Chapter 1: What insights does Tony James share about building successful firms?
If you think about the development of a successful company, there's kind of an S-curve. It starts off small and entrepreneurial. Then there's this kind of escalation where you create a lot of value and a lot of size. People know Blackstone today, a trillion dollars in AUM. It did not look anything like that when you joined.
Running an investment organization like Blackstone, I think you almost have to be a really good investor. If you're going to catch the signals early, they're never obvious. By the time they're obvious, it's priced in.
You led the Series A into Costco. Charlie Munger was still on the board. You guys served together for 30 years. What did you learn? Focus, focus, focus. Flawless execution of details. Build for the long term. Everybody that I spoke with literally attributed the success that they've had in their careers to you. If a young person came to you today, what would you tell them about building a career?
Um... What does it take to build a firm that lasts across decades? In finance, most success is measured in funds, but a small number of people have built firms, organizations that compound talent, capital, and culture over time. Tony James is one of them.
From joining DLJ when it was a subscale firm, to helping transform Blackstone into a trillion-dollar asset manager, his career traces the evolution of modern private markets. The question is not just how to generate returns, but how to build systems that keep generating them.
A16Z General Partner David Haber sits down with Tony James to talk through the decisions, inflection points, and principles behind that kind of enduring success.
Tony, thank you so much for being here. You're very welcome, David. You joined DLJ as an investment banking associate in 1975, I think just after business school. Maybe give us a reminder of what the shape of that business looked like at the time.
Well, if I'd known what I was doing, I probably wouldn't have joined DLJ. It was nothing, honestly. It was a sub-major firm or a sub-sub-major firm, as they used to say in those days. So there were at least 100 firms bigger than it was. We had an investment banking team of five. We hadn't done a financing or a merger in two years. So we hadn't done any business in two years.
But I liked the people. I liked the unstructured nature of it.
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Chapter 2: How did Tony James contribute to the growth of Blackstone?
And I said, wow, you can buy these huge companies with almost all debt. And... It struck me that DLJ at the time was competing with dozens of other firms that had more of everything than we did. More bankers, more clients, more of a track record, more capital, more distribution. There was nothing we had that should win. So that struck me as a way to kind of end run.
They weren't really doing it themselves. It was a new sector. We could buy clients we couldn't actually win competitively and then do all their investment banking business. And that really fed on itself. Out of the, we built a private equity business. I think our first fund had a 90% IRR.
Those days it was easier because prices were lower, companies were more under managed, and essentially you could borrow 100% of the purchase price. So just by rolling your fees, you could kind of own the company. And then that drove, then we had to, could and had to build a high yield business and other debt businesses. A lot of those were our biggest IPOs. One thing led to another.
So we built the whole investment banking business Cheek by Jal was the principal business. So it was, in that sense, it was a true merchant bank. There was no reason, really, that a KKR or a Forsman Little that were the big players back then should ever have existed. Your old firm, Goldman, should have beaten them. Yep. But the big firms were ambivalent about this business.
They were ambivalent because it wasn't quite an agency business. Yep. There were old line bankers that didn't understand it and didn't actually want to understand it, really. They just didn't want their clients to complain about competing with something that the firm bought. Right. And so that institutional ambivalence gave us a huge runway that we just plowed through.
And it became a magic synergy between the investment banking and the merchant banking. And ultimately, we built funds of funds and real estate businesses, venture capital. We had a business back then called Sprout, which was One of the big three. How can the 70s be gone now?
And I want to dig into the merchant banking business in a bit. One of the folks that I spoke to in preparing for this conversation was Bennett Goodman, who you've had a long history with. And he told me a funny story of you recruiting him when he was, I think, at Drexel at the time. And Mike Milken was sort of
top of the power chain in terms of like the junk bond ecosystem and kind of the growth of the private equity world. And he said, he asked you, what makes you think you can compete with Drexel? And you gave an amazing answer, or at least his recollection. I'm curious if you remember that conversation that you said. I don't. What did he say?
You basically said you had the whole theory for why Drexel's business model was flawed. It was basically that all they had to do was sort of say that they had high confidence that they could raise the capital. And you had a very different point of view that you were going to actually have dedicated pools of capital. You were going to start effectively a bridge fund. Bridge fund, right.
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Chapter 3: What lessons can be learned from the evolution of private markets?
Yep. Drexel had the high yield, the highly confident letter. If we said we were highly confident, people would say, well, so what? You don't matter. So we created this bridge fund and we turned it heavily. We bet the fund and we bet the firm on every bridge loan. And ultimately that lack of capital became an Achilles heel. But we had a remarkable stretch of...
making the right credit assessments and the right market assessments. So every time we got, it would win the business and we would have the distribution. Because we were often controlling the issuer, we could put a little extra VIG in the interest rate. So we became known as the distributor of high yield that people should buy on the issue because we'd price it to trade up.
With debt, it doesn't have to trade up much. It's not like equities. It doesn't have to trade up much to be juicy. So we used that and we developed quite a following. And then when Drexel went under, the bigger firms were also ambivalent about high yield. It had a taint, especially when Drexel went under.
And so we were sitting there in second place, and we just inherited the world in that sense, and it became the most profitable part of Wall Street. We accounted for all of 40% of all trading volume in high yield for 12 years. It was a hugeāDrexel's going on was a huge boost to our banking business. It didn't really help our principal business much, but it was a huge boost to ourā
You were able to recruit like real talent from Drexel. We were. Ken Mullis was a big one and Bennett was huge. And although Ben was only an associate at the time, but I always believe in young talent, great young talent and unleash them. So that's always served me well throughout my career.
Totally. And that has definitely shined through in a lot of my conversations. I mean, maybe just kind of talk through the inception of the merchant banking kind of false platform and how that grew. Ultimately, I think it became one of the largest or the largest in the world at the time. Right.
Well, again, KKR does that Huda ideal back in 1980. I said, wow, this is something we can do. We don't even have to have a client. We're the client in a way. And so I went to the firm and I said, we should do this as I was running M&A at the time. which in and of itself was some kind of distortion of reality because I was like 30, maybe not 30, 29. And they said, go back to work.
We have a principal business called Sprout, the venture capital. And they know how to buy things and you know how to advise. So go back to advising. And I sent them a few deals over the next year or so. And they said, no, that doesn't work. And then someone else would do it and make a lot of money. And I kept going to the firm and saying, this is ridiculous.
These guys don't know how to get out of their way. So ultimately they gave me the responsibility and we started off with a landmark deal. I think it was the third biggest LBO ever called. We bought the retailing subsidiaries from Household International. We ended up with Vons and Ben Franklin, TGI. and coast-to-coast hardware stores. And we sliced and diced and sold them all. And we closed.
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Chapter 4: How does Costco's culture drive its exceptional outcomes?
That put us on the map and led to us raising a fund, and it was a very high return fund, so that then we got a lot of follow-ons. But we were pretty aggressive about starting new businesses. We started a secondaries business, a fund-to-funds business, real estate, as I mentioned, all these things, and they all pretty much all worked. The private markets in those days was not as competitive.
And prices were lower as a multiple of EBITDA and whatnot. And companies were asset heavy. So there was a lot to work with there. And we built that business when we sold DLJ to Credit Suisse. It was about a $29 billion AUM business. Blackstone at the time was high teens. So just to put that in context. And- So that was a key asset.
Once it got put into a Swiss bank, they had all of the institutional issues and the lack of commitment to the principal business that all the other big firms had. So it kind of started to waste away.
And what was the kind of core motivation to sell DLJ to Credit Suisse? Was there some like a macro reason or just good timing? I'm just curious.
I think there were macro and micro reasons. DLJ had had a hell of a run, as I mentioned. And this was 2000. And honestly, I looked around and said, wow, the market's at some kind of peak. And at the same time, the industry was changing. Glass-Steagall was coming down, so the banks were coming in with very deep capital pockets.
Regulations were changing about how closely research, which was DLJ's strength, could work with investment banking. Markets were changing. We'd gone from negotiated rates to very low commission rates. And so the big firms were essentially doing the cash business on a break-even basis to make money on the derivatives.
We didn't have a derivatives business, and we didn't have the technology to build one. Interesting. Um, and then the, our success in, in, in high yield and, and, and private equity meant we'd running out of balance sheet. Our bridge fund was $1 billion. And all of a sudden you were doing $1 billion bridge loans. So you can do one deal at a time.
And if one mistake and you're out of business, because a hundred million of that was ours at the bottom, by the way, which was 40% of our equity or something. So, so. It just seemed to me like everything looked great right then, but was unsustainable. And I tried to push the management. I was number two, but I tried to push the CEO to kind of like invest in the future a little bit.
But he didn't really want to, honestly, and it would have meant some tough years for earnings. So we decided to sell the company. And I'd say, I think in retrospect, a lot of people blame me for that decision, for pulling the rug out for them, because working at DLJ had a little bit of a, you know, kumbaya feel to it that people still talk about. They still get together twice a year.
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Chapter 5: What strategies did Tony James implement for talent development?
That's amazing. You might be the best retail venture capitalist of all time. Yeah. I guess, how did you meet, you know, Jim Senegal and Jeff Brotman? And then ultimately, like, what did you see in them at that time?
Well, they walked in, they walked in unknown to me and said, gee, we have, we have what we think is a really interesting opportunity. There was one unit like that called Price Club that had opened in San Diego. That's where I grew up, yeah. Where Jeff had been the number two, sorry, Jim had been the number two there.
And Jeff recruited him to come start Costco and open the same thing in the Pacific Northwest.
Yep.
Um, there was a research report from a Goldman analyst named Joe Ellis that sort of laid out the business model and it was very, very powerful and elegant. Um, and so, and it was proven in one case and, and the Pacific Northwest was a very good market, very affluent, very good market. Jim was one of the best executives I've ever met. Maybe the best. He's not, he's driven.
He's excellent on the smallest details of execution, but also the biggest principles. He knows exactly, you know, he never compromises. He never does something that's expedient. It's always about serving the customer and driving the competitive advantage to where no one else can go. Just relentless about that. And incredible standards of excellence. And focus, focus, focus.
And, you know, the guy traveled 225 days a year. So, you know, as a CEO. And was at every opening, knew the price of every item in the store. And so you can't meet a guy like that who's a total force of nature and not be blown away. At the same time, he was coupled with Jeff Brotman, who was a clever lawyer, real estate lawyer, and also owned some retailers up in Seattle.
So he really knew that market. And the economic model of the store was so powerful that it was compelling, I thought. And you're not like betting on a new technology. Is the market going to embrace it or is it going to work? Because it was pretty prosaic and someone like even me, I could understand it. But also there was a working model. So we did that and then...
And it was one of the all-time great investments, I have to say. One thing I learned is a lot of people, I think, hold things too long. I'd probably sell too early.
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Chapter 6: How did Tony James approach leadership and succession planning?
And how they treat their employees and ultimately the value they deliver back to the end customer by keeping prices low and really making money through the membership more than they do on margin on the products. But I'm curious if, I mean, the business has grown obviously so much, I mean, from nothing, you know, to what it is today, you know.
Yeah, 250 billion.
Yeah.
Yeah.
I think there's some similarities between DLJ, Costco and Blackstone actually, but focusing on Costco, we built that, it was first of all, all about taking care of the customer. If you really take great care of the customer, then, you know, a lot follows from that. You have a robust business model with a fantastic following franchise, and you get a lot of growth, and your shareholders do fine.
So take care of your customer. Build quality long-term. Don't ever... worry about short-term expediency. Gee, we're having a soft quarter. Let's raise prices or let's sell some real estate. We don't have to own the real estate or this other thing. It's so easy to get enticed into short-term expediency.
Similarly, people have been coming to us for years of, you should buy this or you should buy that. And And we really, we've always had so much growth in doing just what we do if we do it really well. We just have never been distracted by that. So focus, focus, focus, execution, flawless execution of details. build for the long-term, build quality, and keep driving your prices down.
Keep enhancing your value to your customer. Never let that be static. So the more value we give, so whatever, if Costco can go find a new source for batteries and save a nickel, 100% of that nickel gets lower prices. None of it goes into higher margin. And so they're always driving down prices. So their customer value proposition keeps growing. Most companies-
either nibble away at it because they're tempted to have a little more earnings, or they let it be static. And Costco's always driving to increase the customer value proposition. So I think those are all good lessons for any business.
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Chapter 7: What are the challenges and opportunities in private credit markets?
He wasn't blind. But sometimes that sense of confidence, and I tried to put that in the businesses that I've run too, that sense of confidence. You are good. You're really, really good. Believe in yourself. You can do anything. And people lose that. that Charlie could distill everything into a soundbite. You know, I, we were, we, I was,
you know, they owned a newspaper and I think wall street journal was up for sale. And I said, Charlie, what do you think about newspapers? He says, it's the newspaper business. This is not a business, Tony. It's an oil. Well, it's depleting to zero. And I said, well, what about the wall street journal? Well, that's not a newspaper. That's a trade journal. I mean, everything gets right.
He distills it into such an accessible, understandable, um, a way of thinking about things. Charlie was my, uh, my rock. I talked to him every two weeks, whether we were in the board or not, we talked about the world. There are many times when I'd say, Charlie, I'm starting to worry about this other thing. And he was an absolute rock.
So, I mean, I love the guy, honestly, I have a bust, a bust of him in my conference room, my office, a real mentor, uh, so loyal, so supportive. And, um, And very, very high principles. There was no cutting corners on anything. Totally. And he was still coming to board meetings at like 98 years old.
I mean, it's pretty unbelievable. All the way to his death. Yeah. I mean, that is remarkable. So I want to transition to Blackstone, which I think most people know you for because you had such a huge impact on the growth of that business. You know, talk through kind of when you first met Steve Schwartzman. I know it was kind of before you joined the firm. Sure, yeah.
And what was sort of the conversation like, you know, for him getting you to join? Yeah, okay.
Yeah. I think our first serious engagement dates back to 1989. I think it is when we were working on a deal together to buy a railroad company called CNW. Yeah. And it was a hairy time because the markets were falling apart. We were sort of pregnant with this public bid for this railroad company.
We were an equity shareholder, but we were also providing all the high-yield debt and the M&A and on and on and on and on. Part of our business model, put a little equity in and get all the rest of the banking business. And we had a big high-yield deal which had a reset note. And Steve was balking at the concept of a reset. No, I think we're pricing at 15% and it could reset up to 18%.
Think of those rates today. Totally. But Steve said, no, I'm not going to do the reset because I know you guys will reset it to the max. That's just, you know, and this is, well, Steve has a great nose for how to get screwed. And how to avoid it. Yeah, and how to avoid it. But what might happen?
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Chapter 8: How does Tony James view the future of investment firms and markets?
Yep. And we couldn't sell it without the reset. And, of course, what that tells you is the market all thought it would be reset. Interesting. Right? Or at least you want to take the risk out of it. So we kind of went round and round and round on that. We had done a bridge loan, so we needed to get this financing done.
And, you know, the story is Steve said, well, are you willing to put your own personal money on the line? And I said yes. And so we had, okay, if it resets to the max ā you'll pay me a certain amount of money. And I said, okay. Frankly, the amount I would pay Steve was dwarfed by the amount the firm would lose if we didn't get the deal done.
And Steve might've knuckled under anyway, but to me, this was a very good example of losing a battle to win the war. And I felt like if I could give Steve a, you know, a pound of flesh, then I could get the whole thing done.
And the idea of someone putting money up and actually if Steve had to pay more interest rate, which wasn't Steve really, it was the LPs, had to pay a hundred, I would lose some money. All that appealed to him. So that did the trick. And he agreed. We got the deal done. And, you know, we both look back on that slightly differently.
But I think we each accomplished something in our own heads, which is sometimes what it takes to make a deal. So then after that, I was running investment banking for a long time. And Steve was a client, not necessarily the closest client. He did a lot with Chemical Bank and Jimmy Lee and other banks. But we would have a casual, like a once a year lunch or something like that.
And then after DLJ was sold, I had to agree as part of the condition of the merger agreement to stick it out for two years. No other employee did, by the way. But I stuck my two years out and then decided that it wasn't fun. Yep. And that I wanted to do something else anyway. My DLJ that I felt that same sense of proprietary ownership for that I felt for Costco was gone. Yep.
Steve called out of the blue and said, can we have lunch? And one thing led to another. And he said he'd been looking to hire someone for a couple of years and would I consider coming in and helping him run the firm? And my first reaction was, geez, Steve, you're a tough boss. And I really haven't had a boss in like 15 years.
And I don't really, you know, DLJ went public and went private a few times. So I didn't really need to work. And I said, Steve, I don't know that I want to be told what to do or what not to do. I mean, I haven't had that a long time. He said, no, no, no. You come in, you run the firm day to day. We'll talk all the time. I'll back you if we don't agree. By the way, we agreed 98% of the time.
I'll back you. But if performance is not good, I reserve the right to get rid of you. I said, that's fair. So we cut a deal where he could get rid of me at a drop of a hat. I was vested up to the minute in whatever I had. And we agreed to try it. Like so many entrepreneurs, we've all seen this, right, where they say they'll ā they want to bring someone in.
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