AIPIS 200 - A Positive Destruction Revolution with Seth Merrin

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Welcome to the show. This is Jason Hartman, your host and every 10th episode we do something kind of special, kind of different. What we do is we go off topic. So regardless of which show it is on the Hartman Media Network, whether it be one of the financial shows, economics, real estate, investing, travel, longevity, all of the other topics that we have, every 10th episode we go off topic and we explore something of general interest, something of general life, success, value. And so many of our listeners around the world in 164 countries have absolutely loved our 10th episode shows. So that's what we're going to do today. And let's go ahead and get to our guest with a special 10th episode show. And of course on the next episode we'll be back to our regular programming. Here we go. It's my pleasure to welcome Seth Marin. He is founder and CEO of the global institutional trading network entitled Liquid Net. He is the inventor of trade order management systems and started a company on Wall street back in the 1980s. It was sold to ADP in 1996. He is author of new book the Power of Positive Destruction, how to Turn a Business Idea into a Revolution. Seth, welcome. How are you?

I'm very well, thank you.

Thanks for having me on the show.

Oh well, it's our pleasure to have you. And the book is fascinating. The premise is fascinating. It reminds me of the late economist Joseph Schumpeter who talked about creative destruction. Give us, if you would, the premise for the power of positive destruction.

Right.

So I called it positive destruction because to really disrupt an industry or to change the course of your own company frequently it's just better to just knock something down completely to start fresh and build something up new and different. And it's the difference between remodeling a house where you're constrained by the walls, the foundation, the framing. And if you did do that, you could build something incrementally better, but not completely better as opposed to raising that house and you have no constraints and therefore you're only limited by your own imagination to build Something much better in its place.

I would agree with you completely. And most of us, and of course there's such a predisposition for this in terms of our psychology and our environment and so forth, we're just changing the content of things. If we want to do something really revolutionary, we need to, as you say, tear that house down and change the entire context, don't we?

Yes.

And there are many things that I talk about in the book. One of them is creating an unfair competitive advantage. And it's very difficult to create that unfair competitive advantage, something that stacks the deck so far in your favor. So that when you go out to the marketplace and to your prospects, they know virtually instantly within 30 seconds that they would be stupid not to buy that service or product from you. And it's very difficult to establish that when you're changing things incrementally. But if you think about your customers largest problems, your first, second, third largest problem that your customer has, and you come up with a new and different, better way of solving that problem, that creates your unfair competitive advantage and that creates the opportunity for positive destruction.

I doubt anybody listening to this disagrees with this premise. I think it's great. The question though, Seth, is how. How do we get out of our own way, get out of our own mind, get out of our own skin to think in these totally new ways so that we're not working within the confines of the foundation of that house that you talked about.

Right.

So there are a couple of tricks to that trade and there are a number of.

Examples that I give in the book. But the two very simple ones are one chapter I call wtf. So you say what the. Sometimes you're working in a company and you just don't know what, why for the life of you, the company does things that way. Or you take a look at an industry and. Or a company and they have these huge problems and people just look at that as a cost of doing business. The other way that you can look at that is simply taking some things that have been successful in one industry and applying it to another industry. One example that I give in the book is something that is not technological. It's Cemex cement company based in Mexico. You know, cement companies used to supply either way too much cement to a building site or not enough cement. Either way, it ended up costing the builder more money than it should have. And what Cemex did was take a concept from other industries just in time, inventory, and would deliver that cement at the time, and only at the time that the Builder actually needed it. So they never had too much and they never had too little. And just because of that, we.

One innovation.

Cemex, a Mexican cement company, became the largest cement supplier in the world.

I mean, why was that so hard to think of? You know, you look back on those things and you think, well, just in time, delivery. So that they're not calling us in a panic that they ran out of cement, or they're not saying, hey, do we really have to pay for all this extra cement? That doesn't sound very revolutionary, does it? But I guess no one thought of it until then. I mean. Exactly.

That's exactly right.

So everyone just considered that a cost of doing business, because that's how the business has always been done. And then somebody inside of CEMEX said, wtf? And they created an unfair competitive advantage by applying a simple concept that has been used over and over again in other industries to the cement industry. Not a huge revelation. And now you say, of course, why wouldn't everyone think of that? But the first person who thinks of.

That, who thinks in that way, you know, gets the return.

It sort of makes me think of some of these really wonderful, new, innovative business models of the sharing economy, whether it be Airbnb or Lyft, uber, you know, etc. Any of these models where we took all of this, well, we didn't. We're just the beneficiaries of it. But the people who, who came up with it and put a business behind it took all of this sort of unused assets in the world. Of course, many other businesses are finding ways to do that as well with other things, put those assets to work, for example, with people's cars. You know, our cars are typically sitting there doing absolutely nothing 94 to 96% of the time. That's crazy. An airline would never settle for that with a jumbo jet. They would want that plane to be working and amortizing its cost constantly. But with cars, we, we accept that. With spare rooms in our house, we accept it. It's always been funny to me and in the real estate business, how many people want to have a guest room like in their. You know, why.

It'S such a, such a low ROI thing. You know, you could, any guest that would come to town, you could get them a room at the most beautiful hotel in town for less money than cause you to keep this guest room and pay the mortgage on it. Right. It's, it's just sort of odd that we, we think this way.

That's right. But those are great Examples of positive destruction. If you take a look at it from the consumer end, you can see the people who invented Uber and Lyft and those companies, they could say, look, in most cities around the world, there's no taxi system and the bus system and the train system is probably non existent as well. So for all of those cities, you're solving an enormous problem. Nobody thought about it perhaps as a problem. Everyone just owned their own car and you would rent a car. But imagine having one universal app that you can apply, have a credit card, and then you can get a taxi or a car anywhere in the globe from that one app. What a wonderful accomplishment. That is absolutely positive destruction. And Airbnb is the same kind of example where you could certainly go and you can apply on Kayak or all these different websites and find rooms, hotel rooms, but they're not necessarily where you want them to be in whatever part of the city you want to be, or even a decent hotel in lots of cities that you might want to go to. And Airbnb really solved that problem. Yes, it uses leftover rooms that people had available already. But in terms of solving a problem that people didn't even know was a problem and doing it in a very unique and great experience for the user, that is positive destruction.

Sure is. And you know it. You look at things like, we didn't mention this one, but all of these freelancer sites from down at the bottom, a site like fiverr.com where you can get all this stuff for five bucks. Well, not anymore, not as much as it used to be, but. And you know, up to there used to be elance, now it's upwork or, or any of these other, you know, websites where you're, you're putting all these unused assets, whether they be people's hands or minds or computers or whatever, to work. You know, SETI did that with the search for extraterrestrial life using all this computing power that was dormant most of the time. It's truly amazing. In your book you talk about shaking up the market, about business being a series of problems to solve and, you know, the good old usp, the unique selling proposition. Add to that a little bit more and talk to us about the art and science of launching a company.

Well, there is absolutely an art and science to launching a company, and there's certainly an art and in the science to building a company that's going to last. So, you know, this book, the Power of Positive Destruction, is really a culmination of the four businesses that I've started and the 30 years of time that I've been in business to compilation and distillation, just the things that I wish that I had known when I started out. So, you know, if you're going to start a company, how do you go about actually defining the concept, knowing when the concept is right? How do you stack the deck in your favor? How do you go about raising money? And, you know, all of those there are tricks to the trade. So I start with, if you find a concept, go out and validate that concept. Before you start spending any of your own money, go out and validate it with people who, you know, you respect. And if, in fact, when you find that concept, do you know that it's a really good concept? If you can create a unique selling proposition in 30 seconds so that anybody that hears it would be absolutely stupid not to buy that product or service from you, and that's how you know that you've got it so that you don't have to spend an hour explaining it to different people. That's how grabbing it has to be. And it's all about stacking the deck in your favor. There's so many things that are unknown that you have no clue control over. What you want to do is you want to have as much control over your success as you possibly can. And once you have that, I talk about creating credibility circles. So how do you stack the deck in your favor so that when you want to go out and raise money, if this is something where you want to go out and raise venture capital or professional money, how do you stack the deck in your favor so that you know you've created the best odds that you can to actually get that money? And, you know, I go into concepts of credibility circles where if you take smart money, if you go to smart money, if you have this ability, people who are well known in the industry, and if you can get them on your board of directors or an advisory board, that creates a circle of credibility around you? Smart money people follow people feel like they've already validated your concept. If you can get some prospects, some prospective customers who will agree to be on your advisory board and help you do a beta or help define the product, that also expands your credibility circle. And the more expansion of credibility circles you have, you take all of that in one big package to venture capitalists and they will respect that, and you stack the deck in your favor. There's no guarantee that they're going to give you money, but you've done everything that you can to increase your chances of in fact, getting the financing that you need to start your company. There are lots of other tips like that throughout the book, but, you know, those are just key things that people can take away in a short period of time.

Yeah, fantastic, Seth. You know, you have just had an incredible career. You sold one of your companies to ADP in the mid-90s. You've got another company now, Liquid Net. These are solving some problems and you've really thought in new ways in business. Tell us a little bit about your own experience and, you know, maybe if you can talk about how some of the principles in the book apply to these.

Well, you know, Liquid Net was really taking all these principles and simply applying them. So I really did. And we continue to use the principles in the book every day at liquidnet. And, you know, we went from a startup company, really just a PowerPoint presentation, going out and raising money, starting the company, building it, selling it. How do you sell a brand new product? And this is something that, you know, confounds every startup. And so in the book I talk about, okay, well, you know, if you have a really compelling value proposition, you know, the problem is nobody wants to be first, but then if it's really compelling, nobody wants to be second either. How do you solve that problem? And so I go into a concept of selling in groups. So if you have a bunch of peers sitting around the table and it is compelling and they're all nodding with each other, then sign them up all at once. And that is a great way to get over that hurdle, sort of crossing the chasm all at once. And then it's about, we've been in business now for 17 years, and how do you build a really successful, sustainable company? And so we talk about, you know, how do you build a culture? We talk about, you either have a culture by design or you have a culture by default. And you don't want to have a culture by default. You want to design it very carefully. You want to live it, you want to teach it, you want to train on it. And how do you get the most out of your employees? And how do you be the best in the world and how do you manage people? And managing people is incredibly important. And we use the analogy of that of a sports coach. And a sports coach who wants to go to the championship is pretty brutal and brutally honest with his players. And if you have somebody with all the intent but not the ability, that person has to go. And if you have somebody with a lot of ability but they don't show up for practice, that person has to go or if they show up for practice, but they're not really putting in the effort. You have to talk to them and ultimately they have to go. And most managers simply do not manage that way. But if they thought more about going to the championships and being a coach, and a lot of people do coach their kids or different sports clubs, and they understand that from a sporting perspective, but if they manage their companies that way, then their companies would be much better off.

Yeah. Fantastic. Very good advice. Very good advice. So tell us a little bit about Liquid Net and maybe some insight into Wall street too. You know, I love to just call Wall street the modern version of organized crime.

To some extent. The definition, definition is how fast I can take money out of your pocket and put it into my pocket.

No question about it. No question about it. It seems like it's becoming. The pendulum always swings back and forth, right? There was a time when Wall street was only for the wealthy. And then Merrill lynch changed that. I mean, they were one of the first. And then online, online trading with Schwab changed it again, you know, and made it more accessible to the this small investor. But now, and this is largely anecdotal, this impression, it seems like it's swinging back. Kind of like Michael Lewis going on 60 Minutes talking about how, you know, the high frequency traders and Wall Street's a scam and the little guy can't compete. It seems like it's swinging back to, you know, really being an institutional game. I'd love to know your perception of that. And then your platform is built for institutional traders. So I'd love to just have you share with people how that's different and why they need this type of thing.

Let's be honest, it was the investment banks that blew up the world in the 2008 global recession. So the industry has to take responsibility. Even though they neither admitted nor denied it, Everyone understood that. Yes, and there was a lot of government complicity and so on. But ultimately it was the excess of Wall street that brought the world to the greatest financial recession that we've had since the Depression. So, yeah, when Michael Lewis writes a whole book about these high frequency traders and says that the market's rigged, to some extent he's true. And to some extent he's, you know, using his own poetic license to sell more books. But there's certainly truth to what he's saying. And now that our new president is taking off more and more regulation off the financial industry, it's only, I think, a matter of time before the Industry goes back to its excesses, and that becomes extremely problematic and scary. So, you know, liquidnet, we serve the institutional asset managers and the institutional asset managers, they are the ones that manage the pension funds and the mutual funds and the retirement accounts on behalf of all of us. Right? So. So they have grown their assets about 40 times in the last 30 years. Back in the early 80s, when the big bull market started, the amount of assets that were invested with these institutions and sum total was about $250 billion. Today, it's about $15 trillion. And the markets had not kept up. It's like a whole bunch of Home Depots had popped up, but no wholesaler had popped up to service them. They still have to go to the corner hardware store to buy a million hammers, and that just doesn't work well. Liquidnet was created and formed to create this wholesale marketplace to service just the institutions so that when they trade, they can trade in size and we can eliminate the market movement, the supply demand imbalance they would create every time they went into the exchanges, which is a decidedly retail environment. So when we started, there's a whole industry that was built around measuring how much it cost these institutions and the inefficiency of the trading that they did. And it amounted to about $100 billion a year, and that's $100 billion a year tax on all the returns of all the people that invest their money with those institutions. And people just looked at that as a cost of doing business because they never thought about, okay, how do we actually solved that problem? Liquid Net solved that problem in 2001. And 16 years later, we're in 44 different countries. We have operations on five continents, and we're a very, very large player in this industry. We don't trade on behalf of ourselves. We don't risk capital, and there's no way that we would ever blow up the world. We are providing a very valued service to the hundreds of millions of people who invest their money with the institutions that we serve.

So what happens to institutional investors when they try to just trade like the rest of us, the retail traders do? It serves them up stock in small lots. How much more does it cost them? Like, give us some ideas how big this problem is for us, for them?

I mean, it's all over the map, really. And it really varies by marketplace that you're trading as well. But I'll give you an example that the average institutional size order is greater than 250,000 shares. The average execution size on the exchanges is about 200 shares. So, you know, you as an individual investor, if you wanted to buy 1,000 shares of something, would you want to buy it one share at a time? Does that sound like a good idea or an efficient. No, and I didn't think so. And if you're an institution, if you want to buy 250,000 shares, shares or a million shares, and every incremental price is a penny. So if you trade 200 shares at one price and then you want to buy another 200 shares, you have to pay up a penny and another 200 shares. Can you imagine doing that for a million shares or 250,000 shares? Whatever it is, that's the supply, demand imbalance that the institution creates against themselves every time they go into the marketplace. When you install constitute institutional demand against retail supply. So obviously that's the service that we provide. We match up a large buyer with a large seller. It doesn't happen 100% of the time, but when it does, it saves an enormous amount of waste and cost for those institutions. They're able to buy that 250,000 shares or that million shares in one shot. As you would want to buy 1,000 shares, right?

Yeah. Very, very interesting. What else do you want people to know? Maybe any questions I haven't asked you as we wrap it up, One of.

The things that I do go into in the book, and I know that this is important to you as well, is the idea of corporate responsibility. And that's a big thing at Liquid Net. And I believe that that's a big thing within businesses today too. And we would just want to shine a light on that as an example that we use to be able to attract and retain the best people as well. Because I believe that most people would like to be able to give back, but either they don't know how or they're not given an opportunity. And as part of Liquid Net, one of the things that we created early on is something called liquidnet for good, to provide opportunities for our people to be able to give back locally, internationally, to make the world a better place to give a bigger reason than just making a dollar at Liquid Net. And we find that to be an incredibly great motivator. And all the proceeds from the book are going to youth village that we created in Rwanda to house the orphans of the genocide there.

Very interesting, Good stuff. Corporate responsibility and what one of my friends calls the evolved enterprise. Seth, if you would give out your websites, Twitter, handle, whatever you want people to know so they can find you.

The website for the book is positive destruction book.

The company is. It's also on Amazon. The company is liquidnet.com well, Seth Marin.

Thank you so much for joining us.

Jason, thank you very much for having me on. It was a pleasure.

Thank you so much for listening. Be sure to check out hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own, and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. We look forward to seeing you on the next episode.