John Kuhns (M.F.A. ’75), a former sculptor and Maroon staffer, is a leading investment banker and venture capitalist in the alternative energy market. He lectured on April 5 about his new novel, China Fortunes, and talked with the Maroon about creativity in investing, Chinese business culture, and his future endeavors.
Chicago Maroon (CM): How has your artistic background and time on the Maroon influenced your later experiences?
John Kuhns (JK): I would say the practical utilization of writing skills was very important for me—something I didn’t have when I arrived, but happily I improved by the time I left. Really, writing, and speaking as one writes, in any aspect of business is critically important because in the end, all business is about getting someone to buy your product, whatever it is, a widget or a service. They’re always being bombarded by other supplicants so you’ve got to, when you get to the opportunity, get to the front of the line, and be able to connect the dots for whatever you’re doing and persuade, in so many words—by the way with no adverbs and adjectives. In other words, the minute an audience reads those, Hemingway’s audience, or an audience today hears them, they start to get suspicious.
Beyond that, though, I’ll tell you a little bit, kind of a funny story. I was being interviewed when I was at Harvard Business School for a permanent position at this very prestigious investment bank, a place called First Boston, and the person who was interviewing me was a little stiff, as was generally the case for people who worked with that firm—not everybody obviously, but this guy was pretty tightly wound. [He] said to me, “What did you do before you got to Harvard? I’m looking at your resume. This can’t possibly be right. It says you’re a Master of Fine Arts from University of Chicago.”
I said, “That’s right.”
He said, “What in God’s name would give you the idea that you could go from something like that to working at First Boston?”
He was pretty, pretty abrasive and I was trying to, again, convince him. I said, “Well, I was told that investment banking relies on creativity, and so I thought my arts background, which obviously depends on creativity, would be helpful.”
He says, “Investment banking is evolutionary, not revolutionary.”
Well, tell that to Steve Jobs.
Investment banking is no more static or requiring rapid changes than the underlying product. The finance companies historically, you insisted on cash flows and earnings. But today, companies can do a public offering based on their patent portfolio. You’ve got to be creative enough to convince a buyer of a mutual fund, that that’s maybe more important than having an underlying black bottom line, a positive earning. So my view is writing was important for what I was doing. The underlying creativity that I developed being an artist was equally valuable.
CM: What has motivated your career changes?
JK: Well, let me just say this about anyone looking at a career or changes in their career. Don’t ever make a decision based on money. It’s the worst possible thing one can do. What one really has to do, and I had an opportunity to think a lot in Midway Studios with my headphones on—I was a sculptor pounding away on a rock there, no stereo headphones by the way in 1974, so I had a lot of time to think about what I wanted to do, and what I concluded was the best thing I could do is do something that I was good at. Why? Because that would make the day more pleasurable. What I’ve also found as I’ve winded my way through my career is that if I’m doing something that I’m good at, the success comes.
Now, furthermore, in terms of business plans, you always have to pay attention to the world around you, just like an artist. I was a reductive sculptor, so I would take a block of stone and reduce it to an image, whereas say, someone working with clay is an additive. But either way, you have to adjust to changes going on, so with wood, if you’re carving a piece of wood, if you get to a knot and that was where the face was supposed to be, you’re gonna have to change that figuration. And business is the same way.
Look at Kodak. Those guys had the world by the tail, 20 years ago. They actually had a digital camera. They actually had one of the first digital cameras. So what happened? They didn’t adjust in time. They didn’t look at the world around them and make sometimes difficult decisions. I’ll tell you a difficult decision—I spend every month in China, and I’ve done that for seven years. Every month I’m there two weeks and home two weeks, and believe me, that is not altogether pleasant. Don’t get me wrong--I love China, I love my employees in China, my friends in China, but to get on that Air China flight, 982, leaving JFK and going to Beijing, every month for two weeks, saying goodbye to my wife and kids--why do I do that? Because right now, that’s where the business opportunities for me are the best. That’s where I organize my fund. So I went to institutions and got them to give me $250 million to invest in China on their behalf. That’s what my fund does there.
However, to get back to your question, can I do that today? Can I do fund two in China? No, I can’t. Why? The valuations in China are too high. I could put money into a business and get control of it, for let’s say four times earnings, and think about an exit where we could do an [initial public offering] at fifteen times earnings. Today, if I wanted to buy that same company, I would have to pay Mr. Wu for control twelve times earnings. The spread isn’t there, so what am I doing? I’m taking advantage of what I have. I’ve got my relationships with major players in China and we’re partnering in businesses elsewhere. Not in China, valuations are too up. We’re doing an ethanol plant in Mozambique where we can get in on the ground together, me and my Chinese partners, in Mozambique for two, three times earnings and take that thing public for fifteen, so you have to adjust out there.
CM: It seems like this business thrives in a period of deregulation. Do you plan to capitalize on that in the future?
JK: What you’re always looking to exploit in business is a change. That is the definition of new opportunities in business. So what kinds of fault lines typically lead to the best business opportunities? Sometimes they’re in the business themselves, like changes in regulation. Clearly, that always opens up opportunities, whether it’s in electric power, banking, or any other industry that’s regulated. But other changes are equally important, and they have to do sometimes with the, let’s say, the external environment, like what people are willing to finance. I mentioned earlier that historically, people used to say, “I want to finance an operating company. I’m an investor, or I’m an investment banker, at Goldman Sachs. I want to look at operating companies. That’s what people want.” Well, maybe, maybe not. If you went to people ten, twenty years ago and said to people, “How about a company that just develops intellectual property?” They’d say, “Wait a minute, what’s the cash flow, what’s the bottom line?” “Well, nothing.” “Well that sounds like a research organization, that’s a bunch of funny-head think tank guys, I’m not interested.”
Look at the environment though. Here’s what’s happening as companies like Google and Apple build up these hoards of cash in their technology-driven enterprises. Where’s the growth in that coming from? It’s going to come from pools of patents. We talked about Kodak a little earlier? Kodak’s highest value in their bankruptcy filings is their pool of patents and where they had once taken those for granted, other people see a lot of value. Just to give you an idea, Motorola just sold their patents to a combination of Apple and some private equity funds for billions of dollars. For example—I not only run a private equity firm in China, but my firm Kuhns Brothers is an investment bank here in the United States. We do financings for companies here, we do financings for companies in China, companies in Brazil, but what we’re looking at now is raising money for companies that are developing these intellectual property patents for future licensing and royalty opportunities because we think those companies are going to be a lot more valuable in the marketplace than investors once thought.
CM: It sounds like there could even be deregulation of that market.
JK: Well, yeah, absolutely. I mean, I’ll give you a perfect example. We’re looking at raising money for a company that makes a nano-photovoltaic cell. We’re all familiar with the silicon cells [used for solar power]. The problem with photovoltaic cells made from silicon are the wafers or amorphous material like a film spread on a metal sheet is, it hasn’t dropped in cost as rapidly as people would like. So this particular company has developed patents where the nano-molecules themselves are photovoltaic. For example, they can be mixed in paint, and you can paint your car in these materials, and that car will have a photovoltaic skin. So right now talking about regulation, people still get most of their electricity from the grid, but that’s because there’s not a more efficient way of delivering it locally, or what we call on a distributed basis. That’s coming soon. It does depend on renewable energies like solar because that’s the key distributing opportunity.
CM: What are the differences between business dealings in China and the U.S.?
JK: There are huge differences. I can best summarize by talking about what we all kind of take for granted here, and that is talking about business. The assumption [is] that most organizations that we’re familiar with here stateside are what we call triangular. In other words, there’s a hierarchy: the CEO is on the top, coming down the pyramid you have a technology officer, the CFO, etc. Now you go out to raise money as an investment banker for that company, or as the company itself, and you’re gonna have something called a one-on-one. That is where you go to [a bank], you sit down with the people, you invest their money, they’re going to ask you about your business and they’re going to get to know you. What I’m going to tell you right now is if the people at [the] bank ask a financial question, they don’t want the CEO to answer that question. They want the CFO to answer that question. As a matter of fact, if the CEO starts to answer a financial question, people start to get nervous. Why? Because there’s too much power and knowledge and decision-making concentrated in one person. It should be spread out, right? That’s more or less the way we operate here, that’s what we kind of take for granted.
Now let’s go to China. Think that decision-making is employed over there? Not at all. What’s employed over there is a system where there’s a guy, a person, called a dalaban. Instead of a triangular corporate hierarchy, it’s like the head of a pin. The dalaban makes all the decisions, provides all the information to outsiders, so the system is neither transparent nor diversified. You haven’t got a lot of people contributing to the value of a whole; unfortunately, you’ve only got one person. And no investor in international money centers New York, Switzerland, London, even Hong Kong or Singapore, is going to give that organization money if that investor has a choice. That is the biggest thing to try and get across to my clients and my opportunities that I invest in China. In other words, if I invest in a company that makes silicon carbide, which is used to make tools that cut photovoltaic cells, I’ve got to get that management team to stop thinking that the dalaban has all the answers. Otherwise I’m not going to get what? An exit.
So if you’re an investor, you’re always thinking two sides of every equation. The first side is how can I invest here, how can I get in at the best valuation price? But the second side is how am I getting out? Because if I’m managing the fund for the city of Chicago pension fund, they want to book a return that’s better than normal stocks and bonds. So to book that return, I’ve got to invest low and sell high, but I got to sell. A typical getting out is an IPO or a sale to what’s called a strategic buyer. And in either case, that money will not be forthcoming if you’ve just got a dalaban. So the biggest challenge is not just going to China, figuring out where out in the hinterlands the best deals are--they’re not in Beijing or Shanghai, you got to go out and slog. But once you get there, make your deal, you have to reorganize the way they think about themselves and the business.
CM: What do you see yourself doing in the future?
JK: That’s a great question. Little sales pitch, I’m almost finished with my second novel. It’s about smuggling over the Burmese-China border in South Yunnan. Like my first novel, it’s developed from personal experience. I bought a business down there, a silicon smelter, and my drivers of the charcoal trucks...looked a little too affluent and I asked the translator why that was. And it turns out they’re all smuggling on the weekends. So I obviously did a little more investigation and it’s a fascinating thing and a fascinating topic for a novel.
Now, as far as what I’d like to do? If I would ever have the opportunity that John Grisham has, to sell hundreds of thousands or even millions of hardback books at 25, 35 dollars, I’d rather [do] nothing else than that. Nietzsche said the best thing a person can do is create. He also said the best creation that me or you can do is to dream. But if you can’t do that, than the arts, writing, are useful surrogates. Most of us don’t have that luxury, and so I’m in business in China because it pays the bills and enables me to live the lifestyle I want. But would I swap all that to simply continue to write about China and other places, Burma, absolutely. On the other hand, the publishing business is very difficult- it’s unbelievably competitive. You open the New York Times book review every week and you’re blown away by what people are writing about today and what people find interesting or what people are willing to buy. It’s not something that someone can just dive into and succeed at, it takes a lot.
CM: Print to film?
JK: You just put your finger on it. All my friends who are writers, and accepted writers, in other words, published novelists, etc. or even nonfiction [writers]...they all say and my agent says [that] the key to making money out of this is to get television or film rights and get the product ultimately done. I have a friend who’s published 22 novels and sold every single one in terms of rights to Hollywood, in so many words, but none of them have been furthered in terms of the film or television series so he’s not making the ultimate enchilada that he could if that were to happen, so you have to stay involved. But first things first.