What It Takes: Lessons in the Pursuit of Excellence

by Stephen A. Schwarzman

Every entrepreneur knows the feeling: that moment of despair when the only thing you are aware of is the giant gap between where you find yourself and the life and business you imagine. Once you succeed, people see only the success. If you fail, they see only the failure. Rarely do they see the turning points that could have taken you in a completely different direction. But it’s at these inflection points that the most important lessons in business and life are learned.

We believe in meritocracy and excellence, openness and integrity.

When people ask me how I succeed, my basic answer is always the same: I see a unique opportunity, and I go for it with everything I have. And I never give up.

But wanting something isn’t enough. If you’re going to pursue difficult goals, you’re inevitably going to fall short sometimes. It’s one of the costs of ambition.

if you’re going to commit yourself to something, it’s as easy to do something big as it is to do something small. Both will consume your time and energy, so make sure your fantasy is worthy of your pursuit, with rewards commensurate to your effort.

“Young man, are you independently wealthy?” “No, sir. I’m not.” “Well,” he said, “that will make a great difference in your life. I advise you, if you have any interest in politics whatsoever, to go out and make as much money as you can. That will give you independence if you ever decide you want to go into politics.

few years later, as I predicted, the company collapsed. DLJ was sued for selling stock in a company it knew was rotten, and I had to defend my opinion before a roomful of lawyers. DLJ depicted me as an idiot who had no idea what he was doing, which explained why no one listened to me. The plaintiffs portrayed me as a genius savant, who saw what all of DLJ’s higher-paid professionals had missed. The plaintiffs won.

The Reserves reinforced my suspicion of hierarchy and my confidence in going against it if I saw something wrong.

If ever I ran an organization, I promised myself I would make it as easy as possible for people to see me and I’d always tell the truth, no matter how difficult the situation. As long as you can be honest and rational and are able to explain yourself, there is no reason to feel uncomfortable. No one person, however smart, can solve every problem. But an army of smart people talking candidly with one another will.

“Steve, you’re an interesting guy. If you want to work at Lazard, I’ll make you a job offer right here on the spot. But I advise you not to take it.” “Why?” “Because at Lazard, there are two types of people: masters like me and slaves like you would be. I don’t think you’d be happy being a slave. You should go work at Lehman Brothers, let them train you, and then come here to Lazard as a master.”

Our people are all different, but they share some common traits: self-confidence, intellectual curiosity, courtesy, an ability to adjust to new situations, emotional stability under pressure, a zero-defect mentality, and an unwavering commitment to behaving with integrity and striving for excellence in all we choose to do. Being nice—thoughtful, considerate, and decent—doesn’t hurt either.

I wrote a sixty-eight-page history of the company and its shifting value based not only on the trajectory of its stock price but on its prospects, the market trends, and everything else I considered relevant. I included appendixes and footnotes for clarification. Then I took this work of beauty to Herman Kahn on the partners’ floor. He wasn’t there, so I put it in the middle of his desk where he would see it as soon as he sat down. I went to my office and waited. A few hours later I got a call. “Is this Steve Schwarzman?” Herman Kahn was hard of hearing and his voice was loud, nasal, aggravated. “Yes, it is.” “Schwarzman! This is Herman Kahn! I got your memo! There’s a typo on page 56!” And he slammed the phone down. I looked at page 56. The only error I could find was a misplaced comma. Jesus, I thought.

“Let’s start this meeting over, Mr. Schwarzman. You say, ‘Mr. Putnam, you’re the treasurer of Harvard University, and I’m starting the largest—what will be the largest—student loan lending business in the United States, and I’ve got you down for $20 million.’ Now, say that.” I said it. “That’s a great idea, Mr. Schwarzman,” he said. “I’m in for twenty.” He had read up on the company before I walked into the room and would not be convinced by me one way or the other on its merits. He just wanted my help in making a quick decision on how much to invest. “Now what you do is take your book, get on the train, go to New Haven, and see Mr. So and So at Yale, and say, ‘Mr. So and So, I’m raising money for the Student Loan Marketing Association, which is going to be the biggest lender to students in the United States. I’ve got Yale down for $15 million.’ Try that. See what happens. After that, get back on the train, go to Princeton. Ask them for $10 million.” By the end of my university pitches, I had raised the better part of the $100 million, the money that founded Sallie Mae. Putnam gave me a lesson in raising money that would stay with me throughout my career as I raised fund after fund at Blackstone. Investors are always looking for great investments. The easier you make it for them, the better for everyone.

Getting to know Jack and watching him in action reinforced my growing belief that the most important asset in business is information. The more you know, the more perspectives you have and the more connections you can make, which allow you to anticipate issues.

The fix, I found, was to focus on my breathing, slow it down and relax my shoulders, until my breaths were long and deep. The effect was astonishing. My thoughts became clearer. I became more objective and rational about the situation at hand, about what I needed to do to win.

straight preferred stock, which came with no voting rights but a guaranteed dividend paid out before any dividends to common stockholders. And if you felt really good about the deal, you’d take the convertible preferred, which came with a lower dividend but the right to swap it at any time for common stock.

If I can, I try to find some point of connection, an area of common ground, a shared interest or experience that turns a professional encounter into a more personal one.

I had reached an important conclusion about starting any business: it’s as hard to start and run a small business as it is to start a big one. You will suffer the same toll financially and psychologically as you bludgeon it into existence. It’s hard to raise the money and to find the right people. So if you’re going to dedicate your life to a business, which is the only way it will ever work, you should choose one with the potential to be huge.

The executive committee turned us down. They saw an inherent conflict. They didn’t feel we could give M&A advice to our clients while at the same time trying to buy companies our clients might be interested in.

long enough to know a 10 when we saw one. Eights just do the stuff you tell them. Nines are great at executing and developing good strategies. You can build a winning firm with 9s. But people who are 10s sense problems, design solutions, and take the business in new directions without being told to do so. Tens always make it rain.

But that led to someone telling him I had potential and him giving me work. That can happen in a firm of 550. With 20,000 people, it’s much harder to find the good, young talent.

If your business fails, nobody will remember your name. If your business succeeds, everyone will know it. So just pick something, get on with it, and hope you succeed enough to be known.”

The German schwarz means black. Pete’s father’s original Greek name was “Petropoulos.” Petros means stone or rock. We could be Blackstone or Blackrock. I preferred Blackstone.

We each put up $200,000 in capital—enough to get started, but not so much that we could be spendthrift.

I thought the time and money we spent when both were scarce were essential to getting this right. When you’re presenting yourself, the whole picture has to make sense, the entire, integrated approach that gives other people cues and clues as to who you are. The wrong aesthetics can set everything off kilter. Our business cards were an early step in establishing who we wanted to be.

I had staged a two-round sealed-bid auction. In each round, the bidders submitted their bids in a sealed envelope, not knowing what others were offering. The first round weeded out the low bids, the people just fishing. The serious buyers then got to review the target company’s financials and visit with management. After that they submitted another sealed bid. The magic of this kind of auction is that if the buyers are desperate to acquire the asset, they won’t just try to offer a dollar more than the second-highest bidder. They will offer the highest price they can afford to ensure they win.

As an investment banker and later as an investor, I found that the harder the problem, the more limited the competition. If something’s easy, there will always be plenty of people willing to help solve it.

Simmons had no interest in owning Sea-Land. But he had been buying stock in anticipation of an outside acquisition, intending to hold up any sale until he got the price he wanted. He wanted to be overpaid to go away. The finance industry calls this practice “greenmail.”

you don’t want the cash, I’m going to substitute a private issue, PIK [payment in kind, i.e., not cash] preferred stock with no maturity date.” What this proposal meant was that he could either take the cash, or we were going to turn his asset into a serious liability. If he wanted to take CSX hostage, I was going to do the same to him by using the tender offer to force a merger and freeze him out. His preferred stock wouldn’t be listed on any exchange, so he wouldn’t be able to sell it easily. It would also be junior to corporate debt in the capital structure, so if anything went wrong, he wouldn’t get paid until after the creditors. And with no maturity date, he would never even have a chance to redeem his stock because it would never come due. He would just be stuck holding stock that generated ever-increasing tax bills for the indefinite future. The proposition was detestable and highly unusual.

First, when investors put money in a fund, they want to know that theirs isn’t the only money. So if you’re raising a $50 million fund, chances are you’ll have to raise it in increments of $5 to $10 million. And if you’re going to all the bother of raising $5 to $10 million, you may as well save yourself some legwork and ask for $50 to $100 million. Second, investors would expect us to build a diversified portfolio. With only $50 million in hand, we’d have to do a series of tiny deals to get there. Since our expertise was in working with big corporations, tiny deals made no sense.

The rejections were horrible and humbling. The setbacks seemed endless. We met people who lied to us or never showed up for appointments even after we had traveled across the country. People we knew well in positions of authority rejected us. Pete and I talked throughout these struggles. He was not someone who failed. He hated failure.

People in a tough spot will often focus on their own problems when the answer may lie in fixing someone else’s. By paying attention to Nikko’s needs rather than ours, a possible solution had materialized for both of us.

“Okay,” Kanzaki said. “Nikko is very interested. How much money do you want for your fund?” Pete covered up the phone and whispered. “Fifty?” “A hundred,” I whispered. “It’s what we got from Prudential.” “We’re looking for $100 million,” said Pete. “Okay, no problem. $100 million. We have a deal.

We could use our entire $850 million to buy one $850 million asset, taking on no debt, or treat it as a 10 percent down payment on $8.5 billion worth of assets, borrowing the rest. The second option, assuming we borrowed responsibly, had the potential for much higher returns.

When banks issue loans to companies, they typically raise the money by raising money from other banks as well. But they also underwrite the transaction, promising to cover the balance if investors don’t buy all the securities. If a bank won’t underwrite its own transaction, that hesitation typically signals a lack of faith in the deal.

We carved the transportation division out of USX and called it Transtar. Blackstone put in $13.4 million in equity; USX put up $125 million in vendor financing, lending us money to take the division off their hands; and Chemical raised the rest.

But our first new business line had just popped up in front of us, and it ticked all the boxes: an amazing opportunity, beautifully timed, in a giant asset class, with one of the two top people in the world to manage it. We had prepared ourselves to expect the unexpected, and here it was. We would be fools to let it slip. Pete and I decided we would each invest a further $2.5 million personally in Blackstone to fund Larry’s new venture. We would own half of the new company, Blackstone Financial Management, and Larry and his managers would own the other half.

To be successful you have to put yourself in situations and places you have no right being in. You shake your head and learn from your own stupidity. But through sheer will, you wear the world down, and it gives you what you want.

Some will tell you that all the value is in driving down the price you pay as low as possible. These investors revel in the transaction itself, in playing with the deal terms, in beating up their opponent at the negotiating table. That has always seemed short term to me. What that thinking ignores is all the value you can realize once you own an asset: the improvements you can make, the refinancing you can do to improve your returns, the timing of your sale to make the most of a rising market. If you waste all your energy and goodwill in pursuit of the lowest possible purchase price and end up losing the asset to a higher bidder, all that future value goes away. Sometimes it’s best to pay what you have to pay and focus on what you can then do as an owner.

Market tops are relatively easy to recognize. Buyers generally become overconfident and almost always believe “this time is different.” It’s usually not.

Another indicator that a market is peaking is the number of people you know who start getting rich. The number of investors claiming outperformance grows with the market. Loose credit conditions and a rising tide can make it easy for individuals without any particular strategy or process to make money “accidentally.”

The way to avoid this type of situation is to invest only when values have recovered at least 10 percent from their lows. Asset values tend to increase as economies gain momentum. It’s better to give up the first 10 to 15 percent of a market recovery to ensure that you are buying at the right time.

You must not bury your failures but talk about them openly and analyze what went wrong so you can learn new rules for decision making. Failures can be enormous gifts, catalysts that change the course of any organization and make it successful in the future. Edgcomb’s failure showed that the change had to start with me and my approach to investing and evaluating potential investments.

When people have to pitch ideas, they tend to address the great man or woman sitting at the end of the table. If their idea is no good, the great man or woman rejects them. Regardless of the quality of their proposal, they leave the room with their heads down. A few weeks later, they go through the same routine with a new proposal and leave the room even more slowly than before to show what they think of the decision. The third time, they’re gritting their teeth. The fourth time, the person at the end of the table now feels bad. The proposers aren’t horrible employees, just not that good. But if that fourth idea is near-okay, the boss will end up green-lighting it just to keep everyone happy.

So you have to stop that show. Decisions are much better made through systems designed to protect businesses and organizations than through individuals. We needed rules to depersonalize our investment process. It could never again rely on one person’s abilities, feelings, and vulnerabilities. We needed to review and tighten our process.

we insisted that anyone with a proposal would have to write a thorough memorandum and circulate it at least two days before any meeting so it could be carefully and logically evaluated. The two-day requirement would give readers time to mark up the memo, spot any holes, and refine their questions. No additions could be made to the memo at the meeting unless there was a significant subsequent development. We did not want extra sheets of paper going around the room.

I also resolved that I would never talk to just the lead partner on any potential investment. If I had detailed questions, I would call the most junior person, the one working the spreadsheets and closest to the numbers. If I had done that on Edgcomb, I might have heard from the analyst who hated the deal. Breaking through the hierarchy would allow me to get to know the junior people at the firm and get a different read. The risk may not be obvious on paper, but it came through in the analysts’ tone of voice when I asked them, “Just walk me through this deal from your perspective.” You could hear if they liked it or felt anxious. Psychology would be one of my strengths as an investor. I didn’t need to remember each number in an analysis. I could watch and hear the people who knew the specifics and tell how they felt from their posture or tone of voice.

I laid out in a welcome speech to our new analysts. It boiled down to two words: excellence and integrity. If we delivered excellent performance for our investors and maintained a pristine reputation, we would have the opportunity to grow and pursue ever more interesting and rewarding work. If we invested poorly or compromised our integrity, we would fail.

But all that anyone higher up in the firm cares about is that the work is done well. There is nothing heroic or commendable about taking on too much and then screwing it up. Far better to focus on what you can do, do it well, and share the rest.

We wanted to build businesses that were great in their own right but also made our whole firm smarter. We believed that the more we learned from different lines of business, the better we would become at everything. It was the one thing they taught at Harvard Business School: everything in business is connected.