“Research and psychology would suggest that you should be very conscious about what culture you're creating and what situations you're putting people in because situations can have that that effect on behavior in ways that you might intend but also in ways that you might not intend” -Eric Ball
Alan: Welcome back I'm here today with Eric Ball and Eric welcome to today’s show.
Eric: Thanks Alan,
Alan: So you get involved in a lot of ventures I know currently you're involved in a venture firm but for the listeners here I'd like you to walk us through your career path which is very unique.
Eric: Well sure, I've covered a fair amount of territory, I started life as an academic I went to grad school to study economics, did all the Ph.D. coursework at University of Rochester and then later got my doctorate at the Peter Drucker school down near Los Angeles and decided that I really enjoyed the teaching but I didn't want to make a career out of research and I transitioned into working for big companies starting with AT&T in 1988. I spent five years in different finance roles at AT&T and then five years at Avery Dennison in Pasadena and England and a couple years at Cisco Systems which brought me up here to the valley in 1999, four years at Flextronics in San Jose and then eleven years at Oracle from 2005 to 2015 serving as the senior vice president treasurer at Oracle which was a really exciting role and kind of the cornerstone of my career. I spent a year at a startup after that, C3 IOT run by Tom Siebel and then last year moved to launch my own venture capital firm. So I've kind of moved from academic economists to big company to small company to venture investor over a course of three decades.
Alan: A good breadth of experience and along the way you wrote a book
Eric: I did, in 2012 I published a book here in the US that was republished in Japanese last year and the motivation behind the book was to integrate my academic training with my corporate experience with the idea being that there's a lot of research done at business schools which is not always relevant to practicing executives but there's a decent fraction that is relevant and my goal was to distill that fraction of academic research that I thought can help people in their day jobs in and highlight and expose people to that so. I co-authored with a friend of mine Joe LiPuma out of Boston University, a summary of academic research that we think could be helpful for executives.
Alan: So this is called Unlocking The Ivory Tower and what is the ivory tower?
Eric: Well the idea is that is that the ivory tower is the academy which studies a lot of behavior and occasionally you know garners insights that actually can affect the real world- not all the time but some percentage of the time and I think some of the research is underappreciated in terms of how it can inform management thinking.
Alan: So recently [with your] jump into venture capital- it's a crowded market [with] a lot of people already playing in the market, but how are you finding where we're at with the markets today and the state of business in Silicon Valley?
Eric: Well I think business is strong in Silicon Valley and I think that the state of venture is strong. There's some interesting dynamics going on in venture capital in the last year or two. One is that you're seeing record amounts of venture capital being raised but almost record low amounts being deployed and as you see more companies taking a longer and longer time to exit and allowing themselves to grow larger and larger before going public or being acquired venture investors are responding by assuming that any holding period will be longer so they're fundraising to gather more money but they're being somewhat stingy about deploying that money so it's an interesting dynamic. I also see a distinction between late stage venture capital and early-stage venture capital where I think that a lot of money is being deployed in late-stage venture capital for a couple of reasons but one is that a lot of people have been successful in venture are raising larger funds and when they raise a larger fund their minimum check size becomes higher and that almost forces them into later stage investments because an early stage investment you might invest half a million or a million dollars but if your minimum check size is 10 or 20 million you're forced to invest in more mature companies and what my partner's Dickson Doll and Jack Crawford and I believe is if that creates an opportunity for early-stage venture investing and so our fund is a modestly sized fund that's going to be geared more toward the early-stage companies.
Alan: Do you have any particular markets that you're going to be focusing in on?
Eric: We're not sector specific, it's somewhat fashionable now to have sector specific venture funds and we are not sector specific for two reasons, one is that we think a lot of the firms that have created outlying returns have created new categories you know ten years ago- I have the pitch deck that Uber used ten years ago trying to raise money and struggling to raise money because people said, well why would you use the Internet to order a taxi and now every major venture firm has a digital mobility category and so in a sense I think that a lot of venture capitalists are fighting the last war and that's why we don't want to necessarily drive toward a single sector. Another reason is that we think that a lot of existing technologies today lend themselves toward uses and multiple sectors from birth rather than starting in one and then moving to adjacent sectors, we think that the IOT, Cloud, SAS based technologies lend themselves toward applications in different sectors from the beginning and so that's one of the filters that we evaluate companies that we invest in is whether it might have applications across sectors.
Alan: I'm visiting here today with Eric Ball and Eric that we need to take a quick break and we'll be right back after these messages. Welcome back and busy here today with Eric Ball and Eric in the first segment we ended up by talking about impact ventures and this new fund that you became associated with and when you're looking at companies to invest or partner with what's your process?
Eric: Well I think that there's a process around evaluating the team in the process around evaluating the business and there's a saying in venture that you don't invest in a product you invest in a in a business and so it's not just about somebody who's invented a product because that's not a sufficient reason to form a company that can be built on to form a company so it's really it's really in two directions around the humans that are at the core of the business and around the business itself. I think that in terms of the business itself it's attractive to have businesses that scale you know one of the things that I took out of my time- initially and I started my career at AT&T and I spent much of my career at Oracle and what both of those businesses had in common was a real ability to scale. You know if you build a cable across the ocean it costs a lot of money to do that but the incremental cost of one more telephone call on that cable is zero and if you write software once you write the software if one person can use it a billion people can use it at almost no additional cost and so businesses that have that characteristic of being able to be used by a lot more people at only minimally more cost are very attractive from an investment perspective and there's more to it than that but that's just one factor that we would look at. On the personal side you really want a team, you want a CEO that you think can inspire people to lead them not just because people will think that the business might be successful but it's really somebody that they respect enough to lead them into battle and just not take failure for an answer and that's really what you look for I think that the less sector-specific you are the more as an investor you're betting on the team as opposed to as opposed to an investment thesis which drives you slowly toward the tools or the products but we really look at it both the business and in the management.
Alan: You know we've seen a lot of discussion recently about artificial intelligence and moving how- where would you say we're at in that process right now are we still at the very early stage?
Eric:Oh well, at an early stage I mean there are there are some luminaries here in the valley who say that artificial intelligence will eventually take all of our jobs and we can drink margaritas in the bathtub but I think that that that may happen but that that'll happen over some period of time one of the four initial portfolio companies that we've invested in at impact venture capital is a company that's making drone operation autonomous and sort of its AI applied to the drone space and it's displacing human security guards so they're finding drones to be a cheaper way to ensure physical security of a perimeter than just hiring a bunch of security guards to walk around so we're an active part of unemploying security guards and I think that there are similar companies that are unemploying other skills- the self-driving cars are getting to the point where I think taxi drivers are an endangered species and pretty soon truck drivers will be endangered as well. Over the course of time all of our jobs may be replaceable with artificial intelligence but I think that the more the job depends on sort of cognitive processing the longer it will take and so I think it'll sort of move up the ladder from you know vocational jobs to highly analytical jobs but I think very few jobs will ultimately be safe.
Alan:When we look at the Internet of Things and the whole landscape of this industry it seems like AI is really you know hitting all aspects of it then
Eric: Well yeah it is and I mean, AI is such a broad term that it encompasses- people can use that term to mean a lot of different things but broadly speaking a lot of routine tests and I think increasingly more nuanced tasks will be done better by computers and you're even you're seeing that in a lot of fields, I mean you're seeing robot surgery or even a skill as advanced as a surgeon can be done at least in part improved on with the use of AI and robotic tools and now that's what I meant by nobody is ultimately safe.
Alan: Well Eric I need to take another break and when we get back I want to go back into the book, Unlocking The Ivory Tower.
Alan: We'll be right back after these messages. Welcome back and then visiting here today with Eric Ball and Eric in this segment I want to talk about your new book Unlocking The Ivory Tower, and first of all, the inspiration for this book was?
Eric: Well I'm somebody who has straddled a couple of different worlds. When I was in graduate school studying economics and Finance I decided that I was never going to be a Nobel Prize winner in theory, that I enjoyed learning the material but I wasn't passionate about the research as much and you know as an executive I rose through the ranks but you know I decided I wasn't going to become CEO of General Electric either but where I thought I might be unusual was that I had spent some amount of time in both environments and I was struck by how little the environments communicate with each other and my co-author Joe LiPuma had a similar background he'd actually started as a consultant for 25 years and then become an academic later in his career and we both lamented that academics often study problems that no one else thinks are interesting and when they do study problems that are very applicable or relevant a lot of executives don't believe that somebody in a business school could possibly understand the challenges they face and so they may not always be receptive toward research which actually helps solve problems that they face every day. So we decided that we would be sort of the UN interpreters where we would try to create a bridge between these two worlds that don't spend a lot of time in contact with each other.
Alan: Is management of people instinctive or is that something that is typically acquired through experience?
Eric: Well I think that there are certain natural talents that that can help in the sense that you know if you want to be a professional baseball player it's good to just have good hand-eye coordination and athletic skills, in the same way if you want to be an effective manager it's good to have a comfort in speaking clearly and communicating well but for the most part I think both management and leadership are more acquired than born. I know I don't really believe in the born leader or the born communicator I mean these are skills like anything else that improve with practice and one of the points in the book that- there's some research which talks about [how] management is dealing with complexity and leadership is about dealing with change and both improve with practice. so I'm definitely more in the mold that leaders are made than that they are born.
Alan: What are some of the common mistakes that managers will often make?
Eric: Well you know that could be a long list because I think each manager invents new mistakes to be made but I think there are some common mistakes or some myths that research shows aren't necessarily true, one I think institutionalized misperception is that the way to motivate people is by compensation and there's a whole set of research in psychology- this is usually in psychology departments more than business schools- but there's research that shows that compensation is a small factor in the motivation for an employee. On the one hand it's not absolute compensation that matters its relative compensation. People tend to seem less focused on how much they make in an absolute sense then on how much they make relative to the man or woman who sits next to them and you know if they get a 2% raise but the person next to him gets a 3% raise that 2% raise wasn't motivating so people are psychologically prone to compare themselves to the people nearest to them, not in an absolute sense and I think that's underappreciated. But further than that the research shows that people are highly motivated by a desire to do well and be recognized for their work and that when studies of retention and attrition happen the role of a manager in recognizing and acknowledging work and in creating a sense of shared purpose and mission often is empirically shown- this isn't just ideology- that it's empirically shown to have a bigger impact on retention rates than simply how much somebody gets paid.
Alan: What management practices today do you feel it critical in order for young companies to succeed?
Eric: I think that practices around agility are particularly key and that covers a wide amount of ground but I think that- small companies aren't going to be able to compete with big companies in terms of resources, talent bench, but they can shift more rapidly and that's why a lot of the more successful companies don't fear the fortune 500 competitors as much as they fear three smart young people in a garage somewhere because you can turn a PT boat faster than you can turn an aircraft carrier. And I think that's borne out with the rise and fall of some of the local companies here in the valley. I think HP had some difficulty changing direction and had a couple of rough years as a result, there are other companies Google, and Oracle I would put out as examples of companies that have remained relatively agile despite growing large and so your question was about what people at young companies should be doing and I think that agility is the primary word that I that I would bring to mind for that.
Alan: I'm going to jump over to your career at Oracle you spent a number of years as senior vice there and what changes did you see in the landscape of the whole tech industry during the tenure?
Eric:So many changes and I'm sure that what I saw most closely was only a tip of the iceberg, but I was there for some changes, Oracle as well as many tech companies had not initially been acquisitive, in fact Larry Ellison used to say in the 90's 'we don't we don't buy good products we make them' and an Oracle was not acquisitive but Larry Ellison had the ability and the strength of taking in new data and altering his course as a result and I think he had fundamental insights around the scalability of software and the fact that building a larger revenue base allowed you to spread an R&D budget over a larger and larger base which created a positive reinforcing loop and around the time I joined Oracle, Oracle became highly acquisitive one of the most acquisitive firms in technology and one of the most acquisitive firms in the world and proved to be very effective at that so that was one change that I observed and then I ended up participating in that change because in order to be acquisitive Oracle needed to borrow money and my job in finance was to manage that process of doing very large bond deals. My team borrowed fifty two billion dollars in my 11 years at Oracle.
Alan:That's not a small number
Eric:No it wasn't and we borrowed the money but part of the motivation for borrowing money was to fuel the M&A as well as some other uses of cash. Oracle actually had cash offshore that wasn't terribly tax efficient to spend on shore so we managed investments with offshore cash we borrowed money on shore and before our first bond deal in 2006 no cash-rich tech company had ever borrowed money because the prevailing wisdom had been that in tech the business is risky so you have to offset a riskier business model with a more conservative financial profile and therefore not borrow money and Oracle, we were the first of the big tech companies to start borrowing money in a serious way. And after we did that you saw a Cisco do the same thing you saw Apple come into the debt markets and it became much more common and acceptable for big tech companies to borrow money and to use at least some of that money for M&A.
Alan:I've been visiting here today with Eric Ball and Eric were out of time today but before we go I'd like to ask if a company's interested in seeking to get to now impact better how would they go about contacting you guys?
Eric: Well we have three general partners and impact myself Dickson Doll who is a really an icon in the valley and Dickson was the founder of Doll Capital Management which was later renamed DCM ventures with a sterling career and Jack Crawford, our third partner who went through the Kauffman Fellows program with me in 2011 and I've had the chance to invest with both Jack and Dixon for years prior to the formation of impact. And our email addresses are all very simple it's Eric at impactVC.com, Dixon@impactVC.com, Jack@impactVC.com, we welcome the chance to hear from entrepreneurs, we've invested in four companies in 2017 that were very excited about, a high-performance computing company in my in Santa Clara, Cornami, the drone company I referenced earlier in Mountain View called Nightingale Security, a fraud detection software company in Sacramento area called Pondera and a mobile to mobile IoT company in Oakland called Globe Touch. We're excited about those four investments we've made in 2017, we have many candidates in 2018 but we're always happy to hear more.
Alan: Thank you Eric, thanks for being on today's show.
Eric: Thanks it's been a real pleasure Alan, thanks for having me.
Alan: We'll be right back after these messages. Welcome back I'm visiting here today with Eric Ball and over the break we began talking about the Stanford Prison study and I thought it'd be good to have Eric back to maybe talk about the study why was it put out in the results of the study.
Eric:The Stanford Prison Experiment was a an example of a broader issue around organizational culture. And an organizational culture is sort of- what culture is to an organization is what a personality is to an individual. It's the set of implicit assumptions that aren't always explicitly described but motivate behavior within an organization and in trying to understand behavior we float into the realm of psychology and I think one of the most powerful pieces of research in the area of psychology was the Stanford Prison Experiment. In 1971 Philip Zimbardo, at Stanford, brought together a group of undergraduates in conducting an experiment where they were randomly sorted into a group called prisoners and a group called guards and they were thrown together for a week to role play. And what the experiment discovered is that very quickly the people who'd been randomly assigned as guards started behaving quite cruelly and even sadistically toward the people who had been assigned as prisoners and it got so egregious that after about five days the experiment had to be stopped because the prisoners were being abused physically and psychologically by the guards and what this study revealed is that people perceive that personality drives behavior but empirically it appears that situations drive behavior and that the culture that you put in place and the situations that you put people in can create behavior that can be unintended. Some anthropologists in different research looked at Silicon Valley, they brought in anthropologists who were used to looking at the primitive people of Borneo and other cultures but what they discovered is that if you look at the textbook definition of a cult, that a lot of Silicon Valley startups- even larger companies fit that definition. You have a culture that involves young people with a strong sense of shared mission an affiliation not sleeping enough and spending most of their time with each other and in some cases that's how you define a cult, that's also how you define a very successful startup and so some of this research and psychology would suggest that you should be very conscious about what culture you're creating and what situations you're putting people in because situations can have that that effect on behavior in ways that you might intend but also in ways that you might not intend.
Alan:Interesting so that speaks of the fact how important culture is
Eric: Culture and structure, the structure of organizations and decision making and the relative power roles that the people have.So there there's another set of research that I think is interesting for managers in different business context and it's in the area of cognitive bias and cognitive decisions science. And there was a there's a whole body of research that was started by Kahneman and Tversky back in the 70's around how people are consistently irrational, I mean the economics model is that we're all rational utility maximizing agents but Kahneman and Tversky show that not only are we not rational but we're often not rational in consistent ways. For example they discovered that confidence tends to increase faster than skill. That as we get better at things we get better but we don't get as much better as we think we do and that therefore the most the people most prone to miscalculation are often experts and their research has been used to try to train doctors and pilots and other people into not having their confidence exceed their skill level and that's a very interesting piece of research but then there's another set of research which shows that in some context that experts develop very good intuition you know the firefighter who walks into a home and can't quite figure out why but knows that it's about to collapse and pulls the team out just before the collapse and so there were these competing views of, are experts dangerous or are experts good and valuable? And these two sets of authors got together in 2011 and did a really interesting study which integrated these two views and what they discovered was that in environments that involve frequent feedback, experts do develop a good intuition. So the quarterback who figures out how soon he's going to be sacked develops that intuition from repeated repeated plays and interactions and we see people in fields that get frequent feedback like athletes, nurses, firefighters, policemen, develop very honed intuition and in those cases you can trust the experts but in other environments where there is a failure to get feedback quickly where it takes a long time to learn if you were lucky or if you were good you should be wary of experts this includes political pundits, stock market investors, venture capitalists and other people whose learning feedback loop is very long and so I find that an interesting application and research is to always say is this an expert has gotten enough feedback to have good intuition or is this somebody that we don't know yet if they're lucky or if they're good and it's a distinction that I think is useful in the business world.
Eric:Well Eric I really appreciate you being here on today's show and it's been a pleasure having you with us and for the listeners out there, Eric again he's one of the co-founders of impact ventures, they launches last year their focus in on the early-stage companies and for individuals wanting to reach out you can contact Eric at impact ventures VC dot-com
Eric: Thanks Alan.
Alan: Thank you thanks for joining us today on America Dreams to join us next week right here on this station