Zucked. Roger McNamee
mistakes. What differentiates great portfolio managers is their ability to recognize mistakes early and correct them. Portfolio managers learn by trial and error, with lots of errors. The key is to have more money invested in your good ideas than your bad ones.
T. Rowe launched a pure-play Science & Technology Fund, managed by two of my peers, on September 30, 1987. Nineteen days later, the stock market crashed. Every mutual fund got crushed, and Science & Tech was down 31 percent after only a month in business. While the number was terrible, it was actually better than competitors because the portfolio managers had invested only half their capital when the market collapsed. In the middle of 1988, with the viability of the fund in doubt, the firm reassigned the two managers and asked me to take over. I agreed to do so on one condition: I would run the fund my way. I told my bosses that I intended to be aggressive.
Another piece of amazing luck hit me when T. Rowe Price decided to create a growth-stage venture fund. I was already paying attention to private companies, because in those days, the competition in tech came from startups, not established companies. Over the next few years, I led three key growth-stage venture investments: Electronic Arts, Sybase, and Radius. The lead venture investor in all three companies was Kleiner Perkins Caufield & Byers, one of the leading venture capital firms in Silicon Valley. All three went public relatively quickly, making me popular both at T. Rowe Price and Kleiner Perkins. My primary contact at Kleiner Perkins was a young venture capitalist named John Doerr, whose biggest successes to that point had been Sun Microsystems, Compaq Computer, and Lotus Development. Later, John would be the lead investor in Netscape, Amazon, and Google.
My strategy with the Science & Technology Fund was to focus entirely on emerging companies in the personal computer, semiconductor, and database software industries. I ignored all the established companies, a decision that gave the fund a gigantic advantage. From its launch through the middle of 1991, a period that included the 1987 crash and a second mini-crash in the summer of 1990, the fund achieved a 17 percent per annum return, against 9 percent for the S&P 500 and 6 percent for the technology index. That was when I left T. Rowe Price with John Powell to launch Integral Capital Partners, the first institutional fund to combine public market investments with growth-stage venture capital. We created the fund in partnership with Kleiner Perkins—with John Doerr as our venture capitalist—and Morgan Stanley. Our investors were the people who know us best, the founders and executives of the leading tech companies of that era.
Integral had a charmed run. Being inside the offices of Kleiner Perkins during the nineties meant we were at ground zero for the internet revolution. I was there the day that Marc Andreessen made his presentation for the company that became Netscape, when Jeff Bezos did the same for Amazon, and when Larry Page and Sergey Brin pitched Google. I did not imagine then how big the internet would become, but it did not take long to grasp its transformational nature. The internet would democratize access to information, with benefits to all. Idealism ruled. In 1997, Martha Stewart came in with her home-decorating business, which, thanks to an investment by Kleiner Perkins, soon went public as an internet stock, which seemed insane to me. I was convinced that a mania had begun for dot-coms, embodied in the Pets.com sock puppet and the slapping of a little “e” on the front of a company’s name or a “.com” at the end. I knew that when the bubble burst, there would be a crash that would kill Integral if we did not do something radical.
I took my concerns to our other partner, Morgan Stanley, and they gave me some money to figure out the Next Big Thing in tech investing, a fund that could survive a bear market. It took two years, but Integral launched Silver Lake Partners, the first private equity fund focused on technology. Our investors shared our concerns and committed one billion dollars to the new fund.
Silver Lake planned to invest in mature technology companies. Once a tech company matured in those days, it became vulnerable to competition from startups. Mature companies tend to focus on the needs of their existing customers, which often blinds them to new business opportunities or new technologies. In addition, as growth slows, so too does the opportunity for employees to benefit from stock options, which startups exploit to recruit the best and brightest from established companies. My vision for Silver Lake was to reenergize mature companies by recapitalizing them to enable investment in new opportunities, while also replicating the stock compensation opportunities of a startup. The first Silver Lake fund had extraordinary results, thanks to three investments: Seagate Technology, Datek, and Gartner Group.
During the Silver Lake years, I got a call from the business manager of the Grateful Dead, asking for help. The band’s leader, Jerry Garcia, had died a few years before, leaving the band with no tour to support a staff of roughly sixty people. Luckily, one of the band’s roadies had created a website and sold merchandise directly to fans. The site had become a huge success, and by the time I showed up, it was generating almost as much profit as the band had made in its touring days. Unfortunately, the technology was out of date, but there was an opportunity to upgrade the site, federate it to other bands, and prosper as never before. One of the bands that showed an interest was U2. They found me through a friend of Bono’s at the Department of the Treasury, a woman named Sheryl Sandberg. I met Bono and the Edge at Morgan Stanley’s offices in Los Angeles on the morning after the band had won a Grammy for the song “Beautiful Day.” I could not have named a U2 song, but I was blown away by the intelligence and business sophistication of the two Irishmen. They invited me to Dublin to meet their management. I made two trips during the spring of 2001.
On my way home from that second trip, I suffered a stroke. I didn’t realize it at the time, and I tried to soldier on. Shortly thereafter, after some more disturbing symptoms, I found myself at the Mayo Clinic, where I learned that I had in fact suffered two ischemic strokes, in addition to something called a transient ischemic attack in my brain stem. It was a miracle I had survived the strokes and suffered no permanent impairment.
The diagnosis came as a huge shock. I had a reasonably good diet, a vigorous exercise regime, and a good metabolism, yet I had had two strokes. It turned out that I had a birth defect in my heart, a “patent foramen ovale,” basically the mother of all heart murmurs. I had two choices: I could take large doses of blood thinner and live a quiet life, or I could have open-heart surgery and eliminate the risk forever. I chose surgery.
I had successful surgery in early July 2001, but my recovery was very slow. It took me nearly a year to recover fully. During that time, Apple shipped the first iPod. I thought it was a sign of good things to come and reached out to Steve Jobs to see if he would be interested in recapitalizing Apple. At the time, Apple’s share price was about twelve dollars per share, which, thanks to stock splits, is equivalent to a bit more than one dollar per share today. The company had more than twelve dollars in cash per share, which meant investors were attributing zero value to Apple’s business. Most of the management options had been issued at forty dollars per share, so they were effectively worthless. If Silver Lake did a recapitalization, we could reset the options and align interests between management and shareholders. Apple had lost most of its market share in PCs, but thanks to the iPod and iMac computers, Apple had an opportunity to reinvent itself in the consumer market. The risk/reward of investing struck me as especially favorable. We had several conversations before Steve told me he had a better idea. He wanted me to buy up to 18 percent of Apple shares in the public market and take a board seat.
After a detailed analysis, I proposed an investment to my partners in the early fall of 2002, but they rejected it out of hand. The decision would cost Silver Lake’s investors the opportunity to earn more than one hundred billion dollars in profits.
In early 2003, Bono called up with an opportunity. He wanted to buy Universal Music Group, the world’s largest music label. It was a complicated transaction and took many months of analysis. A team of us did the work and presented it to my other three partners in Silver Lake in September. They agreed to do the deal with Bono, but they stipulated one condition: I would not be part of the deal team. They explained their intention for Silver Lake to go forward as a trio, rather than as a quartet. There had been signals along the way, but I had missed them. I had partnered with deal guys—people who use power when they have it to gain advantages where they can get them—and had not protected myself.
I have never believed in staying where I’m not wanted, so I quit. If I had been motivated