DOW 43,000? • HIP-HOP’S NEW CASH KINGS GLAXO’S TURNAROUND • GARMIN’S RESURGENCE OCTOBER 4, 2016
EXCLUSIVE NEW RANKING
WIZARD OF APPS JEFF LAWSON “WE’RE NOT SOME FLY-BY-NIGHT UNICORN.”
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Contents // OCTOBER 4, 2016
VOLUME 198 NUMBER 4
ON THE COVER 84 | THE WIZARD OF APPS The hottest stock in America, Twilio, is a company you’ve never heard of. It uses the cloud to put communications everywhere. BY MIGUEL HELFT
WITH KPMG THE GREAT REWRITE: CYBER IS EVERYTHING | 86
PLUS: OUR EXCLUSIVE RANKING OF THE 100 HOTTEST PRIVATE COMPANIES IN THE CLOUD
ON THE COVER: PHOTOGRAPH BY TIM PANNELL FOR FORBES JEFF LAWSON WEARS A DRESS SHIRT BY NORDSTROM MEN’S SHOP, SWEATER BY RODD & GUNN AND JEANS BY 7 FOR ALL MANKIND. FORBES CREATIVE STYLE DIRECTOR: JOSEPH DEACETIS WARDROBE STYLIST: DANNY O’NEILL FOR ARTIST UNTIED GROOMING: JAMES ANTHONY FOR ARTIST UNTIED
14 | FORBES OCTOBER 4, 2016
OCTOBER 4, 2016 28
23 | FACT & COMMENT // STEVE FORBES Reckoning for biggest wrecker of the U.S. economy.
LEADERBOARD 28 | DECADE OF DRE In the ten years FORBES has compiled its Hip-Hop Cash Kings list, the top-earning rappers have collectively earned $4.5 billion pretax. Dre accounts for almost a quarter of that haul.
32 | NEW BILLIONAIRE: ROASTS AND ROOSTS Most great wealth in the Philippines belongs to the aged or their heirs. At 39 Edgar Sia is the exception.
34 | EXECUTIVE TRAVELER: A PARADISE NOW Francis Ford Coppola has an island resort you won’t be able to refuse.
34 | RICHEST BY STATE: ALASKA In the real estate universe there are Donald Trump-style impresarios— and in a whole other galaxy, guys like Jonathan Rubini and Leonard Hyde.
36 | AMERICA’S MOST VALUABLE SOCCER TEAMS The average MLS team is now worth $185 million, an 18% increase from 2015 and up a staggering 80% from three years ago.
40 | THE ELON MUSK OF CROATIA Mate Rimac’s Concept One supercar is all electric— and faster than a Ferrari.
42 | FORBES @ 100: RED DAWN America had won World War II but already had its sights on a new enemy: communism.
44 | CONVERSATION Readers come out in force about a profile of Marc Benioff, the founder and CEO of Salesforce.
THOUGHT LEADERS 46 | CURRENT EVENTS // DAVID MALPASS Eight outrages urge Trump to upend Washington.
48 | INNOVATION RULES // RICH KARLGAARD
Culture and success.
STRATEGIES 52 | RETHINKING RECYCLING Not all of your trash has value. BY CHRISTOPHER HELMAN
TECHNOLOGY 58 | MAP QUEST Smartphone navigation apps threatened to push Garmin off the road. To survive, it has shifted to wearables and relied on decades of manufacturing experience to catch up. BY ALEX KNAPP
58 16 | FORBES OCTOBER 4, 2016
DAVID AND EMILY OJOBARO OWNERS, SQUEEZED ONLINE
HOW 60,000 POINTS HELPED CREATE A PICK-YOUR-OWN JUICE BAR IN THE MIDDLE OF THE CITY. 'DYLGDQG(PLO\2MREDURIURP6TXHH]HG2QOLQHXVHGWKHSRLQWVHDUQHG IURPWKHLU&KDVHÎ–QNFDUGWREX\WKHIUXLWYHJJLHVDQGKHUEVQHHGHG WRFUHDWHDSRSXSSLFN\RXURZQMXLFHEDULQWKHPLGGOHRIWKHFLW\ 6RQRZHYHU\RQHNQRZVWKH\KDYHVRPHRIWKHIUHVKHVWMXLFHLQWRZQ 6HHZKDWWKHSRZHURISRLQWVFDQGRIRU\RXUEXVLQHVVE\HDUQLQJ ERQXVSRLQWV/HDUQPRUHDWChase.com/Ink. Accounts subject to credit approval. Restrictions and limitations apply. Chase credit cards are issued by Chase Bank USA, N.A. 2!HUVXEMHFWWRFKDQJH6HH&KDVHFRPÎ–QNIRUSULFLQJDQGUHZDUGVGHWDLOVk-30RUJDQ&KDVH &R$OOULJKWVUHVHUYHG
OCTOBER 4, 2016
ENTREPRENEURS 63 | BLADE RUNNERS Harry’s built an old-school shaving brand through online subscription boxes. Now it’s targeting a bigger market. BY STEVEN BERTONI
INVESTING 66 | PANIC MANAGEMENT If a big drop in the S&P makes you want to sell, consider adding some “crisis alpha” to your portfolio. BY DANIEL FISHER
68 | PORTFOLIO STRATEGY // KEN FISHER My best advice—32 years in the making.
70 | BOND SENSE // BONNIE BAHA Keep calm and carry on.
71 | INVESTMENT STRATEGIES // WILLIAM BALDWIN Dow 43,000.
FORBES LIFE FASHION 73 | EMPEROR STATE OF MIND Soft power dressing reigns in menswear this fall. Empire star Terrence Howard lays down the rules.
BY NATALIE ROBEHMED TERRENCE HOWARD WEARS A LEATHER JACKET ($4,995) AND WOOL SWEATER ($795) BY ERMENEGILDO ZEGNA; COTTON SHIRT BY ETRO ($265); COTTON-ANDWOOL TROUSERS BY PAUL & SHARK ($315); RADIOMIR 1940 3 DAYS CERAMICA WATCH BY PANERAI ($11,200). PHOTOGRAPH BY DAVID NEEDLEMAN
74 | DOUBLE TIME The best two-tone dress shoes for fall. BY MICHAEL SOLOMON
FEATURES 106 | GLAXO TAKES ITS MEDICINE Andrew Witty inherited a drugmaker sick with scandal and has spent the past nine years patching up his patient. GlaxoSmithKline may finally be well again. BY MATTHEW HERPER
LIFE 116 | THE MARCO POLO OF BOURBON Jefferson’s has journeyed into uncharted waters in whiskey-making by aging small batches on the world’s oceans, rivers and lakes. BY ABRAM BROWN
120 | THOUGHTS On health.
100 18 | FORBES OCTOBER 4, 2016
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INSIDE SCOOP EDITOR-IN-CHIEF
Steve Forbes CHIEF PRODUCT OFFICER Lewis D’Vorkin FORBES MAGAZINE EDITOR Randall Lane
A New Experience For Mobile Lives BY LEWIS D’VORKIN
EXECUTIVE EDITOR Michael Noer ART & DESIGN DIRECTOR Robert Mansfield FORBES DIGITAL VP, INVESTING EDITOR Matt Schifrin VP, DIGITAL CONTENT STRATEGY Coates Bateman VP, PRODUCT DEVELOPMENT Salah Zalatimo VP, WOMEN’S DIGITAL NETWORK Christina Vuleta ASSISTANT MANAGING EDITORS Kerry A. Dolan, Luisa Kroll WEALTH Frederick E. Allen LEADERSHIP Loren Feldman ENTREPRENEURS Tim W. Ferguson FORBES ASIA Janet Novack WASHINGTON Michael K. Ozanian SPORTSMONEY Mark Decker, John Dobosz, Clay Thurmond DEPARTMENT HEADS Avik Roy OPINIONS Jessica Bohrer VP, EDITORIAL COUNSEL BUSINESS Mark Howard CHIEF REVENUE OFFICER Tom Davis CHIEF MARKETING OFFICER Jessica Sibley SENIOR VP, SALES EAST & EUROPE Janett Haas SENIOR VP, SALES, WESTERN & CENTRAL Ann Marinovich SENIOR VP, ADVERTISING PRODUCTS & STRATEGY Achir Kalra SENIOR VP, REVENUE OPERATIONS & STRATEGIC PARTNERSHIPS Alyson Papalia VP, DIGITAL ADVERTISING OPERATIONS & STRATEGY Penina Littman DIRECTOR OF SALES PLANNING & ANALYTICS Nina La France SENIOR VP, CONSUMER MARKETING & BUSINESS DEVELOPMENT Michael Dugan CHIEF TECHNOLOGY OFFICER FORBES MEDIA Michael S. Perlis CEO & EXECUTIVE CHAIRMAN Michael Federle PRESIDENT & COO Terrence O’Connor CHIEF ADMINISTRATIVE OFFICER Michael York CHIEF FINANCIAL OFFICER Will Adamopoulos CEO/ASIA FORBES MEDIA PRESIDENT & PUBLISHER, FORBES ASIA Rich Karlgaard PUBLISHER Moira Forbes PRESIDENT, FORBESWOMAN MariaRosa Cartolano GENERAL COUNSEL Margy Loftus SENIOR VP, HUMAN RESOURCES Mia Carbonell SENIOR VP, GLOBAL CORPORATE COMMUNICATIONS FOUNDED IN 1917 B.C. Forbes, Editor-in-Chief (1917-54) Malcolm S. Forbes, Editor-in-Chief (1954-90) James W. Michaels, Editor (1961-99) William Baldwin, Editor (1999-2010)
OCTOBER 4, 2016 — VOLUME 198 NUMBER 4 FORBES (ISSN 0015 6914) is published semi-monthly, except monthly in January, March, April, July, August and September, by Forbes Media LLC 499 Washington Blvd., Jersey City, NJ 07310. Periodicals postage paid at Newark, NJ 07102 and at additional mailing offices. Canadian Agreement No. 40036469. Return undeliverable Canadian addresses to APC Postal Logistics, LLC, 140 E. Union Ave., East Rutherford, NJ 07073. Canada GST# 12576 9513 RT. POSTMASTER: Send address changes to Forbes Subscriber Service, P.O. Box 5471, Harlan, IA 51593-0971. CONTACT INFORMATION For Subscriptions: visit www.forbesmagazine.com; write Forbes Subscriber Service, P.O. Box 5471, Harlan, IA 51593-0971; or call 1-515-284-0693. Prices: U.S.A., one year $59.95. Canada, one year C$89.95 (includes GST). We may make a portion of our mailing list available to reputable firms. If you prefer that we not include your name, please write Forbes Subscriber Service. For Back Issues: visit www.forbesmagazine.com; e-mail email@example.com; or call 1-212-367-4141. For Article Reprints or Permission to use Forbes content including text, photos, illustrations, logos, and video: visit www.forbesreprints.com; call PARS International at 1-212-221-9595; e-mail http://www.forbes.com/reprints; or e-mail firstname.lastname@example.org. Permission to copy or republish articles can also be obtained through the Copyright Clearance Center at www.copyright.com. Use of Forbes content without the express permission of Forbes or the copyright owner is expressly prohibited. Copyright © 2016 Forbes Media LLC. All rights reserved. Title is protected through a trademark registered with the U.S. Patent & Trademark Office. Printed in the U.S.A.
20 | FORBES OCTOBER 4, 2016
AN OMEGA AD jumped out at me as I scrolled down a lengthy New York Times Olympics story on my iPhone a few weeks ago. I expected it to link to a product pitch. What I got was a timely and relevant “editorial” experience, much like newsrooms produce. I thought the destination screen might be the work of T Brand Studio, the Times’ custom publishing group. In fact, Planet Omega was the watchmaker’s handiwork. I e-mailed the link to our chief revenue officer. His reply: “Welcome to Microsite 3.0.” After 15 years in the digital game, there’s a certain pleasure in seeing the old become new again and asking, Haven’t we learned? Of course, times are different. What’s resurrected from days gone by is never the exact same thing. Microsite 1.0 arrived when I was at AOL. Every marketer hated the limitations of AOL’s tiny rectangular pages. So when the Web arrived, the sales guys started to sell brands on microsites, or marketing content sites. Brands spent big bucks on display ads to get consumers to visit. Then came native advertising. FORBES was out front, launching our BrandVoice platform in 2010 for both digital and print. Native ads are supposed to be nondisruptive for consumers—that is, consistent with the editorial experience. That’s what we built. Our mantra: All content is equal as long as it’s clearly identified and labeled. Other news outlets built “studios” to create marketer content for digital screens divorced from the consumer’s site usage— and Microsite 2.0 was born. Now we have Microsite 3.0—or do-it-yourself supersites from brands. They build them, buy their own traffic and more. The problem is they’re doing so with a desktop mind-set when the world has gone mobile. Consumers don’t scroll forever. They want to tap a few times (maybe even a lot) and move on with their mobile lives. FORBES is testing a very different editorial experience for phones. We’ve started to turn our lists into mobile cards—for text, video, data, quotes and more, all bite-size and independently shareable. We hope to do the same for BrandVoice partners eager to reach on-the-go consumers. Once again the aim is to fashion a native ad experience that’s one and the same with our editorial flow. We’ll leave the Microsite strategy, old and new, for others to play out. F
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FACT & COMMENT “With all thy getting, get understanding”
RECKONING FOR BIGGEST WRECKER OF U.S. ECONOMY BY STEVE FORBES, EDITOR-IN-CHIEF
THE BIGGEST, most immediate obstacle to a vigorous recovery for the U.S. and global economies is the disastrous monetary policies of the major central banks, most notably the Federal Reserve, the European Central Bank (ECB), the Bank of Japan (BOJ) and the Bank of England (BOE). Their policies of quantitative easing (QE) and zero interest rates have massively distorted global credit markets and severely hobbled recovery from the 2008–09 economic crisis. Their actions have not only stood in the way of a genuine economic revival but also persuaded governments to put off badly needed structural reforms, because stimulus from easy money would do the job instead! The manifest failure of these institutions to spark a genuine economic revival has finally begun to generate a much-needed examination of what has gone wrong. Recognizing that there’s a major problem is the first essential step in coming up with solutions and reforms. One notable sign of this new self-doubt was a recent article in the Wall Street Journal entitled “Fed Stumbles Fueled Populism: Three key miscues by the bank since the financial crisis add to public disillusion with institutions.” Written by Jon Hilsenrath, a reporter with deep sources inside the Fed, the piece discusses what officials there think are the factors that have made mincemeat of their efforts to rekindle economic growth. Not surprisingly, the insiders’ analysis is way off the mark, since their assumptions about money and the economy are fundamentally flawed. But the Fed’s insufferable, we-know-it-all arrogance has taken a long-overdue hit, opening up the possibility of a productive examination next year. The House has already passed legislation long pushed by Representative Kevin Brady (R–Tex.) that would set up a bipartisan commission to conduct a thorough study of monetary policy. The Senate should quickly follow suit. The three miscues identified by Fed officials and discussed in the article—its computer model “missed
signs that a more complex financial system had become vulnerable to financial bubbles,” the Fed was “blinded to a long-running slowdown in the growth of worker productivity,” and “inflation hasn’t responded to the ups and downs of the job market in the way the Fed expected”—show why this overrated institution has been so flummoxed by events. Take inflation. Our central bank still subscribes to the long-discredited idea, dubbed the Phillips curve, that inflation goes up when unemployment goes down and moves down when unemployment rises. Events have repeatedly demonstrated the falsity of this alleged tradeoff, but the Fed has rarely let reality get in the way of theory. The institution’s naive faith that computer models can replicate the real world and predict how people will respond to changes in the marketplace is stunning. It has forgotten the old adage of modeling: garbage in, garbage out. Its forecasting model has widely missed the coming year’s economic growth for 13 out of the last 15 years, embarrassing the Fed not a whit, until now. Its economists would have done better reading chicken entrails. Economies aren’t machines that can be calibrated, like automobiles. They are billions of people making decisions numerous times a day. The idea that central planners, whether they’re of the Soviet or Federal Reserve variety, can calibrate economic activity always founders because they can’t predict the future. Central planners assume that past patterns always repeat themselves. (This flaw isn’t confined to big government; more than a few smarty-pants hedge funds have blown up from this misconception.) As for that seemingly mysterious decline in productivity, there’s no mystery to it at all. Productivity and innovation depend on investment. What the Fed and too many economists don’t grasp is that unstable money hurts productive investment, because businesspeople and in-
OCTOBER 4, 2016
FORBES | 23
FACT & COMMENT
vestors can’t know what they’ll be paid back with—a 10-cent dollar, a 50-cent dollar, a 120-cent dollar. As a result, capital outlays have been awful for years. All this points to the basic flaw in how the Fed and most central bankers and economists see money. Contrary to their core belief, money doesn’t control the economy. It reflects activity in the marketplace. Keynes and the monetarists had this exactly backward, but it’s been holy writ among economists and policymakers for decades. Money simply makes the buying and selling of products and services easier. It has no intrinsic value, any more than a ticket to a concert does or a claim check for a coat at a restaurant. Money is a claim on products and services; it measures value the way a ruler measures space, a clock measures time and a scale measures weight. Nor, contrary to central bank illusions, is controlling the price of money—i.e., interest rates—the equivalent of steering a car. Price controls never work. The only question is how much damage they will do. The BOJ has been suppressing interest rates across the board since the early 1990s, with baleful results. Nonetheless the Fed, the ECB and the BOE have, to varying degrees, been imitating this destructive behavior since the debacle of 2008–09. Look at what’s happened in the U.S. Not long ago we were the envy of the world in creating new businesses that would become tomorrow’s giants. Our ability to innovate was without peer. But new-business creation is withering, and a critical reason is that our
deformed credit markets now favor extending credit to government and corporations over small businesses and households. Thanks to the Fed’s blundering, bonds now constitute 53% of total U.S. credit, up from 39% a decade ago. Bonds are instruments for large, established entities, not for dynamic new ones. One stunning result: an orgy of financial engineering to puff up earnings. Dividends and stock buybacks now exceed operating profits. The Fed’s crushing of interest rates and its nonstop binge buying of bonds are wreaking havoc with insurance companies and pension funds, which are experiencing stress because they took on liabilities on the basis of normal credit markets. Thankfully, the Fed isn’t alone in beginning to recognize that something’s rotten in the state of central bankland. The Bank of England has long been a skeptic of its peers’ actions and hasn’t engaged in QE with the same gusto. Although the BOE recently announced it will step up its bond buying, it’s doing so with a distinct lack of belief that this will do any good. In fact, the BOE has declared a major policy change that the Fed should immediately imitate: It is excluding bank reserves from leverage requirements, which means banks will have more cash to lend. The always incisive economist David Malpass has observed that if “the new U.K. system ..."were implemented by the Fed, it would be massively stimulative.” Meanwhile, the Federal Reserve
might also make a few other highly constructive adjustments to its activities. ƀǇLiberate all interest rates. Let markets, i.e., borrowers and lenders, decide the cost of money. This would immediately remove the Fed’s antismall-business bond bias. ƀǇReduce its bloated portfolio. When a security matures, the Fed should not reinvest the proceeds but instead let them flow back into the private sector. ƀǇAlong with the Treasury Department, repudiate the Basel Accords. These rules, written by regulators from numerous countries, try to calculate the risk of various classes of assets and then determine appropriate reserves. It’s no surprise that these regulations encourage banks to lend to governments at the expense of private borrowers. For instance, until Greece publicly went bust, the Basel Accords considered Greek government bonds safer than loans to companies like Apple. It’s high time our political leaders faced up to the damage the Fed and its peers have wrought. The unnecessarily punk recovery from the 2008–09 crisis has led to despair around the world and is thereby poisoning the politics of democracies. One reason that such a relook didn’t happen sooner is the credit that’s been given our central bank for “averting a second Great Depression.” The fact is the crisis would never have happened had the Treasury Department and the Fed not substantially weakened the dollar. Moreover, the Fed was created precisely to be the lender of last resort during a financial earthquake. F
Restaurants: Go, Consider, Stop Edible enlightenment from our eatery experts and colleagues Richard Nalley, Monie Begley and Randall Lane, as well as brothers Bob, Kip and Tim.
z Amber 1406 Third Ave., at 80th St. (Tel.: 212-249-5020) This delightful spot offers a dizzying array of delicious Pan-Asian fare. Begin with coconut seafood chowder, Peking duck steamed buns, grilled sake miso black cod or the Upper East Side roll—lobster and avocado, topped with sliced kiwi and mango sauce. Two of the best dishes: braised baby ribs coated in peach white wine sauce and Thai crispy flounder with sweet chili sauce. 24 |
FORBES OCTOBER 4, 2016
z Quality Italian
50 Commerce St. (Tel.: 212-524-4104)
57 West 57th St. (Tel.: 212-390-1111)
This new restaurant is comfortably modern and serves up some great food. The smoked trout deviled eggs, the mini lobster rolls, the beef tartare and the creamy burrata with roasted peaches are great starters. The hanger steak and the roasted chicken earn higher marks than the pan-roasted scallops and the octopus. The perfect finish to a delightful meal: the special blackberry tart or the chocolate cake with white icing.
Quality Italian is just that. The setting is sleek, postindustrial—lots of wood and concrete— with good acoustics; the service is friendly and professional; and the food is great. The grilled octopus with black chickpeas is the perfect starter, the lobster roll does New England proud, and the grilled Chicken Alan is tender and meaty. The coffee-crumb-bun gelato tastes as good as it sounds.
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LeaderBoard OCTOBER 4, 2016
Kasseem “Swizz Beatz” Dean, the Grammywinning producer and rapper, has had a busy summer. In the midst of a nine-week Harvard Business School extension class, he picked up an entirely new gig: global creative director at Bacardi. He’s vowing to amp up its marketing beyond the usual: “Let’s not just pay people to hold drinks.” Swizz Beatz, who has penned hits for Whitney Houston and Jay Z, earned $10.5 million in the past year, good for the No. 19 spot on our Hip-Hop Cash Kings list. PAGE 28
FROM BBQ TO BUILDINGS TO BILLIONAIRE 32 FRANCIS FORD COPPOLA’S PRIVATE ISLAND 34 AMERICA’S MOST VALUABLE SOCCER TEAMS 36 THE ELON MUSK OF CROATIA 40 FORBES @ 100 1946: RED DAWN 42
PHOTOGRAPH BY JAMEL TOPPIN TOP PAINTING: KEHINDE WILEY, FEMME PIQUÉE PAR UN SERPENT OCTOBER 4, 2016 FORBES | 27
LeaderBoard CASH KINGS
Decade of Dre Over the ten years FORBES has tracked the top 20 Hip-Hop Cash Kings, the highestearning rap stars have pulled in an average of $22.5 million per act per year—or a combined total of $4.5 billion pretax. The king of kings is rapper-producer Andre “Dr. Dre” Young, who has accounted for roughly a quarter of that three-comma haul—almost none of which came from his music. The NWA cofounder launched Beats by Dr. Dre in 2006 and took home $620 million when Apple acquired the company in 2014 for $3 billion. Further proof that rhyme pays.
2009 YOUNG JEEZY’S hit album The Recession pays off—with irony. He lands on the list for the first time (at No. 20 with $6 million) while the economic downturn depletes his peers’ earnings.
becomes the first— and still only—Cash Queen (No. 15, $6.5 million) thanks to mammoth Pink Friday album sales.
2010 DRAKE makes his Cash Kings debut (No. 11, $10 million) from ad deals with Sprite and Virgin—plus a chart-topping album, Thank Me Later.
JAY Z signs a ten-
Coca-Cola buys Glacéau, maker of Vitaminwater, for $4.1 billion—and 50 CENT cashes out $100 million from his stake, captured in his 2008 total.
year, $150 million music and touring deal with Live Nation, creating his label and management company, Roc Nation.
2011 NICKI MINAJ
1. 50 Cent $150 MILLION
2. Jay Z $82 MILLION
3. Diddy $35 MILLION
4. Kanye West $30 MILLION
5. Timbaland $22 MILLION
1. Jay Z $34 MILLION
1. Jay Z
2. 50 Cent $32 MILLION
3. Diddy $28 MILLION
4. Timbaland $21 MILLION
5. Dr. Dre $20 MILLION
1. Jay Z
3. Kanye West
4. Lil Wayne
4. 50 Cent
5. Dr. Dre $17 MILLION
TOTAL EARNINGS FROM THE TOP 20
1. Jay Z $37 MILLION
2. Diddy $35 MILLION
3. Kanye West $16 MILLION
4. Birdman $15 MILLION
4. Lil Wayne
DR. DRE’S EARNINGS
28 | FORBES OCTOBER 4, 2016
BY ZACK O’MALLEY GREENBURG AND NATALIE ROBEHMED JIM COOPER/AP; BRUCE GLIKAS/GETTY IMAGES; PRINCE WILLIAMS/GETTY IMAGES; SCOTT LEGATO/FILMMAGIC/GETTY IMAGES; KEVIN MAZUR/WIREIMAGE/ GETTY IMAGES; TIM MOSENFELDER/GETTY IMAGES; JAMEL TOPPIN (2)
HIP-HOP CASH KINGS 2016 HIP-HOP HALL OF FAME (2007–16 earnings)
1. Dr. Dre
2. Jay Z
“Young black Rockefeller … getting money like a bank teller.”
“I’m not a businessman— I’m a business, man!”
“Don’t worry if I write rhymes, I write checks.”
1. Dr. Dre
2. Jay Z
2. Jay Z
3. Dr. Dre
5. Macklemore & Ryan Lewis
WU … WHO?
5. Wiz Khalifa
Pharma bad boy Martin Shkreli bought the Wu-Tang Clan’s “secret album” for a reported $2 million in 2015—not nearly enough for the hip-hop collective to land on the list.
6. Nicki Minaj
$24 MILLION $20.5 MILLION
7. Pitbull $20 MILLION
8. Pharrell Williams $19.5 MILLION
9. Kendrick Lamar $18.5 MILLION
10. Birdman $18 MILLION
11. Kanye West
Apple buys Beats for $3 billion; DR. DRE gets $620 million pretax.
12. DJ Khaled $15 MILLION
13. A$AP Rocky $14.5 MILLION
14. J. Cole $14 MILLION
14. Lil Wayne
DR. DRE gets
first nine-figure payday after HTC buys half of Beats for $300 million.
14. Macklemore & Ryan Lewis
17. Snoop Dogg $12.5 MILLION
18. Eminem $11 MILLION
19. Swizz Beatz
20. Rick Ross
DRAKE inks an eight-figure deal to premiere his new releases exclusively on Apple Music.
1. Dr. Dre $110 MILLION
JAY Z’S Magna Carta… Holy Grail goes platinum before its launch when Samsung pays $5 million for 1 million copies.
20. Ludacris $10 MILLION
2. Jay Z $56 MILLION
3. Jay Z
4. Dr. Dre
4. Kanye West
2. Jay Z
5. Pharrell Williams
5. Lil Wayne
3. Dr. Dre
SWIZZ BEATZ gets a multiyear, multimillion-dollar deal to become Bacardi’s global creative director. MORE AT FORBES.COM/HIP-HOP
4. Nicki Minaj $29 MILLION
5. Birdman $21 MILLION
$427 MIL 2013
$366.5 MIL $110 MIL
$41 MIL OCTOBER 4, 2016 FORBES | 29
ENTERING “THE THIRD PHASE” OF
Hyperconverged Infrastructure Building-block IT infrastructure—which speeds deployment and cuts costs—moves to higher-level purposes. BY JOE MULLICH
ata centers weren’t designed to be adaptable or agile, so many are wheezing under the strain of the huge growth in web applications, mobile users and a flood of data they were never meant to handle. Data centers are difficult to manage, and IT departments can’t roll out the sophisticated applications companies need quickly enough. One solution to this challenge: a new type of IT architecture called hyperconverged infrastructure, which is modeled a little like Lego blocks that can add resources as needed. Hyperconverged infrastructure is based on software-defined technology and computebased architecture, which eliminates external or separate storage array. It converges the compute, storage and networking components into one box. As a result of this configuration, the network performs at a higher level, moving packets of data around more quickly and pushing more data through the network. Hyperconverged infrastructure is a true scale-out architecture that provides the ability to seamlessly add capacity and performance as needed without any manual configuration or management intervention for either adding or removing drives or nodes. “Installation consists of connecting a few cables and turning on power,” explains Qiu Long, President of IT Server Product Line, Huawei. As a result, applications that used to take months to provision and deploy can now be delivered in just days or even hours. Hyperconvergence also simplifies tasks like maintenance and troubleshooting, thus reducing operating expenses by 30% or more. Given that “faster and cheaper” has become an IT mantra, it’s no wonder the hyperconvergence marketplace is growing at lightning speed. According to tech consultancy IDC, sales
of hyperconvergence solutions jumped 170% year over year during the fourth quarter of 2015.
INFRASTRUCTURE IN A BOX Even with all the excitement that hyperconvergence is generating, a key development may have flown under the radar. “Up to now, companies have focused on small-scale, lightweight applications for hyperconvergence,” Qiu says. “However, companies are beginning to use hyperconvergence platforms for more mission-critical applications and at a much higher scale than before.” He calls this “the third phase” of hyperconvergence, which he breaks out in this way: The first stage of hyperconvergence was the physical aggregation and integration of the individual pieces of the infrastructure. The second stage was pre-installing the software to make lightweight workloads easier to apply. The next evolution is using hyperconvergence for mission-critical back-office, database and business-processing workloads. “Today, a lot of companies are still in the fi rst stage of hyperconvergence, and there are not many solutions that allow them to scale to very high-end applications,” Qiu explains. He says Huawei’s “infrastructure in a box,” FusionCube, provides a unique approach that integrates the infrastructure layers into holistic pieces layered with proprietary intellectual property. This allows them to grow to thousands of nodes and handle many petabytes of data, providing the scale and firepower companies need for next-generation applications.
THE NATURAL EVOLUTION OF INFRASTRUCTURE Matthew Eastwood, an analyst at IDC, says hyperconverged technologies are part of
QIU LONG President of IT Server Product Line, Huawei
an historic change in infrastructure, which started with simple server virtualization that will enable companies to make better use of cloud computing. He says companies will have an easier time deploying and managing resources on premises, and then seamlessly shifting to public clouds to handle unpredictable workloads, like a burst of activity generated by a successful marketing campaign. The third stage isn’t just about technology, though. Companies have also embraced a mind-set that encourages them to rethink every aspect of their operations, such as how to procure technology. “In the old days, using legacy architecture, you could buy on a project basis, for a specific use case and specific type of applications,” Qiu says. “Now, an architecture based on hyperconverged technology is more of a platform procurement, because companies want forwardlooking technology that allows them to be more efficient and cost-effective.”
LeaderBoard NEW BILLIONAIRE
Roasts and Roosts
WHICH OF today’s unicorns will become tomorrow’s blue chips? Our ongoing poll of FORBES’ Midas List of the world’s top venture capitalists provides an exclusive take on the long-term prospects of these billion-dollar startups. And the smart money is enthusiastic about Domo, a creator of easy-to-use, cloud-based dashboards that distill a business’ data onto fewer screens. 4 FUTURE BLUE CHIP
ALONG WITH FELLOW BILLIONAIRE Tony Tan Caktiong, Edgar Sia controls the imposingly named DoubleDragon Properties, originally a private joint venture between the two men that they took public in 2014. The firm is a commercial and residential developer with wide interests across the Philippines—building luxury condos in Iloilo City on Panay Island and erecting malls across the provinces. DoubleDragon’s stock has had a fiery rise, up 344% in the past year. With a 37% stake in the company, Sia has seen his net worth quintuple in five years. Sia, a grocer’s son, dropped out of college and convinced his parents to loan him $50,000 to start a restaurant called Mang Inasal (“Mr. Barbecue” in a local dialect) in 2003. He found a small location with “hidden potential,” he says— it faced a busy mall. Sia focused on Filipinostreet-food-style offerings, and Mang Inasal expanded to 300-plus locations, becoming best known for a roast chicken dish: “We really wanted to create a new category, one that wasn’t influenced by American food.” Its popularity impressed Caktiong, who bought a majority stake in Mang Inasal for $68 million in 2010.
32 | FORBES OCTOBER 4, 2016
2 SOLID EXIT
1 BUYOUT BAIT
0 TOTAL WRITEOFF
ROBERT DUGGAN +GHOST TOWN NET WORTH: $2.6 BILLION The pharmaceuticals entrepreneur and philanthropist, a large donor to the Church of Scientology, reportedly shells out $6 million for an abandoned religious colony outside Santa Cruz, Calif.
NEW BILLIONAIRE BY ABRAM BROWN ILLUSTRATION BY ARRON SACCO; CHRISTIAN PEACOCK (BOTTOM)
Most great wealth in the Philippines belongs to the aged or their heirs. At 39 Edgar Sia is the rare exception.
Welcome to Ohio. Itâ€™s on.
LeaderBoard EXECUTIVE TRAVELER
RICHEST BY STATE
Alaska POPULATION: 738,432 2015 GROSS STATE PRODUCT: $53 BILLION GSP PER CAPITA: $71,508 (RANKS NO. 5 NATIONWIDE) RICHEST: JONATHAN RUBINI,
LEONARD HYDE & FAMILIES
A Paradise Now Francis Ford Coppola debuts Coral Caye, his new private island resort. TALK ABOUT sleeping with the fishes. Godfather director Francis Ford Coppola, 77, recently unveiled the newest hideaway in his resort portfolio: Coral Caye, a tiny Caribbean island that he once used for family getaways. The 2-acre resort accommodates up to 12 people with rates starting at $895 a night but is ideal for a couple, with two rustic wooden cottages, canoes, hammocks and snorkeling gear. Butler service, a private chef and spa treatments are also available. In other words, it’s an island you can’t refuse.
ON THE BLOCK
Now Shelling …
In the real estate universe there are Donald Trump-style impresarios—and in a whole other galaxy, guys like Jonathan Rubini and Leonard Hyde. They’ve suffered just one lawsuit in 27 years of doing business, avoid high levels of debt, dread talking to the media, don’t like anyone knowing how rich they are and work out of Anchorage, Alaska, with the Chugach Mountains as their office backdrop. Rubini, 61, came to the last frontier after his father, a Los Angeles doctor, got into trouble with a handful of Alaska real estate deals in the mid-1980s when oil prices plummeted and badly damaged the economy of the energy-dependent state. Rubini stepped in to pay off banks with a small pool of family funds and a smaller reserve of his own. He stuck around long enough to start picking through the wreckage with the help of Hyde, 59, then a local real estate broker. He persuaded Hyde to quit his job and become his partner, and by the 2000s, when oil was once again booming, they took advantage of a healthy local economy to start constructing prominent commercial buildings and a massive military housing project. In 2013 they purchased the 21-story ConocoPhillips Tower, the tallest building in Alaska. Today their relative conservatism leaves them in a position to buy even more, now that the most recent oil crash has again wounded Alaska’s economy. “We’re not strung out, as many developers can be in a down cycle,” Hyde says. “There is clearly going to be a lot of opportunity here.”
IN 1976, after 137 years in business, Patek Philippe decided it was finally time to produce a luxury sport watch. Four decades later the Swiss watchmaker is celebrating the Gerald Genta-designed Nautilus with special 40th anniversary editions, debuting later this month. The timepiece is also being feted by Christie’s, which will hold four auctions of ten vintage Nautilus watches each in Dubai, Geneva, Hong Kong and New York between October and December. Christie’s already holds the record for a Nautilus sold at auction when one produced in 1982 went last year for $909,319, but one can always aim higher.
34 | FORBES OCTOBER 4, 2016
RICHARD HAYNE +$230 MILLION NET WORTH: $1.5 BILLION Shares of Urban Outfitters collar-pop 27% as CEO Hayne announces record profits thanks to big margins at Urban and its sister brand, Anthropologie.
RICHEST BY STATE BY DAN ALEXANDER ILLUSTRATION BY CHRIS LYONS; RYAN DONNELL/THE NEW YORK TIMES/REDUX (BOTTTOM RIGHT)
Christie’s will auction 40 vintage Patek Philippe’s Nautilus watches to mark the model’s 40th anniversary.
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America’s Most Valuable Soccer Teams WHILE STILL THE LITTLE BROTHER in American pro sports, Major League Soccer has nonetheless clocked tremendous growth. The average MLS team is now worth $185 million, an 18% increase from 2015 and up a staggering 80% from three years ago. Last year the league kicked off new TV deals with ESPN, Fox and Univision, more than tripling its annual take from national TV rights to $90 million. Massive demand among potential investors has led to major expansion plans. Atlanta and Minnesota will get teams next year; Los Angeles will get its second squad a year later. In all, MLS plans to grow to at least 28 teams within the next few years, doubling its 2008 size. SEATTLE SOUNDERS Seattle has blown away the league in home-game attendance every year since joining MLS in 2009. This year the team has averaged over 42,000 fans per home game, 32% more than the next team.
THE TOP-EARNING PLAYERS Player salaries have risen alongside MLS team values: Just nine soccer stars made $1 million or more in 2013. Today nearly two dozen do.
1. Ricardo Kaka
ORLANDO CITY SC NATIONAL TEAM: BRAZIL AGE: 34 EARNINGS: $9.4M (SALARY: $7.4M ENDORSEMENTS: $2M)
2. Steven Gerrard LA GALAXY NATIONAL TEAM: UNITED KINGDOM AGE: 36 EARNINGS: $8.6M (SALARY: $6.1M ENDORSEMENTS: $2.5M)
2015 Operating Team Value 2015 Revenue Income1 ($mil) ($mil) ($mil)
Seattle Sounders FC
New York City FC
Orlando City SC
Sporting Kansas City
New England Revolution
San Jose Earthquakes
New York Red Bulls
Vancouver Whitecaps FC
Real Salt Lake
Columbus Crew SC
FORBES ESTIMATES. 1EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION.
36 | FORBES OCTOBER 4, 2016
In 2015 the Quakes more than doubled their revenues after moving into Avaya Stadium, a privately financed $100 million stadium that features North America’s largest outdoor bar.
3. Sebastian Giovinco
TORONTO FC NATIONAL TEAM: ITALY AGE: 29 EARNINGS: $8.3M (SALARY: $7.3M ENDORSEMENTS: $1M)
4. Clint Dempsey
SEATTLE SOUNDERS FC NATIONAL TEAM: UNITED STATES AGE: 33 EARNINGS: $8.2M (SALARY: $4.7M ENDORSEMENTS: $3.5M)
5. Tim Howard
COLORADO RAPIDS NATIONAL TEAM: UNITED STATES AGE: 37 EARNINGS: $8M (SALARY: $5.5M ENDORSEMENTS: $2.5M)
6. Frank Lampard NEW YORK CITY FC NATIONAL TEAM: UNITED KINGDOM AGE: 38 EARNINGS: $8M (SALARY: $6M ENDORSEMENTS: $2M)
7. David Villa
NEW YORK CITY FC NATIONAL TEAM: SPAIN AGE: 34 EARNINGS: $7.9M (SALARY: $5.9M ENDORSEMENTS: $2M)
8. Michael Bradley TORONTO FC NEW YORK RED BULLS The team finally settled a long-running tax dispute in August; it agreed to transfer its stadium ownership to the local government and pay $1.3 million in annual rent.
NATIONAL TEAM: UNITED STATES AGE: 29 EARNINGS: $7.6M (SALARY: $6.6M ENDORSEMENTS: $1M)
9. Andrea Pirlo NEW YORK CITY FC NATIONAL TEAM: ITALY AGE: 37 EARNINGS: $7.4M (SALARY: $5.9M ENDORSEMENTS: $1.5M)
10. Jozy Altidore
TORONTO FC NATIONAL TEAM: UNITED STATES AGE: 26 EARNINGS: $6.4M (SALARY: $4.9M ENDORSEMENTS: $1.5M)
BY CHRIS SMITH; PLAYERS LIST BY CHRISTINA SETTIMI RICARDO KAKA: ALEX MENENDEZ/GETTY IMAGES; SEATTLE SOUNDERS: MATTHEW ASHTON - AMA/GETTY IMAGES; SAN JOSE EARTHQUAKES: JOSH EDELSON/AFP/GETTY IMAGES; NEW YORK RED BULLS: KIRK IRWIN/GETTY IMAGES
SAN JOSE EARTHQUAKES
U30 VILLAGE City Hall Plaza
U30 CREATE Harvard Business School U30 CAPITAL Faneuil Hall
U30 IMPACT Northeastern University
U30 TECH Emerson College
Make an Impact. Change the World. Attending the Forbes Under 30 Summit on October 16-19, 2016? Join HP, the City of Boston and Forbes as we try to tackle some of the city’s more formidable challenges posed by rapid urbanization. During the 4-day event, you’ll have the opportunity to contribute your own creative ideas to the mix via HP Premium Devices located at the five Summit venues throughout the city. The best ideas will be put into action on the final day at the Under 30 Hack-A-Thon. See HP PCs with Intel® Core™ processors. #HPReinvent © Copyright 2016 HP Development Company, L.P. Intel, the Intel Logo, Intel Inside, Intel Core, and Core Inside are trademarks of Intel Corporation in the U.S. and/or other countries.
A Thin and Sleek 2-in-1 Powerhouse The HP Elite x2 Reinvent Obsession HP recommends Windows 10 Pro
Get one at: hp.com/go/thinandsleek/forbes Powered by the Intel® CoreTM m7 processor. Intel Inside®. Powerful Productivity Outside. Multi-core is designed to improve performance of certain software products. Not all customers or software applications will necessarily benefit from use of this technology. Performance and clock frequency will vary depending on application workload and your hardware and software configurations. Intel’s numbering is not a measurement of higher performance. © Copyright 2016 HP Development Company, L.P. Intel, the Intel Logo, Intel Inside, Intel Core, and Core Inside are trademarks of Intel Corporation in the U.S. and/or other countries.
LeaderBoard THE BLANK OF BLANK
The ELON MUSK of CROATIA SEVEN YEARS AGO Mate Rimac began messing around with his shamrock-colored 1986 BMW E series, tweaking its guts to simultaneously make it faster and electric-powered. Rimac, then a 21-year-old amateur car racer, eventually got the boxy E series to do a 12-second quarter-mile (a far quicker pace than any Tesla can manage). But it wasn’t enough for Rimac: “I wanted to make the supercar of the 21st century.” Working from skunkworks in his hometown of Sveta (pop.: 18,000) in northern Croatia, he raised $10 million in financing from a group of investors (including a Chinese firm, IAMAL, which owns a stake in Forbes Media) and began building his dream car, the Concept One. It debuted at the Frankfurt Motor Show in 2011. The current model is a firecracker that can go from 0 to 60 in 2.6 seconds (faster than the average Ferrari), thanks to 1,088hp generated by a system of four electric engines. Rimac has sold only six Concept Ones (for $1 million each) and plans to make just two more before moving on to a new design.
30 UNDER 30
Good Sports A smarter playbook from the Forbes 30 Under 30, in 30 words or less.
CHRISTINE BAUGH PH.D. CANDIDATE, HARVARD | 28
Baugh is a former college athlete herself (rowing), and her research on sports-induced concussions has increased pressure on university teams to more carefully monitor head injuries.
VICENTE FERNANDEZ SPORTSMANIAS | 24
Fernandez founded SportsManias, a feed of news, stats and rumors culled from Twitter. Fans can customize their streams to zero in on specific teams and players.
NOEL HOLLINGSWORTH At sports analytics consultancy Second Spectrum, Hollingsworth helped NBA teams use player movement data to win more games. Now he applies those techniques to streamline corporate logistics.
WHITNEY PING U.S. OLYMPIC COMMITTEE | 29
The Bain Capital VP went to the 2004 Athens Olympics to play table tennis for Team USA. With Rio behind her, she’s working to bring the 2024 Olympics to L.A.
STEVE WYNN -$110 MILLION NET WORTH: $2.4 BILLION Gambling tycoon opens the doors to his new $4.2 billion casino in Macau— the most expensive property he has ever constructed—but investors aren’t impressed. Shares sink 9% and now stand at barely one-third of their 2014 heights.
40 | FORBES OCTOBER 4, 2016
ERIC WALLER SEATGEEK | 29
SeatGeek is the world’s largest aggregator of sports and event tickets and in July became the official ticketing partner for Major League Soccer. Waller, now CTO, was its first employee.
THE BLANK OF BLANK BY ABRAM BROWN; 30 UNDER 30 BY KATHRYN DILL MISO LISANIN XINHUA NEWS/NEWSCOM (TOP LEFT); JEROME FAVRE/BLOOMBERG (BOTTOM); ILLUSTRATIONS BY PATRICK WELSH
UNCOUNTABLE | 26
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As returning veterans hunted for opportunities, the Better Business Bureau feared hucksters might take advantage of their ambitions. So it put together a list of nine common schemes, including the “salted business,” a restaurant sold to someone who had observed a full dining room—actors hired to make a dive seem popular.
As FORBES’ September 2017 centennial approaches, we’re unearthing our favorite covers.
Red Dawn: Aug. 1, 1946
AMERICA HAD JUST defeated the Nazis and Imperial Japan, but already had a new enemy: communism. The country had a twofold fear: That communism might strike from abroad, backed by the U.S.S.R., or from within. Corporate bosses looked mistrustfully at blue-collar workers, unbound from the “no strike” pledge that kept factories open during World War II, and worried about red sympathizers. Our story was penned by William J. Casey, a veteran of the Office of Strategic Services, America’s wartime foreign intelligence service and CIA predecessor. He gave some sound advice to maintaining labor relations, such as quickly settling grievances. Yet some of it prefigured the hysteria that would culminate a few years later in McCarthyism. Casey offered up “Nine Ways to Spot a Communist,” which included tracking workers’ activities when they were off the clock to see if they attended rallies or meetings organized by known communists. Casey would make a career out of being a fierce cold warrior—finally becoming CIA director under Ronald Reagan.
SIGN OF THE TIMES Starting a gas station looked like a fine investment with America beginning to abandon cities for the suburbs. It cost about $2,000 to open a station, $25,000 in today’s dollars, and a well-run shop could make as much as $600 a month (roughly $7,000) by also selling small car parts and accessories, like wipers and batteries.
42 | FORBES OCTOBER 4, 2016
Making Movie Magic Without Bell System sound equipment, pictures might’ve stayed silent.
BY ABRAM BROWN NARVIKK/GETTY IMAGES; STEVEN GOTTLIEB/GETTY IMAGES
Pedal to the Metal
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THE INTEREST GRAPH Put the needle on the record: Online readers of our Sept. 13 issue raved about our coverage of the top-earning DJs on the planet. 423,229 views
The World’s Highest-Paid DJs: Electronic Cash Kings 2016
Nonstop Benioff: Inside the Master Networker’s Audacious Plan to Disrupt Salesforce—and the World 162,011 The World’s Most Innovative Companies 114,877
Inside Billionaire James Dyson’s Reinvention Factory: From Vacuums to Hair Dryers and Now Batteries 39,180
The Super Sizer: How Greg Flynn Became America’s Largest Restaurant Franchisee 21,093 A Step Above: Shoemaker Jack Erwin Is Disrupting the Market for Fine Footwear 18,177
“The latest wonder from Dyson’s workshop is the Supersonic blow-dryer. He spent $71 million (and went through 1,000 miles of human hair) developing it.”
“ ‘The idea was, let’s make beautiful men’s dress shoes for $100 and sell them for $200. It was a completely naïve, totally simplistic plan.’ ”
Follow Your Heart Has Been Quietly Selling Vegan Food for More Than 40 Years 16,849 Corkscrews: Imbibing With the Forbes 30 Under 30
THE BOMB 373 VIEWS 44 | FORBES OCTOBER 4, 2016
“Follow Your Heart has captured excitement with several new products, including the algaebased VeganEgg, introduced last fall.”
How, readers of our Electronic Cash Kings list wondered, is it possible for DJs to earn tens of millions of dollars? THE GUARDIAN: “It’s amazing the amount of money you can make by pressing ‘play.’ That might be reductive, but that’s the lesson to be learned.”
ALEXANDRA POLLARD, GIGWISE: “Though [listtopper Calvin Harris] saw his earnings drop by $3 million this year—a catastrophic amount of money for most people—it was but a drop in the ocean for him.”
GEORGE VARGA, LAS VEGAS SUN: “It’s good news, bad news for electronic music king Calvin Harris. But it’s hard to feel sorry for someone who still is paid $400,000 a night each time he performs in Las Vegas.”
RETRO METAS: “An idiot can be a DJ. And only a bigger idiot would pay these degenerates more than $200 a day for their services.”
NELO, INTERNETDJ.COM: “You have to wonder, is it really worth the exorbitant ticket prices to see the likes of Harris perform? Surely the bubble will have to burst sooner rather than later.”
CAITLIN WHITE, UPROXX: “Women are paid less than men in pretty much every field, and the music industry is no different. The editors of this list remain hilariously oblivious to this issue: No conflict about using the word kings, because there are no women!”
BY ALEXANDRA WILSON
ALEX KONRAD’S Sept. 13 cover profile of Marc Benioff, the founder and CEO of Salesforce, gave readers a glimpse into the “integrated life,” as Benioff modestly puts it, of this tireless entrepreneur. He dished Konrad a scoop about Salesforce’s new artificial-intelligence system—and sang Styx’s “Mr. Roboto” with him during karaoke in Tokyo. “I rarely read business stuff, but Benioff is clearly amazing,” tweeted Adele Armstrong. Others took note of his hundreds of millions of dollars in philanthropic contributions. Wrote Katherine Constantine: “Are we finally entering an era of conscious capitalism as a mainstay of business?” And then there were those simply agog at Benioff ’s red-zone lifestyle. “Mind-blowing,” tweeted digital-media specialist Eric Franchi. “That 36 hours in Japan must have been a blast.”
DAVID MALPASS // CURRENT EVENTS
ITâ€™S HARD TO KNOW which government outrage is the most objectionable. Everyone has his or her own list of major grievances. Iâ€™m tendering economic advice to the Trump campaign, so hereâ€™s mineâ€”the short version. Ć€Ç‡-Ç‡,.,3Ç‡) Ç‡..Ç‡(Ç‡ .,1,ĹťÇ‡ Hillary Clinton transmitted secret information through open Internet "((&-ĹşÇ‡-Ç‡Ç‡ ),',Ç‡..Ç‡*,.'(.Ç‡ official, I find it inconceivable that she 1-Ç‡."#-Ç‡,%&--Ç‡(Ç‡.".Ç‡."Ç‡..Ç‡ *,.'(.Ç‡-3-.'Ç‡&))%Ç‡."Ç‡).",Ç‡13Ç‡-Ç‡#.Ç‡1-Ç‡"**(#(!Ĺş Ć€Ç‡,-#(.Ç‡'Ç‡,(-)'Ç‡',#(Ç‡")-.!-Ç‡ ),Ç‡ĆŞĹ´Ĺ°Ĺ°Ç‡'#&&#)(Ç‡#(Ç‡ currency that was air-freighted to the Iranian Revolutionary Guard, one of the worldâ€™s most dangerous forces. Ć€Ç‡"Ç‡,-#(.Ç‡Ć†-& Ć?,.#ĹŚĆ‡Ç‡."Ç‡,#-Ç‡.,.3Ç‡)(Ç‡!&)&Ç‡1,'#(!ĹťÇ‡ -),(#(!Ç‡."Ç‡(.Ć‰-Ç‡.,.3Ç‡/."),#.3ĹťÇ‡)(Ç‡) Ç‡."Ç‡ /('(.&Ç‡*#&&,-Ç‡ ) Ç‡."Ç‡ĹşĹşÇ‡)(-.#./.#)(Ĺş Ć€Ç‡"Ç‡,&Ç‡-,0Ç‡"-Ç‡#(/,,Ç‡.,#&&#)(-Ç‡) Ç‡)&&,-Ç‡#(Ç‡.2*3,Ç‡&##&#.#-Ç‡.)Ç‡/3Ç‡Ç‡ĆŞĹ´ĹşĹ´Ç‡.,#&&#)(Ç‡)(Ç‡*),. )&#)Ç‡.".Ç‡#.Ç‡#(.(-Ç‡.)Ç‡")&Ç‡)(Ç‡.)Ç‡ ),Ç‡ years, maybe decades. It pays banksâ€”many of them foreign-ownedâ€” (,&3Ç‡ĆŞĹąĹ˛Ç‡#&&#)(Ç‡*,Ç‡3,Ç‡#(Ç‡ĹŚ((#(!ĹťÇ‡3.Ç‡."Ç‡)(-.#./.#)(Ç‡#-Ç‡&,Ç‡ that the power for appropriations and debt rests solely with Congress. .Ç‡."Ç‡(Ç‡) Ç‡/!/-.Ç‡."Ç‡Ç‡1(.Ç‡0(Ç‡ /,.",ĹťÇ‡,#-#(!Ç‡."Ç‡-*.,Ç‡ ) Ç‡#.-Ç‡/3#(!Ç‡Ç‡Ć†,),Ç‡,(!Ç‡) Ç‡--.-Ć‡Ć’#.-Ç‡/,,(.Ç‡*),. )&#)Ç‡#(&/-Ç‡ ,-/,3Ç‡)(-ĹťÇ‡-Ç‡1&&Ç‡-Ç‡)'*&2Ç‡!)0,('(.Ć?!/,(.Ç‡'),.!!Ç‡ -/,#.#-Ç‡(Ç‡."Ç‡.Ç‡) Ç‡((#Ç‡ Ç‡(Ç‡,#Ç‡ ĹşÇ‡"#-Ç‡Ç‡.,#&Ç‡ &&))(Ç‡&3-Ç‡."Ç‡!,)/(1),%Ç‡ ),Ç‡Ç‡*)--#&Ç‡&#(.)(Ç‡'#(#-.,.#)(Ç‡.)Ç‡ ,1,Ç‡"&* /&Ç‡),*),.#)(-Ç‡1#."Ç‡Ç‡)(Ç‡*/,"--Ç‡),Ç‡.)Ç‡ /(Ç‡#( ,-.,/./,Ç‡*,)$.-Ç‡))-.Ç‡3Ç‡#(0-.'(.-Ç‡ ,)'Ç‡."Ç‡Ĺş Ć€Ç‡/&#Ç‡*(-#)(Ç‡ /(-Ç‡)(-.(.&3Ç‡/*.Ç‡."#,Ç‡ĹŚ((#&Ç‡'(-Ç‡)(Ç‡ .2*3,-ĹťÇ‡&&Ç‡."Ç‡/( /(Ç‡&##&#.3ĹťÇ‡/.Ç‡."3Ç‡)(Ć‰.Ç‡#-&)-Ç‡."#,Ç‡ projected outlays. How much in benefits have they promised to pay )0,Ç‡."Ç‡(2.Ç‡ĹąĹ°Ç‡.)Ç‡Ĺ˛Ĺ°Ç‡3,-Ć„Ç‡)Ç‡)(Ç‡(Ç‡-3ĹşÇ‡ /(##*&Ç‡)(Ç‡#--/,-Ç‡ ,Ç‡2'*.Ç‡ ,)'Ç‡(),'&Ç‡#-&)-/,Ç‡,/&-ĹşÇ‡"Ç‡ /(-Ç‡(Ç‡)(Ç‡#-suers have immense political power, so Washington has no intention of regulating them properly, leaving massive bailouts looming on the horizon. Ć€Ç‡#.")/.Ç‡Ç‡-#(!&Ç‡*/&#(Ç‡0).Ç‡."Ç‡,-#(.Ç‡#'*&'(.Ç‡Ç‡-1*ing new health care system that was designed to fail from the get-go. It has harmed millions of people and cost billions of dollars. Ć€Ç‡#&Ç‡#((,Ç‡#.#-Ç‡)*,.Ç‡#(Ç‡Ç‡)(Ć?*,.3Ç‡1),&Ç‡) Ç‡),,/*.Ç‡()(profits and pay-to-play cronyism that leaves millions of people in the &/,"ĹşÇ‡ (Ç‡&.Ç‡/!/-.Ç‡."Ç‡Ç‡&#'Ç‡.".Ç‡."Ç‡)()'3Ç‡1-Ç‡(,#(!Ç‡
Ć†'2#'/'Ç‡'*&)3'(.ĹşĆ‡Ç‡"#-Ç‡'%-Ç‡Ç‡ mockery of the labor statistics, which show .".Ç‡ĹšĹ´Ç‡'#&&#)(Ç‡/&.-Ç‡,(Ć‰.Ç‡#(!Ç‡)/(.Ç‡#(Ç‡ the labor force. Ć€Ç‡"Ç‡(.#)(&Ç‡.Ç‡1#&&Ç‡-/,*--Ç‡ĆŞĹ˛Ĺ°Ç‡.,#&&#)(Ç‡#(Ç‡ Ĺ˛Ĺ°ĹąĹˇĹşÇ‡ .Ç‡-")/&Ç‡Ç‡,ĹŚ((Ç‡.Ç‡'/"Ç‡&)(!,Ç‡ './,#.#-ĹťÇ‡/.Ç‡."Ç‡Ç‡#-Ç‡/3#(!Ç‡%Ç‡."Ç‡ &)(!Ć?'./,#.3Ç‡.ĹťÇ‡&0#(!Ç‡.2*3,-Ç‡2posed to higher interest rates. "Ç‡)(!,--#)(&Ç‡/!.Ç‡ĹŹÇ‡-3-Ç‡.".Ç‡ current policies will cause economic growth .)Ç‡Ç‡)(&3Ç‡Ĺ˛ĆśÇ‡*,Ç‡3,ĹşÇ‡".Ç‡-.!(.#)(Ç‡1#&&Ç‡ */-"Ç‡.Ç‡/*Ç‡().",Ç‡ĆŞĹąĹ°Ç‡.,#&&#)(Ç‡)0,Ç‡."Ç‡ (2.Ç‡Ĺş )&#.##(-Ç‡&#'Ç‡.)Ç‡"0Ç‡Ç‡.Ç‡&#'#.ĹťÇ‡/.Ç‡ itâ€™s written in such a way that they can keep spending freely. Washington has tapped into an endless supply of money. The debt limit doesnâ€™t really cut into spending, because it comes into play after the spending has occurred. Thatâ€™s like saying you wonâ€™t eat a single bite until youâ€™ve lost ten pounds, calling that a diet and renewing the pledge every month. "Ç‡)(&3Ç‡-)&/.#)(Ç‡.".Ç‡1#&&Ç‡"&*Ç‡.2*3,-Ç‡ is to rewrite the debt limit so that it provides actual restraint on spending once the govern'(.Ç‡2-Ç‡#.ĹşÇ‡(Ç‡)(*.Ç‡ ),Ç‡."Ç‡,1,#.Ç‡ is to require a gradual decline in debt as a -",Ç‡) Ç‡ĹşÇ‡ Ç‡0#)&.ĹťÇ‡**&3Ç‡#.#)(&Ç‡ spending restraint. Escalate the restraint with more powerful rules until the debt gets back to its downward glide path. (,Ç‡/,,(.Ç‡*)&##-Ç‡."Ç‡Ç‡#-Ç‡*,)$.#(!Ç‡ Ç‡-.3Ç‡#(,-Ç‡#(Ç‡."Ç‡*/&#Ç‡.Ć?.)Ć?Ç‡ ,.#)Ç‡.)Ç‡Ĺ¸ĹľĹşĹľĆśÇ‡#(Ç‡Ĺ˛Ĺ°Ĺ˛ĹśÇ‡0,-/-Ç‡ĹˇĹľĹşĹśĆśÇ‡.)3Ç‡(Ç‡ ĹłĹšĹşĹłĆśÇ‡#(Ç‡Ĺ˛Ĺ°Ĺ°Ĺ¸ĹşÇ‡ .Ć‰-Ç‡#'*,.#0Ç‡.)Ç‡,0,-Ç‡."#-Ç‡ uptrend. The reality is that debt as a share of Ç‡#-Ç‡&#%&3Ç‡.)Ç‡!)Ç‡/*Ç‡/(&--Ç‡*)&##-Ç‡"(!Ç‡ ,'.#&&3Ç‡#(Ç‡ 0),Ç‡) Ç‡ -.,Ç‡Ç‡!,)1."Ç‡ and slower spending growth. ))(Ç‡ .,Ç‡."Ç‡ (/,3Ç‡Ĺ˛Ĺ°ĹąĹˇÇ‡#(/!/,.#)(ĹťÇ‡ Ç‡(1Ç‡,-#(.Ç‡1#&&Ç‡"0Ç‡.)Ç‡.%&Ç‡."Ç‡(tional debt, reestablish checks and balances and set health care on a better course, as well as tackle a long list of major problems. F
DAVID MALPASS, GLOBAL ECONOMIST, PRESIDENT OF ENCIMA GLOBAL LLC; PAUL JOHNSON, EMINENT BRITISH HISTORIAN AND AUTHOR; AND AMITY SHLAES, PRESIDENTIAL SCHOLAR AT THE KINGâ€™S COLLEGE AND CHAIR OF THE COOLIDGE FOUNDATION BOARD, ROTATE IN WRITING THIS COLUMN. TO SEE PAST CURRENT EVENTS COLUMNS, VISIT OUR WEBSITE AT WWW.FORBES.COM/CURRENTEVENTS.
46 | FORBES OCTOBER 4, 2016
THOMAS KUHLENBECK FOR FORBES
EIGHT OUTRAGES URGE TRUMP TO UPEND WASHINGTON
Find Your Link to Success in South Korea South Korea is a country known for more VJCPLWUVKVUĆƒCUJ[ICFIGVUCPFTGXQNWVKQP CT[VGEJPQNQI[tKVoUCNUQHCUVGOGTIKPICUCP KFGCNKPXGUVOGPVJWDHQTHQTGKIPKPXGUVQTU The nation is the fourth-easiest place to do business in the world, according to a report from the World Bank. This comes as little surprise, given that the country has inked free trade agreements (FTAs) with 53 countries to date. Itâ€™s also the only country among the worldâ€™s top ten trading nations to seal FTAs with the worldâ€™s three largest economies: the United States, China and the EU. Today, a growing number of foreign companies are using South Korea as a springboard to enter major markets in Asia and beyond, thanks to the countryâ€™s extensive business PGVYQTM/QUVPQVCDN[-QTGCoUPGYN[TCVKĆ‚GF agreement with China is set to transform the peninsula into an economic powerhouse.
Fostering Innovation and Growth Along with its far-reaching FTA network, South Korea has everything you need to make your business a success. Thanks to its ideal geographical location, outstanding human resources and top-notch infrastructure, some 16,000 foreign companiesâ€”from big corporations to burgeoning startupsâ€”are turning to Korea for business expansion. Among them, VGEJIKCPV)QQINGQRGPGFKVUĆ‚TUV#UKCPECO pus in Seoul to foster some of the worldâ€™s most innovative minds. South Korea also serves as a great ecosystem for companies involved in newly emerging
industries such as renewable energy and ICT convergence. By putting a strong emphasis on R&D spending and taking various measures to RTQOQVGCEVKXKVKGUKPVJGUGĆ‚GNFUVJGIQXGTP ment nurtures intellectual curiosity throughout the nation. In particular, it is expanding the scope of R&D for small and medium enterprises, ultimately strengthening the nationâ€™s competitiveness as a result.
A Key Business Partner Devoted to making foreign companies and investors feel at home, South Korea has adopted a new slogan to further promote foreign direct investment: â€œGlobal Link to Success.â€? As the slogan suggests, Korea aims to be a key facilitator of business partnerships, growth and prosperity. For any companies looking to expand in South Korea, the country will host Foreign Investment Week (FIW)â€”the countryâ€™s largest international investment promotion eventâ€” from September 27 to 29 in Seoul. FIW will provide investors and businesses with helpful information about Koreaâ€™s investment environment, its business opportunities and its foreign investment policies.
For more information on doing business in South Korea, contact one of KOTRAâ€™s (Korea Trade-Investment Promotion #IGPE[0QTVJ#OGTKECQHĆ‚EGU or visit GPINKUJMQVTCQTMT. KOTRA is a state-funded trade and investment promotion organization operated by South Koreaâ€™s government. You can also visit KPXGUVMQTGCQTI. Invest Korea is the national investment promotion arm of KOTRA.
KOTRA Offices 7PKVGF5VCVGU CHICAGO, ILL. (312) 644-4323 email@example.com
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LOS ANGELES, CALIF. (323) 954-9500 firstname.lastname@example.org
NEW YORK, NY (212) 826-0900 email@example.com
SILICON VALLEY, CALIF. (408) 432-5000 firstname.lastname@example.org
WASHINGTON, D.C. (202) 857-7919 email@example.com
%CPCFC TORONTO, CANADA (416) 368-3399 firstname.lastname@example.org
VANCOUVER, CANADA (604) 683-1820 email@example.com
RICH KARLGAARD // INNOVATION RULES
CULTURE AND SUCCESS
RICH KARLGAARD IS THE PUBLISHER AT FORBES. HIS LATEST BOOK, TEAM GENIUS: THE NEW SCIENCE OF HIGHPERFORMING ORGANIZATIONS, CAME OUT IN 2015. FOR HIS PAST COLUMNS AND BLOGS VISIT OUR WEBSITE AT WWW.FORBES.COM/KARLGAARD.
48 | FORBES OCTOBER 4, 2016
everywhere but acutely felt among Asians, if you believed the sudden heat in the room. Entire books have been written on the bamboo ceiling and the roles of shyness and introversion. It must be said that introversion and shyness are not the same thing. Introverts aren’t necessarily shy. They simply prefer to restore themselves through solitude and a good book. Extroverts feel energized by other people. The worst thing to be, however, is an extrovert who is shy, admitted an Asian HR manager on my panel. “You are energized by people, but fear holds you back.” She conquered her shyness by taking speech classes at Toastmasters.
WHAT IS YOUR CULTURE? Everyone brings baggage—good and bad— from his or her culture. A surprise bestseller this summer was Hillbilly Elegy: A Memoir of a Family and Culture in Crisis (Harper, $27.99) by J.D. Vance. The author is a San Francisco venture capitalist and Yale Law School grad who was born in a small Ohio town. While growing up, Vance split his time between there and another small town in Kentucky. His mother was married and divorced several times, with numerous boyfriends filling in the gaps. Vance’s only role model was his chainsmoking, swearing-like-a-sailor grandmother, who held Vance to high standards. Vance’s memoir is about America’s white underclass, specifically the Scots-Irish who populate Appalachia. Central to this culture is honor. But, writes Vance, as economic prospects fell, the honor became perverted into a binary fight-or-flight response to life’s challenges. The fights were often physical and fueled by alcohol; the flights were people not showing up for work and fathers skipping town. In these politically correct times it seems rude to talk about culture. But succeeding in a hyperconnected economy depends on our ability to leverage the best and transcend the worst of our cultural heritages. What is your heritage? How has it helped you in your career? What have you had to leave behind? Write and tell me. F
THOMAS KUHLENBECK FOR FORBES
ON A RECENT STEAMY Saturday morning in Hong Kong I made the very slow ten-minute walk from the Hyatt Regency to the campus of the Chinese University of Hong Kong. The walk was slow because my northern California bones found the heat and humidity oppressive, and I didn’t want to arrive in a sweat-soaked shirt. But there was another oppressive factor to my day. I was scheduled to appear on campus on a panel hosted by HPAIR—the Harvard Project for Asian & International Relations. My panel’s topic: The Bamboo Ceiling. What could I, a Caucasian son of the American Midwest living in California’s Silicon Valley, credibly say about the bamboo ceiling? I resolved to stick to the facts. Google search had armed me with many—and they were damning. In my adopted home of Silicon Valley nearly all of the large employers are tech companies—Apple, Intel, Google, Facebook, etc. Between 25% and 30% of professional tech employees are Asian-Americans, mostly first- and second-generation, yet only 14% of the corporate hierarchy—the “C-suite”—is AsianAmerican. The most successful company in the world—Apple—had precisely zero Asian-Americans on its list of corporate leaders. I came to my panel armed with these embarrassing facts. My intent was to relay them and shut up. No opinion of mine was going to have any credibility with a Hong Kong moderator and a panel made up of Hong Kong Asians, an Asian-American working for a Vietnamese venture capital firm and a corporate executive from Jordan who lived in Singapore. The audience of 150 students were mostly from Hong Kong, mainland China, India and other Asian and Middle Eastern countries. When the moderator had finished asking her rather predictable questions, she invited the students to raise their hands and ask any questions they had. Bang! The first one was from a young Chinese mainlander. “What about Asian shyness? None of you talked about that! It’s a bamboo ceiling.” Suddenly, there it was—the cultural elephant in the room. All of the panelists had professional reputations to protect, so we hadn’t broached that very personal topic. Though once terribly shy myself, mine had been a Norwegian-American-Midwestern kind—“Ole loved Lena so much he almost told her so” goes the joke. I had plenty to say about shyness, its roots and how it creates barriers to opportunity. But say it here? The young woman’s question turned the panel upside down. During the remaining time it was all anyone on the panel or in the audience wanted to talk about. Shyness is a common affliction among people
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TECHNOLOGY GARMIN’S MAP QUEST 58
OCTOBER 4, 2016
ENTREPRENEURS THE NEW RAZORS WAR 63
MONEY & INVESTING CRISIS-PROOF FUNDS 66
Diapers, dead animals, a loaded gun. It’s all in a day’s work sorting through residential “recycling” at Waste Management’s Houston plant. Of the 300 tons that come through each day, about 15% isn’t even worth processing and gets sent straight to the landfill. PAGE 52 PHOTOGRAPH BY DARREN CARROLL FOR FORBES OCTOBER 4, 2016 FORBES | 51
Rethinking Recycling Not all of your trash has value. BY CHRISTOPHER HELMAN
items. “People mean well,” Steiner says. But there’s an “unintended consequence” of giving people bigger recycling bins and more opportunities to recycle—soon they want to recycle everything. Plastic shopping bags are a common culprit, old garden hoses, too; they wrap around machinery and gum up the works. “It shuts down the plant. Makes it harder to recycle things of real value,” Steiner says. This matters now because the economics of recycling have turned upside down. Recycling used to be the great example of doing well by doing good. It was green—and it was profitable. In 2014, back when China was still hungry for our lightly used paper, aluminum and steel, you could get $100 or more for the
Glass is now trash at this Houston recycling plant. “Being green costs money,” says Waste Management CEO David Steiner.
DARREN CARROLL FOR FORBES
n many days it just looks like a load of garbage,” says David Steiner, CEO of Waste Management, referencing the company’s recycling processing plant in Houston. It is a loud, stinky, dusty, 40,000-square-foot Rube Goldberg machine that handles 300 tons a day. Material flies from one conveyor belt to another. Magnets pull off steel cans. Screens skim up cardboard and paper. Optical sensors trigger air puffers that pop bottles into the right chutes. Not all of it gets recycled; about 15% of the stuff citizens put in their recycling bins should have gone in the garbage can. Workers wearing bandannas against the dust stand along the conveyor belt handpicking
52 | FORBES OCTOBER 4, 2016
BEFORE YOU DECIDE 2016
POLITICAL COVERAGE THATâ€™S
ON THE MONEY
expand my practice to give more best friends second chances.
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average ton of residential recycling. That was plenty to cover $80 a ton in processing costs and leave a nice margin for Waste Management’s shareholders. But that changed. Slower growth in China cut demand. The oil glut has made fresh plastics cheaper than the recycled stuff. Beijing even erected a so-called “Green Fence,” which enacted standards on imports of Americans’ recycling. Now you’d be lucky if your mixed ton of recycled material gets $80—the same as the cost of processing it. The new paradigm for Waste Management’s municipal customers: “When prices are high we’ll pay you to recycle. When prices are low we have to charge you,” Steiner says. During the commodity boom’s heyday Waste Management generated aftertax cash flow of about $150 million a year on recycling operations and was investing $100 million a year in recycling. Since 2013, however, the company’s revenues from recycling have fallen 20% to $1.2 billion last year (out of $13 billion in total sales, the majority from traditional trash collection). To stop the bleeding Steiner slashed moneylosing green initiatives, sold a high-tech incinerator business for $2 billion and mothballed 22 of 126 recycling plants. In the past 18 months the company has renegotiated contracts with 150 municipalities. “Now we make $40 million to $50 million and reinvest nothing,” Steiner says. Investors are optimistic; Waste Management shares are up 28% in the past year. In Houston, for example, the company was losing $1 million a year. During contract renegotiations early this year, the city considered doing away with recycling altogether rather than pay for the privilege. Houston finally agreed to a contract that pays Waste Management $3 million a year for recycling but ends glass pickup. (It would have cost more than $100 a ton to crush that glass into a dirty mass, and it has few buyers.) Landfill costs are just $27 a ton, and buried glass bottles don’t leach any toxic chemicals. Recycling glass would have cost Houston an extra $1 million a year. Without glass it’s easier for Waste Man-
agement to focus on the high-value stuff. Last year the EPA did a study looking at the “embedded energy” of various materials and how much energy is saved by recycling them. The clear leader is aluminum. Because the metal requires so much electricity to make yet so little to reprocess into new cans, every ton of aluminum cans contains energy equivalent to 26 barrels of oil. That energy value is evident in the $1,200 price for a ton of scrap aluminum. Other stuff worth recycling includes copper wire, with the energy of 14 barrels of oil per ton, while mixed plastics have 7, personal computers 5, steel cans 4 and newspapers 3. A ton of glass, by comparison, has just a half-barrel’s worth of energy, which is about what it takes to drive it to the landfill. Even in ubergreen California, scrap glass has a “negative value” of $6 per ton. According to the Container Recycling Institute, California has seen 800 recycling centers— about a third of its total—close since 2013. Of course some eco-zealous cities don’t care about such market signals. In a pilot program New York City has paid $1,200 a ton to collect 16,000 tons of kitchen scraps since 2014. “If you want to have a high diversion rate and you’re ready to raise taxes, we can help,” Steiner says. “We can turn your bottles back into oil. We can burn it to make energy. Or we can put it into a landfill. There’s a green spectrum. And a cost spectrum. The most green is the most expensive.” Steiner isn’t worried about marginally more solid waste headed for landfills instead of being recycled. Waste Management invests $400 million a year in its 249 landfills, which are much cleaner than those of a generation ago and are engineered to capture the methane gas generated by rotting garbage. The company makes enough landfill gas to power 470,000 homes. He envisions a day when it could make economic sense to reprocess landfills to “mine” more metal and plastic out of them. “There is value in everything we bury,” he says. “Could come a day when we want to dig it up and cart it off. If we ever get $200 oil and China growing at 7%, it might be worth it.”
BY THE NUMBERS INSTANT GRATIFICATION SURE, IT MAKES JAVA SNOBS CLUTCH THEIR YIRGACHEFFE POUR-OVERS IN HORROR, BUT IN MUCH OF THE WORLD INSTANT COFFEE IS HOT STUFF: BY 2020 EUROMONITOR EXPECTS GLOBAL SALES TO INCREASE 14% FROM 2015 TO $31.5 BILLION. MOST OF THAT JOLT WILL BE FELT IN ASIA, THE MIDDLE EAST AND AFRICA, WHERE INSTANT IS THE GATEWAY DRUG FOR MILLIONS OF COFFEE NEWBIES. IN NORTH AMERICA? IT’LL STILL COME IN HANDY AS FERTILIZER.
INSTANT COFFEE SALES BY REGION
$9.4 bil 2020 (EST.)
$11.2 bil CHANGE
Middle East/Africa $3.9 bil $5.3 bil 35.3%
Eastern Europe $4.5 bil $4.8 bil 6.8%
Western Europe $4.4 bil $4.3 bil –0.8%
South America $3.7 bil $4.3 bil 16.5%
North America $1 bil $850 mil –16.5%
Australasia FINAL THOUGHT
“Without economics, recycling is nothing more than a meaningless exercise in glorifying garbage.” —ADAM MINTER 56 | FORBES OCTOBER 4, 2016
$770 mil $780 mil 1.5%
MARKUS GUHL/GETTY IMAGES
Meet entrepreneurs and innovators who are harnessing technology to promote better health, optimize active pursuits and power stylish performance. Visit forbes.com/drivingdisruption to read more
Map Quest Smartphone navigation apps threatened to push Garmin off the road. To survive, it has shifted to wearables and relied on decades of manufacturing experience to catch up. BY ALEX KNAPP
58 | FORBES OCTOBER 4, 2016
pany’s height it was generating $2.5 billion in sales—nearly three-quarters of Garmin’s total revenue—and pushed the stock to a peak of around $120 a share in October 2007. But just a few months earlier, in June, Apple had introduced a little device called the iPhone. Paired with the free Google Maps navigation app, the smartphone eliminated the need for a separate device. Sales of Garmin’s GPS units plummeted by almost $1 billion in three years, and the company lost almost 90% of its market value. Pemble replaced Garmin’s billionaire cofounder Min Kao as CEO in 2013 as the company desperately searched for a different route. Low-priced integrated chips, which combine a processor, memory and connectivity, had suddenly made small, sensor-laden gadgets—wearables—much less expensive to make, and smaller companies like Fitbit and Jawbone had jumped to early leads in the market. Garmin joined the race, too, and
With Cliff Pemble driving Garmin in a new direction, the company’s stock has raced up 33% in the past year (versus the Nasdaq’s 12.5% increase).
RYAN NICHOLSON FOR FORBES
n most mornings Cliff Pemble can be found jogging the treelined streets of suburban Kansas City. At 51 he can still move his lanky frame with impressive speed—clocking a sub-eight-minute mile. And as the CEO of Garmin he has access to the latest gadgets that track his performance. Circling a lake in a local park, Pemble runs with a green Garmin Forerunner 235 sports watch on one wrist and a black Garmin Vivosmart HR+ band on the other. The first monitors distance and pace; the second tracks his heart rate and steps. Pemble doesn’t listen to music on his runs, partly because he uses the period for “think time” and partly because of a painful lesson. “I got hit by a car once,” he says, pausing for a brief rest near the lake’s marina. “I learned you have to be attentive.” The irony is that his company suffered a similar blindsiding. Garmin pioneered the market for GPS devices for cars. At the com-
decided to focus on selling slick, relatively expensive wearables to hard-core enthusiasts— abandoning the low end of the market to the startups. Garmin’s sales are growing again, and most of the increases are coming from wearables. The Garmin division that includes wearables and other handheld sports devices brought in an estimated $565 million last year from wearables, up eightfold in two years. The stock, which traded as low as $15.17, is at a recent $49.08, up 33% year-to-date. Garmin originated in 1989 over dinner at a Red Lobster in Olathe, Kans. Its cofounders, Min Kao and Gary Burrell, were frustrated that their employer, a unit of AlliedSignal, didn’t care much about GPS technology. So they struck out on their own, scraping together $4 million from savings accounts, family, friends and a few bankers. One of their first hires was a fellow math nerd named Clifton A. Pemble, who designed some of Garmin’s earliest software. “I was there on day two,” he says. Unlike competitors, Garmin outsourced nothing, making unfashionable vertical integration an early and key hallmark of its business. And despite an ill-timed IPO in 2000, Garmin survived when the dot-com bubble burst. Its sales reached $573 million in 2003, and Kao and Burrell made their debuts on The Forbes 400 with fortunes of $970 million and $810 million, respectively. The same year Garmin released its first wearable, the Forerunner 201, a pager-size, GPS-equipped running watch that cost exactly $160.70. Garmin followed it with several similar products, but its wearables business remained modest and dwarfed by the much larger automobile division. At the time, wearables were still quite expensive to manufacture and were powered by large chips that made the gadgets cumbersome and unattractive. And in the pre-smartphone era, customers didn’t really think much about—or demand—personal GPS-tracking technology.
NOW WEAR THIS GARMIN HAS DISPLAYED AN ACTIVE IMAGINATION WHEN DESIGNING ITS WEARABLES. VARIA VISION ($399.99):
Clips onto sunglasses’ bow, then projects metrics onto the lenses.
FORERUNNER 235 ($329.99): Garmin’s
most popular running watch tracks distance, pace and overall fitness.
FENIX 3 HR ($599.99): Rugged VIVOSMART HR ($129.99): Fitbit competitor
monitors steps, heart rate and sleep.
smartwatch for hiking, open-water swimming and even paddleboarding.
Yet as soon as the iPhone began clobbering Garmin’s GPS sales, Pemble, then chief operating officer and top lieutenant to Kao— who had lasted past Burrell’s retirement in 2004—realized wearables might save the company from extinction. “We saw them as something that had some legs,” he says. The shift to wearables intensified after Pemble replaced Kao as chief executive in 2013, and Garmin accelerated to expand beyond running watches to specialized ones aimed at
cyclists, runners, triathletes, swimmers, golfers and hikers. Garmin sets high prices on these products and designs them thoughtfully. The $350 Approach S6, for instance, measures a golfer’s swing speed and maps more than 40,000 golf courses. The $450 Forerunner 735XT, aimed at triathletes, does the basics (distance, heart monitoring) and also measures your swimming strokes, cycling metrics and oxygen efficiency. “If you’re a hard-core runner, it’s not a tough decision to make. You’ll buy a Garmin,” says Oppenheimer analyst Andrew Uerkwitz. “There’s a loyalty that runners and hikers have for Garmin’s products, because they know they work.” Many of its devices are waterproof (vital for swimmers and triathletes) and feature longer battery lives than comparable products. And all are made in one of Garmin’s three factories in Taiwan, part of its signature vertical integration. Garmin also maintains its own warehouses and call centers, and does all its marketing, design and engineering in-house. Pemble claims all this expensive overhead is an advantage, because it means that Garmin can shift production more quickly than companies like Apple and Fitbit that have to work within the calendars and capabilities of their partners. When Garmin’s goods are ready to hit the shelves, the company can count on “better relationships with distributors and end markets than anybody else,” analyst Uerkwitz says. To that end, Garmin works with everything from small hiking shops to large national retailers. Uerkwitz’s research shows Garmin consumers are the kind who talk to “the guy behind the counter.” For a while Garmin let Silicon Valley rival Fitbit dominate the activity tracker segment.
Trackers are lower priced and less complex than Garmin’s sports watches and intended for a different customer: the semi-sedentary couch potato concerned more about daily steps than their race pace. Fitbit launched its first activity-tracker band in 2009 and quickly became the leader in a market that also includes Microsoft and Jawbone. After sitting on the sidelines, Garmin got in the game two years ago with its own activity trackers, the no-frills Vivofit ($99) and the slightly more sophisticated Vivosmart ($219). “We felt like we could bring something to the table,” Pemble says. “We could work a customer from the tracker all the way up through the higher end of running products.” By adding activity trackers, Garmin boosted its wearable shipments by 60% in 2015, according to market researcher IDC, as wearable revenue almost doubled. To access fitness data, customers download the company’s Garmin Connect smartphone apps, which have become a surprise hit. Launched in 2011, the family of apps has more than 15 million users—a third of whom started using them in 2015 alone. Keeping with its do-it-yourself mantra, the company introduced its own app store, ConnectIQ, in 2014. That allows third-party developers to make apps for Garmin’s devices—a capability Fitbit doesn’t have yet. More than 2,000 apps have been developed for the platform so far, and more than 10 million apps have been downloaded. “People get caught up with ‘Garmin is declining,’#” Pemble says. “What people are missing is that we have growth engines.” As a man who took up running in middle age he understands the importance of embracing new things. “The world is all about self-improvement these days.”
“The best way to take a punch is to look at it. It’s the punches you don’t see that knock you out.” —RONDA ROUSEY
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SHIVANI SIROYA Founder of Tala, a microfinance lender whose app lets it examine a range of personal data for borrowers who lack traditional credit metrics—and who can then get instant access to the loan via the same app.
VEVO Video-streaming service buries the hatchet with longtime competitor MTV, inking an exclusive distribution deal for Video Music Awards performances. IDEA
NOW TRENDING: FAKE NEWS Just days after Facebook announced it’ll rely more on algorithms than it will on humans for its controversial Trending feature, a bogus story about Fox News firing Megyn Kelly topped its charts.
GOOSEBUMPS. With daring curves, a commanding race-inspired stance, and handling so responsive it feels like the car is an extension of you, the Q60 proves the only measure that matters is how it makes you feel.
Blade Runners Harry’s built an old-school shaving brand through online subscription boxes. Now it’s targeting a bigger market. BY STEVEN BERTONI
SHAYAN ASGHARNIA FOR FORBES
vast loft space with polished herringbone floors, wallmounted bike racks and desks of trendy twentysomethings (mostly), Harry’s headquarters in Manhattan could easily pass for the Hollywood set of a fictional, well-funded hypergrowth upstart. But venture inside the razor company, which is taking aim at Gillette’s dominance of the $3 billion U.S. men’s grooming market, and you find a scene that’s more suburban strip mall than SoHo startup. Down the hall from the snackstocked kitchen in early August stood a mock Target shopping aisle complete with cardboard end-cap displays, rows of razors on metal hooks and neat shelves of shaving cream. And there were Harry’s founders, Andy Katz-Mayfield and Jeff Raider, obsessing over every detail of their upcoming partnership with the big-box retailer. “You can’t just throw product on the shelf and hope it sells,” says Raider, who before Harry’s cofounded eyewear disruptor Warby Parker. “The challenge around physical retail is telling the Harry’s story. We’re used to doing that online, where we have unlimited real estate.” In an era when businesses are touting asset-light, e-commerce models, Harry’s has gone against the grain. In 2014 Katz-Mayfield and Raider paid $100 million for a 96-year-old German factory to make high-quality blades. And now, as traditional brands scramble to strengthen their online sway (this summer Wal-Mart paid $3 billion for e-retailer Jet.com, Macy’s an-
nounced it would close 100 stores and focus on e-commerce, and Unilever acquired Harry’s razor-subscription rival, Dollar Shave Club, for $1 billion), the pair are pushing hard into brickand-mortar stores.
Razor wars: Harry’s cofounders Andy KatzMayfield and Jeff Raider are going after P&G’s Gillette.
OCTOBER 4, 2016 FORBES | 63
On Aug. 21 Harry’s began selling shave sets on 4 feet of aisle space in every one of Target’s 1,800 stores—that’s 1.4 miles of razors and foam. It’s a rare nationwide rollout for the retailer, which has the second-largest shave business in the U.S. (Wal-Mart is first.) To prep for the launch, the startup spent months working with retail consultants, designing shelf displays and packaging, upgrading its razors and handles, and increasing production capacity, head count and marketing spend. Harry’s won’t comment on the cost of the launch, but it did raise $75 million in June 2015 to upgrade its German factory and accelerate R&D. “The competition is strong,” Katz-Mayfield says, “so if you’re going to do this, you have to go big and make a real splash.” Katz-Mayfield and Raider grew up in different Boston suburbs and met as interns at Bain & Co. Later both worked at private equity firm Charlesbank before going off to business school. Katz-Mayfield attended Stanford; Raider went to Wharton, where he and friends Neil Blumenthal, David Gilboa and Andy Hunt started Warby Parker (it’s now worth more than $1 billion). After business school Raider returned to Charlesbank, and Katz-Mayfield moved to L.A., where he worked for a dental startup—and hit upon the idea for Harry’s after a bad trip to the pharmacy. “They had all these different razors locked behind plastic gates,” he says, “and in the end I paid $25 for a few blades and a can of shave cream.” Seeing an opportunity, he called Raider. The pair decided it was a market made for a Warby Parker-type disruption. During nights and weekends they went deep on grooming and learned that making razors is complicated. Steel molecules have to be rapidly heated and cooled (from 2,000 degrees to –100) to produce metal hard enough to grind to a perfect edge. “Quality and performance count when you are taking a knife to someone’s face,” Katz-Mayfield says. With Raider’s Warby connections and cachet, they raised $4 million from Thrive Capital and contracted their first products with a German company, Feintechnik. While Procter & Gamble’s Gillette franchise advertises with supersonic jets and razors racing through outer space and Dollar Shave Club used frat-boy
humor, Harry’s marketing had a vintage feel with product models named Winston and Truman. It launched in March 2013 to much hype, offering razors that rivaled Gillette’s Fusion at about half the price. Sales surged. Two months in, the founders realized they had a supply problem. “We knew our growth would be significant, the capacity concerns were real, and we already wanted to make the product better,” Katz-Mayfield says. “The only way we could solve all those problems is to be vertically integrated.” In January 2014 they closed a $122.5 million funding round, convincing their investors that they should buy Feintechnik and its 500-employee blade factory in Germany. “They probably thought we were a little crazy,” says Katz-Mayfield. This year Harry’s expects $200 million in sales. All told it has raised about $300 million in equity and debt—including the $75 million round that was led last summer by Wellington Management and gave Harry’s a $770 million valuation. The Target partnership began to take shape two years ago when Raider spoke at the retailer’s design week. His talk caught the attention of John Butcher, Target’s senior vice president of beauty and personal care. “This industry is ripe for disruption,” Butcher says. “We have the second-biggest shaving business in the country, and Harry’s is bringing cool to shaving.” The big question is whether that cool will translate to the Target aisles. “Of all the big-box stores, Target was most aligned with the Harry’s brand,” says Miro Copic, principal partner at BottomLine Marketing. “For Harry’s the deal grows their addressable market, builds brand awareness, and lets people touch and feel their product,” says Ken Cassar, principal analyst at Slice Intelligence. “And Target gets first dibs on an exclusive brand.” The partnership, which sells Harry’s products on Target.com, too, got off to a strong start, with $5 promotional starter kits selling out in stores and online. The deal could produce 2017 sales of over $20 million for Harry’s, according to a source close to the company. And then there are the possible add-ons like face scrubs, cleansers and the other 50% of the market: women’s razors.
“Life’s too short to hang out with people who aren’t resourceful.” —JEFF BEZOS 64 | FORBES OCTOBER 4, 2016
MARGIN PROPHET TECH-TO-TABLE RESTAURATEUR STARTING IN BOULDER, COLO. IN 2004, FORMER TECHIE KIMBAL MUSK (BROTHER OF TESLA’S ELON) HAS BUILT TWO SMALL CHAINS OF FARM-TOTABLE RESTAURANTS: THE KITCHEN AND NEXT DOOR. BOTH ARE NOW IN FOUR COLORADO CITIES, PLUS CHICAGO AND MEMPHIS.
Why did you start your first restaurant in Colorado? If you think of the Silicon Valley of natural foods, that’s Boulder. Does Silicon Valley offer any lessons that help in the restaurant business? Trying to find your niche and failing as fast as possible. In Chicago we put our restaurant downtown where it’s very competitive. We had to see whether we could win people over. How do you get fresh food in Chicago in, say, February? We work with indoor vertical farms. Did that first restaurant in Boulder do well? We expected to serve 40 to 50 people a night. Within three months we were doing 3,000 meals a week. This in a town of 100,000. How did you finance the first one? My brother was an investor, but I was the primary financier. It cost about $600,000. How long did it take to become profitable? It was instantly profitable. —Susan Adams
PATRICK T. FALLON/BLOOMBERG
Gartner, Magic Quadrant for Enterprise File Synchronization and Sharing, 21 July 2016 Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartnerâ€™s research organization and should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose.
Panic Management If a big drop in the S&P makes you want to sell, consider adding some “crisis alpha” to your portfolio. BY DANIEL FISHER
or months Robert Sinnott’s $3.8 billion Natixis ASG Managed Futures Strategy Fund had been unprofitably shorting European equities, the British pound and commodities. Then on Friday, June 24, the day after the British voted to exit the European Union, those markets all plunged at once. “Brexit was a wonderful time for us,” says Sinnott. “On that Friday we made money in every asset class.” By the close of trading Monday the Standard & Poor’s 500 had fallen 5%, but ASG Managed Futures was up 3%, pushing it solidly into the black for the year. Make no mistake: ASG Managed Futures is still trailing the S&P this year. But in the aftermath of Brexit and other market-shaking events (see table, p. 67), it has achieved its goal: using futures and “momentum” or “trend” investing to make money when investors’ stock and bond portfolios are tanking. Boosters call that trick “crisis alpha”—alpha, of course, being returns in excess of the market. Investors pay a 1.48% annual management fee for that alpha—expensive compared with an index fund but cheap compared with what they’d fork over to a private hedge fund. During its six-year life ASG Managed Futures has outperformed its hedge-fund peers with an annual return, net of fees, of 6.8%. That’s a little more than half the S&P’s return but a lot more than you’d make if you’d held extra cash as your sleep-at-night strategy. (Warning: The fees and returns cited are for the fund’s dominant Y-class shares, sold only through registered investment advisors or to those investing $100,000 or more. Smaller direct purchasers of A shares get hit 66 | FORBES OCTOBER 4, 2016
with a 5.75% upfront load and a 1.7% annual fee.) Befitting his unusual mission, the 30-year-old Sinnott, who earned a B.A. and an M.A. in statistics from Harvard, is no typical fund manager. He has never worked on Wall Street, holds the title of “senior research scientist” as well as co-portfolio manager at AlphaSimplex Group, and states matter-of-factly: “It’s not my business to read into why markets are moving. I only care that they’re moving.” But he fits right in at geeky, Cambridge-based ASG, which was created in 1999 by MIT professor Andrew Lo, known for his work in behavioral finance and risk management. Lo has written extensively about how investors destroy their returns by selling in a panic and then waiting too long to return to the stock market. Lo conceived of Managed Futures as ballast to help investors ride out market storms without making self-defeating moves. Where many
Money geek: Robert Sinnott relies on software to manage his $3.8 billion futures fund but brags he knows “every line of code.”
JONATHAN KOZOWYK FOR FORBES
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RICHARD LEVINE/CORBIS/GETTY IMAGES
driven price declines that devastated stocks and bonds in the financial crisis. Prospective positions are vetted to reduce both correlation and concentration risk. Aren’t futures by definition a leveraged investment? Yep. As of July 31 the fund had more than $24 billion of notional exposure in currencies, stock and bond indexes and commodity futures. But ASG keeps the bulk of its assets in short-term bonds and bank certificates of deposit, which serve as collateral for futures trades. The trickiest part of the process, Sinnott says, is determining when a trend is over and a position should be unwound. But he steadfastly refuses to override the computer unless he thinks there’s a glitch in the program. Not everyone believes in momentum investing. Still, Sinnott says it has a distinguished pedigree dating back to the grain markets in ancient Sumeria. He suspects it works because of slow dispersion of market-moving information, although he doesn’t waste too much time looking for causation, as opposed to correlation. Managed futures perform best when a longterm trend unfolds slowly against a wall of disbelief. For example, ASG Managed Futures made money on the steady decline in oil prices from over $100 a barrel in 2014 to under $30 at the beginning of this year, even as analysts were calling the bottom at practically every $10 increment on the way down. “With oil it was a very, very consistent, strong, negative trend,” Sinnott says. “It started slowly and then picked up speed.” Sinnott got on the winning side of the Brexit trade not because he knew better than the British pundits. Instead, six months before the vote the ASG computers detected that the longterm trend in European markets was down. The Brexit vote “was completely in the direction of what had been priced in over BAD NEWS BULL the past months and quarters,” NATIXIS ASG MANAGED FUTURES TRAILS THE S&P BUT PROVIDES A Sinnott says. CONFIDENCE-BUILDING BOOST WHEN THE STOCK MARKET TANKS. While he enjoyed the aca10-DAY demic study of statistics, Sinnott OUTPERFORMANCE DATE EVENT OVER S&P 500 concedes it’s more exciting with billions of dollars of other JUNE 24. 2016 BREXIT 2.9% peoples’ money on the line in JAN. 19, 2016 OIL-PRICE JITTERS 14.3% the real world. “The only thing AUG. 24, 2015 DOW PLUNGES 1,000 POINTS 10.9% that matters is the truth of the JAN. 14, 2015 DOW DROPS 400 POINTS 7.6% market.” SOURCE: MARKET DATA. of today’s “hedge” funds actually take big risks, the computer program and policies in place at Managed Futures all aim to minimize both short-term volatility and risk, even though that reduces the potential upside. After all, what good is ballast if an investor throws it overboard before the storm? If you’re not taking investor behavior into account, says Sinnott, “you’re imagining a world that doesn’t exist.” An Illinois native who met his appliedmath-major wife on the ballroom dance team at Harvard, Sinnott gravitated to statistics at a time when big data hadn’t yet made the subject sexy. In fact, he says, there were only four undergraduates in the major. (Today, Statistics 110, taught by Sinnott’s mentor, Joseph Blitzstein, is so popular that it’s offered as a free course on iTunes.) After studying statistical machine learning, finance and time-series analysis, Sinnott wrote his master’s thesis on an arcane area of Bayesian theory, named after the 18th-century mathematician who discovered how to incorporate new data into probability calculations. While earning his M.A., he interned at ASG, then signed on full-time straight out of Harvard in 2009. Sinnott helped write the programs that the Managed Futures fund has used, with constant updates, since its launch. “I know every line of code,” he boasts. A bank of servers in downtown Boston runs that software 24 hours a day, monitoring thousands of financial indicators and constantly measuring price trends against historical data to determine if the odds favor a bet for or against one of the more than 70 commodity, currency and stock-index futures the fund trades in. By investing mostly in exchange-traded futures, the fund aims to avoid the sort of liquidity-
BEST BUY The hunted—and more than once left for dead— becomes the hunter; having survived a yearslong Amazon onslaught, the retailer is taking market share from brickand-mortar peers. PERSON
EDDIE LAMPERT After another bad quarter, the Sears CEO’s hedge fund is providing $300 million in additional debt financing for the beleaguered departmentstore chain. IDEA
ELECTION ECONOMICS A big new survey of business economists—i.e., not just left-wing academics—shows that by more than 4 to 1 they think Hillary Clinton will be better for the economy than Donald Trump.
“In a crisis, be aware of the danger—but recognize the opportunity.” —JOHN F. KENNEDY
OCTOBER 4, 2016 FORBES | 67
KEN FISHER // PORTFOLIO STRATEGY
THIS ISSUE I pass Heinz H. Biel to become the longest continuously running columnist in FORBES’ history—a personal, sacred goal. (David Dreman and Gary Shilling, both of whom I respect greatly, wrote here before me and do now, but Gary had many years where he didn’t at all and David writes only occasionally.) I write now in Heinz’s honor and of his sagacity. History is a font of wisdom. So was Heinz. He wrote from Nov. 1, 1950, days before my birth, until Dec. 20, 1982, 18 months before my first blather on these pages. The Information Content of Financial Columns, a 1982 Wharton School study, centered on Heinz. It showed he added value in his picks (a little) and his analysis (more so). His results were inconsistent over time, as are everyone’s. But he beat the market—surely supporting his longevity. Born in Germany in 1908, he got an economics Ph.D. and moved to America and Wall Street in 1933 as an analyst for a string of brokerage firms—first at Ladenburg Thalmann & Co. and ending with Janney Montgomery Scott. He came to FORBES via Joseph Goodman, our fifth-longest-running columnist. (I paid tribute to Goodman in the Aug. 13, 2007 issue.) While less popular than Lucien Hooper, our third-longest-running regular (see my Dec. 16, 2013 column), Heinz was arguably our most
HISTORY IS A FONT OF WISDOM savvy seer. More than not he stayed on the market’s right side, calling peaks like 1961’s and 1966’s biggie, simply by noting the “blind fervor with which the public has been jumping from one ‘hot stock’ to another”—as excess exuberance. Cutely, he wouldn’t pick stocks “with fewer shares than FORBES had subscribers”—too small. He was early in global awareness and foresaw 1974’s global debacle as heavily derived from European problems. From the first he described markets as irrationally extreme. More than what he said to do, he detailed why—so you could weigh his logic. “Why” is always the toughest to get right! Luck sometimes gives “what.” He gave both well. As a Ph.D. economist, his last column ironically said that while the market isn’t always right, “the record of the economists … is worse.” Amen, brother! Among his first three picks was WESTERN UNION (WU, 21), the telegram
monarch—returning 15.2% annually for the next decade. Completely different now, it’s a global money-transfer firm—including for the vast underclass who must move money where today’s banks won’t. That will grow. Technology replaced telegrams but can’t replace this need—a wide, valuable protective moat. Yet it’s cheap at 11 times my 2017 earnings estimate, with a 2.9% dividend yield. As Heinz liked WU then, he would love UNITED PARCEL SERVICE (UPS, 109) now. Heavy infrastructure investment, pricing gains and a growing overseas franchise—all helping UPS exceed expectations. Its 2017 P/E is 17 on consensus estimates but just 15 times my guestimate—and 1.7 times sales, with a 2.85% dividend yield. As Tesla’s halo now tarnishes, that should help brighten the status of DAIMLER (DAI, 69). DAI deserves fatter valuations anyway. Why? Executing well! New models well received! Unit volume rising! Its only real risks are in truck sales. It’s worth more than eight times my 2017 earnings estimate, 40% of sales and 5.2% dividend yield. POLARIS (PII, 86) is the leading on-land motive power-sports brand. Its off-road vehicles are to nonurban America what Tesla and Tiffany are to citified folk—but it has dirt-cheap prestige at 13 times my 2017 earnings estimate with a 2.6% dividend yield and 1.4 times annual sales. I usually skip truckers—too commoditylike—but love short-sellers (when they’re heavily underwater), since someday they must buy all that stock back. By my reckoning SWIFT TRANSPORTATION (SWFT, 19), America’s largest truckload carrier, has one of the highest ratios of short-sellers underwater extant, about 30% of its trading shares. While a bit more levered than I’d like, it’s well managed, viewed wrongly as a play on an imploding economy and should earn $1.70 next year. Buy it. F
MONEY MANAGER KEN FISHER’S LATEST BOOK IS BEAT THE CROWD (WILEY, 2015). VISIT HIS HOME PAGE AT WWW.FORBES.COM/FISHER.
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THOMAS KUHLENBECK FOR FORBES
MY BEST ADVICE— 32 YEARS IN THE MAKING
BONNIE BAHA // BOND SENSE
KEEP CALM AND CARRY ON TO BOOST HOME FRONT morale during World War II, the British government formed the Ministry of Information. One of its propaganda products was a poster exhorting Britons to “Keep Calm and Carry On.” Intended to be issued only in the event of a German invasion of Britain, the posters never went on display. For 60 years they were lost and forgotten until a bookseller stumbled across a copy hidden among articles purchased at an auction. Reproduced on T-shirts and coffee mugs, those five words resonate today. They would have stood people in good stead after Britain’s surprise vote on June 23 to leave the European Union. Investors who panicked on the news incurred unnecessary losses while those who sat tight came through fine. I believe Brexit will prove to be a harbinger of more market-shocking political realignments. But let’s keep calm and carry on, and use Brexit to find takeaways for steering your portfolio in a world of rising event risk. You often make money when you buy, not when you sell. In a kneejerk reaction to Brexit, panic-to-quality trades sent the yield on the tenyear U.S. Treasury to an all-time low of 1.36% on July 8 from its New York close of 1.75% hours before the votes were tallied. Stocks and below-in-
DON’T BE AMONG THE FOOLHARDY LUNGING FOR YIELD vestment-grade credit sold off. In a few weeks the panic trade unwound. The Treasury market stabilized, credit rebounded and U.S. stock indexes rallied to new all-time highs. Remember, markets almost always overreact to surprises. Let’s distinguish, though, between asset classes and individual securities. If bad news emerges on a company whose securities are held in your portfolio, revisit your investment thesis. Beware of wishfully thinking that you can hold on until the “inevitable” rebound occurs. This is called the fallacy of time diversification, and it can lead the complacent into riding that “single name” all the way to insolvency. However, investment cycles with respect to entire asset classes behave very differently from the individual securities they comprise. Entire asset classes (stocks, bonds, real estate, commodities, etc.) go through periods of undervaluation (as well as overvalutation). But rather than vanishing in insolvency, they eventually undergo “mean reversion”: Prices reverse from extremes, and revert toward their longterm historical valuation trend. The same can be said of developed, free70 | FORBES OCTOBER 4, 2016
market countries with deep histories. England has existed as a sovereign nation since the tenth century, and Britain as the political union of Scotland and England since 1707. England and the U.K. aren’t going away because British subjects voted to end their 43-year membership in the EU. The EU will likely face more existential challenges. Those will be passed or failed over many years—not overnight. Don’t be among the foolhardy not reaching, but lunging, for yield. High-yield corporate bonds, and indeed nearly all risk assets, have performed very well since the Brexit vote. But don’t expect this to continue. The surprise move by the Bank of England to lower rates in August in conjunction with other stimulus measures poured more gasoline on the bonfire of investor complacency regarding central bank easing. It might seem simple to throw caution to the wind on the assumption that some central banker will bail you out. You can get higher yield by buying longer-term or lower-quality bonds, but this raises your risk profile in ways you may come to regret. If there’s one thing I’ve learned in my 30-plus years in the capital markets, it’s that the magnitude of the bust is often equal to, if not greater than, the magnitude of the boom. Stay diversified, and don’t make unilateral bets. We’re entering a period where the return of capital trumps (pun intended) the return on capital. Although you can’t hedge all the risk from your portfolio, you can still protect yourself by diversifying. The EU marked years of unprecedented peace and prosperity in Europe, but its flaws may become its undoing. The uniqueness of the current investing landscape is colored by the phenomenon of political uncertainty in Europe and in the U.S., coupled with low, and indeed negative, rates in Europe and Japan. With interest payments at such low absolute levels, longer-term bonds are particularly vulnerable to an unexpected rise in rates. It would be extremely challenging to keep a stiff upper lip when that day comes. F
THOMAS KUHLENBECK FOR FORBES
Money manager Bonnie Baha was Director of Global Developed Credit at Doubleline Capital LP in Los Angeles. She passed away on Aug. 21, 2016.
WILLIAM BALDWIN // INVESTMENT STRATEGIES
GOOD NEWS FOR risk-tolerant savers putting money aside for 20 years: Stocks will do fairly well. My year 2036 targets are 43,000 for the Dow Jones average and 5,000 for the S&P. Bad news: This forecast implies returns considerably below the historical average. If your retirement plan assumes a continuation of past trends, boost your savings rate. U.S. stocks have delivered a real return—price gains plus dividends minus inflation—of 6.5% a year over the past century, and even more in recent decades. That has made possible some very comfortable lifestyles for people now retired. But today’s youngsters will have to work harder or longer before they take up golf full-time. I think 5% is more realistic for a future real return. At 6.5%, a dollar multiplies 12-fold over 40 years; at 5%, only 7-fold. There are three reasons to curb your expectations. The first is the sleepy economy, as illustrated by the dismal 1.1% annualized GDP growth in the second quarter. Expect meager workforce and productivity gains in coming decades. The next problem is that corporate profits, as a percentage of the economy, are at a 59-year high. Some of the fattening in this ratio relates to the ability of U.S. corporations to earn money abroad and is here to
BE A BULL WITH DIMINISHED EXPECTATIONS stay. But more of it relates to how global trade has damaged worker pay. How long will capital continue to get an outsize slice of the economic pie? At some point either competition or politics will restore some of labor’s share. Finally, share prices are at an abnormally high multiple of earnings. The S&P 500 index is going for 22 times the $100 it’s likely to deliver this year (after writeoffs). Expansion of P/E ratios contributed to past returns. A contraction will depress future ones. What about inflation? This is hard to predict. Its present low rate has surprised both experts and central bankers. The best we can do is to take the market’s word for it. From the 1.9% yield on nominal 20-year Treasurys, subtract the 0.4% yield on inflation-adjusted Treasurys. Now subGO TO FORBES.COM/SITES/BALDWIN FOR MORE ON INCOME STRATEGIES.
tract a little bit more as a risk premium, since buyers of nominal bonds are incurring not just inflation but sleepless nights. You get 1.4% as a plausible forecast for inflation. Put a 5% total real return, a 2% yield and 1.4% inflation into a calculator and you get the price targets cited above. Some prognosticators would consider a 5% return expectation too pessimistic. Vanguard has published a ten-year forecast for U.S. stocks that has a wide range of possible outcomes centering on a 7.5% nominal return, suggesting an expected real return a percentage point or so higher than mine. Almost as bullish is Charles Schwab & Co. It expects 1.5% inflation along with nominal returns of 6.9% on large U.S. companies and 7.5% on small companies. But then there are some very accomplished money managers who will tell you it’s utterly foolish to expect even 5% from stocks. Research Affiliates projects all of 1.1% from large U.S. companies and 0.1% from small ones as annualized real returns over the next decade (as with Vanguard, these are the midpoints of very wide projections). GMO (named for founders Grantham, Mayo and Van Otterloo) is even grimmer with its seven-year forecasts. It’s looking for a real annual return of –3.2% on big U.S. stocks and –1.8% on small ones. One thing these two bears agree on is that foreign stocks look like better buys these days. I’ll take inspiration from them to make the following recommendation. Put 64% of your equity money in the U.S. market and 17% each in developed and emerging markets. You can use SCHWAB U.S. BROAD MARKET (SCHB, 52), VANGUARD FTSE DEVELOPED MARKETS (VEA, 37) and VANGUARD FTSE EMERGING MARKETS (VWO, 37). If you prefer open-end funds, Fidelity has the best deals with its TOTAL MARKET INDEX (FSTVX) , INTERNATIONAL INDEX (FSIVX) and EMERGING MARKETS INDEX (FPMAX). F OCTOBER 4, 2016
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THOMAS KUHLENBECK FOR FORBES
Breitling for Bentley chronographs stem from an encounter between two exceptional brands, two worlds dedicated to performance, two identical passions for excellence. Crafted by Breitling with an extreme concern for perfection, they combine highly distinctive designs, opulent finishing and mechanical movements chronometer-certified by the COSC, a token of superior precision and reliability. Breitling for Bentley: the best of two worlds.
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PHOTOGRAPHS BY DAVID ARKY CREATIVE STYLE DIRECTOR: JOSEPH DEACETIS
When it comes to two-tone shoes for fall, it’s all about hue. 74 | FORBES OCTOBER 4, 2016
OPPOSITE: LEATHER LACE-UP SHOE BY SANTONI ($950). THIS PAGE, CLOCKWISE FROM TOP: CALFSKIN-AND-CANVAS “HARBOUR” SHOE BY JOHN LOBB ($1,390); LEATHER-AND-SUEDE WING-TIP SHOE BY ETRO ($900); LEATHER WING-TIP SHOE BY FRATELLI ROSSETTI ($740); LEATHER-AND-CANVAS CAP-TOE SHOE BY JIMMY CHOO ($750); CALFSKIN “CONARD” SADDLE SHOE BY JOHNSTON & MURPHY ($155); TWO-TONE LEATHER WING-TIP SHOE BY TOD’S ($725).
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D N I M F O E T A T S R O R E
r t h is a e w s n e m in g r e ig n s s . in s s e r d r e w o Soft p t h e r u le n w o d s y la d r c e H owa n e r r e T r a t s e E m p ir
f a ll .
PHOTOGRAPHS BY DAVID NEEDLEMAN CREATIVE STYLE DIRECTOR: JOSEPH DEACETIS
TERRENCE HOWARD’S IMPERIOUS performance as hip-hop mogul Lucious Lyon in Fox’s Empire has helped the show rule Wednesday nights since its 2015 debut—and revived his career in the process. The 47-year-old actor, who rose to fame over a decade ago with movies such as Crash and Hustle & Flow, heard his phone go quiet around 2009 after losing his role as Tony Stark’s best friend, James Rhodes, in Iron Man 2. But Hollywood’s memory is short, and Howard is once again reigning supreme, albeit on a slightly smaller screen. Empire, which follows the Shakespearean dramas of a familyowned record company—of which he is the pugnacious patriarch—has been Fox’s biggest hit in recent memory. (Cross-platform viewership averaged an impressive 21.3 million people last year.) Season three returned on Sept. 21, and this time, Howard says, more of the tempestuous history between Lucious and ex-wife Cookie (Taraji P. Henson) will be explored. “Lucious has to deal with whether Cookie is ever going to take him back,” Howard teases. “If she doesn’t, all hell will break loose.” Television’s Lyon King also had some new plot twists with his real-life family: Howard became a father for the fifth time in August and now has two children younger than his oldGOING WITH THE FLOW: THE TAILORING ON SPORT JACKETS AND SUITS IS est grandkid. “You give your child two gifts,” he says. “The first is the gift of life, the second LOOSENING UP. TROUSERS ARE WIDER— AND SO ARE THE LAPELS. OPENER: WOOL is a name. The second gift lasts longer than the first, so you need to give a child a name he SUIT ($9,700) AND COTTON SHIRT ($545) BY needs to live up to.” He and his wife chose “Hero”—but no pressure. HERMÈS; TAMBOUR EVOLUTION CHRONO GMT IN STAINLESS STEEL BY LOUIS VUITTON ($10,300). As for his personal empire: Science rules his life. Heavily influenced by the work of WalOPPOSITE: CASHMERE SPORT JACKET ($4,295), COTTON SHIRT ($545) AND WOOL TROUSERS ter Russell and Nikola Tesla, Howard says he has been working on his own theories, dubbed ($945) BY GIORGIO ARMANI; LEATHER SHOES BY COLE HAAN ($280); OVERSEAS WATCH IN PINK Dark Matter Functions, which he intends to release later this year. A devout numerologist, GOLD BY VACHERON CONSTANTIN ($35,600). he puts his faith in the almighty power of 9. “The Pythagoreans believed there was no numTHIS PAGE: WOOL-BLEND SPORT JACKET ($2,995), CASHMERE SWEATER ($995) AND ber greater than 9,” he explains. COTTON JEANS ($475) BY DOLCE & GABBANA; MONTBLANC 4810 ORBIS TERRARUM WATCH IN Will Empire see that many seasons? “I’m sure if they’re making enough money off this STAINLESS STEEL BY MONTBLANC ($5,900). show,” he says, counting his blessings, “we’ll make it to Empire 12.” —Natalie Robehmed
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STYLE ASSOCIATE: JUAN BENSON GROOMING: MATT REZ
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BEST BUSINESSES PARTNERING WITH THE ARTS IN AMERICA 2016 FOSTER INNOVATION TRANSFORM COMMUNITIES REACH NEW CUSTOMERS ENGAGE EMPLOYEES The BCA 10 Awards are presented by the Business Committee for the Arts, a division of Americans for the Arts. For more information, visit www.AmericansForTheArts.org/BCA.
INTRODUCING THE 2016 HONOREES
Austin Energy Austin, TX Badger Meter Milwaukee, WI CopperPoint Insurance Companies Phoenix, AZ Dealer.com Burlington, VT Dogfish Head Craft Brewery Milton, DE Dunlap Codding Oklahoma City, OK Johnson & Johnson New Brunswick, NJ M Powered Strategies, Inc. Washington, DC Northern Trust Chicago, IL Procter & Gamble Cincinnati, OH 2016 BCA Hall of Fame Award: Aetna Inc., Hartford, CT 2016 BCA Leadership Award: Robert Buchsbaum, CEO, Blick Art Materials, Highland Park, IL
Features OCTOBER 4, 2016
“Hackers find their way in not through the infrastructure but the people,” says Dug Song, founder of Duo Security. “It’s a people problem.” Maybe so, but it’s Duo’s technology that lands it at No. 58 on the Cloud 100. PAGE 96
THE WIZARD OF APPS 84
WITH KPMG THE GREAT REWRITE: CYBER IS EVERYTHING 86
GLAXO TAKES ITS MEDICINE 106 THE MARCO POLO OF BOURBON 116 PHOTOGRAPHED BY BRANDON SCHULMAN FOR FORBES OCTOBER 4, 2016 FORBES | 83
INSIDE THE CLOUD
THE WIZARD OF APPS THE HOTTEST STOCK IN AMERICA, TWILIO, IS A COMPANY YOU’VE NEVER HEARD OF. IT USES THE CLOUD TO PUT COMMUNICATIONS EVERYWHERE.
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ack in October of 2011, when Uber was still a tiny company beginning to expand beyond the San Francisco area, it sent an e-mail to its customers to alert them about a problem. Uber’s SMS provider, Air2Web, was going to have a scheduled outage, which meant some Uber features, like notifications and SMS ride requests, would be temporarily unusable. “If you text in and don’t receive a prompt response from us, it’s not because we don’t want to, it’s because we can’t!” said the snarky Uber note, its irritation at Air2Web poorly concealed. The e-mail landed in the in-box of Jeff Lawson, the CEO of a crosstown
TIM PANNELL FOR FORBES
BY MIGUEL HELFT
Jeff Lawson, cofounder and CEO of Twilio, is helping everyone from Airbnb to Salesforce to Uber connect with their customers.
THE GRE AT RE WRITE
Cyber Is Everything In a world where people, places, and everyday things are digitally connected, all security is becoming cybersecurity. BY LEONARD BRODY
arlier this year, America’s director of national intelligence, James Clapper, called cyberattacks a greater threat to the nation than physical terrorism. What’s really cause for alarm is the unprecedented breadth of what we mean when we talk about cyberattacks. Computer hacking today can bring down the largest-scale enterprises and public infrastructure–or hit the most intimate parts of our lives. The headlines and examples just keep coming. The Democratic National Committee hacked by Russia. Sony Corporation’s film division brought to its knees by malware and stolen documents, in an attack attributed to North Korea. A “smart” refrigerator for household use that can expose owners’ Gmail account information. Home thermostats vulnerable to ransomware. Connected cars whose controls can be taken over remotely. A website called “Big Brother Is Watching You”—with feeds from baby monitor
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“We need more than just an incremental shift...We need to do something inherently different.” GADI EVRON Founder and CEO of Cymmetria, and former chief information security officer for the Israeli government internet operation
cameras in people’s homes. As the world becomes more digital and connected, the need to secure internal data systems from intrusion is just the beginning of what company leaders must consider. More companies are launching business ventures based on collecting and securing information about their customers. Others are placing atrisk digital products into customer sites, residences, hospitals, and public infrastructure. It may not be long before everything we have—our homes, our cars, our appliances, our money, our medical records and life-sustaining devices—is connected to a world of strangers who may not have our best interests in mind. Each of these connection points is, in a sense, a landmine with potentially catastrophic vulnerability. In our series of reports called The Great Rewrite, we’ve been exploring one industry sector after another where the rules are being rewritten from the ground up. Digital security now affects every one of these industries and sectors. A basic tenet of cybersecurity is minimizing your “attack surface”—giving potential invaders as little as possible to lock onto and penetrate. But how do you lower your exposure when just about everything is connected to the entire world? How do you build a moat around your information systems when they are everywhere? “We live in a world that has so many moving parts, distributed in so many different locations, managed by so many different humans, even trying to define the perimeter is a dead idea,” said Adam Ghetti, founder and CEO of Ionic Security, an Atlanta-based startup. “There are billions of devices. You can’t put them all in one safe place.” Cybersecurity expert Bruce Schneier has written that, by pushing wireless
connections into real-world objects, we have given the internet hands and feet. The so-called internet of things, he says, is becoming the world’s biggest robot. Who controls that powerful creation? Cheap computing power gives bad guys
“There are billions of devices. You can’t put them all in one safe place.” ADAM GHETTI Founder and CEO of Ionic Security the ability to launch endless incursions. Traditional malware detection and firewall defense systems alone are no longer enough. The rewritten reality, brought on by the connected world, demands not just new tools but whole new approaches. “We need more than just an incremental shift, more than just doing X better,” said Gadi Evron, founder and CEO of Cymmetria, and former chief information security officer for the Israeli government internet operation. “We need to do something inherently different.” Last year saw more reported cyber incursions than ever. “You will get hacked. It’s a fact of life,” said Greg Bell, the U.S. lead of KPMG Cyber. Companies like Ionic and Cymmetria have concocted new ideas for managing in what we might accurately call a post-breach world. Ionic’s approach is a system for
encrypting each chunk of data individually—even specific pieces of information within documents and databases—so that no matter where the data travels, it can be seen only by authorized users. In the wrong hands, “the data just doesn’t work; it’s cyberdust,” Ghetti said. The company’s cloud-based offering works like an information-security operating system with connections to popular applications that generate data. He says the company already manages 10 trillion individual cryptographic keys for its customers. Evron says he was frustrated by the advantage hackers have had in relentlessly attacking sitting targets. His company’s cyber-deception tools seek to flip the equation, making hackers the ones who have to be careful. Attackers have methodologies that don’t really change, he says. As it happened in the Sony attack and many others, they penetrate a system, often by tricking an employee into inadvertently launching malware. Once inside, they poke around and try to obtain credentials of users with more and more network privileges. Finally they plant their destructive payload. Cymmetria’s software plants false passageways and fake user credentials that only a hacker would take, thus instantly exposing himself. Companies can monitor detected invaders and alert authorities. Tools are racing to keep pace with the threats. The stakes have never been higher. But KPMG’s Bell says security fears shouldn’t torpedo the kind of constant change that a nimble enterprise needs in order to compete. “Security should be a function of business innovation,” he said. “It’s not a technology issue; it’s a business issue.” KPMGVoice: Read more of The Great Rewrite series at forbes.com/TheGreatRewrite
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INSIDE THE CLOUD startup named Twilio, which specializes in cloud-based text and voice communications. Short, stocky and balding, with a round face framed by rectangular glasses, Lawson could double for George Costanza, only without the bumbling, neurotic personality. Lawson is low-key and personable, and what he lacks in the swagger and bombast associated with startup founders he offsets in engineering intensity and entrepreneurial discipline. Lawson knew just what to do with the Uber e-mail, forwarding it to his friend Rob Hayes, an Uber board member at the time, along with a brief sentence: “For the love of God, they should be using Twilio.” Hayes then introduced Lawson to Uber CEO Travis Kalanick, and within a month Twilio was powering Uber’s SMS. “It was mutual love,” Hayes says. Little by little the relationship expanded, and Twilio now runs texts, alerts and voice calls on the Uber app in most parts of the world. When a driver and passenger call each other, they do so through a Twilio number that keeps their own phone numbers private. “We didn’t know Uber was going to be what it is,” says Patrick Malatack, Twilio’s head of product. “But it was great to see Jeff’s hustle.” Twilio, as a company, reflects its chief executive’s personality. “Be humble and be frugal,” says Lawson, a 39-year-old father of two. That aw-shucks credo has translated into 30,000 customers—from small developers to large enterprises—who use Twilio to power some 75 billion annual connections that reach 1 billion devices. Match.com pairs potential lovebirds without revealing phone numbers, Airbnb sends rental notifications and the American Red Cross deploys volunteers, all through Twilio. ING, the European banking giant, recently announced it was yanking out 17 hardware and software systems across its global call centers and replacing all of it with Twilio. Its largest customer, WhatsApp, uses Twilio to verify customer accounts and logins. Apps from Lyft, Expedia, Netflix, Coca-Cola, Salesforce and the New York Times all have Twilio inside. “He’s built a fantastic business,” says Salesforce CEO Marc Benioff. “This is something that every company will build into their applications, like we have.” The latest group that seems to have noticed Twilio’s behind-the-scenes success: Wall Street. Defying the allbut-dead market for tech issues, Twilio, which still isn’t profitable, went public in June, raising $150 million at a $1.2 billion valuation. Shares of Twilio, which would have ranked high on our inaugural list of the 100 hottest cloud companies had it stayed private, nearly doubled the first day. And within two months, fueled by 70%
sales growth in its most recent quarter, it doubled again. Its recent $4.6 billion market capitalization dwarfs better-known tech names like Box ($1.7 billion), Fitbit ($3.1 billion) and Yelp ($3 billion). Twilio’s coming-out party sends a multibillion-dollar signal that building communications functions into apps is both vital and easier than ever, which in turn promises to make every smartphone in the world even smarter. Lawson is aware of the potential. As part of the IPO celebrations, he gave each of his more than 650 employees a T-shirt with a simple message: “Day 1.” ABOUT A YEAR AFTER LAWSON and two friends found-
ed Twilio in 2008, Lawson was invited to introduce it at a popular networking mixer called the SF New Tech Meetup. Rather than talk about an inherently difficultto-explain technology, Lawson decided to let the Twilio software speak for itself. In front of a thousand people Lawson began telling his story while simultaneously coding a Twilio app—a simple conference line. In just a few minutes he opened an account and secured a phone number, and after writing a handful of lines of code that
“THE IDEA THAT SOMEONE WITH NO TELECOM ENGINEERING EXPERIENCE COULD BUILD A CALL-CENTER FLOW BY DRAGGING AND DROPPING WAS AMAZING.”
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everyone in the room could understand, his conference line was up and running. Lawson then asked everyone to phone in, and just like that a mob of developers was on a giant conference call. Lawson then added some more code, and his app called everyone back to thank them for participating. As phones throughout the room began buzzing, the crowd went wild with enthusiasm. “He is the let-me-show-you-what-we-can-do type of exec,” says Byron Deeter, of Bessemer Venture Partners, an early backer who has become Twilio’s largest shareholder. “There’s no bravado and no ego, and that gives him a special charisma and authenticity.” Lawson’s parlor trick did more than generate industry buzz. It epitomized a developer-centric business strategy that has fueled its growth. Twilio is exceedingly simple to use and charges no upfront fees, so programmers often use it to test an idea or product. Pretty soon that product scales and turns into a six- or seven-figure account that required no traditional sales process. “We onboard developers like consumers and let them
MULTIPLE CLOUDS WITH MULTIPLE CHALLENGES?
spend like enterprises,” Lawson says. Like others that have embraced developer-driven marketing—Amazon for computing services, Stripe for payments, New Relic for analytics—Twilio benefits as companies increasingly turn to software for differentiation. “As that happens, and companies hire more developers, they come in with Twilio in their tool belt,” Lawson adds. Given this ethos, all new Twilions, as the company’s employees call themselves, endure a rite of passage: They have to create a Twilio app and present it to the whole company. (And, no, the assistants and marketers and lawyers aren’t exempt: Non-engineers learn the ABCs of coding a Twilio app as part of an onboarding “boot camp.”) On a recent Wednesday evening a few dozen staffers, hunched over catered Vietnamese pho in the company’s cafeteria-cum-kitchen in San Francisco’s South of Market tech hub, cheer a handful of newbies as they unveil their handiwork. Most of the apps are goofy. One answers text queries with a Simpsons’ GIF. Another allows users to text a math problem and promptly delivers an answer from Wolfram Alpha, a Web-based knowledge engine that does computations. The takeaway, however, is serious: Anyone can build a Twilio app. After each presentation, Lawson, dressed in his usual jeans, sneakers and a dark fleece vest over a button-down shirt, officially turns them into Twilio’s version of a varsity letterman: “Here’s your traaaaack jacket!” Lawson also hands them a Kin-
TWILIO INSIDE TWILIO TURNED VOICE, TEXT AND VIDEO CAPABILITIES INTO PROGRAMMABLE BUILDING BLOCKS THAT DEVELOPERS CAN PLUG INTO THEIR APPS.
TWILIO’S “SUPER-NETWORK” CONNECTS APPS WITH THEIR CUSTOMERS ACROSS THE GLOBE.
90 | FORBES OCTOBER 4, 2016
dle, which comes with $30 in monthly credit. “We want to encourage people to invest in themselves,” he says. The CEO has been investing in himself from a young age. Growing up outside Detroit, he started a business in middle school, filming and editing event videos, mostly bar mitzvahs. By the time he graduated high school, he’d moved up to black-tie weddings, pulling in as much as $5,000 on some weekends. Lawson began coding in college, at the University of Michigan, and got his first paid programming gig while still a freshman. Soon after, Lawson launched his first Internet startup, Versity.com, which published notes from the biggest courses on campus. As Versity gained traction and pulled in advertising revenue, Lawson dropped out of school, raised money from venture capitalists, moved the company to Silicon Valley and expanded the business to about 200 campuses. In 2000, as the dot-com wave was cresting, Versity was acquired by a competitor, CollegeClub.com, which had filed for an IPO. Unfortunately, the crash hit before the company could go public, and it collapsed soon after. Since Versity had been acquired for stock, Lawson ended up empty-handed. “No one looked at their burn rate or their cash balance,” he says. “I learned a lot and became very cognizant of spending money wisely.” Bitten by the entrepreneurial bug, Lawson teamed up with a friend, Jeff Fluhr, who had recently cofounded StubHub. As the company’s first CTO, Lawson developed the original version of the ticket-reselling site in just six weeks. “He architected the whole thing and recruited a couple of people to help build it,” says Fluhr. But sports wasn’t his thing, and Lawson left the company after a few months, dabbling in a brick-and-mortar retail venture and finishing his college degree. Hungry for some big-company experience to round out his skills, Lawson interviewed at Amazon in 2004. He got an offer from a tiny team that couldn’t tell him what it was up to until after he accepted. It was the beginning of what would become Amazon Web Services, and Lawson helped build the technology that Amazon launched publicly in 2006. “This whole idea that you can offer infrastructure as a service was kind of mindblowing,” he says. His 15 months at Amazon proved to be formative. Selling the building blocks of computing as a service was a brand-new idea, and Lawson was at its epicenter. The model gained traction with the advent of mobile apps, which over time prompted scores of businesses to turn to software as a way to interact with customers. As he began to think about where he could apply the Amazon Web Services model, Lawson homed in on communications, which had proved essential to every business he had started. Along with two friends, Evan Cooke,
PATRICK WELSH FOR FORBES
INSIDE THE CLOUD
ONE COMPANY HAS ALL THE EXPERTS YOU NEED.
INSIDE THE CLOUD who now works in technology at the White House, and John Wolthuis, who remains at Twilio, they developed a prototype and put it up—where else?—on AWS. Initial reaction from developers was enthusiastic, and Twilio got its first customer, a service called PhoneMyPhone. com, which allowed people to type their number into a website to ring their own cellphone (handy when it’s stuck between the couch pillows). Twilio’s reception on Sand Hill Road was more muted. Many VCs told Lawson that targeting developers, who don’t control budgets of any significance, was a bad strategy. And his timing was lousy: One meeting with a prominent early-stage firm was interrupted by news of Lehman Bros.’ collapse. Eventually, Lawson received some encouragement and capital from angels Mitch Kapor, who had developed the first popular spreadsheet and founded Lotus, and Dave McClure, who had run a developer program at PayPal. Chris Sacca, a former Googler who made his fortune backing Twitter and Uber, and Bessemer’s Deeter also invested. Deeter later secured Bessemer’s position as lead fi-
more than 50 building blocks, or APIs, up from the initial 5—customers began programming increasingly complex functions and gaining access to analytics, routing data, pricing and other features, across not only voice and text but also video communications. Today customers can build a call center entirely out of software building blocks rather than having to purchase expensive equipment or prepackaged communications solutions. What once required pulling copper wires into a data center and costly investments in carrier contracts and infrastructure can now be done by a small team of programmers with no upfront cost. Twilio charges only for usage. “The things they made possible were crazy,” says Sacca, who worked on various telecommunications projects at Google. “The idea that someone with no telecom engineering experience could build a call-center flow by dragging and dropping was amazing.” Today Twilio connects to the global telecommunications network through 22 data centers in 7 regions and has agreements with most of the major carriers that allow it to deliver a message to pretty much any phone on the planet. Lawson calls this Twilio’s “super-network.” “As our business grows, the super-network becomes more difficult to replicate over time,” he recently told investors. Many analysts agree. “Twilio is a company that is light-years ahead of their competitive field,” says Mark Murphy, an analyst at JPMorgan.
WHEN AN UBER DRIVER AND PASSENGER CALL EACH OTHER, THEY DO SO THROUGH A TWILIO NUMBER THAT KEEPS THEIR OWN PHONE NUMBERS PRIVATE. nancier of the company’s Series B round with a Twilian stunt: He used Twilio to program a conference line and asked Lawson to call in at a set time. Instead of a conference, Lawson was greeted by a message: “Thank you for calling the term-sheet hotline for Bessemer Venture Partners. We value your business.” The robotic voice told Lawson to Press “1” for a $15 million term sheet, “2” for $20 million and so on in $5 million increments to $30 million. There were also options for hearing Katy Perry’s “Last Friday Night” and for connecting with a psychic. Lawson ended up choosing to raise just $12 million. Twilio began by offering a simple set of basic programmable communications functions—things like “dial,” “play,” and “record”—which developers could bolt onto their apps. Underneath those, Twilio handled the messy task of plugging into the telecommunications infrastructure across a multitude of carriers in various countries. The service allowed any developer to easily add voice and text messaging to Web and mobile applications. As Twilio’s capabilities expanded—it now offers 92 | FORBES OCTOBER 4, 2016
AT A RECENT ALL-HANDS MEETING at Twilio’s headquarters, Lawson plays MC in front of a hundred or so Twilions, most of whom sit on the cement floor. He’s framed by large monitors that show colleagues from offices in Mountain View, New York, London, Dublin and Tallinn. Lawson introduces a handful of new employees and, to make sure everyone remembers their names, leads the group in a boisterous camp counselor call-and-response routine. (He’s dressed exactly like the night before, when he watched new employees present their Twilio apps.) He then sits down for one of the mainstays of the weekly meetings: a customer Q&A. Gene Schriver, the CEO of Globo, a translation-services company, joins him at the front of the room, and the two embrace. “I’m hugging him because I bought Twilio at $26,” Schriver quips. No one in the audience needs a reminder that shares are above $50. With the two of them on barstools, Lawson, his leg shaking restlessly, listens intently as Schriver explains how he essentially built Globo on top of Twilio. Globo connects customers with translators around the world
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INSIDE THE CLOUD over the telephone. The calls could be coming from a call center serving a customer who doesn’t speak English or a hospital in Bangkok where a doctor needs to talk to a French-speaking tourist. Globo, which also offers e-mail, text and document translations, connects the calls through Twilio and routes them to the appropriate translator, not only by language but also by expertise, be it medical, legal, technological or other. “Twilio was a blank canvas upon which we could make anything happen,” Schriver says. The capabilities and reliability of Twilio’s platform, he adds, are what allowed Globo, which has just 40 employees, to beat far larger rivals for a federal government contract to offer translation for Medicare recipients and people signing up for ObamaCare at government exchanges. Schriver calls his choice of Twilio critical. “It’s the most important bet that we made,” he says. Amid the lovefest, Lawson wants to know what’s not working and what his team could do better. Schriver lists a few: Some services could work faster; analytics on voice quality could be improved; it would be nice to know what new features Twilio is planning. This kind of feedback is an integral part of how Twilio develops its products. Not long ago, Malatack, the VP of product, found out that two large Twilio customers were parking callers they couldn’t handle immediately on a conference line and muting them. He instructed his team to build a capability to queue calls. “We look at what customers are doing and try to make it easier,” says Malatack, a developer himself, who used Twilio to connect the buzzer of his Seattle apartment to his cellphone before joining the company. Twilio’s approach is resonating with all types of customers. When Yelp built a restaurant-reservation system to compete with OpenTable, it used Twilio to automate the confirmation process. Rather than have a host call customers the day before to make sure they’re still planning to come, the interchange happens automatically via SMS, and restaurants see a confirmation on their dashboard. Similarly, Zendesk, a cloud-based provider of customer-service software, has used Twilio to offer call centers to small and medium-size businesses— say, a mom-and-pop limousine dispatcher. Twilio has also brought its simple programmable communications capabilities to countless nonprofit organizations through its Twilio.org arm. Modeled after Salesforce’s 1-1-1 commitment to donate 1% of employees’ time, technology and resources to charitable causes, Twilio.org has been seeded with nearly 800,000 company shares and has a goal of delivering a billion
messages “for good.” It’s currently at 10% of that goal because of organizations like Trek Medics, which gives people access to emergency services in countries where 911 doesn’t exist, like Haiti, the Dominican Republic and Tanzania. In the United States the Crisis Text Line used Twilio to build a service that connects some 1,600 volunteers with people who are contemplating suicide or face a threat of domestic violence. As Twilio integrates with services like Facebook Messenger, the Crisis Text Line is taking advantage of those connections. “We want to reach people where they are,” says Chris Johnson, Crisis Text Line’s CTO. Sizing the opportunity in front of Twilio, which did $167 million in sales last year, is not easy. At its current growth Twilio would hit a $1 billion annual run rate in the second half of 2018. Lawson calls telecommunications services a trillion-dollar market, with big portions of it poised to migrate from hardware to software. But legacy competitors like Avaya, Genesys and others are determined to defend their turf. And a crew of smaller startups, with the next generation of Lawsons, are also
“I WANTED TO MAKE SURE OUR CUSTOMERS KNEW WE WERE NOT SOME FLY-BY-NIGHT UNICORN.”
94 | FORBES OCTOBER 4, 2016
courting software developers. For now, none of the new players have the scale, features or reliability of Twilio. The bigger risk for the company is its overreliance on a handful of big customers, such as Facebook’s WhatsApp, which account for about 13% of its revenue. But with most of the growth still coming from smaller accounts, Wall Street appears unconcerned. “It is very possible that Twilio will compound its growth nicely for many years to come,” says JPMorgan’s Murphy. For Lawson, who learned his lessons during the dotcom boom, success is about not only growth but also financial discipline. Profitability is within reach in no small part because, by tech startup standards, Twilio is downright frugal. Its headquarters south of Market Street are in a modest, revamped industrial building. What passes for a reception area is a cramped room with a security guard behind a small desk who directs visitors through a meandering series of hallways to a cavernous service elevator. Twilio occupies the third floor and parts of the second floor. The company has no fancy furniture
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INSIDE THE CLOUD and no corporate chef. Free lunches, that tech company staple, are catered only a couple of times a week. The combination of thriftiness and rapid growth paved the way for Twilio to conduct its IPO on its own terms. Lawson says the company had more than $100 million left in the bank and didn’t need to go public. “I wanted to make sure our customers knew we were not some fly-by-night unicorn,” he says.
Lawson, whose stake in Twilio gives him a fortune that approaches $500 million, is halfway to personal unicorn status. If Twilio’s stock doubles yet again, Lawson will be a billionaire. As the world gets increasingly mobile and cloud-based, that seems entirely possible—not in two months but perhaps in two years. Says Lawson: “We are absolutely just getting started.” F
THE CLOUD 1OO OUR EXCLUSIVE RANKING OF THE HOTTEST PRIVATE COMPANIES IN THE CLOUD FACTORED IN REVENUE GROWTH, FINANCING, MARKET SHARE AND BUZZ. THE LIST WAS COMPILED WITH THE ASSISTANCE OF BESSEMER VENTURE PARTNERS AND 20 OF THEIR PUBLIC CEO PEERS.
San Francisco Stewart Butterfield EMPLOYEES: 600 FUNDING RAISED: $540 MIL1
Atlanta Ben Chestnut EMPLOYEES: 540 FUNDING RAISED: BOOTSTRAPPED
TEAM MESSAGING APP
San Francisco Drew Houston EMPLOYEES: 1,500 FUNDING RAISED: $600 MIL
New York City Anthony Casalena EMPLOYEES: 563 FUNDING RAISED: $79 MIL
San Francisco Keith Krach EMPLOYEES: 1,800 FUNDING RAISED: $525 MIL
San Francisco David Wadhwani EMPLOYEES: 1,000 FUNDING RAISED: $314 MIL
ELECTRONIC SIGNATURE MANAGER
San Francisco Patrick Collison EMPLOYEES: 505 FUNDING RAISED: $300 MIL
San Francisco and Amsterdam, The Netherlands Peter van der Does EMPLOYEES: 400 FUNDING RAISED: $266 MIL
Palo Alto, Calif. Tom Reilly EMPLOYEES: 1,0432 FUNDING RAISED: $1,040 MIL2 DATA STORAGE
6 SurveyMonkey Palo Alto, Calif. Zander Lurie EMPLOYEES: 618 FUNDING RAISED: $1.2 BIL ONLINE SURVEY MANAGER
TOTAL PUBLICLY-DISCLOSED VENTURE FINANCING 2 ESTIMATE COURTESY OF PITCHBOOK 1
96 | FORBES OCTOBER 4, 2016
THE END OF E-MAIL
STEWART BUTTERFIELD, CEO, CO FOUNDER
As CEO of one of the hottest companies in tech, Stewart Butterfield can barely keep up with his messages. “Every freaking app on my phone has a backlog,” he says. It could be a lot worse. Butterfield’s company, Slack, has taken a big bite of the e-mail deluge now commonplace in offices. Each day 3 million people take to Slack on their computers and phones to send co-workers everything from routine messages to goofy cat pics. “People are creating expense reports or time-off requests with just a button,” says Slack’s chief. Butterfield believes the market for his software is as large as several hundred million people. Slack is already ubiquitous in some industries (media and tech), and they’re working on a new product geared to the needs of large businesses; Harvard University and the State Department already use Slack’s current version. “The scale of this opportunity is to build something that lasts for decades or even longer,” he says.
11 CloudFlare San Francisco Matthew Prince EMPLOYEES: 311 FUNDING RAISED: $182 MIL WEB SECURITY
12 Qualtrics Provo, Utah Ryan Smith EMPLOYEES: 1,243 FUNDING RAISED: $220 MIL ONLINE SURVEY MANAGER
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hpe.com/value ÂŠ Copyright 2016 HPED LP. Source: Synergy Research. Q4 2015 Data, Combined Cloud Infrastructure Equipment, Software and Services revenue data.
INSIDE THE CLOUD 25 Zscaler San Jose, Calif. Jay Chaudhry EMPLOYEES: 609 FUNDING RAISED: $110 MIL
A SEA OF DROPLETS BEN URETSKY, CEO, COFOUNDER
DigitalOcean is an upstart looking to carve out a long-term place in the biggest battle in tech: the war between Amazon, Microsoft, Google and IBM to be the hosts and facilitators of the swelling wave of businesses moving onto the cloud. DigitalOcean’s secret weapon, according to its CEO, Ben Uretsky, is its focus on developers. What coders need, DigitalOcean found: ultrasimple, quick-to-use virtual private servers for building their applications and sites. DigitalOcean calls them “Droplets,” and 750,000 programmers are using them today. “Customers get what they’re looking for with us; it’s simple and easy to use,” he says. “That’s different from what the other providers are known for.” In June Uretsky convinced Harvard Business School teacher and industry veteran Julia Austin to sign on as CTO, and over the summer DigitalOcean launched block storage, a cheap way to store data. Next on the agenda: machine learning and analytics. It’s expensive to build out— DigitalOcean’s borrowed at least $180 million to date—but Uretsky says DigitalOcean now turns a profit on each unit it sells and is no longer in danger of drowning in a sea of red ink.
26 Carbon Black Waltham, Mass. Patrick Morley EMPLOYEES: 700 FUNDING RAISED: $190 MIL IT SECURITY
27 Yardi Systems Santa Barbara, Calif. Anant Yardi EMPLOYEES: 5,014 FUNDING RAISED: BOOTSTRAPPED REAL ESTATE SOFTWARE
28 Anaplan San Francisco No current CEO EMPLOYEES: 600 FUNDING RAISED: $240 MIL BUSINESS PLANNING
29 Avalara Bainbridge Island, Wash. Scott McFarlane EMPLOYEES: 1,0002 FUNDING RAISED: $299 MIL2 AUTOMATED TAX SOFTWARE
30 AppDirect San Francisco Nicolas Desmarais and Daniel Saks EMPLOYEES: 550 FUNDING RAISED: $245 MIL
17 Coupa Software
Emeryville, Calif. Orion Hindawi EMPLOYEES: 251 FUNDING RAISED: $302 MIL
San Mateo, Calif. Rob Bernshteyn EMPLOYEES: 500 FUNDING RAISED: $165 MIL
New York City Brian O’Kelley EMPLOYEES: 1,000 FUNDING RAISED: $250 MIL
Boston Thomas Erikson EMPLOYEES: 720 FUNDING RAISED: $189 MIL
INVOICE AND PROCUREMENT MANAGER
WEB PLATFORM DEVELOPER
32 SMS Assist
San Francisco Chris Wanstrath EMPLOYEES: 603 FUNDING RAISED: $350 MIL
American Fork, Utah Josh James EMPLOYEES: 800 FUNDING RAISED: $590 MIL
Palo Alto, Calif. Borge Hald EMPLOYEES: 1,000 FUNDING RAISED: $255 MIL
Chicago Michael Rothman EMPLOYEES: 565 FUNDING RAISED: $258 MIL
ONLINE CODE REPOSITORY
MULTI-SITE PROPERTY MANAGER
San Francisco Todd McKinnon EMPLOYEES: 804 FUNDING RAISED: $230 MIL
Cambridge, Mass. Steve Kokinos EMPLOYEES: 750 FUNDING RAISED: $200 MIL
Irvine, Calif. Stuart McClure EMPLOYEES: 600 FUNDING RAISED: $177 MIL
New York City Ragy Thomas EMPLOYEES: 1,200 FUNDING RAISED: $239 MIL
ONLINE VOICE AND VIDEO PLATFORM
SOCIAL MEDIA MANAGER
Bellevue, Wash. Sunny Gupta EMPLOYEES: 694 FUNDING RAISED: $136 MIL
San Francisco Greg Schott EMPLOYEES: 700 FUNDING RAISED: $259 MIL
Irvine, Calif. Dean Stoecker EMPLOYEES: 400 FUNDING RAISED: $163 MIL
Los Angeles Therese Tucker EMPLOYEES: 500 FUNDING RAISED: PRIVATE EQUITY
IT INVESTMENT MANAGER
98 | FORBES OCTOBER 4, 2016
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INSIDE THE CLOUD EVENTBRITE:
ORGANIZING ORGANIZERS JULIA HARTZ, CEO, CO FOUNDER
36 Pluralsight Salt Lake City Aaron Skonnard EMPLOYEES: 500 FUNDING RAISED: $165 MIL ONLINE DEVELOPER TRAINING
37 MapR San Jose, Calif. John Schroeder EMPLOYEES: 450 FUNDING RAISED: $194 MIL OPEN-SOURCE BIG DATA
38 Hootsuite Vancouver Ryan Holmes EMPLOYEES: 1,000 FUNDING RAISED: $250 MIL SOCIAL MEDIA MANAGER
39 InsideSales Provo, Utah Dave Elkington EMPLOYEES: 500 FUNDING RAISED: $201 MIL SALES LEAD MANAGER
40 Procore Technologies
Carpinteria, Calif. Tooey Courtemanche EMPLOYEES: 600 FUNDING RAISED: $130 MIL
Pleasanton, Calif. Dave Yarnold EMPLOYEES: 430 FUNDING RAISED: $202 MIL
San Francisco Eoghan McCabe EMPLOYEES: 399 FUNDING RAISED: $116 MIL
New York City Amir Orad EMPLOYEES: 250 FUNDING RAISED: $100 MIL
CONSTRUCTION PROJECT SOFTWARE
FIELD SERVICE SOFTWARE
CUSTOMER COMMUNICATION SOFTWARE
BUSINESS INTELLIGENCE SOFTWARE
41 BlueJeans Network
Mountain View, Calif. Krish Ramakrishnan EMPLOYEES: 500 FUNDING RAISED: $175 MIL
San Francisco Julia Hartz EMPLOYEES: 500 FUNDING RAISED: $200 MIL
New York City Olivier Pomel EMPLOYEES: 230 FUNDING RAISED: $148 MIL
Baar, Switzerland William H. Largent EMPLOYEES: 2,225 FUNDING RAISED: BOOTSTRAPPED
DATA BACKUP AND RECOVERY
46 ABILITY Network
50 Flatiron Health
New York City Ben Uretsky EMPLOYEES: 300 FUNDING RAISED: $123 MIL
Minneapolis Mark Pulido EMPLOYEES: 500 FUNDING RAISED: $550 MIL
New York City Nat Turner EMPLOYEES: 303 FUNDING RAISED: $328 MIL
San Mateo, Calif. Barmak Meftah EMPLOYEES: 278 FUNDING RAISED: $116 MIL
HEALTH CARE SOFTWARE
HEALTH CARE ANALYTICS
San Francisco Matt Mullenweg EMPLOYEES: 490 FUNDING RAISED: $191 MIL
Mississauga, Ont. Mike Wessinger EMPLOYEES: 1,208 FUNDING RAISED: PRIVATE EQUITY
San Francisco Joshua Reeves EMPLOYEES: 300 FUNDING RAISED: $161 MIL
San Francisco Jennifer Tejada EMPLOYEES: 220 FUNDING RAISED: $40 MIL
WEB PLATFORM DEVELOPER
HEALTH CARE SOFTWARE
IT INCIDENT RESOLUTION
100 | FORBES OCTOBER 4, 2016
TIMOTHY ARCHIBALD FOR FORBES
When Julia Hartz and her husband, Kevin, set out to democratize event ticketing a decade ago, they didn’t expect to end up building one of the largest ticket platforms in the world. At first the duo ignored the sexy and lucrative world of music and sporting events, where Ticketmaster and StubHub had a virtual stranglehold. Instead they focused on helping organizers plan, promote and (in some cases) sell tickets for small gatherings like industry confabs or fan meet-ups. “We’re making the unsexy sexy,” says Hartz. “It took many years to show valuable it was.” Now Eventbrite works with largesize customers in nearly every category. Music, long the purview of the big-ticket brokers, is Eventbrite’s fastest-growing category in its leading market, New York. But where things could get really interesting, its CEO believes, is when the company can start offering more services to attendees as well as event hosts. This summer Eventbrite tested smart wristbands at seven major music festivals that could be used for both entry and to quickly tap and pay for concessions. Hartz formally took over as CEO from Kevin (who remains chairman) in April.
San Jose, Calif. Michael DeCesare EMPLOYEES: 721 FUNDING RAISED: $80 MIL
INSIDE THE CLOUD
65 Adaptive Insights
Redwood City, Calif. Nick Mehta EMPLOYEES: 385 FUNDING RAISED: $104 MIL
Palo Alto, Calif. Tom Bogan EMPLOYEES: 475 FUNDING RAISED: $176 MIL
San Mateo, Calif. Kirk Krappe EMPLOYEES: 1,300 FUNDING RAISED: $108 MIL
San Francisco Dan Siroker EMPLOYEES: 350 FUNDING RAISED: $146 MIL
CUSTOMER SUCCESS SOFTWARE
FINANCIAL PLANNING SOFTWARE
Redwood City, Calif. Chris O’Neill EMPLOYEES: 300 FUNDING RAISED: $290 MIL2
Chennai, India Sridhar Vembu EMPLOYEES: 4,000 FUNDING RAISED: BOOTSTRAPPED
Matawan, N.J. Colin Day EMPLOYEES: 550 FUNDING RAISED: PRIVATE EQUITY
NOTE CAPTURE AND SYNC
ONLINE PRODUCTIVITY SUITE
New York City Daniel Chait EMPLOYEES: 208 FUNDING RAISED: $60 MIL
Ann Arbor, Mich. Dug Song EMPLOYEES: 300 FUNDING RAISED: $49 MIL APP SECURITY
59 Health Catalyst Salt Lake City Dan Burton EMPLOYEES: 460 FUNDING RAISED: $235 MIL HEALTH CARE ANALYTICS
60 Fastly San Francisco Artur Bergman EMPLOYEES: 2002 FUNDING RAISED: $130 MIL2 CONTENT DELIVERY NETWORK
71 Workfront DATADOG:
OLIVIER POMEL, CEO, COFOUNDER
As more and more companies look to Amazon, Microsoft and others to store and manage the data and computing that makes their businesses work, no company’s better positioned to track it all than New York-based startup Datadog. The company monitors the cloud usage of companies ranging from Twilio and Zendesk to a top-tier retailer, telco and bank. CEO Olivier Pomel’s pitch is simple: Many IT teams are now mixing and matching cloud services from many companies; by tracking it all through Datadog, engineers can anticipate when usage (and costs) with one may spike. One irony for Pomel: When Datadog works best, you won’t hear about it. “That’s the tragedy of heroes of the office. You remember the guy who fixed the disaster, but not the guy who avoided it,” he says. But privacy nerds may find Datadog’s chief something of a hero. Datadog possesses a data set that’s in high demand from hedge funds and others looking to trade on its insights. But out of respect for the privacy of his clients, Pomel refuses to sell to third parties: “We’re drawing the line there—our focus is on helping our customers directly.”
Lehi, Utah Alex Shootman EMPLOYEES: 671 FUNDING RAISED: $33 MIL PROJECT MANAGER
72 Turbonomic Boston Benjamin Nye EMPLOYEES: 4342 FUNDING RAISED: $75 MIL2 VIRTUALIZATION SOFTWARE
73 NewVoiceMedia Basingstoke, U.K. Jonathan Gale EMPLOYEES: 372 FUNDING RAISED: $141 MIL CALL CENTER SOFTWARE
Santa Clara, Calif. Billy Bosworth EMPLOYEES: 425 FUNDING RAISED: $191 MIL
New York City Clark Valberg EMPLOYEES: 220 FUNDING RAISED: $135 MIL
San Francisco Dustin Moskovitz EMPLOYEES: 215 FUNDING RAISED: $88 MIL
Bellevue, Wash. Mark Mader EMPLOYEES: 389 FUNDING RAISED: $69 MIL
Foster City, Calif. Tien Tzuo EMPLOYEES: 630 FUNDING RAISED: $250 MIL
San Francisco Peter Reinhardt EMPLOYEES: 100 FUNDING RAISED: $47 MIL
Burlington, Mass. Bob Brennan EMPLOYEES: 4652 FUNDING RAISED: $134 MIL2
San Francisco Tiago Paiva EMPLOYEES: 201 FUNDING RAISED: $25 MIL
CALL CENTER SOFTWARE
102 | FORBES OCTOBER 4, 2016
BRANDON SCHULMAN FOR FORBES
58 Duo Security
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INSIDE THE CLOUD
UPSELLING INSIGHTS N I C K M EHTA , C EO
84 Zoom Video Communications
96 Lithium Technologies
Denver Sameer Dholakia EMPLOYEES: 300 FUNDING RAISED: $48 MIL
San Jose, Calif. Eric S. Yuan EMPLOYEES: 390 FUNDING RAISED: $46 MIL
San Francisco Alex Bard EMPLOYEES: 250 FUNDING RAISED: $250 MIL
San Francisco Rob Tarkoff EMPLOYEES: 400 FUNDING RAISED: $150 MIL
SOCIAL MEDIA MANAGER
85 Sumo Logic
Sunnyvale, Calif. Andrew Rubin EMPLOYEES: 160 FUNDING RAISED: $143 MIL
Redwood City, Calif. Ramin Sayar EMPLOYEES: 250 FUNDING RAISED: $160 MIL
Cupertino, Calif. Larry Augustin EMPLOYEES: 475 FUNDING RAISED: $104 MIL
Emeryville, Calif. Andre Hurd EMPLOYEES: 369 FUNDING RAISED: PRIVATE EQUITY
HEALTH CARE ANALYTICS
92 App Annie
98 Skyhigh Networks
Charlotte, N.C. Michael Praeger EMPLOYEES: 800 FUNDING RAISED: $225 MIL
San Francisco David Barrett EMPLOYEES: 101 FUNDING RAISED: $27 MIL
San Francisco Bertrand Schmitt EMPLOYEES: 450 FUNDING RAISED: $157 MIL
Campbell, Calif. Rajiv Gupta EMPLOYEES: 305 FUNDING RAISED: $67 MIL
EXPENSE REPORT SOFTWARE
99 Extreme Reach
New York City Charles Phillips EMPLOYEES: 15,000 FUNDING RAISED: PRIVATE EQUITY
New York City Matt Straz EMPLOYEES: 324 FUNDING RAISED: $108 MIL
Los Altos, Calif. Sanjay Beri EMPLOYEES: 350 FUNDING RAISED: $131 MIL
Needham, Mass. John Roland EMPLOYEES: 850 FUNDING RAISED: $97 MIL
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Santa Monica, Calif. Ian Siegel EMPLOYEES: 400 FUNDING RAISED: $63 MIL
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A happy customer is one that will spend more, and Gainsight’s software helps companies boost their sales by proactively analyzing existing accounts. “The question is how you keep [your existing customers] coming back for more,” says CEO Nick Mehta. When Gainsight adds ten points to revenue growth, its software has already more than paid for itself. Given Gainsight’s business, it’s only fitting that the startup publicly share its own numbers. Mehta says revenue has jumped 110% over the past year on top of a 62% increase in its average contract size, with retention rates of 96% and 113%, when you account for upselling within existing customers. Salesforce is both a partner and investor today, but it could be a competitor tomorrow. One area where Gainsight is developing new tools that sound awfully similar to what Salesforce, Microsoft and others are building: “recommended,” or predictive e-mails and video messages that reps can easily send to accounts they’ve lost, or are worried they may lose. Explains Mehta: “Part of customer success is understanding customer health, but then it’s about making your team more effective.”
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GLAXO TAKES ITS MEDICINE ANDREW WITTY INHERITED A DRUGMAKER SICK WITH SCANDAL AND SPENT THE NEXT EIGHT YEARS PATCHING UP HIS PATIENT. GLAXOSMITHKLINE MAY FINALLY BE WELL AGAIN. by Matthew Herper
OCTOBER 4, 2016 FORBES | 107
ere’s how Sir Andrew Witty, who is due to end an eight-year tenure as the chief executive of British drug giant GlaxoSmithKline, would like to be remembered: in his shirtsleeves, in sub-Saharan Africa, meeting with impoverished villagers and then persuading first-world politicians of the need for drugs in the developing world. As the chief executive whose company developed a malaria vaccine and was first to test a vaccine for the Ebola virus. As the ethical exec who stopped paying doctors what were essentially bribes to talk up drugs. As the pharma boss who managed to stabilize a drug giant without a big, destructive merger. “Honestly, I don’t regret a single decision,” says Witty, 52. “Someone smarter than me probably could have done it better. But I think it was the right direction for us to go in.” History might remember a different Glaxo: the company whose revenues are flat since Witty took over and whose shares have underperformed its peers. The company accused of bribery in a half-dozen countries. The firm that in July 2012 pleaded guilty to civil and criminal charges in the U.S. for marketing in illegal ways drugs like Paxil for depression and Avandia for diabetes, and agreed to pay $3 billion in fines, the largest such settlement ever. After that bruising Witty did something pharma chief executives almost never do. He apologized. “On behalf of GSK, I want to express our regret and reiterate that we have learnt from the mistakes that were made,” he said in a prepared statement. What kind of mistakes? For one, prosecutors alleged that a decade before Witty took command Glaxo paid Drew Pinsky, who parlayed a radio show giving teenagers sex advice into the celebrity persona of “Dr. Drew,” $275,000 for two months to talk about antidepressants and sex. Dr. Drew gave an interview where he segued from talking about a woman who said she had 60 orgasms in a row to saying how Glaxo’s Wellbutrin was better for the libido than other antidepressants. Pinsky didn’t disclose at the time that Glaxo was paying him; no charges were brought against Pinsky. Similar shenanigans occurred with Avan-
dia and Paxil, which was marketed to adolescents even though it wasn’t approved for them. The maddening problem for pharmaceutical chief executives is that their tenures will be judged on the results of decisions made decades before they took command. Most of the scandals of Witty’s term predated him, but so did many successes: Glaxo’s malaria vaccine has been in the works for 30 years. These immutable links to the past, and to the future, weigh heavily on Witty as he looks to help choose his successor. “To have an industry with a 20-year product life cycle, but only to think one year ahead, is destined for disaster,” Witty says. “Your strategy needs to be consistent with that time frame. That’s what we tried to do.” Witty has made some big moves of his own that will help determine whether future Glaxo chiefs succeed. In 2014 he made a deal with Novartis that traded GlaxoSmithKline’s marketed cancer drugs for Novartis’ vaccine and consumer businesses and a $16 billion cash payment. Most other big pharma companies are depending heavily on new cancer treatments, which cost $100,000 and up for a course of treatment. Witty thinks the future of such drugs is at risk because society will not continue to pay for them. In the short run that has hurt him, as insurers in the U.S. have been willing to pony up. He has also focused on countries in Asia and Africa whose pharmaceutical markets are just emerging. The share price certainly doesn’t reflect a turnaround. But profits are up, and in the second quarter of this year new-product sales doubled to $1.5 billion, 17% of revenue. Glaxo is forecasting earnings growth of at least 11% for the year. “His predecessor left an awful lot of issues for him to deal with, an awful lot of settlements that they just kicked into the long grass,” says Richard Buxton, the chief executive of Old Mutual Global Investors, the mutual fund. “I think whoever succeeds him will preside over a better set of outcomes for shareholders.”
The maddening problem for a pharma CEO is that he will be judged on decisions made decades earlier.
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laxoSmithKline, which is based in London, was formed on Jan. 1, 2001 by the $76 billion merger of Glaxo Wellcome, the maker of Wellbutrin (depression) and Imitrex (migraines), and SmithKline Beecham, which made Avandia (diabetes) and Paxil (depression). Both companies had storied histories that involved breakthrough drugs, including AIDS drugs and antibiotics. But they were having trouble coming up with enough new hits.
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GLAXOSMITHKLINE Underachiever TOTAL RETURN TO SHAREHOLDERS OF THE WORLDS’ TOP PURE-PLAY PHARMA GIANTS SINCE ANDREW WITTY TOOK COMMAND OF GLAXO IN MAY 2008.
200 PFIZER MERCK NOVARTIS GLAXOSMITHKLINE SANOFI
100 90 80 70 60 2008
Soon after the merger closed, the controversies began. Critics alleged that SmithKline had failed to publish studies that showed Paxil might increase the risk of suicidal thoughts in adolescents, while publishing studies that showed there was no danger. In 2004 New York attorney general Eliot Spitzer sued the company; the suit was eventually settled when Glaxo agreed to publish on the Internet summary results of its future drug studies. Then came Avandia. In 2007 Steven Nissen, chairman of cardiology at the Cleveland Clinic, published a paper in the New England Journal of Medicine arguing that Avandia, GlaxoSmithKline’s blockbuster diabetes drug, caused heart attacks. The FDA eventually said no new patients should start taking the drug, ultimately erasing $3 billion of annual sales. The response from Witty’s predecessor, J.P. Garnier, was tone-deaf at best. “My wish for the media is to be more sophisticated when they report scientific news,” he said in 2008. He predicted that he would be “vindicated” by the FDA. Later that year, when a BBC interviewer repeatedly asked him about the Paxil controversy, he hung up while on the air. Witty became chief executive in May 2008. He was a 23-year Glaxo lifer, a marketer who had done stints running part of Glaxo’s African businesses before taking over as president of European operations. His first goal, it seemed, was to rehabilitate Glaxo’s image. A series of profiles in newspapers and magazines presented him as concerned about the developing world. In 2009 the 110 | FORBES
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Daily Telegraph called him “the friendly face of big pharma.” But Witty had problems that couldn’t be solved with good press or a friendly face. Patents on GlaxoSmithKline’s top drugs were expiring, meaning that generic competition was going to eat away at sales. Between 2006 and 2009 medicines such as Lamictal for bipolar disorder, Zofran for nausea, Valtrex for herpes and Flonase for allergies went generic, removing billions of dollars from Glaxo’s top line. With the loss of Avandia it all added up to roughly a
quarter of the company’s sales. One way to replace those sales would have been to invent new drugs. Glaxo spends $4.5 billion a year on research and development. Witty doubled down on a strategy put in place by his predecessors: splitting the company’s 10,000-plus R&D staffers into dozens of largely autonomous units that theoretically could function with the agility of biotechnology companies. Back in 2010 Witty was excited about three potential hits. One was a vaccine to prevent lung cancer from recurring. It failed in 2014. Another was a new type of drug to prevent heart attacks. That medicine failed, too, in 2014. Even if it had succeeded, medical journals revealed a side effect that might have torpedoed the drug: It made an unpleasant scent emanate from many patients’ bodies. The third was a diabetes medicine, Tanzeum, that did reach the market, but behind rival meds from AstraZeneca and Novo Nordisk. Despite those failures GlaxoSmithKline has gotten 13 drugs through the FDA during Witty’s tenure, more than any company except Johnson & Johnson, according to the InnoThink Center for Research in Biomedical Innovation. But many didn’t amount to much. Analysts had expected Benlysta, a lupus drug approved in 2011, to generate as much as $5 billion in sales, and in 2012 GlaxoSmithKline spent $3 billion to buy Human Genome Sciences, which had invented the drug. Yet the market just wasn’t there. Sales in 2015 were $350 million, though they grew at a 33% clip. Cervarix, a vaccine, targeted two strains of the human papilloma
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virus (HPV), which causes cervical cancer. Merck’s rival Gardasil targeted four HPV strains, including two strains that cause genital warts. Sales of Cervarix were $135 million, compared with $1.9 billion for Gardasil. Five of Glaxo’s new drugs were for cancer. In 2014 the company’s cancer-drug sales rose 20% to nearly $2 billion. But Witty struck an offer with Joseph Jimenez, the chief executive of Novartis, to sell these marketed drugs, though he made sure to keep the early-stage cancer medicines Glaxo was developing. In return he got Novartis’ vaccine division, including three promising meningitis vaccines, and created a joint venture in consumer health, which included brands like Sensodyne toothpaste and Theraflu for flu symptoms. Many investors thought he was crazy to get out of cancer. But Witty also negotiated a $16 billion cash payment from Novartis, which he says was more than his internal estimates said the cancer drugs would ever be worth. He still insists that by being willing to be unfashionable he got the better part of the deal.
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“I don’t regret a single decision. Someone smarter probably could have done it better. But it was the right direction to go in.”
hile Witty was trying to make up for lost sales from patent expirations, he was busy with another task: trying to get past the ethical messes that had gotten GlaxoSmithKline in trouble before he took over. One problem, he decided, was the way the drug industry traditionally paid sales representatives: It incentivized them to push the ethical and legal envelope. The reps were paid based on whether they could get doctors in their territories to prescribe more of a given drug. These incentives, Witty decided, led representatives to do things like pay doctors to speak when they weren’t experts, give away free trips and meals, and use sales pitches that were not in line with language approved by the Food & Drug Administration. Now the reps, Witty says, are measured on technical knowledge and customer service. He considers this
change one of the proudest achievements of his career. But Glaxo is a huge company with 100,000 employees, and its ethical problems didn’t end just because Witty was trying to fix things. In 2013 the Chinese government announced that it was investigating Glaxo for bribery, saying the company had funneled illegal payments to doctors and government officials in order to boost sales. Witty remembers realizing over a period of days how serious the allegations were. It was “distressing,” he says. “It was so counter to everything we were trying to do.” A year later Glaxo was found guilty of bribery in China and ordered to pay nearly $500 million. In 2013 Witty announced that Glaxo would no longer offer any payments to physicians for speaking or other services. He denies the decision had anything to do with China. At the time, Glaxo, like other companies, was routinely offering U.S. physicians large sums of money—sometimes in the six figures—to give speeches promoting its drugs. Sometimes the practice bordered on institutionalized bribery, as drug reps paid doctors to give speeches as a reward for prescribing medicine. In other cases drug companies would pick only doctors who liked their products, creWitty in 2010. ating an echo chamber in which it seemed like physicians were unanimous in supporting a particular drug. Witty claims that getting rid of this tried-and-true practice has caused “a complete transformation” of Glaxo’s marketing. “We’d say, ‘Thursday night would you please come to the Holiday Inn, have a chicken dinner, listen to a doctor talking about something?’ ” Witty says. “ ‘Great.’ What if that Thursday night wasn’t convenient for you? What if you’ve got kids?” Now, he says, digital tools mean that Glaxo can engage physicians with questions on their own terms. “If you want to talk to us at 3 a.m.,” he says, “we’re there at 3 a.m.” Witty also embraced the idea that Glaxo should publish all its data. Drug companies typically publish only their most positive studies, making medicines seem safer and more effective than they actually are. One analysis of clinical trials for 12 different antidepressants found that only one of 38 positive studies wasn’t published; of 36 negative studies, 3 were published in a way
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GLAXOSMITHKLINE that was accurate, 22 were not published and 11 were published in a misleading way that made the results appear positive when they were not. Witty insisted Glaxo make public the results of all 1,700 studies the company had conducted since 2000.
Résumé Stack POTENTIAL CONTENDERS FOR GLAXOSMITHKLINE’S TOP JOB.
vaccine it had developed with funding from the Bill & Melinda Gates Foundation. Next, the malaria vaccine will be evaluated by the World Health Organization. Witty, who spent years in malaria-ridden sub-Saharan Africa, says one of the most emotional moments of his career happened when he got initial data that showed the vaccine could cut infection rates by nearly half (a number since revised downward).
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VIEHBACHE: SCOTT EELLS/BLOOMBERG; EPSTEIN: GIANLUCA COLLA/BLOOMBERG; O’DAY: GEORGIOS KEFALAS/EPA/NEWSCOM
t would be nice if Witty’s focus on improving the world were also making Glaxo run on all cylinders. But it’s not that simple, and right EMMA WALMSLEY now there is one big question facing the comCEO, GSK CONSUMER HEALTHCARE pany: What will happen as generic competition INSIDER RUNS GLAXO’S CONSUMER HEALTH DIVISION. emerges for its top-selling product, Advair, an inhaler for asthma and COPD? In 2013 Advair generated more than $4 bilABBAS HUSSAIN lion, but sales have already fallen 30% as U.S. PRESIDENT, GLOBAL PHARMACEUTICALS, GSK ALREADY IN CHARGE OF GLAXO’S BIGGEST BUSINESS. insurers have switched to other products and managed to negotiate lower prices. Next year the first generic competitor should emerge in the U.S. As more generics are approved, anaSIMON DINGEMANS CHIEF FINANCIAL OFFICER, GSK lysts at Jefferies estimate, sales will fall by 90% HE KNOWS THE BOOKS. by 2020. The better Witty’s successor can do at slowing this decline—perhaps by competing with the generics on price—the less nervous DAVID EPSTEIN shareholders will be. FORMER HEAD, NOVARTIS PHARMACEUTICALS Glaxo’s heirs to Advair—new inhalers called LONG CONSIDERED A CANDIDATE FOR A CEO JOB. Breo Ellipta and Anoro Ellipta—could generate $2 billion in sales by 2020, Jefferies says. But ultimately growth will depend on new drugs. CHRISTOPHER VIEHBACHER One promising entrant is Tivicay, an HIV drug FORMER CEO, SANOFI LOST OUT TO WITTY FOR GSK JOB LAST TIME AROUND. that competes with Isentress, Merck’s $1.5 billion pill. Jefferies forecasts Tivicay will be at least as big within five years. Another promDANIEL O’DAY ising product is Shingrix, a shingles vaccine CEO, ROCHE PHARMACEUTICALS that is more effective than Merck’s Zostavax, SKILLED MARKETER AT WORLD’S BIGGEST CANCER-DRUG MAKER. which has annual sales of $749 million. Glaxo’s consumer health business, Jefferies forecasts, This was well above and beyond what Glaxo’s settlecould increase 25% to $12 billion over the next four ment with Eliot Spitzer forced it to do. In 2013 he signed and a half years. a pledge with a group called AllTrials, which required Of course, managing all of this will fall not to Witty further promises to make data public, to try to push the but to his replacement. Internal candidates include rest of the industry to follow. The man behind AllTriEmma Walmsley, the head of consumer business, and als, a U.K. doctor and newspaper columnist named Ben Abbas Hussain, who is in charge of Glaxo’s global pharGoldacre, had written a book called Bad Pharma: How maceutical division. The board could want an outsider. Drug Companies Mislead Doctors and Harm Patients and Whoever gets the job, Witty seems more than ready to had been skeptical about Witty’s previous attempts at pass the baton. transparency. But the day Glaxo took the pledge he was “Is everything right?” he asks. “No. Did we make misgushing, blogging that Glaxo’s commitment was “exceltakes? Yes. Did things go wrong? Yes. But it hasn’t put us lent and amazing.” off trying to improve. And I hope whoever takes over will In 2014 Glaxo started its Ebola trial. The next year it continue trying to improve. Because there’s still plenty of received European approval for Mosquirix, the malaria things to keep improving.” F
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The Marco Polo of Bourbon On deck: Jefferson’s founder Trey Zoeller stands atop barrels of his new, river-aged bourbon, available in late fall.
116 | FORBES OCTOBER 4, 2016
Jefferson’s has journeyed into uncharted waters in whiskey-making by aging small batches on the world’s oceans, rivers and lakes. BY ABRAM BROWN
RUSH JAGOE FOR FORBES
merging from the marshes to the north, a small motorboat cruises into New Orleans’ Lake Pontchartrain, traveling at a slow, steady 5 knots through the sticky August air. Steering the vessel is a one-person crew, a young man scruffily bearded after sleeping aboard for almost three months. Once across, the captain anchors along the palm-lined shore facing the city. The craft’s appearance—23 feet of aging metal—belies the value of its cargo: two 53-gallon oak barrels of bourbon. As well as the novelty of its journey from Louisville, Ky., down the Ohio River, then the Mississippi, to the Gulf of Mexico. After the boat is in port a day or so, its owner, Trey Zoeller, a salt-and-pepper-haired Southerner, arrives to savor a special moment with its captain, Ted Gray. The barrels, secured on deck by steel cages, contain six-month-old whiskey. At that tender age, whiskey is normally as clear as water, tastes overly sweet and singes the palate. Instead, tapping the barrel with a power drill, Zoeller siphons out a liquid with the familiar chestnut color of far older bourbon. After they raise glasses of it to their mouths, the captain finishes Zoeller’s next thought. “There’s no"… ,” Zoeller says. “…"bite at all,” Gray says. Zoeller, 48, is the founder of Jefferson’s, a Louisville-based bourbon-maker named for America’s third president (“He embodied both independence and sophistication”) and founded in 1997—before craft whiskey became a national pastime. According to family lore, Zoeller came to whiskey-making naturally enough: He had a truly great grandmother who was a moonshiner in the late 18th century. She was “the first American woman arrested for illegal distilling,” he says proudly. In this century Jefferson’s continues to break the rules, excelling at the innovative flourishes that liquor companies need to come up with to survive the industry’s swell of competition. Fine bourbon is well-aged bourbon, and on a whim Zoeller began experimenting with aging by stashing barrels (he also prefers Cabernet casks from Napa Valley’s well-regarded Groth Vineyard) in duck blinds to expose them to changing weather. His bourbon boats are another iteration of that philosophy. Almost all whiskey—whether scotch, bourbon or rye—ages in barrels indoors. The process takes years, and the longer, the better. It favors
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big distilleries with the warehouses to handle mass quantities and the facilities to fine-tune elements like humidity and temperature to hone small-batch whiskeys. To stand out, smaller brands like Jefferson’s must get creative. As with many great ideas in the spirits industry, the concept of aging whiskey on water emerged after several rounds of drinks. It came during a 40th birthday celebration on a yacht owned by a shark-researcher friend, Chris Fischer, off Costa Rica. As the ship swayed, Zoeller watched whiskey slosh around in glasses, and he imagined barreled whiskey doing the same. In theory a boat’s rocking would speed up the aging as the bourbon came into repeated contact with the barrel—and the elements. (Any high temperatures encountered would have a similar super-aging effect.) In the end this method would greatly reduce the wait. And with the bourbon exposed to nature’s unpredictability and transported along different routes, Zoeller would have a steady source of new expressions. At first Fischer was skeptical of the idea of carrying so much flammable liquid onboard. “But the more he drank,” Zoeller recalls, “the better the idea sounded to him.” Jefferson’s Ocean debuted in 2012 after a journey of more than 10,000 nautical miles. Zoeller priced the 300 bottles at $200 and says they were soon reselling for ten times that. He plans to release the ninth Jefferson’s Ocean later
this year. Tasting a new version for the first time, he says, is still “like Christmas morning. I never know what it’s going to be like.” Sea air gives Jefferson’s Ocean an unmistakable salted caramel finish. Zoeller wanted to develop a less saline version while sticking with nautical maturation, so why not float it from Louisville to New Orleans—the way America’s first distilleries shipped bourbon in the 19th century? A friend introduced him to Gray, 27, a former Eagle Scout with a passion for roughing it. “I looked down into this cabin,” Gray says, opening a hatch to a windowless 6-foot-long, 2-foot-high berth, “and thought, Oh, it’ll just be like sleeping in a tent for three months.” Zoeller selected a small vessel for the voyage. A bigger one would ride steadier on the water, reducing the bourbon’s movement in the barrels. After setting off in June down the Ohio River, Gray could smell the heat caramelizing the bourbon, and sometimes it attracted swarms of honeybees. The journey had a few other moments of adventure. “We almost capsized three times,” Gray says, and while seeking shelter from one squall near Henderson, Ky., “I didn’t know if the dock was going to make it.” With the boat safely harbored in New Orleans, Gray confidently proclaims his cargo “the world’s rarest bourbon.” While it has already aged remarkably well and remarkably quickly, it still has two more legs of its journey to go. Zoeller plans to sail it himself on the muchshorter trip from New Orleans to Florida, accompanied by his friend John Besh, the New Orleans restaurateur and chef. Next, he’ll arrange for it to sail to New York (with Gray possibly returning as captain). The bourbon will be released in time for Christmas as Jefferson’s Journey, and Zoeller has yet to set a price; he’s mulling a figure around $70 for one 200ml bottle combined with a 200ml bottle of another Jefferson’s small batch. If Jefferson’s has a second journey like this, his captain has a list of improvements. “We could use a first mate,” Gray says, leaning on the boat’s wheel. “And air-conditioning.” Zoeller nods along. “Yeah, and maybe we’ll get a bigger boat.”
“Tell me what brand of whiskey that Grant drinks. I would like to send a barrel of it to my other generals.” —ABRAHAM LINCOLN 118 | FORBES OCTOBER 4, 2016
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RUSH JAGOE FOR FORBES (LEFT)
Better off red: Some Jefferson’s is aged in Cabernet casks.
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On Health “Sometimes you have to get sicker before you can get better.” —JEANNETTE WALLS
“Health nuts are going to feel stupid someday, lying in hospital beds dying of nothing.” —REDD FOXX
“He is the best physician that knows the worthlessness of most medicines.” —BENJAMIN FRANKLIN
“IT IS EASIER TO CHANGE A MAN’S RELIGION THAN TO CHANGE HIS DIET.” —MARGARET MEAD
“I ENJOY PERFECT HEALTH, WHICH I WISH I COULD RUIN AGAIN, BUT AGE PREVENTS ME.” —GIACOMO CASANOVA
“HE WAS GOING TO LIVE FOREVER, OR DIE IN THE ATTEMPT.” —JOSEPH HELLER
“I am always busy, which is perhaps the chief reason why I am always well.” —ELIZABETH CADY STANTON
“I am not my body. My body is nothing without me.” —TOM STOPPARD
“It is a disgrace to grow old through sheer carelessness.”
“I AM CONVINCED DIGESTION IS THE GREAT SECRET OF LIFE.”
“THE HUMAN SPIRIT CAN ENDURE IN SICKNESS, BUT A CRUSHED SPIRIT, WHO CAN BEAR?”
“In every sense, fitness is at the heart of the business of living.”
SOURCES: WAR AND PEACE, BY LEO TOLSTOY; ROCK ’N’ ROLL, BY TOM STOPPARD; THE TIMES BOOK OF QUOTATIONS; THE GLASS CASTLE, BY JEANNETTE WALLS; GOODREADS.COM; HISTORY OF MY LIFE, BY GIACOMO CASANOVA; MEMORABILIA, BY XENOPHON; CATCH-22, BY JOSEPH HELLER; FOOD RULES: AN EATER’S MANUAL, BY MICHAEL POLLAN. 120 | FORBES OCTOBER 4, 2016
CLOCKWISE FROM TOP RIGHT: HERB BALL/NBC/GETTY IMAGES; CHRONICLE/ALAMY; E. VLADER/NEWSCOM; SUSAN WOOD/GETTY IMAGES; MARTIN KLIMEK/ZUMAPRESS/NEWSCOM; B CHRISTOPHER/ALAMY; ANDREW TESTA/EYEVINE/REDUX
“As grandmothers used to say, ‘Better to pay the grocer than the doctor.’ ”
“Let life go on in [your body] unhindered and let it defend itself; it will be more effective than if you paralyze it by encumbering it with remedies.”
Youâ€™ve earned your money, but are you owning it?
In life, you question everything. The same should be true when it comes to managing your wealth. Do you know what your investment recommendations are based on? 'RHV \RXU ĂˇQDQFLDO SURIHVVLRQDO VWDQG E\ WKHLU ZRUG" 'R \RXNQRZKRZPXFK\RXĂšUHSD\LQJLQIHHV"$QGKRZWKRVH IHHV DIIHFW \RXU UHWXUQV" $VN \RXU ĂˇQDQFLDO SURIHVVLRQDO and if you donâ€™t like their answers, ask again at Schwab. We think youâ€™ll like what we have to say. Talk to us or one of the thousands of independent registered investment advisors that do business with Schwab. Ask questions. Be engaged. Own your tomorrow.TM
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Wealth Management at Charles Schwab PLANNING | PORTFOLIO MANAGEMENT | INCOME STRATEGIES | BANKING
Brokerage Products: Not FDIC Insured â€˘ No Bank Guarantee â€˘ May Lose Value To see how Schwab stands by our word, visit www.schwab.com/accountability &KDUOHV6FKZDEUHFHLYHGWKHKLJKHVWQXPHULFDOVFRUHLQWKH-'3RZHU)XOO6HUYLFH,QYHVWRU6DWLVIDFWLRQ6WXG\EDVHGRQUHVSRQVHVIURPĂˇUPVPHDVXULQJRSLQLRQVRI investors who used full-service investment institutions and were surveyed in January 2016. Your experiences may vary. Visit jdpower.com. There are eligibility requirements to work with a dedicated Financial Consultant. Wealth management refers to products and services available through the operating subsidiaries of the Charles Schwab Corporation of which there are important differences including, but not limited to, the type of advice and assistance provided, fees charged, and the rights and obligations of the parties. It is important to understand the differences when determining which products and/or services to select. 7KH&KDUOHV6FKZDE&RUSRUDWLRQSURYLGHVDIXOOUDQJHRIEURNHUDJHEDQNLQJDQGĂˇQDQFLDODGYLVRU\VHUYLFHVWKURXJKLWVRSHUDWLQJVXEVLGLDULHV,WVEURNHUGHDOHUVXEVLGLDU\&KDUOHV6FKZDE Co., Inc. (â€œSchwabâ€?), Member SIPC, offers investment services and products, including Schwab brokerage accounts. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal +RXVLQJ/HQGHU SURYLGHVGHSRVLWDQGOHQGLQJVHUYLFHVDQGSURGXFWV$6.48(67,216%((1*$*('2:1<2857202552:LVDWUDGHPDUNRI&KDUOHV6FKZDE &R,QF ÂŠ2016 The Charles Schwab Corporation. All rights reserved. (0516-FTV3) ADP77864-02