Cowboys Like Us: Investor Nick Hanauer on How to Think About Breakthroughs in Business and Society (Part 1)

Last week was a pretty good one for Nick Hanauer. When I visited his office, he was basking in the glow of the mid-afternoon sun—and the afterglow of President Obama’s signing of the much-ballyhooed healthcare reform bill. (Yes, he’s a staunch Democrat.)

But I wasn’t there to talk politics. Hanauer is one of the Seattle area’s most successful investors and businessmen, and one of its most influential thinkers. He is a founder of Second Avenue Partners, an investment group focused on early-stage companies. He was the first non-family investor in (and a board advisor until 2000); the founder of Avenue A Media (which became aQuantive and was sold to Microsoft for $6.4 billion in 2007); and an investor in such diverse companies as Insitu (sold to Boeing for some $400 million in 2008), Newsvine (sold to in 2007), Market Leader (formerly HouseValues), Modumetal, and Qliance.

He is also a political activist, a die-hard science buff, and an amateur astronomer. And he’s giving the opening keynote today at our Xconomy Forum (“What’s Your Breakthrough Idea?”) at the University of Washington at 1:30 pm. He will set the table by discussing where “breakthrough ideas” fit into the overall taxonomy of startups and entrepreneurship, and he’ll give examples of some transformative ways of thinking from his own experience.

To whet my appetite, and those of our readers, I sat down with Hanauer for an extensive and wide-ranging chat. I should have known better; it was like partaking in a 15-course dessert buffet just before the main meal. But it was vintage Hanauer—talking in depth about not conforming to societal expectations and how to think creatively about new ideas and metaphors, reflecting on why venture capital doesn’t work as a sector, quoting famous philosophers, and discussing the one area in which he would seek omniscient advice if he could. All of that sprinkled with insights from Amazon, Insitu, and other prominent companies.

Here is an edited transcript of the first part of our interview:

Xconomy: You’ve talked about the importance of new metaphors in thinking about potential breakthrough ideas. What do you mean by that?

Nick Hanauer: OK, here’s a non-business example of what I mean by that: The entire edifice of modern economic theory—Chicago school, efficient-market hypothesis, market fundamentalism, that has dominated our political discourse for 30 to 40 years—is based on the understanding of the world as a linear system. Modern economic theory requires the system to be linear in order to make the numbers add up. It requires humans to be rational calculators of their self-interest. The only way it works is if you assume every human can make an instantaneous net present value calculation about what they should do at every moment. What that does is it creates this idea in your mind that the market is this perfectly efficient machine.

The dominant narrative has been that markets are perfectly efficient. If it’s perfectly efficient, then the market is always right. And if it’s always right, you also have to believe, among other things, that the rich deserve to be rich, and the poor deserve to be poor. How could it not be, if the market is always right? You have to believe that any civic intrusion into market constructs is an abomination, because the market is always right. These things have to be true if that’s your metaphor for understanding how the economy works. But if you understand the economy for what it is—it is a complex, adaptive system. Our market isn’t just like an ecosystem, our market is an ecosystem. It’s complex, it’s adaptive, and it is shaped by the evolutionary forces identical to the forces that are at work in Puget Sound.

X: So what’s the breakthrough here?

NH: If you understand the market in that way, then it forces you to reckon with it like a giant garden. In that garden, we get to make choices about what’s going to grow, what we’re going to eat, and so on. All of a sudden, a civic intrusion into that structure doesn’t become an abomination, it becomes … Next Page »

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