Nick Hanauer, a “High-Functioning Contrarian,” on How to Think About Breakthroughs in Business and Society (Part 2)

3/30/10Follow @gthuang

Yesterday, we ran the first part of a sit-down interview with Nick Hanauer, a noted entrepreneur, investor, and co-founder of Seattle-based Second Avenue Partners. Hanauer, who has been involved in the early stages of such prominent companies as Amazon, aQuantive, and Insitu, spoke about the importance of new metaphors in recognizing and understanding breakthrough ideas; why venture capitalists don’t take enough risks; and the challenges of healthcare reform.

In what follows, Hanauer talks quite a bit more about Amazon, Insitu, and how to think about solving the biggest problems in business and society (hint: don’t conform). He also touches on why he’s generally bored with the online advertising sector (except for Seattle-based Marchex), and the one key area in which he would seek omniscient advice.

Here is part two of our interview:

Xconomy: What are the prospects for another big tech company like Amazon to come out of the Seattle area?

Nick Hanauer: I think the prospects are very good. It’s a very dynamic, creative, and risk-tolerant business culture here. There’s a fabulous ecosystem of people who understand technology in all sorts of ways. There’s software, Internet, biotech, aerospace. Insitu, as an example, is a big company now. And in 10 years, that could be a huge company. I think they employ 600-700 people now. We [Second Avenue Partners] don’t own it anymore, Boeing owns it, sadly. We have as good a shot at creating more big technology companies as almost any place on planet Earth. Probably not as good as Silicon Valley, but better than most places.

X: Tell me more about Second Avenue’s involvement with Bingen, WA-based Insitu, and when you first invested in it. (This company makes unmanned aircraft systems for surveillance and intelligence applications.)

NH: It wasn’t the first round of financing, but they were a teeny tiny company, employed half a dozen people. We looked at it in June or July 2001, and they were like, “Fishing, we’re going to find tuna with cool planes.” We thought it was really interesting technology. [CEO] Steve Sliwa was so good. We got that if they could pull off this technology in this domain, there are an infinite number of applications. And then [September 11, 2001] hit. And we said, oh. The military’s going to buy a lot of these. OK, we’re in. We led that round, and kept on backing them. I’m sad that we sold it, because it was such a civic achievement; it made such a difference in the lives of so many people. It’s maybe the single biggest thing to happen to that region of Washington and Oregon economically in decades. We were very lucky [with the Boeing sale], there was this incredible global bidding war going.

X: How should one learn to think about solving big problems in business and society?

NH: I think the capacity to think creatively isn’t gated by your intellectual abilities so much as your psychological ability to not conform to what other people want you to believe about how the world works. Humans are social creatures, and getting along, conforming, is an unbelievably important part of the essence of what it is to be human. We conform in ways in which we don’t perceive. When you see the world the way someone else does, you conform. If you’re missing the conformity gene, you get to see it different ways. You get to rearrange it in ways that other people aren’t willing to, or wouldn’t consider rearranging.

I don’t think it’s IQ. Being smart helps, but you don’t have to be a genius to see the world differently. You have to have the capacity to disagree, to take the road less traveled. I guarantee you I am not smarter than lots of the people you know. But I don’t need to do it the way that other people do it.

So I think that capacity is an incredibly important element of being successful in any endeavor, but particularly if you want to be an entrepreneur. Right now, this capacity would make me unemployable by a large company like AT&T. They would kick me out so fast, I’d be in and boom, out in the parking lot before I’d had a cup of coffee in the morning the first day. Because there isn’t anything I’ve ever seen that I didn’t want to take apart and [mess] with. I would be unemployable by a large bureaucratic organization. My friend Jeff Bezos calls me a high-functioning contrarian; the problem is that being a low-functioning contrarian means you’re in prison. I think that capacity to rearrange things and see if they make sense is very, very helpful.

X: Since you bring up Jeff Bezos, what is the key thing that has made Amazon what it is today?

NH: Jeff is just an incredible independent thinker. He would tell you he makes lots of crappy decisions, but they’re not bounded by what other people think, that’s for damn sure. He’s an extraordinarily gifted problem solver.

A huge part of [Amazon’s success] is force of personality. And there are good sides to that and bad sides to that. Jeff has certainly been mostly right, but he has made some mistakes. The thing about Jeff is he understands technology, but he’s not a technologist; he’s not wed to technologies. Jeff Bezos wouldn’t give a rip if the whole Web blew up tomorrow. He’d just find another way. Like, “sold books in paper form for a while, now we’re going to sell them by the bits.” And by the way, it’s kind of obvious it’s going to go that way, so we better get ahead of it. He’s not romantic about anything.

X: Bezos was in New York, so why did he set up Amazon in Seattle in the first place? Some people may not know.

NH: The three reasons were this. It’s a small state [Washington]. California was out because 25 percent of his customers were going to be from California, and they were all going to have to pay sales tax. He wanted that tax advantage. Washington—no people, no problem. The second reason was it had to be a place where you could hire development talent; Microsoft was here, and he figured he could get some good people. The third reason was it had to be physically near to a major book distributor; there was Ingram, a huge warehouse in Roseburg, Oregon, which was close enough. And that was it.

X: We haven’t even talked about aQuantive yet. What are your thoughts on the future of online advertising?

NH: I’m bored with that, other than my big bet with Marchex. I’m actively avoiding investments in that space. I feel like I did it. Been there, done that, it’s just not intrinsically interesting enough anymore for me. And P.S., it’s done. Maybe I’ll be proved wrong, but plus or minus, the online advertising ecosystem is baked. Yes, you can incrementally improve something here, or maybe somebody will do something slightly more interesting over there, but it’s done, it’s just over. Google, Bing, whatever, who gives a [bleep]? So I get all these plans about “we’ve got this new ad optimization blah blah blah.” You know, open a chicken farm, right? That’s being unfair. What they’re doing isn’t bad, it’s just not intrinsically interesting to me. I just feel like there are so many domains where there’s more innovation space, more convention to turn upside down.

X: Given all your experience, what one question would you ask the God of Business?

NH: What’s the best way to get people to change their minds? That’s what I’d want to know, if I could know anything.

X: What kind of answer would you be looking for?

NH: Well, I reckon I’m a very persuasive person, so I have a better fix on this answer than most people you will meet. So I’m being glib. Clearly it’s not that easy. The answer comes down to changing people’s metaphors. If I can get you to start thinking about the market as a garden, then it’s super easy for me to get you to change your mind about regulation. Even the word “regulation” is already living in a world where the market is perfectly efficient. The word “regulation” relates to understanding the market as a machine. You regulate machines. It’s intrinsically a pejorative term. Regulation is intrinsically a failure. Whereas “tending” or “weeding”—these are not failures, these are obligations. Wittgenstein said, “The limits of my language are the limits of my world.” So I think the answer is something like that. Some omniscient advice on this, I would love.

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at Follow @gthuang