The Third Wave: An Entrepreneur's Vision of the Future (15 page)

There were three problems with this notion. First, virtually all of the specific transactions cited by the
Post
(and by a later SEC investigation) as reflecting improper accounting had occurred
after
the AOL Time Warner merger deal. So the transactions and their accounting could not have “misled” Time Warner into merging with AOL, because they happened after Time Warner agreed to the merger (mostly during the year-long period between the merger agreement and the deal’s closing).
Second, though this scandal took place against a backdrop of a period during which several big companies got in trouble for accounting on transactions that were made up, the problems with AOL’s accounting were nothing of that sort. The transactions called out by critics and reviewed by the SEC were real deals involving real payments to AOL—but with some debate about how the payments were labeled.

And third, the transactions didn’t really add up to all that much. The sum total of these deals amounted to a few percent of AOL’s total revenues. As
Slate
wrote in August 2002, under the reading line “What did AOL’s accountants do wrong? Not much”: “The thing to bear in mind is that even the worst-case scenario—that AOL had no business booking the revenue as its own but did anyway—isn’t especially serious.”

Still, the damage was done. With the media frenzy about accounting issues at companies like Enron in 2002, and the widespread criticism of the merger, it was all fuel on a burning fire. I knew we had to do something, but with little remaining influence over the management team, I focused my efforts on swaying the board instead. I distributed a memo outlining a wide range of strategic moves that I thought merited consideration. I suggested that we consider buying Google, back when it was worth $2 billion, long before it went public. (We already owned 5 percent of Google, which AOL obtained in exchange for integrating Google search within the service. Today, that stake would be worth upwards of $20 billion.) I also floated the idea of buying Apple, to benefit
from their expertise in software, hardware, and design. These suggestions, and many others, were dismissed or ignored. It was clear I was out of options.

It was time for me to go.

The year we were trying to get the merger approved, several companies asked the government to block the deal, arguing that the combined company would be so powerful that no one would be able to compete. It turned out we couldn’t get out of our own way. Three years after our competitors marched on Washington to stop us, we stopped ourselves. We had terrific assets—and a great group of executives. But it was a little like the 2004 Olympics: You put together what should have been a dream team, only to go on to lose to Puerto Rico and Lithuania.

There were factors like the stock market meltdown that played a role. But mostly, it came down to people. It came down to emotions and egos and, ultimately, the culture itself. That something with the potential to be the first trillion-dollar company could end up losing $200 billion in value
⁸
should tell you just how important the people factor is. It doesn’t really matter what the plan is if you can’t get your people aligned around achieving the same objectives. As Jim Collins once wrote, “you not only need the right people on the bus, but you also need the right people in the right seats.”

In 2015,
Fortune
held its Global Forum in San Francisco, the very same event I had attended in Shanghai in 1999. The comments almost uniformly made the case that culture is critical. “Fifty percent of our business has changed in the last ten years,” said Joe Kaeser, CEO of Siemens. “The key to surviving is having an ownership culture. You have to get to people’s hearts. You have to get to people’s pride.”

“The culture is the one thing I’ve got to get right,” added Brian Roberts, CEO of Comcast. Mark Bertolini, CEO of Aetna, agreed: “Culture does trump strategy, every day.”

• • •

At the time of the merger, I didn’t fully appreciate how much of a role personal emotions could play in professional decisions. In retrospect, I was naïve to think that strategic moves that seemed obvious to me would be equally obvious to others. For example, I was confident that the best approach for the company was to embrace technology and new business models, and was shocked when my attempts to encourage investment in Napster and other early pioneering digital services were soundly rejected. I didn’t appreciate the work it would take to convince the company’s executives of things that seemed so clear to me. In one board meeting, I even noted that the two sides seemed to be speaking different languages and speaking past each other. And while some of the differences related to different world views and strategic
perspectives, I think much of it, sadly, related to personal mistrust and lingering resentments.

I could have done a better job of managing that mistrust. I could have done a better job of repairing burned bridges and establishing meaningful working relationships with those who treated me with such skepticism. And I could have done a better job of making it clear that I wanted to be part of the solution. My plan, from the beginning, was to take a step back, to make sure people knew that Jerry was the one making the decisions. But in hindsight, I think I stepped too far back. That was in part the result of circumstances in my personal life: Three years before the merger, my first wife and I divorced, which led me to want to devote more time to my children. And just six months after the merger was announced, doctors diagnosed my brother Dan with terminal brain cancer. He didn’t have much time left. I bought a house on his block in San Francisco, and visited frequently in the fifteen months before he died. I don’t regret spending the time I needed with my family. But I do regret not spending more time with key executives. What I intended to be good for the company—staying out of the way—looked to some like arrogance, even indifference.

Perhaps we could have brought in an outside CEO to replace Jerry. But that wasn’t really possible in practice. I’m certain my efforts to oust Jerry would have failed if I hadn’t proposed Dick as his replacement. When I floated the idea
of trying to buy Apple later, I had a side agenda: bringing Steve Jobs into the company, with the thought that perhaps he could eventually become CEO. He had the credibility and skill in the tech and digital worlds, and because of the success of Pixar, he also had the trust of content creators, particularly in Hollywood. I still like that idea, but there were never the votes for it. It was never even seriously discussed.

In the end, resigning from AOL Time Warner was hard. Soon after the merger was announced,
Vanity Fair
had ranked me the most powerful person of the “new establishment,” ahead of Bill Gates, Rupert Murdoch, Warren Buffett, and Steve Jobs. A couple years later, I wasn’t even on the list. I went from running one of the most celebrated companies in the country to not running anything, and being publicly embarrassed. It was not a happy time in my life. I spent much of it reflecting on what had gone so right—and so wrong—and about what I should do next.

A week after stepping down, I met with Donn Davis, who had been an executive at AOL and then my chief of staff when I was chairman of AOL Time Warner. I told him that I wasn’t sure precisely what I wanted to do next, but I knew I wanted to get back to my entrepreneurial roots, and I wanted to work with him to help figure out the path forward.

I started making investments later that year and found that I really enjoyed it. There was something empowering and hopeful about using the money I’d made from AOL to back
the next generation of entrepreneurs. As the size and scale of those investments picked up, I decided to formalize my efforts by creating an investment firm. I called it Revolution, to signal my desire to back entrepreneurs seeking to revolutionize important aspects of our lives. As our planning efforts accelerated, I reached out to Tige Savage, who had been at Time Warner Ventures, and asked him to join our effort. I made the same ask of David Golden, who had worked for my brother Dan at Hambrecht & Quist, and of Ron Klain, who had been my attorney and had become a trusted counselor. Ted Leonsis later joined us, after he left AOL.

I was putting the band back together to pursue a new dream: building Revolution into one of the world’s leading investment companies. I didn’t want us to be passive; I wanted to leverage all we had learned to help entrepreneurs succeed. We wouldn’t just write checks; we would roll up our sleeves and do everything we could to help the entrepreneurs we backed fulfill their dreams.

We spent the winter of late 2004 and early 2005 preparing to launch. We designed a logo—a stylized red
R
in a black circle—and began to scout businesses and industries. We met with experts and entrepreneurs in a variety of fields. We locked down the domain names and trademarks we wanted. While I had built AOL in what was then a remote part of northern Virginia (and thereby had helped create a whole tech corridor in the outskirts of suburban Virginia), I decided to launch
Revolution in downtown DC, hoping to spur a new tech boom inside this urban hub.

In March 2005, we officially launched Revolution. On launch day, I turned up the speakers at our headquarters and blasted my favorite Steve Earle song, “The Revolution Starts Now.”

I
’VE NEVER
been particularly political. I’ve always been interested in history and public policy, but I’ve been independent-minded, not someone comfortable with hyperpartisanship. I studied political science in college, in part because it was the closest thing to marketing that Williams College offered. Even then, so many of the debates we had felt reflexively ideological; people were often polarized and dug in, talking distrustfully past each other. They viewed government in the starkest terms, as either the primary source of our problems or the only solution to them. I could never identify with either of those perspectives, and never liked the black-or-white, win-or-lose style of debate.

Today, when I hear people within the business community talk about government, it often feels like I’ve gone back in time. If I close my eyes, it’s like I’m right back in class, listening to
the same arguments—and they’re as devoid of nuance as they were all those years ago.

My view is simple: Government is going to be central in the Third Wave. Full stop. It doesn’t matter what your view of it is; if you can’t figure out how to work with government—and how to get government to work with you—you’re likely not going to be a successful Third Wave entrepreneur.

I know that government can often be a problem for businesses. I get that. (Indeed, I have experienced that, many times.) I also understand that entrepreneurs are self-reliant, and not generally inclined to work with government. But the role government plays in shaping our society and our economy will make it a key force in the Third Wave.

After all, it will always be government that defines—either through action or inaction—the environment in which entrepreneurship operates. At its worst, government can be just like the caricature my classmates feared: a hindrance that creates maddening obstacles that hamstring young businesses. But at its best, government can create an environment where innovation and entrepreneurship can thrive, not by providing the certainty of success, but by mitigating risk and expanding the scale of opportunity.

Ultimately, it’s government that sets and enforces the rules. Lawmakers decide how easy it ought to be for companies to gain access to global talent and venture capital; how simple it ought to be to start a business and scale it up; how much federal money to invest in research and development, in the
creation of new ideas that companies can commercialize. Government determines the ease with which commerce can cross borders and oceans. And often, with instruments like the tax code, government decides which investments to incent and which industries to jump-start.

It is easy to feel frustrated with, even furious about, the dysfunction in Washington. But it’s a mistake to conclude that government is useless—or hopeless. The better we understand the critical role that government can—and does—play in the life of a business, the better we can understand that it is our politics, more than our institutions, that are the fundamental problem.

In 1958, the year I was born, President Dwight Eisenhower created an agency called ARPA (Advanced Research Projects Agency, later renamed DARPA; the
D
is for Defense), which was charged with researching beyond-the-horizon ideas. Scientists would have the funding, and the space, to explore new and novel concepts without needing a clear sense of their commercial value—to think beyond short-term profit and imagine long-term transformation. In the years since its creation, DARPA has been responsible for groundbreaking innovations, from stealth plane technology to GPS.

Through initiatives like DARPA, the federal government has often acted as a beating heart for innovation, pumping
early energy into nascent ideas that could determine our economic future. It’s been a particularly crucial source of support for projects that, in their infancy, lacked a clear commercial use—including the semiconductors that would ultimately drive a technological revolution. Government has often been willing to take risks where the private sector has been afraid to invest. In an assessment of the federal government’s influence on technological development, researchers found that from the late ’80s through the late ’00s, most of the innovations that were recognized with an R&D 100 Award—which is like winning the Academy Award for research and development professionals—relied on federal support at some point in their development.

The fruits of government-funded R&D labor often end up making their way into commercial use. Think about all the work that went into the components that make your computer and smartphone function. A lot of that was made possible because of Cold War–era government investments.
¹
The navigation system in your car likely wouldn’t exist if the Department of Defense hadn’t created a satellite-based global positioning system to improve the nation’s nuclear deterrence capabilities.
²
The radar system that guides takeoff and landing every time you board a commercial flight came into existence thanks to naval researchers looking for new methods to detect approaching ships and aircraft.
³
The prescription drugs in your medicine cabinet were likely developed, at least in part, through federal grants.
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