In Defense of Private Equity

In Defense of Private Equity

Joe|October 17, 2017

The only way to create prosperity is to do more with less. In economic terms, an increase in productivity is an increase in the amount or quality of output generated for each unit of input. Jobs do not make society wealthier – productivity does. The original example of an industry that has learned to do more with less is agriculture. On a medieval farm, an entire family would have to work to eke out a subsistence living for themselves. But today, a small number of farmers produce enough food to feed the entire planet.

From the green revolution to the present, technological innovations and centralization of farming operations enabled the agricultural sector to do much more with far less. Between 1930 and 2000, U.S. agricultural output quadrupled, even though material inputs such as land, labor, and capital remained constant. This enormous productivity boost freed up Americans to specialize in other sectors: building, manufacturing, and creating new goods and services.

As the example of agriculture illustrates, there are multiple ways to increase economic productivity. One is to build and finance companies with entirely new innovations, typically the domain of the entrepreneur and the venture capitalist. Another is to improve the way existing companies work, often by merging many smaller companies to form one large one, or restructuring management goals and employee incentives within a company. This is typically the domain of the “private equity” firm or a large acquisitive corporation. The two methods sometimes complement each other: when a VC-backed entrepreneur develops a new technology, corporations or PE-like firms often scale the product and quickly spread it throughout the economy.

How Private Equity Works
Today, a private equity or “PE” firm is a company that raises funds from institutions and wealthy individuals and then invests that money in buying and selling businesses. PE firms are usually “activist” investors, which means that rather than pursuing a passive buy-and-hold strategy, they are involved in managing (fixing…or screwing up) the internal operations of the businesses they acquire.

Imagine you’re an investor who wants to make the economy run more productively by improving as many businesses as you’re able to, starting with those with the most potential for improvement. You pore over a map of the economy that shows how different sectors have evolved, which business models have proven effective, where consumer demand is trending, and rafts of other economic data. You want to do more with less – but how? The leaders of private equity firms find themselves in exactly this position, and employ some of the following strategies:

1) Combining back offices of multiple firms to cut redundant costs. Sometimes PE firms will bundle several companies within an industry vertical to reduce supply chain costs. They may also combine an ailing company with a healthy company so that the former can develop better processes and become more productive.

2) Aligning incentives by increasing CEOs’ and operational officers’ stakes in their business. This technique rewards management for increasing company growth and performing a successful company exit.

3) Rescuing and restructuring businesses that are squandering their resources. PE firms commonly target older companies that lack financial discipline, particularly those with inefficient middle management, or where executives spend money on private jets and extravagant parties. These kinds of organizations benefit immensely from the tutelage of private equity firms experienced at leading and running capital-efficient businesses. By aligning rewards with performance (rather than nepotism or habit), PE firms can make portfolio companies much more productive.

4) Locating great sectors and geographies to invest in. PE firms may be able to spot undervalued industrial sectors or localities that others have missed. When these areas are capitalized to their potential, they can fully develop and thrive.

5) Using equity capital more efficiently. The capital markets are highly competitive, and securing loans (“leverage”) for deals requires finesse. Though the popular press often disparages “financial engineering”, reorganizing a company’s capital structure can free up money to deploy to other parts of the business or the economy. Of course, irresponsible leverage makes a firm more likely to fail. But the market accounts for this possibility – investors in private equity firms carefully monitor their investments. A PE fund with failed portfolio companies will have trouble raising as much money and freely determining how to allocate it next time around.

A good example of how PE can positively impact an industry is Carlyle’s buyout of Hertz Corporation in 2005. After the buyout, Hertz improved operational efficiency in a variety of ways – for instance locating car cleaning and refueling services in the same parking lots. Not only did these improvements raise Hertz’s value by $3B, they forced the entire car rental industry to respond with innovations of their own. During the same period, Avis-Budget and Dollar-Thrifty profit margins and labor productivity increased substantially. Another example of private equity techniques at work is the brewing industry. The average worker at a North American brewing company is 7x as productive as his counterpart in 1950. Private equity groups such as 3G Capital, which merges and restructures brewing operations (recently, Anheuser-Busch), have made the industry much more efficient.

Private Equity and Its Discontents
The classic critique of private equity is that its success derives from financial engineering tricks, such as increasing leverage and minimizing tax liabilities, rather than real operational improvements. Michael Moritz recently claimed, for instance, that PE is akin to
“making a small down payment on your neighbors' house; paying for the balance by taking out a mortgage secured by their savings, jewelry, silverware and car; selling off the contents of their property; and then siphoning off some of the loan for yourself.” Similar invectives were leveled during the 2012 presidential campaign of Mitt Romney, who helped create Bain Capital. Like any industry, PE is occasionally corrupt – as when it partners with crony state and local governments to charge exorbitant rates on water utility bills, ambulances, and inmate phone calls. But the image of private equity purely as a parasitic form of business completely misses the point.

The primary way to make money in private equity is to make portfolio companies more efficient and healthier in the long-run. If a PE firm saddles a portfolio company with such a heavy debt burden that the company is unable to return a profit, the PE firm ultimately suffers. Private equity firms are fundamentally incentivized to improve and strengthen the operations of the companies they control, not to cripple them. Furthermore, enabling companies to do more with less allows workers to specialize at other tasks, and frees up wealth with which investors and management can capitalize internal improvements or ventures in other regions of the economy. PE firms succeed to the extent that their portfolio companies succeed, and to the extent that their portfolio companies succeed, America prospers.

Another conventional critique made by Moritz is that PE destroys millions of jobs when cutting costs at portfolio companies. This is empirically false – the private equity industry as a whole is responsible for large job creation as well as destruction, with only modest net job losses. But the deeper fallacy with this argument is that full, constant employment is a kind of summum bonum in America’s economy. If we wanted to create full employment it would be easy: we could simply ban 20th century agricultural technology, immiserating millions of Americans and forcing them back into farm labor. It’s easy to intuit that this would be a bad idea, but it’s harder to imagine the economic progress that layoffs and labor migration imply. The truth is that creative destruction of antiquated jobs and invention of new forms of labor is what drives productivity growth, and PE firms are integral to this process.

Finally, some argue that PE only enriches a select few at the expense of ordinary Americans. In fact, the largest investors in PE are American pension funds, which have committed hundreds of billions of dollars to the American private equity industry. PE assets make up 9% of CALPERS portfolio, for instance, and have generated an annualized net return of 12.3% over the last ten years. When private equity firms succeed, every state government pension plan, university endowment, and large philanthropic endowment shares in their profits. It’s no stretch to say that the primary beneficiary of the private equity industry is the American public.

Private Equity and Venture Capital
Private equity and venture capital have much in common, and The Economist is partly correct to characterize VC as “private equity for fledglings”. Like their counterparts in PE, VC funds have long lifespans, allowing partners to cultivate long-term growth in portfolio companies rather than focusing on quarterly showings. Also, like private equity firms, the modern VC is actively involved in coaching and advising its portfolio companies (though ironically, PE is often more hands-on and entrepreneurial than VC because the latter has the more limited discretion of a minority shareholder).

Jim Coulter of TPG noted that whereas VC is in the business of mutation, PE is in the business of evolution. Where VCs fund “mutant” start-ups that offer completely novel technological innovations, private equity firms facilitate the process of ensuring that only the “fittest” companies survive. This is an important distinction between the two industries, and there are other technical differences. But broadly speaking, you can’t believe in the fundamental value proposition of the venture capital industry unless you believe in the basic paradigm of investment, assistance, and economic repair pioneered by PE.

We believe that in the coming decade, segments of the private equity and venture capital industries will converge and adopt similar strategies. Returns will disproportionately accrue to firms that combine the best of each. In the 1980s – the heyday of the private equity industry – firms such as KKR, Blackstone, Carlyle and Apollo tapped the under-deployed resources of banks to purchase, restructure, and resell corporations. But leveraged buyout (LBO) techniques are now “commoditized,” and the industry is extremely saturated: PE backs 23% of America’s midsized companies, and 11% of its large companies. The private equity industry remains valuable, but in order to generate unusual returns it must “evolve” itself.
PE firms have always tried to harness new innovations, but a surge of new information technologies has made it increasingly valuable for some private equity firms to partner with leading entrepreneurs and technologists – many of whom are located in Silicon Valley. Commercial data is exploding in volume and variety, and metrics are becoming much more precise. Private investors of the future will use technology platforms to evaluate formerly uninteresting assets as hidden stores of data, which will make their businesses and industries more efficient. New information will allow top investors to better assess consumer demand, supply chain logistics, and industry-level shifts, as well as determine where to open channels of communication and dedicate resources. Data-driven PE firms will limit waste, increase their margins, and become more valuable to their partners.

Venture capitalists able to draw on the top networks of talented leaders and builders in Silicon Valley were among the first to develop an armamentarium of data-driven procedural improvements for their portfolio companies. Hybrid groups such as Vista pioneered these techniques in the buyout space. Private equity firms working closely with venture capitalists and technologists may be able to unlock assets that others have not leveraged and build technology cultures to iterate on solutions that make those assets more productive. Some may even reclaim 1980s or 1990s-level returns. At the same time, the best VCs will begin to imitate and adopt PE strategies. Scaling major technological breakthroughs in certain industries requires armies of people and significant resources – private equity’s bread and butter. VCs may also begin to increase their return on equity capital of late-stage portfolio companies with debt financing, drawing on the private credit divisions of investment banks, PE firms and more.

There is still a large cultural rift between the two worlds; the culture of Silicon Valley is very different from the “Wall Street” mentality of the American financial establishment. Fortunately, open-minded individuals in each field are establishing rapport and exchanging insights. We have been lucky to add luminaries including Henry Kravis and Geoff Rehnert as investors and advisors to 8VC, and Sir Deryck Maughan as a board partner. Communication and cooperation between our industries will only continue to improve as the distinction between elite private equity and venture capital investors becomes less meaningful.

Critiques of PE reflect a naïve understanding of what creates economic prosperity. No industry is perfect, but private equity is an integral part of the economy, and should be celebrated for making our country wealthier overall. The confluence of the venture capital and private equity industries will only make each more productive, strengthening and fine-tuning the economy. Savvy, competitive investors able to build, buy and fix companies will continue to stimulate growth by allowing us to do more with less – the only way to create prosperity.

Joe Lonsdale
General Partner, 8VC
8VC is a San Francisco based venture capital firm which invests in industry-transforming companies. For more information or to sign up for our newsletter, visit

Don't Just Donate, Innovate

Don't Just Donate, Innovate

Joe|October 16, 2017

“You’re working because you want to change the world and make it better; if the company you work for is worthy of your time, why not your money as well?”[1] — Larry Page

For most, the word “charity” evokes concepts of altruism and justice completely divorced from considerations of efficiency and profit. The distinction between the spheres of charity and commerce is reflected in the unique legal status accorded to each, and the kinds of people each sector tends to attract.

Today, this way of thinking is misleading and insidious. Our philosophy at 8VC is that many of the companies that present the greatest economic opportunities also create the greatest value for society. “For-profit philanthropy,” or altruistic investment guided by principles of accountability and return on investment (ROI), is often a compelling alternative to non-profit models.

Many of humanity’s most intractable challenges will only be solved through market-driven innovation. For-profit companies can attract top talent with the promise of equity, engendering a positive feedback loop: as talented people build and scale a business, they can leverage their expanding capital to hire more talented employees. Because the private sector has evolved processes and metrics for growth over many generations, for-profit models are more likely to efficiently accomplish their goals. Finally, viable business models easily attract capital and offer the best chance for systemic, durable solutions to social problems.

Wealthy donors typically fund 501c3 non-profits to address important social challenges. In the past year, Steve Ballmer and Michael Bloomberg have received attention for their civic charitable efforts — Ballmer recently launched and the Ballmer Group, and Bloomberg’s What Works Cities initiative has done much to advise and improve America’s cities. I admire these men for their impressive acumen and good intentions. But Ballmer and Bloomberg are not taking full advantage of their experience and abilities. These icons of business are too quick to accept traditional non-profit models, and could use their skills to achieve greater social impact in these areas.

It’s true that certain causes require traditional charitable solutions, for instance disaster relief, and helping those in need who cannot help themselves.** Many “collective action,” “tragedy of the commons,” or “market failure” problems are best solved through government or non-profit action. But philanthropists consistently fail to grasp that there is a class of humanitarian projects where innovation is critical, and where solutions should be structured to create economic incentives. Instead of profit or social impact per se, donors should focus on “shared value” — creating economic value in a way that also addresses social needs and challenges.[2] Bishop and Green, who describe this paradigm as “philanthrocapitalism”, point out that “a profitable solution to a social problem…will attract far more capital, far faster, and thus achieve a far bigger impact, far sooner, than would a solution based entirely on giving money away.”[3]

My experiences building Palantir and running Addepar made me aware of serious problems with government, and inspired me to build a non-profit to look into state spending. Along with a team of several Stanford students, Zac Bookman and I created some of the first online transparency portals, and earned extensive press for our data and insights. We began receiving inbound interest from city officials and policymakers who wanted to compare and contrast their spending in similar ways, yet it was nearly impossible to do this with existing, decades-old systems. In fact, the officials we were working with barely understood their own data. We quickly realized that not only was this going to be an expensive problem for a non-profit, but that releasing studies and advising the leaders was unlikely to have a scalable impact. Only a for-profit corporation could attract the talent and capital necessary to build the technology solutions to power core government processes around budgeting, operational performance, and transparency. Only this kind of technological platform could scale to hundreds or thousands of governments at once.

We ultimately built a company called OpenGov, which fuses a for-profit model with a mission of making governments more effective and accountable. OpenGov powers governments across the country with a new “operating system” that enables agencies to make evidence-based decisions that drive better performance and improved outcomes for communities. It frees data currently trapped in complex legacy software and paper records, making the data available for streamlined budgeting, reporting, ad-hoc analysis, and citizen engagement in the cloud. OpenGov also networks customers together, providing them with the ability to understand key performance indicators compared to other similar government agencies.

We didn’t realize how many top city managers, CFOs, budgetary experts, and city councils would become excited about our innovation. Because OpenGov delivers a valuable public good as well as upside to stakeholders, it was possible for us to attract a bipartisan group of elite investors, advisors, and board members including John Chambers and Marc Andreessen.

The OpenGov team now numbers well over 100, and has created a big data platform and product setthat is used by more than 1,600 governments in North America. In 2015, OpenGov took the state of Ohio from 45th to 1st in the nation in a survey of transparency on government spending data. I have been thrilled to watch OpenGov continue to engage with government customers to determine how to innovate our product and boost sales — even as we deploy in city after city. OpenGov’s innovation promotes the public good, and its philanthropic impact has been far greater than that of a traditional charity. By helping local governments save money, we have improved the lives of citizens across the country while also advancing the interests of our shareholders.

Bloomberg’s What Works Cities initiative, which supplies cities with consultants and grants of millions of dollars to invest in data governance, is a truly necessary program, and is complementary to our work. Often, cities lack the resources or wherewithal to expand their data collection and analytics departments to create more effective policy. The technology that encodes best practices in government goes hand in hand with policy innovation encouraged by initiatives like this one. Unfortunately, most non-profit staff in general are instinctively skeptical of for-profits, reluctant to share their mission or align closely to build toward similar goals. Bloomberg, an entrepreneurial founder himself, should consider working directly with companies fixing the technology stack to improve city’s processes. His involvement in the details and his considered advice as a knowledgeable ally would accelerate adaption of new technology and make the core processes of perhaps the most important industry — government — more efficient.

OpenGov is just one example. Today we are witnessing a blurring of the boundaries between for-profit and non-profit initiatives. Eco-tourism and alternative energy production aim to achieve the twin goals of ROI and environmental sustainability. In education, income share agreements (ISAs) are making it possible for underprivileged kids to attend college, and some charter schools rely on for-profit models. Advances in Bio-IT have inaugurated a new age in medicine, and leading academics are encouraging their top students to build for-profit companies to harness their breakthroughs to cure diseases and save lives.

Here in Silicon Valley, — the for-profit charitable arm of Google Inc. — has made enormous strides as a philanthropy, leveraging data to improve educational opportunity, fight racial injustice, and develop remittance infrastructure for the world’s poorest people. And as the pull quote indicates, Larry Page recently intimated that he would prefer to fund one of Elon Musk’s for-profit companies than donate to a traditional charity, because he believes corporations such as SpaceX and Tesla are some of the most powerful engines for social progress.[4]

In general, for-profit philanthropy may be an important complement to a traditional 501c3 for several reasons:

  1. 1) For-profit philanthropies can raise more money from prospective investors because they offer a return on investment. This makes it easier to grow and scale an organization and increase the overall capacity of the giving sector.
  2. 2) For-profit companies focus on results and substance; non-profit employees often lack clear objectives or KPIs, leading to slower progress and lower efficiency. This structural problem can stall non-profit efforts relative to performance driven cultures.
  3. 3) “Market discipline” holds for-profit charities accountable for wasteful spending. Customer relationships generate direct feedback, and the boards, management, and technologists at for-profit companies are investors with “skin in the game”. Empirically, equity, and metrics-driven, for-profit cultures encourage employees to work harder, iterate faster and deliver innovation.
  4. 4) For-profit philanthropies are more responsive to new developments and shifts in demand than relatively slower moving non-profit charities. They can help cover gaps in the market more swiftly than their traditional counterparts.
  5. 5) For-profit companies are typically better able to attract people with proven track records of success in growing enterprises, and to maintain execution-driven cultures over long periods of time. This sustained, positive-feedback loop is necessary to scale and maximize the effect of a philanthropic endeavor, and will deliver exponential results.
  6. 6) Non-profit organizations are reliant on recurring donations, which makes it difficult to engage in long-term planning, and completely subjects non-profits to the direction of their (usually opinionated) board members. Whereas for-profit companies can build recurring revenue to ensure their survival, tackle problems with longer time horizons, and operate with relative autonomy; non-profits must focus on capital preservation and pleasing their donors.

For-profit philanthropy won’t solve every social and humanitarian problem, but it is often superior to a 501c3 approach. Donors such as Michael Bloomberg became wealthy by bringing together top talent in for-profit, mission-driven cultures that figured out how to build and deliver technologies which transform core processes in large industries. Entrepreneurs build successful enterprises in the face of scarcity, and they should consider carrying this mindset with them as they pivot to charitable endeavors. If billionaire donors had more time and energy, but less money to address these important missions, they might be more likely to consider the ROI of helping to build for-profit companies which can both attract talent and achieve sustainable social impact in the spaces they care about. I encourage more great entrepreneurs and investors to consider partnering with mission-driven businesses as part of their philanthropic efforts, so we can ally, learn, and benefit from what they create.

Joe Lonsdale
General Partner, 8VC

* (From Above) We truly believe in many traditional non-profits in addition to innovative, mission-driven businesses. For instance, we strongly support Ashton Kutcher’s Thorn, which works with tech innovators to stop child-trafficking and to help law enforcement find and rescue abused children. Arthur Brooks is doing incredible work at AEI to encourage free enterprise policy that lifts the bottom of society and restores dignity to America’s least well off. The International Justice Mission has done much to alleviate desperate poverty in the Philippines. Leaders we admire such as Bill and Melinda Gates, Michael Bloomberg, Laurene Jobs and others have done much to save lives around the world, positively influence education and immigration policy, support the natural environment, and contribute to other important social missions. The list goes on. There are hundreds or perhaps thousands of other worthwhile non-profits that deserve charitable donations, and our intent is to complement these efforts in some cases with mission-driven, for-profit cultures, but not to replace them.

[1] Yarrow, Jay. “Larry Page: I Would Rather Give My Billions To Elon Musk Than Charity.” Business Insider, Mar. 20, 2014.

[2] Porter, Michael and Mark Kramer. “Creating Shared Value.” Harvard Business Review, January-February 2011.

[3] Bishop, Matthew and Michael Green. “Philanthrocapitalism.” Bloomsbury Press, 2008.


8VC is a San Francisco based venture capital firm which invests in industry-transforming companies. For more information or to sign up for our newsletter, visit

Announcing Terminal

Announcing Terminal

Joe|October 16, 2017

Hello, World!
Announcing Terminal, by Joe Lonsdale and Jack Abraham

Talent is the technology ecosystem’s most precious resource. Innovation occurs when gifted and hard-working entrepreneurs bend their wills to solve the world’s most challenging problems. A primary indicium of a healthy startup is the talent of the engineers involved. At Palantir, Addepar, Zenreach, Milo and the other companies we have started, we focused on building the kinds of organizations that attract the best minds. There is no formula for innovation, but the best proxy is a group of brilliant, highly motivated people clustered together, working towards a shared goal.

A decade ago, popular opinion suggested that this talent had to physically cluster together — in Silicon Valley. That’s no longer true. First, attracting and retaining talent in Silicon Valley is more difficult than ever; startup founders are spending most of their time and money chasing around engineers to join (or stay with) their companies. Second, proximity is now as much virtual as physical; today everything is in the cloud and deskmates often chat first via tools like Slack before talking across the table. Empirically, the majority of entrepreneurial engineering talent is no longer concentrated in a 15 mile radius but rather all across the globe, in localized emerging talent hubs.

Until recently, mathematical and systems thinking talent remained an untapped resource in many parts of the world. The spread of the Internet and everyday visibility of major technology companies such as Apple and Google has drawn attention to the importance of these talents. Technological literacy rates are rising, and increasing numbers of universities are adapting their curricula to emphasize STEM skills. In fact, the 10 best countries for computer programming do not include the US.

Young people thousands of miles away from Silicon Valley increasingly have the chance to become engineers, scientists, and programmers in top technology companies without immigrating to the US. China is already home to a huge amount of top talent, and is even eclipsing the West in certain specializations. Leading talent from India has thrived in Silicon Valley for decades, and is now building an impressive technological ecosystem on the subcontinent. Despite restrictive government regulation, Western Europe has been unable to suppress the entrepreneurial tech talent emerging in London, Paris, and Berlin. Talent from South America, Australia, and Africa has become part of the global technology community in the last decade.

World-class tech hubs are emerging in distant, sometimes unexpected locations. Ho Chi Minh City, Vietnam is now a major technology hub in Southeast Asia. Business and engineering are the most popular majors for Vietnamese studying abroad, and LG, Panasonic, and Toshiba are establishing R&D operations in Vietnam. Eastern Europe, with its strong tradition of mathematics and computer science, is also emerging as a powerhouse. Eastern European programmers consistently take first place in international competitions, and AVG Technologies, Codewise, and Prezi are all exports from Eastern Europe’s capital cities. Israel remains a technological powerhouse, punching far above its weight in fintech and cybersecurity. “Start-up Nation” features the most SMEs per capita in the world, and Israeli startups raised a record $4.8 billion in 2016.

Some forward-thinking governments have helped shepherd this surge of talent by creating R&D programs and other initiatives. One great example is Canada. The late Finance Minister Jim Flaherty was not only one of the most respected G8 finance ministers, but a visionary with respect to technological progress. Canada’s 2012 budget pledged CAD $1.6b to support R&D and innovation through grants and credit programs, and this number has grown substantially in the past 5 years. Canada also pioneered a startup visa geared specifically towards technologists.

Canada’s efforts have helped bridge its strengths in scientific research, applied science, and experimental development to the business world, particularly technology markets. The public/private MaRS Discovery District in Toronto and the Montreal Institute for Learning Algorithms (MILA) are at the forefront of AI and machine learning research, and the latter has attracted partnerships with Google and IBM. Many of Canada’s top universities — Waterloo, Toronto, Montreal, and McGill — are producing highly talented computer science graduates. Canada is a desirable place of residence for engineers (as well as professionals in other industries) and recently, Toronto startups have experienced a reverse brain drain with double-digit increases in job applications from the US. These political and cultural developments have made it possible for a group of Silicon Valley veterans to create a talent program aimed at nurturing the Canadian tech industry to maturity.

For that reason, we are pleased to announce the launch of Terminal — a company which builds and scales elite engineering teams for the very best technology firms. We funnel talent to top technology firms that maintain the highest standard of conduct and consistently pursue impressive missions. Terminal provides full stack recruiting, comprehensive infrastructure and back-office support for talent. Members of our organization cluster and develop their skills in supportive, stimulating environments, which simplifies the hiring and employment process for potential employers. We already have “terminals” in Kitchener-Waterloo, Montreal, Vancouver and plan to open more soon.
Terminal helps talented individuals across the country find berths in the best technology companies, and helps technology companies locate the employees they need to thrive and grow. One of our central pillars is to ensure that our partner companies will commit to treating their new employees as a first-class citizens rather than replaceable parts. By cultivating mutually respectful relationships between tech companies and prospective employees we are strengthening tech cultures in productive, valuable ways. Our co-founders are Dylan Serota, who built and scaled the successful Eventbrite platform team largely in Mendoza, Argentina, and Luke Finney, who has led teams of Navy SEALs around the world. Together we will expand Terminal to the global scale, and ultimately plan to open “terminals” in all emerging tech hubs.

We strongly believe that the hardest problems in the world will be solved by technology companies. Talented technologists are tackling some of the most difficult problems in healthcare, government, financial systems, and other broken industries. Concentrating and structuring teams of great minds to work on these problems is what the startup ecosystem is all about. We hope our efforts at Terminal will enable great companies to partner with tens of thousands of leading technologists in the coming years.

Kleiner's Laws

Kleiner's Laws

Joe|September 5, 2017

Good things happen in eights. In 1957, Eugene Kleiner and seven other engineers quit their jobs at Shockley Semiconductor Laboratory. Kleiner, a Jewish émigré of Austrian extraction, secured a $1.5 million investment from Sherman Fairchild to found Fairchild Semiconductor, the first major computer chip manufacturer in Silicon Valley. In the subsequent decades, the “Traitorous 8” founded a host of spin-off companies so wildly successful that Fairchild and its offspring are today reputedly worth over $2 trillion.[1]

Kleiner pioneered the archetype of the Technologist-VC. Though he referred to himself as an engineer to the end of his days,[2] he occupied the various roles of Scientist, Entrepreneur, and Investor at different points in his life. In 1968, Kleiner made a major bet on Intel, a company founded by another two members of the Traitorous 8, and now the largest semiconductor manufacturer in the world. In 1972, Kleiner cofounded a venture capital firm called Kleiner, Perkins, Caufield & Byers. KPCB went on to become one of the most prolifically successful venture capital firms in history, with notable investments in Genentech, Sun Microsystems, Compaq, Amazon, Google, and over 350 other companies.

Kleiner was a calm man with a rich baritone, famous for his formulations of entrepreneurial and investing wisdom. Kleiner’s Laws — a collection of pragmatic and occasionally culinary aphorisms — have achieved the status of folklore in Silicon Valley. Though Kleiner passed away in 2003, his principles remain vital to running a successful start-up or venture capital fund. Here are a few of our favorites:[3]

1) Make sure the dog wants to eat the dog food.

The technology may be groundbreaking and the team may be world-class, but if people don’t want to buy the product the company will be a failure. Product-market fit is a fundamental element of any start-up’s success, and some venture capitalists regard it as the controlling variable.

2) Build one business at a time.

Entrepreneurial ambition often outstrips reality. Founders may devote their attention to developing a scattered array of bells and whistles rather than to the core product. The appropriate time for sideshow experiments is once a company has scaled to maturity; in the early years of a company’s life, sustained, precise focus on a singular business mission is vital.

3) The time to take the tarts is when they’re being passed.

Venture capital exhibits a cyclical, seasonal quality. The strategic founder should take advantage of funding when it is available, and not attempt to time funding according to the business’ stage of development.

4) It’s difficult to see the picture when you’re inside the frame.

Boards of Directors and Advisory Boards aren’t a formality, they are a vital source of perspective and feedback on the direction of a business. Kleiner famously quipped that “a good board will give you better advice than your mother.”

5) Even turkeys can fly in a high wind.

In a similar vein, investors should factor in macroeconomic indicators when assessing the value of a company. Tailwinds of irrational exuberance often drive company valuations into artificially high ranges. The intelligent investor understands that few companies can really survive in such thin air.

6) After learning some of the tricks of the trade, some people think they know the trade.

Though entrepreneurs commit this fallacy, venture capitalists are more likely to mistake superficial knowledge for robust understanding. Both founders and financiers should beware dilettantism and make sure they have a deep grasp of the industries they deal with.

7) Venture capitalists will stop at nothing to copy success.

Second-rate investors will often attempt to replicate the strategies of top investors with catastrophic consequences. The winner-take-all dynamics of modern technologies — especially but not exclusively software platforms — mean that it’s usually better to fund companies with first mover advantages.

8) Invest in people, not just products.

To make good dog food, you need a good team. Kleiner famously maintained very close relationships with the founders he invested in, and he was always a source of patient guidance on operational issues. A great company will combine an excellent team, product, and market.

Today, Kleiner’s Laws remain at the heart of what we do as technologists and investors. Kleiner operated from first principles as an entrepreneur and an investor, and his approach yielded enormous rewards. The best culture an investment firm can foster is to constantly invoke, reflect on, and argue from basic principles — and to help their founders do so as well. Only in this way can a firm remain methodologically sound, and make confident decisions. A founding father of Silicon Valley, Eugene Kleiner remains a perennial source of wisdom.

Thanks to Harry LeFrak for reminding me to write this piece.

[1] Morris, Rhett. “The First Trillion-Dollar Startup.” TechCrunch, Jul 26, 2014.

[2] Meyer, Peter. “Giants of Poly: Eugene Kleiner.” p. 22


Jobs, UBI, and Inequality - Joe Lonsdale, 8VC

Joe|June 10, 2017

Joe Lonsdale, Founder of 8VC discusses jobs, universal base income, and inequality and many other dangerous topics with Sam Lessin.

Click here to listen to this podcast


Dialectical Wisdom

Joe|April 21, 2017


I am not by any means a philosopher although I have worked with some talented people in the discipline. But certain philosophical concepts deeply inform the way I think about the world. The idea of "opposing truths at extremes" is a powerful concept that I came to appreciate in my twenties.

My personality has sometimes been called a little intense. When I spend a lot of time reading, discussing, or thinking about an area, I'll often really appreciate why a strong viewpoint is true and come to very firm conclusions. But if I am later exposed to a strong opposing view I frequently find this countervailing view persuasive as well. I found this initially confusing. How could two extreme, contradictory viewpoints both be true?

One great thinker on this issue is G.W.F. Hegel:

The abstract thinking of the understanding is so far from being something firm and ultimate that it proves itself, on the contrary, to be a constant…overturning into its opposite, whereas the rational as such is rational precisely because it contains both of the opposites as ideal moments within itself.[1]

This is what I mean by a “dialectic”, where the truth exists at different extremes and the actual truth is a complex interaction between an initial understanding and its negation. The idea is that most polarizing viewpoints, whether practical or theoretical, contain within themselves apparent contradictions which seem to drive one to the opposite pole. But much as a Zen master appreciates both sides of a koan, one should strive to recognize that two contradicting extremes can often be simultaneously valid.

Many people are sloppy thinkers, and opt for “middle of the road” positions when faced with two opposing extremes. But compromise is often even less accurate than the extreme poles of a dialectic. In my experience, it's common that deep truths exist at both extremes of a dialectic, and the wisest stance on an issue will incorporate “both of the opposites within itself”.

Deeply understanding something and being a passionate advocate on one side of a debate (even in a way that may make others uncomfortable) is a great start, and the path to wisdom. But with maturity comes the insight that you should remain open to ideas and views totally incompatible with your own. I have learned that if I only see and deeply appreciate one side of an argument it means I am probably missing something important.

OK, that was a bit abstract. Let's go over some examples...

An obvious one is the product part of an organization. It's true that a great product team will collect lots of user feedback, systematize it, and make data-driven decisions – a “scientific” approach to product. However, as we know from Sony in the 1980's, Steve Jobs, and other iconic product organizations, it's also true that greatness in products requires leaders to tell customers what they want, not merely to ask and respond to customer data. This requires leaps of creative intuition, or an “artistic” approach to product.

These are conflicting methodologies, but extreme forms of both must exist inside of a product organization for it to be great. It's easy for experienced company-builders to see how mistakes will be made by only relying on one of these and not the other.

Another example is the dialectic between entrepreneurial vigor and lawyerly/bureaucratic restraint. As an entrepreneur, I had a strong bias to move quickly and decisively. I found it frustrating and suffocating when legal counsel or management restricted my freedom to experiment. I understood that most big corporations and government institutions function in massively inefficient ways (which created huge opportunities for Palantir and other ventures). Although I remain committed to these views, I have now grown to appreciate that a bunch of ardent entrepreneurs with large risk appetites can be too volatile; that you need corporate governance and procedural checks to keep a company from blowing up. What’s important to recognize here is that a company should not strive for a middling balance between these two extremes, it should cultivate both at once. Great executives understand that they need to incubate ambitious entrepreneurs with a bias towards fast iteration and “breaking things,” while ensuring that experienced leadership and legal personalities keep the company on a stable trajectory. It’s a very challenging paradigm to master.

A third example is the dialectic between breadth and depth. It has been my experience that deep, obsessive focus at the expense of other areas of life yields exponential returns. The curve tracking productive output against the time a person invests in a single subject matter is highly convex. Yet I have also come to realize the importance of building bridges and relationships across disciplines, and in equally vital pursuits such as family life. A fully torqued engine burns out more quickly. I have discovered that extra-disciplinary conversations spark my intuition and create important synergies for the businesses I have been a part of. My bias is to work extremely hard and dive very deeply into topics, and I attribute some of my greatest work (such as at Palantir and Addepar) to periods of extreme focus. But developing relationships with experts outside of my chosen fields and cultivating other personal interests has helped me expand my worldview and pinpoint opportunities I might have otherwise missed entirely.

These are a few examples for how I apply Hegel’s insight when thinking about startups, but of course dialectics surface nearly everywhere. One profound dialectic I have encountered is between what I’ll call “Nietzschean behavior” and “altruistic virtue.”

A very small proportion of human beings – perhaps the top 1% - has a wildly oversized impact on our political fate and the progress of our species. I am “inegalitarian” with respect to talent. I believe that a small cadre of industrialists, thinkers, artists, and statesmen dominate world affairs largely because of their natural talents and internal will to power – though sheer luck certainly plays a role as well. Effective leaders will understand how to learn from and leverage the extraordinary talents of elite members of society. Great leaders often live extremely uncommon lives, and Nietzsche points out that many elite leaders develop a “pathos of distance” from the affairs of the ordinary person. This remove may stimulate the severe self-criticism and “constant self-overcoming” which enhance a leader’s ability to impact and transform the world.[2] An effective leader will understand when to withdraw from normal life and apply herself to grand projects.

But while it’s true that talent is unequally distributed, a thoughtless, self-glorifying aristocracy is a very dangerous thing. Is it any surprise that Hitler and Mussolini displayed the cruelest forms of Nietzschean behavior – even drew directly upon Nietzsche as inspiration for their atrocities? I believe that truly great leaders are those who embrace the dialectical counterpoint of moral equality among persons, and cultivate a deep sense of altruistic virtue. I personally believe this egalitarianism finds powerful expression in Judeo-Christian principles: compassion for the meek, mercy, and love for thy neighbor as thyself. Powerful individuals often find themselves pulled in different directions by the forces of elitism and virtue, and in fact this is a healthy tension. Many great leaders have both a strong sense of exceptionalism and an unwavering moral compass.

To recap, I believe that wisdom is very often dialectical in nature. Extreme, conflicting viewpoints are often simultaneously true – whether in business or more broadly in human life. It is the hallmark of a wise individual to eschew the milquetoast path of middling compromise, and instead to embrace these “antinomies” of reason and fuse them into a concrete course of action; to be patient and comfortable with cognitive dissonance. I encourage young entrepreneurs, dreamers, and other visionaries to strive to explore both sides of every issue. Dialectical wisdom has been integral to my success and well-being.

[1] Hegel, G.W.F. “The Encyclopaedia Logic” Trans. T.F. Geraets, W.A. Suchting, and H.S. Harris. Hackett, 1991. p.133

[2] Nietzsche, Friedrich. “Beyond Good and Evil.” Trans. Judith Norman, Cambridge U.P., 2002. p.151