Cowboys Like Us: Investor Nick Hanauer on How to Think About Breakthroughs in Business and Society (Part 1)

3/29/10Follow @gthuang

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we’re doing worse. Every health measure, virtually every happiness measure, violence, incarceration, education—pick it—we’re behind. All of this has to do with this radical income inequality we’ve allowed to seep into our society, this giant distance between the rich and the poor. I think at this stage, anything we can do to enfranchise people, to make them part of us, makes us a better country. Will it be more expensive than they say? Yeah, but we spent $1 trillion in Iraq. Let’s spend $1 trillion making our fellow citizens healthy. You could spend the money in worse ways. Because I’m an optimist, I think there is hope to fix the system. I think our message about how to fix the thing—if you push the insurance companies out from in between doctors and patients for all the stuff where they don’t belong, everything gets better—people are beginning to grok that. Now they’ve really got to solve the cost problem.

X: So how does this affect Qliance?

NH: It doesn’t, at least not in the near term. But long term, it’s very good news for Qliance, because we worked super hard to get language in the legislation which permits people in the insurance exchanges to buy primary care without going through insurance. So we were very successful in our lobbying efforts to get our model baked into the legislation. But at the end of the day, it’s years out; there’s no effect in the near term. Although redoubling of focus on how to get costs under control will probably benefit us asymmetrically.

There’s a bunch of venture activity in the healthcare space. There are all these venture firms focused on healthcare because people see it as a huge opportunity. We’ve been in discussion with a large VC whose sole focus is healthcare and is trying to go find ways to bring healthcare costs down, because it’s such a disaster, particularly in places like California.

X: Can you talk a bit about Modumetal and why you invested in this far-out nanomaterials company?

NH: Modumetal is one of these amazingly big swings where if they can crack the engineering challenges, they really can transform the world. That idea that you can grow completely new kinds of metal things in solution using metal salts, some liquid, and a tiny bit of electricity, is a huge, huge idea. Getting them to scale it up industrially is a great challenge that we’ve not yet cracked. But we’ve certainly made some really interesting stuff, and have gotten a lot of interest from a lot of people. It’s a great example of a thing which has almost infinite promise but is incredibly hard to get funding for. If something is truly new, venture firms don’t have a partner who can evaluate it at a level of granularity that gives them comfort. You have this weird Catch-22 where they say they’re all about the new, but actually if it’s really new, they don’t want to look at it because it sounds crazy, or they can’t carefully evaluate it. In the interest of serving the fiduciary responsibility to their investors, they screen out the stuff they can’t understand.

X: How is Second Avenue Partners different from a venture capital firm? (Hanauer and his partners invest their own money.)

NH: We can do whatever we want—because we don’t have to prove to somebody that we made the right decision. You can’t make an investment in something like Modumetal when we did and defend that to a fund manager, other than “we thought it was cool.” That’s all you can say. Imagine if this all works out, it’ll be huge. There’s no business model proof. There’s no technical proof. It’s just a flyer. It’s a bet based on instinct and perspective on what can be big. And it’s indefensible in the context of that [VC] environment. They [fund investors] would say, what do you know about metallurgy? Answer: nothing. What experience do you have? None. We liked them and we thought it was a good bet. That’s a whole different thing from talking to somebody from the Washington State Pension Fund where they’re [pounding the table] saying, are you doing your due diligence?

It’s a very difficult problem for that business. I mean, people do surmount it, like Vinod Khosla and John Doerr [from Kleiner Perkins Caufield & Byers], who have such a track record, and where “if John thinks it’s good, I’m in.” You can get to that point, I suppose. But most VCs don’t have that track record, and certainly John didn’t start there.

X: What are your most notable failures as an investor?

NH: I put $150,000 into Pets.com. It was one of these “Wahoo, we’re going public, we’re all going to make a lot of money” bets. I think that’s a $150,000 sock puppet [points to a puppet in the corner]. We made some early bets on technology— Terabeam was a technology that looked promising. That was a bet we made that didn’t turn out. We had some early Web tools companies, a couple of tries at building technology that would enable people to build websites more easily. They just didn’t execute terribly well.

My partners give me [grief] about one thing we did. I had a friend from Texas, he’s … Next Page »

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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