40 UNDER 40

RISING STARS YOU

NEED
TO KNOW
p. 95

FIVE INDUSTRIES
WHERE DRONES
ARE TAKING OFF
p. 144

GRADING
BUFFETTS
STOCK
PICKERS
p. 67

THE NEW COLD WAR

ON BUSINESS
WHAT A TOUGHER CHINA AND RUSSIA MEAN FOR WESTERN COMPANIES

+3 Rules for
Corporate
Survival
in China
p. 90

S E E B E A U T I F U L I M A G E RY | S E E A H O L LY W O O D R E N A I S S A N C E | S E E B E T T E R D I AG N O ST I C S

2014 Canon U.S.A., Inc. Canon, DIGIC and EOS are registered trademarks of Canon Inc. in the United States and may also be registered trademarks
or trademarks in other countries. All third party logos, product and brand names are trademarks of their respective owners. Images simulated.

THERES MORE TO THE IMAGE

THAN ANYONE THOUGHT POSSIBLE.

| S E E S E L F - P U B L I S H I N G | S E E A D VA N C E D E Y E C A R E

Look Ma,
no desk.
Your road warriors power your business.
Collaboration powers your road warriors.

October 27, 2014 Volume 170 Number 6

ON THE COVER

FORTUNES 40 UNDER 40

77
The New Cold
War on Business

95
Introduction
Our annual list of young
business stars is all about
power and inuence.
The new crop has achieved
that by thoroughly
embracing entrepreneurial
risk takingand to
think: Theyre all under
40 years old.

For two decades, globalization has been the world

economys central story
lineor so it was until Russia
and China sharply changed
the narrative. For big
companies in the West, the
question now is: Can there
be a happy ending?
cov er illustr ation from photos by: jinping: joh a n nes eislelea fp/gett y im ages; pu tin: sash a mor dov etsgett y im ages; statue: peter stuck ingsgett y im ages;
st. basils cathedr a l: hu w jonesgett y im ages; soldiers: dmitry korotay evepsilon/gett y im ages; h a nds: ca hir dav ittgett y im ages

By Ian Bremmer

96
Mr. Sunshine
Lyndon Rive thinks solar
power can overtake fossil
fuels, one rooftop at a time.
Some say SolarCitys CEO
is dreamingbut thats
what they said about his
cousin Elon Musk.

82
The Putin
Paradox
The more the West tries
to punish Russias
President, the more
popular he gets at home.
By Vivienne Walt

88
Beijing Pulls
Back the
Welcome Mat
How Chinas strong-arm
tactics are making life hard
for multinationals.
By Scott Cendrowski

110
The 40 Under 40
Photo Portfolio

By Brian Dumaine

Fortunes series of intimate

photographs captures some
members of our 2014 class
in their natural habitats
whether at home, in the great
outdoors, in the gym, or on
the (mini) golf course.

107
How Swell Swelled

121
The List

Sarah Kauss wasnt cut out for

tax auditing. So the Harvard
Business School grad decided to make a water bottle
that would be cool enough to
convert users of plastic. She
has a hit on her hands.

There are two things that

this years young all-stars
have in common:
They dont like limits,
and they dont like being
told no.

By Daniel Roberts

130
Talking World
Peace With
Ben Rhodes
As deputy national security adviser, he helps guide
the Presidents words and
thinking on foreign policy
at a precarious time.
By Tory Newmyer

134

Get Ready for

Drone Nation
In demand by Fortune500
companies and heavily
funded by Silicon Valley, unmanned aircraft are invading
the world of business.
By Clay Dillow
ON THIS PAGE p ho t o g r a p h b y STEPHEN LEWIS
ON THE COVER i l l u s t r a t io n b y ALEX WILLIAMSON
40 UNDER 40 COVER p ho t o g r a p h b y GREGG SEGAL

FORTUNE.COM

October 27, 2014 Volume 170 Number 6

121 Highbridge founder Michael Patterson, at home in Greenwich, Conn., ranks No. 38 on Fortunes 40 Under 40.

16 MACRO

25 MACRO

36 MACRO

48 VENTURE

67 IN VEST

Closer Look

New Energy

Pro-Files

The New Oracles?

Detroit becomes
an unlikely hub for
high-end bike
manufacturing.

In Ohio, politicians
are squabbling
over energy policy
as manufacturers
clamor for more
renewables.

Global
Power Prole

Super Bowl champ

Roger Staubach
is also a star of
real estate.

Warren Buffetts
protgs are beating the market.

By Jen Wieczner
18 MACRO

By Anne VanderMey
20 MACRO

Executive Read

Priceline founder
Jay Walkers
library chronicles
the history of
imagination.

By Erika Fry
22 MACRO

Fortune 500
Chartist

Leaner lobbying
in Washington.
By Tory Newmyer
and Scott DeCarlo

Worlds Most
Admired
Companies

Southwest Airlines
is ying high.
By Laura
Lorenzetti

Wearable
Technology

Why blue-collar
businesses are
excited about
wearable gadgets.
By Erin Griffith

INSIGHTS
73

Allan Sloan
Will Bill Gross do
better with his new
fund than the one he
left behind?

41 VENTURE

Tech Star

74

32 MACRO

How I Got Started

Nina Easton

Worlds Greatest
Leaders

Josh Hochschuler,
founder of Talenti
Gelato & Sorbetto.

Can Apoorva
Mehta, founder of
Instacart, outrun
Amazon, his old
employer?

McKinseys
Dominic Barton
on four things that
worry business.
By Geoff Colvin

Interview by
Dinah Eng

By JP Mangalindan

46 VENTURE

64 TECH

Verne Harnish

The Fortune500
Series

Five ways to tone

your operations.

Bloomingdales
tests smart
tting rooms.
By Phil Wahba

FORTUNE.COM

10 EDITORS DESK
152 BING!

62 TECH

By Anne VanderMey

Inside Report

It takes a village
to sell a CEO to
both Wall Street
and Main Street.

57 TECH
38 MACRO

29 MACRO

By Stephen Gandel

By Greg Bishop

By Mehboob Jeelani

By Richard Martin

Brieng

Washingtons top
political donors.
Plus: Enrollment at
for-prot schools
drops again.

Johnson & Johnsons CEO enlists

IBMs Watson to
nd new drugs.

Tired of the endless

gridlock in Washington? Blame the
primaries.

CORRECTIONS

Is Africas Rise for

Real This Time?
(Oct.6, 2014) misstated that BP is an
investor in M-Kopa
Solar. Keeping
It in the Family
(Oct.6) incorrectly
said Pernod Ricard
acquired Seagram
in 2008 and Makers
Mark in 2005. It
acquired Seagram
in 2001 and never
owned Makers
Mark; when Pernod
Ricard acquired
Allied Domecq in
2005, Makers was
sold to Beam. Its
Not Lost in Translation (Oct.6) misstated the gender
of the voice used
by Deltas speech
recognition system.
It is male.

Want to know more?

Download and open the
Google app and then say
Ok Google to ask a
question. Look for the Google icon
and search tips throughout this issue.

p ho t o g r a p h b y GREG MILLER

Touchpad technology.
Launchpad performance.
The all-new C-Class.

It is the unexpected fusion of breakthrough intelligence and groundbreaking acceleration. The all-new C-Class
features a more powerful, efcient engine backed by an available AIRMATIC suspension that allows the driver
to choose between a Sport or Comfort ride. Inside, every detail has been redesigned to a new level of luxury and
craftsmanship. The interior boasts a Head-Up Display, a large multimedia screen and an intuitive touchpad that
actually reads your handwriting controlling navigation, climate, music, social media and more. The 2015 C-Class.
Prepare to be amazed with the simple press of a nger and the push of an accelerator.

2015 C 300 4MATIC sedan shown in Iridium Silver metallic paint with optional equipment.

2014 Mercedes-Benz USA, LLC

For more information, call 1-800-FOR-MERCEDES, or visit MBUSA.com.

October 27, 2014

D I G I TA L

Leave the page and head to the screen: Get more from Fortune on the web and tablet.

LIFE BEGINS
UNDER 40
Fortunes list of 40 Under 40 celebrates the best
and brightest young people in the world of business, from titans of tech and nance to retail stars.
The online edition of the list has longer proles of
our 40, including ve things you dont know about
each of the listers. Well reveal the 10 top Instagram
accounts from the group and chronicle the big

FORTUNE.COM

To nd out who these

40 Under 40 kids are,
go to Fortune.com.

moves of some of our 40 Under 40 alumni.

Find out what Jack Dorsey, Ivanka Trump, and
others looked like when they were tots with our
childhood photo gallery. To continue the look back,
weve also compiled advice that these go-getters
would give their 20-year-old selves.
You can nd it all at FORTUNE.COM/40UNDER40.

October 27, 2014

(',7256 '(6.

GLOBAL
(DIS)INTEGRATION
LAST MONTHS LAUNCH OF ALIBABA on the New York Stock Exchange was feted at
a lavish party at New Yorks Cipriani restaurant, where CEO Jack Ma told newly enriched investment bankers he was the luckiest person in this world. The New Yorkers
John Cassidyalso a columnist for this magazinewrote that the mega-IPO conrms that globalization, and the integration of the world economy, continue apace.
Im not so sure. The fact that Alibaba now has a market value exceeding Amazons
and eBays combined, even though it has never really competed head-to-head with
either company, is not a sign of integration. It is a sign of the opposite. And the
implications for every company with global ambitions are profound (see The New
Cold War on Business in this issue).
The end of the Cold War brought gauzy hopes of a world united by commerce.
There was an explosion of global trade, followed by the greatest alleviation of poverty
in human history. Capitalism seemed to have triumphed. I visited the McDonalds in
Pushkin Squarethe largest in the world at the timesoon after it opened in 1990.
Russians were instinctively drawn to the cash registers with the longest lines, assuming after decades of socialism that those led to the good stuff. The restaurant had to
hire door tenders to inform customers they had entered a new era.
In China, accession to the World Trade Organization in 2001 further advanced
the dream of a global trading system built on accepted rules of commercial behavior. Sure, the rip-off of movies and software remained rampant in China. And yes,
stories of Western companies whose Chinese partners opened up competing shops
down the road were legion. But Western businessmen, besotted with the promise
of a billion-plus consumers, ooded into China in the belief that as the economy
developed, commercial rules would follow.
Since the nancial crisis of 200708, however, optimism has faded. In Russia the
McDonalds at Pushkin Square has been shuttereda victim of the growing battle
between President Putin and the West over Ukraine. In China the story is more
subtle but also more disturbing, if only because of Chinas outsize role in the global
economy. President Xi Jinping has promised to pursue economic reforms and further open Chinas economy. But the nations cynical attacks on Western companies
accusing Microsoft of monopoly, for instance, when the company sells only one of
every 10 copies of its software used in Chinasuggest otherwise.
Most Western businessmen are reluctant to criticize the Chinese government, fearing retribution. (The same companies criticize Western governments with abandon,
proving the difference between the two.) But one who hasnt hesitated to blow the
whistle is Fred Smith, CEO of FedEx. The delivery company was an early entrant into
China, and as chairman of the U.S.-China Business Council, Smith was an ardent
advocate of Chinas admission into the WTO. In the past few years, however, FedEx
operating permits were held up by Chinese regulators, while permits for thousands
of small competitors got the green light. In a speech at Tsinghua University earlier this
year, Smith said foreign rms had grave concerns about Chinas indigenous inno-

FORTUNE.COM

10

vation policies. While encouraging domestic innovation is a laudable goal, he

said, the actual effect has been a system
of subsidies, incentives, and preferential
access that is inherently protectionist.
Chinas defenders argue that protectionism is hardly unique to China.
And they are optimistic that as China
becomes more invested in the global
trading system, it will have more reason
to abide by the systems rules. But we
may be learning the limits of capitalism
without democracy. If Xi isnt willing to
protect the rights of his own people or
give them the benet of the rule of law,
why should anyone expect him to do the
same for global companies?

alan murray
Editor
@alansmurray

p ho t o g r a p h b y WESLEY MANN

October 27, 2014

FOUNDER Henry R. Luce, 18981967

CHIEF CONTENT OFFICER Norman Pearlstine
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FORTUNE.COM

12

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MACRO
A Recovery
on Two
Wheels
The Motor City is becoming
an unlikely hub for high-end
bike manufacturing.
BY JEN WIECZNER
photogr a ph by ACKERMAN + GRUBER

BEFORE THERE WAS THE MODEL T, there was the

Quadricycle. Henry Ford fashioned his original
automobile from four bicycle wheels and a chain
at the height of Detroits 19th-century bike (yes,
bike) manufacturing boom. If Detroit rose and
fell on four wheels, its earliest success was built on
just twoand potentially its future one will be as
well. As the city wends its way through bankruptcy
court this fall and its core industry lurches back to
solvency, the Motor City is revving up to become
a manufacturing hub again, this time for a vehicle
that has no motor at all: the bicycle.
Over the past several years, at least seven bicycle
makers have set up shop in the Detroit metro area,
touting sleek, artisanal models. Its kind of in the
Detroit DNA to build things, says Steven Bock, a
clay sculptor who models car panels for Ford Motor
and makes handcrafted bikes in his downtime.
Besides Bocks Detroit Bicycle Co., founded in 2011,
is 30-year-old Slingshot Bicycle, which moved into
a Detroit-area manufacturing facility in June and
is busy repatriating production from Taiwan. Then

FORTUNE.COM

16

October 27, 2014

When hes not

sculpting clay
models of cars for
Ford Motor, Steven
Bock builds bikes
by hand under the
moniker Detroit
Bicycle Co. This
copper singlespeed bike sells
for $4,400.

Closer Look

October 27, 2014

MACRO
br iefi ng

theres 313 Bicycle Works, started by

Detroit reghter Mike Sheppard,
as well as Shinola, a manufacturer of
trendy watches and other goods that
assembles its Wisconsin-made bikes
at a new Detroit storefront. The biggest of the bunch, though, is Detroit
Bikes. Founder Zak Pashak invested
$2.5 million in a 50,000-square-foot
factory that mints about 10 bikes a day
and has sold nearly 1,000 so far. Eventually he aims to produce as many as
50,000 a year.
If the plan is successful, Detroit
Bikes alone would double the number of two-wheelers manufactured
in the U.S. today. The industry
largely disappeared a generation
ago when Schwinn, Trek, Huffy, and
other American brands moved most
of their manufacturing offshore in
the 1980s and 90s. A mere 56,000
bicycles were produced in America
last year, the National Bicycle Dealers Association estimates.
Several factors seem to be driving the renaissance. Cheap factory
rents have lured young artists and
entrepreneurs to set up shop. And as
Detroits population has shrunk, so
too has traffic on the citys wide roads,
making them a haven for cyclists.
While the number of Detroit workers
commuting by car has fallen by 20%
since 2007, those commuting by bike
have surged 43%, according to Census
data. Detroit has had the biggest increase in bike commuting of any major American city since 1990, reports
the League of American Bicyclists.
Jay Townley, co-founder of the
Gluskin Townley Group, who studies the U.S. cycling industry, sees a
rekindling of the Ford-era biking
boom. Between growing ridership
and a rebirth of two-wheeled manufacturing, he says, all of a sudden
youre in what turns out to be the
bike city of the country.
Open the Google app and
say,Ok Google, when was
Detroits peak population?

FORTUNE.COM

18

WASHINGTONS NEWEST
KINGMAKERS
Outside money in politics is playing a bigger role than ever.
The surprise is whos putting it up. BY ANNE VANDERMEY
Inequality in election spending is nothing new. In the previous midterms, in 2010, the
top 0.26% of donors gave 68% of all individual political contributions, according to
the nonpartisan Center for Responsive Politics. Much of that went to GOP candidates. That year the top 100 largest Republican donors outspent Democrats 2.5 to
1at least in terms of disclosed contributions. In 2008 the ratio was 5 to 1. The tide,
however, appears to be changing. True, in the age of dark money (think Super PACs
and the like), not all political giving is transparent, but so far this election season,
Democratic bankrollers have spent $77.7 million to Republicans $54.5 million.
Heres a look at the top ve largest donors of the 2014 cycle so far. Say hello to
the new big-money power brokers.

Tom
Steyer

FOUNDER,
FARALLON
CAPITAL
MANAGEMENT
SPENT SO FAR:
$20,453,034

RECIPIENT
AFFILIATIONS:
100% LIBERAL
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STUDENTS SNUB
FOR-PROFITS

Dismal graduation rates, poor employment

track records, and predatory fees have landed
for-profit schools in regulators cross hairs.
(Proponents say the model can help bridge the
education gap between rich and poor.) Now the
once-fast-growing industry is faltering. Several
companies have closed or led for bankruptcy
this year, including Corinthian Colleges, which
is winding down operations at most of its 107
locations. Analysts say industrywide enrollment
may never recover.

i l l u s t r a t io n s b y JOEL KIMMEL

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October 27, 2014

MACRO
i nside r eport

PACKAGING THE BOSS

These days, it takes a village to sell a CEO to both Wall Street and Main Street. By Erika Fry
There are employees, customers, investors, analysts, activists, regulators, and, of course, the media to please. Luckily, theres
help. While support staffs and functions vary widely at each company, most modern-day CEOs have a compendium of image
experts at their disposal. Richard Marshall, a managing director at executive search rm Korn Ferry, says CEOs are managed
increasingly like political candidates. Here, some of the services the well-prepped CEO uses to keep his reputation in check.

SOCIAL MEDIA GURU

More and more CEOs are delegating
their tweeting and other postings
to staff. Thats the worst way to do
it, says Paul Argenti, a professor of
corporate communications at Dartmouths Tuck School of Business.
Ninety-ve percent of the activity
Isee is really bad blog posts.

EXECUTIVE COACH
Not everyone arrives in the C-suite with polish and stellar communications skillsbut
many are getting discreet help to acquire
them. CEOs rarely open up about coaches,
but John Wood of Heidrick & Struggles says
hed be surprised if the majority dont have
a trusted adviser they turn to.

SPEECHWRITER
It may sound quaint in the age of
Twitter, but execs still need to stand
at a podium now and then. Whether
addressing employees or the
Economic Club of Chicago, the trick,
says Selim Bingol, an ex-SVP of
communications at GM, is to channel the way the CEO talks and thinks.

CORPORATE
COMMUNICATIONS
Some 40% of communications chiefs
(who often get a C-suite
title: CCO) now report
directly to the CEO, with
many melding roles in
marketing, investor relations, and government
affairs. The average
Fortune 500 comm.
department employs
24, though the size can
range from three to 600.

CRISIS PR
Sex scandal? Oil spill?
Data breach? Heaven
forbid, all three? When
times get tough, a CEO
needs reinforcements
and youve got to know
who to call, quick. For
that reason, companies
form relationships with
rms that specialize
in damage control.
Especially hot these
days: rms that handle
activist investors.

EXTERNAL PR
Sometimes even a
robust communications
staff is not enough:
There are timesas
when launching a new
product or making an
acquisitionwhen top
executives need an
outside perspective.
Thats when many
Fortune 500 companies
lean on outside agencies for counsel.

MEDIA COACHES
The shareholder
meeting will be
televised (or at least
webcast). The modern
CEO must be cameraready, voice trained,
and comfortable commanding a room. Many
are, but a number of
CEOs still get refresher
courses before big
investor presentations
or, say, the sit-down
with 60Minutes.

REPUTATION RESEARCH
CEOs like metrics, and in
another sign of campaign
creep, they are increasingly
turning to reputation
research in the way politicians look to polls.

FORTUNE.COM

20

STYLIST
Though most dont cop to it, many
bosses get some help primping. The
goal? Be current but not too trendy,
says stylist Ariel Lawrence. Executives
make for easy clients compared with
celebrities, she says. Theyre decisive.

PERSONAL BRAND BUILDING

For todays CEO, the challenge is often to
be seen as both on task and as a visible
thought leader. Hence, the so-called
executive-positioning pro to help point a
CEO in that Davos direction. In the end,
says Bingol, who began his
career as a speechwriter at AT&T, its really
got to help sell more widgets.

i l l u s t r a t io n b y MARK MATCHO

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October 27, 2014

MACRO
t h e fort u n e 500 ch a rt ist

TOP
FOR 10
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SPE BYING 00
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($ M ERS
I
CU LLION
MU S,
199 LATI
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LEANER LOBBYING

Things are so slow in do-nothing Washington that even

corporate lobbyists are throwing up their hands.
Voters arent alone in noticing that Washington hasnt been able to accomplish
much lately. Since the burst of legislative activity in President Obamas rst two
years, gridlock has ruled, and the top corporate spenders are ratcheting back
their efforts to inuence federal lawmaking accordingly. With Obama set to
square off against strengthened congressional Republicans after the midterms,
even leaner days loom on K Street. %< 725< 1(:0<(5 $1' 6&277 '(&$5/2

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Methodology:
Of the 100 companies that
spent the most on lobbying
activities from 1998 through the rst half
of this year, there were 60 from the Fortune
500. They make up the overall group displayed.
For 2014, we assumed companies will continue to spend
at the same rate as they did in the rst six months.

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$20
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ENERGY ON THE MENU.
In an ever-expanding world, hungry for energy, Shell is at the forefront of the exploration and production
of natural gas, which we supply to more than 40 countries around the world. And thats just for starters.
In China, where the fast-growing economy needs cleaner energy, we are working to unlock large reserves
of natural gas to generate electricity for years to come. And with natural gas emitting around half the CO2 of
coal when used to generate electricity, it could provide us with cleaner energy for around the next 250 years.
Lets broaden the worlds energy mix. www.youtube.com/shellletsgo

LETS GO.

October 27, 2014

MACRO
new energy
Last year Honda installed these two wind turbines at its transmission
plant in Russells Point, Ohio. They provide 10% of the facilitys power.

The Battle of
Ohio: Clean
Energy vs. Coal

bill bow en

AS POLITICIANS SQUABBLE
OVER ENERGY POLICY,
MANUFACTURERS ARE
CLAMORING FOR MORE
RENEWABLES. By Richard Martin
Western Ohio is Honda country. Since 1982, when the companys rst auto production plant went in at Marysville, some
30 miles northwest of Columbus on Highway 33, the Japanese
automaker has built a manufacturing infrastructure that has
transformed the bucolic area into an industrial powerhouse.

In addition to Marysville, one of the largest manufacturing

facilities under a single roof

in the U.S., Honda operates
the Anna engine complex, a
full-assembly facility at East
Liberty, an R&D center near
Marysville, and a transmission plant at Russells Point.
It was at Russells Point
last year that Honda took
another transformative step
by putting up a pair of wind
turbines to help meet its
massive need for electricity.
Owned by ConEd Solutions
and installed by Minnesotabased Juhl Energy, the
260-foot-high towers, each
equipped with three blades
more than half a football
eld long, supply about
10,000 megawatt hours a
yearor about 10% of the
plants power.
Today the turbines stand
as a symbol of Hondas loyalties in a contentious political
ght over the future of
renewable-energy policy in
Ohioone with national implications. In 2008 the state
legislature passed one of the
most ambitious renewableenergy laws in the U.S. The
original legislation required
utilities to get 25% of their
power from renewable- and
other clean-energy sources
by 2025, while cutting their
customers power usage by
22%. (Today Ohio gets just
1% of its total energy from
renewables, according to the
EPA, and 70% of its electricity comes from coal-red
power plants.)
However, in June, Ohio
became the rst state in the
U.S. to roll back clean-energy
mandates when Republican

Gov. John Kasichrunning

for reelection in November
signed a bill called SB 310
into state law. The bill, which
freezes standards for two
years, was backed by deeppocketed Ohio-based utilities
and conservative groups.
Coming just a week after
the EPA announced tough
new rules on carbon emissions from power plants, the
freeze threw into question
the future of governmentsupported renewable-energy
markets nationwide.
Environmentalists and
renewable-power providers fear that Ohio could be
the spearhead for pushing
back other states mandates
for renewables. Despite ve
years of relatively robust
investment in renewables
here, the presence in Ohio
of two of the nations largest
utilities (AEP and FirstEnergy), along with the
legacy coal industry (Ohio
produced 26,000 tons of
coal in 2012), makes it a
prime battleground for
the struggle between clean
energy and cheap, dirty coal.
This is ground zero, says
Sierra Club Ohio energy
director Dan Sawmiller.
But theres an interesting
twist to the conict: The
environmental groups have
been joined in their opposition to SB 310 by a less
obvious allybig manufacturers. The Ohio Manufacturers Association came
out against SB 310, as did a
handful of large companies
such as Anheuser-Busch
and, yes, Honda.

FORTUNE.COM

25

October 27, 2014

MACRO
new energy

FORTUNE.COM

26

MORE WITH LESS

A look back at 30 years of energy use by U.S. manufacturers

shows a peak in the mid-1990s. Gains in efciency are helping to
keep power use down despite a recent surge in activity.
20%

Energy used by the

industrial sector

10
0
10
20
30%
1984

Energy intensity
(Energy used per
dollar of GDP)
1994

is more complicated but

ultimately equally transformative. Simply put, a
conuence of technological
advances in networks, wireless sensors, virtualization,
and monitoring equipment
is enabling improvements
in manufacturing efficiency,
energy conservation, and
quality control that were
hardly conceivable just a few
years ago. Greater efficiency
combined with cheaper
renewable power sources is a
powerful formula.
The benets of alternative energy are not
evenly distributed across all
manufacturing locations,
of course. Hondas Ohio
complex, for example, is
within the service area of
Buckeye Power, a rural electricity co-op that has been
untouched by utility deregulation and still gets the
bulk of its power from coal.
Honda had to reach a power
purchase agreement with
Buckeye in order to erect
the Russells Point turbines.
But now every megawatt

2004

2014

that Honda generates from

wind is one that doesnt
derive from coal.
On a recent evening the
turbines turned lazily in the
breeze while casting long
shadows across the adjoining cornelds. Its a good
bet that Honda will soon
be adding more turbines to
its facilities. Moving from
centralized coal plants to
distributed power generation from renewable sources
benets manufacturers
because users control the
assets, and long-term prices
are xed. Whats more,
shifting to clean energy now
mitigates the risk of future
carbon taxes or other forms
of carbon pricing, says
Barry McClelland, Hondas
longtime energy and operations chief, who retired in
June but still heads the energy committee of the Ohio
Manufacturers Association.
Hondas view is youve
got to go with the change,
says McClelland. Perhaps if
Honda leads the way, others
in Ohio will follow.

gr a phic source: aceee

Thats not as surprising as it might sound. Auto manufacturing, one of the most energy-intensive businesses in the world,
is gradually but decisively reducing its energy use and obtaining more of it from cleaner sources. Honda has trumpeted
its Green Factory initiative, saying it plans to lower CO2
emissions from its plants 30% by 2020, compared with 2000
levels. And the carmaker has made it clear that it wants to cut
its consumption of power from fossil fuels in order to be a better corporate citizen and to reap the accompanying good PR
as long as it makes good business sense. Honda is always looking for opportunities to improve our efficiency and cost, says
Karen Heyob, the director of facility management for Honda
North America. Im happy to say that weve kept energy usage
stable this year despite signicantly expanding our operations.
The embrace of clean energy by industry is hardly a Hondaonly trend. Manufacturers of products from camshafts to
catheters are nding that using energy more efficientlyand
reducing their reliance on traditional, utility-centric, fossilfuel-dominated resourcesis good not only for the corporate
image, but also for the bottom line. Prodded by government
regulations, shareholder unrest, and a changing energy landscape, the manufacturing sector is transforming the way it
sources and uses energy.
This transformation is being driven by forces both outside
and inside the walls of manufacturing plants. The external
factors are well documented: Falling prices for natural gas
and renewable energy have made clean, distributed (i.e.,
located at or close to the plant) electricity generation a compelling business case. The effects of the shale gas bonanza on
U.S. manufacturing are somewhat in dispute, but there is no
question that low-cost natural gas is providing a competitive
advantage to companies that make stuff in the U.S. According to the U.S. Manufacturing Purchasing Managers Index, a
measure developed by nancial research rm Markit, manufacturing activity in the U.S. in September reached its highest
point in more than four years. Factory employment, though
still well below pre-2008 levels, is surging as well, reaching
its highest level since March 2012. A large part of the increase
can be attributed to inexpensive natural gas.
The use of renewable energy in manufacturing, meanwhile,
hovers at 8% to 9%, and its not guaranteed to soar. A June
study by the International Renewable Energy Agency found
that the gure could grow to more than a quarter by 2030, or
a third if some form of carbon pricing takes effector, under
current deployment plans and government policies, it could
stagnate at 10%. Those are global gures; the U.S., with accelerating coal plant retirement and tightening government
regulations of carbon emissions from power generation, should
see increases at the high end of that scale.
Whats happening inside todays manufacturing plants

LETS LIGHT UP HIS FUTURE

WITH BRIGHT IDEAS OFFSHORE.
In the coming decades, the worlds energy demand will increase greatly. The reserves deep below the Gulf of
Mexico, estimated at 300 billion barrels, will go a long way toward meeting this demand. But to reach it will take
a wealth of innovation. Shell has been operating in the Gulf for over 30 years and today is nding new ways to
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And that will go far towards powering lives for decades to come. www.youtube.com/shellletsgo

LETS GO.

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October 27, 2014

MACRO
executive read

ARCHIVE OF WONDER

PRICELINE FOUNDER JAY WALKER HAS ASSEMBLED A COLLECTION OF BOOKS

AND ARTIFACTS THAT CHRONICLE THE HISTORY OF IMAGINATION. ByAnne VanderMey

Walkers library has

everything from a rst
printing of the Magna
Carta to secret
passageways.

Replete with hidden passageways and mysterious iconography,

the room looks as if it belongs on screen next to Harry Potter or
Indiana Jones. Its ancient books and relics could have been lifted from the Smithsonianor the long lost Library of Alexandria.
But this sprawling collection is in a private home in Ridgeeld,
Conn., an hour outside Manhattan, set back from a forested
winding road. Walk into a side entrance in what seems a typical
exurban manse, past a pile of still-unopened Amazon packages,
and you are thrust into a bibliographic time warpa strange
archive with three-story-high bookshelves and hanging artifacts
like an original backup to Sputnik. It all belongs to Jay Walker,
the founder of Priceline and a serial entrepreneur and inventor.

On an early morning tour, Walker fairly skips across centuries in his library, which aims to span the history of human
imagination. By the entrance are a rst printing of the Magna
Carta and a rare copy of the Declaration of Independence;
downstairs, the coronation book of Louis XVI and a mother-

board signed by Steve Wozniak. Mixed in this mlange

are books and booksmost
arranged not by subject, but
rather randomly by height.
There is no catalogue.
Walker is the only person
alive who knows what his
library holdstexts and
subtexts alike. With the
artist Clyde Lynds, Walker
has created his own modern
hieroglyphs in the glass
panels of the staircases.
(Each etching represents a
different human invention.)
And as for those hidden

passageways, Walker will

reveal only that whole
walls move. When pressed
for details, he says certain
books must be pushed but
wont say which. With such a
grand athenaeum, you might
expect Walker to be nostalgic
about what he accepts as
the decline of the printed
word. Not exactly. The end
of writing isnt here, the end
of reading isnt here, but the
end of limited access is here,
he says. Everybody has a
library like this. Its called
the Internet.

FORTUNE.COM
p ho t o g r a p h b y GREG MILLER

29

October 27, 2014

MACRO
wor l ds gr e at est l e a der s

Four Things That

Worry Business

McKinseys Dominic Barton talks about the

new geopolitics, cannibalization, and the global
shift in economic power. By Geoff Colvin

Barton,
photographed
in New York
City last month

See the full interview on our tablet edition. And

view this and other great leadership videos on

FORTUNE.COM

32

Sponsored by

Which companies have

done a good job dealing
with those challenges?
Look at Samsung. No one
knew the brand in 1999.
They were seen actually
as a Japanese company [it
is South Korean]. They
certainly were not a highend consumer electronics
brand. In three years they
said, Were going to change.
While achieving record profits, the chairman is pounding
it out there to say, Were not
moving fast enough. And
this was a chairman who at
one point said to his organization, Next year I want you
to be willing to change everything except your spouse and

your children. Its a mindset.

Lenovolook at its organization model. Its a global
leadership team that makes
decisions at a far faster rate
than many of its Western
peers. Its part of the culture.
And everybodys seeing
their business model
disrupted.
If you were in the S&P
500 in 1935, your average
lifetime as a big company
would be 90 years. And I
worry about that because
McKinseys coming up to our
90th anniversary. In 2011
the average lifetime if you
were in the S&P 500 was 18
years. So the churn rate of
companies is going up. A lot
of the changes are attacking
your existing model, so you
have to cannibalize yourself.
You have to make businessmodel disruption part of
your performance metric.
Computers are doing a lot
of things that managers
used to do, sometimes
better than managers
can do them. That trend
will only accelerate. What
happens to the role of the
business leader?
You need leaders to help the
machines gure out what
questions youre focusing on.
If you dont understand the
business issues or questions
to ask, you can crunch all
sorts of interesting things
and it wont deliver. There
are also judgment calls that
need to be made. Machines
are getting smarter at analyzing masses of information,
but in a world thats more
volatile, judgment is going to
be at a premium.

jason a ldengett y im ages

As global managing director of McKinsey, Dominic Barton

talks regularly with the CEOs of the worlds largest companies
and leaders of nations worldwidetheyre clients of the elite
management consulting rm, which serves some 90% of the
Fortune 100 as well as nonprots and governments. Barton
thus gets an unparalleled inside view of what global leaders
are doingand how the worlds business climate is changing.
McKinsey itself is a leadership factory, whose alumni have become CEOs of American Express, AT&T, Boeing, IBM, and dozens of others. Barton, 52, talked recently with Fortune about
the trends of most concern to leaders now, how infotech is
forever changing their jobs, and much else. Edited excerpts:

What are your clients

worries right now?
Theyre pretty consistent
around the world. The big
one now is geopolitics.
Whether youre in Russia,
China, anywhere, the assumed stability that was
there for the past 20 or so
yearsits not there. The
second is technology, which
is moving two to three times
faster than management.
Most CEOs I talk to are
excited and paranoid at the
same time. Related to that is
cybersecurity: The amount
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October 27, 2014

MACRO
gl ob a l pow er prof il e

Johnson &
Johnson CEO
Alex Gorsky

WATSON,
COME HERE.
I WANT YOU

-2+1621 -2+16216
CEO ENLISTS IBMS BIGDATA SERVICE TO FIND NEW
DRUGS. By Mehboob Jeelani

The partnership is part of an effort to expand

FORTUNE.COM

36

peter ya ng

This past July, IBM invited Alex Gorsky, the CEO of

Johnson & Johnson, to join its board of directors.
The choice surprised industry watchdogs: Why
would an enterprise tech company need a director
with little to no experience in tech? Those questions were answered a month later when IBM announced that J&J would begin using Watson, IBMs
big-data service, to assess and evaluate medications before producing them for the mass market.

surgical care, medical devices, and

J&Js portfolio of drugs. At
diagnostics before being picked to
No. 121 on the Fortune Global 500
replace former CEO Bill Walden.
list with $71.3 billion in annual
Gorsky was named chief in
revenue, J&J is best known by
April
2012 just as the 128-yearconsumers for products like
old
company
was reeling from
Visine, Rogaine, and over-thea
manufacturing
defect with
counter meds like Tylenol. But
Tylenol
that
resulted
in the Food
its pharmaceutical and medicaland
Drug
Administration
seizing
device businesses each account
three
plants
and
a
recall
of
more
for 40% of sales. Gorsky is hopthan
500,000
units.
In
short,
ing that IBMs cognitive superGorsky had a big mess to clean up.
computerwhich thinks like
For years J&J was a decentralhumanswill be a secret weapon
ized
behemoth; many of its 275
in helping it outcompete Big
subsidiaries
operated autonoPharma rivals like Roche, Pzer,
mously
in
60
countries with 450
and Merck.
distribution
centers
and over 100
The hope is that Watson will
manufacturing
sites.
Analysts say
help J&J speed up the developthe
loose
organizational
structure is
ment of drugs in its pipeline
what
led
to
poor
quality
assurance.
the lifeblood of any Big Pharma
Gorsky
centralized
command
companyand at 11.5% of revand tightened control over the
enue, J&J is among the industry
manufacturing units to ensure
leaders in R&D spending. The
quality didnt deteriorate again.
[combined] role of health care
As a result we fundamentally
and technology is going to be
strengthened our quality and
critical, Gorsky tells Fortune.
supply systems, he says. Since he
He is pursuing innovation as
became CEO, J&J stock has risen
a basis for differentiation of J&J
57%, trading recently near $103.
products, a high-risk endeavor,
With Watson, J&Js scientists
says analyst Howard Peterson of
can
analyze vast amounts of geTRG Healthcare.
nomic
data and patient histories.
J&J spokesperson Larry
In
pre-Watson
days that kind of
Thompson says Watson can be
analysis
would
take four decades,
taught to read medical literature
but
now,
in
just
a few days, data
and ask questions about adverse
experts
can
identify
genetic proevents, about alternative pathways
les
that
respond
to
drug samples
by which a molecule might work
without
any
adverse
side effects.
and become a new therapy. That
Big
Pharma
will
be
using more
cuts out research hours (and manbig
data,
not
just
for
R&D,
but
power), ultimately reducing costs.
also
for
pricing
strategies,
says
Though still in its earliest stage,
Erik Gordon, professor at the
one of the rst big projects will
University of Michigans Ross
focus on J&Js diabetes drugs.
School of Business: IBM, with
A U.S. Army veteran, Gorsky,
its Watson project, is hugely in54, began his career at J&J in 1988
volved in citing which treatments
as a sales rep for Janssen Pharmain the real world are actually
ceuticals, becoming its chairman
worth the money.
in 2003. He left the following year
to lead Novartis in
North America, but
Open the Google app and say,
he returned to J&J
Ok Google, in what year did Johnson &
Johnson introduce the Band-Aid?
in 2008 to oversee

October 27, 2014

MACRO
wor l ds mos t a dm i r e d c om pa n i e s

Southwest Airlines Is Flying High

It has leveraged its low fares and customer-friendly heart to become the nations largest carrier
of domestic iers. Now its heading for the borders. BY LAURA LORENZETTI
NEW LOOK, SAME HEART
By the end of the year, Southwest will
complete its integration of AirTran, its largest
acquisition ever. Southwest got a makeover
last month when it unveiled a new corporate
rebranding and paint job for its eet of Boeing
aircraft. The airline revamped everything from
its cocktail napkins to employee uniforms.
The belly of each newly painted plane features a larger-than-life heart, giving credence
to the airlines motto, New look, same heart.

THE SOUTHWEST EFFECT

MORE THAN 100 MILLION PEOPLE catch a Southwest ight

annually. That makes it the nations largest carrier of domestic
passengers, beating out rivals like American Airlines, United,
and Delta. Known for its customer-friendly waysSouthwest
is one of the few remaining airlines that still provide one free
checked bag and no change feesthe former regional player
has transformed itself into a domestic powerhouse. As other
airlines have struggled through bankruptcy lings in recent
years, Southwest has kept its low fares and balance sheet
intact. The airline has recorded four straight years of revenue
gains, and annual sales are expected to be up again in 2014
to nearly $18.6billion, an all-time high.
The 43-year-old airline isnt stopping at the border. It
expanded beyond the U.S. for the rst time this year, though
international ights currently account for only 1% of its
network. Southwest now ies to the Caribbean and Mexico,
routes it acquired from its $1.4billion purchase of AirTran
Airways in 2011, and is considering as many as 50 other
international destinations, including potential ights to
Canada and Central America. As it extends its global reach,
Southwest is staying true to customers: Passengers on
international ights are allowed two free checked bags.

FORTUNE.COM

38

COMPA N Y
SNAPSHOT

HEADQUARTERS

Cities that Southwest ies into have seen a

dual result: Prices drop and passenger trafc
booms. The U.S. Department of Transportation dubbed this the Southwest effect.
The airline ushered in an unprecedented
era of affordability, though that has started
to moderate, says Stifel Nicolaus analyst
Joseph DeNardi. Southwests costs have
come closer to competitors, especially after
bankruptcy lings wiped out much of the
debt of larger rivals. Yet even as Southwests
cost advantage decreases, its legacy of
inexpensive ights remains. Airfares are still
pretty low relative to broader pricing metrics
in the economy, says DeNardi.

Dallas

FLYING GREEN
EMPLOYEES

45,000

THE BUSINESS

The carrier ies

680 aircraft to
96 destinations
in North
America.

Southwest
wears its
heart on its
bellyof
Boeing 737s.

Southwest takes environmental awareness seriously and considers it part of its

triple bottom-line approach: prots, people,
planet. Beginning in 2016 the airline will use
low-carbon, renewable jet fuel on select
ights in partnership with Red Rocks Biofuels. Southwest was searching for a viable
biofuel that uses a sustainable feedstock with
a high rate of success, says Bill Tiffany, vice
president of supply chain for Southwest. Red
Rocks passed that standard, meeting both
nancial and sustainability objectives. Southwest plans to buy up to 3million gallons of
fuel in the rst year, the equivalent of roughly
2.1million ight miles at cruising speed.

Move forward. With condence.

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move forward. As the worlds largest consulting rm, we can
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www.deloitte.com/condence
Copyright 2014 Deloitte Development LLC. All rights reserved.

October 27, 2014

VENTURE
SERVED UP
Gelato sales are
mounting, though
theyre still only a
small fraction of the
ice cream market.

$214

$200 million
100
0
2009

U.S. retail sales of gelato

2010

2011

2012

2013

2014

ch a rt sources: 2014 estim ated, infor m ation r esources inc.; bur e au of l a bor statistics; census bur e au; min tel

How I Got Started

Got a
Whole
Gelato
Love
Josh Hochschuler made
Talentis frozen treat
(dare we say it?) hot.
Interview by Dinah Eng
adventure lured
Josh Hochschuler to Buenos Aires,
but it was his love of Argentinean
gelato that launched a business
anyone with a sweet tooth could love.
Hochschuler, 41, founded Talenti
Gelato & Sorbetto and survived its
rocky early years with credit cards,
loans, and the cash he got from
selling his furniture and car. Today,
Talenti has succeeded to the point
that Hagen-Dazs has relaunched a
gelato line and Breyers has entered
the fray. Churned at a lower speed
than regular ice cream, thus incorporating less air, and made with
less fat, which brings out the main

THE PROMISE OF

Hochschuler
at Talentis
R&D facility

p ho t o g r a p h b y NANCY NEWBERRY

FORTUNE.COM

41

October 27, 2014

VENTURE

how i g ot sta rted

I fell in love with the gelatothe taste, the

texture, the consistency, and the experience
of gathering to talk about it. Josh Hochschuler
avor, gelato commands prices often
25% higher than traditional ice creams.
Talenti is now the No. 3 premium ice
cream in the U.S. (behind Ben & Jerrys
and Hagen-Dazs, No. 1 and 2, respectively), with $95 million in revenue last
year. Hochschulers story:
My father joined the Air Force during
Vietnam and was stationed in Wichita
Falls, Texas, where I was born. My
mother was the family homemaker. After the military, Dad started his practice
as a spine surgeon in Dallas, so thats
where I grew up. As a young man, my
dad had traveled to Yugoslavia as part
of a program called the Experiment in
International Living. When I was 14, he
pushed me into the same program, so I
went to Japan, where I lived with a family for a summer. Because of that, I loved
traveling and visiting other countries.
In 1991, I went to Boston University
to study business administration and
nance. Id work as a waiter, busboy,
and bartender during the school year,
save up my money, and travel through
Europe in the summers. After graduating in May 1995, I traveled through
several countries in Central and South
America with a buddy.
I was 22 and loved Argentinathe
people, the architecture, the food,
their love of sports, and the nightlife. I decided thats where I wanted
to live. I didnt have a job and didnt
speak Spanish. But I had an old Jeep
Cherokee and some furniture, and sold
it all. With $3,000 in savings, I took
two suitcases of clothing and bought a
one-way ticket to Argentina.
I landed in Buenos Aires on Jan. 5,
1996, and didnt know a soul. Luckily,
not long after, I met a taxi driver who
knew a woman who was renovating
an apartment. She needed money to
nish the work. So I gave her a couple
months rent upfront in exchange for

FORTUNE.COM

42

being able to sleep there immediately.

I taught English at the Berlitz
language school in the mornings to
make money and went to the nancial district, knocking on doors, in the
afternoons to nd a job. I got lucky
with a gentleman at the Bank of Boston
in Buenos Aires who had done what I
was doing when he was young in New
York. He decided to take a chance on
me. So I worked at the Bank of Bostons
Buenos Aires branch as a strategic
planning analyst for two years, then
became the strategic sourcing manager.
One of the things I loved about
Argentina was the cultural interaction with food. People hung out at the
gelato and pastry shops to debate the
merits of what they ate. I fell in love
with the gelatothe taste, the texture,
the consistency, and the experience of
gathering to talk about it. More than
50% of Argentinas population has Italian roots, and the gelato is made from
someones Italian grandmas recipe.
In 2001, I wanted to be closer to
family, so the Bank of Boston, which

Hochschuler (right) introducing his gelato

at a Costco in Dallas in 2005

had merged with Fleet Bank, gave me

a job in Boston. Before heading back
to the States, I traveled in Asia for a
few months, then got word of a hiring
freeze, eliminating the job I was going
to start in Boston. So I decided it was
the perfect time to do something on my
own, with something that I loved from
Buenos Aires, namely gelato.
I started approaching the famous
heladeras [ice cream parlors] in Argentina, and one agreed to work with me.
So I went back to Argentina for three
months to apprentice with a family thats
been in the business for several generations. Theyve asked me not to reveal
their name, so Ill call the owner Jorge.
In February 2002 I put together
a business plan and approached 108
family members, friends, and friends
of friends for funding. I got 19 of them
to agree, and raised $600,000. Jorge
invested $15,000, came to Dallas,
and brought a manager for the store,

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October 27, 2014

VENTURE

how i g ot sta rted

I couldnt make payroll and asked my 15

employees to give me a week to nd the money.
That was the moment I thought it was all over.
which I named Talenti after Bernardo
Buontalenti, the inventor of gelato.
In retrospect, we didnt raise enough
money to open the store. The architecture, engineering, and construction cost
about $300,000. But the project ended
up going 10% to 15% over budget due to
unforeseen circumstances, and I ended
up with some subcontractor liens. My
lease required no liens, so I was in immediate default. Thankfully, the landlord
understood and let me open anyway,
and eventually we resolved the liens.
The rst year, revenue was $275,000,
and I was hoping for double that. We
couldnt get people to come in for dessert after dining out in a restaurant.
The store remained open for two years,
operating at a loss. The second year, I
began to convert the concept to wholesale, taking the gelato to restaurants and
supermarkets. My Argentinean partners
considered things sold in supermarkets
low-end products and as a matter of
pride did not see eye to eye with me on
the move. So I bought them out in 2005.
I closed the store and found a
2,700-square-foot space in an industrial
area. I was close to $100,000 in debt
and had to let all my employees except
one go. The two of us made the gelato,
and I did all the sales and deliveries.
I raised some money from my original
investors, took out a dozen or so credit
cards, maxed their lines, and sold my
car and furniture to continue forward.
In 2006 we did $429,000 in sales,
and Costco Texas picked us up. We got
into Whole Foods and the local Kroger
and Safeway stores, but we were still
hanging on by a thread. Then a specialty
chain that I had allowed to go beyond
our 30-day terms placed a massive
order, sold it at half price, and then went
out of business. I couldnt make payroll
and asked my 15 employees to give me
a week to nd the money. That was the
moment I thought it was all over.

FORTUNE.COM

44

My Advice

How to get through

the tough times

JOSH HOCHSCHULER

Founder of Talenti Gelato & Sorbetto

I DERIVE A GREAT DEAL OF COMFORT
FROM MY FAITH. , EHOLHYH WKLQJV KDSSHQ IRU D

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A GOOD FRIEND SENT ME A FRAMED QUOTE

RI 7HGG\ 5RRVHYHOWV 7KH 0DQ LQ WKH $UHQD

VSHHFK ,WV QRW WKH FULWLF WKDW FRXQWV EXW >WKH
PDQ@ ZKR DFWXDOO\ GRHV VWULYH WR GR WKH GHHGV
ZKLFK , NHHS LQ P\ RIFH 0\ IULHQG ZURWH QH[W
WR WKH TXRWH <RX DUH LQ WKH DUHQD , UHDG LW
ZKHQHYHU , IHHO RYHUZKHOPHG RU GDXQWHG

I took out a personal loan for

$25,000 to hang on until we could
stabilize. The opportunity with Costco
led to getting into a number of natural
food and specialty stores where we
gained visibility. It became a domino
effect, and the business just took off. In
2007 we had $1.2 million in sales, but
I needed funding and more expertise,
so I started looking for a partner.
My best friend from college introduced
me to Steve Gill and Eddie Phillips, the
guys who founded Belvedere and Chopin
vodkas. I ew to Minneapolis and told
them Talenti was a luxury brand in need
of a proper business structure, capital,

and a team with sophisticated sales and

marketing know-how. They loved it.
They bought out my original investors,
then provided $1 million in funding
to move forward. Eddie had cancer
and died in 2011. But Steve joined me
in 2008, and we started running the
company together. Eddies son Dean inherited his estate and joined us in 2012.
So the three of us own the company now.
Revenue has almost doubled
every year since 2008. We went from
$6.8 million in 2009 to $26.7 million
in 2011 to $95 million in 2013. Were on
track to hit $160 million this year. With
the recession, it was really difficult
at the end of 2008 and in 2009. But by
the end of 2009, we started doing well,
and now were consistently protable.
It was nice to be under the radar
at rst. Everyone thought we were
their local gelato, and we built a cult
following. But when your sales get
big enough, the competition says,
Im losing market share. HagenDazss gelato line relaunched in 2013.
Breyerss gelato launched this year.
We stopped selling to restaurants and
hotels in 2013. Its a different distribution network, and we didnt have the capacity to fulll both needs. Theres plenty
of space to grow in the grocery stores.
Theres something exciting about
building a brand that your name is
behind. Its a rewarding way to build a
life. Im married and have three little
boys, and when I show up on Parents
Day at school and bring the gelato,
I feel sorry for the lawyers and accountants who come after me. We often
hear from people who say that our
gelato brings them a memory of a trip
to Italy or Spain or France with a loved
one. I love the fact that our business is
part of making sweet memories.
Open the Google app
and say, Ok Google,
who invented ice cream?

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October 27, 2014

VENTURE

v er ne h a r nish

5 Ways to Tone Your Operations

THE LEAN PHILOSOPHY ISNT JUST FOR MANUFACTURING GIANTS LIKE
TOYOTA. SMALLER ENTERPRISES CAN BENEFIT TOO. By Verne Harnish

DEMAND PUSHBACK
Many CEOs underestimate how hesitant employees are to speak up
when theyve been assigned to projects they know are a waste of time.
Give your team explicit permission to ag you down and alert you
no matter how busy you seem. One owner I know discovered that an
employee had been preparing a monthly report the company no longer
needed for nearly three years because the owner had never mentioned
it wasnt necessary anymore.

2. PLUG
TINY LEAKS

3. ENCOURAGE
SELF-SERVICE

4. PREVENT
ERRORS

Jeff Frushtick, CEO of industrial

equipment maker Leonard
Automatics, discovered
through a consultant that his
team spent hours each week
hunting for missing tools at the
Denver, N.C., rm. They turned
up in places like someones
tool belt or a work bucket
at a different assembly job,
Frushtick says. By storing all
gear for each operation on its
own cartand addressing
dozens of other comparable
hiccupshe has raised prots
vefold since 2013 at the
35-employee rm.

To reduce the four hours his

salespeople typically spent closing deals, Steve Hall, founder of
the Dallas-based online automotive retailer driversselect.com,
overhauled the sales process in
2011. Customers now complete
90% of it virtuallyby chatting
with customer experience
ofcers rstand it takes less
than an hour to nalize sales
at the dealership. Prots at the
business, which expects 2014
revenue of around $52million,
are up 12.5% year-over-year.

It costs more to win new

customers than to keep existing
onesso dont let sloppiness
drive your accounts away.
At Return on Digital, a British
digital marketing agency that
serves U.S. clients, CEO Guy
Levine keeps contract renewals
high by having his team use a
nine-point checklist to review all
documents before clients see
them. We should be nding
our own errors and not leaving
it to the client, says Levine,
whose rm has about $4million
in annual revenue.

5. GO LEAN
Everyone equates this method
of reducing waste with manufacturing companies like Toyota
(or Leonard Automatics), but
according to Guy Parsons, a
founding member of the Lean
Enterprise Institute, it applies
to every type of rm. Identify the four to nine processes
that drive your business, and
spring for a lean consultant
to help you streamline them.
In my experience, companies
that dothis often double their
revenue without adding any
additional headcount.

v e r n e h a r n i s h i s t h e c e o of g a z e l l e s
i n c . , a n e x e c u t i v e e duc a t io n f i r m .

FORTUNE.COM

46

i l l u s t r a t io n b y SBASTIEN THIBAULT

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a new series
from the
editors of

VENTURE

Pro-Files

and

STAUBACH SCORES AGAIN

HEISMAN-WINNING QUARTERBACK AND SUPER BOWL CHAMP
52*(5 67$8%$&+ HAS NOW BEEN A REAL ESTATE STAR FOR
A LOT LONGER THAN HE PLAYED FOOTBALL. By Greg Bishop

Captain Comeback loves him some Johnny Football. They

lmed a Nissan commercial recently, as roommates inside a
space divided. The pristine half belongs to Roger Staubach,
the Dallas Cowboys quarterback turned grandfather and real
estate mogul. The cluttered half belongs to Johnny Manziel.

Women surround Manziel, the Cleveland Browns QB, as he

ashes his signature money sign. Staubach sips tea in his Navy
dress blues as a stray football from the rowdy side plunks the

For more great business stories in our Pro-Files series,

check out both Fortune.com and SI.com.

FORTUNE.COM

48

Staubach, 72, still goes to the

ofce every day but has scaled
back his management role.

man next to him in the head.

Manziel says, Sorry, dude,
and the party rages on.
The takeaway, naturally,
is the contrast of two quarterbacks from different generations. Staubach never

partied much. He won the

MVP award for Super Bowl
VI, but when offered the
prize of a Dodge Charger, he
asked for a station wagon
instead. Then he drove it for
ve years. At the height of
his fame.
Staubach met Manziel
last season when Manziel
stopped by Staubachs

p ho t o g r a p h b y TREVOR PAULHUS

diamond imagesgetty images

October 27, 2014

luxury suite at AT&T Stadium outside

Dallas. He did not tell Manziel about
his own collegiate foray into celebrity
nightlife. It was 1963. Staubach had
just won the Heisman Trophy while at
the Naval Academy, and to celebrate
he borrowed some high-water trousers
and stood in front of the Playboy Club
in New York City, certain that someone
would whisk him inside the exclusive
hotspot. No one even recognized him.
Despite their differences, Staubach
and Manziel found much in common. Staubach talked about his days
as a scrambler, the way that drove
his coach, Tom Landry, nuts. They
compared Heisman stories, comeback
victories, deep Texas roots.
Staubach, 72, didnt need to mention
the millions he banked after football. Forbes recently named him the
highest-paid retired NFL player, with
$12 million earned last year. I dont
know about all that, he says, a tad
embarrassed. Its work.
Johnny Football, meet Roger Real
Estate. Inside a corner office at the
commercial real estate rm JLL in
Dallas, there are few reminders that
the occupant played football. Its not
that Staubach has distanced himself;
he helped Dallas land a Super Bowl
host bid and still attends every Cowboys home game.
Its that Staubach long ago moved
on. He can remember the concussions,
or the way they were explained to him
anyway: one in high school, one in college at Navy, six in the NFL, maybe 20
in total if you count what they called
dings. L.C. Greenwood delivered
one, and so did Dave Robinson, and
Ray Nitschke. In Staubachs last game,
against the Los Angeles Rams in 1979,
Jack Reynolds, a beast of a linebacker
everyone called Hacksaw, bounced his
head like a basketball dribble off the
turf. Staubach threw one subsequent
pass to an offensive guard.
He had his rst CT scan after that,
and the doctor recommended that he
retire. So he diddespite an offer from
the Cowboys to play for $750,000

annuallya lavish salary back then.

That was it: 11 NFL seasons, all with
Dallas; six Pro Bowls; ve NFC titles;
two Super Bowl triumphs; an NFL
MVP awardall precursors to his Hall
of Fame induction in 1985. Not bad for
a quarterback who did four years in
the Navy, served in Vietnam, and made
$25,000 as a 27-year-old rookie.
Staubach passed for 22,700 yards
before the NFL became a passing
league. He rushed for 2,264 yards
before coaches designed plays for
quarterbacks to scramble. He led
the Cowboys to 15 fourth-quarter
comebacks, which earned him the
moniker Captain Comeback, and since
he played for Dallas, they called him
Americas Quarterback as well.
He is even credited with introducing
the term Hail Mary into the sports
lexicon. After his last-second, 50-yard
touchdown strike to Drew Pearson
beat Minnesota in the 1975 playoffs,
Staubach told reporters he closed his
eyes and said a Hail Mary.
Staubach believes he could have
played another couple of years at a high
level, but he walked away. He worried
little about his transition. The landscape

Staubach collected
the Super Bowl MVP,
a station wagon, and
a cash bonusand
spent his off-season
selling life insurance.

was different then. The money too.

Besides, his second career had
already started. The off-season before
Staubach won the MVP award, he went
to work for Henry Miller Jr., a titan in
Dallas real estate. That was 1971. Staubach and his wife, Marianne, had three
young children. (They would eventually
have ve.) He needed the extra cash.
Miller hired Staubach for his
insurance division. Staubach sold
life insurance to companies. Imagine
thatAmericas Quarterback and his
sales pitch. He worked on commission
at rst so he could practice with teammates in the afternoons.
That season, the Cowboys won the
Super Bowl. He collected that station wagon for being game MVP and
a $15,000 bonus. As he and Marianne left New Orleans, she asked her
husband what he planned to do next.
Work, he said. By the time they arrived
back in Dallas, Miller had sent over a
telegram. Congratulations on winning
the Super Bowl, it read. And by the
way, youre promoted to vice president.
Miller reminded Staubach of Landry,
his ornery head coach. Both men were
methodical in business, maniacal in
preparation. Their drive prompted
memories of his parents. His mother
worked as a secretary at GM in the
Chevrolet division. His father sold shoes
and other leather goods door-to-door.
After six years under Miller, Staubach opened his own shop. He didnt
want to name the company after himself, says Ka Cotter, a longtime business associate there in the beginning.
He wanted to obtain business for the
right reasons. Eventually he relented.
Thus the Staubach Co. was born.
The name helped, anyway, early on.
Particularly in Dallas. I saw a lot of
grown men look real foolish, Cotter
says. Just fawning over him. But the
name alone did not close deals. In fact,
it shut down a few of them. Whenever
someone hung up on me in Washington, D.C., Id blame it on the fact theyre
a Redskins fan, Staubach says. After
the company opened an office in Wash-

FORTUNE.COM

49

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October 27, 2014

neil leifersports illustr ated

VENTURE

ington, a Staubach sucks echoed one

day down the elevator shaft.
Staubachs company was new compared with established competitors,
and after one meeting in which he remarked how young everybody looked,
some brokers came back the next day
with their hair dyed gray.
While under Miller, Staubach had
handled Xeroxs search for a space to
relocate its office products division to
Dallas. He didnt want to show Xeroxs
reps only Millers buildings; he wanted
to show them all available buildings.
Thats how he came upon representing
tenants, not landlords, in commercial
real estate transactions. This was, at
the time, a new concept, practiced
mainly in New York. Now its commonplace worldwide.
The tenant rep strategy made
Staubach rich, allowing him to open
some 50 offices in North America and
grow his employee base to over 1,100.
To motivate his troops and to expand
his business without incurring debt,
Staubach granted ownership stakes to
employees who opened new offices.
Yet he retained a personal touch.
Whenever somebody wanted Staubach
to make a call, to use his name as a
passkey, he required a sheet that listed
information about the secretary he
would speak with. It had to be good
information, something personal,
something he could use.
Staubach worked long hours and
hardly took vacations. He scheduled
business trips around visits to his childrens various colleges. One of his kids,
Jeff, eventually went to work for him,
and by then Staubach had been in real
estate so long that Jeff knew him as
the businessman who always worked
rather than the retired quarterback
once famous. Im sure my childhood
was a lot more normal than it is for,
say, Peyton Mannings kids, Jeff says.
Staubach had opportunities to
switch professions, slide into something more visible, or more comfortable, or with fewer hours. Early on he

pro -fil es

When Staubach sold his

company, he took care
of his team, distributing
88% of the purchase
price to his employees.
was asked to join a bid for the Cowboys, who were purchased instead by
an oil tycoon from Arkansas named
Jerry Jones. Over the years Staubach
was approached to run for mayor of
Dallas, governor of Texas, and the U.S.
Senate. George W. Bush asked him to
become Secretary of the Navy.
But Staubach is a man of loyalty. He
honored his Navy commitment even
as it delayed his NFL debut. He played
his entire rst career in one place and
stayed in his second career for decades.
He turned down all overtures. Ive
always stuck to the things I said I was
going to do, he says.
A company that started small, with
ve employees and scant revenue, grew
so large that Staubach decided to sell
in order to expand the business internationally. JLL, previously called Jones
Lang LaSalle, purchased the Staubach
Co. in 2008 for $613 million plus upside, which ended up at about $50 million. Staubach handed off 88% of the
$663 million total to more than 300
employees, then stayed on as executive
chairman for JLLs Americas division.
(When the additional $50 million
was distributed, JLLs CEO signed
the checks with worth every penny.)
These days Staubach stays involved in

client meetings and day-to-day operations but has scaled back his managerial responsibilities.
He used to keep an empty mortar
shell in his office to remind him of his
stint in Vietnam, all those afternoons
where he took cover in a bunker, his
head buried in the dirt. Business felt
that way sometimes.
The scars from football remain: surgeries on both shoulders and two ngers,
another to repair a meniscus tear in his
knee (which he hurt playing ag football,
of all things), another procedure on his
back. But Staubach works out six days a
week, and so far he feels no impact from
all the concussions he suffered. Hes in
as good a shape as any 72-year-old in
the world, his son Jeff says.
Of Staubachs 15 grandchildren,
only one so far plays football. Its
Jeff s 11-year-old son. Staubach hasnt
joined any concussion lawsuits, and he
doesnt harbor any ill will toward the
league. But Jeff says, If it were up to
my dad, my father-in-law, and my wife,
our son wouldnt be playing. Concern
runs in the family. Staubachs own
mother used to clutch rosary beads
when she watched him.
At 72, Staubach could retire. Play
more golf. Spend more time with the
family. Reect on life by one of Dallass
many manmade lakes. Anyone who
thinks that, though, never met Roger
Staubach. Hes not going to hunt, his
son says. Hes not going to sh. Its
family and real estate. He has spent a
lot more of his life in real estate than
football. His success there is lot more
rare than what he did in football too.
Staubach rises from a seat in a
conference room near his office in
September. He is still laughing about
that Manziel commercial, but he has
run out of time to talk. No more
stories. No more business insight.
His 3 oclock is waiting.
Open the Google app and say,
Ok Google, how many college football players make it to the NFL?

FORTUNE.COM

53

We went across the U.S. three times in

our first Prius. The new ones got a lot of
adventure ahead of it.
The Russes, Prius owners

toyota.com/prius
Actual Prius owner made previously aware their likeness and statement may be used for advertising. Cargo and load capacity limited by weight and distribution. 2014 Toyota Motor Sales, U.S.A., Inc.

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October 27, 2014

TECH
Gym Stat
Despite the hype
for smart glasses
and watches, the
real action remains
in tness trackers.

Projected wearable computing device shipments, 2015

Activity trackers
Health care
Smart watches
Wearable cameras
Smart glasses

57 million
34
25
16
11

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ch a rt source: a bi r ese a rch

Wearable Technology

Search: How Do I Punch

This Rivet Hole?
The one group more excited than consumers about wearable
technology? Blue-collar business. By Erin Griffith
p ho t o i l l u s t r a t io n BY SEAN McCABE

or igina l photo: bett m a n n/cor bis

FOR DECADES Lee Co., a Nashville-based building-maintenance

business, has employed a steady
stream of experienced mechanics,
engineers, electricians, and plumbers. Yet the company has struggled
to ll those roles in recent years

FORTUNE.COM

57

October 27, 2014

TECH

w e a r a bl e t ech nol og y

APPLE WATCH +
OTHER WEARABLES
because Americas skilled
trade workers are retiring
in droves. We dont have
the seasoned technicians
we once had, the brain
trust we need, says Richard
Perko, president of Lee Co.
Equally problematic, he
adds, is that workers nearing retirement arent always
suited to climb up to a roof
where mechanical equipment is often stored.
Thats why Perko is
building a central command center to preserve
his companys institutional
knowledge. The idea? Assemble that brain trust of
gray-haired experts to help,
with the aid of technology,
less experienced employees
in the eld. The younger
workers wear special
safety glasses equipped
with a camera, microphone,
speaker, detachable ash
drive, and wireless antenna.
Through a Bluetooth connection to their phone, the
eldworkers transmit a live
video feed of their actions
back to the command center. A veteran watches and
gives further instruction.
The smart safety
glasses, made by a Nashville startup called XOEye
Technologies, are a gamechanger, Perko says.
Problems get xed faster,
the younger workers learn
faster, and reports can be
sent to clients to verify that
a job has been completed.
Pleased with the results of a
pilot, Perko plans to expand

FORTUNE.COM

58

APPLE WATCH

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his use of the $499 glasses

and potentially put them on
the faces of 300 of his 800
employees.
The maintenance industry has been slow to adopt
technology. GPS sensors in
vehicles were its biggest innovation this decade. With
wearable devices, italong
with the construction, manufacturing, energy, oileld
services, and medical indus-

trieshave become eager

early adopters, preaching
a gospel of saving time and
reducing mistakes.
Investors have taken
notice and invested millions
in a variety of startups developing software for connected
eyewear. San Francisco
based Wearable Intelligence
will focus on the health care
and energy industries. New
Yorks FieldLens and Pro-

core, in Carpinteria, Calif.,

make construction industry
software. APX Labs, based
in Herndon, Va., serves manufacturing, logistics, and
oileld services companies.
Pristine, an Austin startup,
has raised seed funding
for wearable telemedicine
software. Augmedix in San
Francisco makes glasses software for doctors. Augmate,
based in New York, focuses
on industrial smart eyewear for warehousing and
logistics.
Kevin Spain, a general
partner with Emergence
Capital Partners, says he
invested in Augmedix
because it gives technology
to workers who havent had
access to it before. American
companies spend $250 billion a year on tech for whitecollar workers, he says,
but thats only 20% of the
workforce. Wearables and
smartphones open up the
remaining 80%, he says.
In the past year there
has been a proliferation of
shiny new smart electronics including watches, rings,
bras, and wigs. (Sony led a
patent for a SmartWig last
year.) Most are intended for
consumers, making it easy
to forget that wearables
began as nuts-and-bolts
business tools. DARPA, the
U.S. militarys research arm,
organized the rst wearable computing conference
in 1996, inviting industrial
companies and military personnel to plan for a future

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October 27, 2014

TECH

company is running programs with Schlumberger,

the $132 billion oileld services company, and Saudi
Aramco, the worlds largest
oil producer.
Similarly, factory repair
workers wearing smart
glasses see alerts in their
peripheral vision anytime
a machine breaks down on
a factory oor. Itamco, an
Indiana machining services
company, uses imagerecognition software to help
mechanics identify parts
and tools as they examine
them. In medical settings,
doctors spend much of their
time recording data using
a clipboard or iPad. With
smart glasses they can use
voice commands to enter
the data and give patients
more time and attention. At
construction sites, sheetmetal workers wearing the
devices need not stop their
work on, say, ductwork over
their heads to study instructions on a clipboard.
FieldLens CEO Doug
Chambers says his company
is still in the evangelizing
stage of showing construction customers the benets
of smart glasses. Some see
the augmented reality of
headsets like Google Glass
a distracting safety hazard.
Others believe that the
Glass display is sufficiently
out of the wearers eld of
vision. Whatever the answer, companies including

Like this story? Dont miss A Google Glass Fit

for the Factory Floor by Michael Casey on

FORTUNE.COM

60

Has Marc
Andreessen
Tweeted
Anything
Interesting
Lately?
YES! THE INVESTOR HAD
LOTS TO SAY ABOUT TECHSTARTUP SPENDING.
BELOW, A SAMPLE OF HIS
18-PART TWEET-STORM.
New founders in last 10 years
have ONLY been in environment
where money is always easy to
raise at higher valuations. THAT
WILL NOT LAST.
When the market turns, and it will
turn, we will nd out who has been
swimming without trunks on: many
high burn rate cos will VAPORIZE.
High burn rate kills your ability
to adapt as you learn & as market
changes. Co becomes unwieldy,
too big to easily change course.
Lots of people, big shiny ofce,
high expense base = Fake weve
made it! feeling. Removes
pressure to deliver real results.
Raising new money becomes
harder & harder. You have bigger
bulldog to feed, need more and more
$ at higher and higher valuations.
That nice hedge fund investor
willing to hit your valuation bar?
Imagine him owning 80% of co after
down round. How nice will he be then?
When market turns, M&A mostly
stops. Nobody will want to buy
your cash-incinerating startup.
There will be no Plan B. VAPORIZE.
Worry.

Vuzix, Epson, Sony, and Kopin Corp. see opportunity.

Adoption may accelerate when companies such
as Microsoft, SAP, Oracle,
and Salesforce extend their
enterprise resource planning software to wearables.
Customers are already
asking about it, says Eric
Johnsen, CEO of APX Labs.
Theres a consensus that
[smart glasses are] happening, he says. Its a matter of
how fast.
Enterprise adoption is
good news for Google, since
its Glass headset is the
most prominent example of
the category even as it has
become a subject of scorn
among consumers. (At
$1,500, the device remains
a plaything for the wealthy.
It also looks cyborgian, and
its camera makes people
uncomfortable.) In April,
Google distanced itself from
the Glassholes narrative
with Glass at Work, a program for companies to build
business-facing enterprise
applications on Glass. Five
startups, including APX
Labs, Augmedix, and Wearable Intelligence, are now
partners. More partnerships are in the works. We
denitely anticipated there
would be a wide array of
reactions [to Glass], says
spokesperson Sophie Miller.
Glass at Work is Googles
response to interest and
demand for enterprise apps.
As for consumers? Who
knows? Erlich says. But
the enterprise has needs for
this now. Like, yesterday.
i l l u s t r a t io n b y CRANIO DSGN

or igina l photo: rya n a nsonbloomberg v i a gett y im ages

with belt packs, robogloves,

and heads-up displays.
Two decades later, thanks
to more robust wireless
infrastructure and smaller,
more powerful computer
chips, smart eyewear is
actually viable.
It makes sense that
industrial workers would
adopt wearables faster
than consumers: They
work with their hands, and
any technology they use
must be hands-free. They
are often already wearing
safety glasses. Theyre not
concerned with looks. If it
makes the job easier, why
not put a voice-controlled
computer on their face?
In oilelds workers must
complete safety checklists
for assembly and maintenance procedures. This
task is typically performed
on paper, which requires
halting work and removing
ones gloves to complete.
(Skip the list and risk skipping a step.) A hands-free
checklist, which workers
can follow while theyre assembling equipment, aims
to save time and reduce
mistakes.
These are not new
problems, says Wearable
Intelligence CEO Yan-David
Erlich, whose father spent
his career in oileld services. They are new solutions to existing problems
that have been around for
a really long time. Erlichs

w e a r a bl e t ech nol og y

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October 27, 2014

TECH

tech star

With some $55 million in venture funding, Mehta now must gure
out how to scale a company that doesnt seem scalable.

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OUTRUN HIS OLD EMPLOYER?
By JP Mangalindan
Groceries are a competitive business with paper-thin margins.
Apoorva Mehta believes his startup, Instacart, can succeed
where others have struggled or failed. All it takes, he says, is
sophisticated mathand a platoon of personal shoppers.

Two years ago the 28-year-old graduate of Ontarios University of Waterloo saw an opportunity to briskly deliver groceries

FORTUNE.COM

62

door-to-door without incurring the costs that bogged

down traditional grocery
stores and startups like Webvan, the dotcom service that
imploded in 2001.
Amazon, the retail colossus (and Mehtas former
employer), has furiously
expanded its AmazonFresh
grocery service by building
expensive warehouses for
storing produce. Not Instacart. The San Francisco
startup takes advantage of
an areas existing network
of grocers by selling items
from chains like Safeway,
Whole Foods, and Costco,
as well as local markets.
Without the burden of
physical infrastructure,
Instacart is free of the growing pains that confront
Amazon and others.
Instacart was operational when it was just me
working from my apartment, Mehta says.
Customers place orders
using Instacarts website or
mobile application. A separate app, used by more than
1,000 personal shoppers
whom Instacart has hired
across 15 cities, guides them
to stores from which they
can buy goodsdown to
the aisle and shelf where an
item is located.
Personal shoppers ll
several orders at once as
they go from store to store.
The app suggests the best
driving route to a customers
home, taking into account
weather, traffic, sporting
eventseven local construction. Instacart charges a

premium based on the size

of each purchase. It also
offers a $99-a-year membership that waives the delivery
fee for orders over $35.
Mehta wouldnt disclose
his companys nancials,
revealing only that Instacart expects revenues to
grow tenfold this year.
In September, Instacart
announced a partnership
with Whole Foods. Mehta
believes the deal will help
reduce delivery times
because personal shoppers
will already be onsite. Customers today are interested
in options and services
outside the four walls of the
store, says Walter Robb,
co-CEO of Whole Foods
Market. If you think about
how the grocery world is
unfolding, it makes sense to
explore Instacart.
It will take more than curiosity for Mehtas company
to make it. Amazon appears
bent on world domination.
Googles similarly minded
Shopping Express service
also counts Whole Foods
as a partner. Others, such
as FreshDirect and Peapod,
arent far behind.
Mehta can feel the heat,
even as his 90 employees
settle into a new office in
the South of Market neighborhood. The stiff competition has left him with little
time to do much else, like
play soccer or cook. Ive
been known to make a
mean grilled-cheese sandwich, Mehta quips. But
now theres a 50% chance it
may be burnt.

p ho t o g r a p h b y GABRIELA HASBUN

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t h e f or t u n e 500 se r i e s

TECH

Fit for the Future

TO STOKE SALES AND SPARE
HALF-DRESSED SHOPPERS
AGONY, %/220,1*'$/(6
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Weve all been there. While shopping for new clothes, you enter
a tting room to try on a stack of possibilitiesexcept some
of the items, it seems, arent the right color or size. You crack
the door and crane your neck past the threshold. Where did
the attendant go? And how on earth are you going to describe
exactly which pair of jeans you really need?

Bloomingdales, the upscale department store owned

by Macys Inc., thinks technology can help solve a common problem that has cost apparel retailers dearly in sales:

Search for Can Bigcommerce Become

the Next Big Name in E-Commerce? on

FORTUNE.COM

64

EMPLOYEES

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frustrated customers who give up and leave

rather than take the time to acquire the
right piece of clothing.
The solution? Smart tting rooms
equipped with wall-mounted tablet
computers. At ve of its 37 stores,
Bloomingdales has installed Apple iPads
that connect to the complex inventorymanagement systems it uses to keep track
of tens of millions of items. With the
iPads, a customer or a store associate can
scan the item in question to nd which
colors and sizes are in stock, as well as see
ratings and reviews by other customers.
The tablets also recommend items that
would complement the scanned original.
And with a tap, a customer can summon
an associate. (No neck craning necessary.)
The problem we are trying to solve at
Bloomingdales is age-old, says R.B. Harrison, chief omnichannel officer at Macys
Inc. Youve got a customer sitting halfnaked in the tting room and wanting to
try a different size. This is technology for a
common problem customers have.
The technology isnt particularly advancedcustomers still have to try items
onbut the initiative is part of a bigger
push by Macys Inc. to best its competition
at integrating analog and digital shopping
experiences. Its paying off: Macys is way
ahead of Kohls and J.C. Penney in terms
of using unsold inventory from physical
stores to ll online orders (rather than
selling it on clearance), as well as offering
store pickup for orders placed online.
If its tablet test proves effective,
Bloomingdales may roll out the system
nationwide. Macys Inc., like its peers, hopes
that its embrace of technology will help
stem losses of customers to e-commerce
behemoths like eBay and Amazon. The
existential threat is why it created an
internal tech incubator called Idea Lab in
San Francisco. Its also why the company
continues to experiment with tech-avored
initiatives such as same-day delivery and
Shopkicks ShopBeacon, which lets the
retailer deliver personalized, locationspecic deals to shoppers mobile devices.
Our stores are the fundamental differentiator from pure plays, Harrison says of
his digital rivals. So doing both is a whole
lot better than doing one or the other.
i l l u s t r a t io n b y JASON SCHNEIDER

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691501.1.0

October 27, 2014

INVEST
TODD & TEDS EXCELLENT
ADVENTURE Fortune identied
which Berkshire holding was picked
by Todd Combs and which by Ted
Weschler. Heres how theyve fared
(using estimated purchase prices).

MasterCard

TODD COMBS STOCK PICKS

TED WESCHLER STOCK PICKS

$2 billion

SIZE OF
INVESTMENT
Lee Enterprises

Visa
Liberty Media

0.25
Viacom

General Dynamics

Wabco

DirecTV
DirecTV

Precision Castparts

Dollar General
Dish
(Sold in Dec. 2013)

DaVita

Suncor Energy

Verisk
CVS (Sold in Sept. 2012)

GM

Deere
Verizon

Liberty Global (A)

Intel
(Sold in June 2012)

RETURN

notes on the gr a phic: libert y medi a r etur n includes va lue of sh a r es in sta r z, w hich w er e spu n off a nd sold. ch a rter commu nications,
w hich berk shir e h ath away in v ested in, is not included because fortune was u na ble to deter mine w hich m a nager purch ased it.

0.5

National Oil Well Varco

Verisign
Chicago Bridge & Iron

Liberty Global
(C)

TIME HELD (YEARS)

Buffetts Protgs Are

Beating the Market
Berkshires Ted Weschler and Todd Combs are delivering,
according to Fortunes analysis. By Stephen Gandel
g r a p h ic b y NICOLAS RAPP

A YEAR AGO Ted Weschler, one half

of the duo likely to someday take over
the massive Berkshire Hathaway stock
portfolio and the even more titanic
investing legacy of Warren Buffett,
was in a footrace with the S&P 500.
Weschler was leading by a nose with a
20% gain, vs. 18% for the S&P, in the

FORTUNE.COM

67

INVEST

October 27, 2014

bu ffet t s protgs

They have made Berkshire billions already

that we wouldnt have otherwise made.
Warren Buffett

FORTUNE.COM

68

Ted Weschlers
returns have built
steadily.

Todd Combs has

had huge leaps
and periodic stalls.
116.0%

120%
100
80.9%

80
60

Todd Combs portfolio

performance

Ted Weschler portfolio

performance

40
20

S&P 500

S&P 500

0
9/30/2011

6/30/2014

a much larger proportion of the

companys assets in the past decade.
(Buffett says the person has been
picked.) None of the plans are nal,
and Buffett says he has no intention to
retire anytime soon.
Berkshires CEO has offered few
details on the performance of his
handpicked successors. The company
is required to reveal its holdings once
a quarter, but it has no obligation
to explain which manager chose a
particular stock or at what price. As a
result, just how well the duo have done
has remained a mystery.
Fortune set out to solve that mystery.
We scrutinized public llings, sounded
out investing pros who know Buffett,
Combs, and Weschler, and made some
educated guesses. (More on our methodology later.) We ended up with what
are most likely the current portfolios
of Combs and Weschler, as well as a
list of all the shares they have bought
and sold for Berkshire in the past four
years, and at roughly what price. The
returns calculated from those portfolios
largely jibe with what Buffett has said

12/31/2010

6/30/2014

about Combs and Weschler, and got the

thumbs-up from the close Berkshire
watchers we showed them to.
Combs and Weschler declined to
comment. Buffett says Weschlers performance exceeds Fortunes estimates
of his results, but he declined to comment further.
So how have the Oracles disciples
done? Quite impressively, according
to our estimates. Both have outpaced
the S&P 500 in their time at Berkshire
(their compensation is determined
by how much they beat that index
over three years). Combs has done the
better of the two, generating a cumulative return of 116% over the past
nearly four yearsmore than double
the S&Ps 55% over the same period.
Weschlers portfolio is up 81%, but hes
had only three years to prove himself.
Combs picks increased an incredible
51% last year alone. And Weschler is
well ahead of the market this year.
Combs and Weschler took unlikely
paths to Berkshire. Combs was 39
and ran a fund, Castle Point Advisors, which managed just $400 mil-

combs: nati h a r nika p photo; w eschler: da niel ack ergett y im ages. gr a phic source: sta nda r d & poors, berk shir e h ath away filings

rst nine months of 2013, according to

estimates compiled by Fortune.
Then, in November, one of Weschlers
largest holdings, satellite television
provider DirecTV, announced it had
signed up an additional 139,000
subscribers. Another Weschler choice,
dialysis-center operator DaVita
Health, reported better-than-expected
earnings. Both stocks shot up. By the
end of the year, Weschlers portfolio
had risen another 11%.
In his annual letter to shareholders in April, Buffett revealed that both
Weschler and his partner Todd Combs
once again handily beat the market.
They have made Berkshire billions
already that we wouldnt have otherwise made, the Oracle of Omaha told
CNBC that month. They both have a
fundamental combination of soundness and brilliance.
What will happen to Berkshire
after Buffett, 84, is perhaps the most
closely watched succession story in
corporate American history. If investors are nervous, they arent showing
it. This summer the price of Berkshires
A shares oated above $200,000. The
conglomerate, which owns dozens of
companies, ranging from insurer Geico
to railway Burlington Northern Santa
Fe to ice cream chain Dairy Queen, has
a market cap of $331 billion. The question is whether Berkshire will be able to
continue its stellar success after Buffett.
How Combs and Weschler do will
comprise a large part of the answer.
As of the middle of this year, the two
managed a total of just over $14 billion (their allocation has been increasing) of Berkshires $115 billion stock
portfolio. This month marks four years
since Buffett hired Combs. Weschler
joined the company a little less than
a year later. A third, yet-to-be-named
person will run Berkshires operating businesses, which have become

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INVEST

October 27, 2014

bu ffet t s protgs

Combs tends to get in and out of stocks

much faster than Buffett. Weschler prefers to
buy and hold a few stocks for a long time.
lion, when he was hired by Buffett.
Weschler, the founder of a successful hedge fund, Peninsula Capital,
wasnt on Buffetts radar until he won
a lunch with Buffett, for which he
paid $2.6 million in a charity auction. Buffett has been critical of hedge
funds, but the two hit it off. At the next
years lunch (Weschler paid another
$2.6 million), Buffett recruited him.
A look at the stocks Combs and
Weschler have picked since joining
Berkshire shows that their investing
philosophies have a lot in common
with Buffetts (no surprise there). Both
Combs and Weschler have bought into
cable-TV providers, including DirecTV,
Dish, and most recently Charter Communications, which generate a lot of
cash ow and have a so-called business moatits hard to get into the
business of providing cable television.
Those are two traits that Buffett has
said he seeks. And just as Buffett loves
iconic American brands like Coke
and, more recently, Heinz, Combs has
purchased shares of tractor company
Deere. Buffett is a longtime holder of
American Express shares; Combs has
opted for Visa and MasterCard.
In other ways the protgs strategies
diverge from Buffetts. A good example: Liberty Media and its CEO, John
Malone. Both Combs and Weschler
have bought shares of various Malone
entities, which tend to have complicated corporate structures. Buffett has
tended to be wary of the sort of complexity that, in his view, makes it hard
to grasp the workings of a business.
Combs and Weschler run their portfolios autonomously, though for compliance reasons they do have to inform
Buffett of their selections in advance.
Combs tends to get in and out of stocks
much faster than Buffett. For instance,
Combs prescribed himself $200 million worth of shares in drugstore chain

FORTUNE.COM

70

CVS in late 2011, only to dispense with

the stake at an estimated 28% prot a
year later. Weschler prefers to buy and
hold a few stocks for a long time. His
$7.5 billion portfolio at Berkshire is
spread among just seven stocks.
To crunch their performance
numbers, Fortune enlisted the help of
hedge fund tracker Insider Monkey for
a list, based on public lings, of all the
shares that Berkshire has bought and
sold over the past four years. Fortune
also examined holdings at the funds
Combs and Weschler ran before they
joined Berkshire. Weschlers former
hedge fund, for instance, owned shares
of DaVita. So when DaVita popped up
in Berkshires portfolio, we inferred
that it was a Weschler pick.
Next we talked to some longtime
Buffett watchers, some of whom have
known Combs and Weschler since
before they joined Berkshire. Once
we had our best guesses, we went
back and double-checked our work
with the investment pros. There were
some close calls. Lee Enterprise, for
instance, owns newspapers, as well as
other local publications. Buffett has
said that he is interested in buying up
smaller newspapers. But others argued
the Lee investment is Weschlers and
we included it in his group.
To calculate returns, we used the average price of the stocks that Combs and
Weschler were buying in the quarter.
That approach may articially depress
our calculation of the mens returns
since its entirely possible that skilled
traders bought at prices below the average. We did not include dividends in
calculating their returns or those of the
S&P 500 because Combs and Weschler
do not appear to be reinvesting their
dividends. Berkshire has yet to le its
holdings for the third quarter, so we
were able to calculate performance only
through the middle of the year.

Combs and Weschler have made

some very good investments at
Berkshire. Both seem to have a knack
for catching stocks near their lows.
Weschler bought shares of Canadian
oil company Suncor in mid-2013 for
around $30 a share; the stock now
trades for $36. Shares of credit card
company MasterCard have been a big
winner for Combs. The shares, then
worth $25, were his rst investment at
Berkshire. Today they trade for $74.
Of course, Combs and Weschler have
endured a few bumps. Recently Combs
has struggled. Shares of Chicago Bridge
& Iron, which was an $800 million
position in his portfolio coming into the
year, have tumbled 30% because of weak
construction activity. Overall, Combs
portfolio inched down an estimated 1%
in the rst half of the year while the S&P
increased by 7%. Combs bought shares
of Intel in late 2011 for just over $21. He
sold his remaining stake nine months
later for under $20 a share.
And shares of General Motorsone
of Weschlers biggest holdingshave
fallen 21% this year in the wake of the
scandal surrounding the companys
faulty ignition switches. Weschler
acquired the shares at about $22, sold
some at $36, and is still holding the
rest at $32. Other investors might rue
not selling more when the stock was
above $40 before the recall scandal
ignited, but Weschler is a believer: He
added $100 million worth of shares in
the second quarter.
Its decades too early to discern
whether Combs and Weschler will ever
be able to live up to Buffetts legacy, and,
in fairness, thats far too high a standard. Its hard to follow a legend. Still,
every now and then a Joe DiMaggio is
succeeded by a Mickey Mantle.
Open the Google app and say,
Ok Google, what was Warren
Buffetts rst investment?

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Songs for a Healthier America

Fortune's Stephanie Mehta leads a panel discussion

with Mayor Michael A. Nutter of Philadelphia

The Partnership for a Healthier America (PHA)

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Will Bill Gross Do Better

With His New Fund Than
the One He Left Behind?

i nsigh ts

25%
20
15

14.0%

10
5

Market share of Pimcos

alternative bond fund

0
2011

2012

2013

2014

SHRINKING SHARE Alternative bond funds have

doubled in size since 2012, but Pimco Unconstrained,
managed by Bill Gross, has been hemorrhaging cash.

By
Allan Sloan
asloan@fortunemail.com

HE ABDICATION OF BILL GROSS, the erstwhile king of bonds,

gr a phic source: mor ningsta r

has done something you rarely see: Its brought intrigue to the world of fixed income and made it fun to write about. Gross, as you know, bailed out of Pimco, which
he had built into the leader in actively managed bond mutual funds, to join Janus,
whose bond fund assets are a pimple compared with Pimcos.
But what you probably dont know is that the kind of fund
that Gross will run for his new employerthe Janus Global
Unconstrained Bond Fundis the hottest retail bond product on Wall Street. And you almost certainly dont know that
even though assets of alternative bond funds like Janus
Unconstrained have more than doubled in size since the end
of 2012, Grosss Pimco Unconstrained Bond Fund suffered
heavy investment outows for much of that period.
Let me explain. Bond mutual funds are supposed to be
simple, straightforward, relatively safe investments for retail
investorsa bedrock of their investment portfolio. You put up
your money, and in return youre supposed to get a stream of
interest payments and little or nothing in the way of excitement.
But thanks to the current ultralow interest rate environment
created by the Federal Reserve Board, short-term bonds yield
almost nothing, and long-term bonds have gotten dangerous.
Thats because when interest rates nally rise, the price of
existing long-term bonds will decline sharply.
As a result, Wall Street, always alert for sexy-sounding, highfee-generating products, has been pushing alternative bond
funds, whose managers are free to do whatever they please,
rather than having to hew to various guidelines.
According to Morningstar, whose statistics Im using throughout this article, these funds attracted a total of $80 billion of
new investor money from the start of last year through the end
of August, the most recent date for which data are available.
Those inows, combined with the funds returns, boosted
unconventional bond assets to $154 billion, from $71.5 billion.
But in the past 12 months, according to an analysis that
Morningstar did at my request, Grosss Pimco Unconstrained
Go to the tablet to hear Allan Sloans most recent
interview on the Marketplace Morning Report.

suffered $8 billion of outows, and its market share fell to 14%

of the alternative bond category, from 24.8%. That outow and
market share loss offer one likely example of why Pimco was
reportedly getting ready to depose Gross before he abdicated.
In the world of stocks there has been a stampede out of
actively managed funds into low-cost index funds and some
relatively low-cost active funds. But bond indexes give lots of
weight to U.S. Treasury securities that are sure to be clobbered when rates rise. Hence the cash gushing into these
nontraditional bond funds, whose sales pitch is that they will
protect you when rates rise. These funds are the last stand for
active managers, quips Don Phillips, Morningstars longtime
research director, who stepped down last year but remains a
managing director. If you buy into them, he says, What is
supposed to be the simplest building block of your portfolio
is now the most complicated and untested part.
People believe these funds can protect them from rising
interest rate environments, but we havent had such an environment since these funds became popular, adds Josh Charney,
an alternative-investments analyst at Morningstar. Youre
buying on faith that the manager can protect you.
Can Gross do that for investors at Janus Unconstrained now
that he is running a fund that had a mere $12.9 millionthats
an m, not a typical Pimco fund, with a b as in billionin
assets? Hell have less market clout than at Pimco, but will have
much more exibility because the fund is small. Will the guy
Fortune dubbed the Bond King in early 2002 (and who wrote
for the magazine from late 2002 through 2007) succeed in
attracting billions of dollars to his Janus fund? Can he make
money for you, as opposed to Janus and himself, if you buy into
it? Theres no way to tell, but it will sure be fun to watch.

FORTUNE.COM

73

Tired of the Endless

Gridlock in Washington?
Blame the Primaries

i nsigh ts

2012 caucuses with the lowest participation rates

Wyoming GOP
Minnesota Dem.
Maine GOP
Hawaii GOP
Washington GOP

0.3%
0.5%
0.6%
1.0%
1.1%

THE INCREDIBLY SILENT MAJORITY In some states

less than 1% of eligible voters help choose their partys
presidential nominee. The result? More extreme candidates.

By
Nina Easton
nina_easton@fortune.com

HE 2014 PRIMARY SEASON has come to a sleepy conclusion, and

the numbers are in: It had the worst voter turnout in history. Why should business
care? Because the publics lack of interest in primaries is a key factor behind corporate
Americas inability to move the dial on issues it cares most about, from immigration,

FORTUNE.COM

74

candidates it opposes, saying the Tea Party is an important

part of a center-right coalition. Instead, he says, hes going
after candidates from the caveman caucus. When you get
[to Washington], says Reed, you have to be willing to govern.
Thats a new standard that Chamber strategists are using in
assessing whom to support.
Primary candidates supported by the Chamber, along with
other establishment GOP groups like Karl Roves American
Crossroads, won in 14 out of 15 races this year. It allowed us to set
the table with varsity candidates for general election, said Reed.
Working with local chambers, the Washington office also
mounted get-out-the-vote efforts to encourage more of Main
Street to go to the polls. Still, the nationwide primary turnout
has continued its steady decline. Gans estimates the national
primary turnout this year to be in the 14% to 15% range, down
from 18.3% in 2010.
That level of disengagement by most Americans, who trend
toward the center, still leaves wide running room for politicians
less interested in governing than in making a ery point. The
Republican right gets most of the attention on this score, but
in Congress there is similar intractability on the left. Activists
would have President Obamas head if he dared raise the retirement age or cut the worlds highest corporate tax rate.
On the GOP side, Main Street dodged a bullet this year: There
was no rerun of the 2012 debacles like Todd Akin or Richard
Mourdock. But the caveman caucus will reemerge with wellfunded ferocity in the 2016 presidential campaign. Once again,
the primaries will be where the action is.
So the next time you feel like complaining about gridlock and
dysfunction in Congress, look in the mirrorand then, come the
winter of 2016, go plant a campaign sign in your front yard.

gr a phic source: mich a el mcdona ld, u.s. election project

tax, and entitlement reforms to needed infrastructure spending.

The majority of Americans do vote on Election Day in presidential yearsthough even that has dropped from 57% in 2008 to
54% in 2012. History suggests there will be a 20% or so drop-off
between a presidential election and the midterm two years later.
But the real actionthe place where victors are decidedis
increasingly in party primaries, where only a tiny fraction of
voters go to the polls. Most congressional districts today are
solidly Republican or Democratic, owing to advances in technology that enable legislatures to gerrymander congressional
districts with impeccable precision. Veteran electoral analyst
Charlie Cook has estimated that the number of swing districts
declined from 168 in 1998 to just 99 in 2012. And there are even
fewer this year.
The result? Whoever wins the primary in the predominant
party will probably win the general election. Primaries have
become a breeding ground in both parties for ideologues who
resist compromise and refuse to govern. If you combine low
turnout with one-party districts, the primary is essentially the
election, says Curtis Gans, whose nonpartisan Center for the
Study of the American Electorate calculates voting patterns. An
organized minority of 3% to 4% can propel someone into office.
The U.S. Chamber of Commerce got its wake-up call in last
years special election in Alabama, when it managed to stop a
candidate who applauded the government shutdown, wanted
to overthrow House Speaker John Boehner, and claimed that
President Obama was born in Kenya. During this years primary
season, the Chamber poured $15 million into creative media
support for candidates facing similar challenges.
Scott Reed, the veteran GOP strategist recruited to run
the Chambers blitz, refuses to apply the Tea Party label to the

ACCOUNT FEES, FUND EXPENSES, BROKERAGE COMMISSIONS AND SERVICE FEES MAY APPLY. THE E*TRADE FINANCIAL FAMILY OF
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siemens.com/MadeInAmerica

THE
NEW COLD
WAR ON
BUSINESS
FOR TWO DECADES, GLOBALIZATION
HAS BEEN THE WORLD ECONOMYS
CENTRAL STORY LINEOR SO IT
WAS UNTIL RUSSIA AND CHINA
SHARPLY CHANGED THE NARRATIVE.
FOR BIG COMPANIES IN THE WEST,
THE QUESTION NOW IS: CAN THERE
BE A HAPPY ENDING?

By IAN BREMMER
after authorities cracked down on the massive pro-democracy
protests in Hong Kong that began in late September, a British rm that
provides tear gas to Hong Kongs police decided to review its sales policy. The optics of the situation, perhaps, made that an obvious public
relations decision. But the underlying risk of spreading tensions isnt
limited to traditional politically sensitive industries: In the wake of
recent crises every globally oriented Western company should be rethinking its strategy too. For nations, the geopolitical reworksthe
most incendiary since the fall of the Berlin Walldont add up to a new
East-West conict. No one is talking about a nuclear standoff with Moscow, and Beijing lacks Vladimir Putins inclination for conict with the
West. But corporations face a different reality, as political shifts in
China and Russia drive an emerging Cold War on business. China and

77

COLD WAR ON BUSINESS

Russia are intruding into the marketplace on a

scale unseen since globalization became a buzzword. Beijing has initiated state investigations into
dozens of Fortune 500 companies for monopolistic
activity. In Russia, ratcheting up sanctions over the
escalating Ukraine conict has prompted a frantic
unwinding of U.S. business ties. Capital ight from
Russia hit $75 billion in the rst half of this year,
outpacing all of 2013. Moscow has banned food
exports from the West and oated legislation that
would allow the seizure of foreign assets.
Western companies benet from a globalized
marketplace backstopped by universal values that
allows them to improve supply chains and reach
new customers. They are engineered to compete
with other corporations, not governments. Clashing
states will force many companies to make painful
choices about how they do businessand where.
An uneven playing eld in China isnt new, as
anyone who has experienced Chinas intellectual
property protections can attest. Nonetheless, investing in Chinas growing consumer class and deep
labor force has felt like an overwhelming win-win
for Western companies and domestic challengers. But that is quickly changing. After 35 years of
unabated growth in China, foreign companies are
becoming more expendable. The countrys domestic rms are more sophisticated and competitive in
more industries. China is not as hungry for cash or
lower-scale technology; foreign competitors have to
pay a steeper price for access. In a recent poll, 60%
of foreign companies feel less welcome in China
than beforeup from 41% just last year. Foreign
direct investment in China plummeted to its lowest
level in four years last August. (See Beijing Pulls
Back the Welcome Mat in this package.)
Against this backdrop, President Xi Jinpings
transformational economic agenda is a shock wave
for Western rms. Structural reforms, anticorruption efforts, and nancial liberalization could one
day make the Chinese market more attractive to foreign companies. For the moment, though, theyve
made the business terrain far less certain.
In order to build support for opening the economy, Xi is clamping down politically and looking to
deect pressure. Hong Kong is caught in the cross
hairs. As mainland growth has surged, the city-state
has become less economically crucial for Beijing,
falling from 15% of Chinas GDP in 1997 to less than
3% today. At the same time, Xi is warier of politi-

78

FORTUNE.COM

cal dissent and Western-style governance than ever

before. He has zero tolerance for the sort of political concessions protesters are demanding. Foreign
companies operating in China face similar headwinds. Beijing is willing to scapegoat Western rms
to appease domestic losers in economic overhauls.
Under President Putins leadership, Russia has
responded to a cratering relationship with the U.S.
by cutting off its nose to spite its face. Sanctions
will take a painful toll on U.S.-oriented Russian
rms. Their cost of capital has risen, and Russias
ability to maintain oil production at current
levels over the next ve to 10 years is in question.
i l l u s t r a t io n b y ALEX WILLIAMSON

Avigilon is a powerful business tool

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2013-Feb-04 09:48:27.805 PM

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2013-Feb-04 09:48:27.805 PM

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COLD WAR ON BUSINESS

Nizhnevartovsk

RUSSIA
Power of Siberia
pipeline project

Okha

Chita
Khabarovsk

KAZAKHSTAN

China
connection
Ulan Bator
MONGOLIA

CHINA

Vladivostok
N. KOREA

FORTUNE.COM

Ian Bremmer is the president of Eurasia Group

and a global research professor at New York
University. Follow him on Twitter @ianbremmer.

m a p source: ga zprom

80

As China
and
Russia
pivot
toward
each
other,
American
businesses
and
their
universal
economic
values
will
struggle
to
maintain
a global
foothold.

ing that the potential for prot justies the risk.

(In a telling capitulation, Apple CEO Tim Cook
expressed sincere apologies in the wake of Beijings media campaign against his company last
year.) Other companies, however, are scaling back
or altogether giving up on their China business.
Adobe, for instance, is shutting its headquarters
and closing down its R&D in the country.
And as Moscow burns bridges with the West, it is
building pipelines to China. A 30-year, $400 billion
gas deallong stalled in negotiationswas rapidly
nalized after Moscow dropped its asking price because of deteriorating relations with the West. Russia
has also invited Chinese investors into the strategic
Vankor oil project in East Siberia. China, for its part,
is happy to lock in bargain prices on Russian energy.
Russia and China, the two most important
points of resistance to a rule-based global marketplace, are now working more closely together. As
China and Russia pivot toward each other, American businessesand their universal economic
valueswill struggle to maintain a global foothold.
The Soviet-American clash forced nations to
choose sides, even if they would have been better
off collaborating. The emerging Cold War on business will leave many companies in a similar bind.
For companies hardwired to go global, these new
threats to their very existence in crucial markets
should sound major alarms.

photo: sa sh a mor dov etsgett y im ages

Whatever the answer, Putin will stay the course.

Indeed, his approval ratings at home remain skyhigh. Domestic food producers view the food ban
as an opportunity, and for the rest of Russia it will
necessitate price hikes and imports from riskier
places. (See The Putin Paradox in this package.)
Western multinationals will increasingly pay
the price for geopolitics beyond their control. For
example, all signs point to Russian involvement in
the recent cyberattack on J.P. Morgan Chase; with
83 million households and businesses affected, its
one of the most extreme in history. Given the Russian governments means (well-developed nancial
hacking expertise) and motive (revenge for American sanctions), this is likely to be just the tip of the
iceberg for American companies that will absorb
the brunt of Russias cyberbarrage.
Washington is no bystander in this game. The
American government has played favorites and injected national interest into the IT sector. Google
left China amid cyberattacks, pressure to release user information, and Beijings favoritism
for Baidu. But the Snowden leaks have revealed
similar behavior from Washington, which has
pressured technology companies to comply with
NSA-driven surveillance initiatives. And based on
concerns from U.S. intelligence agencies, regulators have tried to prevent Chinese telecom giant
Huawei from selling its equipment in the U.S.
For now, most major Western companies in
China are riding out the latest storm, conclud-

JAPAN

A New Axis of Energy

Russias Gazprom is building a pipeline
to China that will move $400 billion
of natural gas over 30 years. Above:
President Xi Jinping of China (left)
and Russian President Vladimir Putin
shake on the deal in May in Shanghai.

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2013 Hennion and Walsh. Securities oered through Hennion & Walsh Inc. Member of FINRA, SIPC. Investing in bonds involves risk
including possible loss of principal. Income may be subject to state, local or federal alternative minimum tax. When interest rates rise, bond prices
fall, and when interest rates fall, prices rise. *Source: Moodys Investor Service, March 7, 2012 U.S. Municipal Bond Defaults and Recoveries,
1970-2011. Past performance is no guarantee of future results.

THE
PUTIN
PARADOX
THE MORE THE WEST TRIES
TO PUNISH RUSSIAS PRESIDENT,
THE MORE POPULAR HE GETS.
A VISIT TO MOSCOW REVEALS
NO SIGNS THAT HELL
RELENTOR MAKE THINGS
EASIER FOR U.S. BUSINESSES.

B y V I V I E N N E W A LT

82

fly into moscow on Russias national carrier, Aeroot, and you

will be treated to a dose of nostalgia. The ight attendants are decked
out in Soviet red, their jackets and hats emblazoned with the hammer and sickle of the Communist Party, which ruled this country
with an iron st during much of the past century. Dont be fooled
by the airlines vintage branding. The road from the airport into
the city makes it clear that those days are long gone. Dozens of billboards line the highway, pushing not party slogans but modern-day
dreams to Russias 143 million people: chic global fashion brands,
European luxury cars, and much more. Welcome. Youve landed 23
years after communisms collapsein a country that is once again
engaged in a game of chicken with the West. This time around,
Russian President Vladimir Putin and his American and European
counterparts do not appear to have their ngers poised over their
a ddi t io n a l r e p or t i n g b y g e of f c olv i n

i l l u s t r a t io n b y ALEX WILLIAMSON

COLD WAR ON BUSINESS: RUSSIA

84

FORTUNE.COM

Says Deere
CEO Samuel
Allen, just
back from
Moscow:
Russians,
even young
Russians
80% of them
think Putin
is right. I
thought that
the highly
educated
person
would have
a different
perspective,
but most
people view
the issue as
righting a
wrongthe
wrong
being that
Khrushchev
should have
never given
Crimea
away.

Dow Jones and Pearson. Days later, Putin and Iranian President Hassan Rouhani stated that they would no longer
settle their bilateral trade in dollars.
The next day, Russian officials announced they were halting the Future
Leaders Exchange Program, in which
American and Russian teenagers spend
a year in each others countries. The
government insisted the decision was
made because a gay Russian student
had applied for asylum in the U.S., but
to many it suggested just another chill
with the American government. Hearing the news, my interpreter, who was 7
when communism ended, slammed her
st in disappointment. No! she said,
close to tears. I really wanted my son to
work on his English and go to America
on the program.
Indeed, the prospect of isolation from
the West troubles young Muscovites
accustomed to their wired, global lifestyle. Starbucks 38 Moscow cafs are
lled with such urbanites, tapping away
on their iPads. Theres no chance that
Soviet-style isolation will return, but
older Russians see echoes of it in todays
crisis. It is strange how close we are to a
new Cold War, says banking and media
tycoon Alexander Lebedev (Britains Independent and Evening Standard newspapers are among his vast holdings),
who was a KGB spy in the 1980s during
the real Cold War. Sitting in his topoor office suite overlooking Moscows
gleaming skyscrapers, Lebedev says he
believes economic pressure will not persuade Putin to change his policies.
That may be. But the effects of nearly a
year of conict and sanctions are evident.
After years of high growth, Russia, the
worlds biggest oil producer, is expected
to stagnate next year, with 0.5% growth,
according to the IMF. The ruble plummeted to 40 to the dollar in October,
about 20% lower than one year earlier.
Its free fall has sent Russians scrambling
to move money abroad; an estimated
$120 billion could leave Russia this year.
There are myriad signs of resistance
to Western commerce. French cheeses,

pr ev ious page: pu tin: a lex ey druzhinina fp/gett y im ages; ta nk s: nata li a kolesnikovaa fp/gett y im ages; jets: ga li tibbona fp/get t y im ages

nuclear buttons. Yet the enmity that has riven the two sides
is real. It has imperiled multibillion-dollar deals and could
ravage business relationships for years to come, as well as
pummel the earnings of countless U.S. businesses, from oil
producers to investment banks.
The escalating tension this year is depressing. It started
with Russias seizure of Crimea from Ukraine in March, and it
has been followed by a cascading series of punches and counterpunches: U.S. sanctions on Kremlin officials, Putins support for Ukraine separatists, more penalties against Russia,
and then counter-sanctions as Russia banned the U.S., the
European Union, Norway, Australia, and Canada from selling
billions of dollars worth of fruits, vegetables, sh, and meats
to Russia. The downing of the Malaysia Airlines jet over eastern Ukraine, struck apparently in error by rebels using Putinsupplied rockets, killed 298 people and prompted yet another
round of sanctions. These restricted credit to some of Russias
state-owned conglomerates and banks, which, in turn, hampered multiple deals, such as Exxon Mobils Arctic exploration with state-run Rosneft.
As the winter closes in, Russians are left to wonder just
how steep the price of this conict will be to their postSoviet comforts. Will Western leaders, despite their tough
talk, quietly ease sanctions, especially since the U.S. has
dragged into action a reluctant Europe, 30% of whose gas
comes from Russia? Eventually, many Russians believe, the
ssures between the U.S. and the EUs 28 countries will make
sanctions impossible to maintain. They could be right.
Yet there is another scenario, which, many observers believe,
is just as likely: that Putin, with about $465 billion in foreign
cash and gold in Russias Central Bank, could try to ride out
sanctions, perhaps for years, and emerge even stronger (his approval ratings are above 80%) as the Man Who Faced Down the
West. Putin thinks that neither the U.S. nor the EU is prepared
for a hot war in Europe, according to Stanislav Belkovsky, a political consultant in Moscow. By contrast, he says, Putin conveys
a sense that he is not afraid of conict. For all the problems in
the economy, he says, Putin has the scent of victory.
Putin has been turning the screws tighter on Western businesses. Food inspectors began raiding dozens of McDonalds
Russian outlets in the summer and shut down several of them
for minor infractions. The order included the iconic McDonalds on Moscows Pushkin Square, which crowds thronged
when it opened in 1990 as the rst American fast-food joint
in Communist Russia.
In late September, Russias Parliament voted to restrict
foreign ownership of local media to 20%, a move that could
affect U.S. companies such as Disney, which has a Russian
TV channel, and force the sale of the independent Russian nancial paper Vedomosti, which is part owned by News Corp.s

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COLD WAR ON BUSINESS: RUSSIA

Which Global Companies Face Risk in Russia?

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1. PepsiCo
Russia is PepsiCos second-largest
market after the U.S., with 2013
sales of $4.9 billion. Decades
ago, Pepsi was the rst Western
branded consumer product made
there. But sales are starting
to falter, and in July, PepsiCo
acknowledged the increasingly
challenging environment there.

2. Danone
Russia is the biggest market
for the French dairy company,
which bought Russias Unimilk
in 2010. Having 24 plants in
Russia reduces the impact of
sanctions, but the slumping
economy is hurting sales.

4. McDonalds
Authorities have closed eight
McDonalds restaurants,
pending inspections, so far.
Russia contributes less than
5% of total company operating
prot, but it has been one of
McDonalds few reliable European markets. The company
has doubled its Russian outlets
over the past ve years.

3. Carlsberg
The Danish brewer reduced its
forecast this summer: It now
expects sales in Russia, where
it is the biggest brewerthe
company says it commands
39% of the countrys beer market
and operates 10 breweriesto
fall 6% to 7%.

5. Hugo Boss
The German clothier has been
dropping the franchise model
in Russia in favor of companyowned stores, including a new
agship in a trendy Moscow
mall. Sales have slowed in
Prague and Budapest because
fewer Russians are traveling.

86

FORTUNE.COM

FEEDBACK letters@fortune.com

m a x im shipenkovepa/cor bis

Spanish ham, and other delicacies have vanished from supermarket

shelves or are now disguised as Turkish or Belarusian, with higher
sticker prices. The American-style Chicago Prime steak house near
Pushkin Square no longer serves lobster, and its Black Angus steaks
now come from a ranch in central Russia rather than Kansas.
The Russia-U.S. standoff is beginning to be felt by American business. In late September, Ford said it could lose about $300 million
worth of Russian business this year. Hundreds of deals are frozen
as companies attempt to gure out how to comply with new laws.
George Kogan, a Russian-born American investment adviser in Moscow, says that years of fantastic deals, including numerous IPOs,
have run dry: U.S. hedge funds are all saying, We dont invest in Russia. In Moscow, he says, people who are handing out jobs and contracts would prefer not to deal with Westerners. Alexis Rodzianko,
president of the American Chamber of Commerce in Russia, says U.S.
investment rms are cooling their heels.
Most big U.S. corporations operating in Moscow are loath to discuss

the sensitivities of U.S.-Russian relations. Many

declined Fortunes requests for an interview. A rare
CEO who was willing to speak is Samuel Allen of
agricultural equipment giant Deere, back in the
U.S. after a trip to Russia. Allen says the sanctions
are certainly having an impact on our business.
Some of our customers have had trouble getting
nancing, and things have slowed down quite a bit.
Allen says he was struck by the support for Putin.
In our Moscow office, he says, we have 300 people.
Russians, even young Russians80% of them think
Putin is right. I thought the highly educated person
would have a different perspective, but most people
view the issue as righting a wrongthe wrong being that [Soviet leader Nikita] Khrushchev should
never have given Crimea away in 1954.
For their part, Russian officials insist they can
weather the storm. One government official says that
top leaders met last spring to consider the worst possible scenarios and concluded they should build new
alliances with China, Persian Gulf states, and others,
and begin creating their own products in order to
end their dependence on the West. One month later
Putin signed a $400 billion deal with China to pipe
natural gas to that country for the next 30 years.
The plan sounds optimistic. If there were an
ability to create proper import substitution, it would
have been built long ago, says Andrei Movchan, a
co-chairman of Third Rome, an investment group
in Moscow. They failed 100% on that, because they
dont allow private enterprise to ourish.
Russian tech execs met in Moscow in early October to discuss how to build up their industry,
which has lagged for years, as the country imported whatever it needed, largely from the U.S.
(where many Russians now work in Silicon Valley).
Oil spoiled us, says the official. Now Russia needs
to innovate, and the record of countries trying to
wean themselves from natural resources dependence is, to put it mildly, not good.
As bad as things get, theres one place in Moscow
that reminds Russians that things could be a whole
lot worse: the citys Cold War Museum, which
opened a few years ago in a converted bunker. More
than 200 feet underground, Soviet officers once
monitored the nuclear-bomb control center, braced
to launch the missiles that could destroy U.S. targets. Showing a group of locals around the bunker
late one night, museum guide Irina Chereponko
says the museum tries to teach the new generation
not to repeat the mistakes of the past. So far, she
says, she remains stymied about what to say about
Russias current conict with the West. It will take
time to have that perspective about things now,
she says. Maybe in 30 or 40 years.

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BEIJING
PULLS BACK
THE
WELCOME
MAT
FOR DECADES WESTERN COMPANIES
HAVE INVESTED CAPITAL AND
ENDURED RED TAPE TO REACH
THE WORLDS BIGGEST EMERGING
MARKET. NOW CHINA IS USING
STRONG-ARM TACTICS TO MAKE
LIFE HARD FOR MULTINATIONALS.

By SCOTT CENDROWSKI

88

the zeit berlin german restaurant inside Beijings aging

Royal Palace Hotel is the kind of place foreigners can go without attracting much attention. For the German auto executives
huddled here on a Wednesday night in late September eating currywurst and downing Hefeweizen beer, that may be
the allure. Over the past two months Germanys carmakers
have come under increasing re in China: Regulators ned
Volkswagens Audi joint venture $41 million for unfair pricing and announced an investigation into Mercedes-Benz as
they continued probing BMW. The automakers, which control
nearly 80% of the Chinese premium market and earn large
prots here, suddenly found themselves government targets.
Their monthly meeting has become part networking event,
part therapy session.
i l l u s t r a t io n b y ALEX WILLIAMSON

COLD WAR ON BUSINESS: CHINA

90

FORTUNE.COM

1. Differentiate yourself.
Beijing has welcomed
Tesla with open arms
because the government
is eager to popularize
electric vehicles. What
are you doing for China?
says Jim McGregor,
author of One Billion
Customers. You have to
tell your story so youre
not the ripest target.

2. Dont expect
due process.
In Chinas crackdown
on government corruption, officials are being
detained without charges.
Antitrust investigations
wont be totally different.
Prepare for it. I can
guarantee Microsoft and
McDonalds see this as a
cost of doing business,
says Adil Husain of
consultancy Emerging
Strategy in Shanghai.

3. Hang tough.
McGregor included advice
in One Billion Customers
that rings true today:
The Chinese will ask
you for anything because
you just may be stupid
enough to agree to it.
Many are. Dont be.

gr eg ba k era fp/gett y im ages

What can you do? says a BMW finance exec

standing in the back of the restaurant as someone
from Volkswagen ips through PowerPoint slides of
new leasing options in the country. Theyre going
after everyone.
In the past year, Chinese investigations into foreign companies have multiplied dramatically. The
number of multinationals in the headlinesand the
far bigger nes they have incurred compared with
Chinese rms under a six-year-old antimonopoly
lawhas prompted fears inside the worlds boardrooms that China is going after foreign companies.
The list of targets reads like an all-out assault. Over
the summer, six infant milk powder companies, including Illinois-based Mead Johnson Nutrition and
Abbott Laboratories, were accused of price xing and
ned $110 million. Then contact-lens makers, including Johnson & Johnson, were ned $3 million for
setting minimum prices. Twelve Japanese auto-parts
makers were ned $200 million for price xing this
summer. GlaxoSmithKline was ned $490 million in
September after a yearlong case in which it was found
to have bribed doctors to sell its drugs. After a one-day
trial held in secrecy, GSKs former China head was set
to be deported to Britain. Like Volkswagen, the rest
of the German automakers are expected to pay hefty
nes. Microsoft is being investigated for monopolistic behavior. And Qualcomm is facing a possible ne
of more than $1 billion for antitrust practices.
Theres never been anything like this, says Jim
McGregor, who has worked in China for 2 decades,
rst as a Wall Street Journal bureau chief, then as
CEO of Dow Jones in China, and now as Greater
China chairman of APCO Worldwide, an adviser
to multinationals. This is clearly a concerted
campaign. Foreign business is being targeted, and
so the multinationals are the most negative on
China that Ive seen in 25 years.
McGregor and others dont believe the investigations started as an explicit policy by Beijing to
pressure foreign companies. Rather, a conuence of
events seems to be driving them. The rst is political.
The administration under President Xi Jinping and
Premier Li Keqiang took over a Communist Party rife
with corruption nearly two years ago. Their unprecedented campaign against thousands of comrades,
including a former member of Chinas top Politburo
Standing Committee, has shifted to the next target
on behalf of average citizens: greedy multinationals.
Second, Chinese regulators are scrambling to

THE NEW
RULES
FOR DOING
BUSINESS
IN CHINA

stay relevant amid reforms. The countrys leaders proposed reducing Chinas
dependence on state planning in favor
of market forces last year during the
countrys agenda-setting Third Plenum
session. Youve got regulators out there
desperately trying to prove their worth,
says McGregor. One of the regulators
using Chinas antimonopoly law against
foreign companies, the National Development and Reform Commission, happens
to also direct state planning.
Whats more, it appears the new antimonopoly law is being used to implement
industrial policy. Chinas attitude toward
paying royalties on patents has long been,
Why are we paying to use technology we
build? By going after Qualcomm for chip
prices, the government is reducing costs
and opening the market for domestic national champions like Huawei. Theres
a clear pattern of using the antimonopoly
law to favor Chinese licensees of intellectual property, says Jones Day antitrust
lawyer Sbastien Evrard in Hong Kong.
Foreign investigations have sparked a
war of words in the media and in government halls. The European Union Chamber of Commerce in China came out ring rst in August, saying its companies
were being forced into confessions of guilt
without due process. Competition law
should not be used as an administrative
instrument to harm targeted companies,
the Chamber said. The U.S. Chamber of
Commerce in China followed up a month
later, releasing a survey in which half of
responding companies said they believed
foreign rms were being singled out in attacks. Then U.S. Treasury Secretary Jack
Lew joined the fray, reportedly writing a
letter to his Chinese counterpart warning
him that the investigations were sending
the two countries down a dangerous path.
The backlash has grown so vehement
that China is taking the rare step of responding to criticism. In September,
Premier Li, the countrys second most
powerful leader, said that only 10% of
antimonopoly investigations involved
foreign companies. Two days later, on
Sept. 11, the countrys three regulators
in charge of enforcing the antimonopoly
law staged a press conference to reinforce
the message. Based on facts under the

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COLD WAR ON BUSINESS: CHINA

92

FORTUNE.COM

A Decrease
in Velocity
Chinas economic growth
has slowed
in recent
years, and in
2014 the pace
of foreign
investment
has fallen off
as well.

FOREIGN
DIRECT
INVESTMENT
Monthly
change,
year-over-year
15

Jan.
2011
16.1%

10
5
0
5
10
15

Aug. 2014
14.0%

GDP
Quarterly
growth rate,
year-over-year
10
Q1 2011
9.7%
9

Q2 2014
7.5%

FEEDBACK

@scendrowski

gr a phic source: nationa l bur e au of statistics of china v i a bloomberg

antitrust laws, we will investigate companies, said

the NDRCs antimonopoly head, Xu Kunlin.
Even if that percentage of foreign investigations
is accurateand there are reasons to doubt it, not
least because China hasnt released the full slate of
investigations, and foreign rms have incurred far
bigger nes than domestic companiesthe investigations are scaring foreign companies for other
reasons. An antitrust lawyer working in China told
Fortune that the NDRC is widely known for bullying: It encourages companies not to bring lawyers
to meetings, often doesnt inform rms what they
are being charged with, and tries to force them to
sign written confessions. Weve had conversations
with some of the antitrust officials in China who have
indicated that they view even the request to have a
lawyer present as an indication of guilt, says Erin Ennis, vice president of the U.S.-China Business Council.
The NDRC declined to comment to Fortune.
The case against Microsoft is a window into the
regulators strong-arm tactics. Almost no other foreign company has as good a relationship with the
Chinese government as Microsoft. In 2006, when
then-President Hu Jintao visited the U.S., he stopped
at Bill Gates 40,000-square-foot house for dinner before traveling to Washington to meet President Bush.
Fast-forward to this summer, when investigators from
the State Administration for Industry and Commerce,
another regulator in charge of the antimonopoly law,
raided Microsofts Beijing offices and those of Accenture searching for evidence of monopolistic practices.
The state press announced that Microsofts use
of antipiracy software codes may have violated the
antimonopoly law. Regulators also gave Microsoft 20
days to explain questions about Windows compatibility issuesthis for a company that sells only about
one out of 10 of its products being used in the country
because of piracy and that (not coincidentally) once
said it earned less in China than in the Netherlands.
The antipiracy code was pointed out as the means
of controlling the marketwhich just doesnt make
sense, says Duncan Clark, whos worked in China
for 20 years advising private equity and hedge fund
investors in the tech sector at his rm, BDA. The investigation seems almost farcical, he says, but then
regulators have different motives. Theyre playing
to the gallery. They want to be seen as tough on
foreign companiesif they get big nes, investigations, thats great. What happens now is where it
gets more interesting.

Thats because China runs the risk of alienating

foreign partners. Foreign direct investment in China
tumbled to a four-year low in August, driven by a
decline in the rst eight months of the year in investment from Japan by 45%, from Europe by 18%, and
from the U.S. by 17%. You cant directly link falling
investments to investigations, especially because
Chinas slowing GDP growth (this year economists
expect the governments goal of 7.5% growth to be a
stretch) also inuences how much money foreigners
plow into the country. But taken together, theyve
cooled excitement in the Middle Kingdom.
Government pressure on foreign companies in
China is hardly new. In the aftermath of the global
nancial crisis, China invoked protectionist policies. Before 2009, for instance, the countrys windturbine-manufacturing market was dominated by
foreign operators, which had 40% market share and
the technical know-how. After the nancial crisis
and Chinas $600 billion stimulus package, turbines
were required to be sourced from domestic suppliers, and new technical requirements often disqualied foreigners. Local governments in charge
of growing the nations wind farms legally washed
us out, says Wolfgang Jussen, former CEO of Germanys Repower in China. Foreigners share of the
turbine market fell to 10%. Repower, a midsize
turbine manufacturer, stopped production in 2011.
Thats not to say that all of todays cases against
foreigners lack merit. The automakers, for instance,
cut prices for some spare parts by 50% after the
investigations. They now may be forced to allow
their dealers to use nonoriginal spare parts, something the European Commission has taken issue
with in the past.
Despite the antiforeign news, China is still the
top overseas destination for companies. We see the
sheer consumer demand here, with 1.4 billion people now, and we cannot neglect it, says Kurt Keller,
president of Asia Pacic for Cleveland-based Parker
Hannin, which makes parts for planes and bulldozers. Dozens of companies say the same. For the most
part, even companies under pressure arent leaving.
Shareholders anywhere else in the world wouldnt
understand if you did, says Adil Husain, who runs
a consultancy in Shanghai advising multinationals.
But Western execs wonder whether the current
crackdown represents the new normal or a crisis
to be endured. I doubt this could go on for more
than two, three years, says CJ Liu, a former VP of
Nokia China who runs an executive consultancy in
Beijing. This is the Chinese waythe political and
social reforms come and go and come and go. For
the moment, foreigners are hunkered down, waiting
for it to pass.

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FORTUNE
40
UNDER
40

96 Lyndon
Rive of
SolarCity
E\ %ULDQ
'XPDLQH
107 Sarah
Kauss
of Swell
E\ 'DQLHO
5REHUWV
110 Photo
Portfolio
121 The List
130 Q&A
With
Ben Rhodes
E\ 7RU\
1HZP\HU

What is Fortunes annual 40 Under 40 list all about? For

starters, try power, inuence, and entrepreneurial risktaking. Our 2014 stars have achieved the rst two by
thoroughly embracing the last. And theyve done it at a
very young age. To meet this talented bunch, open the
foldout on page 121. Then get to know Mr. Sunshine,
Lyndon Rive of SolarCity (No. 15), whos betting big on
solar power; hang with deputy national security adviser
Ben Rhodes (No. 13), who crafts the rhetoric of President
Obama; and learn how Sarah Kauss of Swell (No. 36)
turned a simple water bottle into a must-have accessory.
Finally, check out Fortune.com over the next few weeks
for still more stories of our 40 Under 40 crew.
ILLUSTRATION BY JORDAN METCALF

FORTUNE.COM

95

FORTUNE
40
UNDER
40

Mr.
SUNSHINE
In the lobby of SolarCitys glass and
stone headquarters in San Mateo,
Calif., six young men in Dockers and
solid shirtsSilicon Valleys uniform
sit waiting, glued to their smartphone
screens. A middle-aged manager
ambles through a door into the waiting area and announces, Im here
for the new hires. All six stand.
This is a typical day at SolarCity,
which is hiring more than 350 engineers, technicians, and salespeople
a month and now employs a total of
7,500, more than Facebook. Launched
eight years ago, the company has
become the nations largest installer of residential solar systems. So
far SolarCity has installed systems
for more than 140,000 customers
(its No. 2 in commercial installations), and its sales, which doubled
in the latest quarter from the year
before, are on track to hit $250million in 2014, according to Credit
Suisse. Wall Street has noticed.
Since going public two years ago,
the company has seen its stock jump
from $8 a share to a recent price
of $59.62giving it a market cap of
$5.3 billioneven though it has yet
to post a prot. (It is reinvesting all
its cash ow in growth.)
With economies of scale the cost of
solar power has plunged much faster than many people expectedand
some are actually arguing that solar will become cheaper than fossil

FORTUNE.COM

96

LYNDON RIVE
THINKS SOLAR
POWER CAN
OVERTAKE
FOSSIL FUELS,
ONE ROOFTOP
AT A TIME.
SOME SAY
SOLARCITYS
CEO IS DREAMINGBUT
THATS WHAT
THEY SAID
ABOUT HIS
COUSIN
ELON MUSK.

BY BRIAN DUMAINE

PHOTOGRAPHS BY
GREGG SEGAL

RANK

15
Rive before
photovoltaic
panels at the
SolarCity
warehouse
in Foster
City, Calif.

NO. 15 LYNDON RIVE

A SolarCity
warehouse
in Foster
City, Calif.

fuels within the next few years. Now the difference is only
about 25% after subsidies, a margin so small that people like
Lyndon Rive, the co-founder and CEO of SolarCity, can taste
victory. As he stated atly in an exclusive interview with
Fortune: The core mission of the company is selling clean
energy at a lower cost than fossil fuels. Period.
The question is, How does he get there? Can he? Is there
snake-oil salesmanship afoot? Some of the shorts seem
to think sothey now hold 22% of the oat of SolarCitys
stock. On the one hand, Rive is a guy who as a teenager ran
a homeopathic-medicine business, which really is snake oil
in the modern sense. On the other, hes part of an illustrious
business dynasty as the cousin of Elon Musk, who was himself
dismissed in the early days of Tesla as a hype artist, and who
made doubters eat their words.
Solar power still amounts to less than 1% of the nations
electrical-generating capacitycoal produces about 40%
and its proportion will stay in the low single digits until it
becomes cheaper than fossil fuels. Rive, a hyperenergetic,
fast-talking 37-year-old, says he has a plan to get there, which
includes building one of the worlds largest solar-panel plants
in Buffaloa move even many of his supporters say is crazy
at a time when solar manufacturers have been struggling. He
has also sped up the time to install a solar system on a house

FORTUNE.COM

98

from two days to, typically, a half-day, and is slicing the cost
of acquiring customers. Says Rive (rhymes with ve), a
rough-hewn executive who favors shirts with the yellowand-white SolarCity logo on the pocket: The future will be
primarily solar. Just do the math. The industry is growing at
40% to 50% a year. At that rate 50% of our electricity will
be solar in 15 years. That may sound as though hes smoking something, but in September the International Energy
Agency, a group not known for its green leanings, issued a
report predicting that by mid-century, solar would be the
dominant source of our electricity, accounting for 27% of
productionmore than coal, oil, wind, or anything else.
Perhaps better than anyone, Rive understands that this
wont be easy. SolarCitys success so far has come quickly.
Last year it controlled about a third of this $8 billion business. Now great forces are lining up against him: a utility
industry threatened by a technology that is siphoning off
customers, and the gradual expiration of federal subsidies
for solar. Little wonder that short-sellers are circling.
Saved by Underwater Hockey

rive comes from a long line of South African adventurers.

His great-grandmother was the rst female chiropractor in
South Africa, and his grandfather was an African explorer.

When he was in high school in Pretoria, Rive started a business distributing homeopathic medicines. At 17, he got into
trouble with his principal for skipping classes. According to
Rive, the principal thought he was goong off and called him
into his office to threaten expulsion. Rive said he couldnt go to
school because he had to run the company: I showed him my
nancials, recalls Rive, and I said, Let me get this straight.
You want me to leave all this so I can nish high school, go to
college, and then get a job where, if Im lucky, Ill be making
one-quarter of what Im making now? They made a deal:
Rive could stop attending classes and graduate if he could pass
his exams. He did.
Rives mother and Elon Musks mother were twins.
Muska founder of PayPal, SpaceX, and Teslais the chairman of SolarCity and owns 22.5% of its stock. In the late
1990s the family saw opportunity in America, and Musk
was the rst member to leave South Africa for California.
Then Rives mother left, and then his brothers, and nally
he followed in 2000 with a bankroll he had made from his
homeopathy business. With his brother Peter, with whom he
was later to found SolarCity, he launched an IT outsourcing

On their way to Burning Man in an RV, Musk set his cousin Rive
on a new path with a one-word suggestion: solar.

nasdaq: m a rk von holdena p

Top: Lyndon Rive (with puck) playing underwater hockey; above (from
left): SolarCity COO Peter Rive, chairman Elon Musk, and CEO Lyndon
Rive at Nasdaq exchange for the companys IPO on Dec. 13, 2012

software company called Everdream.

Rives strategy in starting a business
is to seek out a niche. He saw that players like IBM and Hewlett-Packard were
doing IT outsourcing for big corporations but sensed there was an opening
to service PCs and laptops for smaller
companies. After surviving the dotcom
meltdown in 2001, Rive built Everdream into a thriving business. Then,
in 2004, Rive and his cousin Elon were
driving to that geek lollapalooza Burning Man in an RV, and he told Elon
that he was sick of the grind of doing
IT support. Musk simply said to him:
solarsort of like Dustin Hoffman
being told plastics in The Graduate.
Only this time the result was better.
When Rive and his brother started
planning the business in a spare bedroom at Peters San Francisco house,
they searched for another niche to ll.
We spent two years looking on the
value chain, Lyndon recalls. At the
time most people were focused on solar
manufacturing and almost no one on
delivery. We started the company with
the idea of making solar affordable. At
that time U.S. and foreign manufacturers of solar panels abounded, but no
major installer existedjust mom-andpop players. By the time Dell bought
Everdream in 2007 for $120 million,
Rive had already launched SolarCity.
Its rst official day was July 4, 2006, to
symbolize independence from fossil fuel.
If it werent for a twist of fate a few
years earlier, Rive wouldnt have been
around to start SolarCity at all. He and
his wife, Madeleine, are underwater
hockey players. The sport is like ice
hockey except the checking and scoring
take place at the bottom of a swimming
pool. Two teams of six players hold
their breath for as long as they can and
maneuver a three-pound puck around
the pool using a footlong stick.
Rive and his wife were in the U.S. on
J-1 visas that were running out. It was
right after the 9/11 attacks, and the
Feds were not renewing many visas, so
the Rives were about to be deported.
Around that time they happened to
October 27, 2014

NO. 15 LYNDON RIVE

attend a practice session in San Jose, where they

met an Asian swimming coach who explained
that she got her visa through a clause in the immigration law that allowed athletes, musicians,
and actors who had exceptional ability to stay.
Both Lyndon and Madeleine applied, but only
Madeleine, who had played for both the U.S. and
South African national teams and had won many
national competitions, was granted a visa. She
was better than I was, admits Rive. As a spouse,
he was allowed to remain in the country to practice his entrepreneurial skills.
Bringing Power to the People

FORTUNE.COM

100

How investors can buy a

piece of the solar boom.
SolarCity eats capital.
Lots of it. This year the company will need to raise about
$1.5billion to nance its solar
installations. Until now it has
raised most of its funds from
big banks and corporate investors such as Google. SolarCity
typically pays these investors
an 8% to 9% return on their
investment. Recently Rive decided that the time was right to
securitize his solar installations.
Think of solar bonds as
mortgage-backed securities,
only withone assumesa
more dependable cash ow.
SolarCitys bundled securities
are backed by 20-year solar
leases held by homeowners,
who pay their electric bills to
SolarCity instead of to a utility.
Solar bondholders are investing in this cash ow.
Unlike mortgage-backed
securities, solar bundles do
not include subprime loans.
For homeowners to qualify for
nancing, they must have a
FICO score of at least 680. In
July the institutional investors
that bought $201million of
SolarCity securities received
4.3% in annual interest. Says
Nat Kreamer, head of the Solar
Energy Industries Association: Securitization is driving
down the cost of capital and
increasing its availability, and
thats the No. 1 priority of the

U.S. solar industry.

So far SolarCitys securities
are being sold only to socalled qualied investors
wealthy individuals and
institutions. The company also
plans to offer solar-backed
securities to retail investors. In
December, SolarCity acquired
Common Assets, a web-based
investment platform where
individuals and organizations
will be able to participate
directly in solar investments.
There are risks. Interest
rates are at historic lows, and
a sharp spike in rates could
drop the value of solar bonds.
Also, though consumers typically stop paying their utility
bills last, its not clear what the
default rate on their monthly
payments might beand
if SolarCity should ever go
out of business, who would
be around to collect those
monthly fees?
SolarCity CEO Lyndon
Rive believes that the risks
are minimal and that solar
bonds could supercharge the
rate of adoption of this clean
technology.
Rives timing might be right.
Some university endowments
are considering divesting
fossil-fuel stocks. Investors
everywhere are searching for
higher yields. It could be a
powerful combination.

i l l u s t r a t io n b y NAME HERE

patr ick t. fa llonbloomberg

the notion that solar power could overtake

fossil fuels is disputed, of course, by big oil
companies like Exxon Mobil and Shell. Exxons
research shows that 75% of the worlds energy
will still come from fossil fuels in 2040. After all,
$28 trillionyes, thats trillion with a tworth
of oil, gas, and coal remains underground.
Rive argues that it should stay underground,
that the oil majors look at the world through
petroleum-coated lenses, and that the benets of
solar are so obvious that once the price becomes
more competitive, fossil-fuel use will plunge. A
carbon tax, which Rive favors, would hasten the
adoption of solar, but he isnt waiting around for
Washington to act.
A lot of investors are betting that his vision
is right. The research rm Mercom Capital
Group says that private equity rms and venture
capitalists are on pace to provide $5 billion in
nancing this year for residential and commercial
solar projects, up from $3.3 billion in 2013. Nat
Kreamer, chairman of the Solar Energy Industries
Association and CEO of Clean Power Finance,
which provides funding for solar projects, lays
out the potential. Of the 125 million houses in the
U.S., about 56 million are suitable for solar (some
are too shaded or have other impediments).
Kreamer says that adds up to a $1 trillion untapped market for solar installers like SolarCity.
Add in warehouses, factories, and other commercial rooftops, and thats another $200 billion.
In Rives vision, American homesSolarCity
has yet to venture outside the U.S.will not only
generate their own clean electricity but also have
a Tesla plugged into a solar-powered charger in
the garage. In addition, homeowners will have
the option to store electricity generated from
solar, solving the sticky problem of what to do

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NO. 15 LYNDON RIVE

SOLAR
PRICES
PLUNGE

Making Solar Cheaper Than Fossil Fuels

Since the 1970s

the cost of
photovoltaic
panels has
decreased
from nearly
$80 a watt to
an average
of 63, driving
a solar boom
worldwide.

New York Gov. Andrew Cuomo with Rive at the groundbreaking for SolarCitys manufacturing plant in Buffalo

FORTUNE.COM

102

$80
1976

$79.40
70

60

50

COST OF
SOLAR
PANEL
($ per watt)

40

30

20

2014

70
10
2030

30
0

photo: n ys gov er nors office; gr a phic source: paul m aycock; bnef

after the sun sets. The company has a pilot project offering small backup storage batteries made
by Tesla that, like emergency backup generators,
allow homeowners to run some appliances and
lights if the power goes out (they could also help
utilities manage loads). The batteries are still too
expensive to provide enough storage to run all
the lights and appliances in your house all night,
but affordability might not be too far off. Musks
Tesla is building a $5 billion battery plant in
Reno that could achieve the economies of scale to
make home storage affordable.
Standing in the way of Rives vision are utilities
that fear that the technology is putting pressure on their century-old business model of big
centralized energy generation. Some utilities are
starting to resist the implementation of solar because they say that while their costs for operating
power plants and grid systems remain the same,
they are beginning to lose revenues from solar
customers who no longer need to buy energy from
them. Arizona, for example, has proposed taxing
solar installations. SolarCity is ghting back, suing to keep the state from imposing grid levies.
Dickon Pinner, a McKinsey director who heads
up the consulting rms clean-tech practice,
says, The utilities for the rst time are feeling
that their business model is being threatened
by distributed-power systems like solar and are
starting to respond.
The key is regulation. Most utilities operate in
a monopoly market and enjoy a regulated 10%
return on their invested equity. Rive calls this insane. As long as utilities stay regulated, its hard to
see what would force them to innovate on cost and
technology.

in the long run, all this wrangling with utilities wont do Rive
much good if he cant beat them on
price. Installation companies such
as SolarCity have two basic costs.
One is solar panels themselves.
The other is the cost of selling and
installing them, which includes
electrical hardware, labor, permits,
interest payments, and overhead
such as customer acquisition.
The good news is that over the
past few years the price of solar
power has dropped dramatically
the cost of residential installations
has fallen 60% since 2000, according to the Lawrence Berkeley
National Laboratory. Even so, an
installation on a typical house still
costs about $27,000. Thats a lot
of money for most homeowners to
shell out upfront. The innovation
that has allowed the industry to
take off is no-money-down solar
leases. Today, according to Green
Tech Media Research, some 70% of
residential systems being installed
are nanced with leases. (The rest
are bought outright or with loans.)
With a lease (or a variant known
as a power purchase agreement),
the homeowner essentially buys
electricity from the installer, which
owns the equipment and does the
maintenance. Deals usually pencil
out to about a 10% to 20% savings
on a typical utility bill. The homeowner gets clean, cheaper energy
for 20 years. The installer gets a
20-year dependable cash ow.
In most of California, SolarCity
now charges its residential solar
customers a at rate of 15 per
kilowatt-hourone of the lowest in
the solar industry for the residential market. (A kilowatt-hour is
enough juice to run 10 100-watt
bulbs for an hour.) But thats not
good enough. Today electricity in
the U.S. costs about 12 a kilowatthour. That 12, however, is an average price. In some coal states in the

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NO. 15 LYNDON RIVE

$80

SolarCity stock price

60

$59.0

40
20
0
2013

2014

$350 million and $400 million. The next facility Rive plans to
build, he says, will have a production capacity of between ve
and 10 gigawatts. Now you get true economies of scale, he
says. SolarCity broke ground on the factory in late September,
aided by $750 million in subsidies from the State of New York.
Rive argues that when the factory is up and running it will
be able to produce high-output PV cells at about 55 a watt
about a 20% reduction from current prices, which will help Rive
get closer to his goal of making solar cheaper than fossil fuels.
Squeezing Costs

FORTUNE.COM

104

in a suburban neighborhood in San Mateo, I watch Victor

Fernandez, the foreman of a SolarCity installation crew,
direct workmen placing rectangular black panels on the
roof of a ranch house. The workmen are using an innovative
installation system devised by a company called ZEP, which
SolarCity acquired last year for $155 million. Before ZEP,
long metal rails were attached to a roof, and then each panel
was bolted to the rails. With ZEPs system the installer
drives a few bolts through xtures into the roof, and then
the panels snap on like Legos. Says Fernandez: We can now
install two systems a day, as opposed to one every two days
using the old system.
As SolarCity races to cut its costs, some investors are starting
to wonder about the companys business model. As weve seen,
SolarCity sells 20-year leases to its solar customers. GAAP
rules dont allow the company to recognize all the income from
a 20-year lease in the year its sold. Investors, then, must value
SolarCity stock based on the present value of that 20 years
of cash ow from leases. The amount of cash ow, however,
depends on some important assumptions. If someone sells his
home, will the new buyers be willing to assume the solar lease?
If not, whats the value of a used solar panel? The company is
saying most homebuyers will assume the lease, but the shorts
believe SolarCity is being optimistic. Also, a signicant part
of the stocks valuation is based on solar deals that have been
booked but not delivered. Customers can back out of a contract
without obligation, raising the question, in some minds, of
exactly how many of those contracts are real.
The shorts talk about another issue: The Treasury Department is investigating whether SolarCity and other solar companies inated the value of their installations to drive more
tax credits to their investors. SolarCity says it has followed all
the rules of the tax credit program.
Rive anticipates that his company will keep doubling in
size for the foreseeable future. Thats hard to do for any company as it gets bigger, and the threat of competitionarchrival Vivint raised $330 million in its October IPOcould
make his task harder. But Rive says hed like to see so much
solar installed that his business is no longer a niche. In that
scenario humanity wins. Right now it isnt winning. And
losing is something that Riveand his competitive clan
cant stand.
FEEDBACK bdumaine@fortunemail.com

gr a phic source: bloomberg

Midwest and the South, electricity costs even less than that,
and it will be a long time before solar is competitive in those
regions. In the 14 states where SolarCity operates (including
California, Arizona, and Massachusetts), the average price is
more than 15.
Complicating the price picture is that starting in 2017,
the 30% federal investment tax credit (ITC) is scheduled to
drop to 10%. (Some in the industry believe the 30% rate will
be extended, but SolarCity cant count on that happening.)
To stay even at a 10% subsidy, the company will have to cut
costs about 13%. By 2020, Rive aims to get another 20% or
so of costs out, which would let him hit that target of 12 a
kilowatt-hour without subsidies.
How is he going to do it? One place SolarCity is looking for cost savings is in the solar panels themselves. Over
the past few years the cost of photovoltaic solar panels
has dropped some 70%. Starting about a decade ago, the
Chinese, who now control 90% of the photovoltaic (PV)
manufacturing market, built up huge overcapacity that has
been driving down prices. Over the past two or three years a
bloody shakeout has occurred, with many solar manufacturers going bankrupt, including some in the U.S. (like Solyndra, which received $535 million in Department of Energy
loan guarantees). Today the price of panels has stabilized
at about 70 a watt, according to Bloomberg New Energy
Finance. To put that in perspective, in the mid-1970s, PV
panels cost $79 a watt. With economies of scale theres still a
lot of room to drive down the price of the panels.
In June, Rive shocked the solar world by announcing that
SolarCity would acquire Silevo, a California maker of solar
panels, for $200 million in shares, plus another $150 million
if cost and volume targets were met. Many in the industry
thought this was either a gutsy move or an insane one. Why
would SolarCity, which now buys its panels from multiple
vendors, want to get into a cutthroat business dominated
by the Chinese, where prots were negligible at best? First,
Rive is worried about supply. At its current growth rate
SolarCity will need enough panels to produce two gigawatts
of electricity by 2017. Using Silevos technology, SolarCity is
building a massive manufacturing plant in Buffalo that will
be able to make about one gigawatt worth of panels a year.
Raymond James analysts estimate that it will cost between

BOREDOM
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Nowhere does it state that on board must equal being bored. Thanks to
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devices. Movies. Shows. Even live TV. In fact, its the most entertainment in the
sky. No wonder more people choose Delta than any other airline.

How Swell Swelled

SARAH KAUSS (No. 36) WASNT CUT OUT
FOR TAX AUDITING. SO THE HBS GRAD DECIDED
TO MAKE A WATER BOTTLE THAT WOULD
BE COOL ENOUGH TO CONVERT USERS OF
PLASTIC. SHE HAS A HIT ON HER HANDS.
BY DANIEL ROBERTS

ITS HAPPENED A FEW TIMES NOW: Sarah Kauss will be on an

important call on speakerphone when a bird suddenly pops out

from her office wall and makes a shrill noise. I just say, Oh, God,
thats our clock, says Kauss. It happened once during a call with
the White House and several times with Starbucksnot ideal. But
those are the kinds of calls Kauss has been elding ever since the
water bottle she created went as viral as perhaps any water bottle
can. You may not have heard of Swell bottles, but chances are

FORTUNE.COM
p ho t o g r a p h b y PATRICK JAMES MILLER

107

NO. 36 SARAH KAUSS

youve seen them. The sleek, stainless-steel vessels have become

something of a sensation since Kauss rst started selling them
in 2010. Now theyre available almost everywhere the styleconscious roam: Theyre in all U.S. J. Crews, Container Stores,
and Nordstroms. Theyre at hard-to-crack Neiman Marcus
(online) and in style-snob emporiums like Jack Spade. They
sold out in a limited run in Starbucks.
The list goes on. Ellen DeGeneres showed them on air and
stocked them in her shows gift store. Tom Hanks ordered them
for his production company. Facebook ordered 500 of them for
employees and clients. For the past two years, Swell bottles were
in every gift bag at the TED conference. It may just be a water
bottle, but it is the sine qua non of water bottlessuddenly a
feverish must-be-associated-with thing among a certain stylish,
in-the-know set. The company expects to sell close to 2 million of
them this year, and Kauss says she anticipates revenue of more
than $10 million, triple the number from last year.
The story of how Swell became a sensation is a combination of the right product at the right time with the right
messageand an entrepreneur who took a risk. In that way
its a classic 40 Under 40 tale. But Kauss, 39, isnt a drop-outof-college-and-make-a-fast-billion kind of entrepreneur. Shes
the opposite, starting her business only after toiling for more
than a decade in the staid, traditional worlds of tax auditing,
consulting, and real estate.
After studying accounting at the University of Colorado at
Boulder, she worked as a CPA for Ernst & Young, rst in Denver
and then in L.A. But when she started working with clients
from startups like Pets.com and GeoCities, she realized she was
more interested in entrepreneurship than in accounting, and
she packed up for Harvard Business School with plans to start
her own company. Then 9/11which happened her rst week
in Cambridge, Mass.put those plans on hold, and instead she
found her way into consulting and real estate.
In 2009, back at HBS for her ve-year reunion, Kauss attended
a panel about the global clean-water crisis. Several months later,
while on a hike in Arizona with her mother, all she had for water
was a cheap, thin metal bottle that had warmed up in the sun,
and she suddenly thought, Why not create a more upscale, fashionable, reusable bottle that would keep liquid cool? Working
from her New York apartment, she hired an outside designer,
found a manufacturer in China, and within a few months had a
prototype: a double-insulated, stainless-steel bottle in a single
color, ocean blue. A share of the prots would go to benet a
wide range of mainly water-related charities. (Kauss started the
company with her personal savings and still owns 100% of it.)
Kauss hustled the way any entrepreneur would, sending
samples to magazine editors and anyone she knew, bringing
some to her old digs at Harvard Business School. In 2010,
HBS became her rst customer, buying bottles to give out to all
incoming students. A few months later O, the Oprah Magazine
wanted to put Swell on its coveted O list of recommended

FORTUNE.COM

108

products. It asked for more colors to show in the photograph,

but the bottles came only in blue. Kauss scrambled, buying a
Pantone book and quickly picking a few more hues; versions
in multiple colors were born.
The Oprah effect was enormous. Soon SFMOMAs museum
store and New Yorks Guggenheim Store came calling, and in
2012, Kauss landed her rst big national account, Crate &
Barrel, which stocked the bottles for the holiday season. Then
began the slow, methodical process of building up accounts:
Swell got into J. Crew storesrst just its Crewcuts kids division, then the Mens Store, then all stores in the U.S. Later
came Neiman Marcus and Nordstrom. And then: Starbucks.
The coffee giant started small with Swell, stocking them in
a limited number of stores in Atlanta and Austin. Without any
special signage, they were a hit; baristas were becoming fans and
recommending them to customers. Starbucks wrote Kauss about
its plans to expand. The email I got from Starbucks last yearI
cant tell you how many exclamation points were in it, she says.
There has been the requisite celebrity love too. The actor Guy
Pearce is a particularly fervent fan. After the blue one he was
carrying on set made it into his movie The Rover, he ordered 70
for the cast and crew. Then he put a red one in another movie,
Results. Im certainly not into product placement for the sake
of it, Pearce tells Fortune, but I love the bottles and the companys whole ethos. Last month the actress Kaley Cuoco from
The Big Bang Theory posted an Instagram photo of herself
holding up a hot-pink Swell bottle to a horses mouth with the
hashtag #obsessedwiththisbottle. The photo got 39,000 likes
and crashed Swells website.
Its hard to say just why Swell bottles have taken off the way
they have. Environmentally friendly water bottles are nothing
new, not even double-layered ones. One reason could be their
sleek shapethe modern design is inuenced by old-fashioned
milk bottlesand the colors and patterns the bottles come in.
(To date, Swell has put out 96 different designs, from solids to
hand-dipped, swirly motifs to a woodgrain line.) The bottles
keep liquid cold for 24 hours and hot for 12, and theyre priced
more like a fashion accessory: from $25 for nine ounces to $45
for 25 ounces, which holds a whole bottle of wine.
All told, Kauss has sold some 4 million bottles to date, which
has earned her the right to be picky. She turned down a big-box
discount chain she thought would water down the brand and
turned down a certain fast-food chain with conservative values.
(We dont like what they stand for, she says.) Next up: Look for
more Swell in more Starbucks stores, and dont be surprised
to eventually see non-water-bottle products.
The more pressing project is moving to new digs. With
22 employees, Swells current headquarters, in a Manhattan
brownstone, are too small. The company is staffing up so
quickly that three new people hired in September had to start
by working remotely.
The cuckoo clock, Kauss says, is coming with her.
FEEDBACK daniel_roberts@fortune.com

A bag full of
farm-to-table vegetables,
because its responsible.

A grocery bag full of

free-range chicken,
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Another bag full of

organic fruit,
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And a can of
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40 UNDER 40
PORTFOLIO

The 40 Under 40
work crazy hard.
But they know
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to recharge. This
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photographs captures some of them
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(mini) golf course.

Jan Koum
NO. 5 At boxing
SUDFWLFH DW &&.
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p ho t o g r a p h b y
r ob y n t w o m e y

FORTUNE.COM

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October 27, 2014

40 UNDER 40 PORTFOLIO

Vijaya
Gadde
NO. 28 :DONLQJ WKH

WUDLOV DW %LJ 6XU &DOLI

p ho t o g r a p h b y
m athew scott

Mason
Morfit
NO. 10 Practicing

DW WKH %LUG 6FKRRO

RI 0XVLF LQ 6DQ
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p ho t o g r a p h b y
p e t e r b oh l e r

FORTUNE.COM

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Gary
Vaynerchuk
NO. 40 7DLOJDWLQJ DW
0HW/LIH 6WDGLXP
(DVW 5XWKHUIRUG 1-
p ho t o g r a p h b y
m a r k pet er son

Josh
Tetrick
NO. 22 ,Q %HUQDO
+HLJKWV 6DQ
)UDQFLVFR ZLWK
KLV GRJ -DNH
p ho t o g r a p h b y
rob y n t w om e y

October 27, 2014

40 UNDER 40 PORTFOLIO

Ivanka
Trump
NO. 33 $W WKH %RWWHJD

GHO 9LQR UHVWDXUDQW

in Manhattan
p ho t o g r a p h b y
ben ba k er

FORTUNE.COM

114

October 27, 2014

40 UNDER 40 PORTFOLIO

Hannah
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NO. 32 2Q WKH 1HZ
<RUN VWUHHW VHW DW
WKH 6RQ\ 3LFWXUHV
ORW LQ /RV $QJHOHV
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m ic h a e l l e w i s

Peter
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NO. 17 +LWWLQJ WKH
OLQNV ZLWK KLV
FKLOGUHQ LQ %ULGJHKDPSWRQ 1<
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ben stechschu lt e

FORTUNE.COM

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40 UNDER 40 PORTFOLIO

George
Logothetis
NO. 31 $W KRPH
in Manhattan
p ho t o g r a p h b y
ben ba k er

Robert
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FORTUNE
40
UNDER
40

BY
DANIEL
ROBERTS
RUPALI ARORA
MICHAEL
CASEY
SCOTT
CENDROWSKI
BRIAN
DUMAINE
CAROLINE
FAIRCHILD
ERIKA FRY
LEIGH
GALLAGHER
STEPHEN
GANDEL
ROBERT
HACKETT
MEHBOOB
JEELANI

BETH KOWITT

What does it take to disrupt, to lead, to innovate? For Jan

Koum it was coming up with a texting app so popular
that Facebook had to have itfor $19billion. For Elizabeth Holmes it was a childhood fear of getting her blood
drawn. For Andriy Kobolyev, CEO of Ukrainian gas giant
Naftogaz, its the ne art of persuading Gazprom to keep
the gas owingwhile getting his countrymen to stop
sleeping with their windows open. As always, youll nd
names you know (Zuckerberg, Mayer) and some you
dont (see Kobolyev). Many are in the tech sector, but
theyre also in nance, fashion, lm, real estate, and
even eggless mayonnaise. This year there are a surprising number of legacies, perhaps reecting how hard
it is to get ahead in todays economy without the right
connections (though for a true rags-to-riches tale, look
no further than Koum). One thing they have in common:
They dont like limits, and they dont like being told no.
Get ready to meet them, and then tell us what you think
on Twitter with #Fortune40.

COLLEEN
LEAHEY
MICHAL
LEV-RAM
JP
MANGALINDAN
TORY
NEWMYER
ROGER
PARLOFF
ANNE
VANDERMEY
AND
JEN
WIECZNER

ILLUSTRATION BY JORDAN METCALF

FORTUNE.COM

121

Mark Zuckerberg, 30

TIE

Travis Kalanick, 38

C0-FOUNDER AND CEO, UBER

Brian Chesky, 33

CO-FOUNDER AND CEO, AIRBNB

Theyre revolutionizing different

industries, but this was the year
Kalanick and Chesky became the
gureheads for the ongoing clash
between the potential of the Internet economy and the rules and
regulations of the old economy. In
the Internet economy the web can
connect us to networks in which
we can help ourselves to extra
inventory, whether its a spare
bedroom in someones house or a
driver for hire idling between jobs.
In the real-world economy, that
ability can collide with entrenched
interests and decades-old laws
and regulations, as these two
CEOs are nding. Kalanicks style
is to enter a market and ask questions later; Chesky is more diplomatic. What they have in common:
growth. Uber currently serves
more than 170 cities (you can now
Uber in Hyderabad and Abu Dhabi);
in June it raised $1.2billion, at
a valuation of $17billion. Airbnb
has provided shelter for 20 million people; on its peak night this
summer, 425,000 people stayed
in an Airbnb somewhere in the
world. There are other challenges
too, like accusations of Ubers
bad sportsmanship with rival Lyft.
(Uber recently hired Obama campaign manager David Plouffe to
head policy and strategy.) But both
are undaunted. We want to be
regulated, Chesky insists, because we want to be recognized.

FOUNDER AND CEO, FACEBOOK

The social
media giant
isnt adding
users as fast
as it used to,
but its minting money from
them, especially in mobile:
In the second quarter of
this year, mobile advertising accounted for almost
two-thirds of ad revenue,
and the number of users
checking in on mobile devices grew to 650 million.

Matteo Renzi, 39

PRIME MINISTER, ITALY

The youngest
Prime Minister
in Italian history came into
ofce on a
burst of promises, pledging
to break ties with labor
and buck Europes zeal for
austerity. His agenda faces
resistance in Parliament
and a triple-dip recession
complicated by a crushing
debt load. But Renzi is vowing to press on, marshaling
the optimism that swept
him to power.

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123

Jan Koum, 38
CO-FOUNDER AND CEO,
WHATSAPP
The Ukrainian-born
engineer toiled at Yahoo
for nearly a decade before
developing WhatsApp, a
simple, free mobile app
that works a lot like traditional texting. Especially
popular overseas, the
startup ballooned to hundreds of millions of users
and in February Facebook,
which had turned Koum
down for a job years
before, bought it for $19
billion. It was the most
expensive acquisition
ever for a venture-backed
startup. Koum signed the
deal papers at the site of
the social-services ofce
where he once stood in
line to collect food stamps.

Andriy Kobolyev, 36

CEO, NAFTOGAZ
Kobolyev
took over at
Ukraines
state-owned
gas company
in March, a week after his
predecessor was arrested
on corruption charges and
in the midst of the countrysconict with Russia, its
main gas supplier. Add to
those combustible politics
fears over Europes energy
security (which relies on
Naftogaz pipes), Ukraines
$5.3 billion in unpaid gas
billsRussias Gazprom
cut its supply in Juneand
residents so used to cheap
heat they keep windows
open all year. Kobolyev now
needs to shore up the gas
supply before winter.

40 UNDER 40 / JESSE COHN SPEAKS KOREAN PROFICIENTLY.

Marissa Mayer, 39
PRESIDENT AND CEO, YAHOO
No one ever
said turning
around Yahoo
would be
easy, and
Mayer is facing restless
investors as ad revenue
remains challenged and in
the wake of the sale of part
of its stake in Chinese ecommerce goliath Alibaba.
The sale earned $9.4
billion for Yahooa portion of which Mayer may
use to add to the 40 or so
acquisitions she has made
in the past two years. But
investors are questioning
her ability to create value
with that strategy: The
companys core business
is now valued at less than
its stakes in Alibaba and
Yahoo Japan.

MICROSOFT IS MASON MORFITS SIXTH BOARD SEAT.

7
Tom Farley, 38
PRESIDENT, NYSE

When he was just 30,

Farley was named
the head of the New
York Board of Trade.
It was a tough gig:
The NYBOT was an
also-ran exchange
that did most trading on its physical
oor as the rest of
Wall Street was going
electronicand being
young and tech-savvy
won Farley immediate enemies among
its old-school traders.
But ve years later,
trading volume on the
NYBOTrenamed
ICE Futures U.S.
had doubled and
earnings were up sixfold. Farleys new assignment is exponentially bigger and more
prominent: In May he
was named president
of the New York Stock
Exchange. His plan
to keep the old man
of Wall Street relevant: Modernize and
simplify everything,
from trading systems
to office space. Hes
already overhauled
management. Says
Jeffrey Sprecher, CEO
of the Intercontinental Exchange, which
last year bought the
NYSE: Its his show.

8
CO-FOUNDER AND CEO, SOLARCITY

1. kalanick: brent lewingetty images; chesky: suhaimi abdullahgetty images; 2. david ramosgetty images; 3. laura lezzagetty images; 4. yuriy kirnichnyafp/getty images; 6. eric piermontafp/getty images; 9. steve jennings
getty images; 11. dorsey: jeff kowalskygetty images; silbermann: david paul morrisgetty images; 13. mandel nganafp/getty images; 15. pat greenhousegetty images

Never believe that if you just had more experience you would be
better off. Instinct outweighs experience. Lyndon Rive,

Kevin Systrom, 30

CO-FOUNDER AND CEO,

INSTAGRAM
Snap-happy
Systrom has
just begun to
make good on
Mark Zuckerbergs $1billion bet on the
photo-sharing service,
rolling out its rst stab at
sponsored ads in the past
year. Since the acquisitionwhich paved the way
for Facebooks fatter bids
for upstarts like WhatsApp
($19 billion), Oculus VR
($2 billion), and Snapchat
($3billion)Instagram has
grown by about 10 times
in both size and audience:
It now has more than 200
million active monthly users
and some 150 employees. In scaling one of the
worlds most engrossing
and consistently downloaded apps, Systrom has
introduced fresh features
such as private messaging
with Instagram Direct and
new creative tools for photo
editing. He also scaled his
career up a few notches
when he was named to the
Wal-Mart board last month.

10

TIE

Jesse Cohn, 34

HEAD OF U.S. EQUITY ACTIVISM,

ELLIOTT MANAGEMENT
Cohn has led
three dozen
shareholder
campaigns
against tech
giants like Novell, Compuware, and EMC on behalf
of $25 billion hedge fund
Elliott, which created a new
role for Cohn dedicated to
shaking things up.

Mason Mort, 39
PRESIDENT, VALUEACT CAPITAL
Last year the
stock picker
produced a
lauded report
on how to x a
lumbering Microsoft. Behind the scenes, he rallied
support for a change at
the top of the tech giant
and got one: a new CEO.
This year Microsoft added
Mort to its board, making
him the companys youngest director by nearly a
decade.

11

Elizabeth Holmes, 30

FOUNDER AND CEO, THERANOS

Holmess revolutionary
blood analytics company
employs more than 500
people and is valued by
investors at about $9billion. Theranos performs
blood tests for a fraction
of the price charged by
competitors using a painless, patented method of
pricking a nger. Board
members include Henry
Kissinger, George Shultz,
two former senators, and a
range of other luminaries.

CO-FOUNDER AND CEO,

SQUARE; CO-FOUNDER
AND CHAIRMAN, TWITTER
Despite new
competition,
Dorseys
mobilepayment provider, Square, continues to
grow and is said to be raising capital at a $6 billion
valuation. (A much-hyped
IPO, however, has reportedly been delayed.) Dorsey
joined Disneys board last
year, and this summer
traveled to Ferguson, Mo.,
to document the demonstrations (via Twitter, of
course).

Ben Silbermann, 32

15

Nick Woodman, 39

FOUNDER AND CEO, GOPRO

What started
as Woodmans
desire to capture his own
athletic feats
led to a wearable, durable
camcorder and a selling
machine; the company
sold its 10 millionth GoPro
this year, and since its IPO
in June, GoPros stock has
more than tripled.

13

Ben Rhodes, 36
DEPUTY NATIONAL SECURITY
ADVISER, WHITE HOUSE
One of the
last charter
members of
Team Obama
still in the White
House, Rhodes channels
the President on foreign
affairsno easy task when
the world appears to be
melting down.

TIE

Jack Dorsey, 37

12

CO-FOUNDER AND CEO,

PINTEREST
His e-corkboard now
claims 30billion pins on
750 million
boards, and it has displaced
Facebook and YouTube
to become the top social
referrer to retail sites.

14

TIE

Evan Spiegel, 24

CO-FOUNDER AND CEO,

SNAPCHAT
A (now-settled)
lawsuit over
its ownership,
controversial
emails, and a
spurned $3 billion offer from
Facebook: The ephemeralmessaging app that Spiegel
co-founded and runs
has grown to 100 million
monthly usersand it has all
the xins for a movie script.

Emily White, 36

COO, SNAPCHAT
White helped
run local and
commerce
businesses
at Google
before leaving for Facebook
and then moving to the
newly acquired Instagram.
Last December she joined
Snapchat as COO, tasked
with helping to turn it into a
viable business. And shes
on the board of Lululemon.

Lyndon Rive, 37

CO-FOUNDER AND CEO,

SOLARCITY
The South
African native
(and cousin
of Tesla CEO
Elon Musk)
is co-founder and CEO of
SolarCity, the largest installer of solar panels in the
U.S. (see page42). The San
Mateo, Calif., companys
leasing revenue (the main
driver of its business) was
up 110% last quarter; after
going public in 2012 at $8 a
share, it traded recently at
$60, giving it a $5.5 billion
market value.

16

Raj Chetty, 35

ECONOMICS PROFESSOR,
HARVARD UNIVERSITY
Harvard academic Chetty,
who focuses on economic mobility, is on a
breakout streak. His work
on the value-added of
teachers helped win him a
MacArthur genius grant
in 2012, after Obama cited
his research in the State
of the Union address. Last
year he won the John Bates
Clark Medal (known as the
baby Nobel), given to
the best economist under
40. And he recently gave
the same presentation to
Obamas chief economic
adviser and to Republican
Congressman Paul Ryan
on the same day. Chetty
now oversees a staff of 10
researchers, a job he does
not take lightly: My biggest nightmare is always
that someone is going to
have made an error in the
thousands of lines of code
that are involved in these
projects and that feeds into
some public policy thing.

RAJ CHETTY GOT HIS PH.D. FROM HARVARD WHEN HE WAS 23.

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Anthony Watson, 37

CIO, NIKE

17

Peter Wallace, 39
SENIOR MANAGING DIRECTOR,
BLACKSTONE
Wallaces rst big investment pitch at Blackstone
opped. After the meeting
a colleague called Wallaces ideaa buyout
of AlliedBarton Security
Servicesdopey. Wallace persisted. Two months
later Blackstone bought
Allied, now expected to
reap more than $500million in prot for the rm.
That ability to think for
himself has won Wallace
lots of fans at Blackstone,
where hes one of the most
senior executives in its
buyout business. Its also
helped that his deals have
been huge successes. In
addition to Allied, Wallace
led Blackstones buyouts
of SeaWorld, the Weather
Channel, and Vivint Solar.
Wallace resisted going
into the family business:
Grandfather Mike was a
60Minutes correspondent;
father Chris is an anchor
on Fox News.

18

Olivia Gareld, 39
CEO, SEVERN TRENT
A year ago,
Gareld was
a top exec at
British Telecom, helming
its broadband division. This
year shes the newly installed CEO of Severn Trent,
the U.K.s third-largest publicly traded water company.
The move made Gareld
the youngest-ever female
CEO on the FTSE (and one
of just ve women) and
tracks her careers upward
trajectory: In 2013 she was
appointed to the board of
grocery giant Tesco.

The Londonborn former

chief information ofcer
of Europe,
Middle East, and global
operations at Barclays
moved westway westin
April to one of the top tech
jobs at Nike, where he has
already spearheaded a
big deal with Juniper Networks. The rare openly gay
executive in the C-suite of
a Fortune500 company,
Watson last year became
the rst non-U.S. citizen to
join the board of GLAAD.

20

22

Josh Tetrick, 34
CEO AND FOUNDER,
HAMPTON CREEK
Tetricks
Hampton
Creek is best
known for its
Just Mayo
brand of eggless mayonnaiseits the top-selling
mayo at Whole Foodsbut
hes on a bigger mission: to
create a new category
of food products made
from plants. The endeavor
has attracted big-name
investors like Li Ka-shing,
Peter Thiels Founders Fund,
Jerry Yang, and Khosla Ventures. Bill Gates has cited
Hampton Creek as one of
three companies leading the
reinvention of food.
Julie Smolyansky, 39

PRODUCER AND FOUNDER,

ANNAPURNA PICTURES
The notoriously shy
daughter of
Oracle founder
Larry, Megan
Ellison rst caught Hollywoods attention as an
executive producer on True
Grit in 2010. Her Annapurna
Pictures, launched in 2011,
has turned out a steady
stream of hits, and last year
she was the rst female
producer to have two lms
nominated for Best Picture
in the same year (American
Hustle and Her).

CEO AND PRESIDENT,

LIFEWAY FOODS
Sales of
Smolyanskys
Lifeway Foods,
the leading
U.S. maker of
yogurt-like ker, have been
on a tear: Gross sales hit
$109 million last year, up
from $12 million in 2002,
the year Smolyansky took
over after the death of her
father, Lifeways founder (in
the process she became the
youngest female CEO of a
public company). The energetic, Kiev-born Chicagoan
has invested heavily in R&D,
rolling out new products
like a childrens line, savory
avors, and frozen ker.

21

23

Megan Ellison, 28

Rahul Sharma, 37
CEO, MICROMAX
Micromax
started as an
IT software
company, but
Sharma hit on
a winning formula making
cheap cellphones with a
month-long battery life. In
ve years handset sales
have grown from 10,000
to 36million; 2013 revenue
hit $500 million. That
could get bigger now that
Micromax has a deal with
Google to make its sub$100 phones for the Indian
marketand Hugh Jackman as brand ambassador.

Delphine Arnault, 39

EVP, LOUIS VUITTON, LVMH

Sure, LVMH
is her fathers
company. But
Bernard Arnaults daughter has real business chops.
After working magic at Dior,
the McKinsey alum won a
top spot at LVMHs Louis
Vuitton brand last year. Her
eye for talent is considered
a key weapon in LVMHs
luxury arms race with Kering; she already helped woo
designer Nicolas Ghesquire as Vuittons creative
head. Many think shell get
her pres job one day.

40 UNDER 40 / JOSH TETRICK MEDITATES FOR 10 MINUTES EVERY MORNING.

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24

Tang Yan, 35

FOUNDER AND CEO, MOMO

Tang Yan calls his Chinese social

app, Momo, a combination of Snapchat and Tinder. And just like those
provocateurs, he tests the limits in
his country. Momo is huge in China,
ranking as one of the top social
apps, with 150 million registered
users (52 million active monthly)
since being released in 2011. Its
been called hormone-lled by
state media, but Tang says Momo
wasnt built for dating or onenighters. (Mo is part of a Chinese
word meaning stranger.) Rather,
its location-based system, which
lets users nd new friends nearby, is
targeted at Chinas big-city arrivals
who want to build a social circle. Of
course, many also want a partner:
Of the 900 million messages sent
a day, 600 million are between two
people and 5% are about hooking
up. (Momo also has many groups for
dating, sports, and entertainment.)
A move to the U.S. is likely next:
Tang has set up a subsidiary in San
Francisco.

17. bertrand roberts; 18. matt crossickpa wire; 20. alberto pizzoliafp/getty images; 21. kuni takahashigetty images; 22. tetrick: david paul morrisgetty images; smolyansky: d dipasupilgetty images;
23. jean-francois robert; 26. taylor hillgetty images; 28. & 35. david paul morrisgetty images; 30. stefanie keenangetty images; 32. kevin wintergetty images

19

TIE

25

TIE

Kevin Chou, 34

CO-FOUNDER AND CEO, KABAM

Chou has
built his
mobile gaming
company from
a tiny startup
to $360 million in revenue
and a $1 billion valuation.
The company pivoted from
social apps for sports fans
to gaming in 2009 after advertising revenue dried up.
Now its rocketing, teaming
with Hollywood studios
and making a big push into
Asia: Alibaba has invested
$120 million in the company;
Kabam will publish mobile
games on Alibaba Groups
mobile applications.

27

Sam Nazarian, 39
CEO, SBE

The IranianAmerican son

of Qualcomm
co-founder
Younes Nazarian made an early fortune in
wireless before pioneering
celebrity nightclubs in the
90s. Now he helms hospitality conglomerate SBE, a
collection of hotels, clubs,
and restaurants with revenue
approaching $500million.
His largest project to date,
the SLS hotel-casino in
Las Vegas, developed over
eight years at a cost of $800
million, opened in August.

Kunal Bahl, 31

CO-FOUNDER AND CEO,

SNAPDEAL
In less than
three years,
Bahls online
marketplace
(he co-founded
it with high school pal Rohit
Bansal) has exploded to
become Indias largest. The
eBay-backed company
nowhas 2,500 employees
and hit $1billion in sales this
year; Ratan Tata invested
personally in the company.
Unfazed by competition
from Amazons foray into
India, Bahl is doubling
down, expanding into online
education, automobiles,
and real estate.

26

Rebecca Minkoff, 33

CO-FOUNDER AND CREATIVE

DIRECTOR, REBECCA MINKOFF
The designers
leather-studded apparel
and handbags
regularly appear on the red carpet, but
its the Morning After Clutch
(MAC) that put Minkoff on
the map. Her company,
which she founded with
brother and CEO Uri in
2005, sold its one-millionth
MAC bag and crossed
$100million in gross sales
this year. Next up: three new
company stores in the U.S.
and wearable-tech products
like a text-message notication bracelet and a compact
mobile charger.

28

Vijaya Gadde, 39

GENERAL COUNSEL, TWITTER

Indian-born Gadde has
proved vital to Twitters efforts at international expansion. While over 70% of the
social media companys 271
million users are overseas,
its been banned in multiple
countries. When the Turkish
government blocked Twitter
last March, Gadde and her
90-person legal team led
lawsuits in local courts,
eventually prevailing. Also on
her list of recent milestones:
helping steer the company
through one of the most
anticipated (and unlike
Facebooks, incident-free)
initial public offerings in
recent years. Gadde, the
only woman on Twitters executive team, says the most
important aspect of her job
is allowing as much content
to ow freely while respecting local laws. A graduate
of Cornell undergrad and
NYUs law school, Gadde
previously spent close to a
decade at the Silicon Valley
law rm Wilson Sonsini
Goodrich & Rosati.

29

Robert Reffkin, 35
FOUNDER AND CEO,
URBAN COMPASS

Reffkin has the kind of rsum that

exhausts you. He graduated from
college (Columbia) in just over two
years. At 25, after spending two
years at McKinsey and two at
Lazard and getting a Columbia
MBA in between, he became a
White House Fellow, during which
he spent a year working with Treasury Secretary John Snow. Then he
returned to banking, spending ve
years as a VP at Goldman Sachs
and a year as now-president and
COO Gary Cohns chief of staff. In
2008 he raised $1.3million to help
the Success Charter Network open
its rst school in the Bronx. Last
year he launched Urban Compass,
a tech-driven New York City real
estate rm with 96 agents, an
easy-to-use app, and $73 million in
funding from big names like Marc
Benioff and Ken Chenault. The
Berkeley native hasnt abandoned
his public-service mission: Reffkin
also founded America Needs You,
a nonprot that provides career
development and mentorship to
rst-generation college students.

JULIE SMOLYANSKY HAS SEEN PEARL JAM 35 TIMES ALL OVER THE WORLD.

30

Sophia Amoruso, 30

FOUNDER AND CEO, NASTY GAL

In 2007, Amoruso started
selling vintage
clothing on
eBay. After
earning $70,000 in a year,
she jumped off on her own.
Today Nasty Gal has $100
million in sales and a cultish
following among millennial girls, who also like her
unconventional path to the
top: Her memoir, #Girlboss,
became a bestseller. Despite
a reported 10% workforce
reduction, Amoruso has said
shes hell-bent on Nasty
Gals continued success.

31

George Logothetis, 39
CHAIRMAN AND CEO,
LIBRA GROUP
The Financial Times
called him a
tycoon, but
London-born
Logothetis calls himself
an underdog. At 19 he
took over his familys thentiny shipping business. He
bought ships for cheap during a glut, sold them at the
market peak, then bought
big again in 2009, snapping
up 80 ships and some $7
billion in diversied assets,
building a portfolio that now
includes 90 helicopters and
over 40 hotels.

32

Hannah Minghella, 35
PRESIDENT OF PRODUCTION,
COLUMBIA PICTURES
After almost
three years
as head of
Sony Pictures
Animation,
Minghelladaughter of
the late director Anthony
Minghellawas tapped to
be president of Columbia
Pictures, a title she shares
with veteran producerscreenwriter Michael de
Luca. Among her successes: helping to get Sony the
rights to Facebook COO
Sheryl Sandbergs Lean In.

SOPHIA AMORUSO DROPPED OUT OF HIGH SCHOOL.

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33

36

EVP, DEVELOPMENT
AND ACQUISITIONS,
TRUMP ORGANIZATION
The Donalds
daughter has
emerged as a
dealmaker in
her own right,
spearheading the $200million pact with the U.S.government to redevelop the
Old Post Ofce in Washington, D.C. (In every aspect
of the deal, Ivanka was the
lead, says Kevin Terry,
who led the governments
negotiations), expanding the
Trump Hotel Collection, and
growing her clothing and
footwear collection into 11
lines now sold at Nordstrom,
Macys, and many more.

FOUNDER AND CEO,

SWELL BOTTLE
The HBS grad
and exErnst
& Young tax
consultant hit
a winning formula with her stylish, stainless-steel water bottles,
now found in Nordstrom,
Whole Foods, J. Crew,
Williams-Sonoma, Starbucks, Athleta, and more.
Facebook ordered 500 of
them. They were (of course)
the ofcial water bottle of
TED2014. Kauss says revenue has tripled to over $10
million. (See page 49.)

Ellen MacArthur, 38
FOUNDER, ELLEN MACARTHUR
FOUNDATION
Once Britains
youngest
dame, MacArthur broke
world records
at age 28 in a 71-day, deathdefying solo sail around
the globe. After witnessing
shing villages depleted
by whaling, she turned her
focus toward the circular
economy movement, in
which products, buildings,
and the like are designed
with reuse in mindand
pulling in giants like Cisco
and Unilever to her cause.

37

40

Sarah Kauss, 39

35

Tristan Walker, 30
FOUNDER AND CEO,
WALKER & CO.

34

Nate Morris, 33
CEO, RUBICON GLOBAL
He may be a self-described
garbage man, but Morris
has gilded ambitions. His
company, Rubicon Global,
based in Atlanta, is bringing
an Uber-like approach to
waste management by
matching multinational clients with local haulers. With
operations in all 50 states, he
plans to go public in the next
two years. More interesting
is his other network: The
Kentuckian has emerged
as a major Republican
power broker well beyond
his hometown of Lexington.
Hes established himself as
a key connector in Silicon
Valley and on Wall Street
for Sen. Rand Paul, as the
likely presidential contender
builds a donor baseand he
will gure prominently in any
Paul bid as an ambassador
to business leaders. Morris
himself sounds destined to
run for ofce: Once I pick
up all this garbage.

After stints at Twitter and Foursquare, designer-marketer Tristan

Walker was invited by revered tech
investor Ben Horowitz to become
an Andreessen Horowitz entrepreneur in residence. While there,
Walker cooked up the idea for a
health and beauty brand for people
of color, lling a long-decried gap in
the market. The rst brand under
his Walker & Co. is Bevel, a shaving
line with sleek, vintage-inspired
products that combat razor burn, a
particular problem for black men.
It is sold by subscription only, and
signups are growing by an average
of 50% a month. Many see Walker
as a key player in efforts to address
Silicon Valleys lack of diversity.
To that end, he also co-founded
Code2040, which places minority
engineers in summer internships at
top tech companies, named for the
year when the majority of the country is projected to be nonwhite.

40 UNDER 40 / SARAH KAUSS LOVES OLD GODZILLA MOVIES.

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128

Alexa von Tobel, 31

FOUNDER AND CEO, LEARNVEST

Its been a big
growth year
for von Tobels
personalnance startup: It opened a 50-adviser
planner hub (with alums
from Goldman Sachs and
Morgan Stanley) in Arizona
as revenue from consumer
clients grew 400%. It
partnered with Fidelity and
Putnam Investments to offer
content to those giants
individual investors. And it
launched a new service tied
to 401(k) plans, which is
attracting big employers.

38

Michael Patterson, 39

PARTNER, HIGHBRIDGE
PRINCIPAL STRATEGIES
In 2007 the ex
Navy lieutenant
(he planned
the militarys
rst drone
strikes) launched one of
the rst funds focused on
direct lending. Now he is a
go-to guy for companies
in trouble. Highbridges
direct-lending funds have
produced an annual return
of 13%. The loans are risky,
but Patterson has never
had a default. He also helps
oversee all of Highbridges
$19 billion debt investment.

MICHAEL PATTERSON LIKES SPY NOVELS.

Gary Vaynerchuk, 38
CO-FOUNDER AND CEO,
VAYNERMEDIA
The self-styled social media
marketer has his share of
haters for his brash manner,
but before you roll your eyes,
consider that hes now on
his third successful act:
He built his fathers New
Jersey wine shop into a $45
million business by bringing
it online and creating Wine
Library TV, the oddly viral
wine-tasting web show.
Its success made him a
social media marketing
guruwhich in turn led to a
10-book deal with HarperStudio. Now hes focused
on VaynerMedia, a digital
agency that advises the likes
of GE and PepsiCo and has
grown to nearly 500 employees. Vaynerchuk, an early
investor in Twitter and Uber,
also launched a VC fund
with Miami Dolphins owner
Stephen Ross to invest in
startups like Birchbox and
Medium. @GaryVee may be
loud, but his inuence is real,
and he isnt going away.

33. neilson barnardgetty images; 37. vivien killileagetty images; 40. eugene gologurskywireimage

Ivanka Trump, 32

39

Read the story behind our performance.

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RDFT082540

Talking
World Peace
With BEN
RHODES (No. 13)
AS DEPUTY NATIONAL SECURITY ADVISER,
HE HELPS GUIDE THE PRESIDENTS
WORDS AND THINKING ON FOREIGN
POLICY AT A PRECARIOUS TIME.
BY TORY NEWMYER

lot of late nights, especially on the big speeches.

Youre one of the last charter Team Obama guys still on

the job. Whats keeping you around?
I dont necessarily see this as a situation where Im going to
be going through the revolving door, in and out of administrations. I happen to have found somebody who I really love
to work for, who I have a really good relationship with, and
its hard to walk away from that.

How hopeful are you about a lasting peace, in whatever

relative way you want to dene that, presiding in the
Middle East in the mid- to long-term? The reason I have to
be optimistic is that its the one thing everybody in the region
seems to agree onthat [ISIS] is such a shocking organization that it has stirred people out of complacency and opened
the doors to alliances that werent previously possible. We
had the Iraqi Prime Minister in a meeting with the ve Arab
nations in our coalition, who have Sunni-led governments.
That would not have been thinkable even six months ago.

Do you ever feel envious of friends you started with, who

are out now and setting their hours?
Anybody who leaves here, you see them a couple months
later and they look 20 pounds lighter and ve years younger.
So it does give you some envy because you see the physical
toll the job takes on you. I still come to work in a windowless office in the basement of the White House. But the other
side of the coin is that theres no other job like this. When
you walk out that door for the last time here, you realize your
ability to be at the center of events and decision-making on
momentous things that are changing the course of history
that goes away. It cuts both ways.
You and the President spend a lot of time together. Do
you have any travel rituals? What do you do on the plane?
Hes a card player; Im not. But well have very intense schedules on these foreign trips. He likes to nd little pockets of
downtime in the day to just unwind, talk about other things.
But the one ritual thats always the case is that on speeches,
he works very late, so hell constantly be making line edits
and ddling with text up until the last minute. So you get a

For an extended version of this interview, visit

Economically, the center of gravity in the world is shifting to Asia, but with ISIS, Israel, Ukraine, and Ebola,
it seems your focus is directed elsewhere right now. You
have to be very disciplined to make sure that even as youre
working the urgent issues, youre not neglecting the opportunity pieces of your agenda. When I went to the UN with
the President, even as we had to work on the speech and all
the elements of the coalition building, I carved out two hours
for a meeting with the presidential adviser from Burma. It
would have been easier to just scrap something like that and
focus on [ISIS]. But you have to remember to focus on the
opportunities in the world and not just the threats. In the
long run, those may end up making a bigger difference.
Youre part of the rst brother team to make our 40
Under 40 list. [Older brother David, president of CBS
News, rst made the list in 2011.] What was your
dynamic growing up? We always got along very well. We
denitely had different political perspectives. But weve
never been competitive, in part because were in different
elds. Seeing his perspective also gives me an understanding
of the dynamic on the other end of the phone when Im talking to a reporter, which I have to do a fair amount of.

FORTUNE.COM

130

p ho t o g r a p h b y MELISSA GOLDEN

THEY SAY
ITS THE
COMPANY
YOU KEEP

CBRE is proud to be recognized among

the worlds top three outsourcing services
providers and as the only commercial real
estate services company to receive this
distinction by the International Association
of Outsourcing Professionals. We thank
our professionals and celebrate our clients
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full potential of their real estate portfolios.

CBRE Global Corporate Services

Source: International Association of Outsourcing Professionals (IAOP) Global Outsourcing

100 for 2014, which ranks the top outsourcing service providers across all industries.

cbre.com/gcs

IN DEMAND BY FORTUNE 500

COMPANIES AND HEAVILY
FUNDED BY SILICON VALLEY,
UNMANNED AIRCRAFT
ARE RAPIDLY INVADING THE
WORLD OF BUSINESS.
BY CLAY DILLOW
PHOTOGRAPHS BY STEPHEN LEWIS

The IRIS+ from 3D Robotics costs under $1,000 and includes a follow me camera mode in which the drone tracks the user from above.

Were taking the drone out for a spin. Its a sundrenched Friday in Indianapoliss Broad Ripple
neighborhood, and though its late afternoon the
wind hasnt picked up. Perfect ying conditions. T.J.
Johnson, 29, co-founder and chief engineer of a local
consumer drone startup called AirDroids, kneels on
the untrimmed grass in the middle of a city park. He
unzips a small black carrying case no bigger than a
regulation football and extracts an almost-nal version of his companys sole product. The Pocket
Dronea collapsible, three-rotor aerial vehicle
folds up small enough to t in a backpack easily, but
its three independent propeller motors are powerful
enough to carry a GoPro camera. Johnson and his
partners think it could be the rst in a huge, new
category of personal electronicsthe small, easily
portable ying robot that goes everywhere with you
to capture overhead imagery on demand.
FORTUNE.COM

136

In a few swift motions, Johnson snaps

the rotors into place and connects the
battery. Stepping back a few paces to
give the machine clear passage to the
airspace above, he taps in some guidance waypoints onto the satellite image of the park displayed on his Android
tablet. Then he gives the command to
y. The propellers whir to life, and the
drone zips into the air with startling
speed, hovering for just a moment
directly overhead before streaking off
to autonomously execute its ight plan.
As we watch it soar, were updated on
the drones progress via a female robotic
voice emanating from Johnsons tablet:
Waypoint onewaypoint two
Johnsons company has achieved

drones

ch a rt source: frost & sulli va n

AN UNMANNED
AERIAL VEHICLE
BOOM IN THE
HEART OF
TECHLAND
MAKES SENSE
ONCE YOU
REALIZE THAT
AMERICAS
DRONE
INDUSTRY
IS TIED UP
INEXTRICABLY
WITH THE
EXPLOSION
IN DATA
ANALYTICS.

liftoff almost as quickly as his invention.

Along with co-founders Timothy Reuter,
37, and Chance Roth, 40, Johnson developed a rough prototype of the Pocket
Drone and put it on Kickstarter in
January. The partners were hoping to
raise $35,000. But they ended up getting $929,212 in just 60 days to produce
roughly 1,800 drones. Pre-orders on
the AirDroids site have pushed sales
still higher, to some $1.2 million. To
do a million? We felt like we really had
something here, but we were denitely
surprised, says Johnson, an engineering
major in college who has a day job as an
intellectual-property attorney. None of
us were expecting that kind of demand.
AirDroids is just the tip of the

propeller. Think of this as a Model T

momentwhen a new industry nds
its commercial footing, and thereafter
the world is never the same. The idea of
unmanned aircraft as consumer devices
or commercial tools is a relatively new
one in the U.S. Drones, as they are
more commonly known, own a place
in the American public consciousness
right next to the war on terrorism and
Americas shadow conicts in places
like Pakistan and Yemen. Predator
and Reaper dronesthe hulking,
matte-gray unmanned aircraft now
synonymous with drone strikeshave
loitered in foreign skies for decades. But
ve years ago consumer drones didnt
exist. Even two years ago, low-cost and
easy-to-use commercial drones were
largely the subject of futurism. Today
the business world is on the verge of being swarmed by unmanned aircraft.
The global market for nonmilitary
drones has already ballooned into a
$2.5 billion industry, one thats growing 15% to 20% annually. And thats
under the current law. One of the
biggest potential markets for commercial dronesthe U.S.isnt even open
for business yet. At least not officially.
While the use of unmanned aerial
vehicles (UAVs) for commercial purposes is soaring in countries like Japan,
Australia, France, and the U.K., the U.S.
Federal Aviation Administration has yet
to institute regulations governing the
operation of commercial drones, and

in the meantime it has issued a blanket

ban prohibiting their use in nearly all
endeavors. Further complicating things
is the gray area in dening the difference between recreational drones
(which arent restricted by the FAA)
and commercial drones (which are). In
September the FAA issued exceptions
to six lm companies to use drones, and
it has approved their use to monitor oil
operations in Alaska. Regulators arent
expected to issue a full set of guidelines
for at least another year.
But the buildout of the drone industry is racing along even as Washington
dithers. Everyone from Fortune 500
companies to venture capitalists to
startups is pouring vast amounts of
money into the technology. Amazon,
Google, and German shipping giant
DHL have made headlines by experimenting with drones for deliveries. Facebook says it is developing a
drone the size of a 747 that could y
for months at a time, beaming down
wireless signals. Meanwhile, unmanned
aircraft have already begun to gain
traction in big businesses, ranging
from agriculture to mining (see box
on Five Industries Where Drones Are
Taking Off ). The industry has even
recently retained a Washington, D.C.,
lobbyistfunded in part by Google and
Amazonto make the case for drones
on Capitol Hill. So, strictly legal or not,
Americas drone revolution is already
well underway. The question is not

Projected global market for unmanned aerial vehicles

$25 billion
20

$4.4

Hobby

15

$6.4
10

Commercial

$11.6
Military

0
2014

2015

2016

2017

2018

2019

2020

FORTUNE.COM

137

AirDroids co-founder
T.J. Johnson ying the
companys Pocket Drone.
The Indianapolis startup
has already received
$1.2 million in orders
for its compact UAV.

TO DO A MILLION? WE FELT LIKE WE REALLY HAD SOMETHING HERE,

BUT WE WERE DEFINITELY SURPRISED, SAYS AIRDROIDS CO-FOUNDER
JOHNSON. NONE OF US WERE EXPECTING THAT KIND OF DEMAND.

whether drones will have a real impact

someday. Rather its, Which businesses
will be the most disrupted? And which
entrepreneurs and investors will make
the biggest windfalls in the process?
ark Heynen wants to make
one thing perfectly clear:
Were a data company,
not a drone company, he
declares moments after we meet.

FORTUNE.COM

138

Heynen is the senior vice president

of client operations for San Francisco
commercial-drone startup Skycatch,
a company whose business model is
based on the manufacture and sale of
drone hardware and software to commercial customers. So in that sense, his
comment may seem counterintuitive.
But its a refrain I heard repeatedly over
several days while exploring the Bay
Areas burgeoning drone corridor.

Over the past 18 months, a host of

drone startups have sprung up amid
the regions more traditional software
companies. Many, like Skycatch, have
recently closed major funding rounds
and are starting to take on the sheen
of proper Silicon Valley tech startups,
moving into modern, open workspaces
accented with reclaimed wood and
high, exposed ceilings beneath which
platoons of twentysomething coders

p ho t o g r a p h b y A.J. MAST

Push your enterprise

and move the world.
In the next few years, more data will be created than in
the entire history of the human race.
If that seems almost too overwhelming to consider, it has,
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Push your enterprise and you can move the world.
But to do that you will need a partner.
A partner that can help you turn millions of Tweets, posts and
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A partner that can make total mobility and constant connectivity
a Monday morning reality for all your employees and customers.
A partner that views security not as a ball and chain, but as a
strategic game changer that puts people next to opportunity.
Today, one company has the real-world experience and deep
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That company is HP.
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Visit hp.com/makeitmatter for more.

Copyright 2014 Hewlett-Packard Development Company, L.P.

Left: Looking down on the IRIS+ drone. Right: The rotors of this Pocket Drone prototype by AirDroids fold up for easy storage.

perched at adjustable sitting/standing

desks hammer away at their keyboards.
This UAV boom in the heart of
techland makes a lot of sense once you
realize that Americas drone industry
is tied up inextricably with the ongoing explosions in data analytics and the
so-called Internet of thingsareas that
Silicon Valley and the larger technology sector have a vested interest in
developing. For us, this is just another
increase in step function in the sources
of information we can work with, says
Aaron Levie, co-founder and CEO of
enterprise cloud company Box, of the
proliferation of commercial drones.
Where will the next trillion les be
created? Broadly: the Internet of things.
But UAVs in particular are going to be a
massive source of that information.
Drones have the unique ability to y
lower than manned aircraft and higher
than cranes and other ground-based

FORTUNE.COM

14 0

vehicles can reach. They offer everyone

from lm producers to civil engineers
to open-air mining operations to
individual photographers a wholly new
perspective on the world below. Using
multispectral sensors, they can capture
data impossible for the human eye to
seelike gas leaking from a pipeline
and food crops suffering from lack of
nitrogenfaster and at greater volume
than has ever been possible in the past.
Tapping into the ever-increasing power
of the cloud, they can quickly produce
high-resolution 3-D maps of vast geographic areas. Its the data that many
companies are after. Drones are just
the means of getting it. If we could get
this data some other way, we would,
says Curt Smith, technology director
for the information technology and
systems office at BP, one of the only
companies currently cleared by the
FAA to use drones for commercial pur-

poses in the U.S. We do this because it

allows us to do things that we couldnt
do before.
Skycatch founder and CEO Christian Sanz launched his company last
year after he spent two weeks using
a drone he had built himself to shoot
aerial photographs of a construction
site. Sanz had approached the builders hoping to make a business case
for drone photography, and it turned
out they had a voracious appetite for
images to track the projects progress.
Sanz walked away overwhelmed by the
demand for affordable, high-quality
aerial images. Two weeks into it I
couldnt keep up, says Sanz, chuckling
at the memory. I was disappointing
people, and I was doing it for free.
He decided to build a company
around the idea of automating the
process. So Sanz developed an industrial system that includes GPS-

drones

THERES THIS
GRAY AREA WITH
THE RULES,
SAYS ONE
ENTREPRENEUR.
BUT PEOPLE
ARE GOING AHEAD
AND USING
THESE THINGS.

guided drones to capture imagery and

automated ground stations that can
charge and swap the drones batteries between ights. By the end of
2013, Skycatch had 10 clients buying
the units at $100,000 apiece. The
company closed a $13 million funding round in Mayinvestors include
Google Venturesand Sanz says
he is already working on a far more
substantial Series B round.
Skycatchs customers include construction industry giants like Clayco,
DPR, Bechtel, and Frances Bouygues.
But it also quickly found data-hungry
customers in other industries such
as mining (Rio Tinto) and energy
(Chevron, First Solar) who are eager
to exploit efficiencies made possible
by regular and accessible overhead
imagery and 3-D mapping. Skycatch
says that its doubling the number of
systems it sells each month. Drones
are no longer just an experimental
extravagance to many enterprises;
increasingly theyre viewed as an
operational necessity.
Theres an ongoing shift from a
focus on cost to a focus on the value
of data, says Jonathan Downey,
founder and CEO of Airware, another San Franciscobased drone
technology startup. Downey started
Airware in 2011 to develop what

amounts to a common operating

system for dronesa set of software
tools interfacing with an ecosystem of
sensors that can be installed to make
any unmanned aircraft interfacefriendly with other drones within a
companys eet.
Like Skycatch, Airware has gained
a lot of momentum over the past
year, raising $11.7 million in Series A
funding in 2013 from backers including Andreessen Horowitz and Google
Ventures and an additional $25 million in July. Also like Skycatch, Airware just moved into nice new digs
in San Franciscos SoMA neighborhood. And Airware also works with
customers to apply drone technology
to commercial ends. Which means,
like Skycatch and almost every other
company trying to develop the commercial-drone industry, Airware has
a problem. As Downey says: A [U.S.]
customer cant buy our product today
and be legally compliant.
In the 2012 FAA Reauthorization
and Reform Act, Congress gave the
FAA a mandate: Develop a process
for integrating small UAS into the
national airspace as well as a set of
regulations to govern their use. The
FAA plans to release a proposed set
of rules by the end of this year, and
after a period of review by industry
and lawmakers the agency will issue
nalized regulations sometime in the
second half of next year. Drone makers
are obviously eager for a resolution.
Meanwhile, because the FAA lacks the
manpower to police the entire national
airspace at all times, many companies
get away with ying their commercial
drones until someone brings it to the
agencys attention, at which point a
cease-and-desist letter goes out.
Over the past year the status quo
has changed somewhat as money and
commercial interests have aligned
themselves behind the commercialdrone business. In August consumerdrone makers DJI, 3D Robotics, and

Thwart.

Foil.

Stymie.
We report more cyber intrusions
than anyone in the world.
+3RHUV6HFXULW\6ROXWLRQV
IRUWKH1HZ6W\OHRI,7
See all the stories at
hp.com/makeitmatter

Copyright 2014 Hewlett-Packard Development Company, L.P.

WHERE WILL THE

NEXT TRILLION
FILES BE CREATED?
SAYS BOX CEO AARON
LEVIE. [DRONES]
ARE GOING TO BE A
MASSIVE SOURCE OF
THAT INFORMATION.

Parrot teamed up with Amazon to form

the Small UAV Coalition, hiring D.C.
lobbying group Akin Gump to represent
the industry on Capitol Hill (Airware,
GoPro, and GoogleX have since joined
the group). Elsewhere in Washington,
D.C., a consortium of institutional
investors and aerospace companies has
assembled a $2.2 billion fund to invest
in infrastructure critical to the safe integration of commercial drones into the
national airspace and to advocate for
commercial drones. The UAS America
Fund, as the group is known, has already led a lawsuit challenging the
FAAs blanket ban on small commercial
drones with the hopes of creating some

legal headroom for companies that

simply want to conduct small-drone
R&D ights while the FAA works on its
broader regulations.
The big paradox is that this is all
about safety, but in order to make this
safe, companies have to test, says Michael Drobac, executive director of the
Small UAV Coalition and senior policy
adviser at Akin Gump in Washington,
D.C. We dont want to cede the opportunities to other nations when we
have such a base of companies and innovators that are already at the cutting
edge in this space. Lets move forward
responsibly, but lets move forward.
e can solve most of these
problems with technology, Jono Millin says of
the FAAs safety concerns.
We personally have the capability to
solve so many of their problems.
From a hill overlooking an expanse
of salt ats in Menlo Park, Calif., Millin can see the future of commercial
drones. Drones of all stripes will be
extremely easy to use, he believes.
Theyll be accessible from anywhere,
no matter where they are ying. Theyll
be extremely safe; both the authorities
and the companies that specialize in
helping their customers deploy their

FORTUNE.COM

142

1943 / The German military debuts the FX-1400, or the Fritz X,

a 2,300-pound bomb with four
small wings and a radio controller.
A breakthrough for guided aerial
weapons, it also was the rst
remotely controlled munition put
into operational use.

1940 / Actor and hobbyist

Reginald Denny sells 15,000
radio-controlled target
drones to the U.S. military
to train anti-aircraft gunners
for World WarII.

A BRIEF
HISTORY
OF
DRONES
ITS A BIRD, ITS
A PLANE, ITS
AN UNMANNED
AERIAL VEHICLE? HERE,
A FEW HIGHLIGHTS IN THE
CENTURY-LONG
FLIGHT PATH
OF PILOTLESS
AIRCRAFT.
C.D.

drones will be able to monitor what

drones are doing in real time. And
absolutely everyone will use them. No
one will be able to afford not to.
Millin is the 28-year-old co-founder
and chief of product at DroneDeploy,
and along with co-founder Nick
Pilkington hes brought me to the very
heart of Silicon ValleyFacebooks
sprawling headquarters are visible on
the far side of the cracked, chalk-white
atsto see this future in action. The
company ies almost weekly, Millin
says, typically to give the team back in
the office the chance to debug software
and address issues brought up by the
companys two-dozen beta customers
scattered across 10 U.S. states.
Those customers are mostly companies trying to gure out how best to
integrate drone technology into their
operations, Millin says. Nobody wants
to be left behind. People are going
ahead and doing this, he says. Theres
this gray area with the rulesand it is
a messy gray areabut people are going ahead and using these things.
With just nine full-time employees,
DroneDeploy is still in its lean-andscrappy phase. Its three founders
launched the company out of a shared
one-bedroom apartment in San Francisco. Its current office more closely

1898 / At an exhibition at
Madison Square Garden,
inventor Nikola Tesla wows
audiences with a small
unmanned boat that appears
to change direction on verbal
command. (Hes actually
using radio frequencies to
switch motors on and off.)

1944 / Photographer
David Conover snaps
images of Norma Jeane
Doughertysoon to
be known as Marilyn
Monroeworking at a
wartime assembly plant.
On her workbench: a
half-assembled drone.

1960s / The size

and cost of transistors plummet,
ushering in an
age of radio-controlled products
and a generation
of tinkerers and
enthusiasts.

tesl a: hulton a rchi v e/gett y im ages; monroe: dav id conov eru.s. a r m y; the fr itz: de agostini/gett y im ages;
leba non wa r: mik i shu v itzgpo/gett y im ages; pr edator: tech sgt. effr a in lopezu.s. a ir force/r eu ters;
pa r rot: brook stonepr news foto; top gu n: pa r a mou n t/courtesy ev er ett collection; a m a zon: a m a zona p

drones

resembles a loft in Bushwick, Brooklyn, than the ashy, polished workspaces that dot the surrounding area.
Theres no reclaimed wood to be seen,
no brightly painted conference rooms
full of beanbag chairs, nothing in the
way of Silicon Valley swaggerjust a
group of twentysomethings intensely
focused on their computer screens.
Millin, Pilkington, and CEO and
co-founder Mike Winn attended high
school together in their native South
Africa and were scattered around
various cities in the U.K. in mid-2012
when they decided that a longsimmering idea theyd shared had
nally come into its time. If we tried
to build DroneDeploy ve years ago,
it wouldnt have been possible, Winn
says. Now it appears that the timing
couldnt be better.
Winn left a job building sales
tools at Google while Millin and
Pilkingtonpursuing doctorates
at the University of Edinburgh and
Cambridge, respectivelyabandoned
their studies to develop a piece of
hardware roughly the size of a deck
of cards. Called a CoPilot, its essentially a 4G/LTE wireless modem that
interfaces with a drones onboard
systems, feeding data to the autopilot
and offloading images and other data

1982 / At the outbreak of hostilities with

Syria, Israel outwits
Soviet anti-aircraft
technology by using a
swarm of unmanned
aircraft to draw it into
revealing its location.

from the drones sensors via existing

wireless networks.
The big idea can be summed up
in three words: drones as phones. By
routing the control system for drones
over the existing wireless communications infrastructure, DroneDeploys
technology eliminates the need for
unwieldy ground stations for downloading data, say the founders. Data
go directly to the cloud for processing, users can access drones from
anywhere, and companies can scale
their drone operations using Verizon
or AT&Ts infrastructure instead of
buying or building their own.
Integrating drones into existing
communications infrastructure is
what allows Millin, Pilkington, and
me to stand around eating salted almonds while a white, Styrofoam-body
airframe loops back and forth across
the sky overhead. Before sending the
aircraft skyward, Millin dialed in the
ight path from his smartphone. But
twice during the half-hour ight one
of the companys programmers back
in the office sends us a text to let us
know hes making small adjustments
via DroneDeploys dashboard software. The whole office is watching this
ight and the data streaming directly
from aircraft to cloud, Millin says;

2010 / The Parrot AR

Drone, a smartphonecontrolled quadcopter for
consumers, is introduced
at the Consumer Electronics Show in Las Vegas.

1995 / The General Atomics MQ-1 Predator UAV enters

service. In the decade following
9/11, the Predator will become
the public face of drones.

2012 /
Congress
requires the
FAA to integrate small
drones into
the national
airspace by
2015.

Mobility
is agility.

Connecting employees,
processesthe world.
Think of it as Big Mobile.
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IRUWKH1HZ6W\OHRI,7
2013 / On 60 Minutes, Amazon
CEO Jeff Bezos unveils an audacious plan: delivery drones and a
future service called Prime Air.

See how it all works at

hp.com/mobility

2014 / As the FAA

grants an exemption to
lm and TV production
companies for drone
use, producer Jerry
Bruckheimer reveals
that actor Tom Cruise
will star in Top Gun 2
alongside drones.

Copyright 2014 Hewlett-Packard Development Company, L.P.

A worker for BP
using a drone to image
and map oilelds near
Prudhoe Bay, Alaska

FIVE INDUSTRIES WHERE

DRONES ARE TAKING OFF

DATA PROVIDED BY DRONES IS TRANSFORMING INDUSTRIES ACROSS THE

SPECTRUM, OFTEN IN SURPRISING WAYS.
Unmanned aircraft have long promised to provide critical information and unlock efciencies across industries, but were only
beginning to see just how large an impact that data can have as
companies nd new and often unexpected applications for drone
technology. This usually starts when people perceive the benet
of not hiring an aircraft for something, says Mark Heynen, senior
vice president of client operations at commercial-drone maker
Skycatch. But it quickly trickles into other places. C.D.

Agriculture / New
sensors and data
analytics are taking
precision agriculture
beyond simply monitoring crops for stress.
Imagine farmers boosting crop yields by optimizing the fertilizer mix
for different parts of a
eld, or winemakers
precisely controlling
drip irrigation down to
the individual vine.
Construction / On
large-scale construction sites it can be
extremely difcult for
contractors to get the
big picture. Drones
make it simple for
construction giants like
Bechtel and DPR to
monitor progress and
supply stockpiles on a
day-to-day basis.

FORTUNE.COM

14 4

Energy / The
energy industry uses
drones for applications
far beyond pipeline and
are stack inspection.
In Alaska, BP uses
drones to monitor
its gravel-extraction
activities to stay within
environmental guidelines. ConocoPhillips
has used unmanned
aircraft in the Arctic,
and Chevron has
experimented with
them as well. First
Solar employs drones
regularly to inspect for
faulty solar panels.
Mining / Mining giants like Rio Tinto are
reducing risk to their
human workforce by
using drone technology to detect potential
landslides and inspect

safety infrastructure,
as well as to keep a
more accurate eye on
how much mineral it
extracts.
Film and Television/ Several
American TV and lm
production companies recently received
FAA clearance to y
camera-equipped
drones in U.S. airspace, offering major
Hollywood studios
such as 20th Century
Fox and Warner Bros.
the opportunity to leverage this technology
on home soilsomething theyve done for
years in other countries. Drone technology
will bring much of that
overseas shooting
back to the U.S.

technically were there only to launch

and recover the drone itself.
This kind of simplicity is what will
make commercial drones safe, Millin says. It would be simple enough to
beam our ight plan to the FAA for
approval and check it against a database of other ight plans or restricted
airspace in the area. This type of automation is also what should pave the
way for drones to penetrate all kinds of
enterprises. While were having a snack,
the robot is compiling 10 acres worth
of high-resolution mapping data, and
depending on whats being mapped,
that data can be extremely valuable.
he high value of data continues to drive companies
toward drone technologies, but the FAAs ban on
commercial-drone use means that
much of the rush toward drone adoption is happening in the shadows. Airwares Downey has plenty to say about
his companys customers in Australia,
France, and elsewhere in Europe, but
on the subject of potential U.S. clientele
he simply notes that the company is
focused internationally. DroneDeploys
founders openly admit that they have
users across the U.S.companies that
are experimenting with commercial-use
cases for UAS technologies if not using
them for direct commercial gainbut
the company is not saying who those
customers are. Skycatch provides technology to some of the most recognizable global brands in open-air mining,
construction, and energy, and Sanz is
candid about the fact that his companys technology is deployed regularly by
companies right in the Bay Area, but he
wont go into specics.
Many of those companies wont have
to y under the radar much longer. As
the FAA has scrambled to deal with
both the proliferation of small-drone
technology and pressure from various
industries and interest groups to relax
its commercial-drone ban, the agency

drones

has devised a mechanism that allows

it to exempt specic companies and
aircraft from its own rules. The rst
so-called Section 333 exemption
was granted earlier this year when
BP was given permission to y one
single kind of drone aircraft system
for commercial purposes in the airspace over Prudhoe Bay, on Alaskas
northern, Arctic shorean exemption far too narrow in scope to really
move the needle for the larger drone
industry.
But in late September the FAA
gave out a second exemption under
Section 333, this time granting a
consortium of lm and television
production companies permission to
use a number of different drone platforms across the TV and lm industries. Aside from being the rst move
by the FAA to open up commercialdrone use across an entire industry,
it established a process within the
FAA for evaluating and implementing exemptions for companies that
can prove that their drone operations
are safe and reliable. That bodes well
for drone entrepreneurs. More than
a dozen industriesranging from
construction to agriculture to energy
to electric utilitieshave Section 333
requests waiting in the FAAs
pipeline, many of which are due for
review before the end of the year.
Some drone makers are simply
avoiding legal issues by exploiting demand for recreational drones, which
remain largely unregulated by the
FAA. Hong Kongbased DJI claims
to own a full 50% of the recreational
market, selling 30,000 or more of its
now ubiquitous Phantom quadrotor
drones every month. If DJIs claims
are true, that values the consumer
drone market at roughly $800 million, though some in the industry
value it as high as $1 billion (the disparity arises from what one considers
a consumer drone product).
Chris Anderson, the former editor-

FEEDBACK letters@fortune.com

in-chief of Wired magazine and cofounder and CEO of Berkeley-based

3D Robotics, which last September
closed on $30 million in Series B
funding, is one of those who see a
much larger consumer market. 3DR
makes off-the-shelf drones that are
designed to be customized by the
userunmanned aircraft that sit
somewhere between the consumer
and hobbyist spaces. The underpinning technology could beand will
beleveraged into commercial-drone
tools in the future, Anderson says.
Were seeing the convergence of the
consumer and commercial markets,
he says. And consumers are leading
this market in terms of technology
and in terms of adoption.
ack in Indianapolis, the
AirDroids drone returns
from its programmed
circuit and sails in for
a smooth landing a few feet away.
Johnson turns and shrugs, squinting
into the drooping sun, almost bored.
So thats it, he says.
For the moment, AirDroids is still
very much a startup. Johnson is tinkering with the design of the secondgeneration Pocket Drone in his basement. But the companys potential
market is expanding daily. Consumers looking for a small, affordable,
and easy-to-use photography drone
are behind the overnight success of
AirDroids. And the current customers
are the earliest adopters. Johnsons
co-founder Reuter says he expects
sales to increase once the rst units of
the Pocket Drone, which costs $599,
begin shipping all over the world in
November. There is the potential
for exponential growthboth for
AirDroids and the drone industry
overall. These are established technologies with no established brands,
Reuter says. Theres an opportunity
to grab a lot of mind share. And a lot
of prots too.

Flex, when
in flux.

HP Helion can spin up new cloud

services in minutesnot weeks.
+3RHUV&ORXG6ROXWLRQV
IRUWKH1HZ6W\OHRI,7
See all the stories at
hp.com/makeitmatter

Copyright 2014 Hewlett-Packard Development Company, L.P.

October 27, 2014

while you were out
by stanley bing

OUTSOURCING THE ACTION

I thought offsite boondoggles were a thing of the past. Turns out theres just been a change of nomenclature.

I DONT GET THINGS COMPLETELY WRONG very often, but

Next, I can drink a lot of free top-shelf booze and go to

kick-ass parties with beautiful people, some of whom will
want to suck up to me because they believe I represent a
professional opportunity of some kind. I probably dont.
But its not a real event if youre not ingratiating yourself to
somebody. Id like to meet Warren Buffett, for instance. Or
George Soros. I hear will.i.am and Harrison Ford showed up
at a Fortune confab not long ago. Cool, huh? I can also go
whitewater rafting, ride a bike, or just lie on a beach. And if
I really want to get serious, I can play golf.
Oh, and of course when need be, I can feel good about
myself while listening to stimulating presentations. A recent
mega-conference run by the Wall Street Journal in beautiful
Newport Beach, Calif., featured Jack Ma, Tim Cook, Marc
Andreessen, Rupert Murdoch, and Carlos Slim Hel. Talk
about heavyweights!
Perhaps best of all, while Im at my boon...I mean conference, I will slowly but surely become part of a community of
like-minded cool people who are bonded by the experience. I
may make friendships and connections that will last a lifetime!
When I get home, I will feel refreshed, energized, and
just a little bit superior to the poor fools who didnt get to go
this year. I will sit in my office and feel terric, ready to face
whatever the operating environment throws at me. As I sip
my morning coffee, I may call up a new friend I made while
I was away. Heck, I may explore a business opportunity or
ctive deal that almost got struck there. I may even take a
peek at my morning trade news to see when the next exciting
gathering might be that I could offer a legitimate business
reason to attend.
Good God! Its in Kathmandu! Wont that be a blast?
Hope to see you there!
Follow Stanley Bing at stanleybing.com and on Twitter
at @thebingblog.

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FORTUNE.COM

152

ja son schneider

when I do, Im big enough to say so. For years, sometimes

in the pages of this magazine, Ive contended that the fun
in this game is over and that essentially social events where
people go away to some remote location, have drinks, put on
a serious face when need be (mostly in the mornings), engage
in sporting adventures, enjoy more drinks, eat tasty meals,
play games, fool around a little, have some more drinks, and
generally keep their spirits up, all in the name of business,
have gone the way of Hula-Hoops, laser discs, and Excellence.
I was wrong. Boondoggles arent gone. Theyve just been
outsourced. Theyre called conferences.
This misunderstanding on my part has led me to hold a
negative attitude about these increasingly ubiquitous events.
Some people always seem to be on their way to one, at one,
or coming back from one, and Ive always seen them as a
bunch of heedless slackers. Now I see what theyre up to, and
you know what? I want to get in on the action. I loved boondoggles! Some of my best times were spentor misspentat
them! I thought they went away. But it turns out I can still
get all the good things I used to enjoy.
First, just as in the old days, I can stay at a lovely location Ive always wanted to visitfree. Possibilities include
Chicago, Aspen, Sun Valley, San Francisco, Gstaad, Singapore, Paris, London, Dubai, and Dublin, just to name a few.
Google nancial conference and just look what a Baedeker
of destinations we have to choose from.
While there, I will of course be staying at a marvelous and
stunning hotel I probably wouldnt spring for if it were on
my own dime. Years ago I had stayed at such dreamy places
as Pebble Beach, Captiva Island, Park City, and Hilton Head,
and believe me, those establishments know how to pamper
a serious businessperson. Try one of their bathrobes on for
size! (But dont take it home unless you want it to appear on
your expense account.)