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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this super fast-talking, really glib, good-looking guy. He couldn’t talk without including five buzzwords in a sentence. He was Mr. Technology. I can’t even tell you what the business was, some platform network, blah blah blah… it was called Agillion. I was really smitten because he seemed so smart and had this big track record in the bubble that looked really good. He called us from a G-4 flying across the country where he described the business plan. We put $400,000 in this thing, and 10 minutes later it was gone. My partners have always called it “a gillion ways to lose money.” We couldn’t even describe what the hell the money went for. That was 1999-2000.

X: So how do you manage the risk of investing in projects that could, if they work, change the world—when in fact they probably won’t?

NH: We want to help people at the earliest stages do the newest and most interesting things. We want to take as much risk as there is to take, and we also want to get rewarded as much as possible for taking that risk. Lots of people don’t like to take risk. We had a VC come out to look at Qliance. He called me later and said, “Fabulous meeting. Let me tell you about the things we’d like to see progress on before we feel like we could make big investment.” He proceeded to list every single business risk—literally every possible risk, every sales risk, every operational risk, every legislative risk, everything—as a threshold for where they’d be super interested in investing. That’s not venture investing—I’m not sure what that is. I think that’s banking. Unless you’re prepared to take risk, you’re a banker.

X: But were VCs ever all that different from that, in truth? What are your broader thoughts on the venture model?

NH: I suspect that in the very early days, they were mostly cowboys like us who met people working on interesting problems and said, “Yeah, to heck with it, we’re in.”

A very successful venture capitalist was in the office the other day. He said, “Venture used to be a cottage industry, and it’s turned into a sector. It should never have been a sector.” Venture doesn’t work unless it’s a cottage industry. Once you professionalize it, you’ve taken the life out of it. The business model is toxic to risk-taking, because it’s so unbelievably profitable for the partners just if it doesn’t fail. They get these 2 percent fees on these giant funds; you raise $1 billion or $2 billion, pay yourself 2 percent on that a year, split between six guys? All you want to do at that point is not screw up. It’s crazy how much money these guys make to produce nothing, for zero return. Now you can argue, if you don’t produce returns, you’re going to lose your fund—yeah, in 20 years when you’re retired. These things hang on forever. It’s a gravy train for partners, I think it’s unconscionable. They are so massively overcompensated for the value they create. To me, it should be [two tenths of a percent]—you should earn a fee enough to keep the lights on.

[Stay tuned for Part 2 of the Q&A tomorrow, where Hanauer talks about Seattle's innovation culture, how to change people's minds, and how to think about solving the big problems in business and society---Eds.]

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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