The Story of the Seven Dwarfs Mining Inc: | How the Coronavirus Masked the Corporate Debt Bubble

Disney’s Seven Dwarfs team up to tell the story of corporate America (2012-2020)

by Tim Langeman 2233 words (17 min read)

Introduction

Before the coronavirus, a false narrative arose that the economy was healthy, as measured by:

  • growth in the stock market and a
  • reduction in the unemployment rate ..

when in fact this facade was only made possible with an increasing mountain of debt and low interest rates.

Wall Street Bubbles Cartoon, 1901
1901 Cartoon depicting JP Morgan as Bull

But there is more to the economy than the stock market and unemployment rate. The bond market is larger and “smarter” than the stock market. When assessing the pre-coronavirus economy, one must also take into account the stagnant profits1 corporations disguised by borrowing in the bond market to fund purchases of their own stock, artificially inflating the stock market.

Like an Injured Athlete taking Pain Killers

The US economy was like a professional football player who had been “playing hurt” for many years.

Brandon Scherff Injury: Falcons at Redskins 11/04/18
Brandon Scherff Injury, Nov 4, 2018
Keith Allison Sports Photos (CC BY-SA 2.0)

The economy used debt, like the football player uses pain killers.  The debt masks the economy’s  problems2 and allows it to perform at a higher level than otherwise would have been possible had  pain-killers not dampened the brain’s ability to perceive reality.  But unfortunately an economy is not like an athlete in that it can’t retire at the end of a 15-year career.

Featuring: The Seven Dwarfs

The story I’m about to tell is intended to illustrate how corporations borrowed money and then used that money to buy their own stock, inflating the stock price.3  In finance jargon this is called “leveraged stock buybacks”.4  Corporations have used stock buybacks as a major strategy to boost their share price but many corporations didn’t have enough profits to buy back their stock because the overall level of (pre-tax) corporate profits has been flat since 2012.5.  While some companies may have been able to legitimately afford to buy their own stock with real profits, over 50% of those buybacks were done using borrowed money.

In fact, if you look at who had been the buyer of most of the stock purchases in 2018 and 2019, it had mostly been the companies themselves purchasing their own stocks, not pension funds, individuals, or hedge funds.

I illustrate how this market manipulation works using a fairy tale featuring the seven dwarfs and their mining company “7 Dwarfs Mining, Inc.” Early in the story the dwarfs seemed to have discovered a easy way of making money until an unforeseen emergency struck and disrupted their carefully laid plans.

It is commonly known that emergencies reveal.

This story illustrates what emergencies can conceal.

The Founding Members:

Grumpy Dwarf
Grumpy Dwarf

Once upon a time, the 7 Dwarfs Mining company was founded in a small Forest Kingdom town by Seven dwarfs:6

  1. Dopey,
  2. Doc,
  3. Bashful,
  4. Happy,
  5. Grumpy,
  6. Sleepy, and
  7. Sneezy

After a number of years in business together, the mining company was valued at $7 million7 and generated $700,000 profit per year, which they split 7 ways.8

Assets# of SharesYearly ProfitProfit per ShareDebt
$7 million7$700,000$100,000$0

Going Into Debt to Hide Flat Growth

Federal Reserve: Profits before Taxes
Notice how Corporate Profits flattened out over the last 6-8 years

One year, Grumpy decided he was unhappy in the mining business. Perhaps this was due to his sour attitude, or perhaps he was feeling blue because the mine’s profits had not increased at all in the previous 6 years.9 Grumpy decided to sell his share in the mining company, but there were not a lot of other dwarfs that wanted to buy out his stake at the price of $1 million.

The other 6 dwarfs in the company wanted to continue in the business but they didn’t have the cash to buy out Grumpy, so they decided to borrow the $1 million from the bond market. Interest rates were low in the Forest Kingdom because the economy hadn’t fully recovered from the previous debt-fueled financial crisis a dozen years prior.10 The kingdom’s treasury secretary’s belief that low-interest rates stimulate growth was also a factor in setting the interest-rate climate.11 This easy lending environment allowed the dwarfs to succeed in borrowing $1 million at an interest rate of 3% per year.

The Dwarfs’ Epiphany: Earnings per Share

Earnings per Share
Earnings Per Share by Nick Youngson
CC BY-SA 3.0 Alpha Stock Images

After Grumpy exited the company, the 6 remaining dwarfs renamed their business: “6 Dwarfs Mining, Inc“. The total value of the company (market cap)12 was still $7 million and they split the same $700,000 profit six ways instead of seven. This resulted in profits of $116,666/share, a 16.7% increase over the prior year. Grumpy sulked for the next year and a half about missing out on the share price increase his exit had created, but Dopey reminded him that it was his own idea to leave. 🙁

ExitMarket CapLeverage RatioYearly ProfitProfit per Share% Profit Increase
per Share
EquityDebt
Original 7 Dwarfs$7 m7/7$700,000$100,000$7 m$0
Post-Grumpy Exit$7 m7/6$700,000$116,667 1316.7%$6 m$1 m
(Note: I’m abbreviating “million” as “m” to save space in this chart.)

Upon learning of this increase in EPS (Earnings Per Share), the 6 remaining dwarfs were elated! By taking on debt to buy out Grumpy’s stake, they managed to reduce their number of shares, thereby achieving their first share price increase in 6 years! Things were looking up! **

** “Earnings per Share” were up even though the Dwarf’s equity in the company was down.14

Scrabble Series Debt
Scrabble Series Image By: ccPixs.com

Setting Dopey’s Debt Plan in Motion

Bashful was known to wear his heart on his sleeve, especially if he had romantic feelings for someone.15 So the next year, after Bashful’s most recent crush departed the village, Dopey encouraged a lovestruck Bashful to retire from the company and follow his sweetheart to the neighboring Mountain Kingdom to the North. Dopey wanted to reduce that number of shareholders in the mining company because he had learned the benefits of having fewer shareholders from Grumpy’s exit, even if that comes at the expense of having more debt. He calculated that splitting $7 million five ways would result in a share price of $1.4 million per share. This would be a 40% increase over the original $1 million share price, although the company’s profit was still the same $700,000 per year. Once again, the dwarfs went to the bond market and used borrowed money — an additional $1 million dollars — to buy out one of their fellow dwarf’s share.

ExitMarket CapLeverage RatioYearly ProfitProfit per Share% Profit Increase
per Share
EquityDebt
Original 7 Dwarfs$7 m7/7$700,000$100,000$7 m$0
Post-Grumpy Exit$7 m7/6$700,000$116,66716.7%$6 m$1 m
Post-Bashful Exit$7 m7/5$700,000$140,000 1640%$5 m$2 m

After the successful payoff, Dopey said to Doc: “Wow, this debt thing is really an easy win. A few years ago we were struggling with plans to make efficiency improvements to the mines but that would have required us to invest some of our profits into new machinery, research and development, and employee training. Instead, I only needed to identify the key to Bashful’s heart and use some accounting wizardry17 to increase our share price the “easy way” — with more debt.”

Following the Plan

Dopey had a reputation for harebrained plans, but he knew that Sleepy’s drowsiness was no reason to doubt his intelligence or acumen.18 Dopey concluded that the two things that would most motivate Sleepy to sell his share were the attraction of sleeping in until noon and a bonus of $100,000, so he struck up a conversation with Sleepy on these two themes when the two had a private moment together. The next year, Sleepy was enjoying a restful retirement in the tropics and the mining company had one fewer shareholder.

2020 Ferrari F8 Tributo
2020 Ferrari F8 Tributo
Debt King License Plate
Debt King License Plate

The pattern continued again the following year with Happy given a $150,000 bonus contingent on his retirement, causing the share price to rise to $2,333,333 (a 133% increase). All the remaining dwarfs were extremely happy at this turn of events, as was Happy himself. 🙂 Dopey took out a loan to buy a red Ferrari with the vanity license plate “Debt King” in anticipation of his upcoming buyout. Yet, at the same time, the company’s total profit remained the same $700,000 per year it had been originally before Grumpy exited.19

ExitMarket CapLeverage RatioYearly ProfitProfit per Share% Profit Increase
per Share
EquityDebt
Original 7 Dwarfs$7 m7/7$700,000$100,000$7$0 m
Post-Grump Exit$7 m7/6$700,000$116,66716.7%$6 m$1 m
Post-Bashful Exit$7 m7/5$700,000$140,00040%$5 m$2 m
Post-Sleepy Exit$7 m7/4$700,000$175,00075%$4 m$3 m
Post-Happy Exit$7 m7/3$700,000$233,333 20133%$3 m$4 m

(Note: These figures are simplified. They do not include reinvesting profits or interest charges on the debt.)

 

A Declining Credit Rating

Credit Rating Chart
Credit Rating Chart

One of the unnoticed consequences of Dopey’s plan was that the mining company’s credit rating began to deteriorate as the company borrowed money in the bond market. The company was effectively agreeing to devote some of its future revenue (i.e. paying interest on the additional debt in the future) in exchange for a higher earnings per share today. Before Grumpy exited, the company had a AAA credit rating, but as Bashful, Sleepy, and Happy’s shares were bought out, the company’s credit rating fell to AA, then A and now stood at BBB, the lowest investment grade.21

Dopey was warned that if the company was assessed another credit downgrade the company would fall to a non-investment grade status (often referred to as “junk” bond status22). Were that to happen, pension funds and many investors would no longer be legally permitted to own the company’s debt and the interest rate the dwarfs would have to pay would spike higher. Dopey calculated that there was a higher risk to the company’s finances in the coming years, but he figured that would be Doc and Sneezy’s problem, not his, because he, Dopey, planned to be the next dwarf to exit. After Dopey left the company his financial interests would be separate from the mining company and he would not longer care if the company should happen to suffer losses.

The Unforeseen

Coronavirus
Rapidico virus

The number of shares now stood at 3, with Dopey, Doc, and Sneezy remaining, when something unforeseen happened — a sickness called Rapidico took hold in the neighboring kingdom of Achin. As the illness reached the cities of the Dwarfs’ Forest Kingdom the advisors to the kindom’s Queen — Queen Elizabeth II’s23 privy council24recommended that the kingdom go into lockdown to prevent the spread of the disease.

The Response

A lockdown seemed like a radical idea, and one that the queen deferred to individual provinces.25 As other provinces of the kingdom went into lockdown, Dopey, Sneezy, and Doc were dismissive and continued business as usual at 3 Dwarfs Mining, Inc.

Sneezy Dwarf
Sneezy (Disney Fandom)

A month and a half later, an outbreak of Rapidico took place at 3 Dwarfs Mining, Inc., set off by an asymptomatic Sneezy. Dopey later recalled, “Sneezy is always sneezing; I didn’t think nothing of it.” But the tight quarters of the mine proved to be fertile ground for the contagion to spread and many mine workers were infected. True to his name, Doc threw himself into the job of treating the afflicted dwarfs and heroically saved countless lives, but the mine’s production ground to a halt nonetheless. Other businesses were similarly affected and the queen was forced to move beyond her earlier deference to provincial autonomy and call for a strict quarantine.26

Quarantine Sign
Quarantine (PublicDomainFiles.com)

The Divided Kingdom

Because the Forest Kingdom was so fractious and the forest creatures so impatient, financially vulnerable, and headstrong, not all parts of the kingdom followed the queen’s orders closely. This disunity among the provinces resulted in stubborn pockets of disease in the lagging parts of the kingdom which hampered the economic recovery.27

The length of the quarantine caused heavy losses to the 3 Dwarfs Mining, Inc., requiring them to borrow more money. Of the original $7 million that the company had started with, the 3 Dwarfs Mining Inc had only $3,638,841 equity left ($9,846,549 assets – 6,207,708 debt)28 because they had borrowed in the bond market to buy out the shares of Grumpy, Bashful, Sleepy, and Happy, resulting in a debt of $6,207,708.29

The Risk and Reward of a High Leverage Ratio

Debt vs. Equity: The Risk and Reward of Leverage: Dopey's Debt Plan

Companies can choose how much risk they want to take to accelerate growth (Risk vs Reward). The use of debt is a key contributor to the speed at which a company can grow but it also increases the risk that the company will falter should an unforeseen risk arise.

In this particular case, the leverage ratio30 I’m comparing is the ratio of market cap31 to debt. Notice how the Leverage ratio increases as the number of shares (or equity) decrease. Reducing the equity, in this case, increases the leverage ratio (7/2 = 3.5), which increases the profit per share.

Notice how the profit per share increases as the leverage ratio increases.

ExitMarket CapLeverage RatioLeverageProfit per Share
Original 7 Dwarfs$7 million7/71.0$100,000
Post-Grump Exit$7 million7/61.17$116,667
Post-Bashful Exit$7 million7/51.4$140,000
Post-Sleepy Exit$7 million7/41.75$175,000
Post-Happy Exit$7 million7/32.33$233,333
Planned Dopey Exit$7 million7/23.532$350,000

Note: This chart has been simplified33

When Dopey planned to exit, the share price would have risen from $1 million to $3.5 million on the leverage ratio alone. A more complex calculation that reinvests profits each year would have the original $1 million share price to rise to $4,923,274, not including a bonus of $200,000, which would leave Dopey with a total exit package of $5.1 million dollars!34

When things are going well, leverage has the effect of multiplying a company’s earnings per share by the leverage ratio. But when an unforeseen tragedy hits, it leaves companies with less of a cushion to ride out a storm.

The “Debt Bomb” Goes Undiscovered

Debt Bomb
Debt Bomb (Creative Commons Zero – CC0 )

There had been a concern before the Rapidico virus hit, that a large number of Forest Kingdom companies had also been following Dopey-like plans to increase their share price the easy way — through financialization — that is “financial engineering” that inflates share price but does nothing to improve labor productivity. In the 7 Dwarfs Mining Company, profit growth is assumed to be zero, but EPS (earnings per share) still goes up anyway because the number of shares goes down. The shareholders retain ownership in the company, but often with higher levels of debt.

Resetting the “Debt Bomb”

Ticking Time Bomb
Reset the Clock on a Debt Bomb Creative Commons 4.0 BY-NC

The result is a potential “debt bomb”35 36 where a buildup of debt can threaten the whole economy. The companies contributing to this “debt bomb” report share price growth, but this “growth” is artificial because total profits are flat and earnings per share growth is only made possible by taking on more debt. When the debt bomb explodes (or pops like a bubble) it threatens to spill over into the broader economy, threatening the whole country, not just the borrowers. 37

The Rapidico crisis had given the government the opportunity to blame some of the kingdom’s problems, which had been years in the making, on the Rapidico virus and the country of Achin, even though a significant part of the financial problems were the fault of the kingdom’s systemic dysfunction. Had the kingdom not already experienced a financial crisis a dozen years prior, and had there not been such low interest rates, the Dwarfs would not have taken on so much debt, leaving their mining company financially vulnerable in a time of crisis. Had the Rapidico crisis not happened, such debt dysfunction was bound to lead to another recession anyway and leave the kingdom to grapple with questions about the authenticity of the prior decade’s growth.

Debt for Productive Purposes?

Amish Hay Wagons
Productive Purposes

When some of the queen’s more intellectually self-critical advisors speculated that it would have been better had the Forest Kingdom’s companies invested the money they borrowed into productive assets rather than share buybacks, others replied that too few workers could afford to buy38 what the companies would have produced.3940

Sweeping it Under the Rug?

Sweep it Under the Rug
Sweep it Under the Rug
from “Whistle While You Work”
Disney’s Snow White and the 7 Dwarfs, 1937

A lone advisor commented that the prior 6-8 years of flat profits41 during supposed “good times” boded poorly for future growth prospects. “When was the last time we’ve generated substantial growth without a lot of debt and the creation of another artificial bubble?”, said the deputy finance minister. Many advisors agreed with her, but were hesitant to break the bad news to the public. Nevertheless, all agreed that the queen’s legacy depended upon her taking steps to prevent such a debt bomb from re-emerging and requiring yet another bailout. You might be able to afford this bailout, but we haven’t done anything to pay down the debt from the previous financial crisis and we certainly can’t afford to make bailouts the norm. Next time, her advisors said, you won’t have the Rapidico virus to blame for the bailout and you won’t be able to sweep all that debt under the rug.

Will the Dopey Financial Plans Stay Concealed?

A cute little girl is hiding behind a tree and peeks around holding her finger to her lips saying, shhh
Stay Hidden? photo by Sheila Brown (CC0 Public Domain)

“I know we’ve got to face our problems,” said the queen,42 but a financial crisis is no time to address deep weaknesses within the economy. Calling attention to the country’s debt dysfunction will only erode consumer confidence when we need it most. Besides, many of the Debt-Dopies are particularly crafty and hire former members of parliament as their lobbyists! Another bailout is inevitable. It is better for me to let the “Debt Dopies” 43 remain concealed by the wider bailout for now, encourage optimism about the economy’s revival, and let someone else deal with the problem later.”

To repeat my opening statement:

It is commonly known that emergencies reveal.

This story illustrates what emergencies can conceal.

Dopey Dwarft
Dopey’s Debt Plan to increase EPS (Earnings per Share)

 

by Tim Langeman

Perhaps you have ideas on how this story could be improved. I welcome your suggestions.

I also welcome suggestions about who you think would be interested reading about and collaborating on this issue.

Tags:

Note:

This is a very simplified example of financialization involving only debt and share buybacks at large corporations. More complicated cases can involve some profit growth, executive compensation, and cost-cutting. This story is not about small businesses. It has been simplified to a case of only 7 shareholders for illustrative purposes.

Questions:

  1. Had you heard how much many USA large corporations’ credit ratings declined in the years before the coronavirus crisis started in early 2020 and that much of their debt was rated just above “junk” status at that time?44 45 NPR’s Planet Money has an accessible and entertaining story on why Credit ratings declined. It was this 9-minute podcast story which inspired me to do the research for this piece.
  2. Did you know that most of the stock purchases made before the crisis were NOT made by pensions, individuals, foreign investors, or hedge funds, but by the companies themselves?
  3. Did you know that over half of companies’ stock buybacks were funded with debt?
  4. Why do you think many large corporations chose to borrow money to buy back their stock rather than invest it for productive purposes between 2012 and 2020? Here’s some possibilities to start with:
    • Too much regulation to make investment profitable?
    • Taxes too high?
    • Too much political uncertainty?
    • Customers already have what they need?
    • Customers too maxed out to afford to buy more?
    • The company has a mature market position- there is little room to grow. Better to draw down on the company’s credit rating (“mortgage the company”) and redirect the money to other companies with better opportunities?
    • Executives don’t want to take a risk on long-term innovation and growth when low-interest rates make significant short-term debt-driven share price increase a low-risk choice?
    • Perverse incentives reward executives for hitting bonus targets in any way they choose, even if their choices are contrary to the long-term interests of the company?
  5. How would you feel if it turns out that, contrary to conventional wisdom, corporate profits (before taxes) had been flat from roughly 2012 – 2020 and stock prices were inflated with debt?4647
  6. What other political or economic things are being revealed or concealed by the coronavirus?

 

Background Reading:

  1. Financialization is profit margin growth without labor productivity growth. (by Ben Hunt)
  2. Texas Instruments: a poster child for financialization, the Obama/Trump Zeitgeist: an unparalleled transfer of wealth to the managerial class (by Ben Hunt)
  3. 9 Questions about the Finance System: Was the Pre-Coronavirus Stock Market a Bubble Inflated by “Financial Engineering”? (2014-2020) (by Tim Langeman)

 

See Linked Spreadsheet for Details of Dopey’s Financial Plan.

(Improve my numbers: download Excel version, tweak and Email me.)

 

Videos


Social Capital CEO Chamath Palihapitiya’s case against stock buybacks, dividends

 

 

More that is Concealed:

Federal Reserve enters new territory with support for risky debt

Programme to support ‘junk’ bonds aims to soften blows from coronavirus and downgrades

.. The Federal Reserve has jolted credit markets by expanding the scope of its support measures, announcing plans to buy debt issued by riskier companies in a radical addition to its crisis-fighting toolkit.

Junk Bonds
Junk Bonds by Simon Cunningham

.. Under the programme, the central bank will buy corporate bonds that were rated triple B minus or above — the threshold for a company’s debt to be considered investment-grade — on March 22. That still includes bonds from recently downgraded companies such as Ford, known as “fallen angels” when they lose their coveted investment-grade ratings.

Read More: Financial Times (British)

 

Obscure Section of CARES Act Provides $195 billion for Wealthy

.. the $2.2 trillion CARES Act passed by Congress last month contains deep within its 800 pages two barely-noticeable tax clauses that only benefit rich Americans, perhaps including the president.

The new tax clauses will cost Americans about $195 billion over 10 years48

Super Yacht: The Rising Sun: Larry Elison & David Geffen
Yacht: The Rising Sun owned by David Geffen
photo by Scott Smith

.. The astronomical cost only became evident a day after CARES was signed into law, when the nonpartisan congressional Joint Committee on Taxation (JCT) published an analysis of the provisions. The committee’s latest findings show that four of five millionaires will pocket an average of $1.6 million more this year alone thanks to the stimulus bill. This of course dwarfs the $1,200 one-time checks average Americans will receive.

In total the tax clauses will cost taxpayers more than the funding allotted in the CARES Act to all hospitals throughout the US, and more than the relief provided to all state and local governments, according to the JCT analysis. Together, they are the costliest elements of the relief package.

Read More: Quartz

Echoes of 2008: They Mistook leverage for genius

Steve Eisman (of Michael Lewis’s book and Movie “The Big Short“)


Steve Eisman: Quantitative Easing was a failure: it didn’t get corporations to borrow and invest. Rather, they borrowed and bought up their own stock. They didn’t really invest in the economy.

In other words, they increased their profits by increasing their debt (leverage) ratio.

(the interview is from 2017)

 


Steve Eisman: Inequality was a cause of the 2008 Financial Crisis (10:17)

People “levered themselves” (ie took out loans that increased their debt-equity ratio)

 

Steve Eisman: They made money because they increased their leverage (debt ratio) and they mistook their leverage for genius (12:19)

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

(Most images created by others)

 

Footnotes


  1. You might wonder why this Federal Reserve chart looks different than upward sloping graphs you are used to.  The first reason is because this graph uses pre-tax figures that do not include the boost that corporate tax cuts gave to the stock market.  The other reason is that this graph is based upon total profits, rather than earnings per share.  In the rest of this article you will learn how corporate debt artificially inflated earnings per share .

  2. The fallout from of the prior 2008 financial crisis was not delt with.  The government bailed out the system and assumed the debt.  Most Americans’ wages had stagnated and healthcare and education expenses have gone up dramatically.  In order to compensate for week customer demand, companies had begun to borrow money and buy back their own stock.  Even with a deficit of $1 trillion/year, pre-coronavirus, the economy grew at a rate of 2.1% and was projected to fall to 1.6% in by 2024.

  3. Now with the coronavirus crisis, the federal reserve is buying some of that debt, as well as allowing corporations to issue additional debt at artificial prices.

  4. Leveraged” is just a fancy term used to indicate that a financial activity is amplified by borrowing.

  5. Pre-tax Corporate profits peaked in 2014 and have been roughly flat since 2012.  The perception of growth is mostly due to the additional debt (share buybacks) and the  2017 tax cuts (federal government debt).

  6. There are many variations of the Seven Dwarfs’ Names. I’m going with the 1937 Snow White and the Seven Dwarfs animated musical fantasy film produced by Walt Disney Productions

  7. The value of all the stock is equal to the value of all the company’s assets minus its liabilities.

    ( total stock shares = number of shares x share price)

  8. I picked round numbers for this. If you want to help me improve the numbers, see the excel doc in the footer and edit it.

  9. In Place of the Finances of the 7 Dwarfs Mining, Inc., I’ve inserted a Graph above referring to US Corporate Profits before Taxes, as reported by the St. Louis Federal Reserve. Read more about the chart and about “Financial Engineering” that turns this flat graph into a growing one.

  10. While the level of consumer debt was reduced, corporate and government debt went up.

  11. How different would rates have been if the government had not pushed for a late-cycle stimulus and not resisted advice to raise interest rates?

  12. Market Capitalization is the total value of all outstanding shares. Shareholders own what remains after everyone else has been paid (this includes employees, bondholders, vendors, etc)

  13. 7/6 = 1.67

  14. Equity” is the what the shareholders own after all the bills (including debt) have been paid. It is the value of assets minus liabilities. The additional debt they took on to buy out Grumpy’s share is a liability.

  15. Disney Fandom: “Aside from his coyness, Bashful also appears to be romantic. He adores the idea of true love, and when Snow White decides to share a story with the dwarfs, Bashful joyfully suggests a love story, which she obliges to.”

  16. 7/5 = 1.40

  17. Investopedia.com: financial engineering is the use of mathematical techniques to solve financial problems. .. Although financial engineering has revolutionized the financial markets, it played a role in the 2008 financial crisis. As the number of defaults on subprime mortgage payments increased, more credit events were triggered. Credit Default Swap (CDS) issuers, that is banks, could not make the payments on these swaps since the defaults were happening almost at the same time.

  18. Disney Fandom: “However, in spite of spending most of his time nearly falling asleep, Sleepy is apparently the most observant and logical of the seven dwarfs, whether he knows it or not. He was the only dwarf to make the assumption that the Evil Queen may be attacking Snow White at the cottage when the forest animals frantically interrupted the dwarfs’ mine work.”

  19. This is a simplified version of the finances that doesn’t include interest or profit reinvestment. I was concerned that adding them at this point would take away from the broader point.

  20. 7/3 = 2.33

  21. Prior to the coronavirus, roughly half of all corporate debt was rated BBB , which is the minimum “investment grade” rating. A lot of this debt was purchased by the Fed as part of the bailout, including debt that was downgraded to “junk” status.

  22. “Junk” bonds are often referred to as “high yield” bonds. “High yield” sounds nicer and it accurately conveys that these bonds have a higher yield (or interest rate) as compensation for the extra risk the lender takes.

  23. I am deliberately using the British System as a way to distance the reader from drawing favorable or unfavorable inferences onto current American officials. This story is really about the dwarfs (and especially large corporate businesses) and the way they relied on debt to raise their share price.

  24. The Privy Council of the Forest Kingdom is a formal body of advisers to the Sovereign. Its membership mainly comprises senior politicians who are current or former members of either the House of Commons or the House of Lords.

  25. Provinces are like states in the American context. The head of a province is the Premier.

  26. Yes, I know in the British system the Queen would leave this governance to the prime minister but I figure an audience of Americans don’t understand the British system and this version is simpler to explain while taking the spotlight off of particular American politicians.

  27. In some parts of the kingdom the quarantine was applied multiple times to respond to re-occurrences.

  28. Equity” denotes how much their company is worth — how much remains for the shareholders after everyone else is paid.

  29. One might think the debt would be (4 x $1 million)= $4 million. But the actual cost of buying out each share increased as the share price increase: $1 million + $1.28 million + $1.67 million + $2.35 million + bonuses.

  30. For simplicity, I’m using a leverage ratio which uses marketcap/debt. A more common ratio is debt/equity.

  31. value of all shares, which is the share price multiplie by the number of shares

  32. Leverage = 7/2 = 3.5

    • I’m assuming a constant total profit of $7 million to simplify this example
    • I’m not including reinvesting profits or deducting interest paid on the debt

  33. See spreadsheet at the bottom of this page

  34. A debt bomb is a situation where a default on a large accumulation of debt can produce major negative consequences not only for the borrower but for many other market participants. That is to say, other people’s debts can harm you even if you were not over-indebted yourself.

  35. .There is more than one type of debt bomb. Banks can become debt bombs. Countries can become debt bombs due to public debt. This is a simplified example of a small business as a metaphor for an entire country.

  36. Low-interest rates make it easier to have more debt and to create “debt bombs”.

  37. 40% of Americans can not afford a $400 emergency. Why should companies invest in increased capacity when consumers’ wages have been stagnant for decades and therefore can’t afford to purchase more products and services?

  38. One can argue that share buybacks are a good way for established companies with limited opportunities to redirect money to shareholders, but does this also apply when companies don’t have the cash but decide to take on extra debt for this purpose?

  39. I’ve heard that leveraged stock buybacks can be thought of as “refinancing,” but refinancing only changes the interest rate of existing debt. These seem more like talking on additional debt for the purpose of converting equity to debt. The average homeowner can think of this like taking out a second or third mortgage on a house. You’re taking on more debt. If the debt doesn’t have a productive purpose it is likely to be problematic.

  40. Yes, profits per share increased because the number of shares decreased, but total profits were flat.

  41. My goal is to focus on the debt and the circumstances why it was incurred, rather than to focus on Trump (in the American context) or any particular politician, which is why I cast Queen Elizabeth II in the role of queen.

  42. In the Disney series, Dopey does not talk, which does make it a problem if you want to portray him as a “Financial Schemer”

  43. When I talk about large corporations, I’m not talking about small businesses of less than 1,000 employees. The 7 Dwarfs were used as an illustration to make the situation easier to understand, but I don’t mean to include small businesses in this analysis at all.

  44. Roughly half of all corporate debt is rated BBB, which is the minimum “investment grade” rating. A lot of this debt was purchased by the Fed as part of the bailout, including debt that was downgraded to “junk” status.

  45. It is possible that profits are not flat, that they have actually gone up but the unreported profits were siphoned off to tax havens.

  46. Another factor that contributed to corporate share price growth was tax cuts which were “paid for” with additional growth in the national debt.

  47. I don’t know how much money David Geffen will personally get from this bill. I use his yacht as a symbol of the wealth that isolates rich people from the typical citizen and curries favor with the politicians that write, vote for, and sign the bailout packages.

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For many years now we have had Negative GDP so we were not Growing in the absence of Debt

wipe out over three years yeah speaking
70:54
of kind of bad situations we are not at
the end so we don’t have complete
clarity of the hindsight but there’s
been a lot of what I’ll just call bad
behavior in the market that led to a lot
of this so whether it’s the
over-leveraged of corporations or even
hedge funds at the key talks right at
one point a lot of the debt fueled
buybacks the CEO departure is kind of at
the top all of these things what’s your
take at this point in time right so
we’re kind of going into this situation
we’re not out of it but like how do you
view a lot of that be
right now so I got it I got an email
this morning actually from my prime
broker so hedge funds were at 99 to a
hundredth percentile of their historical
max leverage literally February 20th and
now we’re at you know the 20th to 30th
percentile historically so you know we
were probably at 7 or 8 turns of
leverage and now we’re probably down to
one and a half to two or three I think
that this next go-around you’re going to
have to realize government will have to
realize that in 2008 all they did was
allow financial institutions to pass the
buck they were able to take the leverage
off balance sheet and when you subtract
out debt as a function of GDP for many
years now we have had negative GDP so we
were not growing in the absence of
people issuing debt and most of that
debt unfortunately was not towards R&D
but it was towards things that
superficially propped up stock prices
which really only benefited a handful of
people and I do think we have to
restrain people from being able to do
that in the future I don’t think it
makes a lot of sense and I don’t think
it adds a lot of value and I think that
it’s not that it was obviously
responsible for the coronavirus but I do
think that when you look at how much
devastation we are encountering and when
we do the final tally on the amount of
buyback oh sorry the amount of bailouts
we need the bailouts are directly
correlated to how stupidly run and badly
run these companies were you know why is
it that California is legally mandated
and you’ll say oh because it’s a
nonprofit but legally mandated to have a
rainy day fund but a company isn’t and
then the company is the first one to
knock on the door of the government and
we’re just waiting for the next shoe to
drop or California Mississippi Alabama
Louisiana to all do the same thing and I
would much rather see the money go to
the states and the cities in an in an
fair even
then the money go to a private company I
think that those private companies
should be wiped out the equity should be
wiped out and they should need to
restart it’s one thing I’m a hundred
percent in alignment with you on this
but the part that I don’t understand is
how do you continue to benefit from the
elements of capitalism if you take out
the risk moving forward it everyone
knows I can quote unquote take this like
fake risk and if anything goes wrong I
can just run to the government and get a
bailout you changed the dynamic of what
happens and I actually think you
incentivize even more bad behavior right
it’s almost like there was bad behavior
and then there was no punishment for it
and therefore you just encouraged that
to continue you know when we get out of
this thing well I it depends on what you
view capitalism as I think if you view
capitalism as a game of risk I think
you’re right I’ve always viewed
capitalism as money becomes a fulcrum
instrument for change what do you want
to see in the world okay
money is your lubricant you decide and
the person with more money or the person
who’s willing to put more money into
something and who can be more clever
basically has the opportunity to win so
I I think it’s a game that puts
ingenuity and money at the forefront
that’s what to me that’s what capitalism
is and so when companies are doing
things that are fundamentally not
advancing that forward they should
disqualify themselves from them being
able to run to the government so it
would be a different thing entirely if
all the airlines had invested let’s just
say 96% of free cash flow dollars on
supersonic flight failed and then came
to the government and said look I took a
big bet on the future to help advance
humanity it didn’t work and I need a
bailout I would be the first one to say
okay but when 96% of free cash flow
dollars go back to buying back shares
and then you basically claim the same
thing I think you should be punished and
punished financially so you know you you
you took the money that you had you
refused it you refused to multiply it by
a good smart bet on the future and I
think that there should be consequences
for that
yeah I don’t disagree with you at all
last question for you
been incredible kind with your time here
if you were the president over the next
six months
what’s your playbook so president Shamus
got full control can do whatever was it
within the presidential powers what’s
your playbook to kind of weather the
storm and get us out of this
I would first stand up every single
voting site that we would use in the
November election
and I would schedule every single man
woman and child to come through all of
those testing facilities and I would
basically deploy a rapid test to figure
out whether they had coronavirus in that
moment okay and families could come you
know 10 minutes apart so that you could
get back into your car and go etc etc in
step number one if you didn’t have
Corona so you weren’t shedding the RNA
in that moment you go to a second and
you get administered a finger prick
and you get tested for the antibodies
and within 15 or 20 minutes and you’re
held in an isolation
77:06
you know booth area where you you know
77:08
you’re on Instagram and when you’re done
77:11
you’re given a wristband and that
77:15
wristband basically says one of three
77:18
things well if you had tested positive
77:21
you get a red band you go home and you
77:23
isolate if you test negative and you
77:26
have the antibodies you get a green one
77:28
and if you test negative and you how
77:30
don’t have the antibodies maybe you get
77:31
a blue one green and blue are allowed to
77:35
go back to work right away red self
77:38
isolates you contact trace etcetera etc
77:41
that’s sort of the frontline of getting
77:44
the economy back to work and you have
77:48
some combination of the National Guard
77:50
and sort of like a whole infrastructure
77:54
then separately I think you introduced a
77:57
massive massive massive infrastructure
78:00
bill that starts to drive the
78:03
refactoring
78:04
of the supply chain back in
78:06
to the United States and part of that is
78:09
incentives and part of that is
78:10
government spending and it has to cut
78:13
across many categories from you know
78:16
semiconductors in silicon all the way to
78:20
clean energy to actual physical
78:22
infrastructure like you know bridges and
78:24
and tunnels and roads and in that what I
78:28
think you’re mandating is a certain
78:30
percentage of things to be made
78:32
domestically in the United States and
78:35
you start to get people back to work so
78:37
the short term path I think is to kind
78:39
of baseline the disease and get the
78:42
people who are allowed to be working
78:43
back into a green zone of every city
78:45
every town where people with these green
78:49
and blue bands are allowed inside and
78:52
the red banded people have to stay and
78:54
quarantine themselves so that we can
78:56
start to restart this economy and then
78:59
longer-term is an infrastructure build
79:01
that basically resets incentives towards
79:03
resiliency towards inefficiency away
79:07
from efficiency I think that’s a pretty
79:10
solid plan I’m shot I’m actually shocked
79:13
that some of this hasn’t been instituted
79:14
already the lack of testing just blows
79:16
my mind I mean the stats I saw on
79:19
Saturday 895 thousand people I think
79:22
I’ve been tested at a 330 million in the
79:24
United States I think the other
79:25
reckoning that we have to do maybe just
79:27
to finish on this is that we’ve
79:29
politicized things that should never
79:30
have been politicized health should not
79:33
be politicized you know the problem is
79:36
that starting with Obamacare health
79:38
became something that was about the
79:40
Democrats versus the Republicans and you
79:44
can see how that’s sort of like you know
79:46
flowed into things like the FDA and the
79:48
CDC and history will tell what they
79:52
could have done better history will tell
79:54
what the w-h-o should have done
79:56
differently
79:57
but I think what we can see is that
79:59
there are many points along the
80:02
evolution of this disease where logic
80:05
and open-mindedness and iteration ran
80:09
into bureaucracy and bureaucracy one and
80:14
I think that’s probably the most
80:16
generous way of describing it and we
80:19
need to figure out
80:20
where there are almost constitutional
80:23
level provisions you know you have the
80:26
right to bear arms great what about the
80:29
right to basically not you know not die
80:32
in a preventable scenario what does that
80:35
mean for how these organizations should
80:37
run you know we at a very basic level
80:41
have told the healthcare infrastructure
80:44
that we must do no harm and I think it’s
80:47
time to say look with 8 billion people
80:48
in the world and a 90 trillion dollar
80:51
economy that supports those eight eight
80:53
eight billion people do no harm doesn’t
80:56
work anymore it doesn’t scale we need to
80:59
do our best and there’s a lot of rules
81:02
that could change in a scenario where
81:04
you embrace do your best and I think
81:08
that that that has to happen but the
81:11
failures of the political infrastructure
81:14
and the healthcare infrastructure to use
81:16
bureaucracy as the thing that that
81:18
drives decision making I think is also
81:20
the a domino that has to fall after this
81:24
and we need to revisit because it’s a
81:25
you know we’ve we’ve done a lot of
81:27
unnecessary damage to ourselves and some
81:34
of this some of these self-inflicted
81:35
injuries we should figure out how to
81:37
prevent for the next time because it’s
81:38
gonna come again yeah I think we’re
81:40
living in incredibly uncertain in
81:42
chaotic times and you know one just
81:45
thank you for your time today but uh too
81:47
is uh think I speak for a lot of people
81:49
in that we’d love to see you go public
81:50
and kind of be along for the journey so
81:53
you’re doing an incredible job and I
81:55
just appreciate you uh
81:56
kind of going out there and sticking
81:58
your neck out there frankly because a
81:59
lot of people who they they’re gonna all
82:01
be the armchair quarterbacks right okay
82:03
two three years from now like I said I
82:04
told you that we should have done X or Y
82:06
but right now they’re they’re kind of
82:07
quiet so we’ll see how it plays out well
82:10
I really appreciate the fact that you
82:11
had me on and I just want to say that I
82:13
think you’ve been a really good person
82:16
in being out there in this moment the
82:19
reality is like in moments like this you
82:21
need people to be coalescing opinions
82:24
and I think that you’ve done that that’s
82:26
a really important service because it
82:28
allows people to get to ground truth so
82:31
I just want to say thank you for doing
82:32
that
82:32
thanks for including me
82:34
no problem at all all right sir well
82:36
thank you a teacher
82:37
all the best talk to you soon right bye

Chamath Palihapitiya, Founder and CEO Social Capital, on Money as an Instrument of Change

During his View From The Top talk, Chamath Palihapitiya, founder and CEO of Social Capital, discussed how money is an instrument of change which should be used to make the world a better place. “Money drives the world for better or for worse. Money is going to be made and allocated – you have a moral imperative to get it and then use it to make a difference.“

Chamath Palihapitiya Keynote – Hack the North 2018 – University of Waterloo Engineering

Transcript

00:03
and now without further ado shamov poli
00:08
a Bhatia is founder and CEO of social
00:11
capital which is a technology driven
00:12
investment firm whose mission is to
00:14
advance humanity by solving the world’s
00:16
hardest problems before founding social
00:18
capital Chamath was a member of the
00:20
senior executive team at Facebook and
00:22
held leadership roles at Mayfield fund
00:24
AOL and winamp he was born in Sri Lanka
00:27
grew up in Canada and graduate graduated
00:30
with a degree in electrical engineering
00:31
from the University of Waterloo shamov
00:34
is also an owner and director of the
00:36
NBA’s Golden State Warriors moderating
00:45
the conversation will be DJ co-founder
00:48
of Athos DJ is also from Sri Lanka also
00:52
studied EC at the University of Waterloo
00:53
and his company Athos actually started
00:57
as a senior year design project right
00:59
here at Waterloo which Timnath found
01:01
while he was checking out the senior
01:02
project showcase he ended up funding the
01:04
company moving DJ and his team down to
01:06
Silicon Valley and the rest is history
01:09
please join us in welcoming DJ and
01:11
Chamath
01:13
[Applause]
01:17
so walking up here I was thinking about
01:19
the first time I heard about tomorrow
01:21
which was actually when I was doing a
01:23
co-op term he at blackberry and I was
01:25
trying to add my manager on LinkedIn and
01:28
I saw this guy on the other side it’s
01:30
like some brown guy what he was working
01:33
at Facebook I was like
01:34
they went to Waterloo is brown as a VP
01:37
at Facebook you can do something from
01:41
Waterloo but but but for the rest of us
01:45
oh no you how’d you get started from
01:48
being bomb at Waterloo as in class to
01:51
chew my Polly pinion the barely
01:56
the barely passing class part is the
01:58
most accurate I mean one of my best
02:00
friends one of the best Menem this guy
02:04
herman pack was here was literally my
02:07
savior and it’s not that herman was
02:10
particularly smart because he was also
02:11
an idiot but his two sisters had done EE
02:16
before us and so we inherited every lab
02:20
every test every exam everything you
02:24
could have imagined I was still on
02:25
academic probation
02:26
remember were smart not hard he was top
02:29
of his class he was top of our class I
02:31
was on academic probation I got a letter
02:33
from the Dean of engineering at the time
02:37
who also taught ECE 100 guys to G
02:40
Chaudhary and the letter said you have
02:43
passed because of your labs and I
02:45
thought who thank God for Jane and Julia
02:47
back because otherwise back home in
02:50
Ottawa and I would have completely
02:52
ruined my life
02:53
I mean look I’ve told this story so I
02:57
gave the very short version but my
02:59
parents moved from Sri Lanka to Canada
03:02
my dad worked for the Embassy of Sweden
03:04
and after four years when he was
03:07
supposed to go back through a bunch of
03:09
conditions one was the war and two was
03:12
he was his life was threatened we
03:15
claimed refugee status and we stayed and
03:18
we lived in Ottawa I had two younger
03:21
said I have two younger sisters and then
03:22
I actually wasn’t even supposed to go to
03:25
Waterloo because I didn’t think I could
03:26
get in to be completely honest I had
03:27
mean pretty terrible marks
03:30
in high school so this is a repetitive
03:32
theme here we’ll figure how you gonna
03:36
get to where you are right now
03:41
self-proclaimed but note I had I had I
03:45
had bad marks and so I didn’t really
03:47
know what to do and so I applied when I
03:51
applied for schools in Ontario you have
03:52
to pick three and you rank them and I
03:53
put Waterloo lass and I was like well
03:56
let me put my safety school first I put
03:57
Western and then no offense to anybody
04:02
for wasn’t that was my signal to you
04:05
guys are probably much better-looking
04:06
than us but you’re all now working for
04:09
it so very good so I applied to Western
04:16
and then I applied to Queens and the
04:19
first acceptance I got was from Queens
04:21
and I thought man this is crazy how did
04:23
I get into Queens and I had taken it
04:25
because I just didn’t expect Waterloo to
04:27
accept me and it was like a Monday and I
04:30
was gonna mail it in by a Wednesday and
04:32
in this case my laziness completely paid
04:35
off because before I mailed in the
04:36
acceptance I got the acceptance to
04:38
Waterloo and it changed my life I worked
04:41
for a bunch of random companies during
04:44
my coop terms so that wasn’t
04:47
particularly eventful except that I
04:50
worked at a bank and then after I
04:52
graduated I was I got a full-time job
04:55
there and it was this constant feeling
04:59
of not like it just didn’t fit and I
05:03
quit which totally freaked my parents
05:06
out at the time because we needed the
05:09
money I mean I’ve you know we were
05:11
struggling financially so I was always
05:13
helping them and and at by the time when
05:15
I graduated I was thus almost basically
05:17
the the sole breadwinner of our family
05:20
and so you know it was just a thing ever
05:22
since I was fifteen
05:23
most of my salary just went back to my
05:25
family so it was a thing to leave a job
05:27
where you had a guaranteed salary it was
05:29
quite good to move to Silicon Valley and
05:33
work for a start-up and I worked at a
05:36
company called winamp and my my biggest
05:38
reason I joined it was because it was
05:40
eight other people all at the same age
05:43
or younger than
05:44
and at the time I was 22 and the only
05:47
reason I did it was I was just thinking
05:49
about the risk of working for people
05:51
smarter than me and I thought how could
05:52
these people know much more than I did
05:55
and so we’ll all learn together and that
05:58
ended up being a defining thing because
05:59
what I really took a risk on was just
06:01
the process of learning yeah and you
06:04
very quickly had to become comfortable
06:06
with being wrong and even more
06:08
comfortable with being derided for the
06:10
decisions that internally are you know
06:12
your body is telling you is right for
06:13
yourself that’s a really hard thing to
06:16
amplify consistently over time and it
06:20
wasn’t it wasn’t rewarded quite honestly
06:22
because I moved down to Silicon Valley I
06:23
was working at this company it was
06:25
bought by AOL AOL was rife with a lot of
06:28
turmoil because it had had a stock that
06:31
shot up it bought Time Warner then they
06:34
were decoupling the merger and all this
06:36
chaos people getting fired businesses
06:39
getting destroyed and then finally
06:42
something clicked for me which was I got
06:44
promoted enough times where I had a
06:46
chance to then take another shot and the
06:48
choice was stay at AOL where I had
06:50
become kind of an executive a young one
06:53
25 26 or leave and I left and I went to
06:58
Mayfield and then I was like wow this is
07:00
great I’ve made it oldest venture
07:02
capital firm in Silicon Valley and I
07:06
remember you know like thinking to
07:08
myself I’ve just climbed the top of the
07:10
mountain and within six months I’d
07:12
realized this is not the top of any
07:14
mountain that I wanted to be at the top
07:16
of and I had known Marc through that
07:19
process and I went and I worked at
07:22
Facebook for from 2006 2011 and then in
07:27
2011 I had the same decision which was
07:30
you know when I left Mayfield my parents
07:33
again freaked out they’re like you’re
07:35
making 250 grand a year now like you
07:37
don’t do that to go make $55,000 a year
07:39
what is a start-up what is the Facebook
07:42
you know no it was called the Facebook
07:44
and you know my dad is like it is a book
07:47
of faces
07:48
[Laughter]
07:50
I don’t get it and so you know you’re
07:54
dealing with this but underneath that
07:55
kind of like humor was a lot of pressure
07:57
again and so I didn’t know whether that
08:01
choice is right and then obviously by
08:02
2009 and 10 I was validated and so at
08:06
that point I start to tell myself like
08:08
listen whenever I have a feeling in my
08:09
gut I have to follow it as chaotic as it
08:12
may seem to everybody on the outside I’m
08:15
a reasonably good decision-maker if I
08:17
follow my instincts 2011 I get to the
08:20
same kind of decision point because I
08:22
had been building a product at Facebook
08:24
that didn’t ultimately get launched I
08:25
was building a phone and I woke up one
08:29
day and I was like well if I stay I’m
08:31
now only staying for the money and I
08:34
left and I started social capital and
08:38
it’s crazy and I mean I’ll tell this
08:40
story now because it’s kind of bananas
08:42
to think about this but I had equity
08:45
that was triggered on the number of
08:47
users and basically the incentive was
08:49
stay to get to a billion mau than two
08:51
billion mau whatever yeah and I left at
08:54
750 million Mau and I left enough stock
08:56
on the table that today I don’t know
08:58
somewhere between one and two billion
08:59
dollars
09:00
could you imagine serious money and so
09:03
again like you know my parents didn’t
09:05
understand any of that my family didn’t
09:07
understand any of that and so they’re
09:09
like what are you doing and I’m like
09:10
well I just don’t think if I if I stay
09:13
I’m gonna become a slave to money
09:14
because I have lost the passion of
09:17
figuring out monumental things I was
09:19
incremental II kind of iterating on
09:21
things and at the same time in 2011
09:25
there’s a lot of bad things that were
09:27
starting to happen in the world you know
09:29
if you look it’s sort of like for
09:30
example in the Middle East like there
09:32
was a fruit vendor in Tunisia that lit
09:34
himself on fire
09:36
Egypt started to see the rise of like
09:38
all of this dissent there was these
09:39
massive riots in Paris by all these
09:41
people living in slums all of a sudden
09:43
you would have these targeted bombings
09:45
everywhere and I was like where is all
09:47
of this hatred and frustration coming
09:49
from and now fast forward in the last
09:52
seven years what have you seen it’s all
09:54
a byproduct of this like growing sense
09:56
of like detachment and disassociation
09:59
with the human condition nobody has that
10:02
respect and
10:03
we used to anymore for the people around
10:05
us but I was feeling that in 2011 was
10:08
that the reason that you did not change
10:10
yeah and and and I said what am I gonna
10:12
do I’m not gonna go work in another
10:13
social network I wanted to do two things
10:15
one was basically see if what I was
10:18
saying to myself was right and two was
10:20
be a part of the solution and so I said
10:23
let me go and start working on really
10:26
hard problems again things that were
10:28
non-obvious things that weren’t
10:30
necessarily part of like Silicon Valley
10:33
you know dinner party gossip but we’re
10:36
really about the things that matter you
10:39
know mental health cancer diabetes
10:41
climate change all these things that to
10:43
me I found really interesting and I
10:45
thought if I do something about them
10:47
I’ll feel productive and and so that
10:51
gets me to here which is what I’ve been
10:52
doing for the last seven years looking
10:54
back did you like that feeling that you
10:56
had like a lot of kids haven’t seen that
10:58
thought that well how would you
11:00
characterize that like was it like a
11:01
feeling for like getting bored like what
11:04
is that internal feeling like you want
11:05
bigger problems so this is a this is a
11:08
much very complicated way of explaining
11:12
it and I really really really implore
11:14
you to listen to this okay because
11:15
there’s nothing to do with goosebumps or
11:19
something in your stomach this has
11:21
everything to do with psychology and
11:23
most of the psychology is really around
11:26
how you grew up okay let me tell you how
11:29
I manifest when I’m not in balance and
11:32
when I’m not in balance this is when I
11:35
need to get to balance which is I need
11:37
to change something so what do I do when
11:40
I’m not in balance something in my life
11:42
that I value is out of whack it’s not
11:45
fitting and what happens is I start to
11:49
feel really insecure and really inferior
11:53
about myself and then what do I do
11:56
I manifest that by really beating myself
11:58
up internally okay
12:01
and it’s like the negative self-talk and
12:03
the doubt and then I manifested by
12:05
projecting it on the people around me
12:07
typically the people that I love or care
12:09
about the people I work with the people
12:12
I’m in a relationship with
12:15
to make myself feel superior what I’ve
12:18
eventually figured out is it was the
12:20
pattern that my parents played out
12:22
themselves on me that I had been playing
12:24
out with the people around me except the
12:26
way that my parents played it out was
12:27
because of our poverty and other things
12:29
there was depression there was
12:31
alcoholism there was you know physical
12:33
abuse there was all of this stuff with
12:35
me it was much more deeply psychological
12:37
and nuanced but that was the feeling
12:40
when I was out of balance so it took me
12:42
a long time so I listened to my
12:44
instincts when I got out of balance and
12:46
changed but I couldn’t explain it until
12:48
very recently so what I would explain it
12:51
to you is we all are suffering from or
12:55
benefiting both from the legacy of how
12:58
we were raised
12:59
and it all really dictates your
13:02
decision-making as much as you may think
13:04
it doesn’t it does at the root cause of
13:06
all good and bad decisions is sort of
13:09
your sense of self-worth and that really
13:11
comes from these really important years
13:13
when you were a child and when you were
13:15
an adolescent and where you were
13:17
validated largely by parents and then
13:19
your peer group around you so in my case
13:22
what I have figured out is I care about
13:24
three things I care a lot about
13:26
professional accomplishment I do it’s a
13:29
scorecard that helped me save myself and
13:31
make me feel whole when I felt worthless
13:33
okay I care a lot about sort of like
13:36
social capital meaning like not the
13:39
company I built but the term right and
13:42
what does that term mean it’s a sense of
13:45
affiliation and belonging to the people
13:46
around you right that the ability to
13:49
influence and guide and Shepherd and be
13:51
guided and shepherded and then I care a
13:53
lot about having a few really deep
13:56
profound emotional relationships in my
13:58
life I care about that and so for me
14:03
what I’ve realized is whenever in a
14:05
situation I can explain this now the
14:08
reason I’ve changed is because
14:10
underlying it one of those three things
14:12
were not working and they were not
14:14
working to such a degree that I was
14:16
feeling so out of balance that I was
14:19
basically being in some way shape or
14:21
form projecting on to the people around
14:25
me and it was really affecting my
14:27
happiness
14:28
and in turn their happiness and I really
14:32
think at the end of it all all of us go
14:35
through that loop infinitely and what
14:39
I’ve been able to do because I’m
14:41
fortunate enough to have the time to
14:43
really think about it is get to a place
14:44
to understand it but it’s really
14:49
important because if I at 21 or 22 had
14:54
even barely scratched the surface of
14:56
understanding it I probably would have
14:58
made a lot of different decisions or
15:00
maybe if I had made the same decisions
15:02
let’s assume I’ve made the same ones it
15:04
would have been with a completely
15:06
different mental frame both in the
15:08
moment and then after the moment and I’m
15:10
sure all of you are thinking to yourself
15:11
like how different like of the things
15:13
that you do to yourself to beat yourself
15:15
up how it can get in the way
15:16
it’s unblocking that that allows you to
15:18
do everything and like I just think like
15:21
I’ve been lucky enough to get to a
15:22
simpler place where I can just put that
15:25
in a good frame and act on how do you
15:27
catch yourself when you get get in that
15:29
place like do you have a process for
15:30
that now
15:31
yeah and now I mean like you know to be
15:35
to be completely honest with you look
15:37
I’ve gone through a very tumultuous year
15:39
you know this past year which is the
15:43
combination of many years of things that
15:46
didn’t feel right I have had deep
15:49
meaningful personal changes in my life I
15:51
got divorced I had deep meaningful
15:54
professional changes in my life which is
15:56
that I was in the business of making
15:58
money for many many other people as well
16:00
as myself and I was not in the business
16:02
anymore of solving hard problems and so
16:05
I’ve had to reconcile and course-correct
16:07
that I’ve had realizations around that a
16:11
lot of the people that I had called my
16:13
friends were as a surrogate family that
16:15
I had built around me to compensate and
16:18
these were all people that were working
16:20
with me or for me that I was paying in
16:22
some way that’s not a family I mean
16:26
respectfully that’s not those are
16:29
colleagues friends friends they’re not
16:32
friends
16:34
coworkers I was about to see her but I
16:40
would have a thousand dollars to act and
16:41
I’m really trying to so so in any event
16:48
but in any event the point is that all
16:52
of these things changed and how I catch
16:57
myself is like I I now realize like in
17:00
that process there’s been moments where
17:03
for example like I’m in a new
17:05
relationship and when I was going
17:09
through a lot of this stuff I would
17:10
project a lot of this on to her and one
17:13
day she caught me and she’s like hey
17:14
listen we have to figure this out
17:15
because this is not you and then I
17:18
thought about it and then what I really
17:19
did was I went back and I thought about
17:20
all the other times that this manifested
17:22
in my life and now unproductive it was
17:24
and it brought me to a place where like
17:26
I recognized the physical
17:27
characteristics of it which is I feel
17:29
kind of tense I feel this thing building
17:32
up inside me and then I and then I start
17:35
to feel like I’m getting short-tempered
17:36
and then I’m getting angry and then I
17:38
get bursty you know and I’ll pick on
17:40
people and you know in the office it was
17:42
so funny because I got Facebook there’s
17:44
all this lore about me and my behavior
17:46
there but fundamentally it was probably
17:48
because I was dealing with a lot of
17:49
stuff that I had never really dealt with
17:50
and so now I’m just learning how to how
17:54
to find the trigger and slow it down
17:56
and go back and say wait either it’s
17:58
emotional or social or professional
18:00
something is happening that I really
18:02
care about that is now I’m taking with
18:04
me now projecting into the world in a
18:06
negative unconstructive way I gotta go
18:08
figure it out
18:08
by the way this is probably not the
18:10
conversation you’re probably but let me
18:14
tell you something okay I have literally
18:16
been checking every box that you have
18:18
been told to check your whole life and
18:20
what I’m telling you is at the age of 42
18:22
what I’ve gotten to is is a realization
18:24
that this is the most important thing it
18:28
gives you the energy to do whatever it
18:30
is you want to do be in a committed
18:31
relationship
18:32
start a business be a productive
18:34
co-worker or a colleague be a good
18:36
friend none of that is possible without
18:39
that kind of stuff really and truly
18:43
and so I’m just giving you that advice
18:44
because you know look you’re about to
18:46
start a hackathon it’s
18:48
fun maybe there’ll be some great things
18:50
that come out of it you’ll build some
18:51
great relationships and friendships
18:52
maybe you get motivated to go and do
18:54
something in the world that’s amazing
18:56
but also take away that this idea which
18:58
is that like there is work that you can
19:01
do on yourself that puts you in a
19:02
position to be excellent and it is
19:05
thankless work because nobody sees it
19:07
nobody values it everybody derives it if
19:10
you talk about it and it needs to get D
19:13
stigmatized because we all carry it with
19:15
us and the minute you on shop e yourself
19:16
from it and leave it you are powerful
19:19
and there’s nothing you can’t do and
19:21
that’s why it’s important
19:34
so a couple of things that you touched
19:36
on one is that about like you basically
19:38
had a feedback system that you over time
19:41
developed into being able to treat just
19:43
teach yourself into figuring this exact
19:46
refining your intuition on when you’re
19:48
gonna react that way are there like
19:50
feedback systems that you built to help
19:52
you learn and refine intuition around
19:54
like the people you hire or the ideas
19:57
you invest in or decisions you make what
20:01
are the systems you use this guy that on
20:07
my team wrote me a letter this week and
20:10
I won’t share it with you but I’ll share
20:12
while she was the love note he told me
20:19
this funny story which I had forgotten
20:20
which is when I first interviewed him I
20:23
actually only gave him ten minutes and I
20:26
forgot that originally when I was really
20:28
interviewing a lot of people my core
20:29
team let’s go back to the Facebook
20:33
example my quark team at social capital
20:35
is the same way our gist he’s
20:37
exceptionally talented human beings and
20:39
they’ve gone on to do great things so
20:42
when I look back like the thing one of
20:44
the things I’m the most proud of is like
20:45
I’ve really found a way to associate
20:47
myself with really credible good people
20:49
that are capable of doing a lot of
20:50
things so how do I not get in my own way
20:53
right and I’ve over these last 10 years
20:55
one of the first things is like
20:57
interviewing and talent I keep these
21:00
interviews the initial ones to as short
21:03
as possible 10 15 20 minutes and it may
21:06
seem brusque and Curt but mostly it’s
21:09
because if I stay too long I’m gonna
21:11
fall into there you know storytelling
21:14
and their narrative and what I’m really
21:16
gonna lose is that like that core sense
21:18
of who they are when they’re still
21:20
initially kind of nervous and like you
21:22
know they’re gonna be their true selves
21:23
because it’s hard to fake it when you’re
21:25
kind of nervous it’s much easier to fake
21:27
it when you’re like comfortable I always
21:29
ask people as well
21:31
teach me something that I don’t know and
21:33
I give them like a minute or two and
21:35
what I’m really trying to understand is
21:37
how well do they understand the things
21:39
that they care about because I think
21:41
that’s really important because a lot of
21:42
times things go right things go wrong
21:44
and if you don’t have the ability to
21:46
care about something
21:47
no matter what it is but something
21:49
you’re basically like a sociopath and
21:52
you’re not a very productive person in
21:55
in in a working context you know when I
21:59
think about investing
22:01
I actually don’t particularly like the
22:04
business of investing as a team I’m not
22:06
very good at it
22:07
a good team player I’m not to be very
22:11
honest with you I’m not you know I I was
22:15
looking at this recently but I’ve made
22:18
three massive investments outside of
22:20
social capital
22:21
the Warriors which by the way I mean
22:24
honesty guys I’ve done you know I’ve
22:30
helped start businesses and cancer
22:31
diabetes education nothing and the
22:40
Golden State Warriors gets the largest
22:42
year I mean it’s cool but anyway so the
22:48
Warriors Bitcoin and in 2013 or 14 I
23:00
made this I I did something which
23:04
created a lot of tension amongst my
23:06
friends at Facebook because I basically
23:08
sold all my Facebook stock in bought
23:10
Amazon we have one fried subscriber here
23:20
thank you
23:23
but all those decisions I made by myself
23:26
and by the way when I made all those
23:29
decisions
23:29
totally derided ridiculed by the people
23:32
around me nobody understood and I just
23:36
felt out of kilter and so I had to do it
23:38
those things by the way I’ve compounded
23:40
at 75% a year and these are sizable
23:43
things so I think I’m just much better
23:45
when I make investments by myself not
23:48
that that’s a particularly great thing
23:50
we’re a much better as a team is when
23:52
I’m in abling really talented to
23:54
technical people or I’m partnering with
23:56
really talented technical people to
23:58
think about big ideas and to feel like
23:59
there
24:01
fearless and that I’ll have their back
24:03
that so that we can go and tackle
24:05
problems that’s where I think I’m a
24:06
really good team member so for me I
24:10
think investing is a little overrated
24:12
quite honestly because I think there’s a
24:14
lot of situational luck and timing
24:16
that’s overlooked I also think it’s
24:18
fundamentally a solitary thing and the
24:22
team orientation I think is probably a
24:25
little misguided and oversold but team
24:29
building around companies and ideas
24:30
that’s fabulous
24:32
there’s nothing better there’s really
24:34
really I mean orders of magnitude away
24:36
from anything else it’s the most
24:38
incredible thing so if you don’t have
24:40
teams and like if you’re investing by
24:42
yourself
24:42
how do you check yourself like how do
24:44
you make sure your venture I’m afraid to
24:46
I’m not afraid to be wrong like I just
24:49
think being wrong is overrated in the
24:51
North American philosophy we we really
24:54
look there are certain times where you
24:56
can’t be wrong if you’re a pilot you
24:59
can’t be wrong or surgeon I get that or
25:01
fear no it’s not true actually surgeons
25:03
make mistakes all the time they leave
25:05
you no utensils or whatever not you know
25:12
but I I get how certain professions need
25:15
to value the sort of like the binary
25:18
distinction of right and wrong but I
25:21
think for most of us it’s really sort of
25:24
like you’re either learning or you’re
25:25
not learning and I think we right now we
25:28
create too much of a like a god complex
25:30
around being right and we don’t
25:32
celebrate enough like the fun process of
25:35
iterating you know and being able to
25:37
like be in the grind with people and
25:39
like like laugh when things don’t work
25:41
that it’s not like the end of the world
25:45
so I I think to me like that’s probably
25:48
the single biggest thing that people
25:49
have to get comfortable with which is
25:52
like just you’re learning you’re
25:53
learning and you either care about that
25:55
or you don’t like if you’re a good
25:57
entrepreneur like we were talking about
25:59
this in the green room nobody should
26:01
grow up to be an entrepreneur I’m sorry
26:04
that’s that’s great that’s ridiculous
26:06
you should grow up to be really angry
26:09
about something in your life that you
26:11
want to fix or change to make better
26:16
do you know what I’m saying yeah because
26:25
then all of a sudden like you’re not
26:27
gonna give up when something doesn’t
26:29
work when something is wrong you’re just
26:32
gonna keep working at it because it’s
26:34
learning but that mindset is only
26:36
possible in that context so I don’t know
26:39
I just think like that’s it that’s a
26:41
really important thing to really
26:42
internalize starting from there like
26:45
there there’s a lot of kids here
26:47
we’re like in what first year second
26:49
year you know high school are you do you
26:53
have to bring your parents here to sign
26:55
the letters but you know like the
27:00
world’s changed a little bit since you
27:01
were in school when you were doing
27:02
homework with the abacus like what
27:08
you DJ that’s what I’ve tasted so good
27:16
though that thousand dollars my gosh Wow
27:19
yes but what advice would you give kids
27:23
going into the workforce now like the
27:26
graduating how should it think about the
27:28
world they’re going into I think it’s
27:31
really really again I’m sorry but I’m
27:33
just gonna give you a very psychological
27:35
answer I think there’s a massive risk
27:39
that so many of us are unfortunately
27:42
raised in an environment where we can be
27:45
tricked to feeling inadequate okay you
27:49
spend 90% of your time on your phone I’m
27:51
sorry but I bet you at points in time
27:53
I’m sorry cuz I’m just gonna ask just be
27:55
really honest how many to any point in
27:57
the day do you feel inadequate when
28:00
you’re on the phone and like interacting
28:02
and whatever site you’re doing
28:03
we’re jealous or naive like envious
28:06
please please please be honest do ya
28:09
everybody okay could you imagine the
28:13
impact of that when that gets compounded
28:15
day after day year after year
28:17
so my advice is really like find ways of
28:23
breaking that cycle and I don’t really
28:26
know the answer I think
28:28
are the answer I think being outside as
28:31
cheesy as that may sound is the answer I
28:33
think like what if you’re in Canada it’s
28:35
cold in the winter let’s go be outside
28:38
there’s lots of things to do in the snow
28:40
but but right you can harvest maple
28:45
syrup you can go fishing in an ice pond
28:49
you can hunt a polar bear I mean there’s
28:54
so many things DJ but my point is like
28:59
um I think like if you’re if you’re in
29:02
your teens and 20s right now I think the
29:05
most important thing is to figure out
29:06
how you yourself are wired and to try to
29:09
basically get those things address
29:11
because it is in a most amplified state
29:14
than it’s ever been like I did not grow
29:17
up deeply insecure in success and no one
29:21
would never say you’re insecure
29:22
no one ever say you’re insecure oh I’m
29:25
deeply yeah absolutely I don’t know how
29:28
do you think you become you know super
29:31
successful you think these people I mean
29:32
look I’ve met these people you think
29:34
these people are normal do you think
29:37
they’re like ho-hum I’m whole let’s be
29:39
friends and have a burger that’s not
29:43
what these people are yeah okay they’re
29:47
not they’re deeply profoundly insecure
29:49
they manifest a lot of that by their
29:52
need to find something that they can
29:54
latch onto that makes them feel less
29:56
inferior ie superior and the success
30:01
tends to be proportional to that feeling
30:03
that’s true and you see a lot of people
30:07
you meet like whenever you meet somebody
30:08
who’s like I’m a teacher and I’m really
30:10
happy that person is whole that’s what
30:15
it means okay and when you meet like a
30:18
super billionaire who’s like trying to
30:20
become a super big a Becca billionaire
30:22
they’re super secure it’s just true it’s
30:27
okay it’s nothing wrong with that but
30:28
that’s just the reality the problem is
30:31
that when I was growing up it wasn’t
30:32
that big of a deal because the things
30:34
that amplified it were minimal they were
30:38
okay
30:39
I had a StarTAC flip
30:41
phone okay at best I had a pager when I
30:44
was in you gonna explain that to
30:46
everybody else a pager a pager is a
30:47
thing it’s like a phone but with up
30:50
things you can touch that just has a
30:52
number of the person that’s calling you
30:53
I mean it sounds ridiculous but I mean
30:56
you felt really cool when you had a
30:58
pager hi listen who had pagers cool
31:02
people and drug dealers okay I did
31:06
there’s a cool is there to be both I was
31:09
neither but I aspired to be both okay
31:17
always hustling like the thing is like
31:23
great so III was I made me felt what I
31:26
felt but I wasn’t completely bombarded
31:28
with things on the outside that
31:29
exacerbated and amplified it kids today
31:32
are and I think it has an impact in on
31:35
your general state of happiness your
31:37
general state of fulfillment your
31:39
general state of belongingness I really
31:41
do and I see it it is a big deal so if I
31:45
was in high school today look you’re
31:47
gonna do what you’re gonna do you’re
31:48
gonna spend your time on your phones the
31:51
way you’re gonna spend your time
31:52
whatever do it but just know that it is
31:56
a drug like any other drug and you have
31:59
to find ways of regulating yourself and
32:01
managing yourself and finding positive
32:03
outlets to replenish yourself and don’t
32:06
trick yourself otherwise otherwise
32:08
you’ll enter the workforce and you’re
32:10
going to be unhappy why do you think so
32:12
many people job hopped every six months
32:14
nine months I’m sure you have friends
32:16
siblings whatever that are in your in
32:18
their mid-twenties like why is it that
32:20
the average employment rate or the
32:22
average duration of employment in
32:23
amongst you know mid 20 year olds and 30
32:26
year olds is like half of what it used
32:28
to be
32:29
oh I’m unsatisfied oh I’m unfulfilled
32:31
well is it that all of a sudden like
32:34
something is cataclysmically changed in
32:36
world capitalism I’m sorry but the
32:38
answer is no it’s that your internal
32:40
sense of fulfillment and belongingness
32:42
has definitely changed because there are
32:44
other people around you that can amplify
32:46
your sense that they are happier but
32:49
they’re not they’re marketing happiness
32:51
better than you
32:59
so what do you do about it like you know
33:01
you’re great like you gotta figure on
33:03
hard problems
33:04
I really think heart problems means that
33:06
you find out something that really
33:08
upsets you about your the human
33:10
condition in which you grew up in or the
33:12
human condition that surrounded your
33:14
family or your friends or something
33:16
because it is deeply motivational
33:19
because it forces you to course-correct
33:21
all of that stuff that I just talked
33:22
about all of those potholes get filled
33:25
in you know if you have a parent that’s
33:28
suffering from cancer and you can commit
33:30
your life to doing something not only
33:33
will you honor that person in them
33:35
actually the best way possible you will
33:38
probably impact enormous numbers of lies
33:40
positive positively and oh by the way
33:43
you will be mega super deca rich if
33:46
that’s what you want because you can’t
33:49
not be impactful in a place like that
33:51
and not make money as a by-product but
33:54
if you’re like man I’m really mad about
33:56
scooters I’ve got a of the scooter
33:59
crisis you’re actually playing a charade
34:02
about trying to be an entrepreneur and
34:05
arbitrage in what is obvious it’s
34:07
probably not going to work you’re
34:09
probably gonna fail and there’s zero
34:11
chance that when the going gets rough
34:13
you don’t just quit because I’m just
34:17
sorry I don’t understand the boundary
34:19
condition where that matters to you you
34:22
know you may be a person that loves to
34:24
live in the outdoors and you may have
34:25
all these memories when you are young of
34:27
how like you felt whole and complete and
34:29
safe when you were there and now you see
34:31
the earth earth just getting shredded
34:33
apart and so you decide to do something
34:36
at climate change awesome do that that
34:39
energy will guide you that’ll course
34:41
correct it’ll get your insecurities out
34:43
the way you’ll be able to tell all your
34:44
friends you know what I get it you’re
34:46
gonna do your thing you’re gonna market
34:48
your happiness I’m doing this and I’m
34:49
actually happy and I’m gonna work at it
34:53
and it could be twelve years fifteen
34:55
years and something may happen something
34:57
may not happen but I’ll feel like I did
34:58
the right thing for myself that’s the
35:00
solution harp things that matter let’s
35:03
go fix the harp things that matter let’s
35:05
go figure out how to like a
35:06
eradicate this like virulent strain of
35:09
populism that’s emerging in the world
35:11
why are people so angry why are people
35:14
so unhappy let’s fix the boundary
35:18
conditions for them let’s show them a
35:22
better path that’s what you or should be
35:25
doing you are so smart you have to
35:28
allocate your time to these problems so
35:31
find the thing that upsets you and
35:33
pisses you off and go fix it give a
35:43
mental model so you keep to like sort of
35:45
separate our like hey these are hard
35:47
problems worthwhile versus like you know
35:49
what don’t worry about this hard problem
35:51
or you’re going down a wrong path
35:53
there’s never going down the wrong path
35:55
because that’s learning but we have
35:58
things that we basically dot on a line
36:00
of now-ish to never issue and what I
36:05
mean by that is like there’s your
36:06
certain things that would be bananas if
36:09
we could figure it out but I just think
36:11
are just truly difficult with the
36:13
toolkit that we have today like meaning
36:16
the toolkit of physics and math and
36:17
science and our understanding of
36:19
materials etc so some of those some of
36:21
these interesting hard problems are just
36:23
not for today and I and despite like a
36:27
lot of the I think like the PR hype
36:29
around some of these things like you
36:31
know like a looker every year like the
36:34
last 10 years quantum of computing is
36:36
like next year cold fusion you know cold
36:38
fusion is next year so there’s a couple
36:41
these things that I just think are very
36:43
difficult but then there’s a bunch of
36:45
stuff that’s more today what we do is
36:47
the following we basically sit around
36:49
now and we id8
36:50
and we generate a bunch of ideas on a
36:52
whiteboard and then what we do is we try
36:55
to filter and what we do by filtering is
36:58
we get experts so we go to Xerox PARC we
37:00
go to Stanford we go to MIT we have
37:02
about 40 or 50 like sort of profs and
37:05
PhDs and postdocs who know something
37:07
about a lot their thing very well and
37:10
then they teach us and we sit around and
37:12
we learn and we learn and we learn and
37:13
we document and we learn and then we try
37:16
to decide like is this interesting
37:17
enough for us to pursue and then when we
37:20
do that well
37:20
and we say well what how do we learn
37:22
more sometimes we launch experiments so
37:24
we’ll go and do a science project we’ll
37:26
go and you know get a couple of you know
37:28
master students to go and run some
37:29
experiments for us we collect the data
37:31
we see what it’s doing other times we’ll
37:33
bill get a financial person to go and
37:34
look at a market and say is there a
37:36
company we could buy to help us
37:37
accelerate whatever and then we sit
37:41
around we sit around and we wait so that
37:44
we’re not impulsive because the minute
37:46
we make one of these decisions they’re
37:47
probably 15 year 20 year decisions and
37:50
we have to get it right and it’s not
37:51
about the first 50 or 100 million
37:52
dollars because whatever it’s about the
37:54
next 500 700 a billion dollars we have
37:57
to put behind an idea there we have to
37:59
be right we can’t be wrong right so like
38:02
you could say blah climate change but
38:04
unless you’re precise you’re gonna burn
38:06
a lot of money which many people have
38:07
you could say blah Internet access for
38:10
everybody
38:10
but unless you get to the right answer
38:12
in the first version of the problem
38:13
you’re gonna burn in an enormous amount
38:15
of money so that’s our process we id8 we
38:18
learn we were fine we experiment and
38:20
then we basically create a map of how we
38:22
want to pull it off and we Jam Jam now
38:26
rip it in and it’s okay to be wrong yeah
38:29
I think like I say all the time changing
38:32
your mind is free I know you think it’s
38:35
not think about that because you
38:36
probably have like imagine how hard it
38:38
is for some of you once you make a
38:39
decision to change your mind because
38:42
you’re so fixated on like oh my god I
38:44
just I’ve made a decision well changing
38:47
my it’s like look at these pants I love
38:49
these pants and then you know like your
38:53
girlfriend says ah you know these are
38:55
not nice pants you’re like no these are
38:58
great pants
38:59
you know these are the best pants but
39:02
changing your mind is free okay whatever
39:04
you know like the past change that’s now
39:05
that’s a stupid example but it’s like
39:07
you know in business and when you’re in
39:10
a start-up like it’s so important change
39:12
your mind and like you just touch them
39:15
like you know if you’re working hard
39:17
problems being wrong is okay because you
39:19
might incremental progress is theory
39:20
yeah in fact it’s so crucial like if
39:23
you’re working on something that’s
39:24
really hard you have to be failing a lot
39:26
because otherwise you’re just basically
39:29
making a bunch of silly riskless
39:31
decisions that you know are probably
39:33
bound to be right
39:34
but that just means you’re gonna fail
39:35
anyways yeah and you don’t create
39:37
something new you don’t add value to
39:39
society but not like the people who in a
39:40
Nobel Prize what do you think their
39:42
processes they’re creating something
39:44
foundational in the world that gets
39:45
recognized 20-30 years later but they
39:48
are fundamentally people who have to
39:49
orient their minds around failure
39:51
failure failure right because it’s it’s
39:54
they’re swinging for the fences each
39:56
time they try to run some experiment and
39:59
I think working on hard problems is
40:00
basically requires that mentality which
40:02
is also I think it’s so much fun because
40:05
then it also allows you to clarify who
40:06
you work with imagine the people you
40:08
collect around you colleagues again not
40:12
family colleagues not friends coworkers
40:14
right who also then care you’re learning
40:20
together you’re living the struggle
40:21
together there’s camaraderie together
40:23
man what an incredible feeling there’s
40:25
nothing better
40:26
literally nothing better definitely so
40:30
now these kids are going into hackathon
40:32
they’re not trying to fail by Sunday
40:36
they’re trying to figure out something
40:37
how do you how do you start like you
40:40
know you have big problems do you want
40:41
to tackle like I don’t want to solve
40:43
small problems I got on a build a
40:44
website like okay you can’t you can you
40:48
can’t solve global warming in the
40:49
weekend right like it’s like eating an
40:52
elephant one bite at a time where do you
40:53
start
40:54
trunk tail well this is this is the
40:59
entree to a really bad off-color joke so
41:02
yes I’m gonna answer it in a different
41:04
way let’s say is anybody gonna work on
41:08
something related to drones
41:15
[Laughter]
41:24
one night – oh you have two guys okay
41:29
with you know two grand
41:30
Oh two grand go two times what I was
41:36
gonna say is like I just think that
41:37
there are probably I would encourage you
41:41
to do two things one is be realistic
41:44
which is I don’t intend to give you some
41:47
you know glib thing above yeah ghosts
41:50
all breast cancer in the next 48 hours
41:51
because it’s gonna be great it’s not
41:55
true and it’s not accurate but I do
42:01
think what’s important is something else
42:03
which is go prove to yourself that you
42:05
can start something and finish it and
42:06
not be afraid of being judged and
42:08
failing so doesn’t really matter to be
42:11
quite honest what you do in the next 48
42:13
hours in my mind it matters that you
42:15
take away the that thread I started I
42:19
created a plan I broke it down into
42:22
small bits I finished it I’m proud of it
42:25
and I don’t care how people judge it now
42:29
take that and amplify that and then go
42:32
and work on something hard and do it
42:33
over the next 10 years
42:44
I think what you said about like having
42:47
a end goal and having a bigger picture
42:49
and then breaking down to pieces is like
42:51
really really important because you
42:52
can’t you can’t solve everything but if
42:54
you don’t have a plan if you don’t break
42:56
you up into pieces like you don’t know
42:58
where you’re trying to get to with with
43:00
this stuff you’re doing right now like
43:02
how are you breaking up into pieces like
43:03
it’s like you’re chewing a big problem
43:06
already like solving hard problems and
43:08
helping other people solve other hard
43:10
problems you started with getting
43:12
information but where else are you going
43:13
with it where else do we get information
43:16
yeah what else are you doing like that
43:18
that’s stage one of the plan I get
43:20
information how else you like how do you
43:22
expand on that like how do you help
43:23
these guys figure out how to break
43:25
problems down how do you how do you
43:27
define MVP how do you define like what’s
43:30
the the problem to break down it’s it’s
43:33
really I mean I don’t I don’t know how
43:35
to answer that question to be honest it
43:37
really just depends on the idea so for
43:38
example like with you yeah right like
43:40
when we were working together what was
43:43
our true core MVP it was basically can
43:47
this sensor be viable right under a lot
43:50
of different conditions that would have
43:52
mimicked real life and so you guys I
43:57
think did a great job of and it took 18
43:59
months basically to break the problem
44:00
down into all little bits that got us –
44:02
yeah the sensor is roughly functional
44:04
yeah so it really just depends on the
44:08
problem itself because it but I think in
44:10
in all of these things the answer is
44:12
always the same which is it’s a really
44:15
unglamorous thing that your litmus test
44:20
should be will you feel embarrassed or
44:23
will people like chide you for that
44:27
thing that’s the right MVP that’s always
44:31
the right MVP when the answers to that
44:34
huh wouldn’t the answer is yes if you
44:36
will feel embarrassed yet or people will
44:39
laugh at you at this thing as a proof of
44:42
concept that is what the MVP is not the
44:45
thing that’s grandiose that answers most
44:47
of the questions where you feel great
44:48
you know telling somebody over a beer
44:51
that’s not the MVP in fact that’s like
44:53
counter-intuitively it’s probably like
44:55
you’re less likely to be successful
44:58
because you’re gonna give a complicated
45:00
answer to all these things and features
45:01
and functionalities and
45:02
blah-blah-blah-blah-blah
45:03
the point is you’re never gonna get and
45:06
you just have to hack something together
45:08
and ship it yeah ship it
45:12
something like that
45:13
oh I wouldn’t have used the f-word there
45:17
baby
45:19
definitely definitely taught me that one
45:21
but couple things one I always
45:24
appreciate when I have conversations
45:25
about you with you is sort of is that
45:35
you you always end up helping reframe
45:38
the problem and help them sort of think
45:40
about something a little bit bigger so
45:42
that you you attack it from a different
45:43
angle how do how do people practice that
45:47
and where’d you get that scale like what
45:48
what are things that they can try to
45:50
help like up level or think in a bit I
45:54
have never been a very linear person and
45:56
I don’t say that in some like grandiose
45:59
way I’ve always been a little random and
46:03
haphazard so that was partly because I
46:07
think again
46:08
I’ve always felt an uneasy with the way
46:12
that I was and I have tried to ask
46:17
questions and learn about things that
46:19
made me feel comfortable and I always
46:22
gave myself time to meander I’m not a
46:25
big book reader I’ve said this a lot
46:28
because I don’t want other people’s 250
46:32
pages of you know expert opinion on
46:35
something because I don’t think they
46:38
probably have it
46:39
I love articles I love journals
46:42
I love Wikipedia I love the web I love
46:45
reading blogs things that are succinct
46:47
force people to tell the truth things
46:50
that are long allow people to tell their
46:51
opinion and so like I’ve always fed this
46:56
thing of just like there’s randomness is
46:59
good for you
47:00
it’s very very good for you finding
47:03
people around you that you don’t
47:05
necessarily get along with in the most
47:07
obvious ways is good for you getting
47:09
yourself out of your comfort zone and
47:11
like
47:11
about yourself is good for you oh there
47:14
is one book that I would recommend which
47:16
I’ve read end to end and I think for me
47:20
and I’m just gonna tell you in this
47:22
immigrant condition or like the the
47:25
psychology of how I helped myself
47:27
it’s called adult children of alcoholics
47:29
and I would really encourage anybody who
47:32
finds any of the first part of what I
47:34
spoke about interesting to read that
47:35
book because it is written in three
47:37
parts and part one is what have you
47:42
lived and it goes into so much detail
47:44
that it was just stunning to me how much
47:48
of that I had lived at the first time in
47:50
my life when I had thought that I was
47:53
suffering alone
47:54
I realized so many other people had gone
47:56
through this so much so that this woman
47:59
and the 70s could write a definitive
48:00
book about it okay that’s section 1 and
48:03
section 2 is it then says here’s
48:05
probably all the traits that you brought
48:06
with you into your adult life and so
48:09
many of them rang true and then section
48:11
3 was here’s how you can start to put
48:13
together a plan to help fix yourself
48:15
adult children of alcoholics it’s the
48:17
only book that I really would recommend
48:19
and it’s not for idle it’s not just
48:21
because you’re you grew up in an
48:22
alcoholic family I just think it’s like
48:24
any any kind of dysfunction it’s
48:26
incredibly helpful the way but otherwise
48:27
I’m me and ER I read a lot I asked a lot
48:30
of random questions and I try to give
48:34
myself other ways of exploring my
48:38
intelligence working on yourself is a
48:41
really meaningful way of working on your
48:43
intelligence you know being alone
48:46
sometimes is a really powerful way of
48:47
clarifying the things that you think are
48:49
important to you these are not all
48:51
things anymore that are valued right
48:53
we’ve stripped it all the way we really
48:55
have in the last 10 years stripped it
48:57
all away and in many ways we’ve
49:00
amplified the worst parts of it
49:02
so I would just encourage it’s sort of
49:04
like work on yourself
49:05
I really think like the next great
49:08
entrepreneur that spouts from this place
49:09
is probably the most whole among us Wow
49:12
yeah I know we’re both thought
49:16
so I have a question for you but before
49:18
I get to that you guys are supposed to
49:22
submit questions via Twitter somebody’s
49:24
gonna go filter those things out and
49:26
then text it to me and then I’m gonna
49:28
ask him those questions and then he may
49:30
answer that but while you figure out how
49:33
to do two questions
49:36
random question what are you guys doing
49:38
at social capital and what are you guys
49:39
doing here
49:41
with social capital well we’ve always
49:43
had a Fellows Program that Fellows
49:45
Program has been about picking some of
49:48
the most capable computer scientists and
49:50
direct our portfolio and directing them
49:53
to work with us so a chance to work at
49:55
companies like intercom slack pathos etc
49:59
yeah we’re hiring and we’re often to
50:01
work at ask our interns we’re here for
50:03
that we’re here to hire for our own team
50:05
so that’s why we’re here and I’m here
50:08
because I’m Canadian and I was it was a
50:10
great chance to come see my mom in
50:11
Toronto and then come see you guys and
50:14
then what’s happening at social capital
50:18
is just about honoring what we started
50:23
and you know it’s really interesting to
50:27
read the press cycles and see how
50:29
inaccurate they are and to feel kind of
50:33
like whole enough to not care to care I
50:36
mean yeah we’ve done an incredible job
50:41
we’ve in investing we’ve made many many
50:46
many billions of dollars in the job of
50:49
incubating heart problems we’ve done in
50:52
my in my opinion even more work that I’m
50:54
proud of and the future we’ll be really
50:57
focusing on how to do that better and
51:00
aligning around a core team of people
51:03
that want to be surrounded by engineers
51:05
and product managers and data scientists
51:06
and just get back to building and you
51:09
know look I spent the last two years
51:10
glad-handing around the world meeting
51:12
rich powerful people and I was gutted by
51:16
a same feeling you had before when you
51:17
would leave yeah same thing I’m not a
51:20
money person who doesn’t doesn’t really
51:23
get me yeah and there’s been several
51:25
times in my life where I’ve succumb to
51:27
it but every time I
51:30
reconcile who I really am as a man and
51:32
as a human being I come back to my core
51:33
truth which is I’m a person that’s a
51:35
builder I like building on hard things I
51:38
like surrounding myself with earnest
51:40
people that care about hard things
51:41
because they share that same passion and
51:44
core energy and I like learning and it
51:47
makes me really happy so that’s what’s
51:49
happening with social capital it’s more
51:50
about having the fidelity and strength
51:55
to honor what we started
51:57
sweet all right I guess I’m waiting for
52:00
questions are coming in a panic all
52:02
right head Shaw asks too much if I win
52:08
hack the north can you transfer Curry to
52:10
the Raptors no I mean guy in the front
52:26
go and I of your hair I mean it has like
52:37
undulate wave that I can see them in
52:39
here that’s really comforting to me
52:54
honestly I don’t know I I think you
53:04
can’t I think the people that own these
53:06
next-gen technologies will decide the
53:09
fate of the world
53:09
oh that’s there’s no doubt gene-editing
53:12
I mean like think about that you know
53:15
think about the implicit
53:17
look III had the I have the honor of
53:20
working with a company that’s working in
53:21
AI on something and half the time I’m
53:25
stunned at the compute power that we’re
53:28
creating half the time I think what
53:30
happens if this fabric gets in to the
53:32
wrong hands and I don’t know the right
53:35
answer I you know I work with another
53:37
company that does a lot of stuff with
53:39
three-letter agencies in the United
53:40
States and sometimes I wake up and I’m
53:43
like weird
53:43
doing God’s work and sometimes I wake up
53:45
and I want to vomit well that’s life and
53:48
you know what I’m glad to be in the
53:52
Sturman drag of that emotion honestly
53:55
because at least I’m the edges I can
53:58
help be a part of some of that decision
54:00
making but abdicating that and naik not
54:02
being there is not the right answer
54:04
because somebody else is going to do it
54:06
and somebody else may not have my moral
54:08
and ethical perspective not that mine’s
54:10
better than anybody else’s but it’s just
54:12
different it’s my own and so I’d rather
54:13
reflect my own than somebody else’s no
54:24
just means that I have to work harder so
54:25
that it’s my turn it’s like it’s like
54:29
it’s like kind of like you know like a
54:31
boxing day sale at Zellers okay and
54:34
there’s a single line you got to wake up
54:37
early man and fight for that space in
54:39
line cuz if they give it away to
54:40
somebody else that’s not right how many
54:51
people do you think I have buying me
54:53
clothes right now also there’s a whole
54:55
lotta people here give me a good example
55:01
mart zara zara zara yeah sorry there’s a
55:06
good one all right
55:07
so one of the questions that came in is
55:08
that how do you find the balance between
55:10
being secure enough to be successful and
55:13
being not insecure enough to be happy
55:17
don’t try to be balanced just be aware
55:20
what is what is balanced mean who cares
55:22
about balance somebody like balanced
55:24
people you want a whole person but a
55:26
whole person isn’t boring you know what
55:29
I’m saying don’t be boring it’s not
55:31
about negating at all it’s about
55:32
honoring it it’s about knowing that it’s
55:35
there and it’s about helping you to
55:37
become better with it I don’t know just
55:40
I felt like ya know makes me feel better
55:42
because I’m still bouncing back between
55:44
security and insecurity all the time and
55:46
at least now you can trigger on it and
55:48
figure out what you want to do good
55:49
times
55:50
not all the time and not very well but
55:52
at times you repeat since you’re taking
55:56
them on the side
55:57
okay the question is he has an idea but
56:01
he’s afraid he doesn’t think there’s
56:03
hope he doesn’t know what to do
56:06
dude I don’t know what to do
56:10
so but I’m just gonna do I think you
56:15
can’t worry about the finality and the
56:17
end state too much like be very selfish
56:21
for a second and think to yourself if
56:23
doing this will make you happy let’s
56:26
just assume the world is screwed you
56:28
might as well be happy until it all ends
56:29
anyways shouldn’t you shouldn’t you
56:33
I mean well there’s there’s no point
56:37
there’s no point you know boom owning it
56:38
cuz it’s let’s just say it’s a fact the
56:39
complete what are you gonna do I would
56:41
just say be happy and my version of
56:44
being happy is I want to work on things
56:45
that I care about so I wouldn’t get too
56:47
fatalistic about all this stuff I think
56:49
we are evolving things in an incredible
56:51
way as a race and as a species the big
56:54
problem today is that these systems that
56:55
are supposed to work for the many really
56:57
only work with a few and they’re too
56:58
asymmetric this is why when you fix a
57:01
hard problem what you really do is you
57:02
level the playing field that’s something
57:04
that’s worthwhile getting in balance and
57:06
so I would not get too hung up on how
57:11
screwed the world is instead I would
57:14
kind of tell myself listen things are
57:17
gonna happen good and bad I have a
57:19
responsibility if I’m capable of
57:20
allocating some of the goodness to as
57:22
many people as possible and honestly
57:24
dude if you’re afraid of all this stuff
57:25
and it freaks you out get to work
57:28
no like right now get to work you
57:30
shouldn’t even be here you know what I’m
57:34
saying like you cannot get caught up in
57:38
your own underwear on this stuff because
57:39
it’s debilitating yeah don’t worry about
57:45
it do a food distribution like you guys
57:48
we haven’t we own value at our company
57:51
call be a player which basically goes
57:53
back to saying like you were a problem
57:55
like the first question you should be
57:56
asking is like what am I gonna do about
57:58
it and then go do it
58:00
like you can’t wait for somebody else to
58:02
solve the problem right so you can take
58:04
the first step and it’s noticeable to
58:06
care about ten things equally that’s not
58:08
true right let’s just say you had three
58:10
pets
58:11
the dog a hamster and a rat don’t lie to
58:17
me and tell me you’d like the rat more
58:19
than the dog it belongs kick-ass rats
58:22
suck
58:22
hamsters get eaten there’s a priority
58:24
okay ideas are the same that person
58:44
cannot be negative don’t tell me that
58:47
your mastery of rhetoric there isn’t
58:51
Kenny the question is Canadian brain
58:54
drain how do we combat it to Hippocrates
58:57
well why did I leave I left Canada
59:03
because I didn’t feel I was I felt at
59:08
home meaning on the one hand I felt at
59:11
home because it had raised me and had
59:13
given me so many things but at a much
59:16
more core level about what I wanted to
59:18
do for the future I did not feel at home
59:19
I did not feel it was a place that could
59:21
embrace risk and failure and I did not
59:23
feel like it was a place that I could
59:25
surround myself with the people that
59:27
would allow me to build what I was
59:28
capable of building I don’t think that
59:33
that’s been fixed yet here so how do you
59:37
fix it I think at one level we have to
59:42
fix the taxation system because
59:45
unfortunately or not there’s a huge
59:47
incentives that comes with taking the
59:49
kind of risk that we take and it’s
59:52
well-established in the United States
59:54
and it’s not here it’s just not and then
59:58
the second thing is that I think that
60:00
culturally you have to find ways of like
60:02
organizing around people that don’t
60:04
celebrate checking boxes and being
60:07
middle of the road being in balance
60:09
symmetry is valued in Canada come along
60:13
get along everybody’s nice and
60:15
hunky-dory in the middle right it’s true
60:18
being an outlier and being spiky is not
60:21
valued and so a lot of people feel out
60:23
of place and if you’re in technology
60:25
you’re probably
60:25
predisposed to being that kind of spiky
60:27
person and all of a sudden you see these
60:29
shiny objects like Facebook and Oberer
60:30
and Google in Silicon Valley and you’re
60:32
like wow I’ll be understood I’ll be
60:34
around my tribe I’ll find connection and
60:36
affiliation so that’s what you have to
60:38
solve you have to solve the financial
60:40
incentives and you have to solve the
60:41
social incentives and community then
60:43
people won’t go one the government can
60:45
control and two is like places like this
60:48
you know and like how these places
60:50
evolve over time can do that I don’t
60:54
think it’s not overnight solve either
60:56
like it takes time for building the
60:57
ecosystem yeah ii support startups
61:01
i was pulling out i was i was this was
61:05
yesterday i was at some shopping center
61:10
near my house in Palo Alto okay and I
61:12
was pulling out of a lot of a stall or
61:16
whatever and this woman was on her phone
61:18
totally oblivious to me kept going right
61:20
through I have it I have a Tesla Tesla
61:25
but I get these drops and the latest
61:29
software dropped that I got basically
61:30
stopped the car for me well cuz I was
61:34
just pulling out and it made a decision
61:36
and it intervened you know I’m thankful
61:38
I am it also turned out I mean it’s also
61:41
true my kids were in the car so it would
61:43
have been a you know really bad thing
61:45
but these are the kinds of expert
61:47
systems we’re building you know there
61:49
there are people right now that are like
61:50
doing an incredible job you give them a
61:52
small amount of data and an image and
61:54
boom they’ll know whether they can
61:56
detect a tumor or whatever all these
61:58
things are possible because of AI so why
62:00
fear that stuff we need a better compute
62:02
fabric so that you could do it faster
62:03
and a better scale I think so that’s
62:07
kind of my view I think I think this
62:08
whole thing of like the robots taking
62:10
over is a little overblown in 50 years
62:12
we’re gonna have to worry about
62:13
something like that but not now
62:14
cool well we’re out of time I have a
62:16
bunch more questions about this stuff
62:18
but how can I say
62:22
okay the blonde the blonde lady I was
62:25
waving this this question is not gonna
62:39
go in a good place huh
62:40
she’s gonna either we’re you can already
62:42
tell right everybody knows go ahead
62:43
sorry miss your question but did you
63:11
just did you miss the point of what I
63:12
said that is what I said I don’t think
63:14
that this is a I’m sorry but like look I
63:17
got exceptionally lucky okay am i proud
63:21
of it yeah is that at number inaccurate
63:24
yeah it’s actually much much better than
63:26
that
63:32
I have nothing to be ashamed of okay so
63:37
but none of that matters that’s my whole
63:41
point
63:41
it doesn’t matter don’t label me by that
63:44
number which is inaccurate to the
63:46
downside by many multiples okay but it
63:48
doesn’t matter what I’m trying to tell
63:51
you is that it matters that you realize
63:53
we are living in a world that has the
63:55
disproportionate percent propensity
63:57
whether you’re rich poor black white
63:59
male female gay straight doesn’t matter
64:02
to make you feel unhappy and yes I do
64:06
think it is the most important thing and
64:08
there are different weights and measures
64:10
for different people and you owe it to
64:12
yourself to learn about what it means
64:14
for you and do it I’ve started to do it
64:17
because I got to these check boxes and
64:19
didn’t feel happy so yeah I’m agreeing
64:22
with you
64:23
there’s nothing I said that is
64:24
correlated with all that stuff that you
64:26
just talked about there’s nothing to do
64:27
with being rich okay one last thing
64:38
before I before you guys go go read that
64:42
book if you care can you repeat the name
64:45
of the book so that everybody catches it
64:46
again adult children of alcoholics go
64:49
read it I mean not all of you need to
64:54
read it but I’m just saying for some of
64:56
it and then take the time to take care
64:59
of yourself and then you’ll be able to
65:02
do whatever the hell it is that you want
65:03
to do and I wish you the best of luck
65:05
and I wish you all the skill in the
65:08
world but I wish you really the best of
65:11
luck
65:13
[Applause]