5
casting off conventions
YOU DON’T NEED to be the sharpest knife in the drawer to succeed, but you must have a desire to learn. I don’t think I’m any smarter than the next guy, but I am curious, and I think that I have an inquisitive mind. That trait sometimes makes me a pest, because if I question a person and the answer is “we always do it that way,” I will not only ask why but then continue to pursue that person until I hear a rational answer. If you can ask enough of the right questions, you will eventually come to an understanding through common sense. The mouse that scurries around the maze sooner or later learns the way out.
Unfortunately, we have a society that does not always question. And even when people do ask questions, what often impedes them is the fact that they don’t ask the right questions. I think many times they unconditionally accept what they see without being curious as to why. The average person who turns on the television probably doesn’t know and doesn’t care how an image got from Tokyo to New York in a matter of seconds. But some wonder, How could that be? What’s behind that? It may be that certain people have a compulsive desire to know why things happen. I am one of those people.
What drove Einstein to question that space and time are the same thing and that it’s light that doesn’t change? This query led him to formulate the theory of relativity, which states that the speed of light is constant and independent of your movements. Through this, we learned that clocks run slower in orbit than they do on Earth. What are the practical applications of this insight? There are many, including a scientific explanation of how the GPS in your car works—but the real issue is asking the question.
If nothing is ever questioned, convention will always stand. This is the way we do it. Why? Who cares? It just is. Not asking questions about the conventions of how something is done leads to stagnation. If you’re a slave to conventions, you’re just following a plan set by someone else. If you don’t question the plan, how can you know its basis? In business, it’s vital that you ask questions about how things are done and why, especially when you’re entering a new field or starting a new business. Don’t simply settle for the same old “That’s just how we do it.” Find new ways to do things. Cast off the conventions.
riding a sextant to rome
After I graduated from college, I served in the U.S. Navy. It was during the Korean War, and most recruits complained about how military service was going to take two or three years out of their lives, keeping them from their chosen pursuits. I looked at being in the service differently. I thought, “If you really believe you are just marking time, then that’s what you will be doing.” I held the opposite view. Why couldn’t it enrich my life? So, I used every moment to try to learn something new. I also took a hundred bucks out of every paycheck and put the money in the bank so that when I was discharged, I would have something saved to make that new start.
In the navy, I was a navigator on an old cargo ship. It was an interesting job to me because I was fond of trigonometry, which I had studied in high school. Navigation was a step more complicated because it involved celestial trigonometry.
At the time, I was a lowly ensign, and the navigator slot was billed for the rank of lieutenant. The only way I was going to get the position was to ingratiate myself with the captain, and the only way to do that was to prove that I could handle the job. I found a book on spherical trigonometry and studied. In those days, the operations officer was the navigator as well, and when it was announced he was being transferred, I spent the last three months of his term on the bridge of the ship with him so that I could learn navigation.
In those days, there was no such thing as a GPS system, so the only way you could determine your location was by using an old-fashioned sextant. A sextant is an instrument that measures the location of the stars on the horizon so that you know in which direction to sail your ship. You would “shoot the stars” and then undertake twenty minutes of calculations to establish your location.
All ships carried two or more sextants. A sextant is a somewhat delicate instrument, and dropping one on any hard surface can damage the alignment so that you might calculate your position as being three hundred miles off the coast of England and find yourself looking at North Africa instead—not something that would endear you to your captain. Nevertheless, this was always a possibility, so it was mandatory that you maintain and protect these instruments, and thus the ship and all of your mates. As a consequence, I began to tinker with one of the sextants, knocking it out of line, then trying to realign it. Eventually, I could take the sextant completely apart and reassemble it. As it turned out, that unconventional exercise would stand me in great stead with the brass.
Every year, our ship was given a proficiency examination by a team of senior officers. These officers would examine all of our records and make sure everything was in order. Perhaps it was this training that later gave me the patience to slog through all the regulatory hurdles I have faced in real estate development and in the administrative and legal minefield of unconventional corporate finance.
USS Denebola—“Mr. Roberts” had nothing on me.
Anyway, one day a team of senior officers arrived to conduct the inspection. The ship was under way. One of the officers, a senior captain, stayed on the bridge with the navigator (me) and assigned me problems to solve. One day, the captain asked if I had another sextant. I told him that I did, and he asked to see it. He proceeded to take the sextant apart and then asked me to put it back together. “Now?” I asked. Yes, he said; he wanted to watch. He handed me the little screwdriver he was holding. It took me about two minutes to reassemble the thing. I aligned it and handed it back to him, thanking my lucky stars that I had done it before.
He was impressed, but not for long. He made a general comment that I seemed to have a pretty good handle on things. Then he took a different tack. “Let me ask you something,” he began. “If you have a three-masted vessel and the after mast is higher than the two masts in front of it—what do you call it?”
I stared at him. Maybe a minute. It seemed like an eternity. And then I ’fessed up. “Captain, I haven’t the vaguest idea,” I replied. “I wouldn’t know if it was a schooner, a yacht, or a what. I don’t know anything about sailing vessels.”
“That is too bad,” the captain said, as he walked away.
I looked at his back and thought, “Well, I was really cooking, and now I’ve blown it.”
Three days later when the inspection was complete, our entire unit gathered in the wardroom. The senior captain held court. We were given a grade: outstanding, excellent, average, or fail. He went through each department with comments, concluding with the grade he awarded. I was last on the list. It was as if I were in school again, fearing what my teacher would do to me if I gave a wrong answer. He started with my failing to correctly answer the sailing vessel question. At that moment, I looked over at my executive officer. He was staring at me as if I had just punctured a hole in his ship with the anchor. Then, just as surprisingly, the senior captain’s demeanor changed. He said he had given the sextant task a dozen times to various officers and I was the only one who had reassembled the instrument. I might not have known my masts, but my putting that sextant back together led to my being the only sailor to receive a grade of outstanding.
Consequently, I was granted certain privileges. For example, one time we docked in Naples, Italy, for seven days. I said, “Captain, I am the navigator. What am I going to do here for the next seven days?” He asked what I wanted to do. I told him that I would like a short leave to go to Rome. He nodded and told me to be back the day before the ship was to sail. So I rented a motorcycle and rode to Rome—all thanks to the fact that my curiosity had led me to take apart the sextant.
It was this incident that sparked my interest in cosmology. The scientists in this field are on an eternal quest, always asking “Why?” because they are working in areas where one question answered begs the next question asked. The fairly recent discovery of dark matter and dark energy has led to studies that show that the universe is flying apart at increasing speed. Does this have any impact on us? Probably not, but the fact that someone is asking those questions demonstrates a curiosity that most people have difficulty comprehending.
Jacques Cousteau talked about the difference between an explorer and a scientist. A scientist, he said, is somebody who starts out asking for a specific answer to a question. For example, a scientist might want to find out why lions travel in prides. That is a narrow line of inquiry into a specific area. But Cousteau said that an explorer sets out with no idea of what he will discover. He is exploring for the pure joy of finding out the unknown. He is not taking a concept and saying, “I am going to try to solve this particular problem” (which, by the way, is how our educational system trains us to think).
In business, you have a task. No one is going to pay you to search for something unknown, and if you are an entrepreneur roaming around looking for the unknown, you may have a very long journey. But what you want to do is try to cast off the conventions so that your mind is free to accept the possibility of anything. If you can accept any possibility, then that leads you to ask all of those questions that defy convention. And maybe you will come full circle and find out that the conventional way may actually be the best way, but, regardless of the final conclusion, it is through the process of inquiry that you will have opened your mind to myriad alternatives that might trigger success.
I have put this type of unconventional thinking to working in seemingly conventional areas.
using redevelopment agencies for conventional development
My partners and I have been involved in doing conventional development in an unconventional way—namely by going directly to redevelopment agencies. Redevelopment is the process by which a city designates what is usually an impoverished or stagnating area for new construction to attract people and businesses. It also involves “infill,” which is the process of taking empty tracts of land and putting them to use.
A redevelopment agency is the public entity charged with responsibility for implementing this process. The agency targets a blighted area that is run down and that has a low tax base. It appraises that land and acquires it by condemnation or by exercise of the eminent domain laws, which allow a city to purchase and condemn land in the “public interest.” If the landowner does not agree with the price the city is willing to pay as compensation, he may obtain his own appraisal and fight the valuation in court. Eventually, he is paid what the process concludes is the fair market value for his property.
The people who undertake the planning cannot by law profit from the deal, because redevelopment is meant to be for the good of the community.
Sometimes there is a public referendum on redevelopment projects. I welcome referendums when I am involved in redevelopment that requires a change in zoning. I believe the people should determine their own destiny in a free society. Often, a mayor or a city council member will be skeptical of a project. I say, “Let the people decide. If they don’t want it, we won’t do it.” You show them a picture of what you want to build, make your best argument for the project, and let them vote.
Development is a hazardous undertaking even when everyone agrees. No developer wants to go through all the objections, exceptions, redesigns, public hearings, arguments, legal obstacles, and, possibly, lawsuits that can drag on for years and that can force the abandoning of a project or, worse, culminate in an economic disaster. The community suffers, the tax base deteriorates, and the public loses faith in the process. A city, through its redevelopment agency, develops a master plan based on input from various citizen’s groups, the mayor’s office, the city council, and local developers. The entire process is open to the public, and the residents are asked to make comments about what they want and what they don’t want. So the best of all worlds is to have the overwhelming support of the public, won through the democratic process.
If a project survives all this and is approved, the city’s redevelopment board next decides where it will get the money to finance the purchase of the land. For example, it may sell a thirty-year bond issue and use the proceeds to acquire the land. After the purchase, the city offers it in parcels to developers on the basis of the master plan, which divides the land into different sections such as commercial, residential, office, and public.
Qualified developers are required to make a pitch. What makes you qualified? You must have both a track record of doing redevelopment and the financing in place. Each developer who wants to bid brings in his architect and engineer and makes a presentation to the agency that will select the winner. Again, this is a public process. These bids are not competitive on price; rather, they are competitive on the idea itself and on the ability of the developer to execute the idea. The winning developer then purchases the land from the redevelopment agency, and the agency either pays down the bonds or grows that money and pays the bondholders back over time.
Pasadena, California, has undertaken several ambitious redevelopment projects, and Lew Wolff and I became involved in the redevelopment of the downtown area. Even though Lew had worked on the very successful redevelopment of San Jose, the project in Pasadena was far from a sure thing because of the dynamics of the city.
Institutions are one of the things we look for as a developer in an area. If the economy collapses, what will be left standing? In Pasadena, there is the California Institute of Technology, the Jet Propulsion Laboratory, and the Huntington Museum and Gardens, where world-famous roses (as in the Rose Bowl) are cultivated. These institutions have been there for a long time. Because Pasadena has been a popular place for well-heeled easterners to summer, there are also some magnificent mansions there. Institutions and history give an area solidity.
The Pasadena Redevelopment Agency, which was run by Jerry Trimble, was very forward looking and aggressive about making the project work. (He later became head of redevelopment for San Diego.) The centerpiece was a shopping center built by Ernie Hahn, considered by many the pioneer of the shopping center. Lew and I were awarded the contract to build the parking structure for the center, as well as other parking the town wanted for the civic center. In addition, we were awarded the contract to construct a unique townhouse development. Ultimately, the project became very profitable for us because it helped revitalize the city’s tax base.
This is conventional development done in an unconventional way, because, without a redevelopment agency, you could never undertake such a project. You need a local public entity with the legal powers of condemnation and eminent domain to acquire large parcels of property in a city. As an individual developer, you would have to buy each parcel, and, even if that were possible, it would take years. Using a public process, a redevelopment agency can get it all done at once.
Is this for the benefit of the community? This is private property. The developers are wiping out people’s houses to revitalize an area. Is that equitable? Yes, if the homeowners are paid the market price for their property. There are also a lot of other people in that community. Is it fair to those people to live in a blighted area? The simple answer is that if the area is redeveloped, it will benefit everyone. How? First of all, the tax base will go up, and that improves services for everyone. Redevelopment also turns out to be the fairest way to rebuild a city because it gives market value to existing owners and provides all the citizens a way to turn around their otherwise decaying neighborhood in a short period of time while having some control over their own destiny.
assessing risks when challenging convention
Investors always talk about risk, but they are approaching it from a conventional standpoint: What is the downside risk, and what is the upside potential? How do you measure these? The ultimate downside risk is simple: You lose all your investment. No one ever calculates the difference between losing a little and losing everything, with good reason—you would never complete a transaction if you did not think you would be successful.
Therefore, risk must be specific to the transaction. For example, if an apartment building you own has fifty units and you have twenty leased and must reach forty-five to break even, you should analyze the operating statement to calculate your costs and determine what rent level you will need to break even and service your debt. That means that you do not look at the situation as a risk manager controlling a portfolio might.
My approach has not changed over time. You must look at each specific project first as a stand-alone, evaluating it on its merits. Once you do that, then you look at the competition. You have to evaluate who else is in your particular market and who will compete with you. That is a risk assessment. I look at risk and ask, “How am I going to make my project better than what is around me? What are the advantages and disadvantages?”
Take the electronics business. You can invest in something great, and, five minutes later, along comes an electronics geek who has something twice as fast and half the size, and you’re out of business. I was once involved in a microfiche business that suffered such a fate.
There was a period of time when slow-speed, low-memory computers printed out reports and inventory lists on paper that came out folded over. You were left with stacks of these reports that needed to be boxed and stored in a warehouse. The theory developed that paper was passé. All this paper was accumulating, and it was tough to transport, store, and access. There had to be a more efficient way to store information.
Initially, that way was to print information on microfilm. The rage at that time was COM, Computer Output on Microfilm. Some data were stored on microfiche, a 4 6 card that looked like an X-ray. That required you to have information storage and retrieval systems to view it. This gave birth to a business ancillary to the computer industry: the recording of information using microfilm and microfiche. Of course, we now use computers for information storage, but there was a brief period when microfilm and microfiche were the standard ways to reproduce and copy data so that they could be stored and retrieved.
As in all film reproduction, the traditional methods for storing information on microfilm and microfiche involved transferring the image from a negative to a positive by threading the two pieces around a capstan. All movie cameras work this way, as does the printing of positive images at laboratories where film is processed.
Our inventor, a man name Bob Bispell, saw it differently. Why not find a way to bond the positive to the negative that did not involve going around a circular shaft? The idea he developed is deceptively simple. Just take the two rolls of film and thread them through a vacuum chamber so that the air between them is sucked out. They stick together for a brief moment, the image is transferred, and the film rolls on its way. With two pieces of film running in a plane as opposed to running around a capstan, the image could be transferred very quickly, enabling businesses to copy an enormous amount of information in a short period of time.
This method also solved another problem. When information is stored optically, the storage capacity of any film is limited by the eye’s ability to distinguish discrete letters and symbols. As in all circular motion using the traditional method, in the old method the outside film travels further than the inside film as it wraps around the capstan. On microfiche, that results in a blurred image, rendering it unreadable. Bob’s method avoided this by bringing the two rolls of film together in a flat plane.
A couple of partners and I financed three or four of these machines. We named the company Extrapolation Techniques. With any invention that is somewhat different, you must go through a period where you prove to the major players in the industry that it is viable, so we gave the machines to big companies like 3M and IBM to try. We got the endorsement of these major companies, and the next thing we knew, we were in business. My job was to raise the necessary financing to underwrite the business plan, guide us through the start-up phase, and take us public as EXTEK Microsystems. Initially, the company flourished, but then the technology began to change.
Over the course of the life of the company, the use of microfilm began to diminish as computers became faster and cheaper and fewer companies used microfilm to store information. Once we saw the writing on the wall, we sold the company.
That was the one of the few times I have ever been involved in a so-called cutting-edge, high-tech business. I have two good reasons for steering clear of this kind of enterprise. First of all, while I may have the kind of mind that can foresee what the new needs might be, I do not have the technical expertise to translate that information into a working solution. I never studied engineering and therefore lack the education to solve the specifics. My mind works spatially, rather than digitally, if you will.
Second, I do not feel comfortable investing in a business where the underlying technology can change so quickly. Again, you can be in business, and, in the blink of an eye, somebody invents something smaller, faster, better, and you’re gone. It follows Moore’s Law: Computers become twice as fast and half their current size every two years.
There are many examples of substantial companies in all forms of technology that have had their moment, only to be superseded and then fade from existence. Polaroid, for instance, was a huge company at one time, but it no longer exists. It started with the fascinating idea of instant photography, which caught on quickly, but, over time, a combination of new technologies pushed it aside and digital imagery became the standard. A more obvious example of rapid change is in the medical field, where new and improved drugs are a necessary constant for success.
Of course, fortunes can be made in a new technology, but that requires an intense application of expertise. There are venture funds, like Kleiner Perkins in Silicon Valley, that can practically see around corners. These funds find people with Ph.D.s in esoteric disciplines who are not entrepreneurs by nature and then raise billions of dollars to create a business out of their inventions.
So the bottom line is that you need to know your limitations when challenging conventions. I view technology as a great thing to use. My iPhone amazes me every time I touch the screen, but I don’t pretend to understand its inner workings. As much as I like to cast off convention and free my mind to the possibility of anything, I also understand when I do not understand.