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Go Big or Go Home

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Stephen A. Schwarzman is Chairman, CEO and Co-Founder of Blackstone, one of the world’s leading investment firms with $571 billion under management.

 

 

 

 

 

 

 

 

 

 

by Kenneth Rapoza

If walking on hot coals at a weekend retreat, or a few how-to books were the keys to success, many people’s dreams would come true. They’d be outliers. Stephen Schwarzman is one. How good timing and a desire to think big made him the type presidents seek advice from.

Late March, Stephen Schwarzman was on the phone with President Donald Trump to discuss the economy under quarantine.

Sure, he’s the founder of Blackstone. Yes, he’s a Yale man and Harvard Business School graduate, but how many entrepreneurs are sought after by heads of state for their advice? Maybe couple of hundred, but did they take a company with a single $50,000 M&A advisory contract (and 500 rejection letters) and turn it into a $500 billion private equity firm? Does the President call on them for insight?

It’s like being a professional athlete. It’s very difficult to make the team. It’s harder to stay on one once you’ve made it. There were no guarantees of success for Stephen Schwarzman.

“Most people spend very little time telling you about the pain and low points that come with starting a business,” said Schwarzman. “I have always used three key tests to determine whether a new business is worth it,” he said, outlining them: Is the upside big enough? Is it unique? And, timing is everything.

Timing is perhaps the most important in Schwarzman’s journey to the top. The market you are targeting with a new business should be lifting off with enough momentum to make you successful, he believes. He’s not a big risk taker. He is, however, an outlier of American business.

Timing is Everything
At the height of the 2008 recession, author Malcolm Gladwell’s book “Outliers” revealed how the Beatles became the Beatles, and how Bill Gates made the personal computer as ubiquitous as a refrigerator. A key takeaway was the importance of timing and putting in the work so when the time came, they were ready for their close-up.

Schwarzman’s business story is one of timing, too. He grew up working at his father’s curtain and linens store. It was just after World War II. The U.S. middle class was being formed, and suburbs were being built.

“All these new housing developments were going up and they all needed the kind of merchandise we sold in the store,” he recalled. So, he gave his dad an idea: let’s go nationwide because…timing.

“I thought it would be logical. If Sears can do it, why can’t we?” he said. But his father was risk averse. Happy where he was in life, he rejected his son’s expansion hopes and kept it local.

“I couldn’t understand why somebody who is smart didn’t want to do something that I thought was an easy success,” he recalled about his father at the time. “He didn’t have that desire, and I found it curious because I had it and he didn’t. He was a great father. But he wasn’t an expansive entrepreneur.”

500 Rejections
For Schwarzman, logic and reasoning are two go-to sign posts worth following. He erred early on with assumptions. He and Peter George Peterson, the chairman and CEO of Lehman Brothers, decided to create Blackstone in the mid 1980s. He assumed that because of their background “everyone would want to do business with us.”

They sent letters advertising their services to 500 people they knew. No one responded—at first.

“I said to Pete, ‘Do you think the post office lost all of the letters?'” Blackstone was a lead balloon. “The world wasn’t ready for us initially.”

The idea was to start with a boutique M&A business, then create a private equity fund and open other business lines with compelling investment opportunities they could market to investors.  Three weeks later, they got a client called Squibb Beech-Nut, a pharma company, who hired them for a small advisory job. It was their first $50,000. Add seven more zeroes to that, and you would have the approximate amount of assets them manage for clients today. “The world wasn’t ready for us initially,” he said.

But when the merger cycle turned, their connections gave them enough crumbs to eat. Over time, they built up their expertise in what they could offer clients.  “It was scary and depressing,” he said. “If you go from a big setting (Lehman Brothers) to a micro setting of two people and a secretary and you’re failing, you sort of go, ‘What have I done with my life?’”

Successful companies don’t just happen because of good education and good connections. “Raising money and recruiting good people is very hard,” Schwarzman said. “Even when you are small and your resources most constrained, finding the right people is the most important thing you can do.”

For him, new hires have to share the company values. This is especially true for new companies. People you bring on board have to understand the mission and fit into the culture of the business.

Schwarzman is thinking of the future now. One of his favorite future sectors is artificial intelligence. “I’m no engineer or scientist, but the one thing I see every day is that most companies and industries are about to be transformed by artificial intelligence,” he said.

Considering today’s headlines, AI could be used in the medical field, such as increasing the speed in diagnostic testing. The post-coronavirus world is going to be big on this, much in the way the post-9/11 world was big on cybersecurity and lead to the creation of the Transportation Security Administration. Countries will never want to be caught flat footed by a pandemic again.

“I was in the hospital the other day visiting my brother and there was a robot cleaning the floors,” he said. “And delivering medicine. That’s now. This is just getting started.”

The future is unpredictable. That’s why everything Blackstone invests in has to be part of the three keys: do people need it? is their upside? and is the timing right? They don’t want to be too early.

“We have to protect capital,” he said. “We have to be responsible, thorough, and we have to avoid risk. The world doesn’t actually like pioneers. If you’re too early, your risk of failure is high.”

Beyond timing, new businesses need consistency. The consistency is the workout. It’s the grind.

Schwarzman learned to enjoy the workout and the grind while running relay on his high school track team.  In a one-mile relay race, he pulled a muscle during his portion of the race. At that point, a runner has two options: fall down or run in pain.

He pulled a Forest Gump and just kept running, handing the baton off to his best friend, Bobby Bryant who ran the last leg and made up Schwarzman’s lost time.

“Bobby ran so fast…it wasn’t even possible!” he said. “He put his arm around me afterwards and said ‘I did this for you’,” the 73-year old Schwarzman said. It was a nice recollection of youth; of teamwork and going through the pain.

The people on the team need “to be committed to similar objectives which is don’t mess up, avoid risks, don’t lose money,” he said. “Create something wonderful…which you can do.”

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