High-End Dialogue:Neil Shen and Stephen Schwarzma

2020-03-16

April 23 2020, Neil Shen (Founder of Venture Capital firm Sequoia Capital China and #1 on the Forbes Midas List in 2018, 2019, and 2020) and Stephen Schwarzman (Founder and CEO of private equity firm The Blackstone Group) had a live discussionIn this conversation, these two giants of their respective fields discuss everything from China’s economy and the impact of COVID-19 to the core traits an entrepreneur should have and what to look for when hiring.






                                 Part 1: The World After COVID-19: Where Are Our Economies Headed?

Neil ShenHi! I’m Neil Shen, steward of Sequoia Capital. I’m excited to be joined by Steve Schwarzman, Chairman, CEO, and co-Founder of Blackstone, one of the world’s leading investment firms. Steve’s New York Times best-selling book, “What It Takes: Lessons in the Pursuit of Excellency” which draws on his experience in business, philanthropy, and public service has just been translated and published in China by [China publisher]. I look forward to discussing some of the lessons from his book, as well as his views and tips on managing businesses and investing in the current economic environment.

Stephen SchwarzmanHi Neil, how are you.

Neil Shen: Good! Good evening from Hong Kong. So maybe we should start from, talk about the general economic landscape. Steve, what should we do to help the global economy regain its growth, and people to regain their confidence after this pandemic?

Well the situation we are now seeing, economically, is unprecedented. Countries, everywhere around the world, have asked their economies to be shut so that they can control the spread of the virus. Now, it’s time — much like China has controlled the virus — to restart the economies. So, I think a few things are necessary.

The first, is people are sometimes scared of going back to work, for fear they will catch the virus from someone else. Particularly in the West now, and China may be through this stage, is that what we need is mass testing. If you know the person to your left, and the person to your right, does not have a problem, then you know you will not get the virus. So, I think there’s going to be enormous effort to make sure the testing is dramatically increased. If it is, people will come back to work much faster instead of recovery being very very slow. You will have a much faster recovery. People will also have much more confidence, and they will be able to go back to their normal life. So I think that testing is very important.

Also, because the West is behind China, in terms of recovery, that in the West at least, breakthroughs in medicine to treat the disease have finally a vaccine, which will probably be available in a year to year and a half. And so for the world itself, if you look out a year to year and a half, people should not be scared at all. They should go back to work. The recovery will not be smooth, because not all parts of an economy go to work at exactly the same time, with the same success. The more we can accelerate that, the better the world is going to be.

China is already in a different phase. China has done a very strong job with the virus. But this morning, US time at least, China reported that its economy in the first quarter went down 6.7%. This is the first time in anybody’s records that the Chinese economy has gone down. And so one should look at that as a bottom, and a great opportunity for growth in the future in China.

Neil ShenA couple countries are planning to move their production and supply chain back home. What do you think about this? Is this a sign that the world is going against globalization? What’s your take on where the world should be headed.

Stephen Schwarzman: I don’t think it’s a globalization statement, per se. I think what happened, is that a lot of companies have experienced a severe dislocation in terms of its ability to get goods, from China in particular, because China is the manufacturing capital of the world. I had one CEO, somebody in the fashion industry, who said, “100% of my supply comes from China, and I can’t get anything. I’m going to go out of business because I can’t get any merchandise.”

So once you experience that kind of situation, and it doesn’t have to do with government directives, a normal businessperson would say, “I can’t leave myself exposed to any place, doesn’t matter what the name of the country is. I need to have a more diversified supply chain.” And I think that that lesson was learned around the world, and it didn’t have to be directed at China.

It could be other countries that shut its borders, which happened for the first time in, certainly in my lifetime, other than a world war, where you couldn’t get goods from other places. This is the first time. So what that meant, is that it woke up almost every businessperson to at least evaluate what their supply chain is. Now, what I think may happen, is rather than remove existing operations, growth may go to locations that are closer. Because different businesspeople say, “I just don’t want to be as concentrated in any one country.”

Neil ShenSo basically, you are suggesting that both the industry as well as the countries, all should try to optimize their supply chain, and to avoid, obviously, too much of a concentration. That’s not always to the best benefit of the country and industry.  

Stephen Schwarzman: Yes, I think so. But it will still be the super-competitive countries, like China, in an advantaged position. The only question will be, “How much of the supply chain will they get in the future?” Of course, there are countries that have moved manufacturing facilities to China for Chinese consumption. And China will come out of this downturn from the virus, probably as the strongest growing country in the world. So China has natural advantages for its own economy as it continues to internalize it.

Neil ShenAgreed. I think clearly that there is still a lot of great advantages for the industries in China in many ways.

Stephen SchwarzmanIn terms of China itself, you’re one of the top experts in the world in terms of looking for investment opportunities there. What do you see, in terms of industries that you think would be interesting now and areas of the country? So I can learn a little about that.

Neil Shen: Oh, thank you. You guys have also been very active in China. I’ve been investing in China for the last 15 years, and have seen several cycles of ups and downs. Many leading companies came out of such tough times, because they become even stronger players in their respective sectors. They take advantage of the “dark moments” and make many effective moves in gaining more market share.

And I think it’s the same for the investors. The current environment actually provides some great opportunities for us to back those long-distance champions in different industries. If there’s any sort of successful formula for us in the last 10, 15 years in Chinait’s because we consistently long China. And obviously now, its probably time to double down on China in many sectors. And I think there are many, obviously, attractive investment themes in China. Probably the most important ones are around technology and innovation.  

Digital technologies, as you know, include Internet, AI, IoT, transforming many service and manufacturing industries in China. And the recent coronavirus might actually accelerate some of those transformation processes.

And in China, clearly, the public health system will be further upgraded. The healthcare industry, will enjoy higher growth as investment from both the private and public sector will increase. It’s going to include vaccines, innovative drugs, medical devices, [hospitalities?], etc. We’re going to see quite some new areas of innovation and growth in the broader healthcare area.

Stephen Schwarzman: I was thinking about this myself, because I know I was going to ask you that question. I agree that technology and healthcare are going to be really sort of precarious.

Part 2: Entrepreneurship in an Increasingly Uncertain World

Neil Shen: Yeah. Let’s go back to the book. You talk a lot about the core value, the culture, etc. So, what are the core values required for successful entrepreneurs? What should entrepreneurs do to deal with the current world, which is obviously increasingly uncertain?

Stephen Schwarzman: Well, I think, as you know from working with entrepreneurs and being one yourself, there are a number of core values.

The first, is you have to be able to take a lot of setbacks, a lot of pain. You need to be very psychologically strong, emotionally stable, and you need to have enormous amounts of energy. Because you constantly have setbacks.

Secondly, you need to learn and adapt from mistakes. And we all make mistakes. But most people may pretend those mistakes didn’t happen. They don’t analyze them. They don’t look at them to figure out what went wrong, so it’ll never go wrong again. So I think that’s the second part of an entrepreneur.

The third, is to have a worthy dream. Just going out and doing something everyone else is doing, is okay, but it’s not sufficient to have a great dream. So I think that entrepreneurs need to look at the world, and figure out how their talents can be best used to create something that doesn’t exist now, but that other people will want, once you point it out to them.

Another core value, core competency, is entrepreneurs typically have to be convincing. They have to convince customers, they have to convince suppliers, and they have to convince people to join them. So its very hard for an entrepreneur to be successful just as a single person. They have to have all of these groups form a system, and so they have to recognize what it takes to deal with other people. So all of those, and it’s helpful, in many cases, to have some basic understanding of finance and numbers to make sure they don’t run out of money.

The final thing, is fear. Fear is a very good thing, because it makes you work harder, but it also helps you avoid areas where things might really go wrong. And if you’re scared of failing, you’ll take that fear, and adapt it to de-risk types of decisions that you might normally not think so much about, that taken could go wrong.

So those are elements of what makes a terrific entrepreneur.

Neil ShenYeah, I think these are very good suggestions on traits. I found it interesting that when you’re look at US entrepreneurs and Chinese entrepreneurs, the very top ones share very many similarities, in terms of their entrepreneurial traits.

Stephen SchwarzmanI enjoy meeting with all of the great Chinese entrepreneurs, and in fact, other than the language — which is different. But many of them know English as well. The American ones don’t know Chinese, but we don’t know many languages at all, other than English — that the similarities are really overwhelming.

Neil ShenYeah. What’s your suggestion to them? Now we’re getting to a world with so much uncertainty compared with before. Any specific suggestions for those entrepreneurs?

Stephen SchwarzmanSure. Well, I’ve been through a lot of downturns, probably five or six in my life. And they’re all scary at the time. This is so extreme, that maybe you have to look at this and say, “Okay. Humans were not meant to be hiding in their houses. They are social creatures. They are going to come out of their houses. And they will want to go back to work.” So, since we know that is going to happen, and we know that the virus has a life of maybe a year and half, maximum. In the meanwhile, the medical people and the drugs are going to get better and better. So in effect, we know there’s going to be a movement of people back into the workplace. We know, with pretty good certainty, that once that starts, economies are going to get better all over the world. So it’s important to not have an emotional response to this, but to look at it and say, “What’s going to come back first? What’s going to come back last? What’s going to change, and not go back?”

So there’s going to be much more on the internet, people meeting virtually, just like you and I are. So that’s going to hurt, maybe travel, but it’s going to help technology. And what that does for an entrepreneur, is you have to have a view of what the new world is going to be, where the demand is going to be, where you can get capital to do something in the areas that are unique to this. And then, when you think through something specific, you just go there. And you go there with 100-120% total commitment. And you’ll be successful. And other people will be frozen.

And it’s the pre-disposition to action, when you see major trends that are going to be happening. And if you put yourself in front of that major trend, odds are, you are going to be successful. Most people will be scared and do nothing.

Part 3: Why Culture is more important than Management

Neil ShenYou mentioned in your book that corporate culture is more important that management. Can you elaborate on this philosophy? And how does Blackstone’s culture differentiate itself from others? And what have you been doing to build this very unique culture?

Stephen SchwarzmanWell, what you learn is that no one person, no matter how good they are, can do what everybody does. And you can’t control what everybody does, other than by teaching them good values, teaching them what you believe so that they can keep the core of what you believe and enjoy themselves. So at Blackstone, we have a variety of things that you just have to have. If we’re hiring people, we have to hire very smart people. We have to have people who are honest and have high integrity. We believe that high levels of cooperation. I believe in the “zero-defect culture.” And what that means, is you can make mistakes in judgement, but you can’t make mistakes in your work. It always has to be accurate. Anything that leaves your desk that goes to someone else, has to be perfect.

I believe, and we teach everyone, that groups can make better decisions that just one person. And decisions should be made based on intensive analysis, laying out all the risk factors in any decision, and then assembling a group of six to eight very smart people, and having them analyze that information in an open way.

And we have a culture where no one is an observer. If you’re in the room, you must talk. And you must tell people what you think. Not what somebody else thinks.

I don’t believe in what I call, and I hope this can translate, “paid audiences” of people in a business. If you’re at a table, you’re there to make a contribution. You are not there to watch other people intellectually work. And so we have these very vigorous debates. It’s part of the culture. It happens on every decision. But it’s not personal. Because in most organizations, if you say something that disagrees with someone else, then the person is going to view it as attacking the other person. And that doesn’t work well. So people are reluctant to say the truth.

We’ve created an environment where you have to tell the truth, and what you think. And it’s impersonal. And once everybody knows every meeting is going to work like that, then you have the benefit of everyone’s intelligence, which is very important. And we also have other core values, which is helping society so that people have a chance to help their organization outside of the business. And we treat everyone in the business as if they’re family.

I view the business as if it’s a small business. Now right now we have over 500,000 people with our parent company, which has about 3,000, and the other businesses and assets that we own. But I try and make sure that our senior management group, on Monday, is on video with everyone in each of our individual business lines. Because if you’re going to transmit your values and what you are thinking about the world, you can’t just send out an email. You have to be in-person. And video has transformed the way to manage businesses. And so, if all of your people for example in private equity, and after private equity meets, our real estate business meets, and then our credit business, and then our tactical opportunities business all day, four of us, sit in the same room, and the equivalent of 250-[“20 hundred”] professionals meet with us for each of those businesses. We go over everything in the world that’s happened so that every person knows everything. Even if you’re 23 years old, you know as much as the senior person in the entire business. We try and treat everyone as if they’re the most important person in the business. It’s a very American type of style. Very horizontal. Not vertical.

And what happens is when you take very talented people, and treat them as if they are extremely important, then they will do almost anything to the benefit of the business because they think like you. So that style of constructing an organization is exceptionally powerful. And each one of those people, when they’re in a situation alone, will reflect your values. You don’t have to tell them what to say. They will know what to say.

Neil Shen: That’s a very very unique culture. And it’s clearly not easy for a large organization like yourself, and still, everyone feels that they are a family member. It’s just a very very powerful culture. You did mention a couple times about talent, and you want to hire the best team members and talent. So, in the book, you talk about to build a winning firm with nines, with people who have the score nine, but people who are 10s, who can take the business in new directions without being told to do so. So how do you know someone is a perfect 10? How do you evaluate talent?

Stephen SchwarzmanWell, you’re a 10. So how would I know that you’re a 10? Well, one way I would know, is that for people who are older than 40 years old, they are their reputation. What I see doesn’t matter much. If everyone who knows you says you’re amazing, what I’ve learned in life, is you are amazing.

Neil Shen: They are.

Stephen Schwarzman: And when people are younger, it’s harder to judge that, because they aren’t fully formed yet. So I’ve interviewed huge number of people over my life. I’ve been in business over 50 years, and it’s one of the parts I enjoy the most. And I enjoy it because when a person comes in, it’s hard to know what’s going to happen, so it’s an adventure. It’s not like the normal part of your day. And usually, I get a resume, or a CV you might call it, and usually, at least in the West, particularly with younger people, they have their background, and at the bottom they have something that says interests. Either they’ve climbed Mt. Everest or they’re the best swimmer, they won a silver medal in the Olympics, or they are the Number 1 chess champion in the United States under the age of four. Some funny thing. So what I’ve learned, they put that there so you’ll ask them about it. I always ask them about it, because that’s my way of being friendly, since they’ve sort of asked me to do that. And then that conversation goes someplace. And I’ll take it wherever it goes.

Sometimes I’ll walk in a room, and have done something very interesting, like this video, that’ll be all over China. And I’ll say to the next person who sees me, “I just did the most amazing thing! I just was talking to maybe 100MM people in China. How interesting!” And if they don’t respond, that’s sort of odd, because this is not an everyday thing that somebody would do. So I’ve learned, if they don’t respond at all, that means they don’t have a lot of curiosity. So I’m looking for people who are [“mally-o-laud,” maybe “malleable?”], they’re smart, they’re flexible, they’re curious.

If you start talking about something that they don’t know, and don’t have a background, they’ll either try to play along and make a mess, or they’ll say, “You know what? I have absolutely no background in that area. Here’s what I can say, but this isn’t an area I’ll be very good.”

I’m looking for people who are stable under pressure. It’s very easy to be sort of self-possessed when there’s no pressure on you, and you can figure that out just because the interview setting is tension producing to them, not for me. So I try and figure out how they’re doing under that pressure. Did they enjoy it? Did they come alive? Or if you ask them some things, do you see them sitting further back in their chair, symbolically trying to get away from you. If that’s the case, there’s no hope.

I sort of imagine that this person is already working at the firm, at Blackstone. Would I want to see this person again? Are they showing me something that maybe I don’t know. A different way of looking at something, where I’m not an expert. And so what happens, is you can very quickly figure out how good somebody is.

By the time I interview people now, the fact they know how to do their work well, somebody else has figured out. People just don’t come in and see me. Usually, in our system, they’ve met 15 or 20 other people before they get to me. So my judgement, in this stage in my career, is “What is their potential to be great?” And if I see someone, which I did about nine months ago, to start one of our new areas in Growth Equity, just an extraordinary person. I was supposed to see him for a half an hour, I just couldn’t stop talking to him. So after an hour and a half, I said, “Look, I haven’t checked with everybody else, everybody thinks you’re great, you’re hired. You’re amazing. And I can’t wait to be working with you.” Now that doesn’t happen that often, because people who are 10s are pretty rare. But hiring people and knowing what their capability and potential is, is one of the things that makes a great organization, as you would know.

That’s what you do that for a living. You interview people constantly to try and figure out [“whether it’s a 10 that you have”], and the drive, talent, intelligence, flexibility will get you to something great. Sometimes, if you have a great person, in the venture business, and their idea seems great but the world changes, that one investment might not be as good. But they’ll be successful doing something else the second time. Because basically they’re enormous pieces of talent.

Part 4: Principles for Life and for Investing

Neil ShenWell, that’s a very good suggestion how businesses [“seasons”] interested should talking to potential candidates. Obviously, the very reason you can make those decisions and make those calls when you interview them, is because you obviously come from a history of successful investments. So let’s get into that part of the conversation now.

So in the book, you mention one of your guiding principles is “Never lose money.” Can you elaborate on that? Are there any other investment principles you’d like to share with the audience, with the younger generation?

Stephen SchwarzmanYeah, sure. “Don’t lose is money” is like this famous saying for a doctor, “Do no harm.” In other words, you don’t have somebody come into your office, do some things to him, and kill the patient, right? So, I’ve learned, from the third investment that we made, in the steel distribution business that went wrong, investors hate it when you lose money. If you don’t make so much on some things, it’s okay. That’s just a mistake. If you lose their money, they get astonishingly angry at you, and they’ll almost never give you more money. So you have to be very careful when you make a decision. That doesn’t mean you don’t take risk. But when you make any decision, you have to believe that you’re not taking risk.

And the reason you would believe that is either because you’re stupid in the first place, and you just sort of feel like believing that, or you’ve done the work to show where things can go wrong. And you’ve discussed it, and planned, to take those things that obviously can hurt any new business, any new organization, any new investment, and you’ve engineered those out.

I think it’s important that investments are not balanced — that the chance of losing money is equal to the chance of making money — that’s a ridiculous approach in my view, even if it’s a lot of money. I’m not in the venture business, like you are, where people do that all the time. And sometimes they do astonishingly well. What I’ve learned, is when you’re handling large amounts of money — like we have, over $500B of money that’s a huge amount of money for private investments, the biggest in the world, actually, at Blackstone with no other company close to our size — that our responsibility is always doing a great job for people. And using the process I talked about earlier, where we openly debate the basic assumptions of everything, enables us to, for the most part, to avoid loss

Before the financial crisis that we now have — we’ll see how we all come out of that — our last 700 investments, we only had had one bankruptcy. One catastrophic loss. And that’s a pretty amazing record, when you buy a lot of things, and you borrow a lot of money for each one. To only have one that collapsed out of 700 shows that you can do that.

Neil ShenAbsolutely. I think, I guess every single one of the 700 has some embedded downside risk, but somehow you analyze it and you manage it. That’s an amazing number and record. Other than “Never lose money,” any other investment principles? You pick one to share with the audience.

Stephen SchwarzmanYeah. Go into industries that have growth. If you’re investing in something where that whole field is doing well, and is going to do better in the future than it is the day you invest in — in that kind of field — you will find your way to success. If you’re investing in something that you think is quite cheap, but has very little growth, then when something goes wrong, you don’t have a way to fight your way to success. So that would be the other thing I would say.

So for example, Neil, in the real estate business, we sold our large shopping centers and malls when we saw the internet coming in. In the Western world, that was a very smart thing, to not own those. And we took the money, new money, and bought warehouses. Now why did we buy warehouses? Because all the Internet sellers, whether they’re the Alibabas or JDs, doesn’t matter, they all need warehouse space for their goods to ship them to customers. And so warehouses, throughout the world, ended up being best asset class in real estate. Now, we were the largest purchaser of warehouses in the world over the last 10 years. So what we did is, we looked at the way the growth was going to be, where society was changing, got out of things that we thought weren’t going to work, and made huge commitments to the things we did.

Neil ShenYes. It’s a lot better to be in a growth industry. They enjoy the tailwinds. Instead of meeting the headwinds. So many young people in China are reading your book, not only for investment, but also for advice on their career life. So if you can only offer one suggestion to them, what would that be?

Stephen SchwarzmanI think one of the suggestions, particularly for younger people, is go into something that you love. What you find in life, is if you find something where you are a natural fit, your interests and your capabilities fit a certain type of activity, you can be really great at doing that. So one funny example, in our country, is we had a basketball player named Michael Jordan, who was probably the best basketball player who ever played. Remarkable athlete. His father died and he became very depressed. He quit basketball and tried to play another sport, called baseball. And Michael Jordan was a terrible baseball player. Here was the best person in a sport, who went into another sport and was mediocre.

How is that possible? They’re both athletic. But after a year and a half, he decided to go back and play basketball. And I was at his second game, he hadn’t played in almost two years, and he scored 40 points. In his second game. Which is an exceptionally high score. Because he was gifted. And each of us have something we like, that we’re better at than other things. And if you stick to where you have a gift, you’ll find that you’ll have a more successful life, you’ll be happier, and you’ll probably be much more successful.

So I think I’d like to ask you, what your number one career advice is for people, given the disruption in the economy today, in China.

I would say, whether there is disruption or not, I think the same rule actually applies. And you have said that so well. I think you need to be enthusiastic your job, and your career, and something you truly love. And in addition, I think you can choose an industry where there is a lot of exciting development, I would say, not only in the short term, but also in the medium-to-longer term. I think I would advise young college graduates to look at those criteria. Those are much more important than just compensation.

Neil Shen: For young entrepreneurs, which I know many of them are just starting a company, it is not an easy time. I would suggest them to focus on survival during this very [“significant?”] time. And I think the most important thing is, attend to your cash flows. Because that’s the only way you can make sure the company will survive. And also, like any startup, focus on product. I think the crisis will be over, and if you have a truly differentiated product, you’re going to come out as someone who is much stronger in the sector. And I just feel like you need to be resilient, in terms of, in markets like that, because many great companies actually have been built during special periods of time, like… (interrupted).

Stephen SchwarzmanBut I told our younger people, that they’re actually quite lucky to be involved in our industry, which is the investment industry, at this stage, of really huge, economic dislocation. Because they’re going to learn to never trust anything that somebody tells them about what the future’s going to be.

As you said, make sure you have enough cash and cash flow so you don’t get in trouble. When young people start, they look at the world, they look at models, they build expectations, and they don’t always plan for everything going wrong. When I started — I first started in 1969, then I went to business school and came back and started again in 1972 at Lehman Brothers — there was no equity increase for 10 years in the United States. So I learned, equities don’t go up, automatically. And if they do, it’s a gift. And it may be temporary. So my whole career — because I learned at that time —

Neil ShenYup. Yup.

Stephen Schwarzman — is not believe what everybody tells you. Always assume it can go wrong. Always protect the business.

Neil ShenAnd prepare for the really [“long”] (interrupted)

Stephen SchwarzmanRight. And so what happens is, the young people now, who are starting out, and other people, who have businesses, will learn discipline and what academics call “risk control” in a way that will benefit them for the next 10, 20, or 30 years of their careers. And even though it’s tougher times now, they have to look at it as educational time, where they will learn rules that will help make them success.

Neil Shen: Great. Really enjoyed talking with you. We are running overtime — but I hope that you could actually come back to China soon, so that you can physically see the audience who will become big fans of your book.

Stephen SchwarzmanWell, I’d love to come back soon. I have the Schwarzman Scholars program at Tsinghua University. Right now, everybody is scattered around the world. From the foreign students’ perspective, everybody would like to come back. We all need to be safe. That’s the job of our governments, to help provide that safe environment. But it’ll be great to come back as soon as I can.

Neil ShenGreat. Thank you so much for your time. And stay safe!


Updated at Kinetic Energy Ventures 2020-04-24 

(Link: https://12mv2.com/2020/04/24/rare-interview-neil-shen-sequoia-china-and-stephen-schwarzman-blackstone-part-i/)