How To Build A $1.55Bn Artist Colony

Oct 10

I’ve worked with C-Suite Leaders at Google, Bloomberg, Uber, and across the Fortune 500.

But Ethan Berman, CEO of RiskMetrics, had the most enduring impact

In this article I reverse-engineer his 5 secrets for disruptive growth.

Ethan Who?

Ethan Berman was the youngest person to ever be named managing director at JP Morgan. He ran the most profitable trading desk on Wall Street for much of the 1990s until he left in 1998 to launch a new venture, RiskMetrics, which went public in 2008, and was acquired for $1.55bn by MSCI in 2010.

His incredible achievements were just some of the reasons I expected to dislike him enormously when he acquired my startup Innovest, where I was the head of banking analysis, in 2009. I thought he would be like every other Wall Street CEO who just obliterated the world economy from the comfort of a private jet.

I was wrong. Ethan was not one of “them.”

He studied theater at Williams College, and became a playwright when he graduated. In order to make ends meet he took a job in the mailroom at JP Morgan. Then he started trading. Then he became one of the best traders at the bank, and then the world. He was early to recognize the power of big data technology. But he understood that the best tech talent didn’t want to work on Wall Street. He had to create a culture that made the best innovators in the world love coming to work every day.

So he created an artist colony.

You Don’t Run A Business You Run An Artist Colony

Ethan used to say that 400 years from now people will talk about the technologists of today the way that we talk about artists from the Italian Renaissance. As CEO, he believed his job was to be a “Medici,” to lead an artist colony. This meant hiring the greatest technologists in the world, challenging them to achieve incredibly aggressive outcomes, and trusting them.

Trust them to be so motivated by the vision that they’ll push themselves harder than anyone else could push them.

Trust them to speak up when they are blocked.

Trust them to beat the $hit out of themselves when they screw up.

Trust them to be so insanely curious about the work of other artists that they’ll cross-fertilize incredible innovations together.

At RiskMetrics there were no job titles, no offices, and no dress code. I cannot overstate how insane that was on Wall Street. In contrast, at Goldman Sachs and Morgan Stanley, everyone who was VP or above wore $300 Ferragamo ties, and you didn’t respond directly to emails from anyone with a job title lower than yours. Ghosting was a (stupid) rule.

But Goldman and every bank on Wall Street was a RiskMetrics client.

Because the RiskMetrics artist colony was 50x better and faster than anyone else.

If you have the freedom of an artist colony, you have the responsibility to be 50x faster than everyone else

10x better was never going to be good enough to get banks to change their deeply ingrained processes. Banks aren’t like people who switch from cable to streaming without much thought. Banks have tons of bureaucracy and politics to change anything. No one was going to buy this artist colony hype unless they had undeniable proof that it was 50x better.

That 50x proof was the 4:15 report. Every bank needs to set aside a specific amount of money so that if the market collapses the government won’t have to bail them out. To calculate how much money to set aside they have to run thousands of simulations. These simulations calculate how the bank’s assets would have changed in value if for example the 1929 stock market crash, the 9/11 attacks, or the Lehman bankruptcy happened today. The bigger and more diversified the bank, the more complex this calculation becomes. It used to take banks 2-3 weeks to run these tests, which made regulators nervous. RiskMetrics did it in 15 minutes.

Please take a moment to let that sink in.

It took RiskMetrics 15 minutes to run a calculation that used to take banks 30,240 minutes. So when the market closed in New York at 4pm, 15 minutes later at 4:15 banks got their risk report. The banks were happy, the regulators were happy, and RiskMetrics just showed the suits at Goldman Sachs that a bunch of long-haired freaks in an artist colony does a better job than they ever could. So, yes, the artist colony was happy too.

Curiosity is the only way to create a meritocracy

When my startup was acquired I loved Ethan’s emphasis on the company culture. But I didn’t believe it. Too many of my colleagues lost their jobs as part of the acquisition, and some serious problem employees kept their jobs (they were soon fired).

But the show had to go on. We still had a product to deliver. Soon after the acquisition closed I found myself working until midnight, listening to punk music in an empty office trying to meet a deadline. It turned out I wasn’t alone. Ethan was also working late. He pulled up a chair and asked me what I was working on. I gave him a cautious explanation of my analysis of European banks due tomorrow. He was visibly energized and intrigued. It was clear that he missed being in the trenches like I was. After that I never felt I had to be deferential or afraid around him. It truly flattened the hierarchy. His curiosity gave me confidence that he was sincere about his values.

Many people at RiskMetrics had a story like this, in which Ethan rediscovered his youth by rolling up his sleeves in the trenches with them. It was infectious and energizing.

Extreme Ownership (or you’re fired)

“I have a deeply bruised ego, but I recognize that you all were right and I’m wrong.” This is how Ethan announced in a Town Hall that he would no longer be both Chairman and CEO of the company, and that he was handing the Chair position to Knut Kjaer (another legend). Ethan owned his mistakes with rare candor and vulnerability. He was self-critical in a way that set a standard for ownership and accountability across the company. People who didn’t operate with that level of integrity and ownership didn’t last long.

Artist Colonies Don’t Scale Well

I learned as much from Ethan’s mistakes as from his accomplishments. As much as he inspired me, he was also deeply flawed and error-prone.

He promised things (money) and didn’t deliver. My admiration of Ethan Berman grows stronger with age. But it took a while. Soon after RiskMetrics acquired Innovest, Ethan gathered us into his conference room and promised we would be paid on par with our counterparts on Wall Street, as opposed to our anemic startup salaries. He never kept that promise. I now know why: RiskMetrics was about to be acquired, and had to tightly control its operating expenses. But I wish he gathered us in his conference room again and said, “For reasons I can’t reveal, I’m unable to keep a promise I made to you to increase your salaries. I’m really sorry. You may all now get in line to punch me in the face.” I’d have been gentle when I punched him.

RiskMetrics shouldn’t have gone public. Artist colony startups are incredibly disruptive if they stay small and super-niche. But, they don’t scale well above a certain size. Once RiskMetrics was public Ethan had responsibilities that he didn’t like and wasn’t good at. He was less of a leader and more of a manager. The company became political. He had less autonomy to pursue great breakthroughs that took a long time, and he was under incessant pressure to show quarterly growth for innovations that take much longer than three months. In short, the company was less fun, and increasingly dysfunctional. (He explained to me recently that he tried to step down as CEO after the IPO, but the board convinced him to stay.

He acquired too many companies. RiskMetrics was too small to IPO so it bulked up through M&A. And then it kept bulking up inorganically after it went public. The startup I worked for, Innovest, was the only acquisition which was based in New York. So we were able to move into the RiskMetrics office, and integrate with the artist colony culture. But the other acquired companies were deeply distressed, and were culturally unable to adapt. They quickly spiraled into a costly, political, soul-sucking civil war.

He shunned publicity for the company and himself. For Innovest this meant that we had to harvest leads from the miniscule niche where we already had some traction. It prevented us from reaching a broader audience, a big driver of lead generation before our acquisition. I believe that people building a new culture or a new category need to build an audience of evangelical fans and find a way to convert them into customers.

About a year after RiskMetrics acquired us, it was acquired for $1.55billion by MSCI, a spin-off from Morgan Stanley. Within weeks the artist colony culture of RiskMetrics was dead. Lots of the talent left. It was replaced by the investment banking hierarchy I hoped to avoid. I soon left and accepted a job as director of innovation at Bloomberg.

It’s been nearly 15 years since I worked in Ethan Berman’s $1.55billion artist colony. Here are the lessons that still resonate for me:
1. If you’re trying to disrupt an entrenched industry you need to create a cultural oasis for the best innovators to do their best work. This is an artist colony.

2. An artist colony means you trust your team to push themselves to achieve 50x results.

3. Know the limits of your own scalability and stay within those boundaries.

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