Understanding Startup Failure & TIGER 21 (w/ Dr. Howard Morgan) | The Interview | Real Vision™

Understanding Startup Failure & TIGER 21 (w/ Dr. Howard Morgan) | The Interview | Real Vision™


Have you had any companies come to you that
you funded that didn’t work out but which you still think, wow, that could have been
something extraordinary? Because there must be some that don’t fail
because they’re a good idea. They don’t fail– they just happen to not
be at the right time. Well, you know, Bill Gross at Idealab did
a study of 200 companies and what was the key element in failure? Was it product? Was it market? What– and it turned out that the biggest
failure element was timing. In 2000, at Idealab, we had all of the same
companies that became unicorns 10 years later. But we had 20 million people on dial up internet
at 50 kilobytes. And so we started a company called Z-com,
which was basically YouTube entertainment, but you couldn’t really run video over that
dial up internet. And so timing was a critical factor. You know, Andrew Weinrich started Six Degrees,
which was Facebook, if you will, too early. So timing is, in fact, the most important
factor in these things. But we’ve had a lot of companies that have
failed that we’ve thought, gee, this was a great idea. Otherwise, we wouldn’t have invested in it. But I like to quote Stephen Sondheim, who
in one of his songs says, having just the vision’s no solution. Everything depends on execution. And it’s really true that three people with
the same idea, the one who will win is the one who executes well. And that means really sticking to it, being
really quick about that execution, and doing iterative– being iterative very quickly. We’re big believers in– Idealab calls it
sense and respond. That is, build your product. It’s not perfect. But measure everything and then make the changes
very quickly. At Google, everything that you see in Google
is the result of trying a whole bunch of experiments. And they’ll take 1% of the Google users for
a day. And they’ll say, we’re going to change this
box from green to blue. Does that make for more or less? And they say, oh, more. OK. We’ll make it green. We’ll change this box– we’ll move this box
three inches to the right. Does that do better or worse? Everything is tested. Everything is measured. And that’s the mark of a great entrepreneur. They execute, but they measure so that they
can iterate. So I’m going to ask you this question the
other way around in terms of how you counsel the entrepreneurs whose businesses fail, oftentimes,
just down to timing, not through fault of their own necessarily. How did you guys get yourselves to the point
where you understand that the majority, in many cases, of VC investments are going to
fail? It’s the one that– it’s 20% that you talk
about that– how do you get yourself to that position? Because, as an investor, that’s not the mindset
you come into this business with. You have to change the way you look at things,
and be OK with this higher failure rates. Right. Well, I’d say, first of all, we’re fortunate
it’s not it’s not 80% failure rate. Our failure rate’s more in the 30% range. But we can usually tell within nine months. So we start out with an idea, and we start
out with the entrepreneur. And we say, how are we going to measure if
this is working? And within nine months, sometimes 12, we know
whether this is going to be a rocket ship or it’s not. And, at that point, if it’s not, then the
question is, is it going to be a 1X return? Can we get our money back? Sell this and move on. Or is this going to be a limp along for a
long time because the entrepreneur is just too wedded to the idea? And we try to counsel the ones that are counsel-able. One of the attributes we look for in an entrepreneur
is coachability. Do they listen? Do they listen? And some do, and some don’t. And, you know, yes, you need persistence to
be successful. But it’s not the only quality. So we’re here at the TIGER 21. And I’m interested to learn how you got involved
in this fantastic program. What was your first contact with TIGER 21? Interesting enough, my first contact came
through somebody at the office who was using LinkedIn to look for people. And they reached out to me. And then I found out that I had some friends
who had been in TIGER 21, although I’d never known about it. And I looked into what they were doing. And for me, I was just getting to the point
where I was setting up family office, and I was worried about the issues of how do I
get my grandchildren and my children involved in all– in this and dealing with the wealth. Although they’d actually done quite well. My middle daughter is now the Treasurer at
Goldman Sachs. She’s got some family wealth. My oldest daughter has some family wealth
of her own through her husband and his hedge fund, and her work at McKinsey. But I was worried about those issues. And wanted to find a place to talk about it. And I also knew that my fortune was in technology. And I had to diversify. And wanted to find some hints on how to do
that. So I went to a meeting. And I said, hm, this is kind of interesting. And I really liked it. And then I went to join the group in New York. And the people there were just diverse, interesting,
and they all had a story. And the fact that we had this intimate setting,
completely confidential, where we could, you know, bare our financial souls, and some other
parts of our souls, as well, really, really resonated with me. Well, I mean, talk a bit about– because I
mean people– I’ve spoken to Michael Sonnenfeldt, obviously, the founder of TIGER 21. But talk a little bit about what a typical
meeting, what it’s like. Because people will be hearing this and not
understanding how it works. We started meetings with a little bit of what’s
happened to us. You know, have we made some new investments? What’s happened to our families? And we started this year with what our goals
for the year were, for example. And then we look at world affairs and world
events, what in the macro world could affect us? And then we’ll typically have one or two presentations. It could be an investment presentation by
some investment group. I’ve never done much real estate. A lot of TIGER members have done real estate. I had never done much and three years ago,
now I’ve started to do that. I’ve learned about the tax benefits of it,
and some of the long-term wealth creation benefits of it. So I’ve really explore– expanded my role
there. And then we’ll have what’s called the portfolio
defense, where once a year you lay out your entire portfolio with the numbers, and the
other members take pot shots. And they say, you know, gee, you don’t have
enough insurance. You’re too much of a cowboy. They have a scale from sort of cowboy to conservative,
and I’m very close to the edge of the cowboy scale there. I guess because of all my venture investing
and my quant investing. Yeah, sure. But everyone’s respectful. But they’re saying, gee, you know, you don’t
have enough of this. You’ve got to look at insurance. You know, do you have insurance to cover estate
taxes? And they’ll talk about how your portfolio
has changed. The criticism this year to me was, you have
too many investments. Because it’s, you know, the portfolio goes
on for three pages. And they say, that’s just too many for you
to manage. How are you going to do that? And I have to start thinking about that. So that the meetings give you a really good
lesson and schooling in your own behavior, which you often don’t hear from anyone else. Well, you know, I’ve met lots of TIGER 21
members, and I’ve spoken to various chapters around the country, and, I mean, they’re a
remarkable group of people. And I’ve been really amazed by the openness
with which they talk to each other, and you guys, you know everything about everybody–
I mean, everyone’s lives. It’s not just about investment. No. This is about family, and lifestyle–
And in our group, we told one member that they had been waiting too long to get the
divorce final. They really had to get it done. And they did. And they thanked us. A few months later, they really thanked us
for that. So, yeah, we do talk about the families. We talk about, how do you deal with your sons-in-law? I have three sons-in-law. And with one of our other members, he’s got
a son who is kind of a cowboy-ish kind of guy. But it’s all done in a way that everyone knows
it’s confidential. And you don’t share it outside of the confines
of that TIGER meeting. So for this year, for you, as a VC who’s there
to incubate, to help people, and to give them advice, into TIGER 21 where you’re like-minded
people who do the same thing for each other, and for people that don’t have the wealth
to be a member of TIGER 21, for example, who haven’t had the success yet, who haven’t been
able to get themselves VC funding, how should they go about thinking about building that
network in their own lives? Because it’s important to have people around
you that you can be open and honest with, and can critique you, but do so in a way that’s
constructive. It’s a difficult thing to build. It is. There are organize– other organizations for
people at different levels in their lives and so on that try to do this. We– if you’re a private company owner or
a builder, we tell– and I tell my friends this, to build their own board of directors,
as it were. Maybe it’s their lawyer. Maybe a lawyer and an accountant and some–
somebody who might be a trustee of an estate for their kids. But you should build a group of people. It’s just hard to find, the way that TIGER
does for you, a group of people who you don’t have to see everyday socially. So you don’t have to feel any– oh, I just
told them such and such. Yeah, yeah. And so you really need that separation, which
TIGER gives you. Although you do still then become friends
with people. But it’s not quite the same as it would be
if you were just taking your best friend and baring your soul. So I am going to have to ask you this, and
I’d take this inside the meeting. If it’s confidential, you can tell me. But when you– at the last meeting, you talked
about the macro views, and the things that might affect you guys as members. What’s the thing that’s uppermost in people’s
minds at the moment? Well we have a lot of political stuff, obviously. We have– my group has, I’d say, 75% Democrats
and 25% Republicans, a few of whom are staunch Trump supporters. And that leads to some interesting discussions
at times. I think we’re all concerned about the possibility
of a recession in the next year and a half, two years because of the situation both in
America and elsewhere with– if you look back cyclically at the ’30s, you see what happened
after the Great Depression point. And if you believe in these sort of Kondratiev
cycles and so on, we’re in that isolationist piece of the cycle. And it’s not a great piece for the world. And it’s not a great piece for investment. So you have to become more defensive in your
investing policy. And we talked about that.

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