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- [00:13]
A
Hello and welcome to the Consumer VC Podcast, where we discuss the intersection of venture capital and consumer innovation. I'm your host, Mike Gelb, and if you're enjoying the show, you can subscribe to my newsletter where you'll receive every new episode a week early. Head to the consumerbc.com and click subscribe. All content episodes are for informational entertainment purposes only and is not investment advice. Hello and Happy Holidays. Just like we've done in years past, during this special time of year we're going to be sharing recaps of our most popular episodes from this past year, 2022, an annual roundup, so to speak. It's going to be during Hanukkah and Christmas, so every day from December 18th through December 26th. Today we'll be recapping my conversation with Chuck Newall, who is one of the founders of New Enterprise Associates, or also commonly known as nea. NEA is one of the largest and most renowned venture capital funds in the world. The companies he's financed has over 400 billion in revenues to pray. My word, it's unbelievable. He's also a Vietnam War vet and has earned many combat decorations including the Purple Heart and is a true American hero. Chuck released his latest book, Dare Disturb the A Memoir on Venture Capital, which I highly recommend picking up, and it's an incredible story about the history of investing on innovation and really gets to the core of what is the role of venture capital in the economy. Really love my time with Chuck. I hope you enjoy this recap episode. Chuck, thank you so much for joining me here today. How are you?
- [01:41]
B
Great, Mike. It's nice 100 degree day in Baltimore and you don't want to go outside, so I'm sitting in air conditioning.
- [01:50]
A
That sounds exactly like Baltimore or the east coast more broadly speaking in the summertime. As you know, I grew up in the D.C. area, so know that region pretty well and that sounds status quo for the region, obviously. Thank you. I know you've written also a lot on this too. Thank you so much for your service as well in Vietnam and also, I mean you've had this incredible career in venture capital and business, so we're going to be focusing our conversation more on that part of your life. So I want to start out by saying, like, what do you think is the purpose of venture capital and what are its origins?
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B
To create companies from scratch that change the way the world is. Do you want an example?
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A
Yeah, I would love an example.
- [02:31]
B
Well, my partner worked for GE Information Systems and this was a big computer service company which GE provided to business and consumers service. The fellows at Accel, which we were very close to, the firm that Jim Schwartz and Arthur Patterson founded, found a little company called UNET in Washington. And they thought Peter's background was ideal. So they asked NEA to join them in financing UUNet. And Peter really became the lead investor. And there was this guy by the name of Allen who was a techie who ran it. Good guy. But he didn't know really about how to build a business. The business really only had about a million and a half of revenue. He'd started bootstrapped it and it was losing money hand over fist. And so Peter brought in a management team he that he recruited out of GE Information Systems. John Sidgemore and two other guys who were highly experienced. And they created a company called Unethical which at one time had 70% of the traffic over the Internet. That company created the Internet both business and consumer. So Peter, before recruiting Sidgemore, knew the strategy of GE Information Systems. And he basically said what they did on mainframes we can do over the cloud and over the Internet. And that's in fact what the company did. But instead of focusing on the consumer market like many did, he focused on the business market, but also while serving the consumer market. And in the day the businesses would use it. In the night the consumers would have access to the pipes which also could give them instantaneous communication. But in any event, UUNET grew. My partner Dick Kramlich had started a communications box company in high speed data communications. And they became the most important customer of UNET and basically provided the proof of concept. So UU Net grew to about three or four billion dollars in a period of four years. You know, lost money for a good bit of time, like we were talking about where you basically in a land grab to grab ISPs. And they acquired a bunch of ISPs, Internet service providers from college, from universities. But that market soon became overpriced so they basically had to start in each region of the country. But then they get a dominant market share and that's how they became the industry leader. So Peter basically helped the company formulate its strategy. It recruited its management. He talked the CEO founder into becoming chairman in wonderful partnership with John Sidgemore, who built the company and provided basically you end up providing marital advice to the CEOs and chief executives of the companies. You find you become sort of a father confessor or someone to bounce ideas off of. And you know, you're not always right, but at least you give your opinion.
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A
You mentioned that, you know, the one thing that you're not is a CEO. And I'm kind of curious. You, you had been around venture capital from such a young age. Your father was a venture capitalist, worked in aerospace innovation. You, obviously, I remember in the book you mentioning that he had a very, you know, close friendship with Lawrence Rockefeller, who was also a venture capitalist as.
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B
Well, put it this way. Lawrence Rockefeller.
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A
Yep.
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B
Started Polaroid, Eastern Airlines, McDonnell Douglas, ITech, thermoelectron before Apple and Intel. So Lawrence had an immense impact on the venture capital business.
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A
No, for sure, for sure. I'm curious, since you were around this from such a young age and clearly you were attracted to innovation, right? It seems. But why did you want to go in the financier route, become a venture capitalist rather than become an entrepreneur?
- [06:48]
B
Well, that's a story that, again, is sort of funny. So I grew up around venture capital, all right? My father, one of his companies became Thiokol, which basically sent the man to the moon. He built the first rocket engine. So we had people like Chuck Yeager and Edward Teller to dinner. And I grew up around entrepreneurs and my study at college, University of Pennsylvania, if you can believe it, was the romantic hero in 18th and 19th century, late 18th and early 19th century American and British literature. And I fell very seriously and fascinated with people who wanted to change the way the world is, who had this, you know, vision that they put above everything else in their life, fought for it. And I guess I am an entrepreneur, and I certainly have helped to run nea, but I wouldn't call myself a CEO. So I decided I wanted to be a writer and a warrior because I was. Wore a uniform from the age of 8 until 23 and was with the 101st Airborne and the Special Forces. And I very much considered becoming a special Oz person. Those were the days when you couldn't get above colonel because everybody thought the next war would be with tanks in Europe. They were a bunch of fools. But anyway, so I decided not to make the Warrior a career. And I became somewhat disillusioned with writing because you had to be a college professor to support yourself. And all I saw with college professors was they argued about how many angels could stand in the head of a pin and get into big fights over what Chaucer was talking about. So I was sort of disillusioned with that. And I was sitting in a hamburger hill, which I did the reconnaissance for, and about 60% of my men had been killed or wounded. And we were withdrawing from the Hill and it came upon me because the equipment that was being used to provide us with fire support, the IN flight refueling system that enabled the Navy jet fighters to support land ground troops. It was a company my father had started which really changed the way the world was in terms of fighting wars because now you could get close in air support anywhere you went. And I said, you know, I'd like to be around those people I was reading about at the University of Pennsylvania. I call them the romantic heroes slash entrepreneurs. And I'd like to change the way the world is. And that was my vision that became my purpose in life where I was willing to sacrifice anything in pursuit of creating those companies.
- [09:50]
A
That's really powerful. That it was in Vietnam that actually inspired you because you saw all the technological advancements in the military inspired you to really think about innovation in that way.
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B
If you can believe it, I was shooting with my two hands and thinking about that at the same time.
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A
It's unbelievable. It really is unbelievable. So why did you decide to eventually start your own partnership? I know this is a few years later, but why did you eventually decide to start your own partnership? And how did NEA raise your first fund and how did the partnership come together?
- [10:29]
B
Well, that's an interesting story too. So I was in love with venture capital. And I was interviewing at Harvard Business School and I got turned down by Greylock. My father was a good friend of George Dorio. Who? The great venture capital guy who started American Research and Development. I was turned down there. Dorio said, you know, English majors really shouldn't be venture capitalists. You should have an engineering degree and be a three star general like me. And I love George Dorio and he was a role model, but I didn't necessarily follow his advice. So I went to an investment management firm called T. Rowe Price. And T. Rowe Price was a leader in gross stock investing. In other words, they wanted to invest in the company that the entrepreneur had built and was in the process of making into IBM buy and hold for the long term. And they said, I think it's a good thing for us to get into the venture business, so why don't you put together a plan to do so. So I did that while working for the New Horizons Fund and investing in venture backed companies when the world fall apart in the oil crisis. So I had about a 58% compound annual return on my investments. And T. Rowe Price at the end decided, well, well, we're having the market's gone to blazes because the oil crisis has occurred. The gross stocks are down. We have to use our money for retiring our senior employees. And besides that we don't want to give a profits interest, a carried interest to someone who's managing a division because all the guys that manage the growth stock fund, the New Horizons fund and everything else will be wanting a profits interest and that's the way the venture business is. But really we think it would upset our whole company. So basically Tom Berry and Cub Harvey, who Cub Harvey was CEO of the firm and Tom Berry was running the New Horizons Fund. A great guy who went on to run the Rockefeller office if you can believe it, the whole shebang said you ought to start your own venture firm. But you, you know, you're a young analyst, 32 years old, wet behind the ears and I think you ought to go out and get some partners. So I went out and talked my wife's first cousin Frank Bonsel who'd really created the investment banking business and venture backed companies for Alex Brown. And they were one of the four horsemen. And he knew everyone in the venture business had done a lot of venture investing while in an investment bank. And we went out and said Cub said well you got to get someone who really knows what he's doing. So we went to ARD and talked to Jim Morgan who was one of George Dorio's right hand men at ard. Jim decides to join us. Now you have to understand I've now spent every bit of money I've made. I. I'd made about three or four hundred thousand dollars and I'd put it all into starting the nea. And Jim Morgan decides to quit the day that we are mailing the prospectus. So we go out and we're beating on doors and the way you get to get people to invest is you get people who know you. And fortunately I had been backing a bunch of successful entrepreneurs. T. Rowe price put in $1 million which would retiring all their employees was 17% of the net worth of the firm. Landmark. Another friend I knew, Howard Wolf who ran the Dear family money put in four and a half and then we got entrepreneurs like Bob Krieble of Loctite. I knew the people at 3m very well and that were a T. Rowe Price client and, and then Dick and Frank each new people and somehow we talk people into giving us 16 and a half million dollars which was our first fund and that's how we started. And then we just went out and started making investments and building companies and the rest is history.
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A
You had this line in the Book that NEA and Kleiner Perkins could not be more different firms. What did you mean by that?
- [14:57]
B
Well, there was a story about J.P. morgan, the great J.P. morgan who created the investment bank and the Morgan bank and all these other things who created all the railroad. And he was with a young partner and he was going through the New York Yacht Club and the young he Morgan goes and this is my partner so and so yacht. And this is my partner so and so yacht. This is my partner so and so yacht. The young guy said well where are the customers Yachts. For NEA we had the most important people were our entrepreneurs and our limited partners and they came first. And the whole firm was designed around being entrepreneur friendly and giving the limited partners the best deal in the industry. So our fees were about a third of what the rest of the industries were. But we had a higher carried interest. Well, carried interest is not what deteriorates limited partner rate of returns. That is 70% determined by the fees. I don't want to go into the math of that. It's really very simple and then. But whether you return capital before you pay it all back. And so NEA basically build a business that would have entrepreneurs come back three and four times to start companies. And the partners of limited of NEA1 I think contributed about a billion and a half dollars to NEA 10 which was a $2 billion fund. They just stayed with us. We were fortunate enough to get some of the guys who pioneered the fund of funds business and as they grew we grew like Bon French of Adam street and Ray Held of Abbott Capital and a whole group of that, the Hancock people. And we developed an extremely loyal limited partner group, an extremely loyal group of entrepreneurs. Now Kleiner Perkins had a loyal group of entrepreneurs, I wouldn't say as loyal as ours but they basically charged high carried interest and high fees. I don't think. Well, I'm not going to say it but I leave it to your imagination. I don't think they treated their limited partners as well as we did. In the end I think we treated our entrepreneurs better. So I would call them more like I'd characterize Kleiner Perkins in the days as Pirates of the Caribbean.
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A
I, I really appreciate you sharing this. So it seems like for nea, you know, since you had a greater priority when it came to the actual carried interest, meaning you actually you needed to generate a return in order to make money as gps, right?
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B
Oh yeah. They you have to understand that venture capitalists aren't paid a salary. Now we get a salary that's called a loan and we gotta pay that back with interest. So at the end of the day, if our investors don't make money, we don't make money. Matter of fact, we could lose money. It took an NEA partner about 10 years. With me, it took like 12 years before I started taking money out of the business as opposed to putting the money in. Now I. Because you have to put up 1% of the capital for each partnership you start. And since you're doing early stage investing, it can take eight to 10 years to achieve liquidity. So you just do the math on that. And you know, that became a good thing in recruiting because the people who wanted to make a fast buck didn't want to come with nea. You had to have people who. Let me read you a quote from Jim Schwartz, who I admire, and a quote from Dick Kramlich, which captured to me the essence of the venture capital business. This is Jim Schwartz, who started Accel, who wrote the introduction to my book. You know, it's interesting to have a quote competitor. We didn't consider other venture capitalists competitors because they were our brothers in arms when we went on boards together. Venture capital has always been about helping a person or a project succeed. It is about adding judgment, perspective and selfless desire to, to see a company succeed. Venture capital is best practice is a calling, not as a job. It was never about maximizing wealth. Venture capital must be practiced with absolute integrity and ethics. That's Jim Schwartz. My partner Dick Kramlich said venture capitalism is about having the courage to put your trust in others and the conviction to do the right thing even when it's hard.
- [19:53]
A
No, for sure. Speaking of all this, I mean, how do you think when you meet with a young company and you get involved with the young company and maybe it's a first time CEO, what piece of advice do you have for the CEO when it comes to board construction?
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B
My first and foremost advice to a entrepreneur and someone getting married is the most important thing you pick in life are the partners which you choose. Either your wife or the people you choose to do your business with, including the venture capitalist. And by the way, I've seen venture capitalists mess more companies up than CEOs because they get into a greed war when a company goes through a multiple round of financings and end up doing crazy things. So I had a rule that I only deal with people that I knew and had worked with for a long, long time. So I had about five or six partners of choice and if I didn't get one of those partners to go along with me. It would be unlikely that I'd fund a company.
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A
What do you think are some of the biggest changes and shifts with venture capital since you got started?
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B
Well, of course, venture capital business. T. Rowe Price used to say the investors only in certainty. Certainty is change. The venture capital business changes every day with the technologies, with the type of people that are being financed. Because, you know, Amazon was started by a group of young guys in Google and Twitter, IBM. Sherman Fairchild recruited Tom Watson to build that company. And Tom Watson came from National Cash register. So, you know, you went from, at least in the technology space, particularly the consumer technology space, from proving, from backing prove it, business people to financing a lot of visionary pioneers. The type of businesses change. You know, when my father started in the business, you financed aerospace companies. Then of course, you started computer companies. And that was unheard of because when I was in the 60s and 70s, Big Blue was God, and no one could compete with Big Blue, which was IBM. But then you had a little company called Digital Equipment Corp. And another one out on the west coast and started the mini computer business. Arthur financed that west coast company, Arthur Rock. And then you had Apple come along. And who would have thought, you know, first of all, most conservative businessmen would have scratched their head and said, why would you ever name a company after a fruit, an apple of all things. I happen to live off apples because I have to have an apple every day. So let me tell you a little story about Apple. So we were getting started and there was this English guy, Anthony Montague, and he was the second son of Lord Montague, very fancy, proper Englishman. Except as the second son, you get a pair of shotguns. And your brother, the first oldest son, gets everything, every single thing. Just a pair of shotguns. Now, they're nice shotguns, but. So Anthony had to make money, ran his merchant bank and then sold it, his family's firm. And then he started a venture capital firm. And we were fortunate enough that we got to know Anthony and he became a close friend of NEA along with his partners. And Dick introduced him years ago, before NEOA was formed, to this little company out in the Silicon Valley. So Antony goes out there and you imagine this guy, he would dress in a wool suit in the summer and he always had a coat and tied English accent, very proper. But he was a wild hare because he'd like to drive a Cadillac in London streets. And he loved electric carving knives. He was really a character. He also was the first guy to back Andrew Lloyd Weber. So he had a lot of interest as well as being a major art collector of art, Lucian Freud. Anyway, so Anthony goes into this company, sits down and Andy made his mind up quickly. About 20 minutes into the meeting he said, I will not leave this company. And he pounds the table but very hard, scares these two little techno freaks across the table from him and says, I will not leave this company until you let me invest. So they got him a Reuben sandwich for dinner that night and I don't know what they got him the next night. Maybe a tuna fish sandwich. They tried to give him the worst food to drive him away they could. But when they arrived in the morning, which was around 6am There was Antony opening up the door to let him in. And when they left at night, he'd locked the door behind them. So at last on the fourth day, one of the co founder of the company said, okay, Anthony, I've never had a house in my Life. Anthony bought 4% of Apple for $400,000.
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A
Oh my gosh, that's unbelievable. That is unbelievable.
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B
He proved to mommy and daddy that he had more than a pair of shotguns.
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A
Yeah, he definitely, he definitely, definitely did.
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B
By the way, when my son started his business, he did it with Anthony. Montague's son Ashton started his own venture business. So you can say my family got in the business in 1945 and we're still going strong today.
- [25:36]
A
That's amazing. That's amazing. Well, Chuck, I mean, thank you so much for coming on the podcast. This has been so terrific chatting with you. If you haven't picked it up, listeners, I highly recommend you do Dare Disturb the Universe. It's a fantastic read. Not just because I'm with you. I really did enjoy reading it. And Chuck, thanks again so much for your time.
- [25:56]
B
Well, it's an honor to be in the program and get a chance to tell people about venture capital.
- [26:02]
A
And there you have it. I hope you enjoyed this highlight episode. If you enjoyed this episode, I'd love it. If you'd write a review on the Apple podcasts, you're also welcome to follow me, your host, Mike, on Twitter ikegelb and also follow for episode announcements at Consumer vc. Thanks for listening everyone.