Richard Parsons on tackling inequities in venture capital and finance (Full Stream 3/23)

Nice to be with you, Jonathan. It has been a long time.

Oh, well, thank you. Thank you. You and I go way back to when I was an editorial writer at the New York Daily News and writing about the Apollo Theater, and you, as chairman and CEO of Time Warner, adopted the theater to help turn it around. And can you believe that was more than 20 years ago?

Incredible. Absolutely incredible.

No, it's not just the bottom line. Let me start from the beginning and build up a little bit. The Equity Alliance was an idea that I had with a friend of mine named Kenny Lear, who was sitting around in the wake of George Floyd, and I was complaining about the fact that everything that people were reporting and complaining about what the George Floyd incident, excuse me, it sounded like 50 years ago when I was a college student or a law school student just coming out of school, and we had all the riots in Detroit and New York and Philadelphia and Newark. They appointed a commission called the... it just went right out of my head, and it'll come back to me in a minute. The commission reported on the causes of these riots, and you could have taken the first page out of that and read it 50 years later with George Floyd. Same issues: discrimination, poor housing, lack of educational quality, lack of job opportunities, unfair policing. Nothing had changed in 50 years. It was just stunning to me. And when we thought about it, Kenny and I were sitting there thinking about it, I said the real problem is that in order to change things around, in order for people to grow in terms of personal... being safeguarded, they need capital. And if you look at the way in which we allocate capital in this country, the asset management business, something like a 70 to 80 trillion dollar business, less than two percent of that investment capital gets into the hands of minorities or women who are overlooked by our structure. I say it's structural inequality. I don't use racism because racism suggests there's an intentionality to it, and I don't believe that's necessarily true, but it is unequal. Minorities and women do not get anything close to their fair share of invested capital. So we said, we're obviously not going to change the world by ourselves. We said, what can we do to start to level that playing field? So what the Equity Alliance is, it's a bunch of folks that I know and Kenny knows from the investment world who put some money together to start a fund of funds that focuses on other emerging venture managers who are either people of color or women. Because we believe that A, there's a lot of talent out there being overlooked; B, we could find that talent and create an investment vehicle that gave superior returns because there's no shortage of ideas and opportunities in the overlooked communities, particularly in the minority community. And so our objective was to set out to prove that you could, as I like to say, find gold in them hills. You could find real great investment opportunities and get a return that was superior to the returns you'd otherwise get in the market. And our further thought was that because, frankly, this is a bit of a confession against interest, we were the incumbents. All of us, I mean, I came from mainstream. By the time I got to this, I headed up a number of S&P 500 companies and been involved in commerce and investment for years, as have the other fellows we brought in. And so we could then go back to our former colleagues and peers and say, hey look guys, take a look at this model. This works. This is the way you can invest in communities you've overlooked in the past and get a decent to superior return. So wake up. That was the point of this. Everybody was now woke, right, because of the George Floyd situation, but they didn't know what to do. They wanted to do something, but they didn't know what to do. So we thought we'd try and create a model for them. Sorry to go on, but I wanted to give you the background.

It's all right. I only know it because that was the year I was born, so I'm very mindful of 1967. Listeners, go back and read the first page literally of the executive session of the Kerner Report in terms of what was the root cause of this turmoil. They could think they were reading what happened right after George Floyd. 50 years have passed and nothing had changed.

Well, we're looking for, first of all, as I said, we are emphasizing managers who are diverse, who are either people of color or women. So that's the first screen, if you will. And then we look to see what the background and track record, to the extent there is one, is of these folks. Now, I mentioned, I said to the extent there is a track record, one of the problems that women and minorities have is that they don't have the track record because they haven't been able to get into the game. It's like the old, I can't get a job unless I have experience, and I can't get experience unless I have a job. Same issue. A lot of these managers don't have the track record to put up, so you have to make a bet, if you will, on the quality of the leadership. So that's the second thing we look for. What's been your experience either as an entrepreneur in corporate life or with someone else, and what are your qualities as a leader? Because I always believe at the end of the day, I don't care whether you're running any kind of business, at the end of the day it's all about the people. So we press hard to see if we think we've got some folks who have skills, who have intelligence, who have insight into areas of the economy we think are going to grow, and who we think can put together a team to make it happen. And then we look to make sure that they have the fundamentals in place. In other words, there's a lot of people out here who have an idea for their pal, and the two of them have an idea, but they don't have any financial competence, they don't have any compliance competence, they haven't managed businesses before. We like to see a team because investing successfully is generally speaking a team effort. Put a team together with different skills and competence. So we look for all the same things that other investors look for. It's just that we recognize that the track record part of it is going to be skimpy. And these are usually young people who didn't go to all the right schools because that's part of the game here, right? A couple of three or four schools that produce 75% of the entrepreneurs, and they all go to the same schools, they have the same experience, they end up in the same investment pods. And so one of, if you would ask me what's our secret sauce, what do we do just beyond trying to kill people, we are trying to create a community. Very interesting. You look out on the West Coast, Silicon Valley, there's a community of folks out there that meet and greet, talk to each other, and support each other. As I said, they all went to the same schools and they all live the same kind of lives. Our folks don't. Our folks are not part of that community. So we're trying to build a community among this group that we're putting together so that they get the same kinds of support.

Well, I'll start with an anecdote. Advice that was given to me by an early employer. He said, you know, success in life is 10% what you know, 10% who you know, and 80% luck. And by luck, you know, you picked the lottery or just circumstances of your birth, your parentage, your school, and all that things you had less to do with than actually getting out into the work and trying to make it go. The important part to me was the who you know was just as important as what you know. What happens in the real world is that relationships count for a ton. Because I'm sure that as you look back on your impressive career, there's been a lot of relationships that helped you make your way up the ladder as you've done. People who you met along the way, circumstances where you came into the view of those who could help you. So you see a lot of that. In fact, interesting, I know one of the things we're going to talk about in a minute is this Silicon Valley situation. That to some extent is a function of the network, right? Silicon Valley named heavily, this is the net downside of it, to lean heavily into the startup community, venture capital community. And as soon as one got word that things weren't going so well, the word spread within that community and bang, they were out of business. Right? Well, that works in a positive way when you're trying to raise funds to start a business. And it works in the following way: someone you know and who has confidence in you reaches out to his or her or its network of other investors and said, hey, I know this guy, I know this gal, I know this group. I'm putting some of my money up, and I think you should as well. And that's how the game is played. That's not a game that's been available frankly to minorities or to women because they didn't have those kind of relationships. So part of what we're doing is creating a community that enables them to play the same game. And this is why it's been important that the investors, being people we can let them lean on our networks, we can introduce them to folks who can fund and to themselves because you know, Jonathan, similar experience, right? People who are similar backgrounds to just give you a sense of confidence that if these folks who make it, I can make it.

No. You should answer it. It had very little to do with ESG. It had to do with, first of all, no bank can really withstand a run. The nature of banking is such that you take in money short, meaning you have to give it back whenever somebody shows up for it, then you lend it long. Silicon Valley Bank made lots of loans in the startup space, and they also invested in some treasuries that at the time when interest rates were really low looked very attractive. But two things happened: one, interest rates spiked, and so the treasuries they invested in lost value big time; and two, a lot of the venture loans they made were very long. I mean, you couldn't just call the guy up and say I need my money back because my depositors are here. So a run, and in today's world, back in the day when I was a banker, if you wanted to run on the bank, you had to literally show up at the bank to get your money. Right? Today, that would take weeks, and you had a chance to defend yourself and put your case before not only regulators but your own depositors. Today, it happens in a matter of hours, as we saw on that Friday, that Silicon Valley just ran out of dough. But it doesn't have anything to do with ESG. Some of the crazy things that our cultural warriors have been saying, I'm not mistaken.

Yeah. I'll start with referring back to what I call the structural inequity, right? You know the expression, when I was in the service, stuff flows downhill. I'll clean that up for you. At the bottom of the food chain always sort of get hit the hardest. What the particularly the SVB and Silvergate Bank and the other one that went down, what that has done is it's created a credit constraint, let's put it that way. It makes banks feel they have to tighten their lending, right? So it's going to result, no question about it, in tighter lending constraints. And the fact that money now costs more is also going to create a strain on the lending. You know, used to be, I can remember saying to people two years ago when it was free almost, I mean it was so cheap. Now it ain't free anymore. And is that going to hurt minority entrepreneurs? Yes, it is, because it's going to hurt anybody trying to build a business, and that's where most of them are in the life cycle now. They're trying to build, they need capital to build. That's the whole point behind the Equity Alliance. You got to get capital into people's hands for them to build something. And so I expect to see more stringent lending requirements by the banks, and it's going to, like seemingly all things, it's going to impact the minority and women community of entrepreneurs more painfully than on mainstream business enterprises. Now, is it going to cut it out all together? No, but it's just going to be harder.

Good question. Frankly, I think that because of the fact that the federal government stepped up and did the right thing, they learned something in 2008. They did the right thing, which was to sort of backstop all the deposits and say we're not going to let this banking system melt down because people were afraid they're not going to get their money back. I think they nipped it in the bud. I really do. I think this is more akin to, if you were born in the 70s, you were just a high school or college kid when we had something called Long-Term Capital in 1998, which was one of the big investment funds that broke up, and the Fed stepped in and nipped it in the bud. And there was some concern for a week or two, is this going to play out? But then ultimately the market settled down and they realized that the government was not going to let this become a contagion type of situation. 2008 was a total collapse of the system, and it took a while for the government to really figure out that we need to inject capital into this system to stabilize it and to restore trust. I said earlier, no banking system can exist unless there's trust in it. This time they hit the mark. The following Monday after the collapse on Friday, they said we're not going to have the trust drain out of the system. We're going to support the depositors, the bank's depositors, and we're going to make sure that none of them lose any of their money. And so they nipped in the bud what could have been a real disaster.

No, I don't think that's going to happen because what they're going to do, you watch and see, they're going to go back and revisit some of the regulatory requirements that were eased in 2018. That's the purpose of regulation, to make sure that the banks aren't being irresponsible. Moreover, the people who put the money up for the bank, the investors, and some of the lenders who are outside the scope of deposits are going to lose money. Particularly the investors and the management are going to have to be held accountable. But it's in our national interest, it's actually in the government and the people's interest to defend and protect the depositors because that's what a banking system does. It takes in deposits, it gives you your money back when you want it, and then that money is invested in our economy and economic growth. That's an engine that we want to keep going. And I've seen some of the things written by our favorite senator from Massachusetts and others who want blood, right? There's always a pitchfork crowd that shows up. But I will tell you, I don't think any of the problems that have been dealt with with SVB or the other banks you mentioned are going to cost the taxpayer money because there are more than enough assets there. We learned in the Dime, we learned in the city, there are more than enough assets there to cover those liabilities if you give it time. That's the thing. You have to give it time to unwind these things, and there's more than enough there.

Well, I think it's akin to what I called earlier the structural inequalities. I mean, who sits on the boards? Boards are the ones that determine who's going to be CEO. And I can tell you from my experience, whenever I was involved either in the search or looking for somebody and trying to find somebody of color, people would actually say to me, well, you know, I don't know anybody. I don't know where they are. And I would say, well, you know, you're not going to find them at your club, right? You're not going to find them living next door to you. You have to reach out. And that's just something we need to keep harping on, the reach out part. There will be more. At least now, I made this prediction 20 years ago when I was the CEO that there would be many more Blacks and women. Women are doing better by the way in this regard, but you do run into them in your club and you do have some familiarity. But as long as we tend to live separately, going back to that, we're becoming a nation of separate nations. As long as we live separately and as long as corporate boards in particular are... women are starting to come on board, but white men, it's a struggle simply because... I don't know any... wait, Mr. Parsons, repeat that because your mic went out. It's a struggle because what? Oh, it's a struggle because we don't live together, and therefore we don't have familiarity with each other. And until the complexion of corporate America at the board level changes more, you're not going to see that much change in the CEO job. But the complexion of corporate America is changing. There are more minorities and particularly more women, and so I have hope. It's just a slow moving process. Needs to speed up.

Oh, it's been my pleasure. It's nice to see you too.