Howard Morgan, B Capital Chair - From Ham Radio to GenAI: A Remarkable Journey in Tech

All the people in the Bay Area in those days were like, if you're more than 30 minutes from my office, I'm not going to invest in you. Now that has changed, right? After college, some of them obviously dropped out of college. We always tell the entrepreneurs who come to us, they say, 'Look, you got Mark Zuckerberg, you got Bill Gates, you got Michael Dell,' and I said, 'Okay, now name the next 20.' And they... so you finished college. Raising money in the venture world, whether you're raising it for a fund or you're raising it for a company, is a matter of great storytelling. I just like to learn something new every day, and particularly if there's technology involved.

Well, I grew up here in New York as a kid. I did ham radio and technology. Back in those days, if you wanted to talk to people far away in other countries, you had to use ham radio. You didn't have an internet chat or Instagram or places here. So that was the social network of the day that got me interested in general. And mathematics, which I was good at, it turned out. And I went to City College here in New York to get a physics degree. And this was in 1962, long before most of you were born. And I saw a poster, it said, 'We're getting a computer, we're going to give a three-hour course in programming, three Tuesday afternoons or whatever.' And I asked my physics professor if I could skip those classes and do it, and he said, 'Yeah, sure.' And that got me hooked. That was the very early, it was called the desktop computer. It was literally the size of a giant desk, Royal MCB LGP 30, companies that are long, long gone out of business, with punch paper tape. But it got me hooked. There was no internet back then. There were barely, I don't think there were modems yet at that point. They were just starting to be communication modems. So that came later. But it got me hooked enough so that when I was finishing in February of my last year, my senior year, I had gotten a fellowship to MIT for physics. But one of the mentors at the computer center, who was a Bell Labs scientist, said to me, 'If you've ever seen The Graduate,' or he whispers, 'Plastics, Dick.' Hamming whispered to me, he said, 'Computers. You don't want to do physics.' He said, 'Yeah, there are Nobel prizes, but they're really hard to get.' And I love to see how you love the computers. So I ended up saying, 'What do I do?' And he said, 'Well, operations research is a combination of computing and decision-making and mathematics. You have good skills there.' I said, 'Where will I go?' He said, 'Well, Cornell and Stanford are the two best places. I have really good friends at Cornell.' And two weeks later, I had a fellowship to Cornell.

Oh yeah, no, I also did some work on the databases for the quant side. Renaissance was special because Jim's idea was to do quantitative trading and build a quantitative trading organization the way you would build a university research department. And so, unlike many of the proprietary trading places you see today, or even D.E. Shaw, who started a little bit after Renaissance, every week there was a seminar and somebody would give their ideas, and it was very open and public. So everybody at Renaissance shared their ideas with everyone else, just as you would in academia. Now, they had very tough non-competes, five-year non-competes, which they enforced with a vengeance. But in fact, it meant that you could keep a really open climate, and that way you could trigger ideas in other people. And it took a long time to get the quants trading right. So 1982, we started Renaissance. Jim had been doing some quant trading on his own. We made a little money, and we had $70 million from investors. And we used half of that in venture capital and half of that in quant trading. And by 1989, the conversation Jim and I had was, 'Look, the venture capital is now a top decile venture firm, it's 25% IRR, but it takes years to make it liquid. And we now have the quant trading to be 38% IRR, and if I want to go home tomorrow, I can just cash out all the positions and go home.' So we took the venture out of Renaissance at that point.

Fully globally. And you have one of the people I met early in the venture world and respected very well, who's quite about a decade older than me, and he's speaking later to close this out, which will be great, Alan. And I've become good friends. But in fact, he was in venture before me. But what we learned was you mostly invested in local. And all the people in the Bay Area in those days were like, 'If you're more than 30 minutes from my office, I'm not going to invest in you.' Now that has changed. Aside from them opening offices everywhere, they started flying around the world. Jim and I did invest in California quite a bit. So I made, you know, typically 12 to 15 trips a year to California. We invested in liquid crystal display technologies in Northern California, in security software and hardware. The whole SWIFT network, banking network, is in crypto by a company which was then called Silink, which Jim and I invested in early on. And we invested in PC software companies in Los Angeles. Remember, the PC came out in '80, '81, '82, so just when we were starting. So we did a lot of investing in that piece of the industry. And I learned pretty early, because New York was not a hotbed at that point, that if you wanted to find good investments, you had to be pretty open and be willing to travel. We didn't have Zoom, so we traveled quite a bit. We actually, at Quarterdeck, which was one of our investments, they did the first Zoom product called WebTalk in 1995. And it was over painfully slow 28.8 kilobit modems. And of course, today you've got gigabits in your pocket. But you could kind of make out the people at the other end, and if they didn't talk too fast and they didn't move too much, you had video conferencing way back then. Video conferencing, of course, was shown first in 1939 by AT&T at the World's Fair here in New York, and it took another 70 years for it to become universal.

Well, for one thing, they've gotten younger. I mean, I think when we were investing in the '80s and in the '90s, most of the entrepreneurs had graduated college, worked for a company for a couple of years before they started their company. And that did change once, after we started First Round and Y Combinator started, you got a lot of people who were much younger starting their entrepreneurial careers. And if they were doing it when the internet was really exploding, and I don't mean the bubble in '99, but I mean the sort of 2005 to 2013 period when we finally had broadband, we finally had, you know, at Idealab, I helped start Idealab with Bill Gross in '96, we had all these amazing ideas for internet companies. In fact, Mary Meeker wrote an amazing report about here's 100 industries that the internet is going to transform, and we had ideas in every one of them. And many of them are gigantic companies today, but not the ones we started. So we started a company called z.com, my best email ever, hz.com. And z.com was streaming entertainment, but streaming entertainment over 56k dial-up, which was what it was at that point, was just painful. And eventually we did sell it, but not for very much. And of course, today you have Netflix, right? So once you went from 100 million people on 56k dial-up in 1999 to a billion people on broadband by 2006 or '07, it opened up huge possibilities. So these entrepreneurs coming out of Y Combinator and other places were able to start companies right after college. Some of them obviously dropped out of college. We always tell the entrepreneurs who come to us, they say, 'Look, you got Mark Zuckerberg, you got Bill Gates, you got Michael Dell,' and I said, 'Okay, now name the next 20.' They... so you finished college. But then start. And we did start the Dorm Room Fund at First Round, so the people who wanted to start companies in college could stay in college, get their company started, and then once they graduated, take it out.

Sure. Well, particularly in fintech, where you have in many places a highly regulated piece of the industry, you can't always upset that with a college dropout, right? Who hasn't worked at a bank, who hasn't been subject to compliance, who hasn't... and all those things. So it's not quite as easy as it looks.

So one of the things that attracted... so when I started First Round with Josh Kopelman, I told Josh, and I invested in two of Josh's companies in the '90s, and so we became good friends. And I said I would give him 10 years, because at that time I was 60. I said, 'When I'm 70, I don't know what I'm going to want to do next.' And I told people I was stepping back from First Round. And Eduardo Saverin, who was the co-founder of Facebook, and it's quite different than the guy in The Social Network movie, which is a great movie but it's not completely accurate. But in any case, Eduardo came and with Raj Ganguly, the other co-CEO, and said they wanted my help. They were going to start something. And I said, 'Great, I'll be a big LP.' And they said, 'No, no, we want you to join us as our chair, a third of my time, part-time, and help us make new mistakes, not repeat the mistakes you made building Renaissance and Idealab and First Round, so we can get a quick head start.' And what attracted me was that it was global. So the headquarters are in Singapore and LA. The offices we now have today are in Singapore, Jakarta, Bangalore, Delhi, Beijing, Hong Kong, and then New York, Miami, Los Angeles, San Francisco. So truly a global firm. And we're finding today that we pulled back from China because the geopolitical winds are just making it very difficult. Even though it's still a great market, there are great investments to be made, but Xi has gone too far into state control, and state-owned enterprises have never worked. And the whole Eastern European thing that happened after the fall of communism showed that when you go back to market systems, you do much better. Deng Xiaoping opened up market systems, they did much better, and then Xi sort of closed it down. But we are finding India to be extremely business-friendly now. And Modi over the last decade has really changed the climate for doing business, for getting investments, for exiting investments. One of the big problems with India had always been exiting investments and getting your money out was difficult, even if you made money there. That's really changed. India has over a hundred top-tier universities. We all hear about the IITs and the IIMs. There are a whole bunch of others creating a large number of really brilliant graduates and a number of interest areas. So for example, India now has a booming space technology business. It's an area we've been looking at, invested in here in the US as well. They're obviously enterprise software and SaaS kind of businesses. They do really well at a lot of digital healthcare. They don't have national medical records, good EMR systems, a lot of opportunity.

Am I spending a lot of time in space? No. But I have taken 90-degree gravity flights, so I do love space. I invested in the Zero Gravity company about 10 years ago, or no, more than that actually, and have been following it. So we invested in a company which is based in Jacksonville, Florida, and New York, called Star Catcher, which puts satellites up to become the power grid in space. The idea is that if most satellites have two solar panels, and if one of them gets struck by a micrometeorite or something and goes out of service, then you've got half the power to your satellite, which may not be enough to do all the things you want to do on it. You might have to deorbit it. If you deorbit it, the insurance company has to pay, and they don't like paying. So what this company does is it collects the sunlight, then uses lasers tuned to the frequencies that solar panels like best to beam power down. So we can beam another one or two sunlights' worth onto the existing working solar panel. We can also do that while the satellite under us is, which, and of course we're tracking it and we're also in motion, is on the other side of the earth in the eclipse side, so then in the darkness. So we can give them much more power. And that's important, one, for keeping satellites up that have had problems, and two, in the future, people want to put H200 chips in orbit. They want to do things that are very power-hungry in space. It's all about weight. You pay by the kilogram to put stuff in orbit. And if we can give you power up there and you don't have to put more batteries or more solar panels, we can save you money or let you do more with the same budget.

Well, Eduardo is more technical than people think, and so he's built a team in Singapore, an AI team for us. And some of the things we've done are, we took a, we made a private instance of Claude, the Anthropic large language model. On a typical investment committee meeting, we would ask questions of the team. We'd get a 30-page document for our later-stage companies. We'd ask a lot of questions. We'd say, 'By the way, we're looking at the unit economics, they don't seem to add up in this particular way. Can you explain? Can you tell us more about it?' And they would say, 'Well, can we get that to you tomorrow?' And so on. Now we take the investment memorandum two days earlier, we give it to our AI instance, which also brings in all of the competitive analysis, and we build a chatbot for that company. And then before I go to the investment committee meeting, I spend an hour with the chatbot. I ask it all my questions, I get answers very quickly, and then the discussion at the IC is a much more focused discussion. All of your quant questions should have been answered, many of your competitive questions should have been answered. So we focus on some of the things like, how big is the market really? How good is the management team for the company? But it's really made us extremely efficient. Secondly, it's reading all of our emails and automatically filing everything so that we have much better records. Because one of the annoying things in venture capital firms that try to keep a good CRM is, who does it, right? As a partner, I really want to spend a lot of my time fooling with the Salesforce kind of stuff or even other things. At First Round, the solution was we created an email to a group in, I think it was Guatemala, and we would copy them on emails and then they would figure out how to put that into the database. Now we have the AI do that. So if I can say, 'What are our last 10 interactions with this CEO?' it'll say, 'Well, you talked to him three days ago, and Karan talked to his CFO and she gave him the update yesterday,' and so on. So it really streamlines our operations horrendously.

No, it's not plug-and-play. And also because of the danger of confidential information leaking, we have to do it as a private instance, which isn't cheap. But it is extremely valuable, and we think it gives us a competitive advantage in terms of deal flow and companies. And we also make available to our CEOs the ability to use some of this as well. And we're continually growing the uses and the use cases for our AI. Our team has been very responsive.

A little bit. The associates and principals who do most of that creation are using it too. They're using it particularly in any of the numeric stuff, so it pulls that in together, and in the competitive analysis, because that can pull stuff out of not just the web but PitchBook and Crunchbase and so on. So we are using it to help them create it in the first place, but then to query it in the second place for everyone else, and then finally to make all that kind of data available to the CEOs as well as the company.

Well, look, you need to have empathy with the founders, right? You need to understand that the founder's journey is not an easy one. And because I founded companies myself, and so has Eduardo, and so most of the key players in our team, we do think we have the empathy that when things aren't going well, when things aren't going smoothly, we don't just dump on the founder. We try to help them. We try to figure out what is going wrong. Have we had some experience that's relevant, and can we help? And so we've learned that. We've learned that founders need to have passion, and we learned to try to help them get that passion across to the investors, the people they're trying to hire, and to the customers. Because raising money in the venture world, whether you're raising it for a fund or you're raising it for a company, is a matter of great storytelling. And so we try to make sure that the founders learn, if they don't already have it inherently, how to be really good storytellers. We're working with one founder now, we have a company based in the Midwest, and it's got amazing technology, it's far ahead of competitors, but it's been a long slog getting the founder to be willing to hype, if you will, what he's achieved with his team. And he's got a great team, he's got a bunch of PhDs in this particular area, and he's got an amazing woman dealing with ethics in the field and so on. And it's just been pulling teeth to get him to figure it out. I think we finally made the inroads, and a lot of pitch coaching. First Round used to use David Rose and other people to help pitch coach, and then we brought in an internal team at First Round to do pitch coaching, because it's very important.