Today’s guest on the Successful Pitch is Jonathan Rosenthal, he’s an expert at spotting trends and knowing exactly when to make an investment or launch a new startup. All the way back in 1978 he was aware that things were going to be disrupted when the airlines got deregulated and now he’s involved with looking at how things are being disrupted in the shipping industry from when products get shipped from China all the way here. He said, “When you look for industries with rapid innovation but their culture has people being slow adopters, they will then be an ideal target to go after.” He said, “There’s no difference between being too early when you launch and wrong, so timing is everything.” He’s all about collecting, curating, and analyzing data so you can make smart decisions. Enjoy the episode.
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Innovation Secrets with Jonathan Rosenthal
Hello and welcome to the Successful Pitch podcast. I’m really excited to have Jonathan Rosenthal on as the guest today. He’s an entrepreneur, an investor and what’s really interesting is, he’s a logistics innovator. You don’t find many of those around. He’s recognized as a top investor, entrepreneur, and supply chain expert, particularly where deregulation drives macro industry change. And he was retained by the federal court as a lead advisor in the Pacific Gas and Electric 2001 reorganization. He’s represented, get this, $16.5 billion of invested capital that he attained, the largest unsecured credit recovery in history. And he’s had similar roles in reorganizations of Kmart and other companies like that. He led a $28.5 billion of claims in the 2003 reorganization of United Airlines, so clearly he’s used to dealing with big numbers and big companies. Jonathan, welcome to the show.
Well, thank you, thank you.
I’m always interested to hear how people got their start. So, you were a philosophy major and then went on to get your degrees in that but did you know when you were studying philosophy that you wanted to get into this kind of investing?
No, life is serendipitous and so, they always say, “Life is what happens when you’re planning for the future.” So, that’s a little bit of what happened to me. I got out of law school and started practicing law back in 1980 and that’s really all I ever wanted to do. I really wanted to be a lawyer and I loved the law, until I started practicing law. And when I started practicing law, I said that, “I only had one problem practicing law and that was staying awake.” I found it boring and it just wasn’t for me. I’m massively ADD and so I was bored with the practice after about three years. I worked for a large law firm, that may actually have been part of the problem, had I been on my own. I’m not very good at taking instruction.
But in 1983 I saw that there was going to be very significant macro change in the transportation system, as a result of the 1978 Deregulation Act of the airlines. That ’78 Deregulation Act meant that, the airlines and the Civil Aeronautics Board would be deregulated in 1983 and so everybody could fly wherever they wanted, they could charge whatever they wanted and I said, “That is going to be a huge opportunity.” And in fact, when I look back at my career over the last 30 plus years, what I’ve learned is, that where you can find an industry that has rapid innovation and that innovation is driven by something external, that externality can be technology. That externality can be regulation or deregulation. So, lots of things that can drive massive, rapid innovation.
But when you find an industry like that and then on top of it, the participants in that industry are slow adopters. And, they’re slow adopters partly culturally and partly because they have so much embedded infrastructure. When you find that kind of an industry and the airlines were a great example, that’s why I got involved there and that’s really where I started. So, I started in 1983, I had an idea. I started in my upstairs bedroom. My father loaned me $13,000, at the time $13,000 was a lot of money to him.
So, I started a company in 1983 that was a precursor, it ended up being the largest on demand national jet charter service in the country. We were the largest non-scheduled certificated carrier. So, the idea was, gosh, with deregulation, it’s going to be a lot harder to get around, because I predicted at the time, that airlines were going to fundamentally change as a result of deregulation, we were going to have a direct point-to-point system. So, instead of getting on an airplane in San Diego and going directly to Chicago, you were going to have to go through a hub. So, you would go from San Diego, perhaps to Denver, and then you would change planes and you’d go from Denver to Chicago. So, that’s a hub-and-spoke system, that’s a much, much more efficient way to move things. Fred Smith knew that when he started Federal Express. The airlines knew that when they had deregulation.
Let’s just take a minute there because there’s so much valuable information that’s so timely today. So, if you’re looking to see whether your idea is scalable and is the right time, because one of the key issues that I’m always telling everybody when they’re pitching is, why you and why now? And I think what you just tapped into is the whole answer to the, “why now?” and certainly, rapid innovation with slow adapters in the culture is the key hotspot and everybody understands what happened to the airline industry.
If you take a look around you can see that happening, for example with robotics replacing jobs in factories, right? There’s a lot of disruption happening with, in this case technology causing it, cars have been made the same way from high-priced union workers, that’s why there’s such upset over job losses. So, I think what you’re saying that you did back then is just as relevant to what’s going on today, just different reasons for the disruption.
You’re 100% right, John and it is fundamental, that is never going to change. That’s not, when I say that you look for industries with rapid innovation and slow adopters, that is never going to change. There are going to be those opportunities in the world and they exist today and they existed 10 years ago, and they existed 50 years ago. You’re right that timing is quite important. I learned, I’ve made many investments. I’ve made a little over 100 investments over the course of the past 30 years. So, I’ve learned that there’s almost no perceptible difference between being too early and being wrong.
I love that. We’re going to tweet that out. That’s a great line. There’s no difference between too early and wrong, it’s all the same result, right?
It’s all the same result, so timing is important but there are a lot of other factors that come into play and so, when I look back at that first experience of building a company from scratch, literally from my upstairs bedroom and then going through three rounds of venture capital financing, I learned a lot about that. I knew nothing, I was a lawyer, I had never read a business plan.
I literally had to go to the library, get a book on how to write a business plan and really start from scratch. But at the end of the day and I hope from my few minutes with you, that anyone that listens to this, that one thing that they should take away, is that people are everything. The quality of the people you deal with, the relationships you develop are everything. It’s not about a good idea, although good ideas are helpful. It’s not just about timing, although timing is very helpful. It’s about surrounding yourself with great people. People that are knowledgeable, people that are incredibly persistent, that won’t give up in the face of all odds. People who are fundamentally honest and are fair minded. Doesn’t matter how good your idea is, if you don’t have good people, if you’re not surrounding yourself with good people and that could be consultants, it can be partners, whatever it is. If you don’t have good people around you, your likelihood of success is quite low.
It’s a great, great takeaway. I had one investor tell me, “We’re investing in the jockey, the person, not the horse, which is the idea.” And you’ve just underlined it and said it in a whole other way. So many people think, oh I’m going to get funding or I’m going to get someone to hire me because I have a great idea or because my app is so cool or this is the perfect time to fix this problem. All of that’s good but if you’re not the right people to execute it and have the tenacity and grit required to not give up when it gets tough, then you’re never going to make it, that’s really valuable information and insights with all your experience.
And the other part of that is, that everything is tough, everything is tough. I often joke that somebody out there has all the easy deals, because I’ve gotten none of them.
That’s funny. It may look on the outside looking in that it looks easy, right? But it’s, you don’t have a sense of what it all took. Jonathan, I love people like you who are great story-tellers. So, can you tell us a story of what you did with Kmart in that reorganization because I think that’s so helpful, so many people talk about the need to pivot and I’m, that’s just another work for reorganization in a way, yes?
Yup. Well, all of these have their own stories. I was fortunate enough, frankly honored, by the shareholders of Kmart to be asked to reorganize the company back whenever that was, early 2000s, when they went into bankruptcy. So, it’s an interesting phenomena, you show up, and keep in mind that when an industry is going through massive transformation or a company’s going through massive transformation, they try to fix the problems on their own and many times, they might be successful. If it gets to a point where I get involved, it means that all their ideas failed, otherwise I wouldn’t be there.
So, when I showed up at Kmart, it was the day after the bankruptcy filing. They literally had no CEO, the CEO had been let go. They had a rented CFO, they had a consultant that was a part-time CFO. They had sort of a chief operating officer that shuttled back and forth and the executive suite was empty. So, when I showed up, with my team of, I think I had five, four or five people with me and we sat down with what was left of the management team. I asked the question, “So, tell me how we’re doing?” And they said, “Well, we’re losing about $100 million a month.” And I said, “Well, that certainly can’t last long.”
So, we had to do something quickly. This is the equivalent of someone arriving in the emergency room and bleeding out of their aorta. They may have lots of problems, they may have a cut foot, and a cut hand, and a cut head, but you got to fix the big problems first. So, at a $100 million a month of losses, we had to do some things very quickly.
With Kmart losing 100 million dollars a month, we said, “Let’s take three buckets. Let’s take a bucket of stores.” We had I think 2,800 stores. “Let’s take out a bucket of stores, let’s put in the first bucket, the bucket of stores that are making money, in the third bucket, we’ll put the bucket, we’ll put the stores that are losing money. And the middle bucket, let’s put the buckets that are sort of on the edge. Let’s close all the stores that are losing money.” And so in a period of about 90 days, I think we closed 600 stores. That was very, very tough.
I must tell you that doing what we do, which is changing industries. We’re involved in transformation of industries, you’ve got to make some tough decisions. I view what we do, I view what I do as an agent of change. And so, by definition, if you’re an agent of change, you have to make some tough decisions but I will say, and so you have to keep some distance, right, because you’re making professional decisions, much like a doctor is making a professional decision about getting too involved with his patient.
It’s triage time.
It’s triage time. But I must say that the night we closed 800 stores, I had a tough time sleeping. Because, I think we lost 30,000 employees. But without that Kmart wouldn’t have survived.
Exactly, you’d be losing everybody, right so?
Yes, so my saving grace there was that I thought about the 225,000 employees that we did keep. So, Kmart was interesting and it took a while to kind of get through the issues, but you have to start with the big problems. The same was true of a company like United or Pac Gas, you really have to start with those things that are really going to move the deal. And so you focus on those.
Now, more current day, you’ve got so many exciting things going on, starting with, you were appointed, just this year, to the board of Global Infrastructure Solutions and Mayor Garcetti in Los Angeles here, appointed you as the Sustainable Freight Advisory Committee by the federal DOT to the Marine Transportation System. Tell us about what all you’re doing with that world.
Again back to my core thesis, which is, try to find industries that are going through rapid innovation and are populated by participants that are slow adopters. About five years ago, I looked around and I said, “Okay, what’s the next business? What’s the next industry that’s big, that’s going to go through rapid innovation and is relatively slow to adopt?” And what I focused on was the freight ecosystem. That is moving things from place to place, moving things from a manufacturing facility in China to a store shelf in Ohio. That’s what I think of as the freight ecosystem. Some people call it the, “supply chain.” I don’t like to use the word, “supply chain” because it’s really not a supply “chain,” which implies that something is linear, that the path is linear.
Yes it does.
And that it is a series of links, with one link being mostly related to the adjacent length so, that notion of supply chain is incorrect. It leaves people with a false impression. In the ecosystem, the freight ecosystem, everything is interrelated. So, whether it’s a ship, or a dock, or a warehouse, or a truck, or a train, it is all interrelated to the environmental impacts, the economic impacts, the labor issues that are associated with that ecosystem, so it’s a network, it has a network effect. It’s a system, it’s actually a system of systems.
One of the things I’ve been trying to do over the past five years, we made a number of investments. We acquired a midsize third party logistics provider, which is basically a warehouse operator. We have warehouses all over the country. We acquired a number of trucking companies, both long-haul and in the freightage business, that’s the movement of containers from the port to the first distribution point. We invested in data analytics within the logistics base and we’ve invested in real estate in port related real estate infrastructure. That freight ecosystem as an industry is going through massive disruption. It’s going through disruption for a whole bunch of reasons, not least of which is the introduction of the internet. So, things as you know, people are not going to the store to buy things. But that’s changing everything. It’s changing how things are manufactured, where they’re manufactured. It changes how you actually order things, how you get bids.
So, just in simplistic terms, instead of having to deliver goods made in China to a retail store, now they’re having to deliver them to an Amazon distribution center, would that be an example of what you’re talking about?
That or to your house.
Oh, right, okay.
So, the entire distribution system changes, right, it would be, now years ago, your manufacturing might have occurred down the street. You might have been a company here in LA and you manufacture things in a factory in Riverside. Now, all of a sudden you go on the internet and you get bids from companies in Vietnam, and in China, and India, and Korea, and God only knows where. So, the distribution channel has gotten much more complex. Lots of change, lots of innovation there. Then you add to that, things like Global Positioning, GPS. You add to that big data, the ability to curate, collect and curate, and analyze a lot of data. Add to that the Internet of things, which means that every garment, every box, every container, every ship, every truck is going to produce data.
Where am I? Where have I been? Who owns me? What temperature am I? Have I been tampered with? It’s going to produce lots and lots of data. I’ll give you a couple of examples. Today, in the freight business, there are approximately 100 million containers, sea-bound containers. So, going around the world, these big metal boxes, they’re approximately 100 million containers. Less than 1% of those containers are smart.
Wow, that’s, you would think by now that’d be at least half. That’s a big problem to solve, that’s for sure.
Less than 1%. So, the chassis pools, there in, just in the Los Angeles area, there’s about 80,000 chassis. There’s probably less than two or 3% of those chassis had any kind of a brain. Again, where am I? Where am I going? How much weight am I carrying? Who owns me? All of that kind of stuff.
And is the reason why it’s such a small percentage Jonathan, is because no one wanted to invest in it? They didn’t see the return on investment over the time to be able to track that better?
The question you’re really asking is, the side that we talked about a little bit earlier, which is slow adoption. Why is it, that there’s rapid innovation, we know that, we know there’s very rapid innovation within the freight ecosystem but there’s very slow adoption? Slow adoption in an industry can be driven by a couple things. One, it can be driven by culture. So, just generally, the culture of the trucking business, the culture of the shipping business, the culture of the warehouse business, is generally a bit of a slow adopter. It’s not exactly the Silicon Valley. So, it’s a little different culture.
But it’s not just that. It’s also the embedded infrastructure. So, to be able to innovate rapidly, you have to spend money. And when you have money invested, think about the freight ecosystem and think about how much has been invested in the freight ecosystem, how much has been spent. The last terminal that was built in Southern California was about three billion dollars and we have 14 terminals here in Southern California. That’s a lot of embedded infrastructure.
Then you think about the highways, the rail, the trucks, the bridges, the cranes at the terminals, the ports. All of that infrastructure is embedded, stranded costs. So, you can’t just flip a switch and say, “Okay, there were lots of better ways to do this.” The technology is available and becoming more and more accessible every day but it’s not so easy to do. I mean, not a lot of people want to write a check for two billion dollars and build a new terminal.
And that’s what’s required to make those containers quote, “smart”?
No, that’s a different chute. Today we have 100 million containers across the world, to make them smart means you’ve got to have probably new containers or at least have technology implanted on those containers. That’s expensive, and no one has been willing to write that check yet. But it will come.
Well, you almost have to do an analysis don’t you of, how much is it costing us with damaged goods, lost goods, things that are overheated, whether it’s art or wine or whatever that needs to be measured with all those details that could have been not lost or insurance having to cover it, that the return on investment would come in three years, five years, whatever, right? I’m assuming that’s the thinking that goes into it.
Well, it’s partly that and it’s also, it doesn’t do you any good to collect a lot of data and not be able to do anything with it.
Got it, so that goes back to what you said earlier, you need to collect and curate it. That’s really the key.
You have to be able to curate it, and you have to be able to analyze it. So, we’re actually working very, very closely with IBM’s Watson team because they have developed the Watson system, which is quite good at absorbing a lot of data and comparing that data and making sense of it, being able to analyze it. The Holy Grail is being able to take all of that data and predict the future. Let me give you an example, so let’s say you’re a manufacture and I can come to you and I can say, “John, based on all the data that we see in the marketplace. And that includes weather data, traffic data, data about other shipping companies, data about what’s happening on the oceans, data about what’s going on inside all of the warehouses. Based on all these millions and millions of pieces of data, we determined that your shipment has a 14% chance of being two weeks late.”
Interesting, almost like predicting whether a plane’s going to be on time or not.
You hit it on the head. I didn’t make this stuff up. I stole it from the airlines. The airlines are actually quite good, when you get on an airplane and that airplane is full, airlines are running at 90% plus load factors, when that airliners full, you gotta ask yourself, how did they do that? How did they know, just exactly the number of seats and how many people wouldn’t show up? Well, they were able to predict it. Now, sometimes they miss. But the airline knows exactly how many times they miss. So, when they pay you $100 to take the next flight, they knew that there was some likelihood and they have predictive analytics to tell them on a certain number of flights, we’re going to have to pay a certain number of dollars but it’s better in the long run because we keep our airplanes full. That’s an analysis that you can’t do without curating the data.
Great, great insights. That’s really fascinating stuff. Well, do you have a book that you would recommend someone to read about how to be a better entrepreneur or just how to be more aware of spotting these types of trends you’ve talk about?
I’ve got some great books, I read a lot, so there are some wonderful books. I think if I had to choose two, one I’m sure most of your readers have read called, “Good to Great.”
It’s a wonderful book. I would read that at least a couple of times. But the other one that a lot of people haven’t read is, “Where Good Ideas Come From: The Natural History of Innovation.”
When you think about innovation, a lot of people think innovation is an epiphany. That someone wakes up one day with an epiphany and they say to themselves, “Oh my God, I just figured out the answer to the world’s problems, here it is.” When you dissect innovation, when you look back at history and you say, “Okay, the computer was obviously, everyone would agree, a terrific innovation. How did that happen?” And you begin to dissect that and you learn that innovation is the result of many, many steps. It is an incremental process. The computer started back in the early 1800s.
Yes, I was watching a movie about that whole thing of during the war and even before, so the 1800s is even earlier than people anticipate but yeah, it’s taken, or the new movie “Hidden Figures” about how NASA used it by hand. So, all of that innovation doesn’t come overnight as you said. I love that.
But when you look at innovation and that could be everything from, the innovators, “Where Good Ideas Come From: The Natural History of Innovation,” is probably the book that I learned this from, things like the lead pencil. Things that really changed the world in a pretty interesting way but when you dissect those, those big innovations in history, you find out that it was an incremental process and it involved many, many people and many steps. We sometimes say, “Wilbur and Orville Wright invented the airplane.” And then you look at the history, you read about the invention of the airplane, you find out, oh no, no, wait a second. They were at the tipping point and so they get a lot of credit but really they were a piece of the puzzle.
So, I like the innovators, “Where Good Ideas Come From: The Natural History of Innovation.”
Yes, well you are certainly busy and you’ve got your hands full with everything, all the innovation you’re doing now. But if someone was ever interested in possibly having you invest or come in and do what you did for Kmart, what’s the best way for people to engage with you?
That’s a good question, probably LinkedIn or something like that, so I’m on LinkedIn.
Well, we can certainly put that in the show notes.
Yeah and again my real focus these days is not doing turnarounds of companies as much as investing in the freight ecosystem because it has such a huge impact on the economy, on jobs, on the environment. It’s really been a fascinating ride.
Great, well Jonathan, I can’t thank you enough for being a guest on this show today.
I’m delighted. I appreciate having the opportunity.
- LinkedIn: www.linkedin.com/in/jonrosenthal
- Book: “Good to Great” by Jim Collins
- Book: “Where Good Ideas Come From: The Natural History of Innovation” by Steven Johnson
- John Livesay Funding Strategist
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