved with algorithms.”

Dr. Eric Daimler is a leading authority in Robotics and Artificial Intelligence. Eric served under the Obama Administration as a Presidential Innovation Fellow for AI and Robotics in the Executive Office of the President, with the sole authority for driving the agenda for United States leadership in research, commercialization and public adoption of AI & Robotics.

“Don’t confuse a clear vision with a short time horizon.” Take the Jetsons, for example. We had a clear vision of a robot who would do all these things. Nowadays, we have a Roomba. AI will be most successful when deployed in very structured environments.

On AI and consciousness, “this will certainly not happen in the next 10-20 years, if ever. We don’t even understand our own consciousness.”

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Eric Daimler

Founder & CEO

Conexus

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum, at the intersection of finance, technology, and geopolitics. SALT Talks are a series of digital interview we've been doing during the work from home period, in lieu of our global conference series.

John Darsie: (00:25)
Just like we do at our SALT conferences, our goal is twofold. It's to provide our audience a window into the minds of subject matter experts across those disciplines that we listed. As well as provide a platform for big, world changing idea. That is not embodied more than by our guest today, Dr Eric Daimler. An expert in artificial intelligence.

John Darsie: (00:48)
Dr Daimler is a leading authority in robotics and AI, with over 20 years of experience as an entrepreneur, investor, technologist, and policy maker. He served under the Obama administration, as the Presidential Innovation Fellow for AI and Robotics, in the executive office of the president. As the sole authority driving the agenda for US leadership in research, commercialization, and public adoption of AI and robotics. He serves on the boards of WelWaze, Petuum, the largest AI investment by Softbank's Vision Fund.

John Darsie: (01:19)
His newest venture, Conexus, is a groundbreaking solution for what is perhaps today's biggest information technology problem, which is data deluge. As a founder and CEO of Conexus, Eric is leading a leading CQL patent pending platform, founded upon category theory. A revolution in mathematics, to help companies manage the overwhelming challenge of data integration and migration.

John Darsie: (01:45)
He's served as the assistant professor and assistant dean at Carnegie Mellon's school of computer science, where he founded the university's entrepreneurial management program, and helped to launch Carnegie Mellon's Silicon Valley campus. He studied at the University of Washington Seattle, Stanford University, and Carnegie Mellon University, where he earned his PhD in computer science.

John Darsie: (02:06)
A reminder. If you have any questions for Dr Daimler during today's talk, enter them in the Q&A box at the bottom of your video screen. Now I'll turn it over to Anthony Scaramucci, who's the founder and managing partner of SkyBridge Capital, as well as the chairman of SALT, to conduct today's interview.

Anthony Scaramucci: (02:23)
Doctor, great to be with you. We had Kai-Fu Lee a month or two back, talking about AI. People in our industry, frankly some of them are just a little confused about it. There's a whole big bandwidth of AI. From, let's say, artificial intelligence, machine learning, and robotics. I was wondering how you sir, how do you personally define AI?

Eric Daimler: (02:49)
Yeah, well thank-you, Anthony, for having me. It's good to be here, as part of your terrific video series. Kai-Fu Lee is a friend of mine. We actually were in the same program at Carnegie Mellon University. I like him, I like his work. I like his book, AI Superpowers. I find that the way in which people think about AI in these contexts, can often resemble how I would think about it as an AI researcher.

Eric Daimler: (03:19)
I've been doing AI for 30 years in various capacities. But when I was an AI researcher day to day, I would think about AI as a learning system. A subset of which is machine learning. Many people have heard of that. Then a subset of machine learning is deep learning. Often popularized by the company, Deep Mind. Deep Mind and deep learning is a subset of machine learning, which is a subset of AI. There are non machine learning AIs, which is semantic AI. That level of being pedantic about AI isn't terribly helpful, I find, for the people that are not day to day AI researchers.

Eric Daimler: (04:00)
What I like to do, and probably what I'll be doing for the rest of my life, is trying to bring people into the conversation about AI. So they purchase, a way to grab onto the conversation, about what it is. How I do that is talking about AI as a system. As the totality of a deployment. From sensing, to planning, to acting. Then learning from that experience.

Eric Daimler: (04:24)
If we go to sensing, we would think that, "I'm going to collect data". This could be the billion points of an internet of things. This could be data, the LIDAR on top of my car. This could be the air quality in my room. I'm going to collect data. That then moves across a network, where it then goes into planning, processing, thinking. That's the traditional way people might think of AI.

Eric Daimler: (04:52)
If I look out in these images, and I say, "Well is that a crosswalk? Is that a kid at a crosswalk?", then it goes into planning. I make a determination, with what degree of confidence is that a kid at a crosswalk? How confident do I think of it?

Eric Daimler: (05:05)
Then I have acting, right? Sensing, planning, and then acting. I act on that experience to say, "Well, should I slow down the car? How abruptly? Or should I have a sharp left turn of the car? Or should I wait until I collect more information?". Then it loops back on the experience. Sense, plan, act, learn from the experience. That's how I think about the system of AI, as a useful definition for citizens and policy makers.

Anthony Scaramucci: (05:29)
It's very good. It's very helpful. You're the CEO of Conexus. You've got great signage right now. I just want to tell you, I'm very proud of you, sir. Because you're beating John Darsie in room rate. I'm obviously in a hostage situation. If I blink twice, call the FBI for me. Darsie has all those fake objects in his room there. But you're winning the room rater -

John Darsie: (05:51)
I'm trying my best. I'm trying my best.

Anthony Scaramucci: (05:53)
Conexus, what does Conexus do? You're the CEO of the company, and the founder. How would you describe it to our listeners and viewers?

Eric Daimler: (06:01)
Yeah, and first of all, thanks for the compliments of the room. I was alerted to this when, in the COVID crisis, a new Twitter handle came up. I think it's called something like Rate My Room. You'll see people like us going on that, and people will see -

Anthony Scaramucci: (06:13)
He gave me 1/10th of a Scaramucci for my current environment, which is one out of 11. It hurt my feelings, I have to tell you that. Because you'll figure out by the end of this, I'm very shy. I'm a little bit introverted, and I'm somewhat sensitive. I'm very thin skinned, so I was hurt. But go ahead.

Eric Daimler: (06:29)
That's your reputation, yeah. Well aware. Yeah.

Anthony Scaramucci: (06:32)
Yes, so go ahead sir. What is Conexus? What does it do?

Eric Daimler: (06:36)
What does Conexus do? Yeah, Conexus. What Conexus does is, we will guarantee data and models, in order to be making better decisions. That's what we do. That's obviously very important in these AI deployments. That's what we do. We're an MIT spin out. We like to think of ourselves as the cartography of the 21st century.

Eric Daimler: (06:57)
How maps were made, how they used to be made is, we would send a ship out. That ship may hit a rock, and then go to the bottom of the sea. Then we would send another ship out, and it wouldn't hit that rock, because we made a map of that rock. But it might hit another rock. This trial and error approach resulted in thousands of ships at the bottom of the sea.

Eric Daimler: (07:16)
That happens today, in our scientific process, and in the deployments of AI. Early on in Amazon's history, they would be trial and erroring their logistics systems. It happens today in other domains of AI. Today, when I get a dumbbell shipped from Amazon in 48 hours, I may not care about their trial and error approach to shipping or logistics. But in high consequence contexts, I really do care.

Eric Daimler: (07:45)
If I'm sending a commercial jetliner into the sky, if I'm managing a utility system, if I'm developing a COVID vaccine, these trial and error approaches can cost real lives. That's what Conexus does, is we work to guarantee the data and the models in the deployment of these systems.

Anthony Scaramucci: (08:04)
Well, it sounds very compelling. Who's your typical customer then? You don't have to give us a name of a customer. But who would call you up and say, "Okay. I would like this information"?

Eric Daimler: (08:15)
Yeah, well I can give you an example. Where we're working with a large logistics company, to find out where their personal protective equipment is. I didn't know how large some of these logistics companies could be. One was tens of thousands of employees, and their client was also tens of thousands of employees.

Eric Daimler: (08:35)
This client of our client had these ships around the world. Each one of these ships had tens of thousands of containers. The Conex box, the shipping containers. Inside of those were personal protective equipment, PPE. Where in the world the PPE is for our client, or our client's client, might seem like an easy question to answer, in the age where I could get a dumbbell shipped from Amazon in two days. But it's actually surprisingly hard, and it could take hours, if not days, to come up with this answer, of transferring data across these massive systems.

Eric Daimler: (09:09)
That's what we work to do right now, is make these systems more agile, more responsive. To address, "Where is my personal protective equipment? Should it go to Seoul, or Houston, or Rome?", much more quickly than how classic approaches would allow.

Anthony Scaramucci: (09:26)
Yeah, so you're making the economy more efficient. You're saving costs, saving energy. It's good for the environment. Conexus category theory. It's a game changer. Explain to people what that is, what it means, and why is it a game changer?

Eric Daimler: (09:45)
We are based on innovations to mathematics. This is just a fundamental basis for the foundation of the firm. We're not the only ones doing it. We're just the leaders in expressing this with enterprise software. We're often used to these innovations in physics. These reach the popular imagination, because they've kept the continuity of Moore's Law. These innovations in physics. We see them in faster chips.

Eric Daimler: (10:09)
But what we're less appreciative, is theses innovations in math. These discoveries in math, that have enabled transformations of our world. This is even more foundational than the nature of physics. The relational database system, upon which Amazon does its business, was funded, founded, powered by Oracle, who runs a big relational database management company. That would have not been able to be started in 1977, were it not for the discovery of relational algebra in 1970.

Eric Daimler: (10:42)
We have that new type of mathematics, categorical mathematics, category theory, that powers a new way of thinking for the digital age. This will sweep away everything you know, Anthony, about math, over the next 10 to 20 years. It's a math more appropriate to the digital environment. Calculus, trigonometry, geometry, that is a math of our ancestors. It's not inappropriate, it's just going to become less appropriate. A little bit like Latin. You know, you and I are speaking in English, not Latin. We won't really mention Latin, except when it comes time to our bonus, etc.

Eric Daimler: (11:19)
Those other maths will still exist. But they'll just become less important. The math of the future, the math of the digital age, the math that will sweep away everything else, is category theory.

Anthony Scaramucci: (11:30)
Okay, and so if I had to describe it to my 20 year old son, category theory is what exactly? How is it different from trigonometry, and ...

Eric Daimler: (11:39)
It's the math of equivalence. The math of our ancestors is the math of rigid equality. Rigid equality works really well when you're building a factory, and you have gears that need to interlace. When you're looking at a farm, and there's precise definitions of where a farm ends. It's much less appropriate in a digital environment.

Eric Daimler: (12:05)
The math of continuity is calculus, in waves. The math of a digital environment is in these relationships, where things are fungible. Where things are not exactly equal, but they could be related. Where you need to be transforming a view, from one view to another view.

Eric Daimler: (12:24)
I'll give you an example of this. We're working, one of the things Conexus does, my company, is we're working with some firms to come up with a COVID vaccine. If we looked at a COVID vaccine, we see many, many drug databases that need to be brought together for analysis. If we're bringing together more data for analysis, we find that they've been collected in different ways, because they've been collected at different times.

Eric Daimler: (12:48)
I might see one drug database that said, "Do you have high blood pressure?". Another drug study would say, "What is your high blood pressure? What's your number?". Another might say, "You have it. What's your medicine that you take? How much medicine do you take?". The classic ways of doing this bring together that data, and they just say, "Yes, high blood pressure". That's based on the math and the systems in the classic approaches.

Eric Daimler: (13:14)
We have to bring it together in a way that maintains the fidelity for better analysis, and better decisions. To come up with vaccines that are more effective, and faster to market.

Anthony Scaramucci: (13:27)
All right, that's a very good description. Where do you think AI is going? Do you have a personal philosophy, or an opinion on that? Obviously we have dystopian visions. Elon Musk has said this could end up like The Matrix. Kai-Fu Lee was on the opposite side of the spectrum. He didn't think it was ever going to advance to the point of full blown consciousness. Where are you on that spectrum? In terms of where the future is for AI.

Eric Daimler: (13:55)
I have many things to say about this. I spent my time working in the last administration, talking to congressmen about what AI is, and generally how scared they should be about AI. This is still a very useful conversation to be had. When we think about AI, and I remember, Kai-Fu Lee and I talked about this a couple of times. We both look at this dystopia, from The Terminator, to a utopia, like it'll save all of our lives. As a sort of lazy thinking.

Eric Daimler: (14:28)
Those extremes just aren't terribly helpful. Because there's a multitude of expressions in between, that we need to have a conversation about as a society. As I've said, I've been in AI for a long time, in a lot of different ways. One of which was a venture capitalist, on Sand Hill Road. In that capacity as a venture capitalist, we had an adage. Which is, "Don't confuse a clear vision with a short time horizon".

Eric Daimler: (14:57)
People do this all the time. Before I was born, way back in the '60s, there was this cartoon called The Jetsons. It's still entertaining. You can watch it today. In that cartoon, there was this robot that walked around and cleaned the house, did the dishes, vacuumed the floors, made the food. It was called Rosie the Robot. We had a clear vision back then, "This is what we want".

Eric Daimler: (15:17)
But 50, 60 years later? We have a Roomba. That's all we have, a Roomba. You had a clear vision, but you would not want to confuse that with a short time horizon. I think today, when people think of the fears, or even the hopes of AI, they can reflect on Google Glass. That was a disaster. "I know what I want. It's very clear how cool it could be. But it's a horrible disaster".

Eric Daimler: (15:40)
When I think of autonomous cars, we can think what we would like. "I would like a sofa to be going down the street while I watch Netflix". But that is not going to happen next year. Elon Musk has mentioned for the last several years that, "Next year, we'll have a fully autonomous car in every situation". But it's not going to happen next year.

Eric Daimler: (15:59)
Not to put you on the spot. But you can think, imagine in your head when you think fully autonomous cars first appeared on a public street in the United States. The answer is, back when Reagan and Thatcher were in power. In the early '80s. 1983, Carnegie Mellon University had vans. They were big vans, but vans nonetheless. Driving on public streets, stopping at stop signs. They were going five miles an hour. But it's just another indication of, having a clear vision doesn't at all indicate something's going to happen soon.

Eric Daimler: (16:29)
The idea about general intelligence, this idea about AI becoming conscious? I'll tell you, the consensus is, that isn't going to happen in the next 10 to 20 years. If it will ever happen, my personal view is it will never happen. Because we don't even understand our own consciousness. You can do a thought experiment, and I'll leave it at this. When you say, "Who's that thinking?", and then you notice in your head, you're saying, "Who's that thinking?". We don't have enough understanding of our own consciousness to be able to re-create that consciousness in another entity, in a machine.

Eric Daimler: (17:02)
That's my answer. These things actually move relatively slowly. What's distinct about this world, is that things don't just happen quickly. They happen abruptly. That's the distinction people should think about, with regard to artificial intelligence.

Anthony Scaramucci: (17:14)
When you mentioned 1983, doctor, I wanted to ask you, how does Madonna look exactly the same as she did in 1983? But since that's outside of your expertise, I'll ask Darsie about that later.

Eric Daimler: (17:25)
It is indeed.

Anthony Scaramucci: (17:28)
You did a great job of explaining the limitations. But let's talk about application, and talk about current application of what you're doing. What industries are going to be the ones that transform, as a result of Conexus, and a result of what you're working on right now?

Eric Daimler: (17:48)
Yeah, this is something that we can talk about for AI in general. I often am caught saying that every business is an AI business. Every business is an artificial intelligence business. That can shock people. But what I mean by that, is that physical manifestations of goods have become increasingly commoditized over the last 100 years or so. Five percent of us work on farms. A very small percentage of us work in factories. I can buy the gear to run a farm, or run a factory, in a way that I couldn't 100 years ago. We run more and more on data.

Eric Daimler: (18:27)
A friend of mine runs a company that does this sort of analysis for restaurants, or companies. I can give a context for that. When we think about where AI deployments happen right now. AI deployments happen in very structured environments. An easy one is a children's game, Tic Tac Toe. It's a very structured environment. AI can master Tic Tac Toe. Slightly more sophisticated is checkers, and then chess.

Eric Daimler: (18:54)
Then there's this other, more sophisticated board game called Go, many of us are familiar with. It's a Chinese board game, with stones on a big grid. For all intents and purposes, that game was solved about a decade ago, using that technique we talked about earlier. Deep learning. That problem, just because it solved that solution, doesn't mean that every problem now exists around algorithms. That we have these sort of decisions to make day to day.

Eric Daimler: (19:23)
Back to my friend. He goes into companies, looking for ways in which we can solve these ordinary problems. In a café, in this particular instance. The conclusion is, no one wants to buy the last croissant. It may seem counterintuitive to have this highfalutin technologist, with such a banal conclusion. But the idea is that, for whatever reason, people want to buy every croissant to the last one.

Eric Daimler: (19:50)
Even, you might think intuitively, that you want to run out of croissants when the store ends. Instead he said, "Well, we're going to not call that food waste. We're going to call that last croissant, 'Making every other customer comfortable, until that last croissant'". This is proprietary data now. It's proprietary data to that particular restaurant, that particular cupcake retailer or factory.

Eric Daimler: (20:11)
That acquisition of data, that processing of data, and that execution of data, is proprietary information to that cupcake factory. That has more in common with an AI business than may initially appear on its face.

Anthony Scaramucci: (20:27)
It's a great example, and it's a good segue into my next question. Steve Schwarzman, the CEO of Blackstone, is saying to people, or suggesting, that businesses should increase their inventory. In the event that there are future pandemics, and future supply chain disruptions. What do you think of that? Is that a good idea for businesses? Is that something that's going to weigh them down, and make them carry too much cost on their inventory and balance sheets? What's your opinion?

Eric Daimler: (21:00)
Yeah, this ... I remember his statement. That drives me nuts. Because it's, a problem about the COVID crisis, is that we couldn't have predicted it. How can you possibly have predicted something, or planned for something, that could not have been predicted? For people just to carry -

Anthony Scaramucci: (21:20)
Well, I've got a lot of my investors that are on this call. I want you to say that seven more times. Of course you couldn't predict it. That's why we're good fundamental investors. If you get caught, you've got to ride it out. You've got to be patient. But go ahead, I'm sorry to interrupt.

Eric Daimler: (21:34)
No, it's exactly right. How you'd respond isn't by having more bloated inventory, or having now 1000 alternatives. Because you actually don't know what the next problem is going to be. You're going to plan for the last war, is the criticism that we get in government, to the defense department. What's far, far more powerful, is to be a quick learner, and be adaptable. That's where my firm, Conexus, that's where we work with our companies.

Eric Daimler: (22:02)
The logistics company we worked with earlier, we can't plan for every possible eventuality. But what we can plan for is having better visibility. Better capital goods planning. Better labor planning. Then more supply or options, so that we can quickly respond to whatever problem may appear, in whatever timeframe. It's about responsiveness, it's about flexibility, and it's about adaptability.

Anthony Scaramucci: (22:29)
Okay. Well we're getting a ton of questions that are coming into our chat room. I'm going to turn it over to John, to have him ask you some of these questions. But I want to come back in a moment. But go ahead, John. I see the questions piling up.

John Darsie: (22:45)
Yeah. There's a question about, we mentioned that you worked as the Presidential Innovation Fellow for AI and Robotics, in the Obama White House. How did that position come about? What was it like day to day? What were you really working on there? Then how do you think, in general, we do as a government, driving research into AI and robotics? I know that places like China are much more aggressive in pushing into those areas. How are we doing? Talk a little bit about your work while you were in the White House.

Eric Daimler: (23:15)
Right. I will first say, it was a privilege. It was a privilege to be working in the Obama administration. It was actually just a privilege to be working in the federal government. I had an appreciation for the work that people do within the federal government. I was very impressed with the people with whom I had worked.

Eric Daimler: (23:34)
I mostly interacted with people in the defense department. I got a little challenge coin from the work I did with Ash Carter. I flew on a plane with Ray Mabus, and Air Force One is as cool as you think it is. The job and the people are fantastic. I had a great experience.

Anthony Scaramucci: (23:53)
See, Darsie's smiling right now, doc. Because I have flown on Air Force One. I see him laughing.

John Darsie: (23:58)
Anthony I think worked in the federal government for a couple weeks.

Anthony Scaramucci: (24:00)
I was only there for 11 days, doc. But I had three trips on Air Force One. I didn't mean to interrupt your stream and your thought there. But Darsie, you're lucky that we're not in the same room together. You'd get smacked right now. Okay, keep going, doc. I'm sorry about that.

Eric Daimler: (24:16)
It was as cool as you think it is, and the people were fantastic.

Anthony Scaramucci: (24:18)
Air Force One is as cool as you think it is, and Darsie, you haven't flown on Air Force One. I just wanted to point that out to everybody. Go ahead, doc.

John Darsie: (24:24)
I've got time.

Eric Daimler: (24:27)
The work we did, the work that I did, was in the coordination between what the president wanted to do, from the executive office, to the rest of the executive branches. Whether it was state, or defense, or treasury, or health and human services. They would all have their different uses for AI, and obviously the different uses for robotics.

Eric Daimler: (24:48)
We would come to try to conceptualize a framework, under which we could be going down the same path. This is both a Republican and a Democratic talking point, that shouldn't be politicized. I'm fortunate that this one area seems to not have been in the new administration. Because we were trying to make the allocation of our resources more effective for the American people, and maintain American leadership. That was my objective, and it was my day to day work. I hope I get the opportunity to do it again.

Eric Daimler: (25:19)
What I think about policy is, that number one, we need to engage in this conversation. It's not enough to sit back and react to whatever technology exists. We actually have to educate ourselves. As systems have become more complex over the past 50 years, we have become more educated than our parents, and certainly our grandparents, about the technologies in our world.

Eric Daimler: (25:45)
We need to do the same with AI. Because whether we like it or not, there are a million programmers out in the world, codifying our human values into software, in ways we may not like. We need to become educated, so we can be part of that conversation.

Eric Daimler: (26:00)
Another part of policy that I recommend is, that we have circuit breakers. These systems have become automated in ways that we may not appreciate. I may not want, that my Instagram account and my liking of a picture of a hamburger, to then somehow go through a sequence of algorithms, that then affects my life insurance policy. Because somebody thinks I'm now going to have high cholesterol, or what have you. That can happen. That sequence of behavior. So circuit breakers are important.

Eric Daimler: (26:28)
Related to that but distinct, we should have human auditors on AI, overlaying the black boxes that are there. There are tragic stories around black box criminal justice sentencing systems, as AI. I don't like that. I wouldn't want to be sentenced by a black box. I want to be talking to human beings. I want to make sure the decisions represent human values.

Eric Daimler: (26:50)
Those are the three ways I think we need to be involved in policy. Whether we are actually public officials, or whether we are citizens or business people.

John Darsie: (26:59)
Going to the pandemic for a moment, we have a question about, we actually had a very interesting panel a couple weeks ago on health tech. About how the massive amounts of data we have, and our new ability to process that data using AI and machine learning and things, is helping us in areas like radiology, oncology. As it relates to the pandemic, how can a firm like Conexus, leveraging AI tools and data, help speed up the race to find a vaccine, and generally help us confront pandemics going forward?

Eric Daimler: (27:33)
As I said earlier, we are working with companies to detect where personal protective equipment is in the world, and help bring effectiveness and agility to our logistics and shipping systems. This is a global problem, that will benefit our economy into the distant future. We're also working with companies to come up with a COVID vaccine.

Eric Daimler: (27:55)
The way we do that is, we work to guarantee data, and guarantee the integrity of the models. Since the COVID crisis, some 3000 scientific papers have been published. A couple hundred of these papers had to have been thrown out, because this one lab at Imperial College London, was found to have had a misinterpretation of their data. Some corrupted data, essentially.

Eric Daimler: (28:22)
The way we talked about normalizing data, and bringing data together, has found its way into our Centers for Disease Control. This feels almost criminal to me. That the Centers for Disease Control, these are the experts in the United States, to which we give a lot of resources, and give a lot of credibility. They conflated the idea of a positive test for a virus, versus a positive test for an antibody. They just merged them, and said, "Positive test".

Eric Daimler: (28:50)
This speaks to a lack of numeracy. Literacy in numbers, literacy in math. The point of taking math isn't to learn calculus, in the past, or to learn category theory today. It's the point to become literate with these numbers, so you don't have these sort of confusions. But even among the scientifically literate, you have to depend on the integrity of the models, and the data given to you. This is what failed this lab at Imperial College London.

Eric Daimler: (29:14)
Many, many different studies, hundreds in this particular case, had to have been thrown out. That may not seem terribly tragic, until you realize the consequences is a vaccine. It cost time, it cost money. In this case, since we're developing a vaccine, it literally cost lives. That's what my firm is willing to look into helping to shorten, and bring effectiveness to.

John Darsie: (29:34)
Going back to government policy for a moment, we have a question about, again, what the United States needs to do to ensure that AI research and development capabilities don't fall behind China. When you have a centrally planned government, they have an ability to make long term bets, and to drive investment into certain areas that they think are super important strategically, long term. We maybe have lost a little bit of sight of that in the United States, just given our political cycles.

John Darsie: (30:01)
What do we need to do? Should we be more focused on US government policy, regarding AI development? To ensure that we remain either ahead, or competitive with someone like China?

Eric Daimler: (30:12)
I think there's a lot to say here, and there's a lot to say here that doesn't just involve technology. It pained me to have been in, I remember back when I was in my PhD program. I would be around foreign nationals that wanted to stay in the United States, but we forced them back to their home countries. They wanted to be contributing to the research in the US. We paid to train them, but then we would force them back.

Eric Daimler: (30:42)
I would have been the person with whom they were competing for a job, and I'm fine with doing that. But we forced them back. I think that's tragic, because it impairs American leadership. I obviously think that we could multiply, by an order of magnitude, the funding of research overall into these domains.

Eric Daimler: (31:00)
I'll say two things that are very important for the listeners. That besides the funding, besides the immigration, is that we need to be engaged in the conversation, so that we know how to deploy the technology. My friend, Dr Kai-Fu Lee, will often talk about data, and China being the superpower of data. That's fine. But that only goes so far, because the winner will not just be in the accumulation of data. If that was true, where would that leave France, or Brazil, or Germany? As a second class citizen? No. It's in the implementation. It's in the use of AI that will have a lot of power.

Eric Daimler: (31:43)
We need to be looking at this, as I will say, as a system. The totality of an AI system. We have an advantage. As a free country, and as western democracies, to be collaborating with each other. On the acquisition of data, the processing of that data with guaranteed integrity. The analysis of the data, and the execution of that data. I would invite people to look at this as a totality of a system, in order to maintain American leadership. Both commercially, and militarily.

John Darsie: (32:13)
I want to move on to robotics for a moment. We talked a lot about AI. Robotics is very closely related to AI, but we haven't dived so much into it. A question came in from the audience, what are your thoughts about the increasing collaborative robot adoption, in reaction to an overdependence on human labor, post COVID?

John Darsie: (32:34)
The notion that if we're going to expect that there's going to be pandemics and disruptions like we've seen with COVID, are we in danger of companies moving towards a more robotics driven workforce, that has a little bit more flexibility, like an accordion? Depending on economic conditions?

Eric Daimler: (32:53)
You know, this came up in conversations when I was talking to people, representatives in congress. My answer always was, we don't automate what humans fundamentally want to do. We have machines that can do a lot of things. But if we still want to do them, we can still do them. But many of the repetitive tasks for which we have built robots, are not something that people, when they're a child, say, "Gosh. I want to do that repetitive project when I grow up".

Eric Daimler: (33:28)
I invite people, there's many different frameworks one might have about these technologies, including robots. But one is just as an automation tool. As an augmentation. This is how you can think about it. You are not going to be replaced by a robot. You're going to be replaced by a human using a robot. You need to work with these new automation tools. Automation's been coming the last hundreds of years. Learn how to work with these new tools, and how it can have you be better at the job, and then the larger job that needs to be done.

Eric Daimler: (33:59)
There are parts of this world that are fundamentally human. That is often the part where we're interacting with each other, like now. It's the part where we're expressing empathy with each other, like now. Those are the sort of skills that probably need to be nurtured, in order to have a longer term view of what your career is, or what your children's career is.

John Darsie: (34:22)
We have a question, and this might not be in your wheelhouse. So feel free to say so. But about social policy, that will need to be a result in a world where we have greater AI and robotics participation in our workforce. Maybe a stripping out of some of those types of jobs that you mentioned. Ones that maybe are very cumbersome for human beings, that get taken over by robots or machines.

John Darsie: (34:48)
In terms of things like universal basic income, or things of that nature. From a social perspective and a government perspective, what do we need to do in a world where technology replaces a lot of the human labor, that has existed for hundreds, thousands of years?

Eric Daimler: (35:03)
Yeah. You know, I think that it's useful to be contextualizing AI as something that happens abruptly, and not quickly. What's changed here isn't that we're going to have automation, and jobs are getting replaced. It's that those sort of changes used to happen over a generation, but in this world, when they happen, they'll happen abruptly.

Eric Daimler: (35:27)
Long haul trucking is often brought up as an example, because that's actually the largest job in most states, is long haul trucking. But if we look at that job, it's actually terrible. It's a terrible job. Many truckers don't even want to do that job, because they're taken away from their friends and from their family. That job is actually likely to get better, before it's replaced. I don't want to be encouraging my children to be going into long haul trucking. But it doesn't mean that that job is going away next year.

Eric Daimler: (35:53)
I'll tell you how that's going to go. This can give people a framework to think about AI, and social policy. They can invent their own answers. Right now, driving an automated semi down the road is the easiest of problems. But it's still a hard problem. How a company is solving this, Locomation in Pittsburgh, is they're going to have a peloton of trucks, three trucks.

Eric Daimler: (36:15)
The first truck is actually going to have a human driver. The second truck will have drivers, but they'll be asleep. Then that truck will rotate, and another trucker will take over. Then rotate, and then take over. Instead of that truck driving 11 hours, which is the current maximum, the truck can drive 24 hours. You can go out from Philadelphia to Kansas City, and then back, in a timeframe that allows you to keep the relationships with your friends and your family.

Eric Daimler: (36:42)
That's transformational, and those sort of transformations will be available with AI before it replaces jobs. I invite people to think a little more broadly about this. Kathleen Carley has invented a way of thinking about AI, that takes into account a cyber social system. Yesterday, Twitter got hacked. Banks get hacked all the time. Or they get attempted with hacking all the time. That's been happening for a while.

Eric Daimler: (37:11)
But what's now happening is, instead of people just attacking my bank, they're attacking me to attack my bank. "Is this thing fake? Is this thing real?". That gets manipulated now in my news feed, to continue my biases or what have you. But how will it now affect me, if I see videos that may be fake? It takes a whole new dimension to criminal justice, when eye witness accounts may not be eye witness accounts in the traditional sense. That's a new way of thinking about AI. We have a physical manifestation. A physical interaction with these technologies.

Eric Daimler: (37:42)
Then lastly, it is outside of my wheelhouse to be talking about universal basic income. But I will say, personally I'm not necessarily a fan. That came out of Silicon Valley, where a lot of people in my neighborhood think of these sort of easy answers to these complex public policy problems. I'd say that earned income tax credit is a much easier way, is a much more direct way to address folks that have job displacements.

Eric Daimler: (38:08)
I would say that early childhood education is another way to be addressing this. I do not want to have a simple solution, my personal view, of universal basic income, instead of addressing these more complex public policy answers, to that very hard problem.

John Darsie: (38:23)
We have one last question before we let you go. It was a good segue from what you just said, about early childhood education. That's a big part. We can put resources behind research and development. We also need to create a culture, where we incentivize young people to learn about AI, and coding, and robotics, and things of that nature.

John Darsie: (38:41)
I have three young kids. Anthony has young kids as well. What should we be doing, as a society, to teach our children about artificial intelligence? What type of resources should they be consuming? We obviously have a parent that's posed this question, and it's interesting to me as well. What should we be doing with our kids, to drive interest and engagement in the world of AI and robotics?

Eric Daimler: (39:04)
I don't know if I want to drive interest in robotics or AI. But I'd love for people to participate. There's an organization called First Robotics, of which I'm a really big fan. This nonprofit organization, and you can just use your favorite search engine, for First Robotics. I find it to be fascinating, because they allowed for this contest for children of various ages, to get involved in a project, that had a fundamentally technical outcome. But required people in different capacities.

Eric Daimler: (39:31)
What I loved about this particular competition that I saw in Florida a couple years back, was that women, girls in this case, girls were leading these teams of guys, kids, boys, in the development of robots, that they were given a challenge to develop. They were not only developing a technical acuity, but they were feeling comfortable that there was a place for them, that wasn't just the nerd in the basement. Which is how I started out.

Eric Daimler: (40:01)
Other people could say, "Well, I'm the marketer. I'm the fundraiser. I'm going to go find us money from our neighborhood, to help fund for our equipment". "Well I'm the leader. I'm the organizer, to make sure that we are not just experimenting, but we're developing the product towards the solution of winning the competition".

Eric Daimler: (40:17)
These little children were developing these sensibilities. I get goosebumps even just thinking about it right now, I was so moved. That real world interaction. Giving people a place to think about the breadth of opportunity for them, inside of these systems, that's not just nerds in the basement. I think it's critically important.

Eric Daimler: (40:38)
I think math is a big deal. You might say the more math, the better. But if I were to choose, I would say, let's put aside the geometry, the trigonometry, and really the calculus. Put it aside. It's going to become like Latin. Let's focus on probability, and categorical mathematics. Category theory. That's the math of the future. That's the math that we can use. That's the math you'll use in your day to day life.

John Darsie: (41:03)
Well that's fascinating. Dr Daimler, I want to thank you for joining us. You were able to attend our SALT conference in Abu Dhabi last December, where we had a great time. I hope that we can host you at one of our future SALT conferences in person. But for now, this will do. You talked about how you're in San Francisco. That's why you're wearing a sweater in the summer. For a nerd in the basement, you're very fashionable, and you have a very well decorated basement. Thanks again for joining us. We really appreciate the time.

Anthony Scaramucci: (41:30)
I mean, you're calling him a nerd at the end of the thing? I mean, that's like the pot calling the kettle black -

John Darsie: (41:34)
He called himself a nerd, give me a break.

Anthony Scaramucci: (41:35)
I mean, it's unbelievable. But doc, what I will say, is that in the middle of a pandemic, you're helping people see through to where the opportunity is. We're about to embark upon a massive technological transformation again, of our society. Which is going to lead to unbridled economic growth and prosperity. We just have to see ourselves to the other side of it.

Eric Daimler: (41:59)
Yes.

Anthony Scaramucci: (41:59)
But in the meantime, I'm going to be auctioning off the silverware and stuff behind John Darsie. But the truth of the matter is, it's likely not actually to be silver. It's probably just plastic. But that'll be for another SALT talk, Dr Daimler. Thank-you so much for joining us.

Eric Daimler: (42:16)
Good to be here. Thank-you, Anthony. Thank-you, John.

Anthony Scaramucci: (42:17)
All right. All the best.

Venture Capitalists on the Importance of Data in HealthTech | SALT Talks #21

“I think healthcare should be a right whether you’re in the Middle East or India or anywhere in the world… why not also have a major impact on the ideas you invest in.”

Three leaders in the HealthTech space joined our roundtable to discuss their careers investing in healthcare, technology and wellness industries. Dr. Vishal Gulati is a partner at Draper Espirit, a leading European venture capital firm; Noor Sweid is founder of Global Ventures, a Dubai-based, growth-stage venture capital firm focusing on investing in emerging markets; and Vasudev Bailey, PhD, is a partner at ARTIS Ventures, a long-term venture partner.

The debate between investing in healthcare to make money vs. guaranteeing it as a right is a false choice. Bailey makes clear these two ideas can and should coexist. “I think healthcare should be a right whether you’re in the Middle East or India or anywhere in the world. I think healthcare is absolutely broken. It’s not to say you can’t make money in healthcare… why not also have a major impact on the ideas you invest in.”

Investments in cutting edge health technology has placed a premium on data which has become the currency in healthcare. The increased data points serve as key inputs in the application of artificial intelligence used to assist and transform existing medical practices.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKERS

Vishal Gulati

Partner

Draper Esprit

FULL BIO

Vasudev Bailey, PhD

Partner

ARTIS Ventures

FULL BIO

Noor Sweid

Partner

Global Ventures

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie, I'm the Managing Director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and public policy. These SALT Talks are a series of digital interviews we've been doing during the work from home period in lieu of our in-person conferences. What we really try to do with these SALT Talks is provide a platform for leading investors, creators, and thinkers and to provide our audience a window into the minds of those subject matter experts, as well as provide that platform for big world changing ideas that we think are shaping the future.

John Darsie: (00:43)
Today we're really excited to bring you a panel focused on health technology and healthcare investing featuring three esteemed panelists, Dr. Vishal Gulati, Noor Sweid, and Vas Bailey, who is a PhD. I'm going to read you brief bios on each one of the panelists and then I'll give them a little bit of time to explain more about their background and how they got into health tech investing.

John Darsie: (01:06)
Dr. Vishal Gulati is a venture partner at Draper Esprit and an advisor to Oxford Sciences Innovation. He's an investor and promoter of data-driven healthcare in Europe and has an active portfolio about 20 companies. These companies represent a wide range of technology platforms and applications ranging from digital therapeutics to machine learning and AI. Dr. Gulati is a trained physician and he spent time... that includes time at the St. Mary's Hospital Department of Medicine in London, where he was a Rhodes Scholar.

John Darsie: (01:38)
Our next panelist is Noor Sweid who's a general partner at Global Ventures, which is a Dubai-based venture capital fund working with globally minded growth stage companies in the Middle East and Africa region. Increasingly, Global Ventures is focused on health tech investing is that opportunity set has expanded. Now, previously Noor was the Chief Investment Officer at Dubai Future Foundation and was a founding partner at Leap Ventures, which was a growth stage VC based out of Dubai and Beirut. Noor is a very active angel investor. Prior to her angel investing in venture capital days, she actually founded and scaled Zen Yoga, which was the first yoga studio in the UAE that she later sold to a private equity firm in 2014.

John Darsie: (02:21)
She began her career as a biopharma strategy consultant at Accenture in Boston. Noor is a Director-in-Residence for the Corporate Governance Program at INSEAD and a Founding Board Member at Endeavor UAE. She has a bachelors' degree in Finance and Economics from Boston College and an MBA from MIT's Sloan School of Business.

John Darsie: (02:40)
Our last panelist, last but not least definitely is Vas Bailey, who is a PhD. He's a partner at ARTIS Ventures where he focuses on investing in novel and breakthrough health and life sciences companies. He currently sits on 10 boards and he serves as an advisor to several other startups. He's the founder of ARTIS Ventures' Healthcare Pioneers, which brings together some of the world's brightest minds to accelerate and incubate life-changing ideas in healthcare.

John Darsie: (03:05)
In his past role as venture partner at ARTIS, he helped portfolio companies with their business development and growth strategy. Prior to ARTIS, Vas co-founded and served as the general manager of the GLG Institute. He served as a consultant at McKinsey. He received a PhD in Biomedical Engineering, focused on the use of nanotechnology and epigenetics for personalized chemotherapy in early cancer detection from Johns Hopkins University school of medicine. He's been recognized as one of the world's leading biomedical engineers by the Siebel Foundation.

John Darsie: (03:36)
Thank you all for joining us. A reminder to all of our participants, if you have any questions for the panelists during today's talk, you can enter them into the Q&A box at the bottom of your video screen.

John Darsie: (03:46)
So the first question... I'm going to go around the horn, we'll start with, Dr. Gulati. I spent some time talking through your background and your resume, but could you please give us a little bit more about your personal background and your journey into health tech investing.

Dr. Vishal Gulati: (04:03)
Thank you very much, John. Very delighted to be here. I started my career as a practicing doctor and then I did research as a clinical researcher, believe it or not in virology, which was not a very exciting field in those days, but now, it has become very, very topical. Then, I started working at the Wellcome Trust after that and got involved in the human genome program. That opened my eyes in terms of data and how having large amounts of data can open our eyes to a different world in healthcare.

Dr. Vishal Gulati: (04:42)
Interestingly, at the same time, venture capitalists around the world were looking for people with those skills to help them, look for investment opportunities. So I got headhunted to work for a venture capital firm where I spent a number of years. Around 2012 or 2013, I started to look at how the ecosystem was evolving from a very different lens. Just the availability of internet and handheld devices had completely changed people's lives. It seemed quite logical that that would come to healthcare as well.

Dr. Vishal Gulati: (05:20)
Over the last few years, all that data that we generated also opened our eyes to new technologies, like machine learning and other ways of analyzing that data and making sense and inference out of that. That has capitalized a huge renascence, a generation of companies that have taken that data and applied it to hard medical problems. That is the interface at which I love to invest.

John Darsie: (05:49)
Thank you, Dr. Gulati. Noor how about you go next?

Noor Sweid: (05:54)
Thank you, John. For me, it's more of venture capital. So helping startups grow, supporting startups and emerging markets is what we're very passionate about. My journey started in biopharma, as you mentioned, moved into wellness, at the same time scaling an IPO and a company out of emerging markets. So really it's been a little bit of everywhere.

Noor Sweid: (06:15)
When this crisis hit, when COVID suddenly became a part of the global narrative, what we saw was very clear, which is the financial crisis 10 years ago drove the need for financial inclusion and lots of technology, leapfrogging to allow people who are not part of the financial network to come into the financial network, and we saw FinTech.

Noor Sweid: (06:39)
Now we have this health crisis, which will naturally then highlight the need for healthcare, which is in a past emerging markets. We sit in Dubai, we have the Middle East and Africa is a one and a half billion person population where health care access is lacking.

Noor Sweid: (06:54)
So once we started to see healthcare inclusion prioritize and a lot of the founders across the region try to address this need, and need more and more capital for growth, we decided to lean into that and use our background and our knowledge in the space, as well as our background and knowledge in technology and venture investing to support and enable these companies to provide health care access to the population.

John Darsie: (07:16)
Thank you, Noor. Vas, you round things out for us.

Vasudev Bailey: (07:20)
Great. I've been passionate about healthcare from as far back as I can remember. I started my first company when I was 17 years old and it was in the world of fitness monitoring check. Clearly, you can't tell fitness from this, and I understand, but it was something I started. I went onto the Hopkins School of Medicine, whereas you mentioned, I got my PhD, but I'm also on the board of the Johns Hopkins School of Medicine, BME Department, which has been the top program in biomedical engineering since they created it 40 years ago. What biomedical engineering is essentially is where I invest at ARTIS Ventures, which is the intersection of technology and medicine.

Vasudev Bailey: (07:58)
When I left that world of academia and joined McKinsey and company, I had the privilege there to meet Jeff Kindler, the CEO of Pfizer wherein it changed my world and my life because this was a person who did not have great networks in the world of pharma and tech, suddenly changed overnight because I started a business with Jeff Kindler, which was called GLG Institute under GLG. We built what is the world's largest network of CEOs, at 1,500 pharma CEOs working for me at that point and including collaborating with people like David Brennan from AstraZeneca and Shlomo Yanai from Teva.

Vasudev Bailey: (08:38)
The way we think about healthcare is... not say something controversial to start with because many of you will disagree-

John Darsie: (08:44)
We like controversy.

Vasudev Bailey: (08:45)
Yeah. I think healthcare should be a right that everyone has. You should not get better healthcare just because you're born close to Johns Hopkins or close to Stanford University. I think whether you're in the Middle East or in India or anywhere in the world, healthcare is absolutely broken because I think that people who have access to great healthcare tend to do better than people who don't.

Vasudev Bailey: (09:10)
That drives me every day. It's not to say that you can't make money in healthcare, right. Is the fact that we are focused as a venture fund on returns. It is not a nonprofit, we're razor focused on delivering returns to our investors.

Vasudev Bailey: (09:24)
That being said, why not also have a major impact in the ideas you invest in as well. That's what allows me to wake up every day and motivates me to do what we do. We believe that the clear edge you can give innovators in healthcare, which is such a complex web, is through people.

Vasudev Bailey: (09:45)
So my past life of having the CEO network translates into how we give our companies an unfair edge in trying to innovate and move forward.

John Darsie: (09:53)
Well, Dr. Gulati, you're based in London, so you don't have as many of the healthcare costs related issues from a population perspective that we have in the United States and Vas here based in San Francisco. So I want to ask, starting with you Dr. Gulati, a broad question about how technology is changing the healthcare field, helping address some of those concerns around healthcare costs. Particularly for you Dr. Gulati, you're very focused on data driven healthcare solutions.

John Darsie: (10:22)
So how has the collection of data and the harvesting of that data affected and improved health care solutions.

Dr. Vishal Gulati: (10:31)
I'll give you a number of concrete examples. I think that the way healthcare is now delivered is gradually becoming much more distributed. It is no longer centralized in hospitals or centers of excellence. It's still more centralized than I would like it to be, but it is gradually percolating outside. So just in my portfolio, the companies put together have helped more than 50 million people with their healthcare needs, which is not the scale I can imagine by starting a hospital or running a center. I just cannot imagine that level of impact.

Dr. Vishal Gulati: (11:12)
Then with that data comes additional benefits. So one of my portfolio companies, which is called Ieso Digital Health, it has several hundred thousand hours of therapy CBT for patients with depression and anxiety disorders, which they have now analyzed and now they are the best CBT provider in the world.

Dr. Vishal Gulati: (11:33)
In the UK, for example, we have national level data of effectiveness of CBT, and we ranked higher than all other providers because they use the data smartly and we are able to build something out of that. So to give you an example, if the leading drug for depression today was surpassed by another drug that was as much better as Ieso is from other CBT, that would be a multi billion dollar drug.

Dr. Vishal Gulati: (12:02)
So we can build value from data which can be then measured against outcomes. Another example is a company in my portfolio, Zoe founded by a close friend of mine, which launched an app very early when COVID-19 happened for people to just track their symptoms. They now have more than four million users around the world. They have published about a month ago in Nature Medicine, what the clinical symptoms doctors all over the world should be looking for in patients who suffer from COVID-19.

Dr. Vishal Gulati: (12:41)
So just being able to collect all data has given us the superpower, where we have been able to advance healthcare at a speed which would not be possible before.

John Darsie: (12:54)
Noor you focused on investing in emerging markets, mainly the Middle East and Africa region. There's unique challenges to healthcare access in those places. How is technology helping to distribute healthcare solutions in emerging markets?

Noor Sweid: (13:11)
So I think that these questions are always better answered the way that Dr. Gulati did it. So thanks, Vishal, it's through examples. So one of the companies we recently invested in March, and this was pre-COVID, this was a theory that we had starting in January and in March we transacted into a company called Helium Health, which is based in Lagos, in Nigeria. We were fortunate to have great co-investors in that that are enabling us as well, like Ten Cent, an AIC out of Japan.

Noor Sweid: (13:38)
What Helium does is effectively, it's an EMR for hospitals as well as regulators, but then it also had the patient side. So when a patient leaves the hospital or the doctor, they have a report of who they saw, what they said and what the recommended treatment is. Now, if the patient cannot afford the treatment within the platform, they can get a loan instantly.

Noor Sweid: (13:59)
So the different pain points for patients along the journey that got addressed in emerging markets are very unique and are very real. They also apply to a lot of developed markets. So in Europe, a lot of times it's a treatment that people worry about how they're going to afford that treatment, but there's no platform to say, "I want to tell them now." What Helium's done is really worked with the banks and the regulators, as well as the hospitals and providers saying, "It's a lot cheaper to treat the patient now, when they have the flu, the next month, when they have pneumonia."

Noor Sweid: (14:25)
The uniqueness of Helium is that it's online and offline. So you cannot depend on electricity and internet in most of Africa. The need for Helium is because in Africa, less than 30% of hospital visits are documented. So you have a massive problem in a really large population. You want the data, as Vishal was saying, so now they have millions of patient data information on their platform and they're also solving real problems.

Noor Sweid: (14:53)
They've leapfrogged in the sense that it's online offline. So it's like if you take Epic and the Salesforce API that enables a patient, add an app and put it all together, but it's one solution. It's a 20 year old company. It's my Combinator founder, But he's gone back and said, "Here's a real need for real people," and he's able to leap frog.

Noor Sweid: (15:11)
We'll see more and more of these companies. Again, I go back to the financial inclusion similarity. What's the MEPS of healthcare? MEPS came and it changed the way people thought about financial inclusion and what's possible for finance digitally. So what are the companies that are going to come out of emerging markets that are going to change the way we think about healthcare and access to physicians and really push the envelope and take us from inside our box thinking to outside the box thinking.

John Darsie: (15:40)
So Vas, turning to you, you've published over 30 scientific papers and you hold four provisional patents from your research in nanotechnology for the early detection of cancer. Cancer is an area where you've really done a lot of work and specialized. How does technology and data collection and data analysis really accelerating progress in the field of cancer research and cancer treatments?

Vasudev Bailey: (16:07)
I think we will all have agreement with Vishal, Noor, and I that data is the currency of what will transform healthcare. We're at that unique moment in time where we're at digitized biology. When any of you have taken your 23andMe test or Ancestry what have you done? You essentially digitized what would have always been analog, something which would have been tossed away. We're now have access to that digitally to understand what's going on.

Vasudev Bailey: (16:31)
The same thing has happened with your blood pressure or your EKG. In the world of oncology, we have benefited from that as well, real world data and outcomes of how patients have one, done on certain drugs, but also is there a relation between their epigenetic code, the genetic code, to the progression or incidents of disease?

Vasudev Bailey: (16:53)
We've made tremendous progress in the world of oncology using data over the past decade. So much so that the highlights over the last decade in where we have made advances in oncology include one, we've started to use our own immune system to fight cancers. So the idea of personalized cancer therapy is real. We've double up what is the new notion of cancer vaccines, which we'd never thought would have been possible. We have, in the world of diagnostics, where I'd spent my time in PhD, you see companies now that are coming to life like Guardant Health just went public as a $10 billion company. I've invested in a company called Freenome. Let me also give an example.

Vasudev Bailey: (17:35)
In the world of Freenome, what we are trying to do is replace what would normally be the method to detect colon cancer, which is a colonoscopy. For those of you who have had to go get one, it is very effective, however, it's very uncomfortable and the time and the effort needed to prep for a colonoscopy, sometimes deters people from wanting to go get it done.

Vasudev Bailey: (17:58)
So simple question we wanted to answer is, just what if we could have the same sensitivity and specificity of a colonoscopy that you could just get from a drop of blood or from a blood test, would that be possible, but not just from genomics? What if we were to able to combine genomics, mediconomics, proteomics, but bring these things as multianalyte detection, but use data and AI to help in increasing the accuracy of detection for colon cancer detection. That is Freenome. So we've seen massive strides there as well.

Vasudev Bailey: (18:37)
Rest assured, in the world of oncology, it is probably the area in healthcare that has received the most number of dollars. So we will see the next 10 years or so also harvest some of the efforts that have gone into innovation in oncology.

John Darsie: (18:54)
So for our audience, what do you think a realistic timeframe is? I know curing cancer is not really the outcome that you're looking for, but how do we get to a point where cancer is no longer a death sentence for most people into the point where we can really treat most forms of cancer?

Vasudev Bailey: (19:12)
Cancer is a complex disease. It's a multi pathway disease. I think it's really hard for anyone to say that we will forever put an end to all cancers. I think that we can tackle certain types of cancers and make great progress towards treating it.

Vasudev Bailey: (19:29)
We were the first institutional investors in a company called Stemcentrx. It use stem cell therapy to treat certain types of cancers. Fortunately, this company has been the biggest exit in healthcare venture capital. We're excited to have been the first institution to have backed this company.

Vasudev Bailey: (19:47)
I think you will see novel techniques like that, whether it's stem cell therapy, CARs, and CAR T, you will see the idea of in vivo medicine move oncology to ways in which certain things.

Vasudev Bailey: (20:00)
So for instance, if you had breast cancer in 1990s and 1980s, certain types, I think it would be very difficult... it was caught in stage two, three, didn't have a good prognosis. Many different types of cancers, even lung cancer, before the world of Keytruda and Divot, the outcomes were so much worse.

Vasudev Bailey: (20:18)
So I do think there's certain cancers where you can now be diagnosed early and live your life to the fullest and have your cancer managed. That I think is very promising. I'd be curious to hear from Vishal and Noor, but to me, I think it's challenging to say that we'll ever find like one Pinochet for cancer, where we'll be able to tackle all of cancers at one go.

John Darsie: (20:44)
Dr. Gulati, I want to ask you a two part question. One is a followup to everything Vas just said about oncology and cancer research and about AI. AI has a lot of different applications across healthcare, oncology, and this hits home for me because my brother is a radiologist. But how is AI doing things to improve radiology? Do we still need human doctors? Is it just a tool that is going to benefit them and increase the accuracy of their diagnosis? How is AI being applied across oncology and things like radiology to improve healthcare responses?

Dr. Vishal Gulati: (21:18)
Thanks, John. Just to pick up on what Vas was saying, I agree with him entirely that I don't think that we will have a world without cancer. We may have a world where cancer becomes that much less scary and becomes a chronic condition that we manage rather than something we treat radically, which is what we have done in the past. A lot of these advances will come from small gains here and there, all the way from detection, to management, to discovery.

Dr. Vishal Gulati: (21:51)
So it will be a multi pronged approach and we are going to win against this enemy in small battles rather than one big war to end all wars. So I don't think that that's how we will deal with this.

Dr. Vishal Gulati: (22:04)
Coming back to your other question, which is about radiology. Radiology has been one of the first branches of medicine, which has been affected by AI. So there's a lot of abuse of AI in our industry. I'm usually a little bit cautious about trying to, in an unguarded way, say that AI is going to transform or change anything. But specific applications or specific type of AI has had some dramatic improvements in the way the data flows, in the way we make diagnoses.

Dr. Vishal Gulati: (22:44)
So I have been asked this question before, is AI going to eat radiologists? My answer has always been that, we would, but we haven't found enough radiologists to eat because globally there is a massive shortage of radiologists. So I can tell you from the associations of radiologists in the United States or from the Royal College of Radiologists in the UK, wherever I have asked this question, they have all said to me that there are just not enough radiologists. So if you can do something to take some of the load off us, we'll be very, very grateful for that.

Dr. Vishal Gulati: (23:25)
One of my portfolio companies, Kheiron Medical has done just that. They are the first European regulated product for mammogram reading. So they are able to read a mammogram, as good as a human radiologist. What they are now finding in the world of COVID, we had to stop all mammograms in the UK because patients could not visit hospitals. Now we have a backlog of hundreds of thousands of women who are waiting for their scan, which should have happened several months ago. The only way we are being able to deal with this now is by deploying MIA, which is a product for mammograms, right at the front end, which is assisting radiologist as a second reader.

Dr. Vishal Gulati: (24:10)
That one end of the spectrum, if you like in cancer. Now, if you try and imagine how we go further, having better quality images from histopathology and from radiology and applying machine learning will help us characterize patients better. If we can characterize patients better, that is better for clinical trials, we can target drugs to the right patients who are more likely to respond in. Then if we have that data, then it is easier for us to identify patients what treatment they need. So I think that that is one end.

Dr. Vishal Gulati: (24:46)
Then on the discovery side, we will use all the data that's coming out of genomics and proteomics, which is high dimensional data that human brains cannot comprehend. That can be used using specific AI technologies. We can find relationships in there which are going to help us transform the way we treat them. So it's a multi pronged approach, I would say.

John Darsie: (25:08)
So my brother's still going to have a job in 10 years. That's good to hear it.

Dr. Vishal Gulati: (25:11)
Your brother is definitely going to have a job and his job will only get better because he will have a little machine radiologists sitting next to him, helping him get better at what he does every day.

John Darsie: (25:24)
So his wife and my sister-in-law's an emergency medicine doctor, and he gets to just sit there and have a machine given the diagnosis. It doesn't seem quite fair to me [crosstalk 00:25:33]-

Dr. Vishal Gulati: (25:33)
I 100% agree with you. I think your brother is in a much better place.

John Darsie: (25:39)
Noor, do you have anything to add to the conversation about AI and how it's transforming healthcare?

Noor Sweid: (25:44)
So from my perspective, I think the most interesting way that AI is transforming healthcare is that it's personalizing it. So given all the data that Vishal's talking about accumulating, and then layering that on top of the efficacy of different drugs, you're able to ultimately within the information about the genomics of Vas was alluding to get to a point where, as a patient, if you're sick, there's a certain level of expectation that you can have that the treatment recommended to you will actually work for you.

Noor Sweid: (26:13)
Again, like now what we see in medicine is, well, if you are sick, God forbid, you know it's, "Try this," and if this doesn't work, "Try that," and if that doesn't work, "Well, try this." Especially for chronic conditions, you get into this position where, "And there's a side effect and this might work and that hasn't worked."

Noor Sweid: (26:28)
So I think what AI will do is push everything towards, if you have this genomic based and you have tried this before, and that hasn't worked, we've seen the reaction of that on you, then we have a 99% certainty that this other method will work. That applies to medicine as well as to other more holistic treatments, as well as to prevention, as well as to early identification. Because if you have these symptoms for this particular condition, then statistically speaking, based on again, your DNA and your sequence, you might actually also be susceptible to this. So why don't we check that?

Noor Sweid: (27:04)
But I only comes from loads and loads of data that is then being absorbed and the layers and layers of AI on top of that, that gives you this information. I think we're just at the beginning of that. So that level of personalized medicine and more targeted medicine, is something that we all look forward to, because it takes away the uncertainty.

Noor Sweid: (27:27)
Then on the radiology side, we have so many companies in the region and across the world where in developing markets, you have a lot of contributions from well-wishers and people that say, "Here, take these machines." So now we've put these fantastic machines in these remote villages. Then, "You can take x-rays and you can do mammograms, and do all these things." But guess what, there's no one to read these.

Noor Sweid: (27:52)
So you have all those remote teleradiology, as we call it. So then how does AI integrate with teleradiology? Because the accuracy there is not where it needs to be. It doesn't matter how much you've compressed in order to send it over. Again, it's low bandwidth. It's not the internet that we have in some markets. Then somebody else is supposed to read it and send that back. The error rates are much higher than we would like them to be.

Noor Sweid: (28:16)
So if AI can come in and supplement that input and supplement on everything that's done in that space, then that is very much welcome. To Vishal's point, there aren't enough radiologists to eat. So it's definitely something we look forward to because it augments and it supplements, it doesn't substitute as where we come up.

John Darsie: (28:36)
A question from one of our listeners and maybe Dr. Gulati, you can take this or Vas, whoever feels most comfortable, but it's about privacy relating to data. So in a world where AI is eating everything and we're placing an emphasis on trying to gather as much data as possible, but you do have regulation in the United States and in Europe and elsewhere that prevents the oversharing of data, how do privacy concerns factor into the AIs, really infiltration of our entire healthcare system.

Dr. Vishal Gulati: (29:06)
It's a very important question, John, I think that there has been a fair amount of discussion around just collecting lots and lots of data. I think with data, as I always say to all my portfolio companies, is the data is not just an asset, it is also liability. Because it comes with a huge amount of responsibility that you have someone's data and how you're going to use that. So I would say, in addition to machine learning, the second most important job that my founders do is constantly evaluate their data policies and their understanding of what data that they need and how to use it.

Dr. Vishal Gulati: (29:48)
If we are not responsible in the way we are using data and how we are applying it, we could end up destroying this whole industry. This is a very, very important challenge. This is not a problem that just engineers or just doctors or just investors can solve. This is a much wider conversation with the whole world of, what are the trade offs that we are willing to accept in return for getting what we get. I think that this is a very live debate and very, very active in all my companies.

John Darsie: (30:28)
Vas, do you have anything to add to that?

Vasudev Bailey: (30:31)
I agree that it's important. I think that we tend to work with de-identified data whenever possible. So we have no sense of understanding or identifying what we're learning from. The other part, which you see happening in the Valley today is we're working on longitudinal data that is identical to that of a real person, they call it a digital twin and we're generating data to synthetic that you can actually use. Maybe FDA one day will accept that in substitution for real data. So I think it's important and we're all conscious of it, responsible, and it is absolutely a central principle before we move forward.

Vasudev Bailey: (31:08)
But after the world of AI, just really quickly. I agree with Vishal and Noor completely that we are at the start of what is something really special, but I will say sometimes the word AI gets overused, especially here in the Valley. Is it a simple Excel macro, is it AI? Let's actually really talk about that, it's not really AI, come on.

Vasudev Bailey: (31:31)
But if it is, I'll say, you find AI in a lot of strange places and unexpected places where you would not expect. I invested in a company called Eko, E-K-O, which is changing your humble stethoscope. For the past 200 years, a stethoscope hasn't changed. Think about that. Someone is manually listening to your heart and lungs to tell you something is wrong with you.

Vasudev Bailey: (31:56)
What if you could now have the largest database of human sounds, heart sounds, lung sounds, and EKG data, and you truly use machine learning and AI and the algorithms could do better than four out of five cardiologists in detecting and classifying murmurs. You could do an injection fraction, you could do in the world of COVID not be in contact with the patient and yet diagnosis is a crackle or what is going on with your lungs.

Vasudev Bailey: (32:24)
That, I think, is a great application of AI at work, not just here in San Francisco, but anyway. You could be in Nigeria, you could be in the Middle East, you could be anywhere in the world and you are actually scaling up the use of AI. This company has seven FDA approvals, five of which have been in the world of algorithms or AI. They've been able to leave that. We've seen in the world code that another accelerant to the adoption of AI in the world of medicine.

Vasudev Bailey: (32:52)
The last comment I'll have there is, just because you can create something with AI doesn't mean it'll get used by physicians across the world. The key question they should ask is, "Who's going to pay for it? Does it fit into the workflow of physician?" Important principles as you design AI. If anyone's looking to create the next AI solution, do think about that early, because otherwise, it's just cool technology that'll never get used by anyone.

John Darsie: (33:22)
That's fascinating. Let's turn to COVID for a few minutes. I'm sure that's a subject that's at the top of people's minds. So you guys are obviously in the healthcare investing space, the health tech space. We'll start with Dr. Gulati. What's the outlook and timeframe for developing effective therapies, which is obviously one piece that could help us reopen our economy's a little bit sooner? What's the outlook and potential efficacy of vaccines for the COVID-19 virus.

Dr. Vishal Gulati: (33:49)
Thanks, John. I think it is a very topical question and it's not just a million dollar question, it is not a billion dollar question, it's a hundreds of billion dollar question right now if you look at the economic impact of COVID. The human impact is incalculable.

Dr. Vishal Gulati: (34:06)
So in my mind, there are three stages of how we get out of this. The first stage was to try existing drugs to see if any of those work. We have had some things that worked, but by and large the effects are [crosstalk 00:34:25]-

John Darsie: (34:25)
What about President Trump's favorite drug, Dr. Gulati?

Dr. Vishal Gulati: (34:27)
Unfortunately, even though I was very optimistic early on, the data just does not support that hydroxychloroquine has any benefit. So I'm afraid, Mr. Trump will have just built millions of these tablets sitting somewhere in a storeroom in White house. I doubt if they will be of any benefit to anyone.

Dr. Vishal Gulati: (34:53)
So the first generation, if you like, the effect sizes have not been huge. Remdesivir, the effect size is not huge. It is something when we have nothing, then we have dexamethasone, which has a higher effect size than Remdesivir, but still not high enough, I would say.

Dr. Vishal Gulati: (35:14)
The second generation is the new products that we might develop now specifically, and where I'm very optimistic are a number of antibody treatments. This is passive immunization where people will get specific antibodies, which are Lilly's making one, Regeneron is making one, and they're heading some experience or from Ebola, for example, that such treatments could work.

Dr. Vishal Gulati: (35:39)
What I'm trying to look for as well as the therapeutic window, is it something you've given someone's exposed or do you give it at a later stage? So we will find out what that is.

Dr. Vishal Gulati: (35:49)
So coming to the vaccines, I am more optimistic about vaccines than not have been in the last few weeks or a month. I think that the data that we are seeing particularly from the Oxford group is actually very, very good. I looked at the data that came out from the animal experiments, and I think that they have been able to show pretty good antibody response and pretty good T-cell response. So I'm very hopeful.

Dr. Vishal Gulati: (36:20)
What we don't know and no one knows is when we will have sufficient number of COVID infections in the control group to be able to say that the treatment group works. So we don't know whether that will happen in September, October, November, when that will happen.

Dr. Vishal Gulati: (36:36)
Unfortunately, in many parts where they were doing clinical trials, the transmission rates have gone down. So actually, your control group is not getting any cases. So you can't really tell whether your vaccine works.

Dr. Vishal Gulati: (36:48)
So long story short, I'm optimistic about vaccines. I can't tell you how many or if any vaccines we will have in this year, but I'm very optimistic that in 2021, we will probably have more than one vaccine that will have sufficient level of efficacy that is, at least, being given to high risk patients.

John Darsie: (37:13)
So what you're telling me is SALT Abu Dhabi, our conference that we had last December, we're probably not having any in-person SALT conference in the UAE in 2020, and that no [crosstalk 00:37:23] conference last year-

Dr. Vishal Gulati: (37:25)
I'm afraid. I don't think I have good news for you.

Noor Sweid: (37:30)
But, [inaudible 00:37:31], John, you're going to have new one in Vegas next year, which you have to count on.

John Darsie: (37:34)
Hopefully. Inshallah, as they say. Noor, at Global Ventures, have you guys been working on things related to COVID?

Noor Sweid: (37:42)
I think that the UAE is a very special place and there's been multiple responses across the different Emirates for COVID. I think that the contact tracing is a lot more interesting in some of these markets right now than the therapeutic response, which we're leaving to the Lillys of the world.

John Darsie: (38:05)
Ross, how about you? Have you been helping us with the virus at all?

Vasudev Bailey: (38:08)
Yeah, so in February and March, when we started seeing leaders of certain countries go out and promote drugs, but before clinical trials, without naming people, it was important for us to step in and actually do something about it. So we built, at ARTIS Ventures, a comprehensive innovation tracker for the world of COVID.

Vasudev Bailey: (38:30)
So we have tracked every diagnostic, therapeutic, and vaccine that has been created in the world to fight the pandemic. I can tell you, as of today, there are 331 diagnostics that are received EUA or some regulatory approval. There are 145 therapies or treatments. Many of them repurposed, like Vishal mentioned, that are in human trials. There are 31 vaccine candidates that are in human trials as we speak today.

Vasudev Bailey: (39:00)
With that, I would say, we keep a close eye. There are two ways to think about innovation here. Noor is absolutely right. The first one is a public health response. What can you do? Whether it's better masks, better contact tracing stuff to help prevent things. So that's number one. That is sometimes easier to implement and it should happen.

Vasudev Bailey: (39:21)
The second is where we're focusing, investing more leverages in the therapeutics as well as diagnostics. It's the healthcare innovation, which can put an end to the pandemic, hopefully. Well, I would agree with Vishal that I started off a little more skeptical on the vaccine stuff, and I never thought that we'd be able to even get into phase three trials. But then a year it's promising to see that there are two phase three trials that are currently ongoing and we could get data read ups as early as September.

Vasudev Bailey: (39:49)
What is worth noting to everyone is even if we had really positive data for the vaccines this year, it's really hard to manufacture. You can't really manufacture for the mass markets and scale and the supply chain is not built for us to be able to distribute this to everyone.

Vasudev Bailey: (40:04)
But it gives me hope to say that with the vaccines that we made progress in the world of therapeutics, I'm not surprised because we're repurposing drugs to ever found something that would put an end to it. But I'm happy that we have identified things that can help alleviate certain, at least if you're put on a ventilator, it can be made a little bit better and hopefully you'll find other breakthroughs there as well in terms.

John Darsie: (40:30)
In terms of the global society and our approach to how to slow the spread of the virus and how to eventually, develop immunity to it and move past it, there's been some debate about what the right approach is. Sweden, as an example, in particular, that decided to adopt an approach where they weren't going to shut everything down. They were going to try to develop some level of herd immunity.

John Darsie: (40:49)
The virus is obviously something, it's novel. We don't know much about it, but the returns from Sweden have shown that it didn't really spare their economy and they haven't really developed the type of immunity that they were hoping for.

John Darsie: (41:00)
Dr. Gulati, did we make the right decision to shut things down and have these rolling quarantines, or we're going to have to quarantine again in places like Texas and Arizona that had these huge spikes in cases, or is a herd immunity type approach the right approach?

Dr. Vishal Gulati: (41:17)
John, I'm not in favor of the herd immunity approach. I think a lot of the data supports that now. A lot of the herd immunity debate is based around number of deaths. People are saying the fatality rate is X or Y so if we let everyone get infected. It misses two very important points.

Dr. Vishal Gulati: (41:41)
One is that, this disease does not affect everyone in the same way. There are huge variations in who gets this and who doesn't. People in certain jobs, which are generally lower paid jobs, there are a lot of immigrants work, those people are exposed more to this and the impact of this is going to be much, much greater. We should think about the ethical consequences of taking such decisions.

Dr. Vishal Gulati: (42:07)
The other thing which is often missed is that, just because you don't die of COVID-19 doesn't mean everything is okay. We now see the consequences of chronic lung disease, we're seeing neurological complications of COVID-19. So it's not just that, "Oh, it's okay. Just a bunch of old people are dead." It's a lot of old people are dead and you have a huge population of young people who have chronic lung and brain disease. I do not believe that that is the right way to go, but that is my view.

John Darsie: (42:42)
Vas, do you have anything to add to that?

Vasudev Bailey: (42:45)
100% I agree.

John Darsie: (42:47)
So I have a question. During this quarantine, like a lot of other people, I said, "You know what, I want to use this time at home to get healthy." So I started looking at the wearable device market and I said, "Okay, I don't have an Apple watch or a Fitbit. Let me look out there and see what's out there." It was actually a very interesting fact finding mission.

John Darsie: (43:04)
There's a couple of devices, the WHOOP, for example, that the PGA Tour or the Golf Tour in the United States, some players are wearing it. One player while wearing it was able to get readings into his app that basically indicated early signs of COVID. He tested positive for COVID. At the NBA Basketball, they're encouraging their players to wear the oura ring, which is another device that can provide early detection signs for COVID and other diseases.

John Darsie: (43:30)
What is the future of the wearables market and how does that contribute to this data driven future within healthcare? Vas, we'll start with you on that.

Vasudev Bailey: (43:41)
I say the wearables market is very tricky. There is an immense, like excitement and adoption from the hype cycle created for people to want to adopt it. Then past that, how many people... Well, I don't have to add the market research shows that people who had Fitbit stopped using it after six months. That is the case why Fitbit doesn't exist today as Fitbit, because you know what, it's hard to sustain as a company with these wearables over a long period of time.

Vasudev Bailey: (44:10)
I'm not saying variables as a category is a bad category. I don't know if people have found out like what psychologically makes people think that there's not the next device for you to try out. How is the action coming from these devices going to truly change and transform your life? I like ordering these things just because I'm fascinated by them. So I probably opened my closet. I have I think from Stanford, like a pebble, which measures your breathing rate. I have things called [Camigo 00:44:39], which does breathing exercises and meditation. I have things like the ring to measure things.

Vasudev Bailey: (44:44)
So I've tried all of them, but I probably use them for a couple of weeks. None of them are... or even for sleep apnea, you can have an app to try and listen to your breathing and snoring. I did not snore last night, if anyone was curious. So, which is really good, maybe it my caffeine or content. But I'm not sure or overall how useful it is to transform my life.

Vasudev Bailey: (45:07)
So the key thing I'd say is, if you're innovating in the space, always for people coming up with novel solutions, just answer the simple question, "How are you going to add prolonged value to the person using it beyond that first six months of fascination?" If you answered that you do truly do have a business that is worth it.

Vasudev Bailey: (45:28)
For the COVID world, the last part that I'll add, I think is useful. I do think connected devices and connected assistance. Because telehealth without sensors is just Skype and talking to a patient. So the idea of wearables or sensors, alarms are very useful and should be integrated into medical practice.

John Darsie: (45:50)
Skype might say some hypochondriacs, a few trips to the doctor though, don't discount the value of Zoom or Skype. Noor, are you guys looking at wearables at all? Or you have an opinion?

Noor Sweid: (46:01)
Both. Yes. So option D, all of the above. So wearables, in general at large, I think, to Vas' points, "What value do you bring to my life as a wearable beyond novelty." But I think more importantly that the accuracy of the data capture varies from one wearable to another. Until people are convinced that this is actually it'll be accurate, and based on this data, there is some angular outcome for me. It's always an interesting novelty outcome.

Noor Sweid: (46:32)
No one would have can't now that's actually really interesting, is in the FinTech space and it helps a woman and it's more like a wearable. So it's the undergarments, they are on the bras measuring different things that are important for women with breast cancer, for hearts.

Noor Sweid: (46:52)
Again, going back to the woman versus men. So you have to think on FinTech side, you'll have a lot happening and there's a lot in general medicine and healthcare where people have come forward and said, "I could move on these miles, and the moment they look very different, if we only one run man." And guess what? 95% on the one run man.

Noor Sweid: (47:10)
So now you're coming back to all of these wearables and all this data capture for females round the world, not just males to say, "How is this different? What data can we capture? How are women's hearts different to men's hearts?" However, the faster we capture that data, the better medicine we can provide for women around the world and the fastest way to capture that data is wearables at this point.

Noor Sweid: (47:33)
So it's really a data capture exercise that people are plugging into. So we're looking at a few. The one I mentioned is coming out of MIT, so you're seeing a lot, but they have to be very focused on, "Here's the value I'm adding, here is how long you need to do this for," either it's a treatment or it's prevention, but it has the beyond the novelty.

John Darsie: (47:54)
So we have a couple of audience questions before I let you guys go. Dr. Gulati, the first one's for you. What's the best approach for a clinical physician to get started in venture capital, if you don't have a business background? What was that transition like for you?

Dr. Vishal Gulati: (48:08)
Thanks for this question. I've been asked this question a few times and I find that most people I know who are in VC, none of their journeys are ever representative. In other words, there isn't like a cluster of things that they have done. So in this call, there are three investors. Noor, Vas, and I, all three have had very different journeys to get to doing exactly the same job in different parts of the world.

Dr. Vishal Gulati: (48:40)
So there isn't a highly representative way how a physician or a scientist can become a venture capitalist. What I find common in the colleagues that I work with and people in my industry is that, if you will come from a medical background, you generally have a research background with it. You're not just a physician who's a frontline physician. So you've had some encounter about developing new things and you have that excitement of making something new. I think that that helps you do that.

Dr. Vishal Gulati: (49:17)
Also, when you first leave medicine and go into venture capital, it is actually quite disconcerting because venture capital is... healthcare or a bigger doctor is very specialized. So you have a very, very niche specialty. So for example, my specialty was a certain type of immune cell, which is only found in the liver and it responds to only one type of virus. So that was my specialty.

Dr. Vishal Gulati: (49:43)
But when you go into venture capital, you can no longer afford to have a specialty which is that narrow. So you have to retrain yourself in order to learn new things really, really fast. If that is the attitude you have, and that is the life you want, then I think you should definitely consider venture capital.

John Darsie: (50:02)
Next question is for Vas. You're on the board of a project called the Trevor Project, which is a company that provides mental health counseling to young LGBTQ individuals. As we know, technology can be a double edged sword and the impact it has on young people's brains. Vishal, touched on this earlier, how can technology be leveraged in a positive way to positively affect our mental health? During the COVID-19 crisis, it's especially relevant as people sit and stir in their homes.

Vasudev Bailey: (50:35)
Yeah, I think mental health is still so taboo in so many markets and people wanting to seek help is... and having even grown up in India, I can tell you that the idea that depression is something, "Is it real or something is wrong with you?" It's just almost... even an educated families. That was partly what motivated me to be part of an organization.

Vasudev Bailey: (50:58)
Even as an investor, I look and seek for things, and I'll connect Vishal about what he's working on in the mental health space, as he said he is. But in terms of technology, being an enabler to help in preventing... like you'd look at the United States, it was fascinating for me to find that the number one cause of death for people under the age of 21. So for youth, one of the major causes is a suicide and it is absolutely preventable, is absolutely one where we can help and provide the tools and methods to help and even if you save one life, it is something we have done right.

Vasudev Bailey: (51:35)
Technology has been an important part. So with Trevor, the way in which they've done that is one, they started off as an organization by providing phone support. But now they moved into using technology by using chat-based support because that is where younger people are moving. But you see where technology is being used as they even have NLP, as a natural language processing, without identifying, with anonymous, but you could still pick up triggers and understand who has a higher propensity of taking their own life. So you know where and how you can intervene.

Vasudev Bailey: (52:09)
But not just that you have a clinical path of how to respond as well. When you learn from a machine time and time, humans may have a different way of responding to a certain question someone has asked, but a machine is very clinical about it and tells you exactly how you should respond for the best outcome.

Vasudev Bailey: (52:27)
So you can train mental health professionals to also respond in certain ways that gives you the best possible outcome.

John Darsie: (52:35)
Well, thank you all so much for joining us from different parts of the world, Dr. Gulati from London, Noor from Dubai, and Vas from San Francisco. That's the pleasure of just work from home environment is that we've been able to have a lot of these conversations that might not have happened if not for the circumstances. So thanks everybody for tuning in. Noor, Dr. Gulati, Vas, thanks again for joining us.

Dr. Vishal Gulati: (52:56)
Thanks John.

Noor Sweid: (52:57)
Thank you.

Kai-Fu Lee: The Potential for AI in Healthcare | SALT Talks #10

“Artificial Intelligence is very powerful, but also very limited. With good data, AI can do far better than people. But it will never have the capability to think, to be self-aware or to have the creativity humans have.”

Dr. Kai-Fu Lee is the Chairman & Chief Executive Officer of Sinovation Ventures, a leading venture capital firm. Before this, Dr. Lee held various leadership roles at Microsoft, SGI, Apple and most recently Google, where he was the president of their China business.

Artificial Intelligence has tremendous power to help humans do their jobs better. Yes, some “routine” jobs can and may be replaced by AI, but most will be supplemented by its presence. AI can handle System 1 tasks (repetitive, routine), whereas humans beings will handle System 2 tasks (thinking, analysis).

The next big opportunity for AI is in health care. Here in the United States, it can synthesize health records and analyze bodily function far more accurately than physicians. In third world countries, AI can bring doctors to places that may never have had them before.

LISTEN AND SUBSCRIBE

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SPEAKER

Kai-Fu Lee

Chairman & CEO

Sinovation Ventures

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie (00:08):

Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum that encompasses finance, technology, and geopolitics. With the SALT Talks, we try to do what we do at our in person SALT conferences, which is to provide a platform for big exciting ideas, as well as to provide our audience a window into the minds of subject matter experts. Today, we are pleased to welcome Dr. Kai-Fu Lee to SALT Talks. Dr. Lee spoke at SALT 2019 about artificial intelligence and machine learning.

John Darsie (00:47):

It was a fascinating talk that was led actually by Anthony's son, AJ. Kai Fu is the chairman and chief executive officer of Sinovation Ventures, which is a leading venture capital firm with about two billion in AUM, and it focuses on the development of the next generation of China's high-tech companies. Prior to founding Sinovation in 2009, Kai-Fu was the president of Google China, as well as a senior executive at Microsoft, SGI, and Apple.

John Darsie (01:18):

He's the co-chair of the Artificial Intelligence Council for the World Economic Forum and is the author of a New York Times bestselling book, which I highly recommend you read. It's called AI Superpowers. It was published in the fall of 2008, and Dr. Lee tells us that his next book is coming out in about a year and a half. And we look forward to reading that one as well. Kai Fu will be interviewed today by Anthony Scaramucci, the founder and managing founder of SkyBridge Capital, as well as the chairman of SALT.

John Darsie (01:46):

And I'll turn it over to Anthony and Kai-Fu now to begin the interview.

Anthony Scaramucci (01:51):

John, thank you very much. I think Kai-Fu's book was 2018, the fall of 2018, not 2008. So it was a way more current book, but it was a fascinating discussion about artificial intelligence. And I want to start with your origin, Dr. Lee, if you don't mind, because I think it's always fascinating for people. You mentioned at the SALT Conference that you sort of got interested in AI in your sophomore year in college. And so just take us through the steps of what you were thinking about then and how it led to where you are now.

Dr. Kai-Fu Lee (02:26):

Sure. Anthony, thank you, and John, for giving me the chance to talk to this great audience. Yeah, I got fascinated back in about 1980, my sophomore year, while I went to Columbia. And I was given an introduction to artificial intelligence, and I thought this would be the last technology for humanity. That we will figure out our brain and then we would build these amazing robots and life would be wonderful. Didn't quite work out that way. I think there are people who have those either dystopian or utopian beliefs about AI.

Dr. Kai-Fu Lee (03:06):

But what really happened in the last five years is all these AI-based machine learning technology started to work, and they started doing amazing job one task at a time. But these are amazing tools for us to use, but we are actually nowhere close to building that artificial general intelligence, something that's equal to our brain.

Anthony Scaramucci (03:35):

Obviously I've sat it on things at Singularity University and listened to Elon Musk. We hear about artificial intelligence, and you and I are old enough to remember the computer from 2001 Space Odyssey. What is realistic for us? What is realistic for people living on the planet today in terms of where artificial intelligence can go? And what will our grandchildren and our great-grandchildren see from the world of artificial intelligence in terms of the exponential development?

Dr. Kai-Fu Lee (04:11):

Right. AI is actually very powerful, but also very limited. It's powerful in the sense that if you have one single domain in which you have a lot of data and you throw that data at AI and tell it to learn something, something objective, something meaningful, and it will do that task better than people. The first wave of such applications was the internet. That's why Google, Facebook, Amazon are so good at targeting us individually based on what we've done in our history about things that we might want to read or we want to buy.

Dr. Kai-Fu Lee (04:49):

Then came the financial institutions. So automated loans and investment, quantitative investment, and insurance, they're coming up next. And then data in businesses. We're using Zoom now. We're creating data. That data can be mined. Smart things can be built from that for education, work, business, and pretty much any tradition industry. This is all happening right now. This is not for our grandchildren. This is happening now. Then AI will start to see and hear, but not just with eyes and ears.

Dr. Kai-Fu Lee (05:30):

AI can already recognize objects at higher accuracy than people and understand and recognize speech at higher accuracy than people. But what's more is now there are all these new sensors being plugged to AI, so AI can make decisions by aggregating all these sensors. The sensors can, for example, see things that people cannot see. They can sense temperature, humidity. They can do 3D reconstruction. So pretty much AI perception will definitely outdo human perception. Then finally, AI will move.

Dr. Kai-Fu Lee (06:08):

Of course, we already have our beloved Roomba, but AI will do much better than that. Beyond that, AI will be in the factory, warehouse, buses, highway, and then eventually cars, autonomous vehicles, so that it can move with a similar capability as people. You have these four waves adding up together building a lot of very valuable tools and applications to help us. But none of it has the capability of thinking, self-awareness, true understanding, compassion, creativity. All of that is missing.

Dr. Kai-Fu Lee (06:49):

It is simply taking one task, lots of data, with human telling it what to optimize, and then optimizing it so well that for that task it beats people.

Anthony Scaramucci (07:00):

Let's talk about that other wave though. Is it possible, Dr. Lee? I've obviously read your book, but I want you to explain it to others about the consciousness, about the empathy, the ability to change conversation, picking up emotional cues or body language from somebody. Is that something in the future for AI?

Dr. Kai-Fu Lee (07:22):

Okay. So we need to segment that into a few things. The true feeling, the way we feel, the consciousness, the self-awareness that we have, we currently have no idea how to build that for AI. So that could be 20 years, 30 years or longer away. We don't know. But it's probably not soon because we have no idea how to build that at all. However, can AI guess our emotion? Probably, because we give a lot of cues and AI can notice these small cues better than people.

Dr. Kai-Fu Lee (07:58):

So if you want to build a tool that has you and me talking to each other and have AI guess at any given period of time whether I was anxious, happy, sad, angry, suspicious, it can probably make a more accurate guess than people. Then can AI can pretend to be angry and happy? Well, of course, it can. If you have AI create a digital human that looks like us... You've all seen Deepfake. That's AI. We can build a Deepfake on Anthony and make that Deepfake speak like Anthony and appear angry or appear happy. So that is also possible.

Anthony Scaramucci (08:45):

I want you to make me happy, Dr. Lee. Okay? We'll focus on the whole Buddhist element of that.

Dr. Kai-Fu Lee (08:52):

Right. Right. We'll make sure we do that. I think this is really amazing that... The surprising thing about AI is for something that has absolutely no self-awareness, no human brain, and no feeling, it can exhibit feeling and perceive feeling. So that's the strangeness of AI. Similarly, you think AI machine translation works so well better than us. However, it doesn't really understand a word you say. It is merely mapping words to other words, having been trained on trillions of other words.

Dr. Kai-Fu Lee (09:32):

This is all data driven mechanism that exhibit somewhat intelligent behavior, but has no real understanding. It is just matching symbols and giving you other symbols.

Anthony Scaramucci (09:46):

But over the last 40 years while you've been studying and working on AI, you've obviously learned a lot about the human brain. Is the brain a computer, Dr. Lee? How would you describe the brain to somebody? If an alien landed here and you would say, "Okay, the human brain is," what based on your observation?

Dr. Kai-Fu Lee (10:10):

Well, it's still really unfathomable from a computer standpoint. We don't know how to simulate the brain. People are working on it. But if we think about what it is that makes us humans valuable, meaningful entities, what makes our lives full, it certainly isn't doing what AI already does very well. Daniel Kahneman wrote a very famous book, Thinking, Fast and Slow, in which he talked about System 1 and System 2 thinking. And in some sense, AI is doing the System 1 thinking, which is I see, I recognize, I heard, I heard something, and I recognize this word.

Dr. Kai-Fu Lee (10:58):

It's almost reflexive and almost perhaps muscle reflex. It's thing that we do without perception and without deep thinking. But what is interesting about the brain, as Dr. Kahneman said, is that we're able to think deeply, think strategically, think holistically, plan things in a very large space of possibilities, but we just know that if we do A, they'll respond by B, then we do C. So there's this very clear focus and awareness in making our decisions, and also with that, the ability to be creative, and also, of course, emotions and compassion.

Dr. Kai-Fu Lee (11:49):

So to answer your question, I think it's the System 2 stuff that makes us really unique. And that's why people can be brilliant like Einstein or Steve Jobs and that's why people can be compassionate like Mother Teresa. And these are special people and these are the special qualities that we have and that AI cannot do and possibly can never do.

Anthony Scaramucci (12:20):

That's my question. Could it ever be replicated based on your observations?

Dr. Kai-Fu Lee (12:26):

Well, there are many, many views on that because no one knows the answer. I think it maybe impossible to do, because we currently don't know how to do it. And also, I'd like to think that these technologies happen for a positive constructive reason, not because we want to build machines to replicate us. There's got to be something innate about us that makes us human, that makes this life meaningful. So I think we have to hold onto that belief that AI can't...

Anthony Scaramucci (13:01):

And the positive stuff about AI, our mutual friend, Peter Diamandis, has written a lot about the future and what he calls the abundance, and that there is a world ahead of us where through machine learning and AI and lots of other things that are going on in the world that we can end things like poverty, we can end sort of the income divide. So talk a little bit about how AI could be a part of that over the next generation. What do you envision?

Dr. Kai-Fu Lee (13:35):

Well, on the constructive side, clearly AI can make better decisions within limited tasks. AI can take over routine tasks that we have to do. If you think about all the System 1 stuff, those are more the routine tasks, right? If you think about the job of a receptionist, some of that job maybe very interesting, the human element, the warmth, the breathing, the compassion, the branding image on your customers, but a lot of that work is very boring. Show me your face. Show me your ID. Print you an ID. Who are you seeing?

Dr. Kai-Fu Lee (14:12):

Call the person. Well, the boring part can be done by AI, and you can extrapolate that to the job of an accountant, a lawyer, even a doctor. And these jobs, interestingly, AI will take care of the repetitive, routine, and quantitative. Things that we're not very good at. And then we get to focus on what we're good at, which is the System 2 thinking, the analytical, the creative, the compassionate, the human to human connection.

Dr. Kai-Fu Lee (14:48):

I think Peter and I share this belief that AI is here to take away the routine work so we can be liberated from it, and we can spend our time, all of it, on things that makes us uniquely human. That would be the most positive direction.

Anthony Scaramucci (15:09):

Can you talk a little bit about healthcare because I know that you have a belief that AI is going to certainly help us in diagnostic healthcare, research data? Enlighten us about where you think that's going using artificial intelligence.

Dr. Kai-Fu Lee (15:23):

Yeah. So healthcare is an area where AI really hasn't yet made a huge dent yet, but it is so perfectly designed for AI, because AI would work well in domains where you have large amount of data and very clear outcomes and labels and longitudinal data over years and decades. And that's exactly what the healthcare records have. And also, AI can basically deliver very targeted personalized determination. The reason we really get addicted to Facebook is it personalizes and shows us what it knows we want to see.

Dr. Kai-Fu Lee (16:12):

The reason we buy so much on Amazon is because Amazon shows us things that it knows that we as individuals want to see. Yet if you think about medicine, for each disease, we're largely all treated using a single prescription, or maybe for complex things like cancer, there maybe multiple types depending on each person's various background. But each person is unique and human doctors and human teaching of medicine just cannot possibly teach each doctor to treat each person uniquely according to that person's background and the DNA and genome sequencing and family history and so on.

Dr. Kai-Fu Lee (17:07):

But yet, when we have all the data from the patients from one country, that can be trained so that it can specifically target each individual with a treatment that is just right for that person. So that personalized medicine and training and diagnosis is something we can look forward to. Of course, it will have to overcome privacy laws, maybe anonymize the data, maybe use some technology to protect people losing their privacy, but I think that can be done.

Dr. Kai-Fu Lee (17:42):

And once that is done, what will happen to the future of treatment and healthcare is that for people who can afford it, which is basically most Americans today, you will get a human doctor aided by an AI doctor. The AI doctor will suggest to human doctor, ask few questions, take the answers, look it up, suggest treatments. And the human doctor will tease out all about your background and condition and also care about you, show compassion, connect to you, visit you at home, giving you a higher chance of recovery or survival.

Dr. Kai-Fu Lee (18:21):

That's the symbiotic combination that uses people for what people do best and machines for what machines do best. But finally, what's interesting is in poor areas, in under developed countries that cannot afford this expensive doctor who has to go through medical school and charges a lot of money because of the high salary, one could imagine a pure AI doctor that essentially draws no salary, runs on nothing except electricity, give decent treatment, significantly bring up the fatality rate, improving the treatment even for the poor reaches of the world.

Dr. Kai-Fu Lee (19:01):

So I see a lot of opportunities there. Of course, there are also things like robots and improve the intuitive surgical using robots to do surgery, AI for drug discovery, and also connecting AI to insurance and healthcare. Once it knows about you and your family history and your finances, it can design a perfect insurance policy for you that's much more economical than what you can buy from insurance companies. So I think it's endless when you connect all that data together.

Anthony Scaramucci (19:38):

So that brings up the question of further automation. And as we both know, the pandemic, unfortunately, has raised unemployment in the US to 14.7% and that's closing in on depression-like levels. Certainly we hope this is a temporary thing, but do you think it's accelerating the trends? Will it accelerate the use of AI? And will people that had traditional jobs, like the ones you're describing, will they lose out AI, or is it too soon for that?

Dr. Kai-Fu Lee (20:11):

Okay. First, on the AI impact on jobs before and then we get into the pandemic. While I believe in the symbiotic nature for AI in many human jobs as I described earlier, AI will take away many jobs as well, because if it can do 30, 50, 70% of different types of jobs, jobs of receptionists, a security guard, and entry level accountant, assistants, paralegal, and factory workers, drivers. So you list all of this. In a small number of cases, the whole job goes away because AI takes it over.

Dr. Kai-Fu Lee (20:53):

But in most cases, AI takes over 30, 50, 70%, but that still leads to a reduction of employment, because in a pool of workers, AI will take some jobs that it can do, leaving the rest for a fewer number of humans to do. Undoubtedly, there will be significantly fewer people working on today's white collar routine job and blue collar routine job. There will be other jobs created, but we don't quite know what they are yet, and they will tend to be more complex in nature, more creative in nature, or more human to human connection in nature.

Dr. Kai-Fu Lee (21:32):

Because if AI can do the routine jobs, then the jobs available for people would have to be elevated. There is a training gap. So while I believe there will be many more jobs created and the problem of taking the people whose jobs are displaced and retraining them for the jobs that are being created is an upleveling problem, is a training problem that somehow people have to understand what jobs are safe and get trained for it. So that's before the pandemic. Now, the pandemic will do some problematic things and also some constructive things.

Dr. Kai-Fu Lee (22:16):

The constructive thing that pandemic will do for our four habits is that it pushes us to much more online and digitized behavior. I mean, the fact that we're having this session here on Zoom and the fact that people are able to work from home and the billing kids are taking classes at home are signs that we are increasingly going online and increasingly getting comfortable with a digitized style of working. The opportunity is once digitized, you've got data. Once you got data, AI can work. That's the great thing about creating value and improving efficiency.

Dr. Kai-Fu Lee (23:08):

The problem of that is once AI can work and also outsourcing can work, jobs will be challenged. Imagine in the past, if you had a job that required you to go to the office, meet people and talk to people, then it seems hard for AI and robot to take it over. But now you're doing that job online and remotely and by video conferencing and then it will become obvious to the managers of the company that an AI could do your job too. The decision process maybe relatively simple. It can be learned. There's a technology called RPA, robotic process automation.

Dr. Kai-Fu Lee (23:57):

It's rapidly taking away these various types of white collar routine jobs. I believe the pandemic will lead to more digitization, online, and outsourcing and also automation as one unfortunate outcome. The other unfortunate outcome is that companies will have tighter budgets. They'll have to do cost cutting. And before, they might not think about, well, let me spend $2 million to replace $2 million of salary, $2 million of software to replace $2 million of salary or for some period of time.

Dr. Kai-Fu Lee (24:38):

People might not do it or maybe the company is making money, they feel if they did that, it would look bad. But now, everybody's scrambling. Everybody's tight. Everyone's cost cutting. So companies are going to be more willing to look at cost cutting...

Anthony Scaramucci (24:54):

It makes sense. Before I turn it over to questions from our audience, I want to talk a little bit about the relationship between Chinese government and the American government and the competition with AI. There are people in the United States that feel China is ahead of the United States. Perhaps they are. I don't know. Are they? Secondary question is, you and I, of course, want there to be a very healthy and strong bilateral relationship between the Chinese government and the US government.

Anthony Scaramucci (25:31):

But I'd like you to talk about those tensions if you don't mind, how they relate to AI, and where do we stand vis-a-vis the progress being made in AI, China versus United States.

Dr. Kai-Fu Lee (25:43):

Sure. AI turns out to be a technology that is not such a rocket science. There are probably a few dozen important discoveries. If you study them, if you get the technology, the code, you can probably implement AI after months of training, not even years of training. That is an advantage for China. While the US has more of the brilliant researchers who write up the papers, China has a larger army of engineers who are building solutions in the industry. And China's other big benefit is that China is a large country.

Dr. Kai-Fu Lee (26:28):

There is a lot of data. AI works better with more data. So that China has more engineers, more data, fewer brilliant scientists. So in some sense, US and China can and perhaps should in an ideal world be partners in this, where US is doing more the deeper research, the more complex technologies like autonomous vehicles, where China can do more the low-hanging fruit, the implementation, the things that requires a lot of data.

Dr. Kai-Fu Lee (27:01):

And then on domains like healthcare where Americans are extremely concerned about privacy and there are laws like HIPAA preventing aggregation of data in the US, perhaps Chinese companies can build models using advanced American medical technologies and AI technologies. But on Chinese data, it's anonymized, but there's no equivalent of HIPAA in China, so that aggregation can happen. And then the outcome can be shared by both countries. So in an idealistic and maybe at this point naïve viewpoint, the two countries are highly complimentary.

Dr. Kai-Fu Lee (27:44):

There's not an AI war going on. China can build all the things without great dependencies on American products, and US can, of course, build things on its own. But the two countries have such different talents they ought to work together. But that maybe pretty hard now.

Anthony Scaramucci (28:04):

Yeah, no, I get the tension. John, let's kick it over to some of our guests that are inside our chat room here. Ask Dr. Lee a question for us.

John Darsie (28:16):

Yeah. The first question is about GANs, generative adversarial networks. You talked about Deepfakes and things like that. What are the real benefits of GANs in terms of creating positive change to society? And what potential do they have to create general AI, and also what are some potential dangers of advanced AI becoming prevalent in society?

Dr. Kai-Fu Lee (28:44):

Generative adversarial networks are very cool technology. Basically you're building two networks, one to do what you want done, the other to be a critic. And then the critic will tell it, "Hey, this is not right," then it fixes itself, and it continuously improves itself. There are many, many applications of GANs. The one that's probably most infamous, notorious is the Deepfakes. It is using that technology that it manages to turn a video from some other third party into you or a voice and be converted that way.

Dr. Kai-Fu Lee (29:26):

When applied constructively to building entertainment and games and movies with full licensing of the properties, it's amazingly fun. But when you take a famous politician or movie star and put their faces on doing acts that they don't want to be seen doing, then it's a problem. It's the kind of technology where the technology is used by the bad people to do something, then the good guys catch up and catch them, then the bad guys improve again.

Dr. Kai-Fu Lee (30:03):

And unfortunately, because of the nature of the technology, that you have a good guy and a bad guy, basically the two networks, the good guy network and the bad guy network. They continue to iterate. And the moment you think you got a way to catch the bad guys, they take it into their training as well. It's very hard to say whether if we purely competed on the good guy/bad guys. The good guy continue to try to catch the bad guys doing the Deepfakes.

Dr. Kai-Fu Lee (30:35):

The bad guys continue to come up with yet another way to do a Deepfake. It's not clear whether this will lead to a good outcome or a bad outcome. My belief is often we have to resort to other technologies that will guarantee the worst case scenario doesn't happen. With respect to Deepfake, probably we'll need to move to some sort of a future blockchain assisted capture device which guarantees that this photo, this video is authentic. And it can catch anything that's been made on editing it.

Dr. Kai-Fu Lee (31:13):

Some technology like that is probably needed to absolutely guarantee the problem with Deepfakes. Otherwise, I would warn the people watching that we should expect there to be more Deepfakes happening in the social networks. We've got fake news. Now we've got fake video and fake voice. It's very, very hard to catch, and it's going to be a while before we eliminate it. People have to be advised not to believe everything you see even if it looks real.

Anthony Scaramucci (31:50):

Any other questions, John?

John Darsie (31:52):

Yeah. There are several more questions. I'm going to combine two questions into one. We talked about US and China in terms of where they are in the AI race, if you will. We have two questions about emerging market economies, ex. China, as well as Europe. How well are those economies doing in terms of advancing with AI and machine learning? And what potential does AI have to sort of bring emerging economies into a higher quality of life and into a more modern era?

Dr. Kai-Fu Lee (32:23):

Okay. In the current status, I think US and China are ahead of the other countries in terms of AI in an aggregate score, that is research plus implementation plus monetization. Right. Europe I think is very strong in research, but the entrepreneurial ecosystem is currently nowhere close to US or China. And unless that gets fixed, Europe is likely to be considerably behind in AI technology. India is another possible country that could do very well because it has also a large number of people and data. We have not quite yet seen that, but I think the potential is there.

Dr. Kai-Fu Lee (33:11):

And then there's obviously Russia, which is very good in math. There is Southeast Asia which is a large group of people, but not one culture, one language, and then it goes down from there in terms of likelihood of being very strong in AI. But what can AI do for these countries? First, the problem is that AI will create these hundred billion dollar companies, and they're currently pretty much all American and Chinese. The wealth is going to these companies. And AI will decimate a lot of the jobs most of which are routine jobs.

Dr. Kai-Fu Lee (33:57):

AI as a wealth creation is giving that wealth to US and China. In terms of replacing jobs, it will take more jobs away from developing countries because developing countries have more routine jobs. That is the seriously problematic part of AI for the rest of the world. There are some good news about AI in the developing worlds. It will dramatically reduce the cost of education because there will be virtual teachers, which can do a pretty decent job of teaching certain subjects, especially entry level ones.

Dr. Kai-Fu Lee (34:40):

There will be reasonable quality virtual AI doctors that will also provide better healthcare. So some services I think will help the people who are in the most extremely serious extent of destitute. But as a whole economically, it is a problem and I think all the countries have to pay attention about the impact of AI and find a path that makes sense for the country.

John Darsie (35:14):

We have a couple more questions. In science fiction, a very popular topic in movies like Blade Runner and others is the idea of consciousness and whether AI and technology will create immorality for humans in a way. Going into the science fiction aspect of that, do you think that AI will eventually be able, as Anthony was talking about earlier, replicate some aspects of consciousness and provide immortality for humans?

Dr. Kai-Fu Lee (35:45):

There a lot of different opinions on this subject. There are people who think it's imminent. It's within a decade. There are people who think it's another two or three decades, and there are people who think it might be never. I think it's hard to say which thinking is right. But I would like to think that first, we have no idea how to build consciousness. Secondly, we don't really understand what consciousness is. And thirdly, we people must be believe that we have a reason to be on this earth.

Dr. Kai-Fu Lee (36:24):

So I think it makes sense to believe that consciousness is the thing that makes humans unique and that it may not be buildable by machines. I think that will give us the confidence to go on. And I think it also is a plausible outcome and we should let people work on it. But until we see significant breakthroughs, there's no reason to believe that the age of the robots are coming. I think we're still quite a ways from that.

John Darsie (37:01):

Another question relates to the ethics of AI and where AI needs to make decisions in real time, some of which could involve law enforcement or conflict or war type scenarios. How do you program ethics into artificial intelligence?

Dr. Kai-Fu Lee (37:20):

This is a very important aspect and I think we're in a very early phase right now. Right now most AI programmers are not even taught ethics nor do they think they play a role in ethics. And that's important for the AI tools to change. And I think the AI education, some schools like Stanford and MIT, are starting to make sure that AI students are aware that their profession can impact good and bad, right and wrong in society. Just like doctors have to make an oath that they will do no harm. I think AI engineers will increasingly need to do that.

Dr. Kai-Fu Lee (38:10):

It's important also to note that when we read all of these AI disasters in the newspaper, not all of which are a result of AI not understanding ethics. There's usually a different explanation. For example, there are cases where people talk about certain company trained their HR system on AI. They didn't have a lot of women, so it became prejudice. It interviewed more men and fewer and fewer women. It became a downward spiral.

Dr. Kai-Fu Lee (38:41):

That story is true, but that could have been avoided if the programmer or the person who runs the AI over them recognized that their training set, their training data was not fairly balanced between men and women. And if engineers don't notice it, our tools ought to notice it. These kind of ethical issues many of which maybe solvable. The other that's talked a lot about is the autonomous vehicle. Trolley problem. Certainly it's an issue when the car is faced with different outcomes.

Dr. Kai-Fu Lee (39:28):

People talk about if you have two choices, one is 100% going to kill one person, the other is 52% and they kill two people. Which do you do? It is, in fact, a hard choice. But in reality, we have to remind ourselves that there are very few cases that you really have two people killing decisions in an autonomous vehicle. Secondly, we have to remind ourselves humans don't even have this program in. If you talk to all of the people who have been in accidents, who have caused accidents, got in trouble as drivers, they can usually hardly explain why did what they did.

Dr. Kai-Fu Lee (40:12):

I believe the glass half full would tell us is that if we program ethics in some reasonable way for the decision-making and with the powerful sensors that AI can see and the deliberate decisions as opposed to people just getting drunk or tired or sleepy and make a mistake, AI won't do that. At the end of the day, AI will really save a lot of lives. And while we do need to focus on training the engineers, building the tools, I think at the end of the day, AI will save so many lives.

Dr. Kai-Fu Lee (40:56):

That yes, there will be ethical issues and decisions and mistakes made, but in the grand scheme of things, AI doctor will save so many lives more than the few ethical mistakes it may make, and AI autonomous driver will save so many lives more than the few ethical decisions that it will make a mistake on. We have to look at in the grand scheme of things, not just focus on the one case where it appears to be not working.

John Darsie (41:28):

Well, Kai-Fu, we really want to thank you for joining us today. We're going to wrap it up there. I know you're in Beijing right now beginning your quarantine. The Chinese government, as well as other governments in Asia have done a great job of stamping out the virus. I want to thank you for taking the time to join us. Anthony, I don't know if you have any closing remarks for Kai-Fu.

Anthony Scaramucci (41:53):

We're grateful to you. We hope that we can get you back to the SALT Conference physically, Kai-Fu. Otherwise, we're going to have to create an artificially intelligent Kai-Fu to entertain our guests and educate our guests. But in the meantime, we wish you great health and great personal safety, and we look forward to seeing you at one of our next events. Thank you again for joining us today.

Dr. Kai-Fu Lee (42:15):

Yeah, see you in SALT. Bye, bye.

Anthony Scaramucci (42:17):

Okay.

Alex Denner: Biotech Billionaire | SALT Talks #9

“Economic recovery is all about confidence.”

Alex Denner, Ph.D., is the Founder & Chief Investment Officer of Sarissa Capital Management, an activist firm investing in opportunities crated by the unique dynamics of the healthcare sector. Alex has a background in biomedical engineering.

“Vaccines are a hard business.” At the time of this interview, there were 160 companies working on vaccines, the most promising of which was a mRNA vaccine produced by Moderna. The production timeline is unprecedented and, while results are showing signs of early efficacy, there isn’t enough data to ward off concerns of side effects.

As it relates to the economy, the recovery will be less about the technical virus protection and more about confidence in not suffering from severe level of COVID-19 disease. One question is put to bed: COVID-19 is worse than the seasonal flu.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Alex Denner

Chief Investment Officer

Sarissa Capital Management

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie (00:07):

Hello everyone and welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and geopolitics. SALT Talks are a series of digital interviews we've been doing in lieu our in-person conference that do deep dives in the topics that we think are relevant to the investment management community and our global community.

John Darsie (00:31):

Today we're very excited to dive into a topic that's especially relevant given what's going on with the global pandemic with Alex Denner who is the ... that focuses, I'll read a little bit more about Alex's bio. He is a PhD, as well as the founder and CEO of Sarissa as I mentioned. He's been investing in healthcare companies for the past two decades. In 2013, he founded Sarissa to capitalize on the compelling opportunities for positive shareholder activism created by the unique dynamics of the healthcare sector.

John Darsie (01:05):

Dr. Denner has led Sarissa's involvement some of biopharma's most successful strategic transactions and activist campaigns. Prior to founding Sarissa, he was the healthcare portfolio manager for Icahn Capital and at Icahn he developed Icahn's activist strategy in the healthcare sector and was responsible for some of the firm's most successful investments. Prior to joining Icahn, he was a health care portfolio manager at Morgan Stanley, as well as at Viking Global. Today, Alex serves on the board of Biogen as a director, and he's the chairman of the Medicines Company. He received his bachelor's degree from MIT and his master's and PhD degrees from Yale University.

John Darsie (01:46):

If you have any questions for Dr. Denner on today's chat, please use the Q&A box at the bottom of your video screen, and I'm going to turn it over to host the interview to Anthony Scaramucci who is the Founder and Managing Partner of SkyBridge Capital, as well as the chairman of SALT. So Anthony, you go ahead and take it away.

Anthony Scaramucci (02:04):

I appreciate it John. Alex, it's great to be with you. You got a fascinating story. John's bio of you was great, but I want to hear more. Tell us more about your background, tell us how you got to where you are because I want people to understand the significance of your credentials before I start asking these questions.

Alex Denner (02:25):

Thank you Anthony. Thank you for having me speak with you. So yeah, my background basically I have a ... My academic background is in essentially biomedical engineering. And from there I went to Morgan Stanley, had always been interested in investing, and basically became also interested in activism. The idea that for many companies, they're not well managed. There are a lot of principal-agent issues and the companies are often run more for the management teams than the companies themselves. And it's a very interesting intersection there between healthcare and activism.

Alex Denner (03:07):

So having a background in biomedical engineering, I did a thesis on identifying people susceptible to certain types of ventricular arrhythmias, certain types of heart attacks. Basically we approached the situation with the philosophy that in healthcare companies are very ... because they have very high margins and very high barriers to entry, the opportunity for a company to sort of be under managed and still kind of get away with it, if you will, is higher.

Alex Denner (03:51):

I actually approached Carl Icahn with this kind of philosophy and sort of started doing investing in that. And I've been involved in a whole bunch of transactions and investments in the healthcare industry over time. And really what we do is we get in and we try to fix companies. So we've been involved in, as Jonathan said, Biogen, Medicines Company, ARIAD, ImClone, Genzyme, MedImmune. There's a whole bunch of companies that we've been involved with, and really try to make better and often through that process end up in an M&A situation.

Anthony Scaramucci (04:32):

But you know a lot about science and you know a lot about research into vaccines and you know a lot about this disease that the entire world is now struggling with. So I want to go right there, and tell us a little bit about your opinion of the various organizations that are working on a vaccine and working on therapies to help people that have COVID-19.

Alex Denner (04:59):

Yeah, sure. I think there are approximately 160 people out there working on vaccines, and countless, more than a thousand efforts that are on therapies. I think that at this point vaccines are a very hard business, and I think we should sort of take a step back in terms of thinking about it from a societal point of view. It's very hard to develop vaccines, and there are viruses for which we haven't, HIV being a classic example, that people have been working on for decades and we don't have vaccines that work. And there are also viruses, Dengue Fever being probably the most highest profile example where vaccines have been developed that can actually make an infection, a subsequent infection from the disease worse. So a person can be vaccinated, in certain circumstances get worse because they had been vaccinated when they get an infection of Dengue.

Alex Denner (06:09):

So the development is very complicated, and we have to sort of look at things in that light. I am optimistic that we're going to have a vaccine relatively soon. In fact, I think we'll have a number of them. There's a bunch of different technologies that people are working on. The ones that are sort of the highest profile and certainly in the US probably the mRNA vaccines where Moderna is kind of the leader there, Pfizer is also, has a bunch candidates, there's no ... That particular technology has never been successfully implemented in an approved vaccine.

Alex Denner (06:50):

On the other hand, the data that has come out so far has been very promising. And one of the most exciting parts about that approach is that it's relatively quick. You can design the molecule that could produce the immune response and test it quickly and also scale it quickly. So if one of these RNA or DNA vaccines works, it's pretty easy to make, relatively easy to make, hundreds of millions and billions of doses.

Alex Denner (07:25):

The sort of more traditional technologies of using vaccines where the virus has been, like the actual virus it's a killed version of the virus or a more sophisticated technology called live attenuated vaccine, we basically take the virus and don't kill it but damage it in a way that it can't cause a serious infection. Those types of vaccines generally have very good immune responses, like our bodies react well to them and create robust responses, but the timelines to develop them are much longer. So it's-

Anthony Scaramucci (08:07):

So Alex, what timeframe are we talking about though when you say relatively early? When do you think we'll see the vaccine?

Alex Denner (08:18):

A lot of people work on them, and I think that given the day that's come out heretofore, I think it is possible that we'll have multiple vaccines that are showing efficacy this year. Now, that doesn't mean that they're going ... I don't think there'll be a widely available vaccine this year. I think that it'll take some time to scale it up. Moderna has been highlighting that they think at the beginning of the year they may be able to scale to a large number of doses to treat a significant percentage of the US population, but they might be able to treat so high-risk people earlier than that.

Alex Denner (09:01):

There are many risks to that though, and I think that it's not ... I'm more hopeful than I was two or three months ago in terms of a vaccine being developed in the next few months. But I think it's important to note that we may not have a vaccine at all for the next couple of years. It is possible. We have to think about kind of how society will adapt if that is the case.

Anthony Scaramucci (09:27):

But you're optimistic. And just one more question on this because I think our audience is actually interested in this stuff. What can we learn from the prior pandemics? The Spanish flu pandemic is an example, no vaccine, yet the society did go on to progress and we created the roaring '20s shortly after that pandemic ended. So what can we learn from that?

Alex Denner (09:50):

Exactly. No, that's a very interesting area. Look, there have been many pandemics in history as you know Anthony. In the Bible, they mention the plagues and smallpox and cholera and the Black Death in Europe. And these things that have occurred many, many times. And there are many kind of historical lessons that we can learn. They generally, without mitigation kind of most viral pandemics last a few months and they have a few waves. So think of a few months long wave and there's usually maybe three waves. In this case we have ... This is the first time the whole world is really coordinated to do social distancing to slow down the vaccine. So it'll change the dynamics somewhat, but I think we can sort of look to history and say, "Well, this has happened many times before. We've got through that."

Alex Denner (10:53):

Almost all respiratory viruses have a seasonal component. So I think that's an important part here that although we're seeing like in Texas and Florida an increase in the number of cases, and that's very troubling. I think that's something that we should all be focused on, I do expect, I think the sort of the best guess is that there'll be a re-acceleration of viral infections in the fall that just most respiratory viruses behave that way. And that occurred with the Spanish influenza. That occurred with lots of influenza pandemics.

Alex Denner (11:33):

From a societal point of view, in the US, we're learning a lot about how to manage the disease medically. We just saw the recent news on dexamethasone being used and basically kind of in the later stages of the disease it helps, which is very important to know.

Anthony Scaramucci (11:49):

But let's explain how it helps. So what's happening is you're getting an overreaction from your immune system, right, and it's flooding your cells in a way that's causing a breakdown. So it's an immunosuppressant drug to knock that down. Is that a fair characterization?

Alex Denner (12:08):

That's exactly correct. This virus has an acute phase that typically kind of lasts say a week or two, and most people clear the virus. Some people don't, the ones who get more severe disease, and they tend to have an overreaction of their immune system. And steroids can be used to dampen that down also. Tocilizumab is also used in that regard.

Alex Denner (12:40):

It's important that we understand that steroids can actually reduce our body's ability to fight an infection. So you generally don't want to give them early in this stage of an infection. But when someone's in that state where their body is overreacting to the infection, the steroid is going to be very useful. And that's an example, is one of the things that we're learning kind of as the world gets experienced with this in terms of medical management, managing people who have severe disease. And I think even in the absence of a vaccine and in the absence of any new therapies, and I do think we'll have things beyond Remdesivir, in the absence of those, doctors will better understand how to manage patients and improve outcomes.

Alex Denner (13:32):

One of the things that's interesting is that the disease appears to be a disease of endothelial dysfunction. So it's a disease related to clotting of the blood. It's not just a lung infection. It's doing other things systemically. And I think that, the recognition of that is becoming sort of ... Most people would say that generally that's probably what the virus is, and that medical management of that, like reducing oxidative stress, that type of thing can help improve outcomes.

Anthony Scaramucci (14:09):

So I'm going to ask you three questions in rapid-fire succession and so you can give me a yes or no, your opinion of course. COVID-19, is it worse than the flu?

Alex Denner (14:22):

Yes.

Anthony Scaramucci (14:24):

The mortality rate is worse than the flu?

Alex Denner (14:26):

Yes.

Anthony Scaramucci (14:28):

At this stage in the pandemic, would you take your kids out to a restaurant?

Alex Denner (14:38):

I think probably a qualified yes to that, but I think you have to do that very carefully. I actually went to a restaurant today. It's the first time I've done that. It was a restaurant by the sea. We were 10 feet away from everyone else-

Anthony Scaramucci (14:56):

Alex, did you have a martini or something? Hopefully yeah. What did you drink at the restaurant? Don't tell me iced tea. I'm going to cut the internet.

Alex Denner (15:03):

Unfortunately that is what we had, is iced tea.

Anthony Scaramucci (15:03):

Yeah, iced tea, all right.

Alex Denner (15:07):

I think that during the daytime, when there's kind of a breeze, if you will, when people are not close together, I think it's very important who you're having, choosing to have a meal with, if you go to a restaurant, it's a very important thing if you're [crosstalk 00:15:25]

Anthony Scaramucci (15:26):

You were out. Let me just stipulate for everybody. You were outdoors. You were eating at fresco.

Alex Denner (15:31):

I was outdoors and 12 to ... It's 10 to 15 feet away from anyone else. Look, I think that was a calculated risk doing that. I don't think we should be doing that a lot. I do think that in ... Like I live in Connecticut. In this area, the virus was very bad a few months ago. It was horrible. It was really, really bad, and it's come down a lot. So I think it depends a lot of where you are geographically too. But during the summer I think it's important to kind of get out a little bit, not to ...

Anthony Scaramucci (16:10):

What about flying in an airplane Alex? Would you fly in an airplane?

Alex Denner (16:14):

No.

Anthony Scaramucci (16:15):

Okay. Tell us why not.

Alex Denner (16:17):

I think that the ... Look, obviously there's always a risk benefit analysis with that, and sometimes is you need to fly for some important reason I would do it I guess, but the whole process of commercial airline flight is very ... it has lots of opportunities for introducing infection. So the actual being on the plane, you're in an enclosed can, sitting next to people who you don't have any idea of sort of their viral status for an extended period of time. You're touching lots of things. You're interfacing with lots of people. You got to go through an airport to get to the plane. You got to go through security. You got to go to the gate. And when you get out of the plane, you got to go through an airport. You have to think about transportation to wherever you're going. Those types of things are, for me, I don't plan on going on a commercial flight for a vacation kind of purpose in the near term.

Anthony Scaramucci (17:21):

There are people that think if you've gotten the disease and you have the antibodies, you can still get the disease. So can you still get the disease after you've gotten the disease? And what's the difference between synthetic and natural antibodies?

Alex Denner (17:35):

So once the person has had the disease, it's very unlikely that they can get it again. I mean, almost, almost impossible. I don't want to say impossible because there can be ... It'll be very, very hard, for a period of time. I think the question that we don't really know is how long does immunity last for this particular infection.

Alex Denner (17:59):

When somebody gets the chickenpox, they get essentially lifelong immunity to that virus. In the case of corona viruses, the immunity that most people get lasts kind of months or a short number of years. So I think that, again, we don't know, but based on sort of an educated guess on similar viruses it's probably the case that a person can get reinfected in a year and a half but not two months later.

Alex Denner (18:33):

With respect to antibodies. Our bodies when a person gets infected, our immune system kind of kicks in and there's a whole bunch of things that happen. And one of the things that happen is that there's a part of the body that makes antibodies which are substances that go and find things that look like the virus and latch on to it and essentially kill it. Once we've had the infection and our body has created the antibodies, the virus usually goes away or almost all that goes away very quickly. You can take ...

Alex Denner (19:16):

So somebody that's had the virus and then recovered will have antibodies in their blood. So you can do so-called convalescent plasma where you take the blood out of a person who has recovered from the infection, isolate the antibodies, the plasma in the blood, and then inject that into a person who's suffering from an acute infection. That usually helps people. It's not 100% clear that that's efficacious, but it's very, very likely to be efficacious.

Alex Denner (19:50):

Then the next step is let's make those antibodies synthetically. So what I just described is taking an antibody from somebody that has an infection. It's obviously kind of hard to scale and it's a lot of complication with that. It'd be great if you can design the antibody and manufacture it at scale and give it to people so they would have ... It's kind of like a mini vaccine in a way.

Alex Denner (20:13):

That is a very exciting approach. I think the technical probably of that working is quite high. There's a bunch of companies working on that. I'm involved with a company that has a role in that. Probably the leader is Regeneron. They've been working really hard and have some very exciting ideas and they're pursuing that very quickly. That's not something that can be ...

Alex Denner (20:38):

Making the antibodies is a complex process. So it's not something that can be scaled to sort of giving them to everybody in the world. But when we have data that those, that synthetically created antibodies work, they probably would work prophylactically and therapeutically. So in other words, they would probably work to prevent an infection if you gave it to a person who is at high risk for an infection, as well as if you gave it to a person in the early stage of infection and it probably would make the disease go away more quickly.

Anthony Scaramucci (21:15):

In listening to you speak about this, and obviously we know a lot about you and your firm, you're cautiously, can I frame it this way, you're cautiously optimistic about a therapy and a vaccine, and let's call it over the next year, that those things will unfold.

Alex Denner (21:33):

Yes. Even more than ... Hopefully sooner than that even.

Anthony Scaramucci (21:38):

Okay. In your mind you've been an investor for your whole career. So what does that mean for the US economy? What does that mean for the stock market? And what does that mean for the industries and the sectors that you're involved?

Alex Denner (21:51):

Okay. In terms of the societal and the investing impacts, I mean I think, first of all, we have to think of all the different possibilities. So it is possible that we have no vaccine for five years. It's important for as an investor have that in the frame of possible outcomes.

Anthony Scaramucci (22:13):

If that happens Alex, I'm going to stick half of my SkyBridge employees in that beautiful office of yours, okay? We're going to be living rent-free in your house, okay?

Alex Denner (22:21):

There you go. [inaudible 00:22:24]

Anthony Scaramucci (22:24):

Keep going.

Alex Denner (22:29):

That said, I do think it's very likely we'll kind of have some therapies. Economic recovery is all about confidence. So I think it's less about the sort of the technical level of virus protection in the population and whether it's 69% or 73%, but it's people feeling confident that if they go out, they have a low chance of getting a serious disease from doing that. And that can come from a vaccine, that can come from sort of better treatment so that the disease much more rarely become serious.

Alex Denner (23:11):

I do think that that will occur sort of a relatively soon, certainly not this year but kind of probably the beginning of next year. And I think that that will allow us to get back to sort of a something quasi normal. There are industries like that are very ...restaurants and things will probably take longer to kind of get back to full normal, and there are industries that where work from home is working well that are unaffected now or relatively affected there.

Anthony Scaramucci (23:56):

You don't have to give specific stocks but just give us generically the sectors that you're the most bullish on. And if you want to give specific stocks or even are allowed to, I don't know what the regulations are around your firm, but where are you, what do you long, what do you like, what don't you like?

Alex Denner (24:15):

So invest in healthcare stocks. I think one of the most ... So one of the things that's going on here is that in healthcare appropriately everyone is focused on the coronavirus. The companies that are working on that are sort of at the highlight of everybody's thinking. In fact, when you look at the healthcare index performance, it's been largely driven by a few names that have benefited, that the stocks have gone up a lot because they offer promise to sort of have a vaccine or treatment for the coronavirus.

Alex Denner (25:00):

As a healthcare investor, I think that there are promising investments there and we're pursuing them, but I think the bigger opportunity is actually in the sort of non-coronavirus related healthcare therapeutic side. Those companies are being not ignored but they're getting less attention than they normally would. Cancer is still unfortunately just as serious of disease as it was six months ago. Heart disease is still unfortunately just as serious. There have been changes in the industry like the FDA has had to adapt very rapidly to the coronavirus and regulations that were well intentioned but were really kind of slowing the industry down have been bulldozed away.

Alex Denner (25:52):

Kind of one of the best examples of that is in the telehealth area where before, six months ago very few people talked to their physicians over the internet. It was done but it was a very small part of the healthcare ecosystem and the government didn't pay for it by and large and it was very difficult. That has changed completely now as everyone knows, and I think that that frankly is good for everyone, that society will be better off having that trend having accelerated.

Alex Denner (26:31):

There are many, many regulations in healthcare that have been disintermediated by this coronavirus, and basically that whether it's CMS or HHS or the FDA have issued emergency guidance, there's a technical matter is limited to the time during the coronavirus emergency, but I think would permanently changed how we do drug development and deliver healthcare-

Anthony Scaramucci (26:59):

But permanently changed but in your mind better, right? I mean, a little bit less [crosstalk 00:27:02]. We both know the thalidomide story from the '50s which really stunted the FDA. And for those, people that are so young that they don't know that story, they blocked that drug. It was a morning sickness drug. They blocked it in the US. They allowed it in Europe. The side effects of it was it caused limb deformities and so the FDA celebrated that, that they slowed it down, and that made it a lot harder to get drugs through as a result of things like thalidomide.

Anthony Scaramucci (27:31):

So you're saying they've opened this up a little bit. But we also know that they have more scientific data now than they did in the 1950s, and they're able to do broader testing. So that whole process makes those drugs safer. Would that be safe to say?

Alex Denner (27:48):

Yes. I think that ... Look, thalidomide is a great example to bring up. I mean, the FDA has a very important role to play in evaluating drugs, and they're going to demand and rightfully they're going to continue to demand safety data, especially in the tragedy of thalidomide where a drug, a morning sickness drug actually caused birth defects, right? That kind of thing will still be done and should be done. But allowing some ... Like using technology in clinical trials. Not all things have to be done in person. Just many of those sort of bureaucratic rules that have existed because there was no other way to do them when they were implemented have been swept away. And I think frankly it's going to accelerate drug development, it's going to accelerate the value that the healthcare system delivers.

Alex Denner (28:48):

We all know the healthcare system, I think the drug development system in the US is fantastic and works really. The healthcare delivery system doesn't. I don't think anyone thinks that that's kind of extremely well functioning. And I think we're going to come out of this with a better healthcare system. I think that many of the over-regulation and the Balkanization of the healthcare system, people have been forced to work together because the coronavirus, and it works better and we're going to end ... When we get past this, the healthcare delivery I think will be better for it.

Alex Denner (29:31):

I mean, the whole experience of going to a hospital will be easier for patients, will be better for the healthcare providers. Doctors will be better able to treat patients. I think it's really going to be ... There's a silver lining in all of this.

Anthony Scaramucci (29:46):

And I think that's an important segue Alex because in the crisis, a lot of opportunity gets born. In the 2008 crisis, we actually started the SALT conference as a response to that crisis. So I'm very optimistic as you are that things will change for the better. I want to turn it over to our viewers and listeners. John Darsie is going to ask you some questions that are coming in over the transom here, and we've got a ton of audience participation. So go ahead John.

John Darsie (30:18):

Yeah, the first question relates to your process as an activist in the healthcare space. When you're identifying potential targets for an activist campaign, how do you dive into that business and differentiate in terms of measuring why their performance suffered? How do you differentiate between a company that was mismanaged that actually has good drugs but was just fundamentally mismanaged and between companies that either have drugs that are flawed and aren't performing well because the quality of the drug?

Alex Denner (30:49):

Okay, so that's a good question. We do a lot of work on that. Basically it's just, it's gumshoe research. I think that we have a very ... We have a great team, MDs, PhDs, people that are really expert in healthcare. And we dig deep into the pipelines in the currently marketed products of each of the investments that we make.

Alex Denner (31:21):

What we look for, we basically, our process is basically, we look at companies and we sort of look at, we say, "Okay, we know the products, the pipeline, the technologies that they have," and then we ... Because we have a lot of experience in the space, we know the space very well, we can sort of put a cost structure around that. So we can sort of say, "Okay, if the company has three drugs in certain therapeutic areas, we know how much it will take to sell those drugs."

Alex Denner (31:50):

And to first order, we don't take account of what the company is, whether they have ... what their cost structure looks like. We just sort of build what it should be in our model, and we DCF that. And we look at that, that DCF compared to the market price. Was a huge difference like 2x, we sort of get interested, and then we say, "If there's a way that we can put a leverage on the company, can we push the company to change their strategy such that it's better run for investors, the owners, then we'll get involved." And we typically will take a position and typically seek to join the board and kind of often that involves a management change, although not always.

Alex Denner (32:36):

In doing that analysis, we really look for products because it's a long term strategy that we get involved in the company, we're investing, we plan to be investors for years that we look for things that are innovative, that truly add, that benefit patients, that ameliorate a disease in a real way. And those are the types of companies we get involved with. But less interested in a company that has a me-too thing, that's just sort of maybe slightly better than somebody else, because we need to have a very big difference between the value when the company's run properly and the current market price.

Alex Denner (33:28):

The other thing to note is that people ... In the sector we interface with a lot of investors and we get a lot of feedback. So a lot of institutional shareholders will call us and we may hear from five or six institutional shareholders over the course of whatever, some year or whatever, that they're unhappy with the way a particular company is being run. And that's usually not something that it's news to us, but it helps us understand the psychology, the shareholder base that they're ready to implement changes, they're ready to push the company to be run better.

John Darsie (34:12):

Thanks for that Alex. The next question is about the telehealth space. What's your general view on telehealth and do you have any favorite names in the space?

Alex Denner (34:24):

I like telehealth a lot as I mentioned earlier. I think that it's going to become a bigger part of healthcare. I don't have any particular favorite names. I think that one should think about telehealth as the specific part that, is the visible part where the patient interacts with the physician. But also there's a lot of things that can be done with even clinical trial work where you can do remote monitoring of patients, the types of things like we were talking earlier. The FDA's been very forward-thinking in many things, but it's been taking some time to get to kind of incorporate some of these technologies. And I think by necessity, if a company is developing a drug where they can't ... It's not easy to have a patient come in every month to the doctor. The solution maybe a tele solution. So I think it's very important for our healthcare now. It's going to become more important over time and it's going to make the system more efficient.

John Darsie (35:47):

Thank you for that Alex. The next question is you talked a little about a timeline for a vaccine. What would you put in terms of your degree of confidence in percentage terms of a vaccine coming out before the end of 2020?

Alex Denner (36:01):

First of all, let's define what this means. I think to have data that shows that one or more vaccines have some level of efficacy, let's say they reduce severity of the disease in a large fraction of patients or maybe they provide sterilizing immunity in 50% or 70% of patients. I would say that the probability of that occurring by the end of the year is more than 50%. I would have said less than ... I would have been a much lower number three months ago or two months ago, but I think we've seen some data that's been published that has been very exciting from a number of different groups.

Alex Denner (36:47):

Now, there's a different question though which is when is a vaccine going to be broadly available say to Americans or globally around the world? And I think that's something that's unlikely to occur for a broad availability of vaccines, unlikely to occur this calendar year. And if everything goes right, in the US we may have access to that, say, in the first quarter of next year. But that sort of requires everything kind of going right. So I would say there's, maybe to have a vaccine widely available, a 50% chance of it widely available probably would be by the first quarter of next year, at 50%. And I would say 75% by the end of next year.

John Darsie (37:42):

Thank you. In terms of geographically, do you focus on US-based companies or what do you view as the opportunity within healthcare in emerging markets like India and China?

Alex Denner (37:53):

We look at all companies around the world. We do everything in healthcare. That said, we sort of focus on therapeutics. And a lot of the innovation in therapeutics is happening in the US. So we tend to be sort of US focused. There's a lot of opportunity in the US for what we do. Healthcare companies, it's really hard to develop drugs, but when they do it, it's a very high barrier to entry, very high margin business generally, and it's easy for companies to sort of get lackadaisical with respect to capital allocations. So there's an opportunity for us to get involved. So if it's a US company, just most of the companies end up being US. But we look globally.

Alex Denner (38:41):

In China and India, look, I think one of the things that's coming from the coronavirus is India for instance has a fantastically sophisticated generic drug business. There's a bunch of companies that have brought a lot of innovation and brought pills, generic pills available at very low costs to a lot of the world.

Alex Denner (39:07):

But what I think a lot of people come to realize it's having to domestic capabilities, especially as a matter of national security for the US is very important. So I think that you're going to see grow, an increase in the amount of basic provider generic manufacturing, if you will, in the US, so-called API manufacturing, active pharmaceutical. I don't think that will come into the detriment of India and China, but it probably will reduce their growth rates compared to what was projected before the pandemic.

John Darsie (39:43):

Thank you. We have one final question, another one about your investment process as an activist in the healthcare space. A lot of times activism within healthcare is focused on going into mature companies and trying to identify ways to improve their financial performance. How do you look at activism in the therapeutic space for companies with pre-approval drugs or that are earlier on in the drug development process?

Alex Denner (40:09):

First of all, our type of activism is a little bit different than sort of the classical activism in that we look to fix the businesses. And that's a very hands-on thing where we get involved with the companies in terms of the way the operations are being run and sort of make capital allocation more efficient. We hopefully do allocate R&D better, that type of thing. And that can be done in the late stage and early stage the same way.

Alex Denner (40:52):

That said, we tend to be focused on later stage companies because we like companies where there's multiple drivers of cash flow. But there are many early stage companies that have frankly because the index, the market's been up a lot recently, there have been a lot of companies perceive their cost of capital to be essentially zero and they've been spending less judiciously than they should be. So that I think there's an opportunity for activism there. But that is not the sort of classic activism of the financial type thing which we tend not to do anyway.

John Darsie (41:37):

All right. Well, we want to thank Alex Denner for joining us today on SALT Talks. Anthony, I don't know if you have any additional final thoughts?

Anthony Scaramucci (41:44):

No, I mean, I think he wins Room Reader so far. I mean, I'm impressed with all the paneling behind you there Alex. God bless you. Wish you health and safety, and hopefully we'll get some real medical progress on this. But I think it was really terrific today Alex. You put it in historical context what we're all going through and how we're all going to come out of it and hopefully be just fine.

Anthony Scaramucci (42:11):

But in the meantime, I wish everybody great personal safety, health and happiness, and Alex, we'll hopefully see you soon. And I promise you, I'll be buying you martinis. You won't be drinking iced tea with me Alex, okay? That's my promise.

Alex Denner (42:23):

That sounds great Anthony. Thank you very much and thank you John and health and happiness to both you guys and stay safe and appreciate that you're there.

Steve Case: How Tech is Reshaping the Economy | SALT Talks #4

“In this environment, many companies will continue to operate in a hybrid state, where some employees will come to the office while others stay home. COVID-19 accelerated a trend that was already underway.”

There have been three important waves in history: the Agricultural Revolution, the Industrial Revolution and, now, the Technology Revolution. Key to the latter is partnership and policy. Remember: it used to be illegal for some consumers and institutions to event connect to the internet!

Steve Case is the Chief Executive Officer of Revolution, a Washington D.C.-based investment firm. He’s notably the Founder of AOL, where he focused mainly on marketing aspects for the company.

What does a post-COVID economy look like? Broadly, Steve says companies will need to reimagine themselves to not only compete, but survive.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Steve Case

CEO

Revolution

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie (00:08):

Welcome, everyone to the latest edition of SALT Talks. My name is John Darsie. I'm the Managing Director of SALT. In lieu of our global conferences, which have obviously been put on hold by the pandemic, we're hosting these SALT Talks, which are a series of digital interviews with what we think are the leading thinkers, creators and innovators in the world across finance, technology and public policy.

John Darsie (00:33):

Today, we are very pleased to welcome Steve Case to SALT talks. Steve, as many of you know, was a co-founder and the Chief Executive Officer of AOL. And today, he is the Chairman and CEO of Revolution, a Washington DC based venture capital firm that is invested across a variety of sectors. And Steve has talked about a lot of interesting themes, including the third wave of the internet, the rise of the rest, themes that are being accelerated by what we're seeing today with the pandemic, so we're very excited to have Steve here today.

John Darsie (01:04):

He came to our SALT Conference last year and had a riveting panel with Mark Cuban that was moderated by Kara Swisher that you can find on our YouTube channel as well. But I'd like to kick it over to Anthony Scaramucci, the Chairman and CEO of SALT, as well as the Founder and Managing Partner of SkyBridge to host the interview with Steve Case. Take it away, guys.

Anthony Scaramucci (01:25):

Steve, thanks for coming on. Welcome to SALT Talks. This would have been the evening, Tuesday evening cocktail party at SALT. So unfortunately, we're not there now. But hopefully we'll get back there next year. But I would love to have you start out with your personal backstory. I think a lot of people, frankly the newer generation, they could benefit from sort of the curves that came about in your career, how you got AOL started, how you transitioned eventually into Revolution where you are now.

Steve Case (01:57):

Well, first of all, it's great to be with you. I've watched some of the SALT Talks and you're doing a great job and a great service bringing out people to talk about topics. In terms of my own backstory, born and raised in Hawaii. It was a little unusual. Both my parents were born and raised there. Actually, when I was born, it wasn't even a state. It became a state on my first birthday, and grew up there and actually went to high school with then Barry Obama, who became President Obama, which is kind of an interesting, it's a small world kind of story.

Steve Case (02:21):

I went to college in Massachusetts and graduated there, ended up working for some big companies for a little while, Procter and Gamble in Cincinnati, a division of PepsiCo, Pizza Hut, in Wichita, Kansas, and then moved to the Washington DC area to join a startup that was doing some early online things. And that was a failure. But luckily, two of the people I met there and I ended up starting AOL in 1985. Back then, it's amazing thinking about how we're all working from home, Zoom calls and living in a more connected world. When we started, only 3% of people were online, and they're only online an average of one hour a week. Now, of course everybody's connected and connected ubiquitously. So we've come a long way from those early days of just trying to sell the idea of a connected world, the idea of the internet and now basically, because of this crisis, we're now living a much more online life.

Anthony Scaramucci (03:17):

So tell me about AOL. Who were the founders? Jim Kimsey was one of the founders, right? I remember Jim.

Steve Case (03:23):

Jim Kimsey brought the finance kind of perspective. Marc Seriff brought the technology perspective, and I brought more of the marketing perspective. So we were the three co-founders. It was actually a struggle to get started because back then, and as I said 1985, most people didn't really believe that people wanted to get connected. They thought it was kind of a nerdy hobbyist market, never going to be a mass market. We really struggled. We raised about $1 million to get going. And our first seven years before we went public, we raised a total over those seven years of $10 million. And then we went public in 1992. It was the first internet company to go public. We raised $10 million in our IPO and the value of the company that day was $70 million. Nobody really cared about this idea. Of course seven, eight years later, everybody got online. And our market value went from $70 million to $160 billion. It was actually the best performing stock of the 90s.

Steve Case (04:15):

So the first decade was slow and kind of a slog. It was really hard to get going, really hard to get people to believe. But then finally, things really started accelerating in the late 90s.

Anthony Scaramucci (04:27):

But Steve, talk to me, because really for our generation, I still have an AOL account and for our generation, that was the real sign of the future for all of us, when I got that floppy disk or that CD and I put it into my computer and got myself online. What was your marketing idea to make it mainstream because you had competitors. You had Prodigy, which was started by Sears Roebuck. You had others. IBM was in there with Sears. What caused that breakout? How were you able to chip into the market and make people realize that they needed and wanted that product?

Steve Case (05:03):

A mix of things. I think our team was really passionate about trying to create a service for everyday people, consumers. Some of our competitors, like you mentioned Prodigy was more focused on shopping because of Sears and IBM were partners. CompuServe, a division of H&R Block, was more focused on information. Some of the big banks, Citibank was focused on banking and everybody had a particular view of the future kind of based on the rearview mirror of the business they're already in.

Steve Case (05:28):

We looked at it with fresh eyes that we really were going to make this a mass market. We were going to make it easy to use, useful, fun, affordable, and our bet from the very earliest days was on what we call the electronic community, what now we think of as social media. It was really for us the killer app was people, connecting people. And always over half our usage was instant messaging, chat rooms, message boards, ways to connect people. Of course, that's what we're now all doing in this crisis. We're connecting online through a variety of technologies, this one being Zoom, but there are obviously many others. That was always our belief that we'll really be able to kind of break through if we had the easier to use, more useful, more fun, more affordable service, and we really focused on connecting people. And that really drove our success. And by the late 90s, about half of all the internet traffic in the United States went through AOL. So it really was the way most people got online.

Anthony Scaramucci (06:24):

Your bandwidth back then, do you remember the bandwidth? You remember at which you're operating?

Steve Case (06:29):

Well, we're pretty small. We started with 300 byte, the 12 hour, 24 hour, nobody knows that technology. But the bottom line is even 10 years into it, it would take an hour to download a single song so it's pretty and you certainly couldn't do video like we're doing now. So it was pretty rudimentary, but even then you could see there was a certain magic to the idea. Some of you may remember also the screeching modem sound when you actually got connected, but once you did get connected, you're exposed to people and ideas and connected to content, commerce in ways that you had never experienced before. And there was something magical about it even those early days when it's relatively slow and also still relatively expensive.

Anthony Scaramucci (07:10):

Well, if you remember that screeching sound, Steven, it means you have an AARP card. So let's go easy on [crosstalk 00:07:21]

Steve Case (07:21):

Sometimes the screeching sound was annoying for me. It was cha ching, cha ching, I love that dial up modem.

Anthony Scaramucci (07:26):

So let's talk about where we are now, though. And by the way, I'm a room raider. I'm looking at your room, it looks fantastic. You've got all the right motif in the room. You can tell I'm up in the attic. My wife stuffed me up here because you can see the eaves here. Hopefully she'll let me out of this thing when the crisis is over. But behind you is The Third Wave. And the book is exceptional. And so I recommend to people who haven't read the book to pick it up and read it. Because yeah, you wrote it a couple years ago now, but you're really on point in terms of where we're going, and how we're getting there. And so for people who haven't read the book, give us a quick synopsis if you will, and tell us about what you're thinking now.

Steve Case (08:05):

Well, first of all, it goes back to your first question. When I was in college, I remember reading a book. It was the late 1970s by Alvin Toffler called The Third Wave, and I was mesmerized by it. He was talking about the first wave being the agricultural revolution, then the second wave the Industrial Revolution. He was predicting, this was four decades ago, the technology revolution, the digital revolution, the internet revolution.

Steve Case (08:28):

But that's actually one of the things that inspired me to kind of pursue that path in my earliest days right out of college. So I decided to write a book a few years ago. I deliberately called it Third Wave. I had the chance to chat with him over the years and pay homage to him because he really was inspirational for me.

Steve Case (08:45):

The way I was framing it was the three waves of the internet. So the first wave was getting America Online. It goes back to what we said before when we started. Essentially, nobody was connected. By the year 2000, essentially everybody was connected. There's a lot of things around building that early days of the internet and really getting everybody online. Once everybody was online, all the infrastructure is built, all the modems were built, all the servers were built, all the on ramps were there.

Steve Case (09:11):

Then the focus became apps on top of the internet, so Facebook, Google, et cetera. The second wave has really been about software writing on top of the internet. And obviously, there are huge successes that have come out of that. The third wave, which is now just starting to take off and I think this crisis will accelerate it is when the internet really meets everyday life and starts disrupting some of the most significant aspects of our lives and most significant sectors of our economy, healthcare, education, food and agriculture, smart cities, things like that.

Steve Case (09:42):

That's really going to be the focus of this next 20 years or so. And what led me to write the book is I realized that the playbook for entrepreneurs in the first wave was quite different than the playbook in the second wave. And the third wave is going to be more like the first wave and there's a couple things in particular, I'll just touch on briefly. The first wave was only possible because of partnerships. We couldn't have done it alone. We had 300 partners that together helped create the success of AOL.

Steve Case (10:11):

Partnerships weren't really very important in the second wave, Facebook, Google didn't really need partners. They just needed a cool app that spread virally, and suddenly they were in business. In the third wave, if you really want to disrupt healthcare, you're going to have to partner with healthcare institutions. So that's one aspect.

Steve Case (10:26):

Policy's also another aspect. When we got started, hard to believe, particularly for some of your younger viewers, but it was actually illegal in 1985 for consumers or businesses to connect to the internet. It was still restricted to government agencies-

Anthony Scaramucci (10:41):

Because of DARPA.

Steve Case (10:42):

And educational institutions. DARPA had funded it and was still restricted. So we had to do a lot of things around policy to commercialize the internet, figure out what the right policy should be for e-commerce. A whole slew of things around policy and regulatory issues were front and center, breaking up the phone company which unleashed competition, a ton of things had to happen.

Steve Case (11:01):

In the second wave, policy wasn't that important. These companies again could start up relatively quickly and scale relatively quickly, didn't really have to deal with policy. In the third wave, again, healthcare, food, a lot of things we're talking about, policy, regulations are going to become important again. There's a reason why we have regulations about drug safety and things like that. And the final one of what I call the Ps, partnership, policy. The third is perseverance.

Steve Case (11:27):

As I mentioned, that first wave was a slog. It took us a decade before finally we had some some traction. You did see in the second wave and a lot of overnight successes, truly overnight successes, dorm room startups that a year or two later were global phenomenons. That's not going to happen in the third wave. It's going to be back to perseverance. Some of the most successful companies in the third wave will be built in these third wave sectors, but it's going to require the partnerships which take time to form, that's going to require engaging on policy which can be frustrating, but it's going to be very important to be successful in this third wave.

Anthony Scaramucci (12:00):

So you're touching on these broad trends so that the investments that you think are going to be offering the greatest upside are where in this third wave? That would be healthcare?

Steve Case (12:13):

Healthcare is one in particular, yeah. We've made a number of investments in healthcare. I started about 15 years ago an investment firm called Revolution. We have three parts, Revolution Growth, the later stage growth investments. Revolution Venture is more of a Series A kind of investment focus, and also a seed fund called Rise of the Rest, focused on investing at early stages and cities all around the country.

Steve Case (12:36):

But in a Revolution Growth case, we've invested in a couple of healthcare companies that are really showing great promise. One is called Tempus, based in Chicago, that's using big data and machine learning basically to do a better job of diagnosing things like cancer. Right now, if you go to MD Anderson, one of the top cancer hospitals in the country, 25% of the time, they reverse the first opinion. 25% of time, your first doctor was wrong. That's a data analysis problem. And so Tempus is trying to basically use data to create much more customized, personalized therapies based on a much more thoughtful and precise scientific diagnosis of what you're dealing with. They're now extending that into other areas.

Steve Case (13:20):

Another company we back called Talkspace is really seeing enormous growth in the last few months because they're focused on mental health delivered digitally. Instead of having to go to somebody's office to deal with a mental health professional, they're able to do that online and through texting and video chats and things like that. So obviously, it's a sad part of this crisis a lot of people are struggling with mental health issues, but we have a broad mental health problem in this country. It's only getting worse and we do not have enough people to satisfy that. We need to use digital technologies to innovate in sectors like that.

Steve Case (13:55):

So healthcare is an example. We also think there's a lot opportunity in the food space. How do you create healthier options? So we back a company called Revolution Foods, providing healthier school lunches. We back a company called Sweetgreen, focused on fast casual and they've done some amazing things during this crisis in terms of redeploying some of their resources to first frontline hospital workers, and also figuring out ways to accelerate some of the plans they had around delivery and expanding their menu to include dinner and other kinds of things.

Steve Case (14:24):

So we've invested in lots of different companies in lots of different sectors, but they tend to have this third wave dynamic where policy does usually matter. Partnerships do really matter. And place usually matters. This goes back to this Rise of the Rest. We recognize Silicon Valley as an awesome place, will continue to be an awesome place. New York City and Boston are also great beacons of innovation where there's a lot more entrepreneurial activity happening. There's also great entrepreneurs all across the country doing great things, but there's not as much attention paid to them. There's not as much capital focused on them.

Steve Case (14:57):

Believe it or not, last year, 75% of venture capital in this country went to three states, California, New York and Massachusetts, 75% while the other 47 states fight over 25%, some states like Virginia where I am or Michigan or Ohio, Pennsylvania each got less than 1% last year. California alone got 50%. Silicon Valley is great, but not that great. And so how do you make sure the entrepreneurs in these other cities have access to the venture capital they need to start and scale their businesses and that also ties in more broadly in terms of society, because these startups are the big job creators. It's not the big companies, it's the small companies, some of which will end up being the big companies. So if we're not backing startups everywhere, we're not creating jobs everywhere. We're going to have an even greater divide in our in our country. So for us, it's both an investment thesis. There's an arbitrage here. Valuations are lower, elastic kind of supply and demand. There's also a broader impact aspect of this in terms of trying to level the playing field, so everybody everywhere really does have a shot at the American Dream and every community has the opportunity to grow jobs as opposed to just watch jobs disappear.

Anthony Scaramucci (16:06):

Well, and you've done an amazing job. We were talking before we opened up the line to our viewers and delegates about DraftKings. Where was DraftKings located? Was that in California?

Steve Case (16:18):

That actually was in Boston. So there are sometimese in Boston, New York and other cities where we'll invest in. Most of our investments are in other parts of the country but there are some exceptions. DraftKings is an amazing story. A great entrepreneur, Jason Robins started initially focused on fantasy, has expanded the vision of the company to include betting now that a number of states have legalized that. And the most amazing thing over the last month that I've seen is this company DraftKings basically went public with a complicated three way merger and a SPAC and now it's trading I think at three times their market valuation, $10 million.

Anthony Scaramucci (16:52):

Well, FanDuel is part of DraftKings now, right?

Steve Case (16:53):

What's that?

Anthony Scaramucci (16:54):

FanDuel.

Steve Case (16:55):

No. FanDuel is a competitor. They were acquired by another company. But DraftKings has really emerged as the leader in that space and the fact that anybody's going public right now given the situation of the market and a company focused on sports goes public even though most sports, football, basketball, et cetera are not being played really is an amazing testament to the great entrepreneur that Jason Robins is.

Anthony Scaramucci (17:20):

You're also invested in something called Convene. Now tell us a little bit about that. What is Convene?

Steve Case (17:26):

Super interesting company that focuses on the future of work and particularly how you design workspaces. WeWork was focused on basically shared co-working space and obviously got a lot of attention, raised a lot of capital. SoftBank reported yesterday that they marked down the valuation by 90 something percent so they obviously have a challenge. The strategy of Convene is not to compete with the landlords, but to partner with them and figure out new ways to help them think about space and that's accelerating, obviously in this world where we're now working from home. At some point, we'll start returning to work, but even when we're back in the office, there'll be more of a hybrid where some people are in the office, some people will be remote. There might also be some kind of third places that people decide to congregate for special meetings and things like that.

Steve Case (18:13):

So Convene is really trying to imagine how work gets done in the future, how offices get configured in the future, and they partner with the major landlords and also major companies or major tenants to really imagine what that should look like and help build out and then manage it. They think of running off as more like hotel companies, think of managing hospitality. It's not just something to rent and then have somebody who may not have the expertise to operate, try to operate it on the side. They really believe, and we obviously believe as well, which is why we invested. It's a specialized skill. And over time, more and more people are going to rely on companies like Convene to reconceive their office space and manage it for them.

Anthony Scaramucci (18:55):

Well, and obviously COVID-19, this crisis is accelerating those situations. And so, you've been one of the great trend predictors and prognosticators, so lay out for us what your vision is sort of in the post-COVID economy, the return to normalization, but the recognition that something has changed in our culture, a lot like the way 9/11 changed the way we go through airport security. This is going to change us, not saying we're not going to go back to normal and have a good economy. But talk to us a little bit about where you see those trends going now. Are they accelerated? Are they different and how so?

Steve Case (19:36):

I think most of them are accelerating. Some of the things we talked earlier about healthcare. We've always believed that healthcare needed to be reimagined and needed to be better outcomes with greater convenience to lower costs, and we're starting to see an acceleration, particularly in areas like telehealth, where we're showing good momentum over the last 10 years but just in the last 10 weeks more has happened than happened in the previous 10 years and now telehealth has become more mainstream. That's an example of something that's been bubbling for a while. It's one sixth of our economy, it's obviously hugely important, just wasn't working the way it should.

Steve Case (20:09):

We've now seen that tipping point, if you will, and a great acceleration of that. We also think we're seeing that tipping point in the Rise of the Rest. So as people have decided to at least temporarily work from some other place, some of those people are realizing maybe they can get their work done. And maybe over time, there'll be more of a distributed workforce. There are some companies like WordPress, over 1,000 employees entirely remote. They don't have a headquarters. That's probably an extreme case. I think most people will see the value in having that shared space, a headquarters, if you will. But surely, there'll be more kind of remote operations.

Steve Case (20:44):

That will lead to more opportunity for people to decide they could live anywhere they want to live. They might choose to live in San Francisco, they might choose to live in New York City, but if they want to live somewhere else, perhaps in the middle of the country, they're going to be more able to do that now because of this kind of shake the snow globe moment we're having right now.

Steve Case (21:04):

So when it all settles out, a number of these third wave industries I think are going to be restructured. There's a huge opportunity for entrepreneurs not just to focus on reopening and rebuilding, but really reimagining what their sector should look like five, 10, 15 years from now, what their company should pivot to do, and because of what's happening here and some of the consumer trends that are going to accelerate as a result of this, some of the technology trends that are going to accelerate because of this, and also some of the trends around things like Rise of the Rest, where I think there'll be a boomerang of talent, something like 95% of people in Silicon Valley are from some other place.

Steve Case (21:42):

They went there because that was the land of opportunity. That's where the money is, like Billy Sutton, the bank robber said he went to the banks, because that's where the money is. People go to Silicon Valley because that's where the money is. Over time, if we can get more venture capital back and more entrepreneurs in more places, we will see a leveling of that opportunity gap that currently exists. That will give people more flexibility. So next time they're graduating from these great universities in the middle of the country instead of feeling like they have to go to another coast, maybe they stay where they are and some of the people that did decide to go to coast, maybe now's the time they decide to come home and have a different kind of approach.

Steve Case (22:16):

I think that has the opportunity to really create a new, more geographically dispersed, more inclusive innovation economy that could help knit the country together. So it's not just a few people in a few places doing really well and a lot of people feeling more and more left behind. We need to make sure we're creating opportunity for everybody, jobs ready. Entrepreneurs do that I mentioned earlier.

Steve Case (22:39):

And this was news to me until about 10 years ago, I was asked to work on some policy initiatives, including by then President Obama that essentially all the jobs created in this country are from new businesses, startups, small businesses in aggregate are hugely important. We're seeing that right now. We're trying to make sure restaurants and other small businesses can stay alive through this crisis. Big business, Fortune 500 companies, of course, they're hugely important. But those don't account for net job growth. There are some companies growing like Amazon, but some companies like GE declining. As a sector, those big companies do not add net new jobs. Net new jobs are from the startup. So if we're only backing via venture capital entrepreneurs in a few places, not everywhere, we shouldn't be surprised that there are a lot of people, a lot of communities that are feeling kind of left out, left behind and worry about the future instead of being optimistic about the future. So this is a great moment, I think for our country to create a more inclusive innovation economy, back entrepreneurs everywhere.

Anthony Scaramucci (23:37):

No question. And you've also been a strong proponent of immigration reform. And so could you just tell us a little bit how that weaves into these trends? Because if you get that boomerang effect, you're certainly going to need talent to be drawn upon from the rest of the world to come into this economy to help lift more and more people.

Steve Case (23:58):

Yeah, I see immigration as complicated and emotional. Peoople have strong views on it. But I just look at the data. And right now, it's pretty compelling that 40% of our Fortune 500 companies were started by immigrants or children of immigrants, including some of the most successful companies, Apple, Google, et cetera. So part of the reason we are such an innovative entrepreneurial country is we've been a magnet for talent all around the world since our inception. It is worth remembering, kind of take a step back and remembering that 250 years ago, America itself was a startup. It was just an idea.

Steve Case (24:33):

And we led the way in that agricultural revolution and led the way in the Industrial Revolution. More recently obviously, led the way in technology revolution and it was entrepreneurs leading the way as entrepreneurs are coming from all around the world, so we want the United States to remain the most innovative entrepreneurial nation. We need to continue to be a magnet for talent and not just look at immigration as a problem to solve, but as an opportunity to see and that's why kind of figuring out the right approach around immigration to make sure we are continuing to be that magnet is going to be hugely important in the next third wave.

Anthony Scaramucci (25:08):

Well, I mean corollary to that, Sal Khan from Khan Academy was on yesterday with us. And we were talking about inverting the skills pyramid. And so what are your thoughts on that? And what kind of policy initiatives or have you thought about policy initiatives that could help us expand that footprint of skills, which obviously would help us with the income inequality in the country as well?

Steve Case (25:33):

There's a number of things that need to happen. Sal has been obviously a huge pioneer over the last decade in using digital technologies, using the internet to level the playing field in terms of education. So his work is incredibly important. And I did listen to his talk yesterday you did with him and was delighted to hear that three times more traffic now on the Khan Academy site than there was before the crisis.

Steve Case (25:53):

That's an example. Obviously, there's terrible aspects of this crisis. A lot of people die, a lot of people are really suffering, including having this massive unemployment rate, but there are some glimmers of hope that we should kind of focus on and try to build on as we come out.

Steve Case (26:08):

In terms of education, I'm not an expert in it. But I do know we need to make sure we're teaching our kids the things that machines can do. And a lot of that seals around creativity, communication, things like that are going to become increasingly important as we move into this next sector. And we also need to do a much better job of reskilling. A couple of companies we backed through our Rise of the Rest fund, one in Baltimore called Catalyte, another one in Indianapolis called Kenzie Academy are doing a great job of reimagining how you tap and unleash human potential. What Catalyte's doing with AI is basically identifying people who nobody ever sat them down and said, "You know, you seem like you would be pretty good at coding."

Steve Case (26:49):

Instead, they were on some other career track, but they go through this initial test and basically get an aptitude around us and if they pass that test, they've been put in this training program where they ended up often getting double, or sometimes even triple the salary they were getting before. Sometimes it's like truck drivers who are suddenly moving into the coding world. So that's just one of many examples, not just about coding. There are many aspects of this third wave that need skills and we need to make sure we're building the skills for tomorrow for the industries of the future. And we're not just looking at the rearview mirror and doing kind of more of what we've done in the past.

Anthony Scaramucci (27:24):

Totally. John, we have some questions from our viewers out there. So I'm going to kick it over to John, who's been compiling some of those questions. Go ahead, John Darsie.

John Darsie (27:36):

Yes. Steve, you mentioned your role as an advisor to the Obama Administration. You were on his Council for Jobs and Competitiveness. You're based in Washington, DC, so you're in and around the political ecosystem. What from a government perspective can the government do to incentivize entrepreneurship around the country and help to incubate your concept of the Rise of the Rest and create the right incentives for that rise to take place?

Steve Case (28:04):

A number of things. I think there were some things the Obama Administration did that were helpful, including passing The JOBS Act, which was done in a very bipartisan way, called The Jumpstarting our Business Startups Act that updated laws that hadn't changed since 1933, so the Securities Act of 1933, to make it easier for young companies to raise capital, make it easier for companies to go public, confidential filings, things like that. So that was a success.

Steve Case (28:28):

The Trump Administration had success with the opportunity zone, which also had broad bipartisan support, identifying parts of the community where the poverty levels are the highest and creating incentives for more capital to flow into those, into companies as well as reimagining neighborhoods, real estate projects and things like that. It's still early there, but I think that holds great promise.

Steve Case (28:49):

There are a number of other things that have been proposed. Senator Klobuchar just a few weeks ago, introduced legislation that would incent more capital to go to these rising cities, what we call these Rise of the Rest cities. I think that would be constructive. And even today, the White House hosted a session on this reskilling going back to the earlier question.

Steve Case (29:09):

So how do you make sure you are moving forward trying to do it in a bipartisan way, and trying to do things that really do unleash capital, which I do think is a critical ingredient. This idea I mentioned before, 75% of venture capital going to those three states makes no sense at all. So how do you create at a local level, perhaps at a state level incentives around angel investments and other, how do you stand up more regional venture firms? What are the incentives to do that?

Steve Case (29:35):

We need to get more capital backing more of these people in more of these places, and there is role for policy. Ultimately it comes down to investors taking the risk, entrepreneurs kind of having a better idea and deciding to run with it, put everything on the line. Obviously, that's critically important. But the politics, policy does matter. It does set the table. It does set the ground rules and more focus on startups is critically important.

Steve Case (29:59):

I encourage in particular the governors who often spend a lot of time when they think about economic development, trying to get big companies to move their headquarters or to open a factory. Obviously, there's a huge focus on Amazon's second headquarters, for example. It would be way better for them to spend the same amount of time and the same amount of money, not focusing and getting the big companies to move but the little companies to start, some of which will be the big companies of tomorrow. Amazon 25 years ago, we had like four employees. It was a crazy idea of selling books online. So how do you back the Amazons of tomorrow, not try to just lure Amazon to open up an office?

Anthony Scaramucci (30:39):

When you think about the world today, and let's take the Stephen Case at 24, 25. We got a lot of young people viewing us today. Where would you go directionally? Essentially, you went to Procter and Gamble, I went to Goldman. That was our years. If you wanted finance, Goldman. If you wanted marketing, it was Procter and Gamble. But the 25 year old today is probably moving into a smaller company than the ones that you and I chose leaving school. And so what would your advice be to those people?

Steve Case (31:11):

Well, everybody's a little different. We have five kids, and they all have different interests and passions and skills and desires, and so forth. So there's not like a simplistic answer. But I do think people need to recognize the world is changing, and not focus on what exists today but imagine what might be happening tomorrow.

Steve Case (31:28):

Like Wayne Gretzky, the great hockey player, people said he was great, because he didn't focus on where the puck was. He focused on where the puck was going. He just got there just a split second before other people got there. So if somebody is spending the time to think about where things are going, again it depends on whether you're interested in medicine or in teaching or startup or what have you, how is it going to change and have a mental model in terms of at least a shot.

Steve Case (31:53):

Well, of course you won't get it all right, but at least you'll have a sense of what's possible. That's what was helpful to me in those early days. And interesting, I went to Procter and Gamble not actually because I wanted to, even though it's a great company. I wanted to start a company that helped create the internet. But when I was graduating in 1980 at the age of 21, the startup economy didn't exist. Venture capitalists were not backing 21 year olds, and nobody believes in the idea of the internet.

Steve Case (32:20):

So the reason I went to Procter and Gamble was to get some skills around marketing and it was a terrific company and then eventually figured out a way to get into starting my own company when I was 25, 26, something like that. So I think you really have to figure out what part of the world you want to have it put a little dent in and then figure out you have the right skill set to do that, not how can you develop that skill set and also recognize that it's a team sport. You can't do these things on your own. I've learned the hard way the things I've been successful, I'm involved in had a great team. The things that were unsuccessful did not have a great team. So how do you assemble the right team, get them focused in the right way. And going back to one of the principles I talked about in The Third Wave. It's now a principle, I think in this next third wave, perseverance, you got to stick with it. Often, revolutions happen in evolutionary ways. And you really need to take the long view and play the long game.

Anthony Scaramucci (33:19):

When you think about formal education today, in private universities and the competition in terms of the proliferation of universities and the rising prices, Stephen, I mean, they're going up 3%, 4% a year in tuition. And now a lot of them can't finish the semester, this semester, or they've done the semester online. They may have to do online semester next year. What's your thought on that? Have you thought anything about how that's going to change as a result of COVID-19 or just generationally change from the more traditional settings that you and I experienced as kids?

Steve Case (33:59):

Well, that's going to change a lot. And there are some folks who've been on the lead on this. Arizona State University is an example. They really started investing 10 years ago as a really inclusive approach to try to get people who had untapped potential, give them an opportunity to do it at a more affordable cost, and that often is the case to a lot of things online.

Steve Case (34:18):

Online is not perfect. We're all finding that out. But for a lot of people, the ability to do things online is a way to do it more conveniently and more affordably than if you're on campus. But I think the campus is going to change a lot this fall. I've heard different things about different colleges and universities and in graduate school. I thought that Harvard Medical School is not going to even open physically in the fall. There's other like Stanford Business School that are not going to open it all online or offline. I'm not sure that's true, but that's what I heard.

Steve Case (34:47):

I've also heard that about 25%, maybe 30% of freshmen in college that had been admitted likely are going to defer it a year and take a gap year because they don't want to miss out on what is one of the great things about that on campus immersive experience, which is the interaction with other people is not just what you learn, is also who you get to spend time with. So I think overall that sector is really going to be challenged.

Steve Case (35:12):

I think that's healthy because they needed to be challenged. They need to figure out ways to deliver better learning outcomes with more convenience and lower costs. And that's going to be a big tribe. I'm involved in all this. I now chair the Smithsonian Institution, which is known for its museum, 90 museums, but it does research operation, National Zoo, things like that. But there's a real effort underway led by Lonnie Bunch, the new head of the Smithsonian, to create a virtual Smithsonian.

Steve Case (35:40):

Not everybody can get on a plane and fly to Washington DC, spend time on the National Mall, to visit Air and Space and Natural History and some of these other terrific museums. How do you create an immersive virtual experience and allow people to access some of that idea, some of that intellectual property if you will, from any home in any classroom.

Steve Case (35:57):

So the fact that the museums now are shut down is terrible. But the Smithsonian is using that time to reimagine what the Smithsonian should be in the future. And the digital component is going to be much more important. So everybody needs to understand that the world has changed, that we saw in the last 10, 20 years a slow evolution, whether it be technology around distance learning or technology around telehealth, some of the things we've we've talked about. This is a kind of a shake the snow globe moment. When it all settles back, it's going to be different than it was and some of these trends which we're slowly building are going to really start accelerating.

Steve Case (36:35):

I'm optimistic that will result in a better healthcare system, a better educational system, a better food system, some of the things that we've talked about and some of the things we're investing in it at the Revolution.

Anthony Scaramucci (36:48):

Well, I mean, it's also a good segue. You're talking about the Smithsonian, you're doing a lot of work with your wife, Jean. You've given the Giving Pledge. You're going to give away half of your net worth to society, which is a wonderful thing that you guys are doing. And just talk to us a little bit about your charitable giving, how you're thinking about it because I know you're a great investor, that's also a form of investment. It's sort of social investing. So what are your thoughts there?

Steve Case (37:16):

Well, we started the Case Foundation over 20 years ago and my wife has run it that entire time, and over those 20 years, we've invested a number of things. Early days, we had a very significant Digital Divide initiative. We're quite concerned as technology, the internet was starting to take hold, taht a lot of kids were being left behind. So that was a significant initiative. We did things around clean water, cancer research, a variety of different areas.

Steve Case (37:39):

Right now our focus is on things like the Smithsonian for me. Jean, my wife is the chair of the National Geographic Society. She's doing amazing work, the number one brand in terms of social media, Instagram, things like that, has an amazing partnership with Disney for the National Geographic Channel and some of their other digital businesses. For me, it's Smithsonian. For Jane, the National Geographic are our two priorities.

Steve Case (38:01):

But we still with the Case Foundation also, we call the Case Impact Network are looking at how do we level the playing field in terms of opportunity. A lot of things we've talked about on this call, how do we do that from an entrepreneurship standpoint? How do we do that from an opportunity standpoint? How do we work with the groups like Business Roundtable and others that are trying to shift business from just focusing on profit, that sort of Milton Friedman view of a half century ago to recognizing profit really creates a sustainability for businesses, allows them to invest and grow and hire people. These companies also need to have more impact and more purpose. And that's going to be a big trend in the next 10 or 20 years. And that's one of the areas that we're focused on helping to catalyze any way we can.

Anthony Scaramucci (38:43):

Yeah, hopefully, there will be that cultural shift where it is certainly about profit. But also if you think about the social well being of your employees and things like that, it could actually enhance and increase profit. But John has another question for you from the audience. Go ahead, John.

John Darsie (38:59):

Yeah, we had a SALT Talk last Friday with Chamath Palihapitiya, who has been very critical even though he's based in California, he's been very critical not just of the culture in Silicon Valley, but of the system of capital formation about how it sets a lot of entrepreneurs up to fail and doesn't serve the entrepreneurial community very well. How do you feel about capital formation, how it could be improved from a venture capital perspective?

Steve Case (39:25):

I've known Chamath a long time. He actually worked at AOL out here in the DC area before he moved to California, ended up being a key executive at Facebook and obviously quite successfully pivoted into the investment world. I celebrate Silicon Valley. There are amazing things about Silicon Valley in terms of this sense of possibility. People hear an idea and imagine how big it can be. A lot of people in a lot of parts of the country hear an idea and focus on risk factors, why it might fail as opposed to why it might succeed.

Steve Case (39:52):

There's this network density of collision of people and ideas. There's a lot of capital, so there's a lot to celebrate, but I do think sometimes Silicon Valley gets a little ahead of itself. I do think in the sector, these third wave sectors, knowing something about healthcare, for example, I think is going to be important. Domain expertise is going to be important. For a lot of people still in Silicon Valley, think that if you know nothing about an industry, you can bring fresh insights. And there are many examples where that has been the case.

Steve Case (40:20):

But in this third wave, I think you need to marry those fresh insights with some perspective, knowledge and credibility if you're going to form partnerships in these third wave sector. So recognizing that it's not just about the software, it's not just about the apps, these are system level changes. And ultimately, system changes happen as people change, and you have to bring a lot of people along. That's something that I think we can make a lot of progress on and getting more of the Silicon Valley venture capitalists to not just invest in Silicon Valley, but invest in these rising cities, these Rise of the Rest cities, I think, would be hugely important as well.

Steve Case (40:54):

We're starting to see some momentum on that front. Hopefully, this crisis won't slow that momentum. Hopefully, it will accelerate that momentum. But I think Silicon Valley at least should not just focus on itself, but focus more on the country at large and engage more with policy makers because there are a lot of complicated policy issues in this third wave. And it is frustrating as Anthony knows, dealing with government kind of issues. Sometimes the bureaucrats can slow you down and that can be a source of frustration. I get that.

Steve Case (41:22):

But if we're really going to lead as a country in this third wave, we're going to need to have constructive engagement between the innovators, the disruptors, interest groups and the policymakers and figure out as we did in those early days of the internet, commercialize the internet, creating the rules of the road around e-commerce, things like that. You need to do the same in healthcare, smart cities, food and agriculture, these system level changes that are going to be essential in this third wave.

Steve Case (41:47):

So I celebrate Silicon Valley. I just want to create more opportunity for more people in more places, get more of that venture capital backing more entrepreneurs in more places, create more of that fearlessness, anything is possible mentality in the middle of the country, not just in a few places on the coast. I think that will result in a stronger innovation economy, more inclusive innovation economy and also create more opportunity, more jobs for people everywhere.

Anthony Scaramucci (42:12):

Steve, you mentioned Alvin Toffler. You remember John Naisbitt spoke Megatrends? Do you remember that work as well?

Steve Case (42:19):

Yeah.

Anthony Scaramucci (42:20):

So before we let you go, because we promised a hard out in 45 minutes, I want you to be John. I want you to channel your john Naisbitt for a second, and give us a few of the mega trends that you see over the next three, five to 10 years.

Steve Case (42:37):

Well, I think it ties in exactly what the themes that we talked about. I think a lot of sectors of the economy, a lot of arguably the most important aspect of our lives, how we stay healthy, how our kids learn, what we eat, how we move around, how we work are going to be rethought, reimagined, and that's going to create enormous opportunity for entrepreneurs who are willing to play offense when a lot of big companies are shifted into playing defense. The revolution we saw in the early days of the internet, that first wave was around communications, technology, the second wave around media, technology obviously did a lot of disruption there. I think the third wave is going to really impact critical aspects of our lives, some of the most important sectors of the economy.

Steve Case (43:20):

So it's not about any one technology. It's about systems level change in these sectors. And I also really do believe that the playing field will level but the rest will rise and we will indeed have a more inclusive innovation economy. So if I was going to pick two, I'd say watch the third wave as that wave accelerates, and watch the rise of the rest as a lot of these cities that a lot of people have given up on start rising and surprising us all in the next 10 or 20 years, when some of the most iconic breakthrough companies in these important third wave sectors are going to be from places in the middle of the country.

Anthony Scaramucci (43:55):

Well, listen, it was a fabulous conversation. We really appreciate. We covered all the bases today. We're looking forward to seeing your success as it unfolds, and just move your head a little Steve because I want to show the book here one more time. There you go. See that Third Wave right there?

Steve Case (44:13):

[inaudible 00:44:13]

Anthony Scaramucci (44:12):

The Third Wave. I very, very strongly recommend everybody that you get out and buy that book, read that book, listen to it on Audible or an audio tape. I think you'll really enjoy that. And with that, Steve, thank you. Great talk. Have a great evening. Stay safe and healthy out there, everybody, and we'll be back with SALT Talks again later in the week and next week. Thank you, Steve.

Steve Case (44:36):

Thank you. It was fun.

Anthony Scaramucci (44:36):

I appreciate it.

Steve Case (44:38):

Thank you, Anthony.

Anthony Scaramucci (44:38):

Thank you.