James D. Robinson III

Betting on the People

Editors’ Note

Prior to co-founding RRE Ventures, Jim Robinson served as Chairman and Chief Executive Officer of American Express Company from 1977 to 1993. Before that, he held several executive positions within American Express, was a general partner with White Weld & Co. of New York and served as Assistant to the Chairman and President of Morgan Guaranty Trust Company. Robinson is the Retired Chairman of Bristol-Myers Squibb Company. He is a director of The Coca-Cola Company and serves on the boards of On Deck Capital, PrimeRevenue, Revolution Money, and SkyGrid, all private companies in RRE’s portfolio. He is also an advisor to Novell. In addition, he is a member of the Council on Foreign Relations. He is Honorary Chairman of Memorial Sloan-Kettering Cancer Center; an Honorary Trustee of the Brookings Institution; and Chairman Emeritus of the Partnership for New York City and the World Travel & Tourism Council. Robinson served as Co-Chairman of the Business Roundtable and as Chairman of the Advisory Committee for Trade Policy and Negotiations. He holds a B.S. in industrial management from the Georgia Institute of Technology and an M.B.A. from Harvard Business School.

Company Brief

New York-based RRE Ventures (www.rre.com) was launched in 1994 and invests in emerging technology companies, primarily in the fields of software, communications, and financial services. With $850 million in assets under management, the privately held firm provides promising entrepreneurs and management teams between $2 million and $15 million in capital, along with managerial, financial and technical expertise, as well as corporate advice and contacts.

Did the severity and speed of the global economic crisis surprise you, and how do you see the recovery developing?

The speed was not a surprise, given the nature of the crisis. The problem happened because people forgot that size and complexity matter. Information technology was a co-conspirator, because it enabled the trading desks to print an infinite number of derivatives, credit default swaps, and other exotic investments. The permutations of instruments were immense. People thought they were all notational and, therefore, no problem. They forgot that liquidity matters a lot, and they had to carry these things, some with long-tail payout obligations. Subprime was conceptualized as: we’ll package these mortgages, we’ll over-collateralize them, and the probability is that we’ll never have serious defaults; the underlying assets were packaged, rated, and sold on that theory. The theory worked, until it didn’t. When it didn’t, you had a massive run for the door as people tried to liquidate or were forced by mark-to-market requirements to write their assets down to the lowest common denominator. Unfortunately, mark-to-market accounting got interpreted as the last visible sale even though the sale was often under distressed, fire-sale conditions; it had nothing to do with whether the instrument itself was still performing. The magnitude of all these and other developments was so great that, had the Fed and the Treasury not done what they did, we would have had a worldwide disaster – much worse than what we experienced. So when you have something of that magnitude with numbers that big, once it starts to unravel, trust and confidence go.

Recovery is going to be long and slow, unlike in prior recessions, simply because the consumer is no longer in a position to come back and spend. Consumers’ home equity values are down 20-plus percent; their mortgages are underwater; their 401(k)’s are down – they’ve recovered somewhat with the equity markets, but people still feel poor and many have lost their jobs. So they’ve readjusted their spend mentality and are saving more. Consumer debt is 122 percent of consumer income – twice what it was in 1983, which was, in some respects, a comparable period. So consumer spending will be slow to return to previous levels.

In addition, banks aren’t lending. They’re using very low fund rates – virtually zero – and the yield curve to rebuild capital, as they did in the last crisis. Banks are continuing to build equity since commercial real estate portfolios still have a couple of years of real problems. States are up against the wall because incomes, against which taxes are paid, are down. The only one able to spend is the federal government, and in some respects, it’s broke. The country probably will have trillion dollar deficits for some time. We got out of this problem in the Clinton years, for instance, because the economy grew fast enough to bring us through. I don’t see that happening this time, at least not for an extended period of time. Without economic recovery, you’re not going to have job growth, particularly because Congress is putting through a whole host of measures that is going to make it more expensive to do business. And remember, job growth doesn’t come from big companies; it comes from smaller companies.

Many have said that the federal government needed to step in when they did, but sustainable recovery is going to come from private sector, entrepreneurial companies. With regulatory issues today, is it realistic to expect that to happen?

I am concerned. I was recently talking with executives from one of the very successful small IT companies in Silicon Valley, and they said what worries them the most is excessive government interference. The regulation octopus is big, its tentacles are long and, in my view, it has shifted the systemic risk from the financial markets to Congress itself.

So, yes, I’m concerned that the degree of regulation, whether it’s the health care bill, the regulatory environment, the credit card protection act or a whole host of legislative initiatives coming out of Washington are going to make it harder for businesses to grow at the kind of rate we need to deal with the domestic deficit.

Another trend I worry about is the new and expanded focus on risk management, however well-meaning it might be. It follows Sarbanes-Oxley, which launched the era of box checking to show that you take no risks. A major risk that businesses now face is not taking the risk to build a new business. It’s too easy to say we’re not going to do this because it’s a risk. Risk avoidance, taken to the extreme, means a company is not going to grow and be successful.

Entrepreneurship and innovation are great things about the United States and always have been. It will happen, but it will need to overcome the new lead weight of regulation. That’s unfortunate.

Does it concern you that we’re building companies of such size and scale today that they can’t be allowed to fail?

There are a number of them out there, and there is talk of cutting them down in size. In general, that shouldn’t be necessary, because there are more requirements in place now that will enable regulators to take action earlier. The Federal Reserve has been restored to a position of some power. It started losing that power in the mid-’60s when the first large denomination certificates of deposit were introduced, and banks could buy money rather than having to depend on the discount window of the Federal Reserve. Since that time, the infinite variety of ways that banks could buy money had, in effect, insulated them from the Federal Reserve. The Federal Reserve is now back in the game. So there will be new leverage requirements and restrictions. Some of that is a good thing. Managing systemic risk on a worldwide basis is critical. Let’s hope new regulation doesn’t cripple the Fed.

Do you agree with the suggestion that the U.S. is losing its leadership position to the BRIC countries and others, and are you concerned about whether the U.S. will be able to remain the leader in innovation over the long term?

Of course. To me, one of the great challenges for this country is competitiveness on an international scale, because it is different now. You have Brazil, Russia, India, and China finally getting their acts together in terms of being more competitive – that’s a good thing. Remember George Marshall’s tenet: the safest world is an economically interdependent world. The more these countries grow and have cross investment outside their own borders, the better the environment to sustain peace. The U.S. is going to have to realize that it has to be competitive with these countries. It’s going to be a disaster if we go isolationist, thinking we can protect our markets. If our products are not competitive domestically or internationally, there won’t be sales; if there are no sales, there are no revenues; if there are no revenues, there are no jobs.

How much of an impact from the downturn have you seen on RRE’s investment portfolio over this past year, and are you still out there looking for opportunities?

We have seen very little direct impact simply because our companies are in early round financings – they’re not yet big enough to borrow money. If they’re selling to Fortune 500 companies, the sale cycles have slowed down, but we have long preached the wisdom of running on a tight budget. So our companies have weathered the storm and preserved their own viability by managing their cash. We’ve seen an immense flow of great ideas and potentially great companies. Again, this is an example of innovation and creativity being strong.

When evaluating opportunities for the company, do you focus on the concept or the person?

It’s both. You have to have a concept and to believe passionately that you can create a big company. But you are betting on the people. So you look at what they’ve done, you judge their credibility, and you bet on their entrepreneurial instincts, integrity, and track record to build a new company.

Once a company grows to a certain size, is it realistic to maintain an entrepreneurial culture within it?

One of the hardest challenges facing any CEO of a large company is how to manage change, because the bureaucracy will invariably try to kill ideas that will threaten the core business. So you have to try different ways to encourage entrepreneurship and new ideas. Change is inevitable and you better lead it, even if it means cannibalizing your existing business because, if you don’t, somebody else will.

Do you believe entrepreneurship can be taught, or are you born with that ability?

Both. Some people instinctively believe that they can create the next biggest thing. They have the vision, focus, and persistence to succeed. Often, the best learning comes from prior mistakes, even failures. However, best practices can also often be taught with the case method, which broadens thinking.

There may be those clients who insist upon having your direct involvement, but you can only be so many places at one time. How do you focus your time at this stage?

We have seven partners, and we operate as a true partnership. We try to convince each other that whatever company we’re looking at deserves the full support of the partnership. When that happens, we invest. Then we’re all available to help the lead partner circumstance by circumstance.

Is the focus on community involvement a responsibility of the business community today, and how critical has that been in the companies you’re involved in?

I’ve always seen it as a responsibility. If you’re in a position of power or influence, it makes sense to be concerned about the community around you – that’s where your employees live and work and that’s where your customers are. So you better be concerned about how to deal with issues in your community, whether it’s by sitting on boards or working in partnership with others. At American Express, I encouraged involvement in nonprofits because beyond giving money or time, you learn that fourth dimension of the world around you. It gives you a broader way of thinking about the world and helps you be a better executive.

What are one or two of the things that keep you up at night?

The problem we’re living through with the federal government trying to redesign and write the details of a health care bill or financial services reform bill or a consumer protection agency keeps me awake. History says they will screw it up with serious unintended consequences. The question is, how negatively will it impact competitiveness, job creation, innovation, and growth?

What doesn’t worry me is those who say the Federal Reserve is doing the wrong thing and there’s too much liquidity, which is going to cause inflation. We are not in an inflationary environment, and I don’t see us being in one for some time. In fact, with all the price wars and discounts in the marketplace, we’re seeing deflation. So even with the amount of money the Federal Reserve has put in, and even with what the stimulus program has added, it is still only a fraction of what de-
leveraging has taken out. Banks aren’t lending, the capital markets are highly constrained, and velocity of money has crashed. So there is not too much money chasing too few goods and services. Therefore, I don’t see inflation as being a problem.