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Here’s the program.
Andrew Warner: Hi, everyone. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart where every day what I do is I bring on a different person to talk about how he or she built an incredible company, what they learned along the way. And, hopefully, you’ll get all these ideas and use them in your business and come back here and do what today’s guest is doing which is an interview talking about what you learned.
So, today I have with me, Andy Kessler. He co-founded Velocity Capital Management where he turned a hundred million dollars into a billion dollars. Then, he did something that I think is a little unusual. He moved on and made himself into a best-selling author.
One of his books is called, “How We Got Here”, a slightly irreverent history of technology in markets. I want to do an interview that’s a “how Andy got here” and find out how he went from being a programmer and chip designer to becoming a hedge fund manager.
I also want to hear about his latest book, “Grumby”, a novel which venture capitalist, Brad Feld, on his blog says, “Pretty much nails every aspect of a garage startup in Silicon Valley.”
So, Andy, welcome to Mixergy.
Andy Kessler: Hey, thanks for having me.
Andrew: So, as a writer by the way, what kind of investments are you making now?
Andy: Oh, I do some investing on the side. I do some public and some private investing. If I find interesting entrepreneurs who I think have the future figured out and the path to get there, I will do some angel investing. I’ve invested in a few venture funds and the like, but my days of professional investing or investing other people’s money, that’s over. I’m happy to have that burden lifted off my back.
Andrew: Why was it a burden?
Andy: Well, it’s a burden because it’s 24/7. When you’re investing in public markets, you just live and breathe them every day, every minute. It’s a giant puzzle. You try and figure out who is doing what to whom, which is the next company that’s going to grow and all in the context of, is the economy going to grow, is the economy going to shrink, is there something that blows up here or there, that takes your whole portfolio down.
So, you’re just constantly thinking about it and working through these puzzles. I still do that in a small way, but when you’re running a billion dollar portfolio, you can lose. It happened to us. We had our portfolio drop by a $150 million before breakfast. That kind of burden, I’m happy for someone else to do.
Andrew: Was there a time when you looked at your investment career and said, “OK, I reached this mountain top. I can go and find another mountain or, maybe, I can try to jump up and reach the heavens. Or I can do what you ended up doing, which is becoming a writer.” Was there a time when you looked out from the top of the mountain top and knew that you were there?
Andy: You know, it wasn’t so much that as do I still want to be invested in a bunch of these names that have grown like weeds. We ran our hedge fund from about ’96 until 2001, and as you can imagine that was a pretty volatile and roller coaster time. So, I never did this with my career either is say, “Oh, I’ve reached the pinnacle.”
Andrew: We’ve lost the connection. I’m sorry. We lost the connection there for a moment. You said, “I never” and then we got cut off right there.
Andy: OK. I’ve never thought in my career of, “I’m at the mountain top. Now, it’s time to go and find some other mountain.” Instead, I’ve always followed my nose. If there was something interesting going on that I wasn’t doing, I’d say, “OK. How do I switch? How do I make a 90 degree turn and go do that, rather than, “I’ve already conquered this. I need to go conquer something else.” I don’t quite consider it conquering. I just skip around and go, “God, that’s interesting. I’d like to spend more time investigating that.”
Andrew: I want to come back and ask you what you’re sniffing around and noticing right now, what you would investigate and what, maybe, the audience needs to take a look at. But, let’s go back to the beginning. I read in the dedication page of one of your books that it was your dad who got you into technology. Can you tell me how he did that and what kind of fascination did he launch back then?
Andy: You know, my dad was an engineer. He was in the Navy, working on submarines, and then he ended up being a mechanical or noise control engineer. I caught the bug in the mid ’70s, early to mid ’70s. I wanted to build a computer that I could have on my desktop.
Of course, to go back in history, there was no home computers. There was these home brew folks, including Wozniak and Jobs who were on the West Coast. I was on the East Coast, but I ended up in high school building a Z80-based system. We actually stole Bill Gates’ Apple, G-Basic, he called it, and so I had my own desktop machine by the time I got to college.
A few friends of mine and I thought, hey, we can make a business selling these things, and our parents all said, “You might want to go to college instead.” And, of course, that led others to sort of exploit that personal computer business as it grew.
I was an electrical engineer. I studied computer architecture at Cornell and then at Illinois for grad school, and when I left I worked at Bell Labs in New Jersey. I designed chips. I was in the group that did modems, the famous 300/1200 baud modem, and then, of course, they did the 4800, 9600. So, I learned the communications business and programming. I wrote tools to help design chips and the like.
Unfortunately, working at Bell Labs and at AT&T it was a giant bureaucracy, bigger than the Post Office. It was bigger than the Pentagon. It was just crazy.
Andrew: You had a quote in your bio that said you’re a spender of millions, or you were a spender of millions in regulated, last minute, use it or lose it, budgetary funds.
Andy: Oh, yeah, yeah. That was the most fun because when you’re in a big giant company like that, at Bell Labs, what would happen is on December 5th someone would add up the budget for the year and go, “Gosh, we’re under budget, and if we don’t spend it, they’re going to take it away from us next year.” That’s a big company problem.
So, they come to me, and I go, “Oh, I can spend a million and a half bucks.” This was in 1982 or something. I could do that. Give me a day and I’d call up Digital Equipment, and I’d order these VAX 11780s. I’d call up Tektronix and order these big giant terminals. So we had this gold-plated system for designing chips for modems and all that kind of stuff.
But, you learn real quickly that’s not how the real world works. Those were regulated telecom dollars. Grandma calling long distance would pay for my VAX 11780s. That wasn’t sustainable.
Andrew: Did I hear you say that you were a pirate early on, that you pirated G-Basic? Is that what you’re saying?
Andy: Yeah. Well, back then it wasn’t so much pirating. I don’t think you could actually buy it. I think you had to be a computer manufacturer inside or one of those early companies to get it. But, sure enough, those copies were floating around, and we got in on a cassette tape or something like that. I don’t even remember. But a couple of high school kids without much of a budget, and here’s this piece of software that showed up.
I think Bill Gates ended up giving that away with DOS over time. Of course, we didn’t have DOS. We had our little BIOS, and then we wrote our own code to get our system to work. And then, I spent time writing games. I had the greatest Dominoes game. I saw the arcade game, Dominoes, and I said, “I want one of those for my own home computer.” I don’t think I can do that again. I’ve lost the touch on how to program, but in the early days that was what I was doing.
Andrew: This is incredible. You said earlier you made 90 degree turns, and I really do see it. I’ve got now your bio here in front of me. I see AT&T Labs as a chip designer. Then, Paine-Webber and Morgan Stanley, where you were an analyst. Then, you went from being an analyst to actually putting your money where your mouth is, as one person said I think at the time, and investing money.
Now, you’re a writer. How does one person have all these careers in them? Is there something that ties it altogether?
Andy: Well, the comment before about following my nose, but I’ll tell you almost all of those were accidental. I was an engineer because I was good at math and bad at reading. My SAT scores yelled loud and clear, this guy’s an engineer.
But, when I left Bell Labs, I was fussing around, doing some consulting. Everyone does consulting trying to find clients, and I accidentally tripped across a job opportunity on Wall Street at Paine-Webber as someone analyzing the electronics business, following companies like Intel and Motorola and Texas Instruments.
Of course, I didn’t even know what that meant. I didn’t know what Wall Street was. I was an electrical engineer. I didn’t know what a balance sheet was or an income statement. But the guy that hired me, this guy, Bob Cornell, he said, “Hey, I’ll teach you all that stuff. That stuff’s easy. It’s the tech stuff and figuring out is Intel the better company or AMD or Motorola.
Those companies all sort of, they don’t lie but they spin these great stories of how they’re the next great company. So they needed someone like me with a tech background to go figure out who was who and which stocks would do well over the long run and which ones were going to fade.
And then, I learned the financial stuff, not particularly well because it really doesn’t matter. You can forecast Intel’s earnings out for five years, and I guarantee within a month you’re wrong because somebody put changes and the number of processors they sell changes. So, I did that at Paine-Webber for four or five years, and then I went to Morgan Stanley where I did the same time. I was an investment banker, help to take companies public. And really it was then that I learned to appreciate entrepreneurs.
Until then, I was working with big companies. But when I got to Morgan Stanley, we were starting to take private companies public. And, you know, you get in these things when they’re still private companies, and they’re growing like a weed and you’re meeting the founders and the CEO and the board members, trying to decide if this was a good company to take public or the next one was.
It was really then that I learned how God awful hard it is to be an entrepreneur. The ones that are successful have just this tiny piece of magic in them that drives them to grow these companies. I’ve got to tell you, that was very helpful when I started investing in private companies. Back then, I was just taking them public.
Later, I would make another right turn and leave the comfort of, I shouldn’t say the comfort of Wall Street because Wall Street is a nasty place. It’s management by fire. You get yelled at all the time when you’re wrong, and you get praised when you’re right. But, it’s management by fire.
Andrew: Let’s hold on for a second there because there’s one thing you used earlier that I want to dig into. You’re an analytical person. You’re an engineer. You’re an analyst. Define the magic, or help me understand what magic you saw when you were at Morgan Stanley, looking at these entrepreneurs who were doing well. It looked like magic until you saw what when you looked into them further. What was it that made them so successful? What made the guys who had magic stand out?
Andy: Well, it’s a combination of things. First off, those that can manage the massive growth of these companies, you know, when they go from two guys in a garage and really the kitchen table to a company with a thousand people. Just the skills to manage that is very special and rare.
But, I also learned that it really helps if you have this giant wind or hurricane or monsoon blowing at your back. And so, I spent a long time when I was an analyst, not just analyzing companies but analyzing the industry, trying to figure out why these things grew because I was working with guys who were beverage analysts and health care analysts and coal analysts and all these crazy things.
I used to go in and say, “Hey, this industry I’m working with is going to grow 30 percent” and they’d go, “Well, gosh, ours is three percent. What makes yours grow so fast?” I sat down and years and years of digging into this stuff, and you figure out quickly and then you hone it over time that there are these economic drivers of what grows Silicon Valley. Mostly, but not completely, but mostly it has to do with cost going down.
Every time a new chip comes out, a new memory chip comes out, it goes from gosh, it’s 1 mg and 4 mg, 16 mg, 64 mg, 256 mg, 1 gig, 4 gig. Each time these new chips came out, it was the same $10 chip but it had four times as much capacity. It was this economic driver of elasticity that lower cost would create higher volume.
That’s why you have an iPhone today. An iPhone has what, 16 gig. Well, not very long ago, 16 gig would have cost you a million dollars. And I looked it up. In 1968, 16 gig would have cost you $16 billion dollars. It was the talk back then. Every time these costs come down, these new wonderful things happen.
And so, what I try to do is figure out the company and the management team and the guys that were riding those waves. And if you do it that way, you can make money long-term. There’s all these blips and blobs you see what Wall Street’s doing today. It’s down 70 points, down 265 yesterday. You’ve got to ride the roller coaster, but what you hope is that from point A to point B, even though it’s volatile, you can get a 5 to 10x kind of return because they’ve got this wind at their back. That, to me, is what made me a successful investor.
Andrew: Do you have an example of an entrepreneur who was able to get in front of that wind so that it was at his back and pushing him forward, one that you’ve met, one that you’ve looked at over the years?
Andy: I got to tell you. Name me one who hasn’t. First of all, that’s the Bill Gates story, right? You have an operating system that you sell for $30 or $50 and now $100, but it goes on these PCs that every year get cheaper, and they get faster.
Apple screwed around with computers and rode that wave, but in MP3 devices and now phones, the exact same thing happened. Larry Ellison is a software guy. He’s selling databases, but those databases are going on computers that have more storage and more horsepower. So, bigger and more massive companies would buy more and more copies of the software.
I can’t find an entrepreneur — Mark Zuckerberg and Facebook. If it wasn’t for cheap communications and cheap storage and high resolution screens and cheap digital cameras so people could upload photos to that thing, he wouldn’t have a business. It would just be an interesting sideline, but he rode that wave of ever cheaper storage, ever cheaper bandwidth.
I would say if you’re investing in Silicon Valley, if you can’t find that elasticity, if you can’t find the price declines, run away. Turn around and run away.
Andrew: Why them though, because these are massive movements in the industry. A lot of people can spot them. Why is it that only a handful of people, if that, are able to get in front of them and actually do something with that observation?
Andy: Well, that’s a great question. One is the demeanor that I talked about before of managing that growth. I will say very few people can look over the horizon and think that things are actually going to get cheaper. People like to extrapolate what they have today. It’s like, I’ve got 60 gig. I’m never going to use more than 16 gig. Well, what happens when there’s 256 gig are cheaper, or a terabyte is on our smartphone. What’s going to happen? Well, what can we do with it? Well, this is a future question you might ask. But I happen to think the next wave of computing is getting rid of the screens. It’s using both audio and visual clues and here’s my multi-touch that I do on my iPhone.
Well, if I do it to my webcam, let’s have the same thing happen on my screen or have it voice recognition and the like, the interface that we use to get the information, to get the search results. Why are we typing in search results rather than talking? Why aren’t the search results talked into a Bluetooth device in my ear? That’s my next one.
Andrew: That’s your vision. That’s where you’re saying, “Why do I need to have this iPhone in front of me? Why can’t it be even smaller and somehow available to me within my line of sight? Why do I need to have my earphones on when I want to listen? Why can’t I just have something in there? What do you think? How far away are we from that?
Andy: Oh, it’s 10 years. Again, that’s what my new book, “Grumby”, is about. I’ve written four non-fiction books, and they’ve done well. I’ve got another one that’s going to come out in February which is “12 Rules for Entrepreneurs.” But in the meantime, I wrote this fictional account of a guy that comes up with the next greatest consumer electronics device and the roller coaster that he has delivering it.
But, it’s basically that. He takes a Game Boy and shoves it up the butt of a Furby, if you remember the old Furby. Here’s one ripped apart. Imagine if you put two video cameras in here and microphones in the ears and a speaker in its mouth and it’s connected by Bluetooth and the like. Open it, and it’s a personal assistant. It listens to what you do. You ask it a question, “What do I have going on today?” Reads you your Outlook things. It does facial recognition, so when you go and meet someone, it says, “Oh, I know that guy. You met him a year ago and he talked about his golf game,” blah, blah, blah.
That’s the interface that we want. Everyone walks around now with their iPhone, and people complain in New York. Everyone is walking around like this, looking at their screen, or everyone is plastered in front of their computer screen all day.
The heck with that, get rid of the screen. Is the compute power there? We’re getting there. I think the iPhone and the smartphones are still a little too slow. They spend that horsepower on the screen. But voice recognition, Google has it. Apple has it built-in. That’s starting to happen. It can talk to you.
I think power is still an issue. I think the gestures in front of a webcam are coming, and the face time on the iPhone 4, people want to do video conferencing. The heck with that. I want to do my gestures so I don’t have to touch the screen. Eventually, again, into my Bluetooth device, stick it into my ear, tell me the answer to that question. Don’t pull it up on the screen.
Andrew: But this all there it seems, except for that screen. Where does the screen go, and if it has to go in glasses, it’s going to be too goofy for us to wear.
Andy: Why do you need a screen at all? If you ask a question and it answers you audio-wise, then . . .
Andrew: I see. You’re saying earphones are fine. Some kind of device that lets you pick up on what the machine is saying is all you need.
Andy: Yeah. Get rid of the screen. Just have an assistant. Just have your eyes and ears. Now, we’ll always have screens. You need high res. And if you want to do comparative shopping and all that kind of stuff.
In my story, “Grumby”, I actually have the cameras and the microphone built into sunglasses. Oakley comes and cuts a deal with his company. So everyone is walking around with Oakley glasses. Of course, in a crowd, you have all this facial recognition that goes on in real time. You’ll have all these people walking around, so you know where everyone is. Of course, there’s GPS built in, so it always knows where you are and it give you clues.
It’s science fiction, of course, but it’s based on the technology that’s available today, and I think there’s a great investment opportunity to take where we are today, with the iPhone, with PCs, and all the digital cameras and just extrapolate. That what I did with our hedge fund. We sort of stopped as we were going through what I’ve done. I left Morgan Stanley investment banking business and ended up running first a venture fund and then a hedge fund that did both public and private investing.
The vision my partner, Fred Kittler, and I had was quite simple. What happened with chips over the last 20 something years is they would get cheaper and the market would expand for them, this same thing is going to happen with bandwidth, 56K modems was about as fast as you could go.
What happens when you go to DSL, cable modem or broadbands, or something like that? I apologize for the phone here. What happens next? Is there an investment philosophy where you can benefit every time bandwidth gets cheaper, some new application opens up. So, we were investing in companies that were both creating bandwidth but, more importantly, using it.
And so, we were very successful. We hit the wave right and sold out when we got signals that things were getting crazy in Silicon Valley. I think you can do the same thing today. You can say, “What happens as these new interface paradigms get cheaper, as voice recognition and face recognition and audio and video and gestures and all that kind of stuff gets cheaper? How do you benefit? Who are the companies that are selling?”
Andrew: Who are the companies then? I do want to go back and continue the narrative that we started earlier, but who are the companies that you are looking at now that do this?
Andy: Oh, they’re all over the place. I don’t even know half of them. I’m out of the professional investing business. You know, a lot of them are just little pieces of code that show up in apps here and there. What I’ve been trying to do with this book out there is do the fact is stranger than fiction. The “New York Times” had this great piece about a screen that had an avatar on it that was a doctor or a nurse that would ask you questions.
That’s just out of my book. I took this device that I had, and I put Meredith Grey’s, from “Grey’s Anatomy,” face over it, and it would be this snarky doctor that would give you a medical examination or you can do it to yourself. And that was all based on doing it with Sysco which has a telemedicine effort where they have a blood pressure meter and a thing that looks in your ear. It’s a little awkward, but what’s missing is the personality sitting there walking you through it.
So, this technology is all over the place. I found a company yesterday that sells video cam glasses, and they’re getting there.
Andrew: I saw that on your blog. I would like to see the person who’s walking around with those glasses who thinks they’re hiding anything. I get your bigger point that we are getting there, that the camera is going to get into the glasses and is going to get smaller and smaller. But, man, I was looking at that and I said, “Who’s buying that, the big speakers on these glasses? They’re kind of conspicuous.”
Andy: Those weren’t the end game. But, do you remember the first MP3 device was by Creative Labs, and it was the size of a brick?
Andrew: A guy came in my office with that. It basically held one CD. I said, “Why don’t you just get a CD player and a CD? Why do you need that big brick?”
Andy: But, if you saw it, and saw the vision of what could happen with that. Again it’s the same thing. As the silicon shrinks, as the screens get cheaper and everything else, at some point you end up with an iPod and an iPhone. But, you got to do it for silicon and you’ve got to do it with bandwidth, and you’ve got to do it with wireless technologies.
Unfortunately, those last two are in the regulated realm, and so the analysis is kind of funky of how are we going to get bandwidth to be cheaper and cheaper. Some of that is policy decisions, not technology decisions. But, it’s coming. I’m telling you. If you can do it, I would do it, amateur-wise not professionally.
I fully expect professional investors to step up and understand what this paradigm is and build a portfolio out for the next . . . you don’t want to build a portfolio out for more than two to five years. But, if you get on that continuum of companies that can continually improve their technology, where the end game is the screenless interface for a personal assistant . . . that’s why I wrote this book. First of all, it’s very funny. At least, I think it’s funny, a funny book. But I wanted to lay out the roadmap of technology. I thought that might be good.
Andrew: I think Fred Wilson said that you can read the book on an overnight flight or on a cross country flight. It’s that good, that quick of a read.
Andy: That’s flattering to hear. I appreciate that.
Andrew: Velocity Capital Management. How did you start it? You knew the direction you wanted to go in. What was the theory and how did you start it? How did you put it into practice?
Andy: After analyzing companies for Fidelity and Janus and all the mutual funds out there, those were my clients, that was my job to say, “Hey buy Intel, don’t buy Motorola or don’t buy Texas Instruments.” I said, “You know what? I want to get on those equity growth spurts myself. I want to own some of these companies, rather than analyzing them after they’ve already worked to try to figure out the last 20 percent move in either direction. I want the 1,000 percent, the 10x move.”
So, I said, “I want to be an investor in these things. I want to get into the venture business.” So, I ran a small venture fund that ended up being one of the early Internet company funds. But, in doing so, I connected with my partner in the investing business, Fred Kittler, who was at J. P. Morgan. He ran a billion dollar public company portfolio.
We said, “Look, let’s together and we’ll do public and private investing. We’ll attract some capital, and we’ll invest where, again, what I said before, when bandwidth gets cheap, new applications open up. If we can do that, we think we’re onto something.”
So, there you get one percent of capital or management as fees, and then you get 20 percent of the upside if it works. So, we said, “Okay. We can raise a hundred million bucks and, therefore, have a million dollars in fees which would cover costs and travel, salary and the like. And then, the benefit will be the 20 percent upside.
Well, we didn’t raise a hundred million at first. We raised 11. So, we had $110,000 in annual fees, and I think our legal bill was twice that. So, we were losing money, investing other people’s money, at least for the first six months to a year. And then, we raised more money. We started investing. The numbers were pretty good and more money piled in and more money piled in.
We ended up raising about 80 million bucks, and ended up with a billion plus in the portfolio as the thing took off. So, it was by no means a, “This guy just left Wall Street and people threw money at him.” It was quite the opposite.
Andrew: Can you tell us a little bit about how you raised that initial 10 plus million?
Andy: Well, half of it was from a Swiss billionaire I met on an American Airlines flight from San Francisco to JFK. So, that helped. And the rest were people that we knew in the industry, some CEOs and some entrepreneurs who had done well and just others. You work on Wall Street for a dozen years and you know enough interesting people who will then bet with you and invest with you.
But, after we got going, then professional investors started showing up. A few pension funds came in and some foundations, and they gave us big chunks, 10 and 20 million dollar chunks, that helped us get to that figure. But, at first, it wasn’t so much friends and family because my friends and family didn’t have that kind of money. It was the smallish network that we had plus the Swiss billionaire.
Andrew: What did you say on the flight to him that got him to want to keep talking to you?
Andy: He was a medical, a pharmaceutical investor. That’s how he had made his wealth, but he was investing in Silicon Valley because he knew that’s where the growth was. And I told him, “Hey, this is what I’m thinking of doing.” And he said, “Okay. When you do that, you give me a call and I’ll seed you,” because he was an investor in half a dozen major venture funds in the Valley.
But whatever I said intrigued him. I really don’t remember, but it was a great success. I chronicle this in my book, “Running Money,” which was the story of running Velocity Capital.
Let me tell you one other quick story because it’s endemic of the whole thing because . . . remember I said, when the bandwidth gets cheap and benefit that way. It’s never always as you think it is.
Just like, if you lay out that continuum of getting rid of screens and voice and face recognition, it’s never going to be exactly what you think today. Things are going to be different. So, we were convinced that every home would have a DVD rewrite drive sitting next to the TV. That’s how we would record video. And, of course, DVD rewrite drives really didn’t exist, and if they did, they were $800 or $1,000.
We found this little company in Silicon Valley that made tiny little laser dial drivers. It was a boring business. Who cares? It was this little semiconductor company and they were two bucks.
Andrew: Two bucks?
Andy: Two bucks. They would turn a DVD drive from DVD read-only to DVD rewrite. That’s it. That’s the company. But, meanwhile they had a decent business that also worked with CDs. You could have this CD, and you could turn a CD-R into a CD rewrite. This was ’96 or ’97.
All PCs shipped with a CD read-only. But the CD rewrites were $300. No one was using them. Well, we invested in the company. We liked it and thought, this is three bucks a share. The stock’s 3, it’s 3.50. The stock goes down to $2.50. You know, we thought it would go to 6. So, we’re buying it. It goes up and it goes down.
We ended up owning about 10 percent of the company. We didn’t have that much funds in the beginning. As people would give us money, we’d put a chunk of it into this company. It was called Elontech. So, it’s $3, it’s $3.50. We’re elated, and it goes back to $3. We end up with 10 percent of the company. We go in, and we go, “What’s going on? Where is the DVD rewrite? Come on, get going on this thing.”
They go, “Well, that’s probably a little ways away, but we seem to be stuck in the CD rewrite drives and we think that’s going to work.” We said, “Oh, God, so much for our theory. Maybe we should get out of this thing.”
So, what ended up happening was Napster came along. So, with Napster everyone was downloading music onto their PCs, and you can listen to it on the PC or with a piece of code called Roxio you could write it out to a CD rewrite drive and create, not an analog CD, but create a CD, not with MP3 versions of it but with the CD format. And so, all of a sudden, there was an interest in CD rewrite drives. And, of course, with volume, the price goes down.
And in the course of nine months, the number of CD rewrite drives that shipped with PCs, went from, maybe, 5 percent of them to 95 percent. In other words, they all just said, “OK, we’re going to ship every machine now with CD rewrite drives instead of CD read.”
And this got, one competitor was Toshiba, and no one wanted to buy from Toshiba because they sold CD rewrite drives, too. So, this company got 90 percent of the business, 90 percent saturation from 5. You can imagine the growth of the stock. We almost sold at 6. We ended up selling at about 200 bucks. So, it took us six months to buy it, and in the heat of this thing, running up to 200 bucks. We sold it for, I don’t know. We sold it for 200 bucks, but we sold it in about an afternoon, maybe two afternoons because Fidelity and all these mutual funds were just saying, “I need this company. This is where the growth is.” And they would take it off our hands.
So, we had just an absolutely phenomenal return on this thing, not that we got the trend right but we were in the right ZIP code. You just have to be in the right area. You have to be just near where that growth happens. You don’t have to get it exactly right, but if you’re close, the return is going to be phenomenal.
Andrew: What about Real Networks? I keep seeing that attached to your track record. Can you tell us a little bit about that investment?
Andy: Well, I knew Rob Glaser when he was back at Microsoft because when I was on Wall Street I was a big fan of multi-media, whatever that meant, saying chips are going to get cheap, bandwidth will eventually get cheap. And so, if you’re going to do audio and video on PCs. I think that’s going to grow.
So, I met him at Microsoft. He spun out to do Real Networks, which, at first, was just audio streaming and then video streaming. We invested. Just as we built our fund, there was a private round to do in Real Networks, and we invested probably a year or so before their IPO, their initial public offering.
So, it was a great investment for us. Real Networks has gone through a very rocky period over the last dozen years. We were an investor for probably three or four years, and then sold it and got a terrific return on it. I love Rob Glaser. I think he’s terrific and clearly had a vision for where the PC space was going. He had a rocky relationship with his old employer in Microsoft, and I think that both drove him nuts but it certainly was an interesting time. He’s a terrific guy.
Andrew: I’ve got a note here to come back and ask you about why you didn’t give up when you only raised 10 percent of what you set out to raise. Why didn’t you say, “You know what? Now’s not the right time. I’ll come back to this later on, or maybe it’s not right for me.”
Andy: Yeah. It never crossed our minds. First of all, my partner moved out from the East Coast to Palo Alto. So, he had rented a home, so he was good for the year. And I looked at him and I said, “You know what? I quit my last job. I’ve got nothing else to do. I’m willing to go a year or more without a salary.”
Fortunately, I had made enough on Wall Street to be able to support my ever growing family and mortgage and all that for a year or so without collecting a salary. And I said, “Hey, let’s just go for it. I think we’re good at this. Let’s go for it. Yeah, we’re losing money doing this, but if the numbers get good, we can turn this thing into something real.”
Of course, three years later in ’99, every knucklehead from Wall Street was spinning out and raising funds, and it was really easy for them. It really pissed me off because we scrambled to raise 10 and then eventually 80, which we fortunately turned into a billion. These guys were spinning out, and people were throwing 300 million, 400 million, 500 million dollar funds.
Of course, a year later they were worth 30 million. These guys lost 90 percent of their money. So, there’s a message there the harder it is to raise money, the more likely everyone hates the space and the investment returns are going to be there. If it’s too easy to raise money, it means too many people are chasing the space and trouble’s ahead. That’s just a Wall Street deal for markets.
Andrew: You weren’t even making half, or you were making about half of your legal bills in revenue. So, you were losing money, a year and a half safety net, when you have a family, is not that big a safety net. What was it about it? Was it just that you’re confident naturally, and you were able to put out all of those negative thoughts out of your head, or was it that this is just the way things worked at the time and it took a while to build up? Was there something else?
Andy: Confident is not the right term. I’m in that paranoid type. Is this going to work? It’s not going to work. But, I’m also naive and I just said, “It’s gonna work. Let’s just go.” The market could have done what it did in 2008, back when we started in ’96, and the whole thing would have been a smoking hole in the ground. But I just was too stupid or too naive or just didn’t think that it could possibly fail. It’s like the Apollo 13, “failure is not an option.”
And it wasn’t so much determination. It was let’s just do it. We have these long-term trends. We have confidence that the investment side of it is going to work out. And if that works out, then the structure of the fund that we put together eventually people would discover us and give us money, which is what ended up happening.
I meet a lot of folks today who are heading out and starting funds. And I wish them luck and I warn them, first of all, how hard it is and second of all, what a pain in the neck it is to get people to reach into their wallet and actually give them money to invest. But, if you can get a track record going and prove that you know what you’re doing with your long-term visions, you’ll end up raising money and have a successful investment.
Andrew: I asked Fred Wilson about how he raised money for his fund. One of the ways that he was able to change the response that he got from investors was by changing his presentation, by just really simplifying it. I don’t know if he said dumbing it down or not, but essentially what he did was he kept it dead simple. Was there something like that that helped you?
Andy: Yes. We ended up doing that. We ended up going from way too many PowerPoint slides to five slides. Here it is, here’s our investment philosophy. Here’s the space that we’re investing in. You’re either with us or throw us out.
But the other thing that I’ve learned is that people in general don’t have the confidence to make decisions. So, if we would find someone and pitch them, they couldn’t bring themselves to invest. But if someone else told that person, “Hey, I’ve got these two hot guys, and they’ve got this really neat fund. Do you want to invest in it?” They didn’t have to meet with us. They would just send us money.
So, the word of mouth, people will believe what a trust is, like the trust in Facebook. People will believe what a trusted party tells them rather than their own internal guide. And so, this word of mouth, we stopped outbound cold calling. We just stopped, and yet people would discover us. As they did, the assets grew because they would hear good things about us.
Andrew: So, going back to why you decided to move on. I went back and I did research on you. It’s a little hard to do research on you because you used to go by Andrew and now you go by Andy. And Google, for some reason, can’t make the change. It took me a while to figure it out.
Once I did, I found old articles about your decision to just move on, and it was always . . . the writer said well, he just knew that it was time. He was one of the smart ones who understood that it’s time to move on, that the market was too heated and moved on. Can you put a little bit more meat on that? Can you describe the decision-making process a little bit more? Was it tougher than it seems from the outside?
Andy: I don’t know. It was impossible, and we ended up getting some signals that helped. I love Wall Street adages. So, the old adage on Wall Street is that no one rings a bell at the top of the market or at the bottom of the market. At the top of the market, everyone’s euphoric and, of course, at the bottom of the market, everyone thinks the world is going straight to hell and there’ll never be any investment returns ever again.
So, we were fortunate to raise money, closer to the bottom where people didn’t like tech and they didn’t like telecom and all that kind of stuff. But at the top, like everyone else, we felt like we were geniuses. Gosh, we turned 80 into a billion, and this company that we bought at 3 is now 200. And we had all these other investments that we were sure that were going to work.
I had this nagging feeling in the back of my mind that this dot-com boom was going to be over, but the stock would keep going up. Amazon kept running and Yahoo kept running. But, as I told you, it was very difficult. We ended up raising just $10 million, half from one Swiss guy. Well, in 1999, towards the end of 1999, we got discovered because our fund was up 380 percent in 1999.
So, as we were doubling and then growing this thing again, investment funds started finding us. So, in a two-week period, we had two groups from the Middle East try to force $500 million each into our fund. It was the strangest thing I’ve ever gone through in my life. We’re now a billion dollar fund. We scraped and clawed, and now all of a sudden in two weeks time we’re going to double the size of the fund because a group from Bahrain and another one from Saudi Arabia was convinced that we were the geniuses and were throwing money at us.
I turned to my partner after the second one, and I said, “Listen, Not only should we not take these guys’ money.” We didn’t even know where to put the money we had to work. We would have to start chasing the Uniphases and Yahoos and Amazon. I said, “Not only should we not take their money,” which we didn’t. We turned it down politely. “But we ought to get the hell out of this business. In other words, whatever investment money we have, we have to start giving back.”
We didn’t close it that day and give everyone their money back. But over the next 9 to 12 months, every month and every quarter, I would call up investors and I’d go, “Look, you’ve got to take half your money back because we don’t want it. In six more months you can have the other half of your money back.” We had a graceful exit from our fund.
It kept going up, and then it started going down, but we had to sell this because every month I needed to come up with 50 or 100 million dollars to wire back to our investors, who, by the way, didn’t want it. They said, “Keep it. We want the returns.” And so, that was the little bell that went off is when two Middle Eastern firms tried to throw money at us.
My view was, look, if we didn’t take it, someone else would. In fact, I knew the five funds that they would end up investing in because they were the knuckleheads from Wall Street that spun out and were raising big $500 million funds. I’ll bet you those guys from Bahrain and Saudi Arabia lost almost all of that money, and we would have lost it for them, too.
We ended up doing okay on the way down, but only because we had this sell discipline. I can’t sit here today and go, “Gosh, I picked the top.” That’s bogus. That’s BS. I can’t say that, but we were very lucky that we got this signal on the fundraising side that we were so bad at, and all of a sudden we were attracting a billion more dollars. That was what got us out of the business. Quite frankly, it’s why I kept my reputation because we didn’t lose 90 percent of people’s money. We ended up returning 5 to 10x of returns for all of our investors.
Andrew: This is where I become like Barbara Walters, and I have to because I’m so curious about what your makeup is that would allow you to do that because the average entrepreneur, the average investor gets into those two businesses because they have some kind of superman complex or vision of themselves, that they are capable of doing much more than just being at a job where they get to spend the millions in regulated, last minute “use it or lose it” budget funds.
And so, they go out there and they do this. And when the world starts to validate them, the way that you were validated with numbers that showed that you were growing, with money being heaped on you, with praise being heaped on you by people who have the authority to do it, they would say, “All right. This is what I always thought of myself. I’m going to now double down or live up to this big vision that I had.”
Why didn’t you do it? And I’d like to understand why you didn’t do it because it’s going to happen to me. CNBC will put me on three times a day, and I’ll say, why not five? But, I’d have to learn to be smart like you and say, you know what? Let’s hold back and just do one. Can you say why?
Andy: Well, when you work on Wall Street, you learn to check your ego at the door. It’s good to have an ego and confidence, I guess. But I was battered and bruised when I was on Wall Street because I was involved in the semiconductor business. It would be 18 months up and 18 months down. You go from being brilliant to being an idiot, even though you’re the same person.
So, I took some of that into the investment world. When you’re managing other people’s money, as I said at the start, you’re just sitting there. It’s a giant puzzle, and you think through these things. Even though that temptation, that whisper in your ear, you’re a genius, you’re an investing God, and it’s bogus.
And so, when we smelled that there was too much money coming in, all you need is that faint little bell to go off and the smart investor says, “Okay, I get it.” A guy named George Miller, who ran money for Fireman’s Fund, who came up with the expression, don’t mistake brains for a bull market. There’s your answer.
Andrew: How about one story of a setback? Otherwise people are going to say, this isn’t a real person. This is just a series of success stories. Is there one setback that you can talk about?
Andy: Oh, I’ve got dozens of them.
Andrew: And how you recovered from it? I’d like to learn how you do that.
Andy: Well . . .
Andrew: You pick the story. I’ve got one written down here, but I think it’s better if it comes from you.
Andy: Which one do you have?
Andrew: The one that you mentioned earlier, that I said, well, maybe, we can come back to, and you said, I lost $150 million in the morning. I’d like to know how you recovered from that mentally.
Andy: That one was more temporary. That was when those were the days where Alan Greenspan came out and said, “The market is seeing [50:42] and the market’s sold off 500 points.” And our fund went down. It happened another time when Long-Term Capital, which was a hedge fund in Connecticut, blew up and was going to take Wall Street down with it. So, anything that had risk or growth or anything attached to it just sold off.
But what happens with NASDAQ stocks, there’s no market maker. So if there’s no asks, someone just lowers the bid until someone steps up. And so, it was all on paper. You have a stock that’s 20 bucks, and you wake up and it’s 13. And you go, “Oh my God.” But there’s no stock trading really. And then, after everything settles off, it goes back to 18. So, yeah, you’re down 10 percent but you’re not down 50 percent.
Andrew: Can you give an example of a more meaningful one, a meaningful setback?
Andy: Yeah. The first private company I invested in was a complete disaster. We ended up starting with, maybe, a 500 or 700 thousand dollar investment, and the CEO implied everything was going well and it was. And then, one day he calls and he goes, “Well, listen, I’m about to miss the payroll tomorrow. I need another hundred thousand dollars.” I said, “What?” And you scramble, and we ended up putting more money in so they wouldn’t miss payroll and pay their taxes and etc. But, in the end, we put maybe a million two into the company and it all disappeared. We got nothing out of it.
Those things happen all the time. There were companies that we would invest in. There was one mapping company that we invested a little too late in the cycle. I even forget the name, but I can go look it up. We said, “Bandwidth is important. Bandwidth is getting cheaper. We’re all going to have not just GPS devices, but we use our PCs to do all this mapping.” And we found this new company that has this property and the stock was 40 and it was going to 100. Instead, it probably went to 5. We sold it with our tail between our legs.
The trick in a portfolio is waiting. However much conviction you have, not that you can see absolutely that it’s going to work. But if you have conviction that it’s going to work, then you make those companies 10 percent of your portfolio. [53:09] The little ones, like the mapping company and some of these other ones, you make maybe a half of a percent or one percent of your portfolio.
So, if they start working, maybe you buy more or if you want to work and you have conviction, you buy more. So, all you really need are the ones that you have conviction in turn into these 5 to 10x return companies. And if half of the other ones that are only a half percent or 1 percent of the portfolio, if they go to zero, you’re still OK. Your winners make up for your losers in your portfolio.
Andrew: Sorry to stay on the Barbara Walters track here, but I’ve got to say early on in the interview I asked you why you moved on. And you said, the sleepless nights. You were talking about the frustration, the way that it eats, the way that . . . I don’t want to put words in your mouth. I don’t remember the exact words, but I know that it wasn’t easy and it was painful.
Can you flesh that out a little bit? Can you describe one of the frustrating moments, one of the times where you said, “What am I doing here with my life?”
Andy: Well, certainly, when you wake up on a Thursday morning and you’ve lost 150 million of someone else’s money because of indigestion by a Federal Reserve chairman or something. Those are the things that are out of your control. But what really drove me crazy was on days or months that we would be down. And we just weren’t up one percent one month and down one percent the other month. We were up 20 percent a month and down 12 percent the next. I’m telling you it was a roller coaster.
We knew all of our investors, and we knew them well. But, there were some that when things were down, they would call us up and say, “You’ve got to get me out. I’ve got to get out of your fund. It’s all going to zero.” And you go, “I don’t want to have to deal with someone like this that doesn’t have the conviction that we have, that all this setback is temporary and we were going to end up doing well.” But, we had these folks call and you start to question, “Why am I busting my hump to manage someone’s money?”
Now, the reality of it is that you get 20 percent of the upside, so no crying crocodile tears for me. But, once it worked and once the portfolio got to a spot where it was a great return for our investors and lucrative for my partner and I, when things started rolling over and we had the sell discipline, I was in the view, “Let’s just shut it down. We can raise another fund some other day.”
Now, my partner did. He went and raised another investment fund, and he’s done very well investing in solar and alternative energy companies in addition to technology, and I took yet another left turn or right turn or whatever you want to say. I had been writing for “Forbes Magazine” under Andrew Kessler, but I never let anyone ever call me Andrew. I always liked Andy. So, I started writing for the “Wall Street Journal,” and I said now it’s time to officially change my name as a title of a thesis.
And then, I started writing op-eds, opinion pieces for the “Wall Street Journal.” I’ve written them for the “New York Times” and the “LA Times” and a whole bunch of places. And I always wanted to write a book, and that was a whole another challenge in my life was, not only how do you write a book but how do you get a book published?
Those are even longer stories of dealing with the New York publishing business. I self-published my first book and all those crazy things. Nevertheless, I got four books out, a non-fiction. I got this fiction, “Grumby”, which is just out. I’ve got another one from Penguin, portfolio for entrepreneurs. I think it’s going to be called “E People.” That comes out in February.
I keep pretty busy writing books, but all the books at the end of the day are involved in the investing world and how do you find the next set of trends that are going to benefit society and benefit investors?
Andrew: Is “Grumby” your first novel?
Andy: Yeah.
Andrew: What was it like to write a novel compared to a non-fiction book?
Andy: It’s easier in that you don’t have to run around and remember old names or go visit people and do recording. You make it all up, right? But it’s harder in that you’re trying to tell something compelling narrative, keeping it all together and all of the parts that are rolling around. This one took me a while. I didn’t think I would actually do it.
Ten years ago I wrote a story for Slate under an anonymous byline. It was basically the story, it was called “Furboy” and it was, again, some guy takes a Game Boy and shoves it up the butt of a Furby and creates this next great thing. I said maybe I could turn that into a book. And after Wall Street blew up in the ’07, ’08, and ’09 time frame, I didn’t want to write a book about what happened to Wall Street.
Even though I’ve written books about Wall Street. I wrote for the “Wall Street Journal,” op-ed pieces, I didn’t want to write too big to fail or Lehman Brothers blows up. So I said, “Let’s look over the horizon. Let’s just post Wall Street, what’s going to happen next. Let’s tell the story through an entrepreneur.” This entrepreneur takes venture investment. There’s hedge funds in it. There’s investing. They go public. They deal with Goldman Sachs. There’s a whole bunch of things that I wind in from my experiences into this book.
As I said, it’s fun, and it’s funny. The reception has been great, and I hope people read it, not only for the story but, again, for the roadmap of technology because I think this is where this is all headed. And there’s a little bit of vision in there, in the book.
Andrew: The frames behind you, what’s in them? Is this where you write, by the way?
Andy: Yeah. This is my office, but I also take the laptop and go to the Palo Alto Public Library, the Menlo Park Public Library. I go to Starbucks. Sometimes when you write, it’s wherever the moment where the writing hits you. There are days when you can sit here and bang your head on the desk and nothing’s going to come. And there are others, where you have a week where it just flows and flows and flows.
Behind me are all the prospectuses of companies that I invested in, when they were private companies, that went public. Right when they go public, they do an IPO. They have a prospectus that they hand out to investors. So, I always figured that that was sort of declaring victory on a venture investment or on private investment. So, Real Networks is in there somewhere and so is Exodus and Infamy and just a whole bunch of companies.
Andrew: You’re an investor in Tesla, too?
Andy: No, I never invested in Tesla.
Andrew: OK. All right.
Andy: I took a Mazda Miata and ripped it apart and put an electric motor and batteries in it. So, I actually have a cheaper electric car than a Tesla. I built mine.
Andrew: How did that turn out? Did you drive it?
Andy: It still works. My boys drive it to high school, and it’s actually quite fun. I’ve replaced the battery once. I did it because I had finished the book and I couldn’t write again for, I’m sure, six or nine months or my brain would explode. So, I looked for a project that would take six months. I had no idea. I’m not auto mechanical, so I learned quite a lot. It was real easy because you rip stuff out of the car rather than put it in. Putting it in is like Electro Set, motor here, batteries here. It was kind of fun.
Andrew: And when they come back from school, they plug it in, directly to the wall?
Andy: Yeah.
Andrew: Wow.
Andy: Plug it in. It takes about six to seven, six hours to charge, and it only goes . . . Teslas go a lot farther. Mine goes 30 miles, but it’ll go 70 miles an hour which is a little scary in a little Miata convertible but it will do it. It was fun. It was a fun project to do. When you’re a writer, you need those distractions once you’re finished writing, or else you start thinking about, what am I going to write about next? Like I said, there’s only so many brain cycles for those things.
Andrew: Well, the book is called “Grumby”. If you’re out there listening to this, Google “Grumby” and see some of the reviews that have been written by people whose blog you’re probably reading. And then go check it out on Amazon.com. You’re not self-publishing.
Andy: I’ve got a publisher, but we brought it out for the Kindle first. The day we finished editing it, we hit “send” and it was available on the Kindle. And then, it took three or four weeks to get hard covers. So, we got the first set of buzz, if you will, from Kindle readers, and now we have actual hard covers. I like reading hard cover books. I can read it off a Kindle and an iPad, too, but I like something sturdy in my hands. So, it’s done well. I can’t complain.
Andrew: All right. There it is. Pick up the book in the sturdy hard cover version or in the digital version, and let me know what you think. Andy, it’s great to meet you. Thanks for doing the interview. Thank you all for watching. Bye.
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