Online Extra: Allen: "We Drank Some Castor Oil"

The billionaire on investment lessons learned the hard way, how the losses changed him, and jamming with Carlos Santana

For four years, Paul Allen has declined to discuss his investments. In that time, his net worth slipped from an estimated $30 billion to $18 billion. While the Microsoft (MSFT ) co-founder remains the third-wealthiest American, he brought in new management to Vulcan Inc., his investment company, and charted a new course for his portfolio. Allen is moving away from pumping money into his Wired World vision that bet on the convergence of the Internet and entertainment. Instead, he's chasing more mundane investments, such as Houston oil-and-gas producer Plains Resources (PLX ), as he works to diversify his portfolio and improve his returns.

With his new strategy in place, Allen agreed to speak with BusinessWeek Seattle Bureau Chief Jay Greene about his investments. Here are edited excerpts of their conversation:

Q: As you look back at your investments over the last decade, what have you learned?


There are a huge number of lessons we've learned. Obviously we've had some successes and some investments that didn't turn out anywhere near as well as we hoped. Based on a lot of those lessons, we've been revamping our organization here over the last three years. And we're in a completely different place in terms of our capability and our thoroughness and our approach. We're just so much more thorough, meticulous, demanding, and focused now than we were just a few years ago.

Q: What led you to that?


You had a number of bubbles burst. You had the dot-com bubble, the telecom bubble. Some of which we anticipated and some of which was more dramatic, not just for us but for many other investors. We saw some of that coming. But once we got more and more into it, we realized we had to start taking a very different approach. I got much more directly involved in analyzing all these things.

Q: Were you not as directly involved in the investments before?


I was involved in signing off at a high level. I'm much more involved now, especially in certain things. In Charter [Communications, the cable company in which Allen is a major investor], for example, I've taken a very, very active role. We have a weekly review meeting with Charter (CHTR ) -- what steps we can take to improve things and monitor how things are going to run. And yeah, that hadn't been happening previously. I've taken a much more active role in certain things on a frequent basis.

Q: Your Web site doesn't use the phrase Wired World much anymore. Why?


It's like a lot of people don't use dot-com anymore. There are so many dot-coms. I don't think Amazon (AMZN ) or anyone else stresses the dot-com aspect of what they're doing anymore. I guess [the Wired World] has become almost conventional wisdom in that sense. I don't think anybody worries today about whether everybody wants to be connected. Everybody is connected.

Q: Was the Wired World a good investment strategy, or was it more of a vision?


Well, whenever you see wave of change coming, like the personal computer revolution that I was fortunate enough to be involved in with Microsoft, you basically thank your lucky stars that you lived in a time when that was happening and you were able to participate in that and help it come into being. What I saw over 10 years ago was this idea that as computing got cheaper and as we're going to have a pervasiveness of higher bandwidth digital communications, it was going to be available both locally and span the globe. There were going to be some investment opportunities based on that.

We did a number of things based on the fact that people were going to be online or there was going to be some interactive television or communications or other kinds of broadband things. And that's what led us into being excited about cable as an enabling infrastructure and investment opportunity. I saw that coming. I think we made some great investments there. Other investments, for a variety of reasons, have been more challenged.

So, the strategy was a perfectly fine strategy. However, I have to be very direct that there were things we could have done better in terms of everything from buying assets to deal structure to the many, many lessons we learned going though that process.

I ended up writing a memo that had 26 points. Some of them are pretty commonsense business things like, when you're structuring a deal, protect the downside. Assume that everything may not come out as you would hope. Construct aspects of the deal so if things go south, your outcome preserves the maximum value you can achieve through negotiation. Some of these things are almost common sense.

But I wish we had the 26-point memo five years ago. Things would be in a different place today. Those lessons were learned at a significant cost. And I think we've fully internalized them now.

Q: You sent this memo out to the every Vulcan employee. But does this apply to you as well?


Oh yeah. I've thought about them in the context of myself and upper management first. There are only a few that I was involved in that probably wouldn't apply. They are a list of shortcomings. Usually, you get the impetus to communicate something only if you've experienced it yourself, and you'd rather not go there again.

In retrospect everything becomes clear. If I have been more deeply involved in some of these things and thought through them more, maybe there would have been different outcomes. You can get too complacent, and not think, "Wow, bonds. I should know everything there is to know about bonds and debt structure because, if I'm involved in a company that has a lot of leverage, I'd better really completely understand bonds." Over the last couple of years, we drank some castor oil. It doesn't taste good going down. And you don't really relish drinking any more.

Q: How has your involvement in investment decisions changed?


I've got some deeper knowledge of those things than I had before. Maybe my magnifying glass is shined up a lot better. In the past, my analysis of those things would be maybe not as pointed and specific as it is now. Now when you talk about a company with a certain kind of debt structure, I know the questions to ask a lot better. I left a lot of that analysis and due diligence to the people we had in place then, and we've got an incredibly improved group now.

I've been through the fire in the last few years. Now I get involved and ask questions that are a lot more pointed and specific and probing -- and, I think, insightful.

Q: The comments seem to imply that [former investment chief] Bill Savoy isn't here because the investments he made didn't pan out. Is that a correct inference?


If you look back on the history of all the things we've been through, I've already talked about the mixed outcomes. Obviously, there was a parting of the ways there. I'd rather focus on the team Nathan [Troutman, the new investment boss] has got down there now, and the future, and the different approach we're taking now.

Q: How much do you attribute the performance of your portfolio to the tech bubble bursting as opposed to problems with Vulcan's execution?


Well, bursting bubbles tend to highlight things. When everything is onward and upward, when everything is rosy and stock prices are only increasing, when everything is going great, the problems tend to be hidden. When things don't go as well, guess what? They all rise to the top. The bubble bursting causes you to reevaluate.

Q: Was there an emotional toll as your portfolio declined?


You can imagine when you're dealing with some of the stuff we've dealt with over the last couple of years that it's not fun. I guess the one fun thing is that there's a learning experience. You go, "Wow, I've never been in this type of situation before. I've got to deal with this kind of thing." You know, "Bank covenants. I want to learn everything."

You go through situations like that and absorb it, and you have a very short period of time to do it and step up. You feel good working though those things. It's a high-stress situation to be in. But then you get the satisfaction of being able to work though those things and have a positive outcome.

Q: Some people think that since you have so much money and so many different interests, it wasn't all that important to you when your investments went down. Is that true?


No. I'm as competitive as the next person in business. I worked at Microsoft. Is Microsoft a competitive place? It has that reputation. When you're going through those things, there's an element of stiff upper lip, and hanging in there, and toughing it out. But look, you never find enjoyment in losing money or seeing assets get devalued or seeing future potential be cut off or initiatives come up short. There's no reward in any of those things.

You try to bear down and figure out how to change those outcomes. You have to decide which ones are the situations where you cut losses and which ones do you bear down and tough it out. You come out on the other side in a better place.

Q: You got tagged with the unfortunate moniker a few years ago of being the "accidental zillionaire." Does that stuff bug you?


I find it more puzzling than anything else. You go, "Wait a minute, I was there. I founded Microsoft with Bill. I worked on a lot of the initial ideas and wrote the code." I'm not sure I understand the accidental part.

Q: Do you think about things like the legacy you'll leave?


To me, the most rewarding things are when you try to create some new thing with a group of people that moves an area of technology forward or an industry forward, like what we're trying to do with interactive television. Those are fun things that if you're able to succeed, it's rewarding. And hopefully, you change people's lives in a positive way, and there are financial returns.

One thing about me, I don't know if it's self-evident or not, but I just love the whole spectrum of being involved in a whole bunch of different things. They're intellectually challenging. All the businesses in these different areas are interesting. It's fun to be involved in a broad spectrum of things.

Q: Do you worry about spreading yourself too thin?


Yes. You have to worry about that. Because I'm attracted to so many different things, I have to consciously ask myself that question. Am I getting involved in too many different things? Over the last couple of years, we've consciously reduced the number of things we've been involved in. It keeps you better focused.

Q: You still have so many interests though. You own sports teams. You scuba dive. You have your yachts. Do you think you spent too much time on those?


No. You have to have balance. After working my early days in technology, working with incredible focus and not really having a balance, I've tried to have some fun.

Q: What's the most fun thing of those other things you do?


Because I'm a musician, some of the music things have been a lot of fun. I've been able to jam with Dave Stewart [of the Eurythmics]. I've played a little bit with Mick Jagger. Carlos Santana, we did a charity event with him. Peter Gabriel. If you're an amateur musician, when you play with those guys, you realize you're an amateur.

A classic example: We had a party in Venice, and I did this thing with Carlos Santana. He said, "Please, would you play with us. On the last song, we'll invite you up, and we'll trade riffs." I'm thinking I'm doing pretty well. We're going back and forth, and I'm really getting into it. All of sudden he does this incredible run where he goes up two octaves and back down in quadruple time.

And I sit there going, "Uh-oh, I'm not Carlos Santana." I can't play anything even close to that. So those moments are fun. I feel really fortunate and blessed.

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