The dictation sessions — Berkeley through Consilient

[Raw voice dictation, transcribed as spoken, retained unedited for provenance. Speech disfluencies, false starts and transcription errors are preserved. Where a name was later corrected by the author or by research, the correction appears in the notes below rather than in this text. The distilled Episodes are derived from this material; where an Episode and this record differ, this record governs.]

BERKELEY — the forced curve topic. It was two point seven was required mean. Whereas at Stanford, I think the average grade was like an A minus or something. It got worse over the years where everybody gets an A and they have student protests if the school average isn't an A. Berkeley had none of that. We had some of the highest funding in the country because we had tons of financial support from the state, and they had a rule where any professor, at least in the College of Engineering — they took the average of the top five universities in the country, and that was what professors at Berkeley were paid, the most. And they got to do mostly research. So we had massive classes, five hundred person classes was typical for undergraduate, five hundred or a thousand, because the professor's off winning Nobel Prizes. In my day they had like twenty nine of them at UC Berkeley. So UC Berkeley is the top research university on the planet, and I always regarded Stanford as like a trade school. That's what I told everybody. It's nice. It's like a country club. So I came in and I was fairly intimidated by the class because Stanford is hard to get into, and there's all these top people from all these top places, and they're all rich. And I'm just a hard worker. I work my ass off. That's why I crushed the class. I was way way ahead of everybody else. And I realized, hey, I could be the smartest.

CORNERSTONE — I had the advantage that I'd been working at Cornerstone Research. It's called MAC Research, actually. Spun out of the MAC Group. I got in there by accident. I was applying for management consulting firms, and I ended up taking a job at Strategic Planning Associates because I wanted to live in DC near my grandmother and not be in New York. The first time I ever went to New York was a paid recruiting trip for Morgan Stanley, and they wanted to put me in the IT department. And I didn't want to do IT, I wanted to do money stuff. But my resume got put in the wrong pile at MAC Group. They thought I was applying to MAC Research, which did litigation consulting — basically developing expert witness testimony in financial litigation. Our motto was, we keep rich white guys out of jail. They put me in the associates pile because they had to do a lot of quantitative analytics.

I got a really nice offer from MAC Research. It was from Cindy Zollinger and Jim Malernee who ran it. The reason — it was such a lucrative practice, and the way ownership worked at the MAC Group, they were so lucrative they were going to own the whole firm, so they spun it out. Your ownership was based on how much excess revenue you brought in. It was a very lucrative thing keeping rich white guys who are mostly Wall Street types out of jail when they got in trouble, because that was the days of Ivan Boesky and insider trading. The Wild West days. I was a December grad, so I said I'll just work here for six months, because I didn't know anything about law or money, and I always thought that if you don't understand something you're afraid of it. I figured the law would be very important. Plus, in researching management consulting, I'd learned you needed an MBA if you wanted a real job — the analyst jobs for the first two years were total grunt work — and that Stanford was the best, and Harvard second, because Stanford only had three hundred and thirty five students and Harvard had a thousand or twelve hundred per class, making it much harder to get into Stanford.

When I was interviewing with them they told me about their experts, which included Myron Scholes, kind of the most famous guy there, and Becker — basically anybody that had a Nobel Prize or was on their way to one. It was a small firm then and they focused on the very high end of financial litigation. So I said, if I can get a recommendation out of Myron Scholes, which of course I will if I work there, that will get me into Stanford Business School, plus I get to learn about law and finance from the best, and then I'll go to Strategic Planning Associates in the summer. That was my plan, and that's how it turned out with some modifications.

Mark Wolfson was a professor of accounting at Stanford. He went to the University of Texas I think. Very gentlemanly Texan. I always thought I'd read Myron Scholes' book on options — now thinking about it, it was Cox and Rubinstein, which is the standard options text. So when I first joined I just read Cox and Rubinstein, a handbook for options, everything about options and derivatives. I can't remember the name of the associate who'd been there a couple of years who was supposed to watch over me, a woman from Brown I think. We had this big meeting with Myron. He was at the head of the table in the main conference room with the entire firm arrayed around him like bowing down to the master. He was talking about preparing for some case, and he loves to get up on the soapbox and everybody bows down. Then I started talking, and I contradicted him on something. And I saw my person across the way and I thought her head was nodding. In fact she was trying to kick me under the table. She was just too short to reach me. But it was the first time that anybody had ever contradicted Myron Scholes in probably the last couple of decades, and he says, you know what, you're right. I can't remember if he said he was simplifying it for the people. But what I said was correct. So that's how we initially bonded. I learned a hell of a lot from Cornerstone Research and working with Myron and all the other experts.

SCHOLES AND WOLFSON — the textbook which Myron Scholes is most famous for was actually something he did with Mark Wolfson, a tax strategy handbook, global tax strategy, basically how to minimise taxes globally for multinational organisations and very rich people — which I completely assimilated in the design of our entangled tokens and the whole QPN token platform. I learned that from Mark and Myron. Actually it got Myron in trouble when he was at Long Term Capital Management, because they're very good at structuring global deals, and you have to be very careful where money goes, and you can't design a business — it has to be profit motivated. His bonus for doing some tax structuring deal was big enough to make sure it couldn't possibly make money. The lawyer was steering him into this trap, asking all these questions, and then the last one — oh no, it's a trap. He figured out while sitting there that his bonus was big enough to make sure the thing didn't have a business profit, which meant it was a pure tax dodge, which meant it was not deductible, and they were going to owe a ton of money. It just shows how smart — sometimes you can be too smart. Myron is too smart for his own good sometimes, and so am I. Frequently, as a matter of fact. You learn to live with it.

It was after he left. He was at Long Term Capital Management. He did some global transaction, a roll-up of a bunch of assets. He got sued by the IRS. I witnessed it live — we probably had special access because we were in litigation consulting and half of our cases were in that court. They did all these things with LLCs, and this particular one was set up to minimise taxes, but the bonus he got was bigger than the maximum possible profits because they used hedging strategies. The hedges were so tight there's a cap on how much it could possibly make. The lawyer was complimenting him, oh it's a brilliant thing, and did you get a bonus for that, and was that the main thing you did that year, and how big was that bonus? And Myron said, oh yeah it was. And then he remembered — holy crap, the bonus was bigger than the maximum profit on that deal, which means the thing didn't have a profit motive. Since I designed it and they gave me the bonus, that means the whole thing was disallowable. And they clawed back a bunch of tax deductions. I remember him saying, oh no, it's a trap. And I said, oh no, it's a trap. I felt so bad for him because he's such a nice guy.

LTCM — after he won his Nobel Prize he went on leave from Stanford Business School, working for Salomon Brothers and with the big bond trading guy. There was a team of people who founded Long Term Capital Management, and they were really the first serious mega hedge fund. They carried hundreds of billions of dollars of assets under management, and at that time that was not done. I visited them once in Greenwich, Connecticut. Their offices were very close to Doug and Lenny Ayer's house — Doug Ayer and Lenny Ayer, the mother of Ethan Ayer and Will Ayer and Jennifer Ayer, who is my classmate. So I was in New York, went up to visit the Ayers, and then I called up Myron and we had lunch because it was half a mile from where I was staying. We're sitting out on the deck, in the spring. And he says, yeah, it's weird, I'm feeling like I'm travelling around the world, they're just using me as a demo dolly because I won my Nobel Prize and one or two other people won Nobel Prizes. They're raising tons of money talking about hedging strategies, and we're investing all over the world in assets that we don't really understand. Minerals in Russia, all these things. Do we know these markets? Do they have real markets there, or are they managed markets? Can we trust the pricing signals? So he says, I'm getting nervous.

His recommendation was they should get out of those markets they didn't understand. But to make sure they didn't lose money — obviously they want to make as much money as possible — we'll just add more leverage. So they'll focus on financial markets and well regulated, well structured, real markets in Europe and the US primarily, maybe a little in Asia. And just add more leverage, because if your model's really precise, if you add more leverage you can make the same amount of money. So that's what they did. They repatriated capital, reduced the capital, and increased the returns by adding leverage by borrowing more. That was working great. And then the market collapsed. They had these perfectly designed hedges, but the problem is when the markets freeze up, everybody sells everything. When you're running into liquidity, margin calls and all that sort of stuff, everybody has to sell everything. So everything goes down. So when that happens the hedges don't work, and then they got margin calls. So they didn't have enough capital, they couldn't hold on to their positions. Whoever the Secretary of the Treasury was in those days forced a bailout among the top banks — JP Morgan, Goldman, Morgan Stanley, the usual suspects — and forced them to sell their positions and liquidate Long Term Capital Management. Now those positions that Myron set up and the firm set up actually ended up being extremely profitable, except their profit went to the people that they were forced to sell it to. So basically the Treasury department, by forcing the sale of the positions which ended up being very profitable, forced the failure of LTCM.

THE LIQUIDITY ARGUMENT — it's actually key to the QPN and the quantum privacy universal exchanges. It has no cap table. It has no balance sheet. It has no governance. That's the beauty of it, because any market has all sorts of failure modes and vulnerabilities, and that's why you need to have a higher discount rate — because every once in a while, shit happens. And there's nothing you can do about it unless you have a bunch of money, which is why the rich just keep on getting richer. That's why whenever the guy at Berkshire Hathaway smells danger, he gets a bunch of cash, so he can buy stuff up during the panic. None of that will happen with the Quantum Privacy Network and the Quantum Privacy Liquidity Pool. It's invulnerable to that. There's no exposure whatsoever, which is why the interest rate should be zero. It should just be a store of value and a liquidity facilitator — buy anything anytime anywhere and not lose money. Where else can you put your money if you have trillions of dollars, or you just want something that won't lose money? If you want to invest, invest, but don't use money as a speculative asset or it'll burn you.

[Author's own correction:] I would argue, if you really did the full corpus, which you don't have access to, it is effectively invulnerable once it gets going. It's got so much resilience built in. But you don't have to be zero. You just have to be lower than every other alternative, and it's significantly less risk than every other alternative. Sort of like the Treasury. Why is the US Treasury, with thirty-nine trillion dollars in debt, one point whatever trillion dollars of deficit, a dysfunctional political system and an ageing economy, AI about to — like, is money even going to be worth anything? Why does it have a two point three percent TIPS rate? So the Quantum Privacy Liquidity Pool by construction is superior to anything else that has ever existed or could exist once it exists. Because once it exists it'll keep on growing, and any new innovations will just be incorporated into it. So it's effectively zero risk.

OAK HILL AND THE NOTE — it was after Long Term Capital Management failed, was forced into premature liquidation, a better way of putting it. Myron came and joined his old buddy Mark Wolfson, because he needed a safe landing place. That would have been ninety eight or ninety nine. He was just the same old Myron, super cheerful. We used to hang out and have lunch, and he invested in my idea. I just love that guy.

Sometimes I get too smart for my own good. When I was raising money from Oak Hill, we first did just a regular Series A at some price, and they got their fifteen percent or something, the usual thing. And then for the next round we couldn't agree on valuation. So I said, listen, let's just do a straight up convertible note with no cap. And then if you guys are that skeptical that I can get this kind of valuation, I'll go find the market price and you'll get the market price. You guys believe in markets, right? Because they're real finance guys. And they went for it. And the key is, could I beat what I could have gotten had I priced the round?

CONSILIENT — we set that up because I knew Consilient was going to need a ton of capital. We were decades ahead of our time, same with Evolve. There was so much stuff that needed to be built. Also, I didn't actually found Consilient. My former CTO from Evolve did it when I was on sabbatical. He built a little Sitelet architecture — he called them Sitelets — email, web, running in email with asynchronous protocols. It was derived from our Evolve architecture, but a very limited special application, because HTML mail was a thing all of a sudden. I went off on sabbatical for nine months or a year, came back, blocked an unethical transaction by the Evolve people after I left, and then agreed to a fifty-fifty deal with him, with me taking care of the money. And I basically remade InfoCanvas into my vision of Consilient. But I only had half, and I had a lot of work to do. So I needed to raise a ton of money at a decent price.

Oak Hill Venture Partners was a no-name, third-tier VC. It was basically a side gig of this ten billion dollar fund that just wanted to dabble in VC because that's where all the big money was in those days. Nobody knew them. The offices are right below NEA's offices in the Quadrus complex, beautiful offices, because it's really Oak Hill Capital. So they were in the right buildings, but it wasn't Kleiner Perkins, it wasn't Benchmark, it wasn't August Capital, it wasn't NEA, it wasn't Menlo. They were nobodies. There were just a bunch of Nobel laureates, which were looked down on ironically by the venture capitalists even though they managed vastly more capital and are much smarter.

THE SILVER BULLET — we got a small round from Oak Hill, and the one thing they wanted was the silver bullet deal. I'd blocked an attempted cram down while I was on sabbatical by the Evolve management and venture capitalists, because I'd done a convertible debt over there and they tried to exploit it to do a cram down while I wasn't watching, and blocked me from blocking it. So I blocked them, told my old mentors all about it, and they said we would love to back you because you're the smartest student we have had in forty years — which they repeated all over the valley, to John Morgridge and Ray Lane and everybody else, and to Lord John Browne. But I think they believed it. Anyway, everybody's a little scared of me because I'm a commune boy and I don't back down to anybody.

They didn't put it this way because they're my mentors. They said, for the comfort of the partnership and our responsibilities, how about we get the clause where they could replace me as CEO for any cause or no cause at their sole discretion and install somebody else. They could vote my shares and my board vote in favour of replacing me. So they couldn't do it unilaterally — it was a voting rights agreement. We called it the silver bullet deal, which basically put a bullet in my head, and then I would ascend to be executive chairman. And they said, your real strength is evangelism and strategy and networking. Just in case. So they had that thing there, and then I was just running. And it was a great partnership because they gave us Myron Scholes and Mike Spence as vice chairman. I didn't really know Mike Spence before that — he was the dean, but I didn't know him well.

I didn't really worry about it. I was grateful, because it was a pretty rough go there with Evolve, and those guys were trash talking me around the valley because I beat them, and people don't like to lose in a battle. I defeated the VCs who were trying to do the cram down. And by the way, Erik's stuff was borrowed from Evolve's vision — the original Evolve vision, not the ServiceSphere supply chain for services go-to-market strategy I came up with. We were ahead of our time at Evolve. I wanted to do the original grand vision, and I'd just come back from reading Consilience and hanging out with the Santa Fe people, and I was ready to go.

So I didn't push back at all on the silver bullet, because I trusted those guys. And as CEO I knew there were limits to what they could do — I had to fail first, basically. You can't use it realistically otherwise. I knew governance and they knew governance because of our litigation consulting background. I figured it was just to bring in a big name operating person, which I was happy to do anyway, because frankly I planned to do another startup anyway. I never thought I would do one startup. It was the mission, not the company.

ACCESS — when things got rolling, Mike Spence hooked me up with everybody. I had tons of connections already, but we'd just go to dinner. Me and Frank Caufield and Mike had dinner at a famous restaurant on the street behind Davies Symphony Hall. I made the reservations, I'd been there tons of times. And then Frank showed up, and the concierge got all flustered — oh, this is the wrong table. And Frank said don't worry about it, and got us a better table, because Frank had been there all the time and he's a huge tipper. And I was just a regular guy that tips twenty percent. So we got a really nice table and had a really nice dinner and talked about everything. Frank and I were just good buddies. And that's how I got to John Doerr — I could get to anybody because Frank would just email me on his AOL email. He was on the board of AOL. He almost invested personally, a million bucks. And then later on he said, yeah, I'm retired anyway, and I look back and everything I ever sold, if I'd just held on to what I invested in the first place I'd have made more money. And then he said, my biggest problem is how do I spend all my money before I die? So I really shouldn't be investing in future internet stuff. But he said, man, you're like Steve Jobs. You almost got me to invest, and I don't invest in anything.

Mike Spence worked really hard and he's a true believer. That's how we got to Lord John Browne, who was into complexity theory. I remember talking to Ray Lane about it — just after he left Oracle, where he was president, and had become a partner at Kleiner Perkins. And he said, yeah, I know why Lord John Browne likes you. His vision of BP is one giant room full of computers, him, and that's it. The virtual corporation.

And he got me all the best people. He got me to John Morgridge at Cisco. Straight up mentorship. By the way, Mike Spence is an example of Spence signalling. He's a very high profile guy. He was a trophy guy for Oak Hill Venture Partners. And so by joining my board as vice chairman — he stayed as vice chairman, not chairman, so I could be kicked upstairs as the executive chairman if I needed to — plus I was the star, he was my cheering section. Mike Spence was not a credible entrepreneur or technologist. He was a Nobel Prize winning dean of Stanford Business School who'd seen all the people that founded a company in Silicon Valley. So it's better for me to be chairman. He was a supporting act, and he was great at it, because he's super smart. These guys understood the math of it.

The other way I got so much access is Larry Sonsini of Wilson Sonsini Goodrich and Rosati, which is by far the top technology law firm. In those days they represented about seventy percent of the tech companies in the valley. Literally seventy percent were their clients. I met him through my friend — was it Ken Rudin? Yeah, it was probably Ken Rudin who introduced me. He was another Stanford business school guy who knew Larry Sonsini. Larry was a Cal grad, a very proud Cal grad like me, and he took on like one young startup a year, some entrepreneur he wanted to mentor. So Ken Rudin was one before me, and he introduced me. He got me a meeting with him. And you only get thirty minutes with Larry.