Mentorship and Problem Solving with Secretary George Shultz

Joe|July 7, 2016

Secretary George Shultz, born 1920, great American economist, statesman, and businessman.

Secretary Shultz is one of the great men of our age, and I am lucky to have gotten to know him over the past several years during his time at the Hoover Institute at Stanford. Born in 1920, he has lived an extraordinary life and is still actively working on some of the most important problems of our time including nuclear non-proliferation and mentorship of government leaders.

Shultz hardly needs an introduction — an economist, statesman, and businessman, he has served in four Presidential administrations in a variety of roles including Secretary of Labor, Director of the OMB, Secretary of Treasury, and Secretary of State. He is an extraordinary polymath; a man admired by many leaders from all backgrounds.

Zac Bookman — my co-founder of OpenGov and the company’s CEO — and I visited him at his office recently to show off the progress at OpenGov and to get his advice in other areas. The Secretary is an advisor to OpenGov and we are excited to hear he plans to visit our team again soon. We were proud to show him that we have deployed the technology to over 1000 cities and districts, from 0 when we first discussed the idea with him, and to see his excitement about programs we are rolling out to make government work better. Although OpenGov was one topic, I was so inspired by other parts of our conversation and by the Secretary’s stories that I thought it would be fitting on America’s Independence Day this year to share some of this great American’s wisdom.

When Ideologies Clash, Focus on Problem Solving vs. Principals

In the early seventies, President Nixon put Vice President Spiro Agnew and Secretary Shultz in charge of getting rid of school segregation in the seven states that resisted earlier court rulings. Agnew didn’t want to touch the topic because he saw it as politically destructive, so Secretary Shultz jumped in and started working on the problem. Emotions were high and confronting this sensitive issue was tough going at first, but Shultz persevered and set up multi-racial commissions of leaders in each of the seven states. When he met with the commissions, he’d steer them away from ideological conversations and instead talk about the problems that needed to be solved — he would have them agree on the problems and discuss possible solutions.

“People are great problem solvers — it’s what we do,” he told us. By applying his leadership and persuasion and getting people to agree on a problem and work together to solve it, versus arguing about principles, groups overcame their differences and successfully eliminated segregation in many of the most stubborn parts of the southern US.

Make It Their Idea, and Work Behind the Scenes

It almost seems like a fantasy in this day and age, but when Secretary Shultz came up with a tax reform idea under President Reagan, he was able to get it passed 97 to 3 in the US Senate.

The reform lowered the tax rate in the top tax brackets for corporations but was revenue-neutral as it eliminated a lot of loopholes. Rather than take credit for the idea, which he knew would lead to opposition by the Secretary of Treasury and others in the White House, he convinced President Reagan to make it his idea. Then he worked behind the scenes with leaders on the left, found what was important to them, and got them to propose something similar. By having dialogue with both sides and empowering each to push forward what they wanted, his leadership and the trust he had from all sides enabled him to guide the reform through with nearly unanimous support.

Secretary Shultz never got credit for much of what he did, but he did earn great respect from many people on the inside. This is what true leadership looks like, and we can’t help but wish we had more men like him in government today.

Not Bi-Partisan, Mr. President — Non-Partisan

When Shultz and Henry Kissinger were visiting President Obama at the White House to discuss nuclear non-proliferation, the President commented that it was great to see much needed bi-partisan work being done. The Secretary corrected the President; the work wasn’t bi-partisan, it was non-partisan. Partisanship had nothing to do with it — some issues are just about what’s best for America and the world, regardless of parties. Rather than always see the world through the lens of parties and the goals of both sides, which leads to a constant “us-vs.-them” mentality, it’s good to carve out as much as you can and work together to achieve common goals.

The perspective of non-partisan goals and accomplishments is a refreshing paradigm; one that is emblematic of an older style of American leadership that would be very welcome in today’s hyper-polarized political environment.

The Shultz Rule

Another great American, our friend and investor Sam Reeves, took my 8VC partner Drew and my father and I golfing at his club at Cypress Point for father’s day this year. Many of the members knew and admired Secretary Shultz, so the golf course came up when I saw him the next week.

He asked how I did on hole 16, which is either played as an easy par 4, or else a particularly challenging 230-yard par 3 over a beautiful stretch of California ocean and cliffs. I went for it twice in a row, and the first ball bounced off the cliffs 220 yards away, but the second one ended up on the green. The Shultz Rule, created amongst his friends, says that if you take the risky and daring shot and go for the green, you get a mulligan (one free do-over) if you miss. By his logic, I was on in 1! His rule encapsulated a few things about the great man — both his bold nature and playful spirit… as well as his sense of diplomacy. It’s worth trying for greatness — and it’s worth having fun!

We are really lucky to have a man like Secretary George Shultz in our lives, and his lessons are particularly apt for today’s leaders.

Pittsburgh: A New Tech Hub?

Joe|July 6, 2016

Pittsburgh, which was founded two centuries ago in 1816, was one of the great economic centers of the United States. It was the 8th biggest city by population in 1920, and it peaked at over 700,000 in the 1940s. A geographic center where the rail lines met between cities including Chicago, Cleveland, DC, and New York, Pittsburgh was the home of great industrialists including Mellon, Heinz, Frick and Westinghouse, to name a few who many of us still recognize today. During the second world war, Pittsburgh itself produced as much steel as each Axis power and was at the heart of American industrial success.

But to my generation that grew up in the 1980s and 90s, the word Pittsburgh evokes an image of abandoned giant metal factories, rusting bridges, and a huge dying city. As the mills closed at the end of the 1970s and unemployment spiked to enormous levels, the job of the city leaders became one of managing decline for many years; the population has steadily dwindled, down to 305,000 today.

Joe Lonsdale and Mayor Bill Peduto, at Pittsburgh City Hall, built with extreme grandeur in 1916 for the city’s centennial;. The mayor commented that some of the exotic wood used by the talented craftsmen is now extinct, and speculated what citizens would do to him were he to try to spend tax money on a building like this today.

Despite this trend, many signs of revival are emerging from the ashes of this rust belt giant. Great universities such as Carnegie Mellon (CMU), University of Pittsburgh, and Duquesne still attract top talent–CMU, for example, is currently ranked the number one U.S. graduate school for Computer Science (CS). Google has hired over 800 people in the city; Uber is building its self-driving lab and testing cars on closed streets; Oculus, Microsoft, and tens of others are building offices. Palo Alto may be an attractive tech center, but Pittsburgh has a not-insignificant cost of living advantage; single-family homes go for around $70,000 and extraordinary mid-century mansions with ten bedrooms and tiffany windows go for $400–500k… twice that amount, a million dollars, barely gets you a one-bedroom starter apartment in Palo Alto.

Pittsburgh has remained an interesting place to live as cultural institutions sponsored by endowments left behind from great industrialist families have continued to support art collections, design programs, and other city life; the mayor and his staff says it was a combination of the universities and these endowments that kept the city alive through the toughest times. And now it is starting to bloom again.

Our entrepreneur friend Matt Michelsen got to know Pittsburgh Mayor Bill Peduto and his staff, as well as the CS deans at CMU, and my partners Alex, Kimmy and I and other teammates were excited to spend time with them this last Friday on the way back to CA from NY. The city has put in meaningful tax incentives that make it interesting for young companies to open up offices in Pittsburgh, and we’re excited to talk to to our companies about them. It’s refreshing to talk to city leaders who care about helping businesses get what they need, whether it’s a test track for Uber or the right connections with the city’s robotics centers and experts.

Mayor Peduto (right) leads Alex Kolicich, Tayler Cox, and Joe Lonsdale, on a tour through the city archives.Until the 19th century, the city council was divided into a Commons Council and a Select, much like the House of Lords and House of Commons in Britain, or the original Senate and House of Representatives in the U.S. federal government.

CMU helped create the field of machine learning and artificial intelligence, and the amount of talent and leadership at CMU that is eager to engage with top companies and apply their ability to solve important problems is amazing. Andrew Moore is a very respected technologist who built a machine learning group for Google in Pittsburgh, and is currently one of the CS deans at CMU. His vision and leadership made the excitement of the city and innovative energy of the university palpable. The deans were excited to structure more of the projects going on around the university as mission-driven startup companies, and as the city and its talent becomes more connected to the technology economy, this seems likely to happen at an increasing pace. Smaller amounts of funding seem like they can go really far here, and 8VC’s angel investors are already following up with several of the professors.

Of course, high-end metalwork and industry is still a big part of the local economy. We also discussed our company Hyperloop One, which we thought should explore the talent and capabilities in these industries as it expands to new offices in the coming years. Today, of course, everybody gets around on airplanes. But were 700 mph + train routes to be installed on the eastern seaboard, Pittsburgh would once again be at the center of a lot of the most important cities in the area, and suddenly, within easy (<1 hour) day trips of each, would would make it a very interesting place to base operations for a variety of businesses.

The Tower of Learning at the University of Pittsburgh, an Art Deco masterpiece built during the Great Depression.

Many people who read about rust belts and decline may not realize that Pittsburgh is an aesthetically beautiful place. Some of the soaring old industrial spaces that can be rented for very little would be really fun to set our designers loose on to make into hip startup offices; probably much cooler than anything we have in California. And in general, there may be some rusting bridges, but the great buildings and city landscape were created at a time when American architecture was at its peak. It’s perhaps a blessing in disguise that the city wasn’t building as much during the brutalist period, or erecting the strip malls and boxed buildings that were thrown up all over America from the 70s through the 90s; Pittsburgh instead retains a charming, mid-century feel. The city hall, built with elements of the Pitt family crest as its theme for the 1916 centennial celebration, evokes the confidence and grandeur of a leading city of America’s past. Speaking to the deans at CMU and the mayor, and seeing talent and ambition start to move back into this old industrial city, one cannot help but feel that the grandeur and pride isn’t just relevant to the past, and that Pittsburgh may yet again play a significant role in our nation’s future.

Practice Safe Financing

Joe|April 26, 2016

This article first appeared on TechCrunch.com

The convertible note is a useful and common financing structure in Silicon Valley. It’s a form of debt that is really more a type of equity — one where the valuation hasn’t been determined yet.

It’s helpful because sometimes you want to align a new investor or bridge a company with extra capital, but not argue about the valuation or have to price the round yet. Many bureaucratic institutions, for example, would make you do all sorts of studies to justify any particular valuation — and you are busy building your business. You want the investor aligned (or want their cash, at least), but prefer to price the round a little down the road.

So the investor loans money to the company at some low rate of interest (usually 3–10 percent) and has all the senior protections of a debt-holder if anything should go wrong. When the next institutional round of capital is raised — usually defined by an investor coming in with at least several million dollars in a priced round — the note and interest converts into that round at some pre-determined discount to its price (usually 10–20 percent). The note holder becomes an equity holder with shares that have the same rights as those in the new round, at a slightly better price.

At a high level, there are two types of notes: capped and uncapped. You should (almost) never raise a round on an uncapped note, as it pits the incentives of the investor and the company at odds with each other.

We use convertible notes a lot at our fund, 8VC — so often that we just call them “notes” to save time. Capped notes are a great alternative to a priced seed round, and a great way to align relevant people in your community or business vertical in between your A, B, C or D rounds. They’re also sometimes a life-saver (or at least a cap-table saver) for companies who use them as a financial bridge to get their ducks in a row and give themselves a few (or more) extra months to hit an inflection point before pricing their next big round.

Of course, companies will generally pretend they are doing the alignment thing rather than admit they needed a few extra months of runway. (Don’t tell anyone, but “We are looking for some strategic partners who can give us advice before we do our next round, and are using this convertible note to align them financially,” is often Silicon Valley speak for, “We need some extra cash so we have the runway to show some better progress before we try to raise a big round.”)

A capped note means there is a maximum valuation at which the note will convert. A typical cap on a seed round note is $10 million. This is fair, as is $5, $8 or $20, incidentally, depending on the group and what they are doing. What’s ridiculous is an uncapped seed round. If the company doesn’t get strong early traction, the investment might be worth nothing, yet many of us have also heard of a company like this taking off and stories of the first priced round being raised at $100-pre. Instead of getting 10 percent or 5 percent for your first $500,000 if you’re an investor, you might now be getting less than 0.5 percent of the company.

Of course, there’s nothing unethical about this — it just means you were bad at structuring your investment. You should have insisted on a cap, or else a priced round. Usually, a good entrepreneur wouldn’t have done this to you — it’s not how almost any of the top people in our ecosystem treat others, as the true talent knows this is a repeated game and that honor and reputation is worth more than whatever percentage points they can get from chicanery.

But the thing that makes uncapped notes especially bad is that the incentive of the investor and the entrepreneur should always be aligned.

It’s wrong to put an investor in a situation where they are deciding between helping their ownership stake versus helping the entrepreneur.

When we invest in a company at 8VC, it’s our job to make that company as successful as possible — from an internal product and strategy perspective, but also in terms of who it is able to hire, what its customers think about its product and its mission, what the media says (but not until that matters) and what other investors think about it. The goal is to help the entrepreneur put their best foot forward in the way that’s the most positive and true to the company and its mission.

Entrepreneurship is in large part about building something from nothing, which means creating a cause. And causes are not created in isolation — great investors are fully aligned with their entrepreneurs and do what they can to push forward the cause along with their most relevant touch points in the community at any given time. Backing a company is a serious business.

Now go back to our $500,000 investor in that uncapped seed round. As he sees the company take off, what are his incentives? At some point, it’s not clear. Maybe he realizes these are amazingly talented entrepreneurs who are on to something, but he secretly hopes a couple of the early attempts will stumble so that they’ll have to raise money at a lower valuation than what they’d get otherwise, so he can convert in.

What does he say to the star designer who is interested and who he knows by joining might drive their valuation even higher before his note converts? And maybe he looks down and mumbles instead of playing them up to a top investor who is excited to invest at a really high valuation, in order that he gets in at a lower price. Or maybe he doesn’t, because he’s honest to his principles and he wants to be aligned with the entrepreneur even against his own interests.

With an uncapped note, you are often creating an incentive for an investor to hope you do well enough that you are going to win in the future, but maybe have some struggles and raise at a relatively low valuation next time.

In our view, a great investor should never have to face that conundrum. It’s wrong to put an investor in a situation where they are deciding between helping their ownership stake versus helping the entrepreneur. I’d like to think I’d always side with the entrepreneur in this situation — it’s who we are and it’s our mission at 8VC — but I’m also driven to win for my LPs who are betting on me: I know my partners and I feel strongly about being good players and role models in the ecosystem, but we are also fiercely competitive to do as well as possible for our IRR.

“Power corrupts” wasn’t just written about madmen who take over governments; it’s true for all of us, and it happens in small ways. Incentives and spheres of influence are powerful things, so it’s critical we keep them as aligned as possible.

There is one scenario wherein it can make sense to do an uncapped note, but even then the note should never be truly uncapped. This scenario is the insider-led bridge round, where the note is expected to be short-lived. If an investor already has equity in a company, she is aligned to make the company’s valuation go up, but she might want to bridge the company; that is, give it the money it needs to keep operating until it completes its next raise.

If the next round is imminent (within the next month or so), the cap on the note can interfere with a pricing discussion. In this case, doing something that ladders is right. For example, you could offer a note with terms of no cap if the round is done within two months, but with a cap and a discount if the round is done within four months, a bigger discount at six months and so on and so forth.

In general, the best solution is to place the cap at a valuation in which you are very confident you can hit that is likely below your next round. Contrary to popular belief, a cap is not always a signal for the price of the next round. It’s true that many rounds are raised near their caps, but I’ve had a note capped at $10 million to let helpful friends into my company that raised its next round at $45-pre, and I’ve seen many great entrepreneurs who value their community take care of allies this way.

In our view, there is a huge misalignment with not having a cap on your notes if your investors have any real influence on your business or the technology and investing community — asking an investor to invest into an uncapped note is about the clearest way possible to tell them they are not connected to any community relevant to your success and don’t matter except for their money. And if they don’t, you should probably find better investors.

Joe Lonsdale
General Partner, 8VC

Real World Parallels to Last Night's Episode of Silicon Valley

Joe|April 25, 2016

Photo Credit: HBO’s ‘Silicon Valley’

Although certain TV portrayals are clearly unrealistic or over the top for comedic value, this episode dealt with a lot of issues we face in our industry.

Perhaps the central theme of the episode was the lead investor gaining control of the board and forcing the founder, Richard, into a CTO position.

Control issues like this happen all the time, although it’s rare for it to happen as early in a company as “Pied-Piper” which is about to raise 5 @ 50 million — when a company is seen doing well and has a lot of momentum and excitement behind it early, the founders usually wouldn’t give up that control to an investor. This situation is more rare today, versus twenty years ago where investors typically had more power over entrepreneurs. It was a rare mistake Richard made to accept terms that created an outside board that could replace him as CEO. But at the appropriate time, funds do often try to bring in experienced leadership, and when they get control they often force it.

Some funds are seen to be on one extreme and generally to oppose replacing founders (such as Founders Fund; their name relates to how they want to stand up for founders). Founders Fund believes that truly great companies that keep growing for a long period do so in part by keeping their founders as leaders. Others, such as Sequoia, were historically known for firing the CEO if they believe it is best for the company [a couple of the people who started Founders Fund for example had been fired as CEOs by Sequoia in the past]. Of course, these are sophisticated funds that have done very well and both of them have been on both sides of these issues.

The portrayal of the founder’s ego and suffering in this situation was apt. We’ve seen far worse — intense people sometimes have their lives and identity wrapped up as CEO of the company and perhaps 10% of them are unbalanced, much worse than was portrayed here — not only intense but also psychologically troubled people seem to be attracted at a higher rate to being a founder. In the worst situations it’s not unheard of to have talk of suicide or violence around these issues, and in any situation it’s extremely difficult for a founder. The question of how a team will stand with or against the founder in these situations is also common.

The lawyer’s betrayal of the founder when Richard got emotional and threatened to sue the investor was interesting. Many lawyers are clear they serve the company and not the founder, but others would have been loyal to the founder and resigned if necessary, as they would want other founders to trust them and hire them based on their perceived loyalty in an industry that values the entrepreneur and that is mostly run by other founders. In the episode, the company lawyer surprised Richard by going against him based on his ‘duty to the company’ and was showing that he cared more about what the investor thought about him long-term and was placing his chips there… this wouldn’t always be the best strategy for a lawyer in real life, as founders wield a lot of power in SV and tend to be loyal to each other. But it’s not unrealistic.

The most unrealistic scenes were around the amusing and egotistical speech about firing of a whole group at “Hooli” by their out of control founder, who pretended he was being humble while blaming them and trying to steal some of their upside. Ego issues are definitely an issue with successful leaders and people love to mock them, but no self-respecting engineers would stay and work for a company with a leader that was that obviously out of control. That said, many successful companies in our industry do probably have a lot of inefficient programs and groups they could benefit by cutting, even if it’s not as extreme as people sitting around on the roof hanging out.

The final scene of the show was my favorite — there are a lot of really amazing, successful people around Silicon Valley who we can learn from when we open up to the fact that we don’t know everything. And in real life we mark the passing of one of the great entrepreneur coaches with the memorial service of Bill Campbell today, a kind and insightful man who shared his wisdom and inspiration with many.

When the show’s potential mentor-CEO came up the skepticism of the team making fun of his previous entrepreneurial and leadership success and cancer research efforts was right on for the cynicism of many in SV, and how they might react at first to a new senior person or “outside wisdom”. Being a great founder or early team member is a difficult dialectic — you have to be a bit overconfident and a big ego isn’t always a bad thing — to change the world requires pushing really, really hard and believing you and your team know something others don’t. But the other extreme is also important to embrace — sometimes, experienced leaders are really helpful, and founders can do best by putting their egos aside and finding ways to learn.

I didn’t like how the CEO was forced on the company — that shows an investor not adept enough to manage the company from the same side of the table as the entrepreneurs — but the nod to experience and to the team learning to grow from others who have been successful is great.

Why Blend is Awesome

Joe|January 19, 2016

To celebrate its successful 2015, ~$40 million in new fundraising in the latest round, and the team’s momentum going into next year, I’m excited to share some of my thoughts on Blend.

Amazing People and Smart Enterprise

Some of the most talented people I used to work with at Palantir founded Blend, and it exemplifies much of what we have written about at Formation 8 and now 8VC (www.8vc.com). Blend aligns with our views about how to create a top technology culture and focus on an uncrowded, yet critical, vertical. It also exemplifies the ‘Smart Enterprise’ theme, as it replaces legacy infrastructure with deep Silicon Valley technology to help an underserved industry and create tremendous value for American lenders and borrowers alike.

Multi-Trillion-Dollar Market

Mortgage loans account for tens of trillions of dollars in our economy; they comprise one of the largest areas of finance globally. As you’d expect with something so big, there are a lot of parts to the mortgage industry, and a lot of people make their living from it. Unsurprisingly, a lot of it runs on outdated systems that are decades old, and this negatively impacts consumers, businesses, and the economy as a whole.

Fixing Consumer Pain

Consumers generally feel a lot of pain around origination — that is, when they are looking for a mortgage or refinancing. They usually have to pull together all sorts of paper documents, fax in information, and fill out endless forms only to learn that they need to provide more seemingly random information. They often wait several days for responses, which then come in formats that are hard to compare and understand.

This consumer experience is so painful because so much of the space is manually run on the enterprise side, with huge teams of humans acting as sort of a subpar “Mechanical Turk” middleware. This leads to sub-optimal results for the businesses beyond just consumer experience, ranging from efficiency (loans cost $7,000+ to originate today vs. $3,000 just 10 years ago) to risk (verifying consumer data at the source).

Preventing Financial Meltdowns

In addition to solving pain on the consumer side, Blend has the opportunity to empower the industry through increased transparency. Many of us believe that the lack of coherent data formats and information processes in this industry obscured risks and prevented sober analysis, and thus was a significant contributor to the 2008 recession. This recession was highlighted in the recent blockbuster “The Big Short”.

Had a platform like Blend existed at the time, it would have been much easier for the various actors to hold each other accountable and to see every detail of what they actually owned starting with the originators and the precise loans and how they were made. Everybody would have had a far better idea of the true value of all the underlying assets and of the actual risks they were taking from precise data, versus unreliable models and guesswork. Needless to say, this would have greatly dampened the risks taken during the fervor of 2005–2008.

Hypergrowth

There are hundreds of relevant mortgage originators, but the top forty or so represent over two-thirds of the origination volume. Blend is now working with a significant number of these businesses, with several more to follow in 2016. Billions of dollars worth of mortgage loans are already flowing through the Blend platform. In short, Blend is in what we in startup land call its “hypergrowth phase,” and it looks likely to continue to grow at a rate of hundreds of percent per year. Although it is currently focused on the full origination workflow, there are many other processes (such as servicing and underwriting loans) that it could expand to down the road.

A Network Effect

There’s an extra point that I feel compelled to make here about Blend’s strategy for some of my savvier friends — the GSEs receive reports from all of the the originators, and right now they spend billions of dollars a year sorting and normalizing files and running analyses on them. Blend hopes to enable new open formats, and possibly even to use cloud-based permissioning, to save a huge amount of time and money for the space and make it a lot more coherent and less manual. This is likely to create a bit of a network effect as more companies are influenced by the new rules and formats to come onto their modern platform.

The Silicon Valley — East Coast Arbitrage

Very few of my Silicon Valley friends have thought about these esoteric mortgage problems. Perhaps because it’s such an important area of finance, a lot of the private equity investors, billionaires, and Limited Partners we know on the East Coast have exposure to the space and are really excited about Blend. Few of them know how to create the elite technology culture needed that solve these kinds of problems though, so there’s an arbitrage available here that Blend is exploiting by taking a top Silicon Valley tech approach and iterating with largely East Coast-based businesses.

Lending is Evolving

The world of lending is evolving quickly, with companies like SoFi, LendingClub, Affirm, and others creating new and vastly improved consumer experiences. Blend is going after the biggest area of lending and making sure that the 99% of consumers that aren’t using these other lending platforms get just as compelling an experience.

Incidentally, This is a Really Awesome Company to Join

Blend’s mission fits into the core theme of how value is being created in Silicon Valley today through Smart Enterprise while positively impacting consumers. The best investors I know fought fiercely over Blend’s latest round. And the Blend team includes some of the most talented people I’ve worked with, along with great leaders and mentors. Needless to say, it’s an ideal place for a talented engineer, designer, or product manager to start or become 10x better at what they do.

Blend is fixing the back-end of one of the most important areas of our economy, which will help make finance work better and could prevent another recession. All in all, Blend is an important and exciting company, and I’m glad to be involved.

Read more about Blend in this recent article on Fortune: http://fortune.com/tag/blend/

It's Time to Open the Pentagon's Books

Joe|January 17, 2016

Disclosure: Joe Lonsdale is an entrepreneur and investor who co-founded and retains stakes in companies like OpenGov and Palantir that create products and solutions for government.

Congress gives the Pentagon $600 billion a year: our largest non-entitlement expense. In return, the military must spend money efficiently and report back to civilian leaders. Fulfilling these obligations builds trust and ensures every dollar in the defense budget benefits America and our sons and daughters who protect us.

Yet civilian leaders at home and abroad struggle to obtain details on military spending. It was unacceptable (but not surprising) to learn last month that the Pentagon buried evidence it could save $125 billion over five years by reforming personnel practices and reducing waste. Perhaps more shocking is the fact that the Department of Defense (DoD) cannot explain $6.5 trillion in financial adjustments from 2015–rendering the Pentagon’s financial reports almost meaningless.

Three features of the Pentagon’s organizational design hamper effective fiscal management. First, Congress slashes funding if a division spends under its budget. Hundreds of managers respond by spending inefficiently and obscuring financials. Second, DoD leaders rarely measure program ROI. Third, elected officials and Pentagon leaders throw more money at failing programs rather than learning from mistakes. This creates a dishonest procurement culture and deters both efficiency and innovation.

How do we fix this? We can begin by opening the books.

Congress ordered the Pentagon to be prepared by October 2017 to finally comply with a 1996 law mandating audits of every agency. This is a positive first step, but true financial accountability and efficiency will remain elusive without deeper organizational reforms and standards.

America has the greatest military in the world, and it’s up to our leaders to set the bar for what a 21st century military culture of innovation with transparent, collaborative leadership looks like. Innovative cultures transparently document spending, admit mistakes, and ask how they can do better.

Technologists and entrepreneurs can help. The Pentagon should use data to guide financial decision-making. Of course, some black ops need to be obscured — but too often, “TOP SECRET” or compartmentalized information is an excuse to hide incompetence. Transparent, top-down financial reporting from every part of the DoD must inform military and civilian leaders.

Today, the Pentagon’s technology is not up to the task. IT staff are scattered across the DoD, operating on inconsistent data standards and formats. Staff devote their energy to maintaining legacy systems: the Pentagon spends 80 percent of its IT budget on maintenance and only 20 on modernization. Outdated IT infrastructure stunts innovation and obscures wasteful spending.

Fixing the Pentagon’s technology deficit begins with standardizing the Pentagon’s financial data, then bringing that data into a unified platform in the cloud.

Why the cloud?

First, effective financial reporting increases visibility into back-office spending, fostering accountability and enabling oversight. For example, with a unified data platform, instead of waiting months to compile questionable reports, military and civilian leaders could access detailed financial information to enable accurate discussion any time.

Second, the Pentagon could budget more efficiently. A data platform would enable data science-driven analytics that uncovers waste and detects fraud. For example, years of budget and transaction data would enable software that flags anomalies, informs trade-offs, and sharpens oversight.

Finally, a financial data platform would boost over a million staff members’ productivity by eliminating routine work, such as maintaining legacy IT systems and compiling data.

Experience shows us these benefits are not out of reach. For example, over a thousand local governments, from San Diego to Washington, D.C., use a company we launched in 2012 called OpenGov to build efficient budgets, track spending, and engage citizens. The Pentagon could get similar benefits from new cloud-based technologies.

We cannot delay a solution. From 2016 to 2046, discretionary spending’s share of the federal budget, which includes defense, will fall from 44 to 26 percent. But the morphing threats emerging in today’s multilateral world won’t disappear. We must spend military dollars more efficiently to address these challenges.

Those who serve in our armed forces do so from a profound sense of duty to secure liberty for their fellow Americans. They enlist to serve their fellow citizens who express their will through elected representatives, not an unaccountable defense establishment.

As President Eisenhower warned us, “Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”

The political right has traditionally talked tough on government waste and accountability, but given the defense establishment a free pass. But President-elect Trump won without help from special interests that refuse to scrutinize defense spending. We have a unique chance for reform. Let’s not waste this opportunity to affirm our dedication to our soldiers and to the liberty they defend.

Let’s open the books.

Joe Lonsdale
General Partner, 8VC