Taking on Silicon Valley with Marty Chavez (Goldman Sachs) | Disrupt SF (Day 2)
9:15PM Sep 6, 2018
So with that, please join me in welcoming our next guest. He's the CFO of Goldman Sachs, Marty Chavez and your moderator Connie Loizos.
Good afternoon everyone.
So I was just telling Marty backstage that I had
I'm a big fan of Bill Maher and last week he had this bit on his show where he was talking about merger craziness in this day and age and he said something funny but that also sort of resonated he said we live in an age of get big or get eaten. In fact I look forward to the brave new day when the only two companies are apples on and Goldman Google Mart
But like I said you know there is there are network effects. Goldman's everywhere. Is that the future where we're headed?
I think it's amusing to talk about of course, and I laughed as well. I do not see that as the future. I think there is, as you mentioned, the winner take all dynamic in certain kinds of technologies what some call the the siren server where you attract the liquidity or you attract the nexus of activity, and you just become bigger and bigger. I think what also happens though, is there's a every 20 years or so a big paradigm shift and very few people see it coming.
And rather than just getting bigger and bigger and further concentrated companies need to do something different in the next cycle than they did in the last if they're going to stay relevant. We're about to celebrate our 150th anniversary and so we've been through a lot of these shifts and a lot of these booms and busts and and we evolve as we go.
It's amazing how you know relevant you made stayed with it. I think a lot of that has to do with obviously your many different initiatives. One that's sort of particularly interesting I think to this audience is just how many investments you've made including in the Bay Area. I think altogether I don't know if this is completely accurate but crunchbase says that you have something like 640 startups stakes Does that sound right to you?
That sounds like the right order of magnitude
Can you talk a little bit about your strategy and and also whether those stakes are sort of made available to all of your high net worth clients or?
So Goldman's a big company. About a trillion dollar balance sheet give or take and we have many kinds of investing activities and it's may be difficult to distinguish them all right, and they just show up in public as Goldman Sachs but sometimes we're investing our own capital our shareholders money directly on balance sheet in startups and seed stage companies.
We have that one activity is called principal strategic investments. It's about 80 companies. Right now about a billion dollars, generally small stakes startups and companies that we see doing interesting things that are aligned with our businesses.
Who are the LPS in that group?
So in that group, all the capital there are no, there's only Goldman Sachs.
It's just Goldman Sachs directly on balance. And it's constrained not just to be any investment that we think is interesting, but investments that are that are part of our ecosystem. So as an example, one of my one of my favorites to talk about is a company called Kensho. Fantastic name. It's the it's a Japanese word that refers to the penultimate stage before becoming the Buddha. You stick around to help other people become enlightened and what they've done is applied machine learning to find signals and very large data sets. And so we discovered the company early.
We became an investor. We became a client. We introduced them to our clients who became their clients? We introduced them to our competitors who became their clients and roll forward. It had an exit just recently to s&p Global and was extremely successful in a very short period of time, which is really a perfect example of where we can apply capital but really be strategic because we really will be a revenue paying client and we'll bring this company into the ecosystem. And so it's no surprise that the IRR of that portfolio is is 25%
Kensho sold for something like 600
Yes. Plus. Yes.
What's the criteria to invest I know I mean I realize you invest across stages.
But what are some of the things that you're looking for maybe especially like you said it at the earlier stages?
So we we like early stages because we we like the valuation we want to pay it appropriate price though we invest and we support the companies through many stages of their evolution and sometimes we do make relatively later stage investments we generally like to lead, we don't have to.
There's a lot of constraints. Because we're a regulated bank, we generally look to have relatively small percentage stakes order of 10% in these companies as opposed to something like 50%, okay? And they're the constraint is it needs to be part of our world that needs to have something to do with finance, those finances a huge and broad theme. So it could be market data or clearing houses and machine learning applied to algorithmic trading. It could be all kinds of things. It's a very broad world, but if we see it as aligned with the rest of our businesses, then it's something that will likely be interested in but it really has to be something where we're not just putting in capital. Lots of people have capital will also become a client and will help the companies understand the use cases and that's really the value
Sure there's there's always some strategic element to it. Another thing that is obviously a newer area of interest is crypto. We have to talk about the news yesterday which
Was there some news yesterday?
Some market making news that bit coin, your Bitcoin trading desk that you sort of talked about in May is somehow being pushed off into the future what what happened?
So I was in New York yesterday and I was co chairing our risk committee, and I saw the I saw the news article come over the writers monitor and I turned to my co chair and said, right, so I guess that tells you something. It wasn't like we announced anything or that anything had changed for us. I think one of the wonderful things about being a Goldman Sachs is we do get written about a lot and I never thought I'd hear myself actually use this term, but I'd really have to describe that as fake news.
So so there was not sort of a I mean, first, what do you think the genesis of that sure fake news might have been and what's exactly wrong with what they reported?
Yeah. So what I would say is that
The world of financial services, as mentioned, is very broad. And there's a lot of important distinctions inside it. So when we began talking about exploring digital assets we knew since the beginning has always been the case for us that it was going to be an exploration that was evolving over time. And so as you know, we've got a commodities business. We've been in the commodities markets for a long, long time and Bitcoin Some think of it as a currency. It actually has a lot more properties you could argue as commodities. And in the commodities market, there's many ways of participating.
Some people participate in actually trading, for instance, physical oil, others participate in trading futures contracts, but they never take delivery or make delivery of the physical oil and then there's over the counter cash settled derivatives linked to the price of oil where you also never make or take delivery of oil.
The exact same thing is the case with Bitcoin and so what we have been doing for some time and really this is always driven by the clients, our institutional clients said we would love for you to clear these new Bitcoin linked futures contracts offered by the exchanges so we've been doing that and then clients may since May, we would like for you also to provide us liquidity and trade the principal as principal the futures contracts, not just clear them and so we've been doing that we the next stage of the exploration is what we call non deliverable forwards. It's these are derivatives over the counter derivatives.
They're settled in US dollars and the reference price is the Bitcoin US dollar price established by a set of exchanges, the same one that's referenced in the futures contracts and so we're working on that now because the clients wanted physical Bitcoin something tremendously interesting and tremendously challenging from the perspective of custody we don't yet see an institutional grade custody cases custodian solution for Bitcoin.
We're interested in having that exist and it's a it's a long road and so I would just be speculating maybe maybe someone who was thinking about our activities here got very excited that we would be making markets as principal and physical Bitcoin and as they got into realize that that's part of the evolution but it's not here yet. I I don't know where that
data that's interesting. So you never necessarily set a timeline as what you're saying. Okay.
Can I ask what if you own Bitcoin?
Yeah. So I do own Bitcoin.
Some of you may know, once this Cassandras who's the founder of Zappos and years ago, I was visiting and I met once this is fantastic guy, and this is many years ago, I think it might have been 2013, perhaps I wouldn't know the exact date and and I said yeah, I've been kind of thinking about about actually having some Bitcoin but it seems seems like complicated to actually get my hands on some Bitcoin This is 2013 and he said, Dude, I'll send you some and so a friend sent me he sent me five Bitcoin, which I still have
good for you.
So we only have so much time and I also wanted to talk to you, you know, on the sort of theme of golden being everywhere and, and everything about Marcus. Yes, this online sort of lending product that you introduced a couple of years ago. Yes, I think it's so interesting. And my understanding is that you're sort of gradually adding products on to this like
You've got sort of a high yield savings account
all kinds of things.
What is Coleman doing? So the middle class is obviously becoming sort of
greater focus of interest, or
the way we think about it, Connie, is that this is a theme that many of you will know of. And I've always been interested in this one, which is what I would call disruption from below. And so as an example, mainframe computer manufacturers used to say, our clients want mainframes, those mini computers are toys, they're not interested.
Oops, that turned out not to have been the best idea. Right, then the mini computers came on, then. microcomputers, then PCs, then PC man manufacturers say, you know, putting it on a phone that can possibly be serious. And now we've got billions of phones, right? And so I think if you are in your niche of wholesale with particular kinds of clients, and you think that's all that's interesting, you could miss all kinds of things.
And so for us, looking at the kinds of user experiences that consumers are getting and demanding is really important. way of understanding what our institutional clients are going to want. Because after all, it's just people at these institutional clients are wanting the same kind of high grade experience that they used to on their smartphones. So when we launched this consumer business, first, we call it Marcus, which is the first name of one of our founders, Marcus Goldman.
And the tagline is a startup with 149 years of experience. And the idea was to look at a place where we can be a disrupter where we can say, Well, here's the downside. We haven't been providing these consumer banking services, so we don't have the data. On the other hand, we don't have the brittle legacy mainframes and the bricks and mortars, branches, and so maybe that's a good thing. And sometimes there's regime changes.
So if you get too stuck in your old data, it's not as useful as the new data and we looked at places where we have things that were remarkably good at in our view and one of them is in managing risk. Another one is, is building software. I came from Silicon Valley. What attracted me to Goldman in 93 is we were building What now, someone would call NoSQL. But we were doing that back in 93 as a condition precedent for managing our risk.
So we saw an opportunity to build software, apply our expertise and risk management, be a disrupter ourselves and solve some pain points in a large addressable market where we don't have to be large for it to be material to us and consumer finance is classic. So being Goldman we wrote up investment memorandum for 100 plus different activities related to consumer finance and we picked one as an insertion point which is installment loans unsecured to creditworthy borrowers at principally for credit card consolidation but we always saw That is we're just getting started and now we're exploring credit cards and savings accounts and all kinds of things
I have so many questions he said credit worthy and I have read that maybe it's like some subprime but I don't want to dwell on that is that it's like a credit score of 640 is enough
Yeah the the you always want to be testing in the lower the lower FICO scores to see things coming right and so there is naturally in everybody's portfolio range of a range of psycho scores but the average score is high and the dispersion is quite well
i think the bigger question
you know you're you're good at so many things. One of these things is underwriting deals. So how do you explain to potential customers like so phi or other online lending companies who may be wondering what you're doing, you know, how do you sort of convince them that you're still their friend and that there Oh,
So this is of course one of the exciting things about being in this industry. We we have a lot of different activities. Sometimes we're an investor. And sometimes we're a financier and sometimes we're an advisor. And sometimes we're a fiduciary and sometimes their obligation as suitability and disclosure. I think it's something that we're all actually used to in the world of finance. So for instance, if we look at some of our biggest peer competitors on their asset management side where their biggest liquidity provider and they're the biggest liquidity provider to our own asset management side So is just in the nature of finance that you do all of these activities
Right. I'm speaking of competition. Yes. Um, who do you sort of see as your biggest competitor? If that's not too bad? A question? I
No it's a it's a great question. I think we're so increasingly so much of what we do is based on automation machine, machine learning engineering, and there's no question that if you just look at our asset allocation to the most important part of our business, which is the people who actually work in our business, there's more and more engineers as could be talking my own book. But when I joined, maybe it was 10% of the company. And now it's, it's, it's, well, it's over 25% of the company. And probably that will continue.
And so given that the people who are building all the software and creating these platforms for market making, liquidity provision, consumer finance, are the core of our business where the competition is really happening is for talent. And so we're competing directly, with the behemoths of Silicon Valley for talent. And there it's really about showing people a career a career progression. So I will always say, if you This is true for me, if you want to solve interesting hard problems for corporations, sovereigns, institutions, they should come work for us and people in Silicon Valley are solving different kinds of problem is not that
people in Silicon Valley are paid very well. Are your engineers paid as well as your traders? I mean, I think sort of the widespread perception is that they're sort of second class citizen.
Yeah. You know, it's funny when I joined in 93, I remember I might have thought back then, well, why am I with all my degrees and stuff doing the math for the trader next to me, and I never felt nor was a treated as, nor they paid as a second class citizen. And so for a long time, and this is really our CEOs idea he was his idea was, let's get fantastic people with a quant data science engineering software development skill set and let's put them on the trading desk right next to our traders and our sales people and let's pay them like that.
And then we had all kinds of technologists, some of whom were further and further from the trading desk. So one of the things I've been working on for the past year, few years is they're all engineers. We're all working on the business. And as times have changed, and more and more markets have become automated and electronic, those old distinctions have really collapsed.
They have they created new sort of strange. I mean, are your are these traders in any way do they see the engineers as threats to their
Well let me put it this way,
for part of my career. I was co head of our equities business and at the peak that business in New York had 600 traders making markets in the US stocks and now that number is single digits. And there are a lot of engineers and there's a lot of software and so if anything that's really the sea change that's happened the people who want to commit capital And take risk increasingly absolutely have to have a math and software skill set and the distinction between what we used to call strap or strategist data scientists here and trader we've actually collapse that distinction we call it traders who code because turns out in 2018 trading and coding are the same thing
Right and you have to do both. We are almost out of time. But I have to ask you I know another sort of important thing to you has been diversity. You are proudly gay, Latino, you've done a lot, I think inside of Goldman to sort of foster a culture of greater diversity. I have to ask you, what do you think of Donald Trump?
I didn't vote for him.
that's a that's a that's a tough one.
What did Gary Cohn tell you about working
Listen what I what I would rather say is like,
Wow, that's really tough one
I think all I can say is I didn't vote for him. He's the president. We disagree on all kinds of things. And certainly on the topic of diversity, I mean, I don't know him personally, I'm not sure what he actually thinks something that we've always done at Goldman done this and all of our businesses is we've said, okay, where a place where we want everybody to bring their talent. And
yes, it's the right thing to do. But it's also the commercially smart thing to do. If you think about it, if we're doing anything that makes someone with a great idea, not want to come and join us because they're gay, or a woman or Latin or an engineer as opposed to trade, right? And then the world changes and we miss it and we excluded them. That's really dumb, right? So that's something that we're passionate about in places like for instance India This is very much in the news india Supreme Court just ruled striking down an old colonial area era law that criminalizing homosexuality and and there we've been operating in India and we've said okay well India has its laws and we respect them here at Goldman Sachs
we respect people irrespective of their sex, sexual orientation. And that's something that I've said before, during and after the election of Donald Trump
Unrelated to his views on diversity. Do you think that he's good for business?
there are certainly aspects of what the administration has delivered
that that have benefits there's no question about that. So we could we could, for instance, talk about the tax reform and it's extremely complicated topic, but there's no question that while it did cause very significant capital, right downs across the industry, the one time effect of tax reform ongoing it's it's a benefit now the question is how are those benefits going to accrue to the society and the planet? And I think it's way too early to tell.
Well, we are. We're out of time. But I love talking to you. I hope you come back. I also have that maybe move. I know you're a native West Coast or so. I hope we get you back here someday.
You'd never know what you're talking with you.
All right. Cheers. Thanks.