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DELTA.COM/WIFI contents — APRIL 14, 2014

40 | gene therapy gurus Firms like Nick Leschly’s Bluebird Bio are tackling rare diseases with next-gen treatments—and attracting big investor interest.

44 | today boston, tomorrow the world Major League Baseball was just the start of the Fenway Sports Group’s ambitions.

50 | m&a mischief How to dress up a loser as a winner. STRATEGIES 40 | BIOTEch’S nExT BIG ThInG After decades of experimentation and failure is gene therapy fnally ready for prime time? Investors certainly think so. by matthew herper 44 | ThE GREEn mOnSTER Winning the World Series was nice, but John Henry and his Fenway Sports Group have plans to build a global sports juggernaut. by kurt badenhausen TEchnOLOGy 46 | hOw much dId yOu PAy FOR ThAT LIPSTIck? 66 | bobamacare 46 | personal Big data is helping customers price goods Pet insurance: pricing according to a customer’s willingness to pay. marginal product, FreshPlum’s by adam tanner great business. dierential- pricing InvESTInG algorithm turns reluctant 50 | mERGER mIRAGE shoppers into Acquisitions are on the rise and winning eager buyers. investors’ favor. But loose accounting rules can make even a bad deal look good. by daniel fisher 54 | BETTInG On BILLIOnAIRES, nOT BuBBLES Kinetics Internet Fund crashed when the dot-com bubble burst. Now it’s killing it by avoiding future dot-bombs. by brian solomon 57 | GET yOuR mOnEy mAnAGEd FOR FREE Some ETFs have negative expenses. The trick: securities lending. by william baldwin

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62 | PORTFOLIO STRATEGy by ken fisher Only two things can stop the bull market. 64 | InvESTOR chEckuP by william baldwin Is your fund trading too much? 65 | SmALL STOckS by jim oberweis The case for stocks with crazy P/Es. EnTREPREnEuRS 66 | PET PROjEcT How a British couple turned the shock of a $5,000 vet bill into a $53-million-a-year 96 | the seed is strong business. Harry Stine has revolutionized by karsten strauss American agriculture. Twice. His corn could do it again. FEATuRES 70 | ThE InnOvATIOn FAcTORy Sequoia Capital is Silicon Valley’s search engine 82 | cable for disruption—and billionaires. cutter by george anders with alex konrad Pro wrestling’s Plus: The Midas List billionaire is streaming his act 82 | mOnSTER mOvE directly to his fans. Vince McMahon sucker punched his traditional TV partners when he launched the WWE Network earlier this year. The unorthodox maneuver could transform his business—or he could fall fat on his face. by michael solomon and daniel fisher 90 | hIGh TImES! Meet the shady band of ex-cons, ganja-preneurs and multilevel marketers behind the great pot penny stock boom of 2014. Don’t say we didn’t warn you. by nathan vardi 90 | marijuana madness Michael Mona’s high-fying 96 | cAn ThIS mAn FEEd investors could see everything ThE wORLd? go up in smoke. Harry Stine built an obscure $3 billion empire by breeding a better soybean seed. Now the richest man in Iowa thinks he has revolutionized corn, the Earth’s most popular crop. by alex morrell

BrandVoice by samsung Launching Students Into Science: how a middle School Touched Outer Space 99

LIFE 106 | ThE BALLAd OF BALcOnES Want to fnd the best single malt whiskey in the world? Look under a bridge in Waco. 106 | the whiskey from waco by abram brown The fnest brown liquor comes not from a glen in Scotland but from an 112 | ThOuGhTS underpass in Texas. On taxes.

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EDITOR-In-CHIEF IN BRIEF Steve Forbes

CHIEF PRODUCT OFFICER Lewis D’Vorkin FORbEs MagazInE Native Advertising EDITOR Randall Lane Catches On ExECUTIvE EDITOR Michael Noer by lEWIs D’vORkIn aRT & DEsIgn DIRECTOR Robert Mansfeld My frst sales trip for FORBES was a stop in Detroit in Au- FORbEs DIgITal gust 2010, memorable for the heat, the humidity and a chilly vP, InvEsTIng EDITOR Matt Schifrin reception. I was pitching BrandVoice, then called AdVoice. ManagIng EDITORs The ad agencies and clients we visited didn’t get it. Still, we Dan Bigman – Business, Tom Post – Entrepreneurs, Bruce Upbin – Technology pressed on with a product for advertisers that few other pub- sEnIOR vP, PRODUCT DEvElOPMEnT anD vIDEO Andrea Spiegel lishers ofered. Soon came the buzzword—native advertising. ExECUTIvE DIRECTOR, DIgITal PROgRaMMIng sTRaTEgy Fast-forward to 2014. Marketers are rushing to native Coates Bateman assIsTanT ManagIng EDITORs ads. For the most part, journalists abhor them. We’ve had Kerry A. Dolan, Luisa Kroll – Wealth 38 digital BrandVoice partners, 18 in print (see p. 99). Each ExECUTIvE PRODUCER is publishing content, always transparently labeled, to Frederick E. Allen – Leadership engage with consumers in a new way. Here’s a look at the Tim W. Ferguson FORbEs asIa Kashmir Hill sIlICOn vallEy state of play. Janet Novack WasHIngTOn 1) Competition: It’s getting crowded, though the intent Michael K. Ozanian sPORTsMOnEy Mark Decker, John Dobosz, Deborah Markson-Katz DEPaRTMEnT HEaDs of many publishers often remains unclear: a strategy Avik Roy OPInIOns beftting the world of social media or a gambit to grab Kai Falkenberg EDITORIal COUnsEl buzzy ad dollars? bUsInEss Mark Howard CHIEF REvEnUE OFFICER 2) Transparency: A year or so ago it referred to the clear Tom Davis CHIEF MaRkETIng OFFICER identifcation of marketer content. Today it also means vis- Charles Yardley PUblIsHER & ManagIng DIRECTOR FORbEs EUROPE ibility into success metrics for the marketers themselves. Nina La France sEnIOR vP, COnsUMER MaRkETIng & bUsInEss DEvElOPMEnT Jack Laschever PREsIDEnT, FORbEs COnFEREnCEs 3) Content Creation: FORBES has a “brand newsroom” Michael Dugan CHIEF TECHnOlOgy OFFICER reporting to sales that acts as an editorial resource. Others are Elaine Fry sEnIOR vP, M&D, COnTInUUM assembling in-house studios to produce native content. FORbEs MEDIa 4) Presentation: Digital platforms, such as FORBES, ofer Michael S. Perlis PREsIDEnT & CEO Michael Federle CHIEF OPERaTIng OFFICER seamless integration within the consumer experience. Tradi- Tom Callahan CHIEF FInanCIal OFFICER tional websites prefer stand-alone treatments. Will Adamopoulos CEO/asIa FORbEs MEDIa PREsIDEnT & PUblIsHER FORbEs asIa 5) Ad Networks: Their goal is scale. The rub: For publishers, Rich Karlgaard PUblIsHER it turns a premium buy into something far less. For market- Moira Forbes PREsIDEnT, FORbEsWOMan MariaRosa Cartolano gEnERal COUnsEl ers and consumers, what’s native about the same content Margy Loftus sEnIOR vP, HUMan REsOURCEs everywhere? Mia Carbonell sEnIOR vP, CORPORaTE COMMUnICaTIOns 6) Evaluation: It’s all over the map—unique visitors, page FOUnDED In 1917 views, likes, shares, tweets, retweets, etc. The endgame is to B.C. Forbes, Editor-in-Chief (1917-54) Malcolm S. Forbes, Editor-in-Chief (1954-90) drive business, which leads to proxies that try to get at sales. James W. Michaels, Editor (1961-99) William Baldwin, Editor (1999-2010) 7) The Players: Ad agencies are building “newsrooms” to service clients, who are building “newsrooms” to run around apRIl 14, 2014 — volumE 193 NumBER 5 p.r. frms, who are building “newsrooms” to compete with

FORbEs (ISSN 0015 6914) is published semi-monthly, except monthly in January, February, April, July, August and October, by Forbes agencies. LLC, 60 Fifth Ave., New York, NY 10011. Periodicals postage paid at New York, NY and at additional mailing ofces. Canadian Agreement No. 40036469. Return undeliverable Canadian addresses to APC Postal Logistics, LLC, 140 E. Union Ave., East Rutherford, NJ 07073. Canada GST# 12576 9513 RT. POSTMASTER: Send address changes to Forbes Subscriber Service, P.O. Box 5471, Harlan, IA 51593-0971. Detroit seems a long way of. In a report released in Janu-

COnTaCT InFORMaTIOn For subscriptions: visit www.forbesmagazine.com; write Forbes Subscriber Service, P.O. Box 5471, Harlan, IA 51593-0971; ary the Interactive Advertising Bureau said 66% of agencies or call 1-515-284-0693. Prices: U.S.A., one year $59.95. Canada, one year C$89.95 (includes GST). We may make a portion of our mailing list available to reputable frms. If you prefer that we not include your name, please write Forbes Subscriber Service. and 64% of marketers intend to spend money on native ads For back Issues: visit www.forbesmagazine.com; e-mail [email protected]; or call 1-212-367-4141. For article Reprints or Permission to use Forbes content including text, photos, illustrations, logos, and video: visit www.forbesreprints.com; call PARS International at 1-212-221-9595; e-mail http://www.forbes.com/reprints; or e-mail in the next six months. Advertising will continue to evolve in [email protected]. Permission to copy or republish articles can also be obtained through the Copyright Clearance Center at www.copyright.com. Use of Forbes content without the express permission of Forbes or the copyright owner is expressly prohibited. the world of social media. Native ads are clearly a big piece of Copyright © 2014 Forbes LLC. All rights reserved. Title is protected through a trademark registered with the U.S. Patent & Trademark Ofce. Printed in the U.S.A. the march forward. F

12 | FORBES APRiL 14, 2014

FORBES FACT & COMMENT — STEVE FORBES

“With all thy getting, get understanding” A cRy tO cOngRESS: SAvE thE IntERnEt!

BY STEVE FORBES, EDITOR-IN-CHIEF

Congress is holding hearings Senate candidates. Knowing how on the most outrageous decision— vulnerable his majority is, Reid among all too many—of the Obama would capitulate. Administration: having the U.S. give So, ultimately, would the White up control of the Internet to some House, just as it did several years as yet undefned international body. ago when a move was afoot to pass Good God, even this hard-left crowd legislation that was ostensibly should see the malignant folly in meant to fght piracy but would this. As Gordon Crovitz put it in the have actually damaged the Internet. Wall Street Journal, “The alterna- Let Congress and the President tive to continued U.S. authority is know that we will not allow anti- control by an international body freedom hacks and dictators to dominated by authoritarian regimes.” pollute and destroy the Net. From the get-go the U.S. has been meticulous in keeping politics out of the functioning of the great Leap Forward most extraordinary creation of modern times. Authoritarian regimes have been hungering This month a new way to measure the economy for years to fnd ways to get their mitts on this will be released, which, as time passes, will powerful and power-to-the-people instrument. have a profound and manifestly positive impact China spends countless billions of dollars and on economic policy and politics. employs hundreds of thousands of bureaucrats The statistic is called Gross Output and will in trying to censure what is said on the Internet. be issued by the Bureau of Economic Analysis The current White House deeply believes (housed within the Commerce Department), that this country should have virtually no foot- which also issues GDP numbers. Both will be print beyond its shores, that everything that released on a quarterly basis. happens anywhere else should be left to the UN, Why is GO such a big deal? Because it mea- the IMF and other dysfunctional multinational sures the economy in a far more comprehensive bodies. The decision to turn the Internet over to and accurate manner. GDP represents the value the tender mercies of the Putins of the world is of all fnal products and services. It ignores all the part and parcel of this America-is-bad mentality. steps that go into the making of these things. It’s Even if counter-Internets were set up to rep- sort of like looking at a carton of milk and paying licate the freedom of the original, they would be no heed to everything that goes into creating that too small to have similar scope and impact. milk and getting the carton onto the store shelf. Congress should dispense with these hearings GDP thus gives a distorted picture of the and pass legislation declaring any such disastrous economy. How many times do we read that Commerce Department decision null and void. consumption represents 70% of the economy If Senate boss Harry Reid were to try to and therefore it’s important to “stimulate block such a bill, Silicon Valley Democrats demand” by increasing government spending? should publicly open their checkbooks to GOP In fguring GDP, government spending is said to

APRIL 14, 2014 FORBES | 15 FORBES FACT & COMMENT — STEVE FORBES represent 20% of the economy, invest- squirming and screaming, as their hold the power of the purse over the ment a measly 13%. (Incredibly, demand focus will look ridiculous Fed. The agency gets its operating imports are counted as a negative for and wrong. Ultimately, more sensible money not from congressional ap- the economy and subtract 3% from tax policies will result. propriation but from the interest it GDP. Protectionists love this absurdity.) Kudos to the BEA. Civilization will gets on its bonds, which it buys with GO counts all the intermediate be in its debt. money it creates out of thin air. steps in the making of products and The time has come for two sen- services. The results are stunning: time to tackle sible moves. Consumption is 40% of the economy, • Audit the Fed. No government or not 70%; government outlays are the Fed government-created agency should down to 9%; and business spending be exempt from outside examina- soars to 50%. Why is the Federal Reserve the sa- tion, because they are run by people, This new statistic will also better cred cow of American politics? which, by defnition, means they’re refect the volatility in the ups and It’s not because it has done a stellar not perfect. In a democracy it’s par- downs of economic activity. The job. Its fundamental, serial errors in ticularly outrageous that a powerful 2007–09 recession was deeper than the 1970s, after the U.S. blew up the government institution should be GDP fgures refected, the recovery gold-based Bretton Woods interna- exempt from accountability. For- somewhat better. tional monetary system, gave us and mer Representative and presidential Noted economist Mark Skousen has the world the Great Infation and candidate Ron Paul has been so right long been pushing for a more accurate a discouraging, debilitating decade regarding this issue. way to measure the economy and thus of stagnation. The Fed’s pursuit of a • Pass the Brady-Cornyn bill. This deserves a Nobel for his work on this weak dollar, which started in the early legislation would create a commis- (and won’t get it, given the politics of 2000s, has been an unmitigated di- sion to examine monetary policy— the economics profession these days). saster. It created the horrifc housing where it is currently and where it Skousen is well aware of what GO bubble. Ben Bernanke’s destructive should go. We need to take a thor- means. As he wrote on Forbes.com, experiment known as quantitative ough, thoughtful look at the record, “Consumer spending is largely the easing distorted the credit markets, from the time the Fed was created efect, not the cause, of prosperity.” thereby unfairly helping Washington just over a century ago to today. We GO rightly puts investment and pile on debt (“defcits without tears”) also need to consider basic reforms— business in their rightfully large places. while making it harder for small and including implementing a new gold GO has faws. It leaves out some new businesses—the job creators— standard—even if they violate the sales at the wholesale and retail lev- to get loans. reigning orthodoxy. Congressman els—for reasons that only theologians In no small part because of the Kevin Brady (R–Tex.) and Senator immersed in how-many-angels-can- Fed, the recovery from the terrible John Cornyn (R–Tex.) have taken dance-on-the-head-of-a-pin kinds of downturn of 2008–09 has been the great care that such a study be carried discussions could love. It still counts worst in American history. out by key members of Congress and government spending as a plus in- The Federal Reserve is the most knowledgeable individuals repre- stead of a negative. Nevertheless, GO powerful agency in Washington, yet senting various schools of thought. is a huge step forward for the world. it has a fraction of the oversight that We’re in a dangerous rut. These Economic debate will now have our intelligence agencies, including two moves would be critical in get- a better focus. Keynesians will be the NSA, have. Congress doesn’t even ting us out of it.

Restaurants: go, consider, Stop Edible enlightenment from our eatery experts and colleagues Richard Nalley, Monie Begley, Randall Lane and Chef Jef Lamperti, as well as brothers Bob, Kip and Tim. l clement l RedFarm l Spigolo The Peninsula Hotel, 700 Fifth Ave., at 2170 Broadway, between 76th & 77th 1471 Second Ave., between 76th & 77th streets 55th St. (Tel.: 212-903-3918) streets (Tel.: 212-724-9700) (Tel.: 212-744-1100) An oasis of superb dining. Favorites: sashimi-style This may be the best Chinese restaurant north Innovative, delicious fare at this Italian trattoria with fuke, tangy carrot soup and heirloom beets with of Chinatown. Such appetizers as pastrami (from American fair. Among the many dishes to warm yogurt and lemon vinaigrette, followed by beef Katz’s!) egg rolls and its sophisticated dim sum the stomach and soul on cold nights: succulent tenderloin or the crispy pork special. Finish with redefne the genre. Main course oferings also eggplant “meatballs”; pappardelle tossed in Clement chocolate banana cake with rum butter dazzle, whether charred pork chops painted with duck conft, preserved lemon, fennel and parmi- ice cream or the sea salt caramel chocolate with lemongrass marinade or a chicken, skin crackling giano; chicken scarpariello surrounded by fennel passion fruit crémeux and thyme ice cream. Peking-style, stufed with shrimp paste. sausage, cherry peppers and creamy polenta. F

16 | FORBES APRIL 14, 2014 WELCOME TO OUR WORLD

Thom Richard is one of the few pilots in the world to possess the talent, experience and courage required to compete in the fi nal of the famous Reno Air Races – the world’s fastest motorsport. Less than ten champions are capable of vying with each other at speeds of almost 500 mph, fl ying wing to wing at the risk of their lives, just a few feet off the ground. It is for these elite aviators that Breitling develops CHRONOMAT 44 its chronographs: sturdy, functional and ultra high-performance FLYING FISH instruments all equipped with movements chronometer-certifi ed by the COSC – the highest offi cial benchmark in terms of reliability and precision. Welcome to the Breitling world.

BREITLING.COM LEADERBOARD Keeping Score on Wealth & poWer

in Crowd sequoia giants

Take 13 tech legends who were all part of Sequoia Capital’s investment roster over the last quarter- century. Bring them together on Tesla Motors’ factory oor. What do you get? An 4 epic blend of talent, plus one sele.

1. Jerry Yang Yahoo A venture capitalist now 6 and vice chair of Stanford’s board of trustees. Built a $2.1 billion fortune as founder of Yahoo.

2. Chad Hurley YouTube 7 Sold YouTube in 2006, 2 5 and praises Google for its growth since. Launched video editing company MixBit in 2013.

3. Julia Hartz Eventbrite 1 3 Ticket-selling champ: Some 2.9 million bands, theaters and Webinar performers use her technology to get patrons’ business.

4. Jan Koum WhatsApp Pending sale to Facebook will net him $6.8 billion. Still uses frequent-fier miles; that might change.

5. Max Levchin Paypal An active advisor to Sequoia. Was feted last year with a garish plaid jacket (like the Masters’) to salute all he’d done for the frm.

18 | FORBES APRIL 14, 2014 6. reid Hofman LinkedIn Stanford philosophy major and active VC at Greylock, worth $3.6 billion. Suggested motto: I link, therefore I am.

7. Arash Ferdowsi Dropbox MIT dropout, built frst computer at age 10. Agreed to set up Dropbox just hours after meeting cofounder Drew Houston.

8. John Chambers Cisco In his 19th year running Cisco. Sequoia founder Don Valentine told him: Make lots 12 of acquisitions; “just don’t mess up the frst few.”

9. Brian Chesky Airbnb Disrupting the hotel industry. His newest fnancing will value Airbnb at 8 10 $10 billion, ahead of both Hyatt and Wyndham.

10. Elon Musk Tesla The electric car pioneer 9 13 briefed Jerry Yang on aluminum vs. steel compression ratios during a break in the photo shoot.

11. Adi Tatarko Houzz 11 Sequoia loves businesses built on their founders’ needs. She wanted better home decorating ideas; Houzz delivers them to millions.

12. Kevin Systrom Instagram Turned down a job at Facebook in 2005. Wise call: Made far more in 2012 selling Instagram to Facebook for $1 billion.

13. Fred Luddy ServiceNow An engineer who loves to build things: He shed the CEO role at ServiceNow because “I didn’t want to be in meetings all day.” See cover story on Sequoia, page 70. APRIL 14, 2014 FORBES | 19 LEADERBOARD 10,000% IPO gains expected to be realized by Apax Partners and Index Ventures, both of which invested in King Digital Entertainment in 2005.

SCoRECARD miSSED oppoRtunitiES winners bittersweet

ooMberG; A GorDoN/bl ooMberG; oCh: AMAND Warren Elon Mark Bufett Musk Vadon Cker/bl ANiel A

+$770 million : D

+$4.6 billion +$1.2 billion y

Net worth: oFSk Net worth: Net worth: Rowland Hommels $2.1 billioN $62.9 billioN $9.6 billioN Ap; leFk Not everyoNe iNvolved in the AMS/ berkshire hathaway posts tesla’s Ceo revs up Vadon’s zulily, an online development of the wildly popular game y Abr record earnings of production of the retailer for moms, reports app Candy Crush Saga will be cashing in A $19.5 billion in 2013, $70,000 Model S after that it doubled its sales and on its maker’s sweet initial public ofer- boosting its shares enough announcing that it outsold customers last year, and to bump up bufett one all similarly priced cars in cofounder Darrell Cavens ing. At least two people who had a role spot to world’s third richest. America last year. becomes a billionaire. with King Digital Entertainment will GeS; iCAhN: heNNy r

miss out on potential billions. Cofounder y iMA

and former co-CEO Toby Rowland and Gett CA/ C

early investor Klaus Hommels each sold A

more than 40 million shares back to the y buS

LOsers company for about $3 million in 2011, just Arr : l before the game launched. Had they held on, they would likely be worth nearly $1

billion each, at an expected IPO price of ooMberG; MuSk $24 a share. Ver/bl A Rowland told PrivCo, a private-com- t pany research frm, “I’d probably have GeS tthew S blown it on wine, women and a vanity y iMA Gett

space program.” He had thought King ADoN: MA Digital couldn’t make him enough money Carl Daniel Eric and left it in June 2008 to start Manga- ooMberG; V

Icahn Och Lefofsky High.com, which teaches children math c aN Ma y

-$860 million -$240 million -$240 million with online games. “My equity was quite tt eellS/bl y r o C ; hoMMelS: JohANNeS SiMoN/ x diluted down. The company was going to : S Net worth: Net worth: Net worth: UsH b

have to be very, very big if I was to have y cr S/reDu $23.3 billioN $3.9 billioN $1.6 billioN my boat,” he commented. Those who A preS his bet on herbalife—and his hedge fund’s shares the honeymoon is over: stayed, including cofounder and current ooMberG; buFFett aNder; caNd CAMer against rival hedge fund sink with the news that Groupon’s stock rose Chief Executive Riccardo Zacconi and / yD manager bill Ackman— some of its investments in steadily after he took over o Chairman Melvyn Morris, with 31 million aN aLeX

stumbles as the FtC opens Africa are part of a Justice as Ceo in August but has y d an investigation into the Department corruption now dropped 20% after a and 36 million shares worth perhaps $744 card b nutrition company. investigation. quarterly loss. and $864 million, respectively, will cer- AND: ChriS Fl wl ore c op: ANDrew hArrer/bl s t tainly have their boats. ro FiGureS reFleCt the ChANGe iN Net worth FroM Feb. 12, 2014 to MAr. 19, 2014. SourceS: InteractIve Data vIa FactSet reSearch SyStemS; ForbeS.

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On the ground and above the clouds, we have one focus: You

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LH.com LEADERBOARD 50% Relative size of Ukraine’s “shadow economy” relative to its GDP, according to the International Monetary Fund. OLIGARCHY

CRIMEAN PUNISHMENT Moscow With Crimea’s seizure by Putin’s Russia, business in the embattled peninsula is rocked by uncertainty, and the 6 million tourists a year it depends on may vanish. The ten billionaire oligarchs who dominate much of the economy have together Ukraine lost almost $4 billion, with Russians faring even worse than Ukrainians.

OIL AND GAS UKRAINE’S STATE-OWNED CHERNOMORNEFTEGAZ IS CRIMEA’S MOST LUCRATIVE ASSET, WORTH UP TO $2 BILLION AND PRODUCING 1.2 BIL- LION CUBIC METERS OF OIL AND NATURAL GAS A YEAR. ITS RESERVES WILL LIKELY BE SEIZED BY RUSSIA’S GAZPROM OR NATIONALIZED. YURIY KOSIUK NET WORTH AS OF MAR. 20: $1.4 BIL CHANGE SINCE FEB. 12: (–$0.1 BIL) Kosiuk heads Ukraine’s largest agricultural holding company. His poultry products have been hurt by import restrictions and inspections in the Russia-Ukraine economic war. KONSTANTIN GRIGORISHIN NET WORTH: $1.3 BIL (NO CHANGE) He controls power plants across the peninsula and has built a seaside spa resort and luxury apartments worth $300 million. KRASNOHVARDEISKOYE

KERCH

YEVPATORIYA

SAKY FEODOSIYA SIMFEROPOL

KOSTYANTIN ZHEVAGO CRIMEA ALUSHTA NET WORTH: $1.1 BIL (–$0.1 BIL) The founder and CEO of Ferrexpo, SEVASTOPOL a mining business, also owns a POPULATION large naval shipbuilder, Zaliv, on 2 MILLION YALTA the eastern edge of Crimea. (4% OF UKRAINE’S POPULATION) 2012 GDP IHOR KOLOMOYSKYY NET WORTH: $1.8 BIL $4.3 BILLION (–$0.3 BIL) (2% OF UKRAINE’S ECONOMY) HENADIY BOHOLYUBOV AREA NET WORTH: $2.1 BIL 10,077 SQUARE MILES (–$0.2 BIL) RINAT AKHMETOV The two own PrivatBank, (SLIGHTLY SMALLER THAN NET WORTH: $11.4 BIL Ukraine’s largest bank, MASSACHUSETTS) (–$1.1 BIL) which has suspended Ukraine’s richest man owns the operations in Crimea since ANDREI KLYAMKO ETHNIC BREAKDOWN new port Avlita in Sevastopol the Russian takeover. and has banking, oil-and- NET WORTH: $1.4 BIL (–$0.5 BIL) gas-exploration and electric- VADIM NOVINSKY NET WORTH: $1.4 BIL (–$0.1 BIL) transmission interests on the RUSSIAN peninsula. The two own Smart-Holding, which has mining and construction interests in 58% Crimea. Five years ago they started a $2 billion development for tourists to VAGIT ALEKPEROV OTHER the region. NET WORTH: $12.6 BIL (–$1 BIL) 5% LEONID FEDUN TATAR UKRAINIAN NET WORTH: $6 BIL (–$0.5 BIL) 13% The head of Lukoil and his right-hand man are 24% investors in a $61 million Radisson resort in the RUSSIAN UKRAINIAN MILITARY FACILITIES Crimean beach town of Alushta.

22 | FORBES APRIL 14, 2014 “ We live in a nice house and have a beautiful boat, but my family always says our most precious possession is o r way o life.”

Along with a unique way of life, Ocean Reef Club offers all the comforts and services of a small but sophisticated town. Airport • Marina • Golf • Spa • Fitness Center • Tennis • Theater • Medical Center • Restaurants • Inn • Pre K3 thru 8 Academy There are also comforts of a different kind. Among them, a tangible sense of privacy and security, tradition and values, and perhaps most important, a sense of belonging unlike any other club on earth.

There are only two ways to experience our legendary private club – as a guest of a Member or through the pages of Ocean Reef Club Living Magazine and our Real Estate Guide. Visit our website to request your copy or call our Membership Department to explore the possibilities. OceanReefClubLiving.com 305.367.5921

HOMES • VILLAS • CONDOMINIUMS • MARINA DOCKS • VILLA & HOME RENTALS PROMOTION | TECHNOLOGY

Building a Better Data Center From Energy to Operations

BY NANCEE RUZICKA Classifying data centers as mature technology might surprise some, but many data centers have been in operation long enough that owners, operators and customers are looking for ways to dramatically improve performance, and that means updating more than just servers.

he next generation of data centers begins to flatten—and that’s when data operational efciencies that can be gained must improve the efciency of the center operators begin to look for opera- by consolidating management solutions facilities, hardware, software and tional efciencies. and data to a single platform. Integrating Toperations to deliver performance Isolating facility managment from the management of software assets with facil- and cost savings that capture the atten- operation and man- ity and infrastructure tion of savvy business customers. A holistic agement of the IT management opti- approach that orchestrates all the elements infrastructure is “Integrating management mizes data center of a data center and its operation improves no longer a valid of software assets with performance and reliability and reduces errors and costs. approach to building reduces costs.” and running a data facility and infrastructure To that end, Capacity Guessing center. Factors like management optimizes Schneider Electric The biggest challenge facing data cen- environmental sus- data center performance has defned an opera- ter operators is the ability to understand tainability and energy tional maturity model and plan for growth. Facility construction costs must be contin- and reduces costs.” for data centers and requires long lead times and is depreciated uously managed and an instructional over 10 to 15 years. IT infrastructure and are greatly affected — JASON SCHAFER framework that software can be rapidly deployed and typi- by the utilization, per- SCHNEIDER ELECTRIC enables data center cally have a useful lifespan of 3 to 5 years. formance and power owner and operators Many companies are taking steps to better consumption of IT to identify critical align construction with IT infrastructure infrastructure and software applications. performance metrics and objectively eval- demands: for example, phased build-outs Software performance and fault toler- uate the way data centers are built and and deployment of standardized modular ance—or lack thereof—are having a much maintained. components with minimal customization greater impact on data center efficiency As data centers mature and custom- to reduce delivery times. and, ultimately, costs. As a result, data center ers expect more, capacity planning In addition to seeing improvements in infrastructure management (DCIM) solutions and operations management become power supply and IT hardware performance, must become more comprehensive. much more critical to cost-effectively today’s data centers are more efcient than meeting service level and performance ever before. Yet even with all these improve- Centralizing DCIM demands. Rather than resorting to the ments, eventually the efficiency curve With StruxureWare Data Center Operation, current reactive approaches to meet Schneider Electric is delivering a DCIM demand, data center operators would be solution that balances the demands of better served by capturing and analyz- availability and efciency across the entire ing operational data and performance data center. StruxureWare Data Center before construction begins. n Operations communicates with building, IT and network management systems to optimize energy and cost efciencies while improving capacity planning and provi- sioning of data center resources. Jason Schafer, Schneider Electric’s Director of Technology & Operations Management, Mission-Critical Services, IT Business, explains, “This is not just a tool For more information, visit for energy efciency; it’s about process and www.schneider-electric.com. We drive data center efficiency.

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Rack-to-row-to-room-to-building architecture lowers cost. > EcoBreeze with Two Economizer Modes Only the scalable EcoBreeze automatically Improving both efficiency and system uptime requires a second look at today’s data centers! Featuring innovative and industry-leading physical switches between air-to-air heat exchange infrastructure components, Schneider Electric™ data centers uniquely span and indirect evaporative cooling to maximize traditional IT “white space” and facilities to improve interoperability, deliver conditions year-round. true data center agility, and achieve cost-saving energy and operational > Data Center Facility Power Module efficiency. Our integrated architecture also lowers total cost of ownership, Our modular, step-and-repeat approach to enables fast and easy design and deployment, and promises the facility power lets you expand capacity in 500 kW highest availability. increments as needed, cutting OpEx by up to 35 It comprises best-of-breed components available from a single source and percent and CapEx from 10 to 20 percent. ™ through a global supply and services chain. From our well-known APC InRow > cooling units…to our innovative EcoBreeze™ facility cooling module with two StruxureWare for Data Centers economizer modes…to our unparalleled data center management software With building-to-server visibility, StruxureWare StruxureWare™ for Data Centers, Schneider Electric products can for Data Centers enables you to make informed be found literally in every data center domain. decisions about your physical infrastructure. We offer the most energy-efficient components — all uniquely engineered > Reference Designs as a system. In the long run, the Schneider Electric rack-to-row-to-room-to- Our standardized architectures for various data building approach reduces total data center life cycle cost up to 13 percent center conf gurations, from 200 kW to 20 MW, and 30 percent of data center physical infrastructure cost over 10 years! reduce time, cost, complexity, and system risk. In fact, it’s the foundation of our Business-wise, Future-driven™ data centers. > Data Center Life Cycle Services Including energy management services,

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©2014 Schneider Electric. All Rights Reserved. Schneider Electric, APC, Square D, InRow, EcoBreeze, StruxureWare, and Business-wise, Future-driven are trademarks owned by Schneider Electric Industries SAS or its affiliated companies. All other trademarks are property of their respective owners. www.schneider-electric.com • 998-1158241_GMA-US_Note3 LEADERBOARD $108 MILLION Average Major League Baseball team payroll for 2014—$4.3 million for each of the 25 players on an active roster.

SPORTSMONEY Williams College DIAMOND JUBILEE Sky-high local cable deals and the lack of a salary cap have fueled massive contracts for baseball’s top-earning players; 22 of them are set to earn least $20 million this year even before endorsements. Only 4 made that much fve years ago.

1. Ryan Howard philadelphia phillies earnings: $25.7 MiL • saLary: $25 MiL • endorseMents: $700,000 the slugger has a fve-year, $125 million contract through 2016, which the team can extend to 2017.

2. Cliff Lee philadelphia phillies earnings: $25.2 MiL • saLary: $25 MiL • endorseMents: $200,000 the lefty pitcher is in his fourth year plugging waste management frm J.p. mascaro & sons.

3. Joe Mauer minnesota twins earnings: $25 MiL • saLary: $23 MiLLion • endorseMents: $2 MiL deals with nike, rawlings, Kemps and steiner sports pad the six-time all star’s earnings.

4. Albert Pujols los angeles angels earnings: $24.8 MiL • saLary: $23 MiL • endorseMents: $1.8 MiL his angels contract climbs annually and peaks at $30 million in its fnal year, 2021, when he’ll be 41.

5. Robinson Cano seattle mariners earnings: $24.5 MiL • saLary: $24 MiL • endorseMents: $500,000 the second baseman scored this winter with a ten-year, $240 million free agent deal.

6. Prince Fielder texas rangers earnings: $24.4 MiL • saLary: $24 MiL • endorseMents: $400,000 the tigers agreed to eat $30 million remaining on his contract when they traded him in november.

7. Zack Greinke los angeles dodgers earnings: $24.05 MiL • saLary: $24 MiL • endorseMents: $50,000 his six-year, $147 million dodgers deal was the largest ever for a right- handed pitcher when he signed it in 2012.

8. Miguel Cabrera detroit tigers earnings: $24 MiL • saLary: $22 MiL • endorseMents: $2 MiL the two-time most Valuable player award winner’s partners include new Balance, sony and Chrysler.

new york yankees

9. Masahiro Tanaka Ges earnings: $23.5 MiL • saLary: $22 MiL • endorseMents: $1.5 MiL his of-feld earnings are expected to soar now that he has joined the y Ima Gett

yankees from Japan with a $155 million contract. /

new york yankees 10. CC Sabathia earnings: $23.4 MiL • saLary: $23 MiL • endorseMents: $400,000 umenfeLd usen the 2007 Cy young winner is tied for the most career wins among a BL active pitchers. adenha ard: LIs w t b ur y k Ges; ho y Ima smoney b t op: Gett spor t

26 | FORBES APRIL 14, 2014

LEADERBOARD 40 Number of months it took Citadel’s fagship funds to gain back all their losses after the September 2008 fnancial crisis.

path to success

Ken Griffin’s mostly happy returns haRVaRD’S hElPING haND in February 2014, with his net YEAR-END $18.0 THE HEAD OF $18 billion hedge fund Citadel began trading from worth at $5.2 billion, grifn ASSETS UNDER J his dorm room as a Harvard undergrad. Now recovered from a bru- MANAGEMENT ($BIL) donates $150 million to his college, to be used primarily for tal credit-crisis thrashing, he just donated $150 million to his alma 26% fnancial aid. mater, the biggest gift in its history. CITADEL FLAGSHIP IF ThE ShORT FITS … FUNDS' NET RETURN earns money repairing computers for iBm while a student at Boca raton community High. CRUShED BY ThE CRaSh at age 18 proftably shorts the Such forward-march tactics backfre in late 2008 amid global Home Shopping Network after 20% 20% fnancial panic; citadel halts inves- reading a ForBeS article about $12.3 the televised-retail operation. tor redemptions after its fagship J funds take a 50% hit—“one of the most difcult decisions i ever made.” the next year he shifts to all IN ThE FaMIlY $11.1 J more straightforward investments Born in 1968 in daytona and returns 62%. “We were overly Beach, Fla. His grandfather $10.5 J confdent,” he admits. had died fve years prior, leaving behind a small oil company. Bankers descended with bids, but grifn’s grandmother took over, learned the trade and years later sold 11% POWER PlaYS out for “several times” those enron’s implosion sparks an inter- initial ofers. est in energy trading; grifn picks up distressed energy holdings from struggling amaranth advisors in 2006: “time and again, we have entered into businesses just as others were retreating.” RaISING FUNDS, TRaDING BONDS While majoring in economics at Harvard, pulls in $265,000 for his frst fund from investors including his grandmother. trades bonds via a computer program he wrote himself. 2010 2011 2012 2013 GREaTER aSSETS, hIGhER PROFIlE citadel’s assets under management hit $1 billion in 1998. Five years later grifn debuts on the Forbes 400 with a fortune of $650 million.

Meyer CITaDEl aRISES ROOKIE OF ThE YEaR Just 22, launches citadel in 1990 with catches the eye of hedge fund $4.6 million, one computer and two manager Frank meyer, who in employees. His aim: to create “a frm 1989 persuades him to move that harnesses technology and quan- to glenwood capital invest- titative methods” to tease out hidden ments in chicago. returns market opportunities. Unorthodox 70% in his frst year there. for the era, and efective: citadel averages a 42% return its frst two years. BY halah TOURYalaI TOURYalaI halah BY BloomBerg citadel: BloomBerg; top:

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BILLIONAIRES WHO FELL OFF THE LIST @ZAKYS911 That’s the proof that even the most successful businessmen can make spectacularly bad bets.

@APESUGAR Now they’re just pathetic millionaires? Losers.

BILL GATES BACK ON TOP @GOODNEWSGODDESS Funny how the more Gates the world’s richest people king koum gives, the richer he gets. FORBES, MARCH 24, 2014 FORBES, MARCH 24, 2014 @MAC5WEBDESIGN 9,710,101 VIEWS ON FORBES.COM 860,789 VIEWS ON Oh good. I’ll bet he was FORBES’ annual billionaires issue listed a record 1,645 people FORBES.COM worried for a sec there. around the globe with a net worth in ten or more fgures, and Senior writer Parmy Olson The Guardian observed that “2013 will be remembered as broke the story of Jan CALIFORNIA HAS THE MOST a good year for the world’s super rich,” as they now are all Koum’s amazing journey BILLIONAIRES @COPPERBITE together worth $6.4 trillion, up from $5.4 trillion in 2012. The from penniless teenage Two words: Silicon Valley. richest of all: Bill Gates, at $76 billion, “despite seemingly Ukrainian to 38-year-old doing his best to drop down the list by giving away lots of American entrepreneur @HANDSOME_HANLEY his lucre via his charitable foundation,” as Digital Trends who sold his business to Thought they were all leaving put it. The growing number of women on the list got particu- Facebook for $19 billion. because of the taxes there and lar attention. The Daily Mail wrote, “The old boys’ club bet- Commenter Rob Rosen- the economic mess. ter learn how to talk to girls, as there now are more female berg appreciated Koum’s billionaires than ever. A record 172 women made this year’s “nice touch to sign the @NVGHOST005 FORBES magazine billionaires list, up 25% from last year.” [Facebook] papers where And yet California cannot Maria Caspani of the Thomson Reuters Foundation observed he had collected his food manage its tax base well that “a sixth of all newcomers on the list are women … stamps.” The Telegraph enough to keep its utilities possibly indicating that climbing the ladder is getting a noted that Mark Zuck- stable. Go fgure! bit easier,” but added, “It’s interesting to note that only 32 erberg’s pursuit of the of the 172 billionaire women are self-made.” Online com- deal was “similar to [his] AMAZON’S WAR ON THE HOUSE OF OTTO menter Will Ganness thought at least one of them had consid- courtship of Kevin Sys- @PETER_S_BECKS1 erable help along the way: “Not sure I would include Sheryl trom, who owned Insta- I guess we the consumers are Sandberg. … Working for the president of the U.S. and then gram before he sold it to the trophy in this battle for meeting Zuckerberg at a Xmas party who then frames up a Facebook for $1 billion last supremacy. major position in his company just for her … is not exactly year.” Matt Silk added, “FB the same.” Many readers were fascinated by the youngest needed to fnd the fastest billionaire of all, a Hong Kong heiress named Perenna Kei. path to get the next billion favorite The Sydney Morning Herald wrote, “Little is known about users connected. ... Is it 24-year-old Perenna Kei, other than that it clearly pays to plausible that WhatsApp tweet be loyal to her father”—he’s a Chinese real estate king who becomes the gateway drug @ConanOBrien made her an 85% shareholder of his Logan Properties. The for FB in every country? Forbes released the list of sbun South China Morning Post added, “Perenna Kei is described ... [Then] $19 billion spent the richest billionaires. a Ha as ‘secretive,’ which is probably a very sensible thing for a doesn’t seem all that crazy Kinda makes you feel bad op: Gabriel young person in her position.” anymore.” for the poorest billionaires. t

30 | FORBES APRIL 14, 2014

thought leaders lee KuaN YeW — CurreNt eVeNts china unfettered old rules No loNger biNd

A rising ChinA is seeking to Americas and Vasco da Gama arrived assert its sea-boundary claims. It is in India. More than six centuries ago naive to believe that a strong China Emperor Zhu Di of the Ming Dynasty will accept the conventional defni- sent out a large feet of trading ships tion of what parts of the sea around to explore and trade with the rest of it are under its jurisdiction. This the world. His choice to command should come as no surprise, but it the expedition was Grand Eunuch has been uncomfortable for some of Zheng He (1371–1433). Zheng He was China’s neighbors and other stake- born and raised a Muslim in what is holders, including the U.S. now Kunming City in Yunnan Prov- China, Brunei, Malaysia, the Phil- ince. He was captured by Ming Dy- ippines and Vietnam are engaged in nasty forces around 1381 and taken long-standing territorial and mari- to Nanjing, where he was castrated time disputes in the South China between the Philippines and China. and subsequently sent to serve in the Sea. The Philippines, under the UN Why this sudden interest in some palace of Zhu Di, who was then the Convention on the Law of the Sea outcroppings in the South China Prince of Yan and would later be- (UNCLOS), has initiated internation- Sea? What gas or oil can be drilled come Yongle Emperor. al arbitration. The arbitral tribunal is or fsh caught around these rocks? Over the course of nearly three proceeding, even though China has de- Much more is at stake than rocks decades (1405–33) Zheng He led cided not to participate in the hearings. and resources. China sees the South seven westward expeditions, which If a negotiated agreement can’t be China Sea as one of its key interests. were unprecedented in size and reached, the ideal solution would be to A rising China is asserting its position range. They spanned the South resolve the dispute based on interna- by claiming historical rights to these China Sea, the Indian Ocean and the tional law and legal principles, includ- waters. And the disputes, which arise Persian Gulf, and reached as far as ing UNCLOS, that have been estab- from claims based on diferent prin- the east coast of Africa. The ships lished in many other such cases. Can ciples, are unlikely to be resolved. used for these expeditions—more this be done through a juridical plat- One-third of the world’s trade than 400 feet in length, based on form, such as the International Court passes through the South China Sea, archaeological evidence—were many of Justice (ICJ)? Keep in mind that a vital sea line of communications. times the size of those Columbus major powers, including China and Many other countries also have im- used to sail across the Atlantic. the U.S., don’t generally submit to the portant interests there. These include These expeditions amply demon- jurisdiction of the ICJ or other such fo- the freedom of navigation and over- strated the power and wealth of the rums. A resurgent China isn’t going to fight, as well as the peaceful manage- Ming Dynasty. More important, they allow its sea boundaries to once again ment of disputes. Quite apart from left a lasting impact on the countries be decided by external parties. There- preventing mishaps and incidents, a visited: Numerous masjids (mosques) fore, I don’t believe the Chinese will framework to manage the diferent in the region are named after Zheng submit their claims, which are based interests should be established. He, commemorating his contribu- primarily on China’s historical pres- Looking to the past tions to the local communities. ence in these waters, to be decided by If historical claims can defne rules that were defned at a time when China’s reliance on historical claims jurisdiction over waters and oceans, China was weak. And China has judged necessitates considering what its the Chinese can point to the fact that the U.S. won’t risk its present good feets did in the past, way before that 600 years ago they sailed these relations with China over a dispute Christopher Columbus landed in the waters unchallenged. F

Lee Kuan Yew, FORMER PRIME MInIStER OF SIngAPORE; DaviD MaLpass, gLOBAL EcOnOMISt, PRESIdEnt OF EncIMA gLOBAL LLc; aMitY shLaes, dIREctOR, thE 4% gROwth PROjEct; And pauL Johnson, EMInEnt BRItISh hIStORIAn And AuthOR, ROtAtE In wRItIng thIS cOLuMn. tO SEE PASt cuRREnt EvEntS cOLuMnS, vISIt OuR wEBSItE At www.forbes.coM/currentevents.

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“Take a risk, take a chance, make website informs. “If you do not pro- a change and break away.” vide their information … the applica- It’s been a decade since Kelly Clark- tion will be considered ‘rejected.’ ” son frst belted out “Breakaway,” yet the What might allow the younger song lives on. Finalists competing on generation to break away naturally? the TV show where Clarkson frst made • The military. Active-duty 19-year- her name, American Idol, still sing it. olds get the pleasure of informing No wonder “Breakaway” is popular. their parents that they can no longer The lyrics capture a stage of life perfect- be claimed as tax dependents. ly. That unmistakably brutal breakup • Cheaper colleges. This would help with Mom and Dad: “So I prayed I lighten another burden, college debt. could break away.” That rash frst move: • More programs that reward “Get on board a fast train.” That pride youthful boldness. One such pro- in proving independence: “I’ll spread gram is funded by billionaire Peter my wings, and I’ll learn how to fy.” away—from their parents. Some do, Thiel. Every year the Thiel Fellow- This disconcerting chain of events but millions of others resent the pro- ship gives $100,000 each to 20 teens can achieve some impressive results, cess. This may be because they sense (19 or younger) who focus on “their whether in TV competitions or in lon- a racket. Our vast fows of fnancial work, their research and their self- ger-term contests. And it can set a pat- aid permit universities to raise tuition education” instead of entering college. tern of independence. Unfortunately, a generally, which yields a perverse re- • Merit aid. This could bring the big- force every bit as powerful as American sult: The more subsidy families get, the gest change and also provides an Idol- Idol blocks the great breakaway. That more school costs overall. In any case, level rush. “Need-based fnancial aid force is our own social policy. Our poli- such resistance is what drove President will never have the same positive psy- cies lure and sometimes even push the Obama into the imperative mode, or- chological efect as a merit scholarship,” young right back into someone’s care— dering high schoolers in Miami to “fll wrote an undergraduate at the Univer- the government’s or their parents’. out the form.” The resistance testifes to sity of Virginia in The Cavalier Daily. One such policy is college fnance. the premium parents place on autono- “Students have the right to be recog- The Department of Education’s fnan- my. Many working-class high schoolers nized for the quality of their work.” Yet cial aid form, the Free Application for also resent awards that focus on need. our colleges, which collude with the Federal Student Aid, is often the frst Children of higher earners fnd Department of Education, trash merit form young Americans confront, well themselves shoved not into govern- aid as impossibly retrograde. before the taxman’s 1040. The FAFSA ment’s arms but rather their parents’. Disrupting the great breakaway asks young people to make what is, in They are forced to make a choice: col- dulls the spirits. This disruption can efect, a Declaration of Dependence. lege or freedom from family. The high- set a pattern for the rest of a person’s To complete the FAFSA the applicants er the university tuition or the more life—if not of dependence, then cer- must demonstrate not what they can prestigious the school, the more likely tainly of cynicism. It all matters be- do but what they and their parents young people will need fnancial sup- cause one sluggish graduating class need. In exchange the FAFSA ofers a port. But the FAFSA denies them the after another doesn’t produce the veritable smorgasbord of breaks. cash. Instead, the form insists they hit kind of innovative growth rebels do. You’d think families who can’t af- their parents up. “You can’t be consid- Stronger growth lightens entitlement ford college would love this deal, as the ered independent of your parents just burdens for all. The truth about the money enables their sons and daugh- because they refuse to help you with younger crowd? If they can’t break ters, by going to college, to indeed break this process,” the Federal Student Aid away, we can’t either. f

Amity ShlAeS, dIREctOR, thE 4% gROwth PROjEct, gEORgE w. BuSh InStItutE; PAul JohnSon, EmInEnt BRItISh hIStORIAn And AuthOR; lee KuAn yew, FORmER PRImE mInIStER OF SIngAPORE; And DAviD mAlPASS, gLOBAL EcOnOmISt, PRESIdEnt OF EncImA gLOBAL LLc, ROtAtE In wRItIng thIS cOLumn. tO SEE PASt cuRREnt EvEntS cOLumnS, vISIt OuR wEBSItE At www.FORBES.cOm/cuRREntEvEntS.

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In 2012 the European Union was Treasurys and $562 billion in annual awarded the Nobel Peace Prize. What bilateral trade, is trickier. was once the European Coal & Steel Despite Republicans’ criticism of Community, the committee wrote, had President Obama, there are no easy alter- evolved into a “successful struggle for natives. In an incoherent op-ed for Time peace, reconciliation and for democ- Republican Senator Rand Paul counseled racy and human rights.” There’s much suspending U.S. aid to Ukraine and getting to be said for the thought that Europe’s Europe to pay for costly American missile- economic integration has led to lasting defense systems, while also saluting Ron- peace. But the crisis in Ukraine shows ald Reagan’s program of “peace through that global interdependence can be a strength,” a success that Reagan achieved source of weakness as well as strength. thanks to a deficit-financed military build- After the Crimean invasion a Brit- up that Paul would today oppose. ish ofcial was photographed hold- Wilson longed for. From Quebec to President Obama famously declared ing a document recommending that Scotland to Catalonia to Crimea to in 2009 there would be a “reset” in U.S.- the U.K. oppose “trade sanctions” Kashmir, one man’s country is another Russian relations, one whose central against Russia or any measure that man’s landlord. Putin has reportedly plank was the forgiveness of Russia’s would “close London’s fnancial cen- called the breakup of the Soviet Union 2008 invasion of Georgia. In 2001 Putin tre to Russians.” Germany gets 35% the “greatest geopolitical catastrophe” told George W. Bush a moving story about of its gas supply from Russia. Europe, of the 20th century, not least because it a cross Putin’s mother had gotten blessed by and large, has been even more left 25 million ethnic Russians outside in Jerusalem; Bush subsequently said reluctant than America to challenge that he had obtained “a sense Vladimir Putin’s land grab. inTerdependence of [Putin’s] soul.” Failure to For a time it was the U.S. Republican address Russia’s growing bel- Party that most vociferously opposed can be a source of ligerence has been bipartisan military adventures. Robert Taft, the weakness as weLL as and multinational. Senate majority leader known as “Mr. sTrengTh This is how wars begin. Republican,” inveighed often against Democratic economies fear FDR’s involvement in World War II. the material downside of War, said Taft, would result in “the prac- of Russian borders. confronting aggression, even if it would tical establishment of a dictatorship in We Americans have tried valiantly to prevent a wider confict. We often talk this country through arbitrary powers see these as issues for others to address. about learning the “lessons of history.” granted to the President, and fnancial But if Russia continues to annex Russo- But G.W.F. Hegel once observed that and economic collapse. … Nor do I think phone enclaves in eastern Europe, “what experience and history teach is that our intervention in Europe can per- these problems will avoid us no longer. this—that people and governments have manently solve the European problems Will Putin test the borders of NATO? never learned anything from history.” any more than it did in 1919.” What happens when China annexes the The “end of history” is not yet Taft was certainly right about that South China Sea or, worse, Taiwan? upon us. Free trade and the expan- last part. The European problem has Over the mid to long term the sion of democracy have done much not been permanently solved. U.S. can do much to blunt Russia’s to reduce confict around the world. The challenge is that people don’t leverage over Europe, principally by But so has American hegemony. The sort themselves neatly into the ethno- exporting oil and gas to the continent. U.S. will fnd relinquishing its lead- centric nation-states that Woodrow But China, with its $1.3 trillion in U.S. ership is far more expensive than maintaining it. f avik roY IS FORBES’ OPInIOn EdItOR, A SEnIOR FELLOw At thE MAnhAttAn InStItutE FOR POLIcy RESEARch And thE AuthOR OF How Medicaid Fails tHe Poor.

36 | FORBES APRIL 14, 2014

thought leaders rICh Karlgaard — INNoVatIoN rules Peter Drucker and me

I was lucky enough to meet the builders of new churches could learn great thinker Peter Drucker in 1996 about entrepreneurship and manage- and again in 2004, about a year be- ment. Drucker agreed to help. Thus fore his death. Both visits were to his did Drucker play a role in the mega- modest home in Claremont, Calif. All church boom of the 1980s and beyond. who visited Drucker have brought One early member in the Leader- up the house. One would walk up ship Network was Bill Hybels, who and down Wellesley Drive in a state had started Willow Creek Commu- of confusion, wondering if the small nity Church in suburban Chicago by house at 636, with the two Toyotas going door to door and asking people in the driveway, could really belong what they liked and didn’t like in a to Drucker. This couldn’t be where church. Because so many had an- Drucker advised the leaders of Proc- swered with “Always being pressed ter & Gamble, GE and IBM, among “quest for signifcance.” for money,” Hybels started his church others; wrote his books; crafted his Buford listened to Drucker. During with no ofering plate. For the frst speeches; and strengthened the pil- the next 12 years his cable company six months he fnanced it by buying lars of Western civilization. Could it? grew more than 20% a year and ex- vegetables wholesale from his father’s But it was, and the meetings with panded beyond Texas. By his mid-50s produce business and using high Drucker always took place in a back Buford was more fnancially success- school volunteers to sell them at re- addition, which had once been a ful than he’d ever dreamed he’d be. tail. Hybels was a born entrepreneur. patio, past the hallway with its olive- Seeking Significance With the aid of Buford and Drucker’s colored pile carpeting and tan walls. counsel he built Willow Creek to This is where Drucker would sit you Buford began feeling a call to enter more than 20,000 parishioners. down and ask in his deep Austrian ac- the world of nonprofts. The older Rick Warren, founder of the cent, “Now, how may I assist you?” Drucker had felt the same calling. 20,000-plus-member Saddleback These Druckerian memories have Drucker, who was born in Vienna, Church in Lake Forest, Calif., had surfaced, thanks to the delightful Austria in 1909, had watched Europe also sought out Buford and Drucker. Drucker and Me (Worthy Publish- disintegrate under despotic leaders In 2004 Warren invited me to visit ing, 2014), a book by Bob Buford, a and two wars that claimed more than Drucker with him. Drucker, who cable-TV magnate turned philan- 100 million people. Drucker devel- would die 14 months later at age 95, thropist. Buford inherited his small oped a theory. He believed that a vig- wasn’t well when we saw him. But family business in Tyler, Tex. after orous nonproft sector of churches, he lit up at the word “purpose” and his mother died in a fre. By his early libraries and organizations such as talked nonstop for 20 minutes about 40s Buford felt overwhelmed. He the Salvation Army could do more why divine purpose was the foun- reached out to Drucker for help. than lift up human beings. They dation of a healthy society. Then he Drucker granted it. could also be bufers between private stopped talking and quickly faded. Before the initial visit Drucker interests and public governance. Warren held his hand and said a told Buford to write a long letter So Drucker and Buford continued prayer. Drucker bowed his head and about what he wanted to accomplish. to meet. Drucker’s Socratic questions squeezed Warren’s hand. It was my Buford soon learned that Drucker helped Buford defne his “quest for sig- last memory of Drucker. had no interest in talking about f- nifcance.” Buford, a Christian, created Thanks to Bob Buford’s wonder- nance or operations. He wanted to an organization called the Leadership ful book, Peter Drucker comes to life hear all about Buford, his life, his Network, under the auspices of which again. F dreams, his hopes. Drucker patiently Rich KaRlgaaRd IS thE PuBLIShER At FORBES. hIS nExt BOOk, the soft edge: where great companies find lasting drew from Buford what he called his success, wILL BE Out In APRIL. FOR hIS PASt cOLumnS And BLOgS vISIt OuR wEBSItE At www.foRbes.com/KaRlgaaRd.

38 | FORBES APRIL 14, 2014

StrateGIeS health care InnovatIon

Biotech’s Next Big Thing After decades of experimentation and failure is gene therapy fnally ready for prime time? Investors certainly think so. By Matthew herper

lliott Sigal earned a reputation was an obvious idea. If defective genes cause at Bristol-Myers Squibb as one disease, why not replace them? Genetically of the drug industry’s best re- modifed viruses do just that, inserting their search chiefs. His bets on risky DNA into our cells. (This is normally how technologies like cancer immu- viruses reproduce.) Enotherapy and new types of diabetes drugs After Francis Collins, now head of the helped Bristol turn from a laggard into a National Institutes of Health, found the gene growth stock. But there was one technology for the lung disease cystic fbrosis, a decade of he wouldn’t touch: gene therapy, which tries work by many groups found the engineered to use engineered viruses to defeat disease at viruses just couldn’t get into the lung. the DNA level. “I was burned on it myself 20 A lack of efcacy in gene therapy wasn’t years ago,” he says. “When they told me gene the worst problem. In 1999 Jesse Gelsinger, therapy was back, I couldn’t believe it.” a teenager with a genetic liver disease, died So what’s Sigal doing now? As a venture when the adenovirus carrying a corrective partner at New Enterprise Associates, he gene made him very, very sick. Investor money just took his frst board seat—at a gene thera- dried up. py company, Philadelphia’s Spark Therapeu- But a small group of scientists kept the tics, which raised $50 million last October feld alive. One of them was Kathy High of from the Children’s Hospital of Philadelphia the Children’s Hospital of Philadelphia. She and hopes to launch a treatment for a genetic thought gene therapy researchers had been form of blindness in as little as two years. making two mistakes: using a virus that might Spark is far from alone. The once aban- make the patient very sick (the adenovirus) doned gene therapy feld has become a hot- and not carefully picking the diseases they bed, with 11 diferent companies raising at would treat. “People were choosing targets least $618 million from venture capitalists based on high unmet medical need and the Gene therapy “is no and the public markets since the beginning of size of the market, not based on the scientifc longer a theory,” says 2013, and one more, AGTC, plans a $50 mil- evidence that gene therapy would impact the Nick Leschly, CeO of lion initial public ofering soon. Top venture disease,” she says. Bluebird Bio, which ran a successful $116 capital frms are among their backers, and High decided to use not adenovirus but million IpO in June. some of the industry’s top talent is being at- another, apparently harmless virus, called tracted to what was once seen as a lost cause. adeno-associated virus (AAV), which seems The iShares Nasdaq Biotechnology Index is to piggyback on adenovirus infections in the up 65% in 12 months. wild. The gene therapist’s modifed AAV “It’s no longer a theory. There’s data show- sneaks little pieces of DNA into patients’ ing the real impact on patients that this kind cells. That piece of DNA can contain a gene of therapy can have,” says Nick Lesch ly, the that makes a healthy version of a defective chief executive of Bluebird Bio, a frm in Cam- protein in a particular patient. bridge, Mass. that’s backed by Third Rock To further boost her odds, High focused Ventures and ran a $116 million IPO in June. her early work on eye disease. The inside Even a few years ago Leschly’s statement of the eye, and also, amazingly, the brain, is would have drawn gufaws. Gene therapy walled of from the immune system, unlike

40 | FORBES ApRil 14, 2014

the lungs or skin. That makes a gene therapy of the gates that transport fats into and out of far more likely to work, because existing an- cells causes buildups of fatty acids through- tibodies won’t treat it as an invader. out the body, including in the brain. Instead of In adults and children who had gone blind injecting the virus into the body, in Bluebird’s because of a bad version of a gene called approach cells (in this case, bone marrow stem RPE65, High’s approach yielded amazing re- cells) are removed and treated with another sults. In one trial 12 patients, 5 of them kids, virus, lentivirus. Unlike AAV, lentivirus inserts had dramatic improvements in their sight. the genes permanently into the cell’s DNA- The children were able to move from Braille containing chromosomes. These stem cells are classrooms to sighted ones. A late-stage reinjected; Bluebird is running a phase III trial study that could result in the treatment’s in 15 patients and aims to get its treatment on J a s on Gro approval is ongoing. the market in the next several years. Bluebird has another rare disease in its These treatments won’t be cheap. The frst w f

or f near-term sights: adrenoleukodystrophy, bet- gene therapy ever to clear a regulator was ap- orbes ter known as the disease featured in the movie proved in Europe in 2012 by the Nasdaq-list- Lorenzo’s Oil. In the disorder a malfunction ed frm uniQure. Reports pegged the price

ApRil 14, 2014 FORBES | 41 StrateGIeS health care InnovatIon at $1 million; CEO Joern Aldag disputes that self to produce more dopamine. any price has yet been set. The treatment is “It is really exciting to see how rapidly sci- not yet on the market. But that kind of pricing ence and medicine are changing to make a power—beyond even the norm of $300,000 big dif erence for patients,” Levin says. per patient per year and up for rare-disease The viruses used in gene therapy have drugs—is enticing more and more companies also joined the war on cancer. Novartis, Blue- to enter the f eld. bird and Juno Therapeutics, which raised trenDInG $120 million in venture capital last year, are One of the hottest areas is already one of what the 60 million the biggest markets for expensive biotech all working on cells genetically engineered Forbes.com users are talking drugs: hemophilia A and B, the genetic dis- to hunt down tumors. Early results in blood about. For a deeper dive go eases that cause the blood not to clot properly, cancer show dramatic reductions in the to FOrBeS.COM/BUSINeSS potentially leading patients to bleed to death. number of cancer cells in patients who had

“Gene therapy for hemophilia A possi- few other options. COMPANY bly could be our biggest product,” says Jean- And biotech researchers are dreaming of BOeING Jacques Bienaimé, chief executive of rare- doing far more. Even viruses like lentivirus, The Malaysia airlines disaster disease specialist Biomarin, which forecasts which write DNA directly into a cell’s chromo- puts the company back in the headlines for all the wrong revenue of at least $650 million this year. some, can make only limited additions to the reasons. Bienaimé says his compa- patient’s genes. They’re like ny estimates there are 50,000 adding an ingredient to life’s PERSON VLaDIMIr pUtIN type A hemophiliacs in terri- GOING VIraL recipe book. But what if you COMPANIES THAT USE VIRUSES with Crimea seizure world’s tories where it markets drugs TO REPLACE DISEASE GENES need to change the recipe? Most Powerful Man proves and who are receiving hemo- HAVE BEEN BOOMING—AT LEAST Recently, researchers have a triumph of ego over philia medicine; that would WHEN IT COMES TO FUND- been working with a series of economics. bad plan. He’ll see. RAISING. LOOK HOW MUCH be his addressable market. A THESE FIRMS HAVE RAISED proteins, originally found in IDEA company called Dimension SINCE THE BEGINNING OF 2013. the immune systems of bac- BaKKeN CrUDe VOLatILIty Therapeutics is competing teria, that allow them to cut COMpaNy raISeD railroads scramble for with Biomarin; Spark, Dimen- aIMs To TreaT ($MIL) DNA in specif c places and new tank cars as vapor- sion and hemophilia expert splice it back together. This pressure studies indicate GeNSIGht BIOLOGICS Baxter International are chas- GeneTIC bLInDness $41 technology, called CRISPR/ north Dakota oil is potentially ing hemophilia B. Cas9, might be deliverable to as combustible as gasoline. BLUeBIrD BIO The promise of the tech- “LorenZo’s oIL” DIsease $116 cells using gene therapy. Edi- nology has some venture cap- tas Medicine was launched aUDeNteS therapeUtICS italists pushing far beyond X-LInKeD MYoTUbULar in November with $43 mil- rare genetic diseases. San Di- MYoPaTHY $30 lion in capital by Flagship ego’s Celladon, which raised SparK therapeUtICS Ventures, Polaris Partners $51 million in an IPO earli- GeneTIC bLInDness $50 and Third Rock to turn that er this year, is aiming to treat DIMeNSION dream into a reality. heart diseases like advanced therapeUtICS Still, laboratory success HeMoPHILIa >$10 heart failure, in which the doesn’t ensure f nancial suc- heart muscle becomes too eDItaS MeDICINe cess. “We may be taking a re- weak to function. YeT To be DeTerMIneD $43 ally simplistic view that if Mark Levin, the former JUNO therapeUtICS you’re able to come close to chief executive of Millennium CanCer $120 treating grievous illness, the

Pharmaceuticals and found- CeLLaDON pricing and getting paid and er of Third Rock Ventures, aDVanCeD HearT developing a valid business faILUre $51 is now serving as interim model will take care of itself,” chief executive of a compa- UNIQUre says Kevin Bitterman of Po- LIPoProTeIn LIPase ny named Voyager Therapeu- DefICIenCY $92 laris, who is serving as Editas’ erIC reeD / InVIsIon aP (LefT) tics, which aims to treat Par- interim president. “The goal VOyaGer therapeUtICS kinson’s disease. Patients now ParKInson’s DIsease $45 very simply is to leverage this get a drug to raise dopamine technology to develop a new NIGhtStarX levels, but it eventually stops reTInaL DYsTroPHIes $20 class of therapeutics against working; Voyager’s gene ther- genetic disorders.” Eager in- VenTUre CaPITaL  InITIaL PUbLIC offerInG apy would cause the brain it- vestors, take note. F

42 | FORBES ApRil 14, 2014

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The Green Monster

Winning the World Series was nice, but John Henry and his Fenway Sports Group have plans to build a global sports juggernaut.

By Kurt Badenhausen Jay Z is looking for a place to play in Bos- ton, and pal LeBron James sells him on Fenway Park. British soccer team Liverpool is looking for a jersey sponsor—at the last minute Boston- based New Balance sweeps past rivals to do the deal. Best Buy decides to stop sponsoring the Boston Red Sox—it moves that money to Nas- car, backing Roush Fenway Racing instead. None of this is happenstance, and none of this is what you’d expect from a company with its roots in one of the most tradition-laden franchises in the most tradition-laden sport. As corporations go, the Boston Red Sox are no more—they are but a cog (with Liverpool and the Nascar team as the other cornerstone assets) in the Fenway Sports Group, the most sophisticated, synergistic player in the coming age of international sports conglomerates. FSG is attempting to marry the clubby world of team ownership and the slick feld of sports management. A sport conglomerate that’s integrated vertically, horizontally— and globally—Fenway Sports Management handles all sponsorships for its three teams, as well as players and squads it doesn’t own, including James, Heisman winner Johnny Manziel, Boston College, MLB Advanced Me- dia and the PGA’s Deutsche Bank Champi-

onship. Sponsors face a bewildering array of Ges;

possibilities across teams, events and athletes. Ges

Way beyond baseball: fsG total valUe: y ima

From LeBron James $3.3 bil “We wake up every day and think about how y ima to Liverpool at to increase revenues because we think that is c / Gett

nesn (80% staKe) a / Gett Fenway, John henry’s 24% the best way to fuel a winning product,” says t international sports $800 mil conglomerate is fnding red sox co-owner Tom Werner, who originally made LiverpooL $1.5 bil new ways to win. his bones in Hollywood, producing the likes of

46% om; marc sero

$750 mil well / liverpool f c 23% The Cosby Show and Roseanne. s FenWay sports “They have been able to go deep and wide,

ManageMent 5% op: John po $150 mil which is why they have so much clout,” says 2% David Carter, executive director of the Uni-

roush FenWay (50% staKe) versity of Southern California Sports Busi- wise from t tthew healey / Upi new $78 mil ock cl ness Institute. “Everything they are doing ma

44 | FORBES APRIL 14, 2014 around the world is more unique and aggres- wired for money sive than others.” mlb team profts are down, but values keep rising thanks to cable television deals. The genesis has been incremental. Com- modities trader John Henry was drawn to vaLue operating Current1 1-year revenue inCoMe2 sports the way most rich guys are: as a trophy ranK teaM ($MiL) Change ($MiL) ($MiL) investment that tends to appreciate whether or not it makes money. His frst major foray 1 New York YaNkees $2,500 9% $461 $–9.1 into pro sports was as owner of the Florida 2 Los aNgeLes DoDgers 2,000 24 293 –80.9 Marlins. Henry then upgraded when he, to- 3 BostoN reD sox 1,500 14 357 25.3 gether with partners Werner and Larry Luc- 4 ChiCago CuBs 1,200 20 266 27.3 chino, bought those legendary losers, the Red 5 saN FraNCisCo giaNts 1,000 27 316 53.3 Sox—along with historic Fenway Park and its 6 PhiLaDeLPhia PhiLLies 975 9 265 –20.9 famous Green Monster wall, and 80% of re- 7 texas raNgers 825 8 257 –4.9 gional sports network NESN—for $700 mil- 8 st Louis CarDiNaLs 820 15 283 65.2 lion in 2002. The Sox were a middling club 9 New York Mets 800 –1 238 1.6 fnancially back then, ranking tenth or low- 10 La aNgeLs oF aNaheiM 775 8 253 5.8 er among MLB’s 30 teams in suite revenue, 11 atLaNta Braves 730 16 253 38.4 sponsorships and concessions. 12 seattLe MariNers 710 10 210 5.3 Soon, however, a pretty good business 13 washiNgtoN NatioNaLs 700 11 244 22.4 emerged from this hobby. After a ten-year, 14 ChiCago white sox 695 0 210 –2.7 $285 million renovation, stadium revenues hit 15 Detroit tigers 680 6 262 7.5 $280 million last year, second highest in base- 16 BaLtiMore orioLes 620 0 198 1.6 ball, as the Sox won their third World Series 17 saN Diego PaDres 615 2 207 33.0 since 2004. NESN, which airs the games, is 18 toroNto BLue JaYs 610 7 218 –14.9 now worth an estimated $1 billion. The Red 19 MiNNesota twiNs 605 5 221 30.2 Sox? $1.5 billion by our count. In FSG’s purchase of Liverpool for $476 20 CiNCiNNati reDs 600 10 209 –11.6 million, it saw a similar value play. The Reds’ 21 arizoNa DiaMoNDBaCks 585 0 192 –5.8 stadium, Anfeld, which opened in 1884, is 22 CoLoraDo roCkies 575 7 197 13.7 even older than Fenway. A remodel, expected 23 PittsBurgh Pirates 572 19 204 21.8 by 2018, should add 10,000 additional seats 24 CLeveLaND iNDiaNs 570 2 196 –1.9 and $50 million annually to Liverpool’s rev- 25 MiLwaukee Brewers 565 1 197 6.8 enues. (The team is worth $750 million.) 26 houstoN astros 530 –15 186 55.9 “These were remarkably rare opportunities 27 MiaMi MarLiNs 500 –4 159 –8.0 and would be difcult to replicate,” says Hen- 28 oakLaND athLetiCs 495 6 187 27.4 ry via e-mail. 29 kaNsas CitY roYaLs 490 7 178 –6.5 Now that FSG has the assets, the trick is 30 taMPa BaY raYs 485 8 181 15.3 making them work together. Early deals give MLB average 811 8 237 9.7 some sense of the blueprint. Examples: Liv- 1Equity plus nonstadium dEbt. 2Earnings bEforE intErEst, taxEs, dEprEciation and amortization for 2013 sEason nEt of rEvEnuE sharing. statistics: Kurt badEnhausEn, michaEl K. ozanian and christina sEttimi. erpool was talking to Nike, Adidas and Under Armour in 2011 about a “kit” sponsorship to the next frontier. “We want to represent blue- make and sell the team’s jerseys when New chip athletes,” says Werner. In addition to Balance suddenly emerged with the biggest greasing the wheels for Jay Z’s shows at Fen- ofer, worth $40 million annually. Thank the way, James helped recruit Johnny Manziel to Red Sox: New Balance has a relationship with FSM, and the 2012 Heisman Trophy winner’s the Red Sox Foundation. Dunkin’ Donuts was frst two marketing deals were multiyear pacts a longtime Red Sox sponsor before it added with James’ partners Nike and McDonald’s. deals with LeBron James in Asia in 2012 and But as any conglomerate CEO will tell you, Liverpool this year. Dunkin’ will be one of the success depends on integration, making the sponsors of Liverpool’s U.S. summer exhibi- whole operate as more than the sum of the tion tour, which of course includes a stop at parts. “Winning is the most important goal,” Fenway in July against AS Roma. says Werner. And they plan to do a lot more of Adding players and marketing partners is it, on and of the feld. F

APRIL 14, 2014 FORBES | 45 TECHNOLOGY ONLiNE rETaiL How Much Did You Pay for That Lipstick? Big data is helping companies price goods according to a customer’s willingness to pay. Firms, seeing green but fearing a public backlash, are treading carefully.

By adam tanner

Ric KosticK, the cofoundeR of Freshplum cofounder cosmetics company 100% Pure, was clicking Sam Odio (left), Chief through his e-mail one day when a message Science Ofcer Sid Patil from a San Francisco startup caught his eye. and ronin in their San Francisco ofce. “We’ve developed a machine learning algorithm that is able to predict which customers will leave your site without purchasing any of your products (with 99%-plus accura- cy) and the capability to ofer only this group a steeper discount than normal to entice them to purchase before leaving,” said the e- mail from Freshplum. The pitch guaranteed a 5% revenue lift. Kostick signed up. He knew some people finch at paying $18 for an 8-ounce tube of shampoo. Perhaps occasional discounts would help. After three months using Fresh- plum’s selective promotions, online sales increased as much as 13.52%, Kostick said. In a traditional bazaar a seller might charge a well-dressed buyer twice as much as another based on visual clues or accents. Big data allows for a far more scientifc approach to selling at diferent prices, depending on an individual’s willingness to pay. “Historically, frst-degree price discrimi- nation has been very difcult to implement, mostly for logistical reasons,” said Harvard Business School professor John Gourville. “With advances in technology and collecting of big data, then it may be that it will become easier to do. However, very quickly you start eliciting complaints about ‘fairness.’ ” Founded by Sam Odio, the former product manager of photos for Facebook, Freshplum orbes or f does not charge anyone extra but promotes discounts to narrow categories such as spe-

cifc geographic areas, repeat customers or eric millette f

46 | FORBES APRIL 14, 2014 For people with a higher risk of stroke due to Atrial Fibrillation (AFib) not caused by a heart valve problem I focused on finding something better than warfarin. NOW I TAKE ELIQUIS® (apixaban) FOR 3 GOOD REASONS: 1 ELIQUIS reduced the risk of stroke better than warfarin. 2 ELIQUIS had less major bleeding than warfarin. Unlike warfarin, there’s no routine blood testing. 3 ELIQUIS and other blood thinners increase the risk of bleeding which can be serious, and rarely may lead to death.

Ask your doctor if ELIQUIS is right for you. ELIQUIS is a prescription medicine used to reduce the risk of stroke and blood clots in people who have atrial ﬁ brillation, a type of irregular heartbeat, not caused by a heart valve problem. IMPORTANT SAFETY INFORMATION: Tell your doctor if you are pregnant or breastfeeding, or plan to become pregnant or breastfeed. Do not stop taking ELIQUIS without talking to the doctor who prescribed it for you. Stopping ELIQUIS increases your Do not take ELIQUIS if you currently have certain types risk of having a stroke. ELIQUIS may need to be stopped, of abnormal bleeding or have had a serious allergic prior to surgery or a medical or dental procedure. Your reaction to ELIQUIS. A reaction to ELIQUIS can cause hives, doctor will tell you when you should stop taking ELIQUIS rash, itching, and possibly trouble breathing. Get medical and when you may start taking it again. If you have to help right away if you have sudden chest pain or chest stop taking ELIQUIS, your doctor may prescribe another tightness, have sudden swelling of your face or tongue, medicine to help prevent a blood clot from forming. have trouble breathing, wheezing, or feeling dizzy or faint. ELIQUIS can cause bleeding which can be serious, and You are encouraged to report negative side effects of rarely may lead to death. prescription drugs to the FDA. Visit www.fda.gov/medwatch, or call 1-800-FDA-1088. You may have a higher risk of bleeding if you take ELIQUIS and take other medicines that increase your risk of bleeding, Please see additional Important Product Information on the such as aspirin, NSAIDs, warfarin (COUMADIN®), heparin, adjacent page. SSRIs or SNRIs, and other blood thinners. Tell your doctor about all medicines, vitamins and supplements you take. Individual results may vary. While taking ELIQUIS, you may bruise more easily and it may take longer than usual for any bleeding to stop. Get medical help right away if you have any of these signs or symptoms of bleeding: - unexpected bleeding, or bleeding that lasts a long Visit ELIQUIS.COM time, such as unusual bleeding from the gums; or call 1-855-ELIQUIS nosebleeds that happen often, or menstrual or vaginal bleeding that is heavier than normal - bleeding that is severe or you cannot control - red, pink, or brown urine; red or black stools (looks like tar) - coughing up or vomiting blood or vomit that looks like coffee grounds - unexpected pain, swelling, or joint pain; headaches, ©2014 Bristol-Myers Squibb Company feeling dizzy or weak 432US14BR00220-01-01 02/14 ELIQUIS is not for patients with artiﬁ cial heart valves. Before you take ELIQUIS, tell your doctor if you have: kidney or liver problems, any other medical condition, or ever had bleeding problems. IMPORTANT FACTS / The information below does not take the place of talking with your healthcare professional. Only your healthcare professional knows the specifcs of your condition and how ELIQUIS® may ft into your overall therapy. Talk to your healthcare professional if you have any questions about ELIQUIS (pronounced ELL eh kwiss).

What is the most important information • vomit blood or your vomit looks like coffee How should I take ELIQUIS (apixaban)? I should know about ELIQUIS (apixaban)? grounds Take ELIQUIS exactly as prescribed by your Do not stop taking ELIQUIS without talking • unexpected pain, swelling, or joint pain doctor. Take ELIQUIS twice every day with or to the doctor who prescribed it for you. without food, and do not change your dose or • headaches, feeling dizzy or weak stop taking it unless your doctor tells you to. Stopping ELIQUIS increases your risk of having ELIQUIS (apixaban) is not for patients with a stroke. ELIQUIS may need to be stopped, prior If you miss a dose of ELIQUIS, take it as soon artifcial heart valves. as you remember, and do not take more than to surgery or a medical or dental procedure. one dose at the same time. Do not run out of Your doctor will tell you when you should stop What is ELIQUIS? ELIQUIS. Refll your prescription before you taking ELIQUIS and when you may start taking ELIQUIS is a prescription medicine used to reduce run out. Stopping ELIQUIS may increase your it again. If you have to stop taking ELIQUIS, your the risk of stroke and blood clots in people who risk of having a stroke. doctor may prescribe another medicine to help have atrial fbrillation. prevent a blood clot from forming. What are the possible side effects of It is not known if ELIQUIS is safe and effective ELIQUIS? ELIQUIS can cause bleeding which can be in children. • See “What is the most important infor- serious, and rarely may lead to death. This is mation I should know about ELIQUIS?” because ELIQUIS is a blood thinner medicine Who should not take ELIQUIS? Do not take ELIQUIS if you: • ELIQUIS can cause a skin rash or severe that reduces blood clotting. allergic reaction. Call your doctor or get You may have a higher risk of bleeding if you • currently have certain types of abnormal medical help right away if you have any of take ELIQUIS and take other medicines that bleeding the following symptoms: increase your risk of bleeding, such as aspirin, • have had a serious allergic reaction to ELIQUIS. • chest pain or tightness nonsteroidal anti-infammatory drugs (called Ask your doctor if you are not sure • swelling of your face or tongue ® NSAIDs), warfarin (COUMADIN ), heparin, What should I tell my doctor before taking • trouble breathing or wheezing selective serotonin reuptake inhibitors (SSRIs) or ELIQUIS? • feeling dizzy or faint serotonin norepinephrine reuptake inhibitors Tell your doctor if you have any side effect that (SNRIs), and other medicines to help prevent Before you take ELIQUIS, tell your doctor if bothers you or that does not go away. or treat blood clots. you: These are not all of the possible side effects of Tell your doctor if you take any of these • have kidney or liver problems ELIQUIS. For more information, ask your doctor medicines. Ask your doctor or pharmacist if you • have any other medical condition or pharmacist. are not sure if your medicine is one listed above. • have ever had bleeding problems Call your doctor for medical advice about side effects. You may report side effects to FDA at While taking ELIQUIS: • are pregnant or plan to become pregnant. It 1-800-FDA-1088. is not known if ELIQUIS will harm your • you may bruise more easily This is a brief summary of the most important unborn baby • it may take longer than usual for any bleeding information about ELIQUIS. For more infor- to stop • are breastfeeding or plan to breastfeed. It is mation, talk with your doctor or pharmacist, not known if ELIQUIS passes into your breast Call your doctor or get medical help right call 1-855-ELIQUIS (1-855-354-7847), or go to milk. You and your doctor should decide if www.ELIQUIS.com. away if you have any of these signs or you will take ELIQUIS or breastfeed. You symptoms of bleeding when taking ELIQUIS: Manufactured by: should not do both Bristol-Myers Squibb Company • unexpected bleeding, or bleeding that lasts Tell all of your doctors and dentists that you are Princeton, New Jersey 08543 USA a long time, such as: taking ELIQUIS. They should talk to the doctor Marketed by: Bristol-Myers Squibb Company • unusual bleeding from the gums who prescribed ELIQUIS for you, before you have Princeton, New Jersey 08543 USA • nosebleeds that happen often any surgery, medical or dental procedure. and • menstrual bleeding or vaginal bleeding Tell your doctor about all the medicines you Pfzer Inc take, including prescription and over-the- New York, New York 10017 USA that is heavier than normal COUMADIN® is a trademark of Bristol-Myers Squibb • bleeding that is severe or you cannot control counter medicines, vitamins, and herbal Pharma Company. supplements. Some of your other medicines • red, pink, or brown urine may affect the way ELIQUIS works. Certain • red or black stools (looks like tar) medicines may increase your risk of bleeding • cough up blood or blood clots or stroke when taken with ELIQUIS.

© 2013 Bristol-Myers Squibb Company ELIQUIS and the ELIQUIS logo are trademarks of Bristol-Myers Squibb Company. Based on 1289808 / 1298500 / 1289807 / 1295958 This independent, non-proft organization provides assistance to qualifying patients with fnancial hardship who December 2012 generally have no prescription insurance. Contact 1-800-736-0003 or visit www.bmspaf.org for more information. 432US13CBS03602 STraTEGiESTECHNOLOGY ONLiNE rETaiL those seen as unlikely to buy. “What made it opaque markets such as insurance. Prices that interesting to me is that they use f gures like f uctuate sharply can anger people, sentiments weather from where visitors arrive at the that car service Uber often experiences, al- website,” said Kostick. “Where are they in though its prices change for all users according TrENDiNG the city? Are they in the outskirts? Are they to supply and demand at any given moment. in the inner city?” This f ner-grained analysis Jeremy Howard is a pioneer in using What the 60 million sharpens the insight into purchase intent. big data to help insurers sell at a price that Forbes.com users Odio, an entrepreneur who sold his produces the maximum lifetime prof t per are talking about. For a deeper dive go to group-photo-sharing service, Divvyshot, customer. When Howard founded the Opti- FOrBeS.COm/teCHnOLOGy to Facebook, says visitors targeted with a mal Decisions Group in 1999 he worked with Freshplum promotion are 36% more likely insurers to deliver every customer a random- COMPANY to buy, leading to an average margin lift for ized price, with rates varying 10% to 15% aIrBnB the days of couch surfi ng his clients of 6.4%. The company, founded in from where they would have otherwise been are over for founders 2011, has raised $2.4 million from investors set. After studying how millions responded, Nathan blecharczyk, that include Google Ventures and Greylock his company built pricing models for new brian chesky and Joe Partners. It now has 34 customers, including customers based on perceived willingness of Gebbia; their room-renting Chrome Industries, a maker of messenger similar customers to pay. platform pursues funding that could value it at bags and apparel. Insurers using these techniques have since $10 billion, making them The entrepreneur declines to describe the made hundreds of millions of extra dollars, the fi rst “share economy” secret sauce used to target promotions but said Howard, who recently started a new billionaires. says he does not use information from data f rm, Strategic Data Science. In 2008 he sold IDEA brokers. Another intriguing fact: The chief the Optimal Decisions Group to ChoicePoint. meSSaGInG scientist behind Freshplum’s algorithm was It is now part of LexisNexis. Land GraB a member of the card-counting team that Some companies suf er negative public- talk is no longer cheap: Alibaba bets $215 million on outsmarted casinos portrayed in the Kevin ity when dif erential pricing is documented, chat app tango at a Spacey movie 21. such as in a 2012 academic study on 200 on- $1.1 billion valuation. the Given the ability nowadays to crunch line stores, later picked up in a larger investi- deal follows rakuten’s mountains of data, it’s hard to believe that gation by the Wall Street Journal. $900 million purchase more f rms aren’t using f exible pricing. In The study, performed by researchers in of Viber and facebook’s $19 billion scoop-up of January Benjamin Shiller, an assistant pro- Spain, found that if Internet visitors came WhatsApp. fessor of economics at Brandeis University, from a discount site such as Nextag.com, they would at times receive prices as much as 23% PERSON published the latest results of a study of how JaCK ma dif erential prices could help Netf ix. lower than others. Their study of 200 stores the visionary head of Using 2006 Web behavior data, he calcu- found Amazon, Staples and videogame store Alibaba (see above) is lated that Netf ix could have boosted prof t Steam among those varying price by geo- prepping for a massive by $8 million in 2006 and $23 million in 2012 graphic location by as much as 166%. Such iPo that could value the chinese e-commerce fi rm by selling the same service to dif erent people practices are legal, but companies are reluc- at $200 billion, making at dif erent prices. In his model some people tant to talk about them. “We do not discuss it the fourth-largest tech would pay as much details of our e-commerce practices,” said company in the world. as 61% more than the “We don’t Staples spokesman Mark Cautela. Amazon Watch your back, Apple. standard rate, oth- did not respond to requests for comment. ers as much as 22% want to cross Many f rms consider targeted coupons to less for a subscrip- the line where be the most ef ective way to implement dif- tion. Netf ix has not we upset our ferential pricing, rather than risk stirring up considered targeting. customers, resentment by using surcharges. “As long as “We like our simple things are presented in the form of a discount pricing,” said spokes- but we still for your special behavior, people accept it,” man Joris Evers. want to said Tim Smith, founder of pricing consulting Dif erential pric- capture the f rm Wiglaf Pricing in Chicago. ing does take place in customers Kostick of 100% Pure acknowledges it is a markets where prices tricky dance: “We don’t want to cross the line vary a lot, such as with that are not where we upset our customers, but we still airlines and hotels, going to buy.” want to capture the customers that are not and in somewhat going to buy.” F

APRIL 14, 2014 FORBES | 49 INvestING Numbers GAmes

Follow the cash fow: Voyant Advisors accounting sleuth Matt Van Winkle.

have jumped or held frm after multibillion-dollar merger announcements. The turnabout is noteworthy, since it comes as major companies, fush with cash and aiming to exploit their high stock prices and low borrowing costs, are ramping up acquisitions. In the frst 11 weeks of 2014, $755 billion worth of mergers were announced, up from $578 billion in the full frst quarter of 2013, according to Bloomberg. Rather than sit back and cheer the next big deal, however, investors would do better to dust of their green eyeshades. That’s because in addition to the operational risks of mergers (management distraction, turnover, poor ft) loosey-goosey acquisition accounting rules allow acquirers to make their purchases look like winners (at least for a time) even if they’re not. “In all the areas of accounting this is the one that gives management teams the most discretion,’’ declares Matt Van Winkle, who spent two years at PricewaterhouseCoopers, became dis- illusioned with the info public auditors Merger provide investors and went of to earn a Ph.D. at the University of Michigan, studying under accounting-manipula- Mirage tion guru Russell Lundholm. Not that Van Winkle, 36, is Acquisitions are on the rise and winning complaining about the merger mush, since it provides fodder for him at his current gig as re- investors’ favor. But loose accounting rules search director of Voyant Advisors, a San Diego can make even a bad deal look good. frm that identifes overvalued companies for short-sellers. By DAniel Fisher funny thing happened after Incredibly, postacquisition adjustments Facebook announced on Feb. 19 allowed by generally accepted accounting prin- that it was spending $19 billion ciples enable acquirers to rebook revenue the to buy WhatsApp, an instant- acquired company has already reported. Such messaging service with only tricks lead Wall Street sell-side analysts to con- oRbes

56A employees and $20 million in revenue: Its sider some big acquirers cheap, when, if “you oR F stock went up 6% over the next two weeks. look at the actual cash fow they’re generating, GheR F Traditionally investors have punished the they look very expensive,’’ Van Winkle says. a

stocks of big acquirers. Not this year. Shares in Moreover, non-GAAP metrics (additional t Gall

Verizon, Activis and Anheuser-Busch InBev presentations in earnings reports) can lull inves- RobeR

50 | FORBES APRIL 14, 2014

InvestIng mutual funds Betting on Billionaires, Not Bubbles Fourteen years ago Kinetics Internet Fund crashed when the dot-com bubble burst. Now it’s killing it by deftly avoiding looming dot-bombs.

By BrIan soloMon Fund was once the darling of Wall Street—one of the top-performing mutual funds of 1998 and 1999. But it crashed and burned a lot of investors, falling from $1.4 billion in assets in early 2000 to as low as $188 million by 2002. But Doyle is not just referring to his fund’s lingering tech-bubble taint—he’s also speaking about his alternative approach. Despite its seemingly self-evident name and legacy as the frst ever Internet-focused mutual fund, there aren’t many websites left in Doyle’s 56-company portfolio today. Instead Doyle is proving that in the current bubbly environment for stocks of social networks and mobile apps, the best way to make money from the Net is old- fashioned: value stocks with long product life cycles, deep content libraries, ample cash fow— and ideally a billionaire behind the wheel. Kinetics Internet has a mere $180 million in assets and is one of eight mutual funds, including the much larger Paradigm Fund, run by $9.7 billion Horizon Kinetics. In 2013 it ranked among the top-performing equity mutual funds, logging a 44% gain. Since its inception in 1996 the fund’s 16% average annual return has more than doubled that of the S&P 500. Its 1.8% expense ratio is steep, but that has more to do with its size than costs. Turnover at the no-load fund is a mere 8%. Kinetics Internet doesn’t own any Facebook stock because Doyle, 51, says he doesn’t feel comfortable investing in a site so exposed to the whims of popular opinion—let alone one that is Peter Doyle’s Internet Have you Heard tHe one Fund would rather back about the In- spending $19 billion on WhatsApp, a messaging John Malone than Mark ternet fund that’s afraid of dot-coms? service with only $20 million in revenues. Zuckerberg. It sounds like a bad money manager joke, “Maybe WhatsApp is a great investment,” but that’s actually the best way to describe he says. “But I’ve got my doubts, and certainly the Kinetics Internet Fund. “Truthfully, if we handing over $15 billion in stock tells you what changed the name, we’d probably get more they think about their company. They’re not money,” says cofounder and portfolio manager interested in buying back their shares; they’re orbes or f Peter Doyle, jacket slung over a chair in a confer- giving them away.” ence room at his midtown Manhattan ofce. Beyond the lofty valuations, Doyle is wary of vid yellen f a

Doyle’s quip has two meanings: His Internet any company that has too much tied up in the d

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Microsoft and me a little uneasy.” After trying and failing to sell Intel ruled the computing world a decade ago the Internet Fund, Doyle and hotshot fund man- but missed out on the transition to tablets and ager Jacob parted ways, with the latter leaving smartphones. Doyle believes Apple is a declining to start his own Internet fund. Doyle was stuck star in the same vein. “All these great companies holding the bag when the tech bubble collapsed. Best Idea have very short product life cycles,” he says. Instead of throwing in the towel on the fund, CHina Play “People in a garage can displace your entire Doyle was quietly buying stocks like Liberty business, and now it’s global.” Media and the Washington Post Co. Meanwhile, Instead Doyle belongs to the “content is the rest of Horizon Kinetics, including a separate- king” camp of Internet investing. Rather than ly managed accounts business and several other value the likes of Time Warner, Starz and Dis- mutual funds, was thriving. Doyle’s Internet Fund ney on the strength of current revenues, Doyle is still a small piece, but its stellar performance focuses on the media libraries they’ve amassed. and fresh f ve-star rating look promising. The product life cycle he’s so concerned with Avoiding bubbly tech stocks is just one of in technology is comparatively endless in the Doyle’s rules. Central to his strategy is follow- world of content. A hit movie like Disney’s 1937 ing big money—stocks owned and operated by classic Snow White has already been reissued billionaires. Indeed, nine of the fund’s top ten in theaters, repurposed for videogames and stocks are billionaire-controlled, including John amusement park rides, rereleased on VHS and Malone’s Liberty Media, Sumner Redstone’s Vi- DVD, Blu-ray and iTunes—and it should contin- acom, and Larry Page and Sergey Brin’s Google. Baidu.com and Tencent are ue to generate more money on new distribution Doyle’s billionaire theory rests on three China’s biggest Internet platforms for decades to come. A year ago Doyle pillars. The f rst grew from the f nancial crisis, businesses, but among the bought into movie studio DreamWorks Anima- when most companies hunkered down and others, NetEase (NTES, 63) has a lucrative niche in online tion at less than what he valued its media library hoarded cash. Doyle believes this is a basic agen- games. Growth is strong, was already worth. Its Shrek franchise, for ex- cy problem—executives are more interested valuations lean. Revenue ample, including its last theatrical release, Puss in keeping their high-paying jobs than in tak- should rise 15.2% this year to $1.75 billion, with earnings in Boots, has brought in $3.5 billion in box of- ing risks for the long-term good of sharehold- f ce revenues since 2001. But when one consid- ers. Driven by opposite incentives, many own- up 4.4% to $5.89 per share. Shrek Analysts expect ﬁ ve-year EPS ers ancillary products, will be a cash cow er-operators prof ted from the crisis by doubling growth of 12.6% annually, for years. The stock is up over 60% since Doyle down. Doyle cites John Malone’s $530 million giving NTES a svelte price/ bought it. loan to Sirius XM in 2009, which turned into a earnings growth (PEG) ratio Media studios and cable networks are not stake that’s worth over $12 billion today. of 0.86. (Benjamin Graham as sexy as apps that seem to attract hundreds of Of course, not many had the resources to liked PEG ratios of less than one.) NetEase just started millions of users overnight, but they do produce make that bold move, which reveals another rea- paying dividends, kicking more restful sleep. son to invest with billionaires: They have access out $1 per share in 2013 and Sleeping well is a top priority for Doyle given that other managers don’t. “Their positioning, $1.41 this year, a payout of his fund’s history. Kinetics Internet Fund was intellectual capital, ability to inf uence policy is just 22% of $6.42 in cash born in 1996 in a Long Island kitchen with a unrivaled,” says Doyle. “If John Malone wants from operations over the past 12 months. Based on $100,000 investment from Doyle’s sister, Maura. to meet with the head of the FCC, chances are multiples of earnings and It was the f rst mutual fund for Doyle, a St. John’s he’ll get on his calendar.” When a major oppor- sales, NTES looks cheap. graduate and former Bankers Trust portfolio tunity presents itself, the titans of industry are Over the past ﬁ ve years it has manager, who formed the f rm in 1994 with four frequently in the right place, and they rarely traded for an average of 17.05 other ex-Bankers Trust employees, including have to pass on a good investment. times earnings, which would produce a $100 stock with cofounder and CIO Murray Stahl. They started The third pillar of Doyle’s billionaire bet is this year’s expected EPS of publishing stock research but seized on the tech valuation. He says many owner-operator stocks $5.89. Since 2010 the average IPO boom by launching the Internet Fund, which are cheap today as a result of money f owing price/sales ratio is 7.35. That came under the direction of one of their junior away from active management and into passive works out to a stock price of analysts, Ryan Jacob. The twentysomething ana- ETFs. Most ETFs weight their portfolio by $78 based on sales per share of $10.57. lyst got caught up in tech stock fever, investing in market capitalization and free f oat, which inher- —John Dobosz IPOs like TheGlobe.com and iVillage. In 1998 the ently penalizes stocks like Viacom, where Sum- Internet Fund had a return of 196%, and in 1999 it ner Redstone controls nearly 80%. Says Doyle, gained 216%. Assets swelled to $1.4 billion. “You’re basically putting on sale the people who “Suddenly we were managing a lot of money are best at allocating capital, have the best access for people, and the names in there were making to information and lowest cost of capital.” F

56 | FORBES APRIL 14, 2014 InvEstIng ExchangE-tradEd funds

Get Your Money Managed for Free Some ETFs have negative expenses. The trick: securities lending.

by william baldwin

o you need more small companies recently collecting premiums of 7% a year. Twit- in your stock portfolio? Check ter lenders were pocketing an annualized 9%. out the latest from the fund in- Accelerate Diagnostics is another contro- dustry: money management so versial stock. The bulls don’t mind a price that cheap that your expense ratio is, comes to 14,900 times revenues. Bears have Defectively, a negative number. racked up a short position equal to 46 days of BlackRock has an exchange-traded fund that trading volume. Loans of the share certifcates works like this. So do Vanguard, Schwab and were recently quoted at 37% a year. State Street. The secret to these negative-cost Securities lending is a curious business. In a products: securities lending. rational world all premiums would be very close Funds lend out shares in their portfolios to to zero. That’s because lenders recoup the value short-sellers for a fee, which ofsets, and in some of the shares, plus any dividends paid while the cases more than ofsets, the overhead cost and loan is outstanding, plus whatever interest is management fee for the fund. The best bargains earned on the cash put up by the short-sellers tend to be in funds that invest in smallish com- as collateral. A tiny fee should sufce to pry the panies, where lending premiums are high. shares loose. Investors in BlackRock’s iShares Russell Not all investors are rational. Quite a few 2000 Growth ETF picked up $15.5 million in have an emotional aversion to lending securi- securities lending revenue in the fund’s most ties out, says Richard Prager, who is in charge recent fscal year. That was 0.35% of average of BlackRock’s trading operations. The con- assets, more than covering BlackRock’s 0.25% sequence is that shareowners with no qualms fee for operating the index fund. The prize about lending can get enhanced returns. for fund efciency goes to State Street’s SPDR If your way of buying growth stocks is to se- S&P Biotech ETF (see table). lect a few like Twitter and 3D, then you might With any of these funds you wind up with a have an aversion to lending the shares. Aren’t better return than you could get on your own those same short-sellers trying to run your buying the individual stocks they hold. Reason: stocks down? If you don’t like that, move shares You can’t easily get in on the sec-lending gravy from your margin account (which in most cases train unless you have a full-time securities lend- allows the broker to put them in the lending ing department and a large pile of securities to pool) to a cash account (where they stay put). lend out. But if you want to own the whole Russell BlackRock oversees $4 trillion of assets, not 2000, lay emotions aside. Go for efciency and quite half of them available for lending and be thankful that Wall Street will pay you for the roughly $160 billion worth out on loan at any privilege of handling your portfolio. F given moment. Its 100-person securities loan department hauls in upwards of $1 billion a year lending expense effective 1 1 1 and hands over most of the loot to BlackRock’s fund revenue ratio cost

clients, among them the iShares funds. iShareS ruSSell 2000 Growth 0.35 % 0.25% –0.10% There’s little money to be made lending bonds Schwab u.S. Small cap 0.11 0.09 –0.02 or blue-chip stocks, where the supply is plenti- SpDr S&p biotech 0.49 0.35 –0.14 ful and the demand modest. But holders lending VanGuarD Small-cap Growth 0.20 0.10 –0.10

shares of 3D Systems and Sears Holdings were 1AnnuAlized, As A frAction of AverAge Assets.

april 14, 2014 FOrBES | 57 Promotion | technology Corporate Security Requires an Integrated Approach

By MIChAel Roney

In today’s world, a multidimensional corporate security strategy has never been more essential for protecting physical assets, intellectual property and human life. The globalization of business means that companies often have ofces in far-fung locations where local laws, public safety and political unrest create risk. Even on home soil, the threats of workplace violence, active shooters and terrorism call for more-sophisticated and coordinated vigilance, while the growing threat of cybercrime adds another layer of vulnerability to critical organizational assets.

he key to efectively managing corporate security in this new era lies in fully integrating safety proce- T dures and processes with a broad technology platform designed to detect risks and intervene at an early stage to ensure a corporation’s resilience. A large part of that approach is credentialing, access control and enhanced situational awareness. “Deployment of standardized and integrated security systems is now possible on a global scale,” says renae leary, Vice-President, global Accounts, tyco. “this has been enabled with iP-based technology and global integra- tors. embarking on a global security program delivers higher levels of security in a more cost-efective way. As a result, we are seeing more global companies centralizing their security programs.” Managing Credentialing and Access As more industries look to outsource key services as a way to save money, they face the new challenge of how to manage the third parties that come into their facilities. the approach helps organizations determine who and equipment, raising the risk of theft. con- challenge facing corporate security is how is allowed to proceed, for what purpose and trolling access to hospital supplies through to adequately vet these visitors and ensure to which destination,” explains mike Sheehan, criminal background checks and drug tests is they meet the security requirements to enter ceo of intellicentrics, inc., a leader in opera- critical to reducing these costs. certain areas of the facility. intellicentrics is tional security and compliance management “intellicentrics helps organizations in uniquely suited for that challenge, due to its services. the Dallas-based company built its industries such as healthcare, transportation, in-depth knowledge of best practices from reputation in healthcare, one of the most and oil and gas ensure that visitors meet the the security industry. As the name suggests, complex and highly regulated industries, and security requirements,” explains Sheehan. its approach is based on the concept of intelli- has an installed base of 6,000 facilities and “these requirements may include proof of gent concentric circles of security—one of the nearly 500,000 users. liability insurance, competency, training and oldest principles of security. Whether you’re hospitals have countless streams of people background checks, among others. We help focused on vendors, visitors or employees, its walking in and out of their facilities every day. organizations convey policies, obtain and system allows you to customize the require- to improve security and protect their patients, manage credentials, and extend privileges to ments based on the individual’s role. hospitals need to know who these visitors are these individuals.” “in the past, security has been defned by and why they are there. Additionally, hospitals realizing it is not always convenient for who must be kept out. today, our intelligent carry large inventories of valuable medications people to go to a central location to check Thailand ofﬁ ce goes live Thursday

How many countries is that now? Seventeen or eighteen?

On how many systems?

Wish all our security systems spoke the same language

Really hope IT got all the software integrated Tough to get things done in real-time across time zones Gotta love talking to people on Monday who are already on Tuesday

Thinking about how to standardize your security systems? We’re thinking about your global solution.

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into a facility, intellicentrics offers a mobile security platforms unify access control, iP video way to quantify the lower risk levels, which app that allows smaller clinics and doctors’ and intrusion detection for small- to medium- traditionally has been a time-consuming offices to quickly and cost-effectively utilize size enterprises. manual process.” the intellicentrics’ vendor credentialing system Products such as these not only pro- technology-generated metrics will without requiring a kiosk or badge printer. vide a single, centralized environment to continue to evolve. the emergence of cloud- help mitigate risk, ensure compliance and based technology, along with sensors such Improving Situational ofer a quick roi, but also can be tailored to as cameras, facial recognition and biometric Awareness With Integration individual users and industries—including scanners, increasingly will allow operators to Situational awareness—the ability to see, those that require the most comprehen- remotely and intelligently monitor the data understand and respond in a coordinated sive of command and control platforms for required to make proactive determinations manner to intrusions at any facility— total system management. “our custom- for security metrics. depends on the seamless integration of ers range from aviation and government, multiple security sys- to healthcare, education, The Human Element tems. For example, the manufacturing, retail and Balancing physical security, including access Proximex unit of tyco The key to efectively residential—from the control, video surveillance and intrusion sys- Security Products, a managing corporate smallest of businesses and tems, with credentialing and best practices group of world-leading security lies in fully residences to large corpo- provides complete visibility of all people access control, video, rate or industrial customers that come and go in a facility, whether it is location-based security integrating safety requiring the highest levels a hospital, an office building or an indus- and intrusion brands, procedures and processes of protection,” says mike trial facility. yet there is one more element ofers Surveillint™, which with a broad technology ryan, President of tyco required: an educated and committed can be integrated with Security Products. “With organizational culture. the control room man- platform designed to our expanded portfolio of “many leaders don’t realize that secu- agement Suite (cmS) detect risks and intervene purpose-built solutions, rity is an issue that requires commitment from Barco, a leader in we can offer customers from everyone,” says Sheehan. “Ultimately, enterprise visualization at an early stage. a diverse array of options it requires a culture of inclusion and vigi- and collaboration. to meet their very specifc lance that permeates the organization, as in this scenario, security personnel can eas- security objectives, instead of the typical well as the tools to operationalize a watch- ily select particular camera sources to display one-size-fts-all approach.” ful attitude. everyone in the organization is in predefined areas on Barco cmS-powered responsible for helping keep the workplace video walls and displays, enhancing the deci- Enhancing safe and secure, and that is the way to cre- sion-making process and shortening reaction Security Metrics ate a lasting safety net of security around times. tyco’s elpas triple technology Active metrics that integrated security systems gen- your operations.” ■ radio Frequency identifcation (rFiD) system erate and track are also part of the security integrates fully with impinj Speedway rFiD equation for hospitals and other industries. WEb DIrEcTory readers and can alert users when assets leave “organizations need analytics in order to their designated areas or when supply inven- track the roi these solutions provide,” Shee- www.intellicentrics.com tory levels deviate from user-defined levels. han notes. “As security and risk management www.tyco.com Similarly, tyco’s Kantech intevo compact converge, these same resources provide a It’s our business to make your business safer.

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KEN FISHER — PORTFOLIO STRATEgY ONLY TWO THINGS CAN stop the bull mArket

While feW ever believe it, only dend yield. two things end any bull market. Like It isn’t so much that I love Swiss- that simple straight vector you learned based UBS (UBS, 20), arguably the world’s about in high school physics—except largest wealth management frm, but that bull markets wiggle wildly—it’s that I see most competitors hurting either by losing steam or by running up themselves in various ways, helping against a newly emergent wall. Keep a UBS gain share. And, as the bull mar- lookout for both. ket endures, UBS’ revenues naturally Running out of steam is best seen beneft—ftting like a glove—driving the via legendary investor John Temple- stock. It sells at ten times estimated 2015 ton’s four-phase quote: “Bull mar- earnings, with a 1.4% dividend yield. kets are born on pessimism, grow Within Australia’s banking oligopoly, on skepticism, mature on optimism NATIONAL AUSTRALIA BANK (NABZY, 16) is the and die on euphoria.” Upon reaching tainly don’t right now. fourth-largest retail but largest busi- euphoria bull markets lack energy to So I wait, watch and remain bull- ness bank. Widening global yield curve propel them further. Bulls climb the ish, noting we’re still, in Templeton’s spreads (long-term interest rates minus legendary “Wall of Worry,” and when parlance, straddling skepticism and short-term) should boost lending and all worries wane to well-worn white- optimism, and, hence, abundant force proftability. It’s also Down Under’s washing, you’re out of steam. propels this bull on. Without a wall cheapest bank at only 11 times my 2014 The wall? Any unexpected, immov- we’re maybe halfway through. Here are earnings estimate with a fat 5.5% yield. able bad force. Markets formally digest fve great stocks for that big back half: This column’s smallest, most-specu- and discount all known phenomena. A bit cheaper and better run than lative and lowest-quality pick is TEXTRON What we know about, despite all varied peers, but larger, UNION PACIFIC (UNP, 187) (TXT, 38). It’s below what it was 15 years views, is already priced in. Exhibit A: is one of America’s oldest publicly ago but is now a better frm. Called a 2008’s mark-to-market accounting! traded rail lines—linking 23 states in conglomerate, it’s grown ever more You should watch for surprises, but not the West and Midwest via the best strategic while analysts sour on it. For many do. Exhibit B: the inverted yield routes. Invest in the West. This one’s example, Textron last month completed curve in 2000—when worries van- ished—that choked bank lending. the key is to stAy oN your toes—ANd But, no, the wall isn’t, by defnition, excess debt, congressional action (or AlwAys expeCt the uNexpeCted inaction), ObamaCare, Iraq, Iran, valuations, on and on. And it isn’t Crimea the best. It won’t go of track at 15 its acquisition of Beechcraft’s parent (though it might be if Russia truly goes times my 2015 earnings estimate with company; that and its Cessna line (both on an unexpected global rampage). a 1.9% dividend yield. based in Wichita) make Textron the It’s a perpetual problem: Either we As retailing evolves into macro- clear small-plane leader in America— can’t observe the situation in advance oligopolies, one dominator is CVS just as this market is bottoming—with or we just don’t pay attention. CAREMARK (CVS, 74), in drug delivery. It huge cost-cutting opportunities.

Solution: Always expect the un- will advance from both the inevita- Today’s Textron is an aerospace frm orbes expected! The key and tricky thing bility of insurance-revenue growth with a tail of other businesses. It sells or f is staying on your toes and endlessly and aging baby boomers’ propensity at 90% of annual revenue and 14 times cK f looking for it. You’re still unlikely for endless, self-obsessed medical my 2015 earnings estimate. But I bet it’s uhlenbe to see it. (Few do, and you’re quite spending. It sells at 14 times my 2015 at four times 2020 earnings—unless we s K F skilled if you’re one of them.) I cer- earnings estimate with a 1.5% divi- hit that unseen wall. Thoma

MONEY MANAGER KEN FISHER’S LATEST BOOK IS MARKETS NEVER FORGET (BUT PEOPLE DO) (JOHN WILEY, 2011). VISIT HIS HOME PAGE AT WWW.FORBES.COM/FISHER.

62 | FORBES APRIL 14, 2014

INVESTINg

wIllIam baldwIN — INVESTor chEckup

Is Your Fund Trading Too Much?

Lord Abbett deveLoping market, Kadlec says, the shortfall re- growth, a big fund that buys small fecting both the expense ratios and the stocks, is dazzling. Its rapid-fre trading invisible loss from trading. has it magically buying into hot stocks On average, the analysis showed, and then getting out before they cool. small-company funds lose 1.5% when It’s up 48% in the past year. It gets fve they go into or out of something and re- out of fve stars from Morningstar. coup a bit more than half the loss with It’s a tempting product, but there’s a portfolio improvement. A fund with problem with it. It’s expensive. 100% turnover in its portfolio stands to Developing Growth, like all funds lose 1.2% a year to trading. Turnover at that quickly turn over their portfolios, is the Lord Abbett fund has been running costly in a way that is not obvious when 200% and higher, suggesting a trading- you look at the prospectus. The pro- cost headwind of 2.4%. spectus tells you about the 1.1% annual the foat (shares available for trading). Thomas O’Halloran, the fund’s lead expense burden (low, at least compared What’s going to happen when the manager, points out that trading costs with other actively managed funds) and fund unwinds this unwieldy stake? have come down a lot since the period the 5.75% sales load. But it doesn’t spell That will depend on a lot of things, like covered by the academics. On the other out another item that in the long run how quickly the portfolio managers hand, Developing Growth’s position matters much more: the cost of trading. make their exit and whether there hap- sizes are larger than its peers’, and the How much is that? You can’t put a pen to be bulls at that moment on the professors established that large rela- precise number on the damage from sidelines, ready to buy on a price dip. tive position sizes accentuate the dam- getting into and out of positions. But For any one buy or sell order, then, age from turnover. statistical evidence says that trading is a the push-away efect is unknowable. But You might say about costs, “So what? big hidden cost at funds that specialize it is quite possible to look at hundreds What matters is the bottom line, and on in the stocks of small companies. Trading will cost you brokerage Furious buying and selling can Make commissions and bid/ask spreads. A third item is at once the biggest and you poorer the hardest to measure: the tendency for trades to push a stock’s price away. of funds doing thousands of trades and that score this fund is a winner.” You won’t feel this efect when you sell come to some conclusions. Alas, that’s no guarantee it will 1,000 shares of IBM. You defnitely Gregory Kadlec, a fnance professor continue to be a winner. The sad truth would feel it if you tried to unload at Virginia Tech, has been studying mu- about Wall Street is that past results are 500,000 shares of a little company. tual fund costs for 16 years. In a study only a feeble indicator of future results. Developing Growth’s problem is published last year in the Financial Ana- But costs drag on. its very success. It has attracted $4 bil- lysts Journal he and two other academ- Investors should pay less attention

lion of customers’ money, and since it ics derived trading cost estimates by to performance and more to costs. If orbes

invests in small companies it winds up analyzing returns for 1,758 funds over a you want small growth stocks, buy or f with large percentages of them. Among 12-year period ending in 2006. a low-turnover, low-expense index ck f its 124 holdings is $69 million worth of Some skillful (or just lucky) funds fund. The exchange-traded ones from uhlenbe

LifeLock, a fast-growing frm that sells beat the market and some fall behind. BlackRock and Vanguard have the s k F an ID theft alert service. That’s 6.7% of Collectively they do worse than the tickers, respectively, IWO and VBK. thoma

GO TO fOrBes.cOm/sItes/BaldWIn fOr MOrE ON TAX-WISE INVESTING STrATEGIES. GO TO fOrBes.cOm/InVestOrchecKup fOr MOrE YEAr-END TAX ADVICE.

64 | fOrBES AprIl 14, 2014 INVESTING JIM OBERWEIS — SMALL STOCKS The Case For StockS WIth crazy P/E’S

Many investors who keep an optimal. Ligand stands to earn royalties eye on valuation metrics worry that on any approved drugs that incorporate we’re in a bubble. But is it possible this technology. The company already that structural shifts could cause a has an ample royalty stream from three long-term change in “normal” valu- drugs, with four more likely by 2014. I ations? It’s happened in the past. In expect Ligand to double earnings per the 1970s research by Roger Ibbotson share to $1.40. Its forward P/E is 49. transformed small caps from the Wild CARDIOVASCULAR SYSTEMS (CSII, 33) is a West to an acceptable institutional medical device company focused on asset class. Demand for small caps minimally invasive treatment for pe- soared, and the asset class delivered ripheral and coronary artery disease. Its stellar returns—both in absolute Diamondback 360 OAS system treats terms and relative to large caps. Insti- calcifed plaque in arterial vessels in the tutions that had previously shunned scary in the near term. Here are three: leg and, following a late-2013 decision small caps now embraced them, and INTERACTIVE INTELLIGENCE (ININ, 79) is a by the FDA, also has approval for use the increased demand took “normal” leading developer of call-center soft- in the heart. The FDA’s nod presents small-cap P/Es to a whole new level. ware. Interactive is increasing orders at a $1.5 billion market opportunity, and Today valuations are above average, a 20% clip, and it gets high grades from although Cardiovascular isn’t yet proft- and I think another structural change market research frms like Gartner able, revenues will grow 30% for the could be in play. Post fnancial crisis, Group and Frost & Sullivan. While its next couple of years as the coronary institutional investors are now desper- forward P/E of 176 looks crazy, don’t be product gains traction. I think the com- ate to achieve their actuarial funding fooled. Transitioning to the cloud will pany may become a takeover target. requirements. Consider underfunded magnify near-term expenses while also Like other FORBES columnists I’m municipal pension funds. Many funds spreading revenue over multiyear peri- obligated to report how I did in 2013. are still assuming returns of 8% an- ods, implying predictable reoccurring If you had bought all 27 of my picks nually. Traditionally, pension plans revenue and increasing proftability in 2013 you would have been up 26% allocate 40% to fxed income, implying that an 11% return is required on the MEgagroWth SMaLL StockS that Look rest of the portfolio to hit their targets. Unfortunately, the market averages only ExPEnSIvE today May bE bargaInS 8% annually. Other than raising taxes to increase contributions, the most over the next few years. after commissions. That’s better than realistic scenario is for the funds to bet LIGAND PHARMACEUTICALS (LGND, 74) is a similarly timed investments in the S&P it all on black—increasing allocations to biopharmaceutical company focused 500, up 19% by contrast. My worst call higher-returning asset classes, such as on drug discovery. It partners with big was Francesca’s, which fell 26%. My small caps and international equities. pharma companies at an early-devel- best picks were MEDIDATA SOLUTIONS (MDSO, A shift like this could support higher opment stage, handing of late-stage 63), which gained 211%, ENVESTNET (ENV, 45) DEALERTRACK valuations for growth stocks. It’s plau- development and regulatory matters , which gained 116%, and orbes sible investors will pay top dollar for to partners in return for license fees TECHNOLOGIES (TRAK, 53), which gained or f stocks with megagrowth potential until and royalties. In 2011 Ligand bought a 71%. For 2014 hold on to these three cK f infation returns to bail out unrealistic formulation technology called Captisol winners plus RIGNET (RNET, 55), METHODE uhlenbe actuarial estimates. that improves the function of molecules ELECTRONICS (MEI, 33) and INVENSENSE (INVN, s K F I think it’s worth it to take a chance in drugs that might otherwise be sub- 24). Sell the rest. Thoma on a few riskier names with home-run JIM ObERwEIS is president of oberweis Asset MAnAgeMent And editor of the Oberweis potential, even if the valuations look repOrt. for More inforMAtion visit www.fORbES.COM/ObERwEIS.

ApriL 14, 2014 forbes | 65 enTrePreneurs insurance

Pet Project How a British couple turned the shock of a $5,000 vet bill into a $53-million-a-year business.

BY KARSTEN STRAUSS

very pet owner has a horror story about shelling out for a sick animal. In 2001 British ex- pats Chris and Natasha Ashton had barely settled into student Elife in the M.B.A. program at the Wharton School when their cat Bodey came down with a mysterious case of anorexia—and rang up a $5,000 vet bill. But instead of getting mad, they got entrepreneurial, hatching a plan to sell pet insurance. Last year the husband-and-wife team sold $53 million worth of Petplan policies for cats and dogs. It’s a business with lots of room to grow. Americans spend more than $14 billion on vet bills annually, but pet insurance premiums total at most a half-billion. The largest player, Veterinary Pet Insurance, had sales of $239 million in 2013. brace, Trupanion and Healthy Paws, has Chris and Natasha Ashton built Petplan The marketing challenge for the Ashtons eliminated such exclusions and ofered con- through alliances— and competitors is signing up customers sumers more choice, forcing older players to and making nice to from a population that either hasn’t heard shape up, says Tennessee vet Doug Kenney, potential clients. of pet insurance or views it, justifably, with author of Your Guide to Understanding Pet some suspicion. Health Insurance. While pet insurance has been around in Even now, however, insurance generally some form since 1890, when Claes Virgin, makes sense only for cash-fow-challenged the founder of Länsförsäkrings (now Agria owners who fear they won’t have the money Animal Insurance) wrote the frst policies in to cover their best friend’s vet bill. (In 2011 Sweden, it didn’t come to the U.S. until 1982, Consumer Reports described pet insurance

and then it got a bad rep. Some U.S. insur- as “rarely worth the price.’’) orbes

ers dropped sick pets or excluded certain With Petplan you pick an overall level or f ten f

chronic or hereditary conditions. of annual coverage (from $10,000 for a us Over the past decade, however, a wave of “bronze” plan to $22,000 for “gold”), a de-

new competitors, including Petplan, Em- ductible (from $50 to $200) and the share michael a

66 | FORBES APRIL 14, 2014

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HiP DYSPlASiA ACl TEAR CANCER ElBow DYSPlASiA iNTERvERTEBRAl cost to treat: cost to treat: cost to treat: cost to treat: DiSC DiSEASE $5,000 to $7,500 (opera- $2,000 to $5,000 $2,000 to $10,000 $1,730 (surgery), $5,000 cost to treat: tion), $500 to 1,000 Vulnerable breeds: Vulnerable breeds: annually (medication) $5,000 to $7,500 annually (medication) labrador retriever (21%) Golden retriever (50%), Vulnerable breeds : Vulnerable breeds : Vulnerable breeds1: boxer (37%) rottweiler (39%), dachshund (25%) German shepherd (19%), German shepherd (19%) beagle (18%), bulldog (71%)

1Percent likely to suffer. SOURCES: AnimAl mEdiCAl CEntER (nEw YORk CitY); ORthOpEdiC FOUndAtiOn FOR AnimAlS; pEtmd; CAnAdiAn vEtERinARY jOURnAl.

of costs you want picked up (80% to 100%). while Chris was still in the Royal Marines, Routine visits and prior conditions aren’t and they decided to attend Wharton together covered. Once you’ve bought the insurance, after his discharge. When cat Bodey got sick, however, you won’t get dropped if your ani- they spotted their opening—in their native mal develops an ailment. Premiums increase U.K. 30% of pets have some sort of insurance

up to 15% a year as your pet ages but not be- coverage. The U.S.? Roughly 2%. Ges

cause you’ve made a claim. For a 2-year-old The couple frst worked on a pilot, Fetch y ima

Gett Labrador retriever living in Johnsburg, Ill., a Inc., at Wharton’s business incubator. “We

bronze plan with a $200 deductible and 80% were completely on our own and had to build arker/

reimbursement runs $26 a month. everything from scratch,” recalls Chris, 40. urie P a Some of Petplan’s numbers would make So in 2003 they took a smart shortcut, ap- Ges; l human insurers drool. Only a third of poli- proaching Petplan U.K., a 35-year-old animal y ima

cyholders fle a claim in any given year, and insurer owned by the German fnancial giant Gett just 60% of the company’s revenues go to pay Allianz, and buying the franchise rights to medical expenses, compared with the 80% develop a new North American division.

to 85% that ObamaCare requires insurers to They pay “a small but fair” percentage of om helmersen /

devote to medical claims. The Ashtons won’t sales to the home ofce, Chris says, and in Ges; t

say, but we estimate Petplan’s gross margins exchange have gotten decades of actuarial y ima

are north of 10%. numbers on dogs and cats and the many ail- Gett With claims capped and predictable, the ments they fall prey to. key to proft is signing up more pets and Financing the venture took partners, too. an murPhy / keeping their owners loyal. Petplan says an After maxing out $100,000 on credit cards y impressive 90% of policyholders re-up and tapping friends and family for $200,000, Ges; r each year. the Ashtons, through some British chums, y ima Gett Since launching in 2006, the Ashtons have found a backer in Godfried van Lanschot, / aPhy

sold 120,000 policies by forming alliances whose namesake bank in the Netherlands oGr t with animal agencies and shelters, among has been around since 1737. He’s invested others, and working old-boy and new social an amount the Ashtons won’t disclose but networks alike. “Partnerships have been is one of Petplan’s four board members. (In tina reichl Pho instrumental, giving us access to a much all they’ve raised a total of $5.5 million but

broader range of people than we’d have been retain majority control.) Ges; chris

able to target,” says Natasha, 39. In July 2006 Petplan wrote its frst policy, y ima Gett Like many entrepreneurs, the Ashtons that October it started selling online at / ard

came to their business by chance but have gopetplan.com, and by December the Ash- w

left little to chance since. They met at Oxford tons had struck their frst marketing alli- skho

68 | FORBES APRIL 14, 2014 ance—with the U.S. Humane Society. Petplan policies to the thousands of employers it of ers society members a discount and do- advises. nates $30 to the group for every new policy The pound. The workplace. Where else signed through its supporter pool. That has to reach pet owners? Since 2011 the Ashtons TrenDinG brought about 5,000 customers—and curb have persuaded BlueCross plans in eight cred. The Ashtons later reached out to ani- states to of er their product. “Pets are part of what the 60 million mal shelters around the country, of ering a the family, so people naturally think about Forbes.com users are talking about. free month of insurance to anyone adopting a pet health care when they’re thinking about For a deeper dive go to new animal (another few thousand policies). their own,’’ reasons Chris. FoRBES.CoM/ENTREPRENEURS The Ashtons have tapped the Wharton As for social networks, the Ashtons swear IDEA network, too, approaching alum Vernon Hill, by their links to Pinterest, where snapshots CRowDFUNDiNg-PlUS who built Commerce Bank of Cherry Hill, of kittens and puppies draw lots of eyeballs. kickstarter and indiegogo are N.J. from nothing to a 470-branch f nancial Most of the $5 million they’ll spend on mar- great. but you can get even powerhouse, which he sold to TD Financial keting and advertising this year will go to more bang for your project Group for $8.5 billion in 2007. Hill has in- paid search on Google. using targeted promos, sending samples to inﬂ uential vested in Petplan and helped add the service That means that consumers should have bloggers and staging launch to the list of elective benef ts for bank em- no problem f nding a policy for their pet. events. ployees. He now chairs its board. Whether they should pay for one is an en- PERSON Last year, thanks in part to the help of tirely dif erent matter. Some owners will save BlAKE MYCoSKiE an Oxford acquaintance, Petplan convinced thousands on unexpected vet bills, but many the toms founder went Marsh & McLennan Cos.’ Mercer unit, the others will simply kiss their premiums good- through four not-so-great Julian s giant benef ts consultant, to of er Petplan bye. Caveat emptor. F startups before hitting the big time with his socially conscious tr a

tens shoe phenom. his worst ﬂ op:

chul a reality-tV channel that raised $25 million before it failed. te/dP EvERY Dog HAS HiS SPA DAY a/ COMPANY c orbis; aP Pho it’s not only vet bills that can run into the thousands. some owners routinely ElECTRo-HARMoNiX pamper their pets in exotic, even outrageous, ways. mike matthews chucked his tie and ibm job in 1968 to design

t PHYSiCAl THERAPY. water4dogs, a new york city animal physical rehabili- o special devices for electric /kin cheunG; do tation facility, focuses on bringing canines back from injury through a series guitars. along the way he’s of services not unfamiliar to elite human athletes. for $165 an hour pets enjoy grappled with angry unions, underwater treadmills, low-level laser and neuromuscular electrical stimula- bankruptcy and russian Xie racketeers. one Pho tion, acupuncture, herbal and nutritional therapy, and deep-tissue ultrasonic healing. t oGr YogA. florida-based yoga instructor suzi teitelman has developed a way of aPhy including pets in her exercises, called “doga.” teitelman oﬀ ers deluxe doga / Gett yogi training kits for $535 and will visit a client’s home for a private session y ima for $100. Ges; aP Pho

PARTiES. for about $700 new york dog spa on manhattan’s upper east Job y ses

t side will organize a saturday-night red-carpet champagne party for up to 20 o /enchanted home Pet guests and their canines. a deejay may be hired for a few hundred more. sions/

FURNiTURE. a custom doggy mansion from bitch new york runs $10,000, Guit and a paisley bedroom set carries a $12,000 price tag. the kitty furniture aris t ma

shop a hidden hollow charges $2,000 for its 10-foot-tall cat tree, which GaZine Via Gett / Q10 Product features four lounging platforms and a fabric exterior. it charges an extra $35 for the installation of an “enchanted fairy door.” y ima s ll DEATH. the old Pine box in edgewood, n.m. builds simple but classy wood- c; richard b en caskets for deceased pets, charging $500 for a large, black walnut coﬃ n Ges ($30 extra will get you a pillow). the hartsdale Pet cemetery & crematory in

. leVine/new upstate new york—one of the oldest facilities of its kind in the u.s.—will bury a full-size dog for $2,000, excluding annual fees for plot upkeep. for those

s on the thrifty side the company will cremate an expired pet for $341 (urn not c om included).

APRIL 14, 2014 FORBES | 69 welcome to the boom: bigger deals and The Midas LisT higher values for hot startups and ipos have made the 13th ranking of the world’s best tech investors the toughest to crack ever. the top ten alone yielded $46 billion in realiZed value from flipping companies or taking them public. The Inno

MichAeL goguen Doug Leone

ALfreD Lin PAtrick grADy

70 | FORBES APRIL 14, 2014 A rare look inside elite The Midas List: How Sequoia frm Sequoia Capital Top 100 tech investors succeeds in China 70 74 79 vaTIon FacTory Apple, Google, Oracle. Cisco, Yahoo, LinkedIn. WhatsApp, Airbnb, Dropbox. Sequoia Capital is Silicon Valley’s search engine for disruption—and billionaires. That’s why the frm dominates FORBES’ 2014 Midas List—and has made its principals as wealthy as the entrepreneurs they nurture. By GeorGe Anders WITH ALeX KonrAd

scott cArter MichAeL Moritz

bryAn schreier

roeLof bothA JiM goetz

ethAn Pines for forbes

APRIL 14, 2014 FORBES | 71 The Midas LisT

hen Doug Leone arrived Yet Sequoia doesn’t dis- in Mount Vernon, N.Y. in play its heritage with the 1968, the 11-year-old Ital- well-heeled pride you might ian immigrant didn’t have fnd at other top-tier ven- a clue. He funked a math ture frms, let alone the likes quiz in school because the of JPMorgan or KKR. At Se- terms “true” and “false” quoia the historic IPO fl- bewildered him. He wore unsightly slacks from Sears that ings are crammed into drab, W invited classmates’ teasing. After school he watched drugstore-quality frames. McHale’s Navy alone on a black-and-white television, hop- Sequoia partners don’t ing to learn colloquial phrases that would help him ft in. enjoy luxurious private of- A few years later Leone began to get his bearings. “I fces; instead they toil at was working on boats as a teenager, sweating like a pig stand-up desks in a big open during a summer job,” Leone recalls. “I could look across hall. Conference rooms are and see all the kids at the country club’s swimming pool. adorned with cheap plas- The young guys were talking to the girls. And I was say- tic wastebaskets. It’s as if ing to myself: ‘I can’t wait until I meet you in the business Sequoia’s partners haven’t world. You just made your big mistake, letting me in.’ ” fully realized that they might Ambition. Vulnerability. Vindication. Lots of suc- be rich. cessful immigrants bottle up those feelings as they rise The past year Sequoia’s to prominence. They hide old slights and do their best scrappy methods have pro- to blend into America’s aristocracy. Not Leone. Even in duced the frm’s biggest his perch as a managing partner at venture frm Sequoia gains ever. A record nine Se- Capital, Leone still carries himself like a hard-luck striv- quoia partners appear on er, scrambling for his frst decent break. “A lot of what the FORBES Midas List of keeps me going is fear,” he confdes. the most successful ven- Step inside Sequoia’s spartan ofces at Silicon Valley’s ture capitalists, thanks to capital of capital, Sand Hill Road, and see what happens the frm’s lucrative invest- when a handful of hungry perfectionists like Leone band ment in companies such as together. Start at the entryway, packed with framed cop- Airbnb, Dropbox, FireEye, ies of fnancing documents for 98 companies. The hit pa- Palo Alto Networks, Stripe, rade begins with Apple’s initial public ofering in 1980; Square and WhatsApp. At the it includes the likes of Oracle, Cisco, Yahoo, Google and No. 1 spot is Sequoia part- LinkedIn. These are Sequoia’s children. Since its found- ner Jim Goetz, who backed ing in 1972 Sequoia has backed startups that now com- WhatsApp in 2011, well before mand a staggering $1.4 trillion of combined stock market Facebook agreed to buy the value, equivalent to 22% of Nasdaq. mobile-messaging company for $19 billion. Leone ranks No. 6, followed by the investMent cLub you wAnt to be in colleagues Michael Moritz, sequoiA’s returns net of fees hAve bLown AwAy the stock MArket, even its LAter-stAge growth funDs. Alfred Lin, Roelof Botha, Neil sIze neT s&P Shen, Michael Goguen, Bryan VenTure ($mIL) Irr 500 difference Schreier and Kui Zhou. sequoia managing Base pay at Sequoia isn’t partner doug us Xi1 (2003) $387 40.9% 6.0% ▲ 34.9 Leone: “a lot of 2 meant to be dazzling. While us Xii (2006) 421 34.6 5.5 ▲ 29.1 what keeps me us Xiii3 (2010) 434 88.4 12.1 ▲ 76.3 the salaries of the frm’s nine going is fear.” general partners can top $1 GroWTH million, Sequoia doesn’t both- us gf iii (2005) 862 14.3 5.1 ▲ 9.2 er with Wall Street-style guaranteed bonuses, and some us gf iv (2008) 903 32.1 14.6 ▲ 17.5 of Sequoia’s more junior partners have taken pay cuts to gf v (2011) 951 58.5 23.7 ▲ 34.8 join. That’s an easy sacrifce to make. The capital gains 1Fireeye, KayaK, LinKedin, PaLo aLTo neTworKs, youTube.does noT incLude evenTuaL exiT vaLuaTion oF 3 PrivaTe comPanies. 2airbnb, droPbox, Jawbone, meraKi, nimbLe sTorage. does noT incLude evenTuaL vastly exceed base pay. exiT vaLuaTion oF 22 PrivaTe comPanies. 3mongodb, square, sTriPe, TumbLr, whaTsaPP does noT incLude evenTuaL exiT. vaLuaTion oF 27 PrivaTe comPanies. Source: Sequoia capital. Note: a 2012 veNture fuNd iS Consider Sequoia Venture XI Fund, which in 2003 Still iNveStiNg (iNcludeS WhatSapp, a 700% irr Score). a 2014 groWth fuNd StartS apr. 14

72 | FORBES APRIL 14, 2014 er $2.5 billion. Look for even more outsize returns from Venture XIII (2010), which is up 88% a year so far, and Venture XIV (2012). The latter two will split the $3 billion or so Sequoia takes home from the WhatsApp deal. Add it up and Sequoia is turning its own partners into billionaires while keeping outside investors purring. “We’ve hired more than 200 outside money managers since I came here in 1989,” says Notre Dame’s investment chief, Scott Malpass. “Sequoia has been our number one performer by far.”

Sequoia opened for buSineSS in 1972, when Don Valentine, a gruf sales and marketing executive in Silicon Valley’s chip industry, decided to try his hand at venture capital. The son of a Yonkers, N.Y. truck driver (a few miles from where Leone grew up), Valentine was blessed with an eye for mavericks who could launch great companies. You’ll fnd him in the history books as the fellow who bankrolled Steve Jobs in 1978, even though the 22-year-old Apple founder, by Valentine’s later account, smelled odd and “looked like Ho Chi Minh.” When Valentine ceded managerial control of Sequoia in the mid-1990s, Moritz and Leone jointly took over. Su- perfcially they are nothing alike. Moritz started out as a staf writer for Time magazine; he is an Oxford graduate who coins clever phrases all the time. Leone earned a mechanical engineering degree from Cornell and then sold computers for Hewlett-Packard, Prime Computer and Sun Microsystems; he curses to get his point across. Moritz won a full partnership at Sequoia after barely two years; Leone needed fve. Yet both ft the Sequoia mold: feisty, decisive—and ready to back the “dentmakers” of the world. “Every time we invest in a little company, it’s a battle against the odds,” Moritz explains. “We’re always outgunned by companies that are far larger than us, who have threat- ened us and the founders with extinction. It’s incredibly thrilling to prove everyone wrong. You can’t get a bigger rush than that.” These days Leone serves as senior partner. Moritz remains an active investing partner but shed his adminis- trative duties in 2012 after being diagnosed with an un-

eTHAn PInes f specifed illness that, he said, could dim his quality of life in the next fve to ten years. In a recent interview with FORBES Moritz said that “staying as ft as possible is the or f key to everything,” adding that he had been swimming orBes for 90 minutes early that morning. Asked if there was any change in his health outlook, Moritz added: “Who raised $387 million from about 40 limited partners, knows what fate will deliver?” chiefy universities and foundations. Eleven years later Sequoia’s partners hear 200 or more pitches a month, Venture XI has booked $3.6 billion in gains, or 41% a while typically funding only 2. Regardless of wheth- year, net of fees. Sequoia’s partners stand to collect 30%, er a meeting ends with “yes” or “no,” founders describe or $1.1 billion, while limited partners get 70%, or anoth- their hour with Sequoia as one of life’s most intense ex-

APRIL 14, 2014 FORBES | 73 The Midas LisT sequoia capitaL

2014 rank nAMe (2013 rAnk) periences. Moritz is the detective, listening to each de- firM Big Deals tail of a founder’s story and asking a few eerily percep- tive questions. Botha, Lin and Schreier are the growth 1 JAMes goetz (7) sequoiA cAPitAL hackers, looking for ways consumer-oriented start- WhatsApp, Palo Alto Networks, ups can rocket ahead even faster. Goguen and Goetz are Nimble Storage the mechanics, drawing on 25 years apiece of experi- 2 MArc AnDreessen (2) AnDreessen horowitz ence with enterprise technology companies to gauge a Facebook, Twitter, Groupon startup’s chances of prevailing. 3 Peter fenton (6) Then there’s Leone. The boy from Genoa likes to benchMArk cAPitAL challenge founders right away to fnd out who is tough Twitter, Yelp, New Relic enough to succeed. Tony Zingale, a seasoned Silicon Val- 4 Peter thieL (3) founDers funD MAnAgeMent ley executive, recalls a 1990s meeting in which Leone Facebook, Zynga, Palantir Technologies grabbed Zingale’s résumé, fipped it across the desk and 5 JiM breyer (1) snarled: “What do you know about running a startup?” James Goetz AcceL PArtners Leaps to They bickered for ten minutes before Leone declared: Facebook, Spotify, Legendary no. 1 because of the Entertainment whatsapp sale. he was “Okay, now we know you are a smart m-efer. Now we 6 Doug Leone (4) the only vc in the deal. can have the meeting.” sequoiA cAPitAL FireEye, ServiceNow, Meraki Today Zingale is CEO of Jive Software, a Sequoia- backed provider of enterprise/social software. It doesn’t 7 reiD hoffMAn (5) greyLock PArtners matter that Leone can deal out rejections that feel like a data point Facebook, Groupon, Zynga punch in the mouth, Zingale says. Slights are forgotten 8 steve AnDerson (22) fast; Leone regularly speaks of Zingale as part of the Se- bAseLine ventures Twitter, ExactTarget, Tremor Video quoia family. “He’s another fery Italian, so we get along well,” says Zingale. 9 PAuL MADerA (11) Meritech cAPitAL PArtners 20 new Borge Hald, the CEO and cofounder of Medallia, Facebook, 21Vianet Group, Fusion-io encountered Leone’s sharp tongue in 2012, when the 10 scott sAnDeLL (8) customer service software company was looking for its new enterPrise AssociAtes Workday, Bloom Energy, Data Domain data point frst outside capital infusion. Most other venture frms

11 Josh koPeLMAn (12) “were sucking up to us and saying we were so good first rounD cAPitAL that they wouldn’t change a thing,” Hald recalls. “Doug LinkedIn, Square, Five Below challenged us. He said that we needed to build our sales 12 chris sAccA (21) 7 eforts in a big way. He said that in a world that’s full of a LowercAse cAPitAL Twitter, Uber Technologies, Lookout returnees struggle between energy and chaos, all we amounted to 13 MichAeL Moritz (13) was entropy.” In this case Leone’s harsh critique paid of; sequoiA cAPitAL Medallia signed with Leone even though passive com- LinkedIn, First Republic Bank, Green Dot petitors ofered richer terms. 14 Mike MAPLes (25) fLooDgAte Part of Sequoia’s edge with entrepreneurs comes from Twitter, ExactTarget, Chegg a willingness to move fast on the best prospects. Pitch to 15 freD wiLson (16) Sequoia partners on Monday morning and, if everything union squAre ventures Twitter, Zynga, LendingClub goes well, you can have a handshake agreement on funding that afternoon. Ask for a term sheet and you’ll get the 16 DAviD sze (10) greyLock PArtners essentials on a single page, rather than a long lawyers’ Facebook, LinkedIn, Pandora Media memo. Among the fans of Sequoia’s speed is Elon Musk, the CEO of Tesla Motors. Musk remembers that in 1999, when he was building what became PayPal, Sequoia Acknowledgments wired him $5 million to get started, even though lawyers data partner: TrueBridge Capital Partners hadn’t fnished all their paperwork. Lead reporter: Alex Konrad “Don’t complicate our lives,” explains Adi Tatarko, the reporting by: Ryan Mac, Hollie Slade, Aaron Tilley CEO of Houzz, a home decorating site. She and her hus- editor: Bruce Upbin band, Alon Cohen, cofounded the site in 2009 and have data: DowJones Venture Source been racing to build it ever since. When Houzz raised money in 2011, another venture frm might have ofered a higher valuation. But Sequoia won their loyalty, she

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The Midas LisT sequoia capitaL

2014 rank nAMe (2013 rAnk) says, by being “very direct and really fast.” firM Big Deals Tatarko and Cohen grew up in Israel, Musk in South Africa, Hald in Norway. A FORBES analysis shows that 17 AneeL bhusri (14) greyLock PArtners a whopping 59% of the startups underlying Sequoia’s Workday, ServiceNow, Data Domain Midas List calculations were built by at least one for- 18 toDD chAffee (23) eign-born cofounder. Put fags in a world map and you institutionAL venture PArtners will see Sequoia connecting with entrepreneurs born in Twitter, Pandora Media, HomeAway Ukraine, Ireland, Finland, Greece, India, Pakistan, Ven- 19 JereMy Levine (9) besseMer venture PArtners ezuela and a dozen other countries. (By contrast, Kauf- LinkedIn, Pinterest, Box man Foundation data show that barely a quarter of all 20 benJAMin horowitz (17) U.S. startups have at least one immigrant cofounder.) AnDreessen horowitz Twitter, Skype Technologies, Jawbone Sequoia’s ties to Silicon Valley’s brightest immigrants are hardly an accident. Italian-born Leone rubs shoul- 21 MAry Meeker (47) kLeiner Perkins cAufieLD ders with fellow partners from Wales (Moritz), South & byers Square, Spotify, LendingClub Africa (Botha), Hong Kong (Lin) and old-line parts of mary meeker The the northeastern U.S. who think of themselves as im- 22 Deven PArekh (new) former wall street tech insight venture PArtners migrants, too. Native Californians are rare at the frm. Twitter, Fanatics, Chegg sage is the top-ranked woman on the list. Everyone is an outsider, still trying to win acceptance— 23 John Doerr (26) and success—in a new land. kLeiner Perkins cAufieLD & byers As a result Sequoia’s partners don’t mind hunting for Twitter, Square, Bloom Energy data point great new startups in the ratty cofee shops and low-rent 24 richArD wong (86) ofces where such companies often are born. Other ven- AcceL PArtners Atlassian, Airwatch, Rovio Mobile ture capitalists let success draw them into Pebble Beach golf tournaments or the rarefed venues of Davos and 25 kevin efrusy (18) AcceL PArtners 4 Aspen gabfests. “We don’t go there,” Leone says. “That’s Facebook, Groupon, SpringSource Women not where the next founders are.” 26 ALfreD Lin (90) sequoiA cAPitAL Uber Technologies, Airbnb, Jawbone The venTure capiTal buSineSS often seems as

27 ProMoD hAque (returnee) strife-torn as a Kardashian marriage. Ambitious young- norwest venture PArtners er partners feud with old-timers. Battles rage with- FireEye, PCH International, Cyan in frms about who is good versus lucky, who deserves a 28 benJAMin nye (24) bigger share of the profts and who should be booted out. bAin cAPitAL ventures BMC Software, LinkedIn, SolarWinds Throw in some personal feuds or indiscreet conduct and

29 roeLof bothA (19) pretty soon VCs’ quarrels become a feast for lawyers. sequoiA cAPitAL Sequoia is the long-running exception. Thanks to Square, Jawbone, MongoDB some unusual quirks in the frm’s hiring habits, every- 30 nAvin chADDhA (52) MAyfieLD funD day work practices—and pay—Sequoia has been able to Qunar Cayman Islands, Fab, SolarCity stay harmonious and rejuvenate its leadership as needed, 31 robert wArD (31) without any fuss. Older partners cash out. New ones take Meritech cAPitAL PArtners their place. The frm runs in line with Leone’s idea of a Tableau Software, Fortinet, Acclarent big Italian family: lots of personalities, plenty of back- 32 biJAn sAbet (51) sPArk cAPitAL and-forth but a determination to stick together no mat- Twitter, Tumblr, FourSquare Labs ter what. Women? Sequoia has none in top U.S. invest- 33 neiL shen (15) ment roles but says it hopes to hire one someday. sequoiA cAPitAL Qihoo 360 Technology, JD.com, Renhe “We want people who come from humble backgrounds and have a need to win,” Leone says. “And we want a cul- 34 hArry weLLer (28) new enterPrise AssociAtes ture where people continuously share credit.” Sequoia Groupon, MongoDB, Opower does hire some recent business school graduates to serve as nonvoting junior partners. But the frm’s bigger partnership slots go to seasoned tech executives like Alfred Lin (Zappos), Bryan Schreier (Google) or Omar Ham- oui (AdMob). These men are known quantities; they have worked for years at one of Sequoia’s portfolio companies.

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2014 rank nAMe (2013 rAnk) Schreier, for example, pitched three of his own firM Big Deals startup ideas to Sequoia in 2008. Moritz didn’t like any of them—particularly a hastily conceived idea about 35 yuri MiLner (35) DigitAL sky technoLogies making phones with big buttons so that elderly peo- Facebook, Groupon, Zynga ple could use them. But, as Moritz now recalls, “the best 36 byron Deeter (29) thing about Bryan was Bryan.” The big-button phones besseMer venture PArtners could wait. Sequoia regarded Schreier’s earnest, self-ef- Box, Criteo SA, Cornerstone OnDemand facing personality as just right for the frm itself. 37 neerAJ AgrAwAL (27) bAttery ventures Sequoia’s partners gather each Monday at 8 a.m. to Wayfair, Nutanix, Bazaarvoice debate investment prospects and review existing port- 38 sAnDy MiLLer (42) folio companies. Unwritten house rules reward the institutionAL venture PArtners Zynga, Data Domain, Supercell humble. “It’s about getting to the right decision, rather than being right yourself,” says Jim Goetz. “If you talk 39 george bischof (43) Meritech cAPitAL PArtners yuri milner he moved his for more than 90 seconds at a time,” adds Aaref Hila- Isilon, Box, Fusion-io head ofce to hong Kong to ly, a new partner (ex-Clearwell), “you’ve probably gone 40 george zAchAry (40) be closer to his china deals. on too long.” chArLes river ventures Twitter, Yammer, Millennial Media Unlike Wall Street’s activist investors—who agitate

41 sAMeer gAnDhi (44) for big shakeups that might rocket stock prices upward AcceL PArtners firMs with the Most in a single day—Sequoia’s partners help companies re- Dropbox, Spotify, Sourcefre partners on List lentlessly with the little stuf that will never warrant a 42 rAnDy gLein (91) sequoIA CAPITAL 9 DrAPer fisher Jurvetson press release. When WhatsApp was having trouble hir- Twitter, Space Exploration ACCeL PArTners 8 ing engineers, Goetz met at least half a dozen candidates Technologies, Box KLeIner PerKIns and their spouses for dinner, where he reassured them 43 kevin coMoLLi (new) 5 CAufIeLd & Byers that this low-key startup really did have a bright future. AcceL PArtners Atlassian Pty, Supercell, 4 GreyLoCK PArTners When Stripe’s 23-year-old cofounder, John Collison, Varonis Systems wanted help pitching his company’s payment services 4 BenCHmArK CAPITAL 44 MichAeL goguen (returnee) to a big East Coast fnancial company, Sequoia’s Moritz sequoiA cAPitAL neW enTerPrIse 4 FireEye, Infoblox, Virident Systems AssoCIATes walked him through two rehearsals, sharing ideas about merITeCH CAPITAL how to sharpen up the story. 45 ryAn sweeney (new) 4 PArTners AcceL PArtners When Sequoia partners sweat the details with start- Groupon, Atlassian, Airwatch 3 Andreessen HoroWITz up founders, much of the conversation involves tidbits of 46 Ann LAMont (returnee) 3 GGV CAPITAL “tribal knowledge” picked up during the 42 years of frm oAk investMent PArtners Castlight Health, Beneftfocus, Bessemer VenTure history. Dropbox, for example, regularly invites Sequoia 3 NetSpend PArTners partner Bill Coughran—a former head of engineering at drAPer fIsHer 47 JoeL cutLer (38) 3 JurVeTson Google—to share thoughts about how to keep expanding generAL cAtALyst PArtners Airbnb, Kayak Software, ITA Software without creating hair balls of complexity. On a recent visit Coughran leaned back in a plas- 48 Jeffrey JorDAn (74) firMs with the Most AnDreessen horowitz recent exits >$200M tic chair and reminisced about the four big engineering Pinterest, zulily, Airbnb needs of Google’s search division, at a time when “rank- KLeIner PerKIns CAufIeLd & Byers 15 49 Ping Li (returnee) AcceL PArtners ing” seemed thrilling and “indexing” seemed dreary. Fusion-io, Nimble Storage, Cloudera sequoIA CAPITAL 15 Didn’t anyone want to index? Yes, Coughran said: The

50 AyDin senkut (new) ACCeL PArTners 12 moment he talked about Google’s desire to crank up its feLicis ventures indexing capabilities 30-fold over the next several years, Meraki, Rovio Mobile, The Climate neW enTerPrIse AssoCIATes 12 indexing suddenly became exciting, too. Dropbox’s 51 kLAus hoMMeLs (66) merITeCH LAkestAr 9 CAPITAL head of engineering, Aditya Agarwal, smiled. Now he PArTners Facebook, Spotify, Airbnb norTHWesT had a new tactic to get people excited about Dropbox’s 8 VenTure 52 Jenny hong Lee (36) PArTners quests, too. ggv cAPitAL 7 Bessemer VenTure 21Vianet Group, Pactera, YY PArTners Founders push back if Sequoia tries to ofer too much

7 orBImed advice. Nir Zuk, the founder of Palo Alto Networks, a 53 Peter wAgner (78) AdVIsors wing ventures computer security company, says he’s told Goetz: “If Fusion-io, Nimble Storage, Opower 6 BATTery VenTures you want to work for me as a product manager, I’d hire you in a heartbeat. But you can’t come to board meetings every six weeks and tell me you know more than

78 | FORBES APRIL 14, 2014 The Midas LisT

our full-time product managers do. It just doesn’t work 2014 rank nAMe (2013 rAnk) firM that way.” Overall, though, Zuk says that what he likes where Listers Live Big Deals most about Sequoia is that its partners are fellow en- 54 hurst Lin (new) trepreneurs who “have gone through what we’re going DcM through. They understand us.” CALIFORNIA 58.com, Shanghai Luxin Packing 73% Materials Science, Tuniu

Sequoia doeSn’T alwayS geT iT righT. In the 55 AsheeM chAnDnA (20) greyLock PArtners dot-com bust of 2000 the frm sufered big losses from Palo Alto Networks, AppDynamics, duds such as eToys and Webvan, an online grocer. More 7% Imperva 6% 2% 9% recently it sank $25 million into failed photo app Color, 3% 56 DAn LevitAn (new) NEW YORK MAveron which ended up selling at a loss to Apple. Even in Ven- MASSACHUSETTS Zulily, Potbelly, The Motley Fool BEIJING ture XI, the fabulously successful 2003 fund, Sequoia SHANGHAI 57 venky gAnesAn (32) rang up more than $100 million of losses on startups that OTHER1 MenLo ventures 1PennsyLvania, moscow, Zurich, London, hong Palo Alto Networks, Virident Systems, turned out to be, um, shutdowns. Kong, connecTicuT, coLorado, washingTon (d.c.), oDesk washingTon. Periodic losing investments come with the territory. 58 Lee fiXeL (30) What vexes Sequoia much more are the meetings with tiger gLobAL MAnAgeMent tomorrow’s legendary founders, when, at the end of Facebook, Palantir Technologies, LinkedIn the pitch, the frm somehow ends up saying no instead 59 stePhen Jurvetson (57) DrAPer fisher Jurvetson of yes. Pinterest slipped away—and so did Twitter. In Space Exploration Technologies, 2007 Sequoia had a chance to take a 10% stake in Twit- Tesla Motors, Synthetic Genomics ter when the fedgling site was valued at just $20 mil- 60 bing gorDon (80) kLeiner Perkins cAufieLD lion. (Twitter’s market cap today is more than 1,000- & byers fold higher.) Zynga, Spotify, Jawbone Live and learn. Sequoia investors put on their hair 61 bryAn roberts (75) venrock shirts in 2011 and tried to identify a fxable mistake in Castlight Health, Ironwood Pharmaceuticals, Zeltiq Aesthetics their Twitter analysis. Their conclusion: They had been too stubborn about seeking their ideal target of a 20% 62 teD schLein (37) kLeiner Perkins cAufieLD to 30% stake in startups. Twitter CEO Jack Dorsey had & byers wanted to sell only a smaller amount. In hindsight, says Chegg, Mandiant, Jive Software Botha, Sequoia should have agreed. Going forward, 63 vinoD khosLA (68) partners now are willing to take smaller stakes—at khosLA ventures Square, Beceem higher than usual prices—when an extraordinary start- Communications, Xsigo Systems up is in play. The worst misstep happened in 2006, when Facebook

how sequoia soLved china American venture frms have a mixed record starting Chi- nese “franchise funds.” New Enterprise Associates has kept only a modest footprint since entering the market in 2003. Kleiner Perkins has seen a wave of partner turnover since 2007. Not Sequoia. Since 2005 its China hands, Neil Shen and Kui Zhou (on the list at 33 and 81, respectively), have guided each of the frst three funds to better returns than the last (its 2007 fund is up 33% a year; the 2010 fund is up 37%), while racking up wins such as Qihoo 360, Vipshop and IPO-bound JD.com. The secret? Diversity of bets (LED makers, wealth management, fast food) and Shen himself. One of China’s early Web moguls as cofounder of travel site Ctrip.com, Shen is aggressive and well connected. He J A S

ON ALDEN/BL recruits cold-call pros to snif out potential portfolio companies and nurtures a formidable network of founders. Says Jenny Lee, a managing partner at rival frm GGV Capital:

OOMBERG “Among the franchise funds it’s only Sequoia. Many haven’t worked out very well, and this is the one that actually has. My view is it’s because of Neil Shen.”

APRIL 14, 2014 FORBES | 79 The Midas LisT sequoia capitaL

2014 rank nAMe (2013 rAnk) founder Mark Zuckerberg taunted Sequoia by showing firM Big Deals up late at a meeting, wearing pajama bottoms, to discuss an eccentric side business called Wirehog. The farcical 64 cArL gorDon (new) orbiMeD ADvisors presentation was a way of “sticking it to Sequoia,” author Inhibitex, Aragon Pharmaceuticals, Adimab David Kirkpatrick later reported. (Zuckerberg at the 65 ron conwAy (41) time was taking advice from fellow entrepreneur Sean sv AngeL Twitter, Zynga, Snapchat Parker, who had his own gripes with Sequoia.) Snub accomplished, Zuckerberg won funding from Accel Part- 66 christoPher schAePe (55) LightsPeeD venture PArtners ners instead, in a deal that eventually produced about a Fusion-io, Solazyme, Aerohive Networks 300-to-1 payof for that venture frm. 67 sALiL DeshPAnDe (71) Today relations with Facebook have been mended; bAin cAPitAL ventures LendingClub, MuleSoft, Buddy Media since 2012 the big social network has paid top dollar for

68 DAviD weiDen (39) two Sequoia-funded companies, Instagram and Whats- khosLA ventures App. Even Moritz, who sufered through the pajama pre- Jawbone, Yammer, Lookout sentation, insists that it only deepened his appreciation 69 hAns tung (100) Hans Tung Two-time of Zuckerberg’s pluck. “At the end of his slide show,” ggv cAPitAL midas lister splits his Beijing Xiaomi Technology, VANCL, Moritz recalls, “he had this slide saying: ‘A Mark Zuck- Forgame Holdings time between beijing and san Francisco. erberg Production.’ I remember privately admiring the 70 biLL gurLey (33) bravado and self-confdence to insert that line. I would benchMArk cAPitAL Uber Technologies, Zillow, Nextdoor never have had the courage to do that at his age.”

71 crAig sherMAn (new) Other venture capitalists salute Sequoia’s results, Meritech cAPitAL PArtners haLL of faMe: Most though they can’t resist the temptation to quibble a bit Zulily, SurveyMonkey.com, Evernote appearances on List with its style. “There’s a ton of respect,” says David Sze 72 bryAn schreier (new) of Greylock Partners. “We are both completely dedicat- sequoiA cAPitAL JoHn doerr 13 Dropbox, Qualtrics, Trulia ed to creating huge successful outcomes to change the mICHAeL morITz 13 73 roger Lee (54) world. They are a little more acerbic; we are a little more bAttery ventures collaborative.” Groupon, Angie’s List, BlueKai JIm Breyer 12 Years ago, when Kayak cofounders Steve Hafner and 74 christoPher gAbrieLi (returnee) VInod KHosLA 10 besseMer venture PArtners Paul English were pitching their travel search engine, Bright Horizons Family Solutions, douGLAs Leone 9 Hafner asked Sequoia’s partners to help him test the ser- Stromedix, Acceleron Pharma vice by ofering up airport codes (such as JFK or SFO). 75 rob hAyes (97) JoHn WALeCKA 9 first rounD cAPitAL When Leone hesitated, some wag interjected: “Doug Square, Uber Technologies, Rearden PeTer WAGner 9 doesn’t know any. He fies private.” The comment was Commerce HALL OF FAMERS NOT ON 2014 a sly dig at superthrifty Leone, who did most of his fy- 76 Peter bArris (49) LIST (APPEARANCES): JAY HOAG ing on United at the time and had just agreed, with some new enterPrise AssociAtes (12), DAVID COWAN (11), WILLIAM Groupon, Boingo Wireless, Echo Global FORD (9), KEVIN HARVEY (9). trepidation, to rent a few hours of private jet service an- Logistics nually, via NetJets. But Hafner didn’t know this. He was 77 Jeff crowe (new) “put of his game,” and the presentation sputtered. The norwest venture PArtners LendingClub, RetailMeNot, Turn two were initially turned down before English returned

78 gorDon ritter (returnee) uninvited a day later and convinced the frm to give eMergence cAPitAL PArtners Kayak a second look. Veeva Systems, Lithium Technologies There’s a stereotype in Silicon Valley that venture 79 izhAr ArMony (new) capitalists become unhelpfully harsh when compa- chArLes river ventures Yammer, RPX, TerraPower nies are stumbling and are in too much of a hurry to

80 MAMoon hAMiD (new) cash out when things are going well. Sequoia, however, the sociAL+cAPitAL PArtnershiP turns those tenets upside down. CEOs such as Brad Pe- Castlight Health, Box, Yammer ters of Birst, a business-intelligence software company, 81 kui zhou (new) sequoiA cAPitAL say Sequoia gives them time and guidance to sort out Xiamen Changelight, Beijing Shouhang snags. But Sequoia becomes insatiable when it sees a Resources Saving, Sinnet company doing well and believes that it could be doing even better. At a recent San Francisco dinner with a dozen CEOs of portfolio companies, for example, Sequoia’s Lin

80 | FORBES APRIL 14, 2014 sequoia capitaL The Midas LisT asked how many attendees used a technique called net 2014 rank nAMe (2013 rAnk) firM promoter scores to gauge customer enthusiasm. Just Big Deals about everyone’s hands shot up. 82 DAviD Lee (new) “Now, how many of you look at why your ratings sv AngeL come in the way they do?” he asked. Twitter, Dropbox, Square “Only if the numbers are bad,” one CEO replied. 83 Peter nieh (new) LightsPeeD venture PArtners “Why don’t you look at them when something goes Nest Labs, QuantumScape, 99Bill right?” Lin shot back. That was a key part of the win- 84 richArD Liu (60) ning formula at Zappos during his time there as chief MorningsiDe grouP Beijing Xiaomi Technology, Phoenix New operating ofcer. Do more of what dazzles your happi- Media, YY est customers, and CEOs can turn strong expansion into 85 DAnieL riMer (34) hellacious growth. Peter nieh debuts on inDeX ventures Sequoia is equally stubborn about maximizing gains the list thanks to a bet Facebook, Dropbox, Flipboard on nest Labs. and he’s from its top-performing companies. (Back in 1979 86 gAurAv gArg (new) 48, the midas average. wing ventures Sequoia sold its Apple stock after holding it for just FireEye, Jawbone, Ruckus Wireless

18 months, and Sequoia partners aren’t about to make 87 gLenn soLoMon (76) that mistake again.) Unlike other venture frms, which data point ggv cAPitAL run their limited partners’ investment funds for 10 Square, Pandora Media, QuinStreet years, Sequoia often looks for ways to extend its part- 88 Jerry MurDock (new) insight venture PArtners nerships’ lives for as much as 16 or 17 years. Sequoia Twitter, Flipboard held its Google stock for nearly 2 years after that com- 48 89 JonAthAn siLverstein (96) pany went public; it held onto Yahoo even longer in orbiMeD ADvisors Average Age Enobia Pharma, Relypsa, superDimension the 1990s. 90 shervin PishevAr (new) An especially intense test of Sequoia’s willingness to sherPA ventures buy and hold involves ServiceNow, a software company Uber Technologies, Tumblr, Fab providing help-desk services to corporate customers. In 91 terrAnce Mcguire (returnee) July 2011 an unexpected suitor ofered to buy the com- PoLAris PArtners Ironwood Pharmaceuticals, Adimab, pany for $2.5 billion. Sequoia had become a signifcant Acceleron Pharma investor in late 2009, leading a $41 million investment 92 Peter chung (67) round, with Leone joining the board. Cashing out at that suMMit PArtners Ubiquiti Networks, M/A-COM Technology point would have brought Sequoia about a 10-to-1 return Solutions Holdings, A10 Networks on its investment. 93 bruce DunLevie (65) Most of ServiceNow’s directors thought the ofer was benchMArk cAPitAL WeWork Companies , ServiceSource Inter- intriguing. Only Leone regarded it as insulting. Rally- national, Pure Digital Technologies ing some of his colleagues, he worked up a 12-page anal- 94 John wALeckA (59) ysis arguing that directors would be “giving away the reDPoint ventures Intermolecular, Qihoo 360 Technology, company,” even at a $4 billion valuation. To his eye, even BCD Semiconductor Manufacturing though ServiceNow was early in its growth curve, its 95 forest bAskett (58) participation in the fast-growing software-as-a-service new enterPrise AssociAtes sector made it a company with vastly better potential Fusion-io, Tableau Software, Audience than outsiders could see. 96 DAviD yuAn (new) reDPoint ventures After some debate ServiceNow’s directors turned Qihoo 360 Technology, Focused Photonics down the ofer. A year later ServiceNow went public and (Hangzhou), iDreamsky attracted a $2 billion valuation. Leone’s disdain looked a 97 Josh stein (70) DrAPer fisher Jurvetson bit of, until ServiceNow shares took of post-IPO. Cur- Box, Yammer, Glam Media rent market value: $8.3 billion. 98 theresiA gouw rAnzettA (82) Simple math says that Leone’s stubbornness made AcceL PArtners nearly $6 billion more for ServiceNow’s shareholders, Glam Media, Imperva, Trulia including company founder Fred Luddy. But it’s more 99 MAtt cohLer (46) benchMArk cAPitAL primal than that: People like Leone still remember those Dropbox, Domo, Peixe Urbano rich kids at the swimming pool, enjoying the easy life. 100 rAnDy koMisAr (new) There’s no reason to slow down until old rivals are left kLeiner Perkins cAufieLD & byers far in the dust. F Nest Labs, RPX

APRIL 14, 2014 FORBES | 81 82 |FORBES photographs by david yellen for forbes of live events andtalent. Triple H),theexecutive incharge husband, Paul Levesque (a.k.a. the chiefbrand ofcer, andher with hisdaughter, Stephanie, Chairman andCEO Vince McMahon CORPORATE MUSCLE: WWE APRIL 14, 2014

credit tk Monster Move Pro wrestling billionaire Vince McMahon sucker Punched his traditional television Partners when he launched his direct-to-the-fans wwe network earlier this year. the unorthodox Maneuver could transforM his business—or he could fall flat on his face.

By MiCHAEL SOLOMOn And dAniEL FiSHER

APRIL 14, 2014 FORBES | 83 FORBES VINCE MCMAHON — WWE NETWORK

ubtlety has no place in sion contract, at more than twice its viewers on the Internet or what’s professional wrestling. current rate of $160.9 million, and known in the entertainment indus- Nuance is for losers. Ei- because of persistent speculation try as going over the top. It’s a move ther you play big—to the that McMahon, who has never artic- that directly endangers both WWE’s smallest fan in the last ulated a clear succession plan, might PPV revenues ($82.5 million) and its row of a sold-out arena, to the mil- sell the company outright (both potential new TV deals, a huge gam- lions tuning in each week on televi- Comcast and the Madison Square ble that according to some estimates sion—or you go home. And no one Garden Co. have been rumored as could double the size of the WWE’s has understood that concept, what suitors). Another bright spot: Emerg- business in two years—or fall fat on Roland Barthes once described as ing market revenue has been grow- its face, enriching skeptical investors wrestling’s “spectacle of excess,” ing at a 7% annual rate for a decade who have sold 4 million shares of better than Vince McMahon. in countries such as India, Mexico, the company short. It’s risky, excit- In the four decades he has ruled and even South Korea, to $116 mil- ing and deeply unconventional. World Wrestling lion last year. Of course it is. Why would Vince Entertainment, the But the world— McMahon do it any other way? 68-year-old chair- “i don’t and a ten-fgure man and CEO has consider fortune—is not n his black-and-red ofce at built the company enough for McMa- WWE headquarters in Stam- from a solid regional Myself a rich hon. Which is why ford, Conn. McMahon stares at operation to a pow- Person. he roostered onto a stark reminder of what mo- erful international norMally the stage at Las tivates him. To the left of his brand that’s valued Vegas’ Consumer desk, mounted on square panels of at $2.3 billion. Today, i don’t Electronics Show what looks like scarlet fur, is an enor- in addition to week- like rich in January to an- mous dinosaur skull. The fearsome ly television shows, people.” nounce a bold new open jaw was a gift from his son-in- which reach 15 mil- venture: the WWE law, Paul Levesque, better known to lion viewers in the Network. McMahon wrestling fans by his nom de guerre, United States, WWE told the cheering Triple H. And the metaphor isn’t lost has programming in more than 150 audience that the WWE Network on McMahon. countries and 30 diferent lan guages. would not be broadcast on cable “I look at it like it’s a really nice There are WWE movies, books, television, where Monday Night monster,” he says in a low, gravelly videogames, as well as the requisite RAW has consistently been a top- voice familiar to millions of wrestling T-shirts, hats and action fgures. rated program each week, nor would viewers who know him as “Mr. Mc- Despite the breadth of its business- it be another pay-per-view (PPV) Mahon,” the megalomaniacal lord of es, revenues have barely budged over play. Rather, the WWE network the ring. “When you feed the monster, the last few years, hovering at around will stream content 24/7 directly to the monster is happy. The problem $500 million since 2008, and profts with that is, the monster grows. And have been similarly stagnant. Exclud- no risk, no reward as the monster grows, then the mon- ing a one-time writedown of $11.7 mil- half of wwe’s revenues could suf- ster wants more to eat. And as long as lion, the company made $14.5 million fer a blow from the new network. you do that, everything’s great. And if last year, compared with $31.4 mil- total revenue: $508 Mil you don’t provide the food, then bad lion in 2012 and $24.8 million in 2011. things start to happen.” Despite these faccid fundamentals, Is the monster the audience? WWE’s stock price has more than tri- TV RIGHTS “You can look at it that way, abso- pled in the past six months, zooming 32% lutely,” McMahon says with a smile. from $9.70 in September 2013 to a re- LIVE EVENTS Or it could be the competition— 22% cent all-time high of $31.98, enough to 2% whether it’s mixed martial arts, the make McMahon, who owns 52% of the DIGITAL NFL or Marvel superhero movies 8% thinly traded shares, a billionaire once CONSUMER that are vying for his younger view- PAY-PER- PRODUCTS again (he was briefy a paper billion- VIEW 20% ers, 21% of whom are under 18. And aire in 2000). 16% in part, the beast represents his own WWE The shares are fying both be- STUDIOS insatiable desire to win. cause WWE is seeking a new televi- Over the past two years WWE has

84 | FORBES APRIL 14, 2014

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WWE TV 9.5 9.4 average WWE pay-per-view costs boat called Sexy Bitch, but McMa- HOUSEHOLDS (MIL) 8.2 about $55, a customer who was pre- hon’s indulgences are limited these 7.0 viously purchasing two PPVs will feel days. “I have a car that goes very fast 6.2 like he’s getting the better of Vince and a motorcycle that goes extraor- McMahon. dinarily fast,” he says of his Bentley Allowing for the cannibalization and a Boss Hoss 502. “I love speed.” of its existing pay-per-view custom- Beyond that, he adds, “I don’t really

S. KOREA U.K. INDIA CANADA MEXICO ers (which WWE estimates could be have anything in common with any- as much as $60 million a year), the one in Greenwich except zeros. Nor-

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AVAILABLE ON FORBES VINCE MCMAHON — WWE NETWORK mally I do not like rich people.” It’s easy to understand why. If Horatio Alger had written novels about characters that wore spandex, feather boas and spangled capes, McMahon’s story would have ft in perfectly with his “rough and ready” formula. A third-generation wrestling promoter, McMahon didn’t meet his biological father, Vincent James Mc- Mahon, until he was 12 years old. Instead, he was raised in a trailer park in rural North Carolina by his mother and several physically abu- sive stepfathers. (At one point young Vince actually lived in a town whose name sounds like it was made up by WWE’s writers: Manly, N.C.) A thuggish teen who was always getting into fghts, McMahon “i haVe a Voracious TEAM WWE: CFO George Barrios; chief of revenue and was shipped of to Fish- appetite, marketing Michelle d. Wilson; burne Military School in for life and everything in it.” Vince McMahon; Stephanie Virginia, where he was a McMahon; Paul Levesque. star wrestler. During those high saw its future: television. es were scripted, calling his product school years McMahon began spend- Professional wrestling had been “sports entertainment.” To old-school ing summers with Vince Sr. in New broadcast on national TV since the wrestling promoters and talent, it York and other cities in the North- late 1940s, but by the 1960s the doz- was tantamount to a magician reveal- east. To a kid who grew up without ens of small-time wrestling organiza- ing how he saws the lady in half. As indoor plumbing, the life of a profes- tions in the U.S., and their respective McMahon would later say of his strat- sional wrestling promoter seemed TV shows, were local. For the most egy, “Had my father known what I glamorous. “When people would say, part these regional companies played was going to do, he never would have ‘Do you think can you follow in your nicely with one another. They didn’t sold his stock to me.” old man’s footsteps?’ I would imme- invade other territories or steal talent. From there McMahon began an diately say, ‘No, and I don’t want to, Vince McMahon saw things dif- all-out television assault—largely on and I can’t fll my dad’s shoes. I have ferently. If the business was going the suntanned shoulders of his big- to do things my own way.” to be called “World Wide,” he rea- gest star, Hulk Hogan—to expand his After Fishburne McMahon en- soned, it ought to at least be nation- brand, now called the World Wres- rolled at East Carolina University al. In 1982 McMahon took his frst tling Federation. He used broadcast and graduated with a degree in mar- big risk: He purchased the company TV and pay-per-view, and moved into keting. But he had never lost his pas- from his father and his partners. “It cable. Within a few years his pop- sion for the squared circle. Vince Sr. was a balloon payment situation,” culture-savvy programming was ev- tried to push him away from the fam- he says, “so if I didn’t make the last erywhere—Hulkamania and the ily business, but in the early 1970s payment they took the business WWF were running wild. he eventually agreed to let his son back and kept the cash.” Over the ensuing three decades promote matches at a small arena in Once the fnal payment was made McMahon has been knocked around, Bangor, Me.—not exactly a glamour McMahon set of a battle royal in the even counted out, in the business. In territory. There, McMahon learned industry. Territories no longer exist- the summer of 1994 the federal gov- what it took to be small-time promoted as far as he was concerned, and ernment put him on trial for illegally er, but he felt that wrestling could be anyone’s talent was fair game. He distributing steroids to his perform- so much bigger. And he believed he also eventually admitted that match- ers. Prosecutors vowed to expose the

88 | FORBES APRIL 14, 2014 90 |FORBES FORBES high times! stock boomof2014.Don’t say we didn’t warnyou. multilevel marketers behindthegreat potpenny Meet theshady bandofex-cons, ganja-preneurs and green wave: CannaVest’s CeO, Michael Monajr., isriding shares that jumped140%thisyear. W ILLUSTRATIONS BY LARA TOMLIN BY NATHAN VARDI changing theirdeclared lineofbusiness. Andjust about every singleoneisthin- ical marijuanaandhempcompanies, eitherthrough reverse mergers orsimply stead, real estate, marketing andoiloutfts have miraculously morphedintomed- via anIPOandallthepeskydisclosure andscrutiny thatcome withthatpath.In- popped up, claimingtobepotand hempstocks. Almost none, mindyou, emerged outfts, many snarledinatangled,dif cult-to-track web ofinterconnections, have for recreational use, and20states allowing itmedically, some60publiclytraded frenzies. With Colorado andWashington now permittingthesaleofmarijuana now runsCannaVest, thehighest-fying stock in oneoftheyear’s biggest market found alucrative feld that’s notaschoosy: the potpenny stock business. Mona quently fled forpersonalbankruptcywhenthecasinocouldnotopen. his application would berejected. He inturnwithdrew hisapplicationandsubse- Mona mightnotbeft forthegamblingbusiness, but16 years laterhehas apRil14, 2014 marketers, includingonewhospenttimeinjail,toldMona well. Theboard, reportedly wary ofhistiestoshady tele- Sunrise Suites hotelandcasinoinLasVegas, itdidn’t go Control Board seekingalicenseforhisMediterranean-style hen MichaelMona Jr. went before theNevada Gaming

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FORBES. But he did respond with an e-mail: “We have not promoted our stock and have no investor relations frm. Our sole focus is to source and supply the highest-quality industrial hemp available on the market.” Perhaps. But CannaVest also serves another purpose. The perfect window on a huge, emerging red fag for mom- and-pop investors looking for a way to cash in on the legalization of marijuana. A multibillion-dollar industry run for decades by criminals and now traded on the vehicle of choice for fnancially savvy swindlers and hucksters! What could possibly go wrong?

he genesis of CannaVest—and the pot-stock frenzy overall— Tcan be traced to Bruce Perlowin. He knows the business well: He spent nine years in prison for drug smuggling. With another ex-con, Don Steinberg (who also went to jail for drug smuggling), Perlowin started the frst publicly traded medical marijuana company in 2009. He got the idea after a CNBC doc- umentary called Marijuana Inc. featured Las Vegas lawyer Bart Mackay is the frst pot stock billionaire. On paper, at least. Perlowin’s drug-smuggling past. After it aired Perlowin was bombarded with ly traded on the over-the-counter bul- take it to the bank: He’s been quietly calls and investment proposals. letin board, or Pink Sheets, where pro- working to sell on behalf of the com- Perlowin and Steinberg already moters can push them with the enthu- pany a private placement of 10 mil- controlled a company that sold debit siasm of a campus dealer. lion shares that can’t trade publicly cards and traded on the Pink Sheets, In terms of a bonanza, all of them for six months, according to an in- Club Vivanet. “Is there any sizzle in trail Mona’s CannaVest, which has ternal e-mail from Mona obtained by debit cards?” Perlowin asks FORBES surged 1,260% since the start of 2013. FORBES. The price: $1.50 a share, or rhetorically. “There was so much siz- Its fnancials aren’t pretty: $28.4 mil- between 2 cents and 3 cents on the zle in medical marijuana.” To remove lion of losses for the frst nine months of dollar of the public value. any nuance he renamed his company 2013, on revenues of just $1.35 million, That should tell you everything you Medical Marijuana and was issued 40 or about what a single McDonald’s fran- need to know about CannaVest’s pros- million shares by the board. chise might gross. But its thinly traded pects. Who needs the heavily regulated What followed has been a textbook stock? In February, when it was trading casino industry when there’s far more example of how to create buzz through at $160 a share, CannaVest hit a market cash on the table in the penny stock wheeling and dealing with related ve- capitalization of more than $3 billion. market, with nary a protection for in- hicles. When Perlowin oversaw it, At a recent $68 a share, it’s still high vestors, save a warning from the Finan- Medical Marijuana didn’t actually do enough to make its largest shareholder, cial Industry Regulatory Authority last much, ofering educational seminars a Las Vegas lawyer named Bart Mack- August to be on guard for “con artists and consulting services. Then, in 2011, ay, the frst pot stock billionaire. Osten- behind marijuana stock scams”? Plus, Medical Marijuana sold a huge stake sibly. “In my view it’s a paper valuation some of the people Mona still gets to do by issuing 260 million shares to a pri- and certainly not something I can take business with have a criminal record or vately held investment vehicle, Hemp to the bank,” Mackay tells FORBES. are under federal indictment. Deposit & Distribution Corp., run by But Mona, the CEO, is trying to Mona refused to be interviewed by Michael Llamas, then 26.

92 | FORBES apRil 14, 2014 Llamas became Medical Marijua- to Mona last year in an e-mail obtained na’s president. Assets began moving by FORBES. “I request you not say it back and forth between the companies “you can’t have again.” he ran, creating at least the appearance Shell game. Three-card monte. Or of progress. For instance, in April 2012 an industry just a furry of dealmaking between Medical Marijuana acquired 80% of a where they say, related companies that happen to be Hemp Deposit business called Phyto- ‘we can put you publicly traded. Whatever you call it, Sphere, which was billed by Llamas in CannaVest’s shares were poised to take a press release as a biotech outft that in jail for the of—and the architects stood ready for produces hemp-based products for rest of your life, a great windfall. pharmaceutical markets. but we probably Llamas also created a joint ven- erhaps the most incredible part ture for Medical Marijuana with Dixie won’t today.’ ” of the pot stock boom: Even Elixirs & Edibles, a Colorado-regulat- Pthough the Obama Administra- ed manufacturer of medical-marijua- tion says it will not enforce the Con- na-infused products. Vincent “Tripp” become CEO of CannaVest, a new com- trolled Substances Act in states with a Keber, the man behind Dixie Elixirs, pany that Mackay, the paper billionaire, robust regulatory regime, marijuana hopped on Medical Marijuana’s board created by using companies he owned remains illegal under federal law. “You and soon appeared on 60 Minutes as to buy control of a penny stock com- can’t have an industry where they say, the darling poster boy of the “green pany in the foreclosure business. New ‘We can put you in jail for the rest of rush” going on in Colorado. (Keber name, same game. Mackay’s share pur- your life, but we probably won’t today,’ ” would be arrested for marijuana pos- chases were fnanced by a Florida phys- says Sam Kamin, a University of Den- session in Alabama in 2013.) Frustrated iotherapist named Stuart Titus, who— ver law professor. “Who would invest casino developer Mona quickly joined surprise!—had helped Perlowin raise in that? Who would put their money in the gang at Medical Marijuana, taking capital for Medical Marijuana. Titus that in terms of raising capital?” a stake in the company and sitting on also backs a hemp multilevel marketing In Colorado, for example, recre- the management committee oversee- company. ational and medical marijuana busi- ing the Dixie joint venture. Titus put $375,000 behind Mac kay’s nesses have to grow and sell their Medical Marijuana’s stock price shot CannaVest play and also got millions product in the state. That is why Med- from 3 cents to 20 cents. But the party of CannaVest’s shares. CannaVest ical Marijuana carefully structured stalled in September 2012 after a feder- then agreed to buy the assets of Phyto- its joint venture with Dixie so that it al grand jury indicted Llamas as part of Sphere from Medical Marijuana and does not actually do anything connect- an alleged $10 million mortgage fraud. Llamas’ Hemp Deposit for $35 million ed with marijuana. It is also a big rea- Llamas pleaded not guilty but resigned in cash or stock. Follow all this? Few son that hemp—a variety of pot plants from Medical Marijuana—just as the people can—a fact that Mona himself that has only trace amounts of THC, SEC started investigating it. apparently alluded to. “Your reference marijuana’s psychoactive ingredient— Time to start fresh. Within a few to this being a ‘shell game’ is ofen- has become the buzzword with the pot weeks Mona left Medical Marijuana to sive,” a Dixie Elixirs executive wrote stock crowd. we want tO take yOu higher the hype arOund LegaLized dOpe deaLing has Marijuana-reLated shares On a tear OVer the Last year.

CANNAVEST GROWLIFE HEMP MEDICAL MARIJUANA $200 $1.0 $0.2 $1.0 WEEKLY CLOSE 100 0.1 0.4 0.4 0.3 0.3 40 0.2 0.04 0.2 30 0.03 20 0.1 0.02 0.1

10 0.01 0.04 0.04 0.03 0.03 4 0.02 0.004 0.02 1/4/13 3/20/14 1/4/13 3/20/14 1/4/13 3/20/14 1/4/13 3/20/14

Source: InteractIve Data vIa FactSet reSearch SyStemS.

apRil 14, 2014 FORBES | 93 FORBES high times — inside the marijuana stock boom

CannaVest says it specializes in fact its independent testing has ver- converted Roen Ventures’ loans to 10 producing and marketing industri- ifed the quality.” But Martin Lee, di- million shares of CannaVest stock at al hemp-based compounds, focusing rector of a nonproft that promotes the 60 cents a share. Voilà! More than $1 on cannabidiol. Some, including CNN medical utility of cannabidiol, says he billion at the recent share price, when correspondent Dr. Sanjay Gupta, be- is concerned about CannaVest. “They you include all the shares he owns. lieve the compound has medical ef- are trying to get around the law that Another winner: Titus, the phys- fects that can reduce epileptic sei- says [cannabidiol] is a Schedule 1 sub- iotherapist down in Florida, who had zures. It’s still a no-no under feder- stance,” says Lee. “The history of the bankrolled Mackay at CannaVest—and al law, but in 2004 a federal appeals people running the show, the shad- worked to fnance Medical Marijuana court allowed a California hemp- iness of the operation, suggests that before that. This year he’s been turning soap company to import hemp that they see a way to make a fast buck out his paper profts into actual cash, tak- does not include concentrated THC. of a population that is desperate for ing CannaVest shares he had bought David Bronner, who runs the soap miracles, when you see the kids with for a nickel each and selling them for company, says the ruling did not con- as much as $150 a share, and pocketing template cannabidiol extraction for $7 million, an SEC fling shows. “I have medical purposes. “It was never con- “the shadiness to say that, you know, this has turned sidered,” says Bronner. “It’s defnitely out quite nicely,” Titus tells FORBES a gray area in the law that was not ad- of the operation in an interview. Meantime, Mona’s son dressed.” CannaVest’s Mona says in a suggests that owns 1.25 million shares. statement that the company imports they see a way As for Perlowin, who went from through Europe in accordance with felonious drug smuggler to pot stock state and federal laws and that the to make a fast godfather, he says he sold of his Med- 2004 ruling “makes legal the importa- buck out of a ical Marijuana stake before certain tion of nonpsychoactive hemp.” population that people and assets morphed into Can- Some proponents of cannabidiol is desperate.” naVest, taking out a cool $5 million. worry that imported versions extract- Today he works down the street from ed from industrial hemp for medicinal CannaVest’s Las Vegas ofces, running purposes can be dangerous. That fear another hot penny stock, Hemp Inc. has been fueled by the former science epilepsy, for people who are sick.” But he’s still wheeling and dealing chief at Dixie Elixirs, which has had a he one thing that isn’t murky with his old pals. Perlowin also says joint venture that is part of the daisy here: the fortunes being made he and his family just bought 300,000 chain of companies related to Can- Tby those at CannaVest. shares in a recent CannaVest private naVest and still uses products made by Of course, there’s Mackay. Even placement for $1 each, a discounted PhytoSphere. She posted on her Face- with the stock at $68, he’s recently price that Mona says in a statement is book page in November that the can- been able to convert loans into 10 mil- “appropriate” given the lack of liquid- nabidiol-based products she was using lion shares—at 60 cents each. That ity in the stock and the determination before leaving Dixie were made from 100-fold arbitrage is the large driver of of a third-party valuation frm. crude and dirty hemp paste. In addi- his “billionaire” status. His pals Mona, Perlowin also claims he’s slat- tion, Charles Smith, Dixie Elixirs’ chief the CannaVest CEO, and Llamas, the ed to buy a large chunk of the Can- operating ofcer, sent an e-mail to kid who ran its forerunner before he naVest shares that Mona is peddling Mona that has surfaced in a court doc- was indicted, helped him pull it of. for the company at $1.50 each. “You ument, saying, “We have questioned Here’s how: Last year an entity want some?” he asked a FORBES re- the quality of the product, in writ- called Roen Ventures agreed to lend porter, who declined. Apparently, we ing, especially in the most recent ship- $6 million to CannaVest. According to are missing the gold rush. “Would ment.” Smith says in an interview that a recent lawsuit against Mona in Ne- you say Microsoft, Google, Oracle, he was not referring to product safety. vada, fled as part of a $17.8 million Apple—were they overvalued when “We have great customer satisfaction judgment related to a land transaction, they started? Of course they were. It and great reviews,” he says, adding that Mona and Llamas had formed Roen. was the dot-com explosion,” says Per- Dixie Elixirs tests cannabidiol to make According to the lawsuit, Mona had lowin. “Don’t you wish you would sure it is safe. personally put up half that loan—and have bought all those I just men- In a statement, Mona pointed to then sold his interest in Roen to Mac- tioned? How dare anyone tell the Dixie’s testing and said Dixie “has kay for $500,000. Mac kay acknowl- American investor that any of these never rejected our product, and in edges buying out Llamas. And then he companies are not a good deal?” F

94 | FORBES apRil 14, 2014

96 | FORBES APRIL 14, 2014 Can This Man Feed The World? Harry Stine built an obscure $3 billion empire by breeding a better soybean seed. Now the richest man in Iowa thinks he has revolutionized corn, the Earth’s most popular crop.

By Alex Morrell photogrAph By JAMie KripKe for forBes

On one of the windiest days in recent memory Harry Stine, the richest man in Iowa, cranes his neck to examine the elevator shaft inside the 110-foot steel ob- servation tower next to his garage. “The cables look awfully frayed. Who knows if it will last one more time?” he chuckles. Nonetheless, we hop into the elevator cab, he fips the switch to get it moving, and up we go as the wind rips into us at 40mph. Stine, the 72-year-old founder and owner of Stine Seed, the largest private seed company in the world, built

APRIL 14, 2014 FORBES | 97 FORBES reinventing america — Stine Seed this tower back in 1987 so he could get as crops fortifed with more resilient The basic technology may be ancient, a good view of his empire, some 15,000 genetics improve yield and efciency. but an innovative, data-savvy strategy, acres of frozen Iowa farmland. Aside That’s good news since the world’s married with shrewd leadership and from a small, glass-walled house, it’s population continues to grow by about a classic midwestern work ethic, has his only visible indulgence. Once home 85 million every year, while arable land made Stine’s operation best in class. to his father’s hardscrabble cattle-and- remains scarce. He isn’t bashful about what his small- crop farm, Stine has, without attracting With a combined market value town company has accomplished. any widespread notice, developed some of $320 billion, fve publicly traded “Our germplasm—our genetic base of the most valuable agricultural prod- conglomerates own most of the action: here—is the best in the world,” says Stine. ucts on Earth here. With more than 900 Monsanto, DuPont, Syngenta, Dow “We dominate genetics in the industry.” patents, Stine sells his coveted soybean and Bayer. Then there’s Stine. Based in Today 60% of all U.S. soybean acre- and corn seed genetics to agri-giants Adel, Iowa (pop. 4,000), the dozen or age is planted using genetics developed like Monsanto and Syngenta, nabbing so companies under Stine’s umbrella by Stine’s companies, which also have a estimated annual sales of more than form an unlikely titan at the heart of the strong presence in South America and $1 billion with margins in excess of market, directly or indirectly generating other international markets. FORBES 10%. Along with his four children, Stine revenues from almost 50 million acres estimates that Stine’s company—which, owns almost 100%. of crops in the U.S. each year. among other things, also breeds corn It is a good reminder to those Stine Seed does business with all genetics, creates plant traits in its bio- tempted to confne “innovation” solely of the heavyweights and has for more tech lab and has a small but growing to the world of Silicon Valley that some than three decades, primarily because commercial seed sales operation—is of the most impressive and fundamen- it has something everybody else worth nearly $3 billion. tally important advances on Earth are needs: the best-performing soybean While rivals scof, he now thinks he occurring today in agriculture, and the seeds in the business. Through plant can double the world’s output of corn, global epicenter is America’s heart- breeding, a roughly 10,000-year-old the most popular crop on Earth. By land. The seed market—a $44 billion technique that’s not unlike creating breeding corn seeds genetically predis- worldwide industry that supplies crop Thoroughbred horses or show dogs, posed to thrive when planted in high growers with the essential element they Stine has been perfecting the genetic densities, he thinks he can supercharge use to plant, har- makeup of soybean the engine generating animal feed, vest and sustain the seeds—primarily used biofuels and food for the whole planet. world’s food supply— “our germplasm— in animal feed and “We’re going to be able to double corn is expected to double our genetic base to produce vegetable yields very easily,” says Stine. “And ap- in the next fve years oils—since the 1960s. parently a lot of people working in the here—is the best in the world. we dominate genetics.” FORBES BrandVoice BY SAMSUNG same industry can’t see that. … They think, ‘How can this be? And further- more, how can this little farm kid out Launching Students Into Science: here be doing this?’ ” After seven years of genetic tinker- How a Middle School ing he’s won plenty of converts. “It’s an insight that will revolutionize the corn Touched Outer Space industry,” says Dermot Hayes, a profes- CORY OLSON AND JIM REED sor of agribusiness at Iowa State Univer- TEACHERS sity. If it works out, it won’t be the frst FORESTVIEW MIDDLE SCHOOL, BAXTER, MINNESOTA time this farm kid, unknown outside his industry, has changed the world. CAD design to “print” payload pieces cleanly and elegantly, and confguring tall man partial to Levi’s and the payload for stability as it encountered jet stream winds of 140 miles blue button-downs with pens per hour. Ain the pocket, Stine stands on the burnt-orange carpet in his ofce— On the day of the balloon launch, a little-changed artifact of the Reagan students and teachers hopped in chase era littered with the nuts, berries and, vehicles, and a dozen local ham radio operators relayed coordinates to the especially, mushrooms he likes to forage club, which was in quick pursuit. “That for (he has a handwritten log detailing FROM LEFT TO RIgHT: CORY OLSON; AL DOREE, HAM RADIO was where you saw the kids take com- VOLuNTEER; AND JIM REED when and where he’s found each of the plete ownership of the project,” recalls 32,000 morel mushrooms he’s nabbed Reed. Eventually, the balloon popped in recent years). He’s waving several im Reed, a multimedia teacher, and Cory and fell back to earth. Then—just as reams of paper, flled with three years Olson, who teaches technology and engi- planned—a parachute dropped the of yield results that drive Stine’s corn Jneering, were looking to push the envelope payload safely onto a farmer’s feld. for their 500 seventh graders at Forestview Middle euphoria. At almost every location they The judges selected Forestview School, in rural Baxter, Minnesota, about two hours plant them, he says, his seeds outper- Middle School’s balloon project from north of St. Paul. form any other variety. thousands of entrants as one of fve The secret to Stine’s golden corn? Ef- “We wanted something that was hard to accom- national winners of the Samsung fciency. In the early 1930s, prior to the plish,” says Olson. “We wanted our kids to think Solve for Tomorrow competition. Dust Bowl, 7,000 corn plants per acre outside the box.” The teachers formed were grown in the U.S., yielding about a high-altitude balloon club and spent “ We wanted to give the kids 27 bushels per acre. Seeds were planted their frst year watching helium-flled as much as exposure to in rows 42 inches apart so horses could weather balloons with crude instrument STEM as we possibly could.” packages vanish into the stratosphere. traverse the felds. Now 35,000 plants JIM REED “That frst year, all we really cared about TEACHER, FORESTVIEW MIDDLE SCHOOL, and 150 bushels per acre is common— BAXTER, MINNESOTA nearly fve times the yield—thanks to was getting our gear back,” Reed jokes. Then they learned of the Samsung Solve modern tractors, fertilizers, pesticides “You could see the earth’s curvature for Tomorrow competition, which encourages and seeds genetically modifed to resist and the blackness of space on video middle and high school students to come up with insects and herbicides. But while ge- taken at 85,000 feet,” says contest solutions for local problems using skills in science, netic modifcation—using biotechnol- judge and Samsung Executive Vice technology, engineering and math (STEM). ogy to insert a genetic trait into a seed— President David Steel. “We wanted to give the kids as much as exposure grabs headlines (and stokes health Reed and Olson point to their class- to STEM as we possibly could,” says Reed, “and get fears, despite overwhelming scientifc rooms as the real scene of victory: them thinking about careers in STEM-related felds.” evidence of safety), traditional breeding Dozens of students, energized by their The competition provided the perfect incentive to programs by seed developers have done experience, are preparing to send up take the project to the next level. The teachers and just as much to raise yields. two more balloons—one to study the students decided to send a sophisticated instru- efects of solar radiation on plants Stine noticed that corn plants hadn’t ment package right to the edge of outer space. changed much in generations. Tall has and bacteria, another to try to break always been sexy for corn, even though Soon enough, the students had all sorts of engi- the 100,000-foot barrier. “It’s all been less than half of the plant is actually neering puzzles to solve: shaving every extra gram an absolutely huge step forward for they could to send their balloon higher, learning us,” says Reed. harvested. That means most of the FORBES reinventing america — Stine Seed the evolution of corn biomass is using valuable resources that Harry Stine revolutionized—and came to dominate—the soybean seed business. don’t necessarily improve a farmer’s Now he thinks he can do the same with corn, the world’s biggest crop, by turning yield. The conventional spacing of corn traditional farming models on their head. rows has also largely persisted at 30 inches or more in modern agriculture, past with narrower rows in use on less than Prior to the 1940s corn was planted in a checkerboard pattern in rows 42 inches apart both lengthwise and crosswise so horses could 5% of corn acres in North America as of traverse the fi elds. 2012, according to rival DuPont Pioneer. Stine f ipped the conventional wisdom on its head. He began breeding corn to thrive at higher planting density: shorter plants with smaller tassels and more upright leaves that attract more sunlight. A leaner, more ef cient plant. After breeding many descendants of the seeds with that genetic makeup, the 27 bushels company has developed corn that can per acre be planted in much narrower rows—12 7,000 plants inches or even pairs of rows 8 inches per acre present apart—increasing the number of plants Now 35,000 plants and 150 bushels per acre is common—more than fi ve times the per acre to as much as 80,000. And, of ul- yield—thanks to modern tractors, fertilizers, better seed breeding, pesticides and seeds timate importance, substantially increas- genetically modifi ed to resist insects and herbicides. ing a farmer’s harvest. “Harry’s breeding for it,” says Van Wiebe, an agronomist with Hefty Seed in Buhl, Idaho, who has seen a 30% dif erence between Stine’s seed and those of his rivals in his experimental f elds. “It’s going to be the way of the future.” 150 Not everyone buys what Stine is sell- bushels ing. A DuPont Pioneer study from 2012 per acre concluded that for most of the Corn Belt 35,000 narrow rows do little to increase yields. plants “Future changes in production practices per acre could favor narrow rows at some point,” says Mark Jeschke, DuPont Pioneer’s stine seed plan agronomy research manager. “But no re- By breeding corn plants with genetics primed for less space—shorter plants with more upright search thus far has shown that ultrahigh leaves—Stine Seed can plant tens of thousands more seeds per acre. It plans to go to even narrower 10-inch rows and expects yields to exceed 300 bushels per acre in the near future. populations combined with narrow rows signif cantly increased corn yield.” “It is an interesting story and a great conversation piece,” adds Tony Vyn, professor of agronomy at Purdue University, “but a sideline to the real drivers of corn yield and economic ef ciency gains that 230–260 are needed most for this decade.” bushels For farmers there’s a sizable capital per acre risk in switching. Buying more seeds per 60,000 acre is expensive. It also requires more plants fertilizer and new planting and harvest- per acre ing machinery specially f tted for the narrower rows. To pay for the change, you’d need at least an immediate 10%

100 | FORBES APRIL 14, 2014 Samsung Solve for Tomorrow National Finalists pose with Bill Rancic at SXSWedu Ltd. Co marks Samsung Electronics of trademarks/service are Tomorrow America, Inc. Samsung and Solve Samsung Electronics for ©2014 Celebrating Tomorrow’s Innovators Today

The Samsung Solve for Tomorrow school competition encourages community-based learning by challenging teachers and students to solve real-world problems, both in and out of the classroom. This year, our 15 National Finalist schools journeyed to SXSWedu to showcase their community-based learning projects in front of a live audience.

Samsung is excited to support these remarkable schools through Solve for Tomorrow, a nationwide initiative to promote science, technology, engineering and math (STEM) education for students in grades 6-12. A successful STEM program creates critical thinkers, increases scientifc literacy, and helps today’s students become the innovators of tomorrow.

To learn more, please visit samsung.com/solve FORBES reinventing america — Stine Seed

them from using the seeds their harvest produced to plant for next season. Cru- cially, it also forbade them from using his seeds to breed their own. “His was the frst company in the industry with soybeans to structure licensing agreements so that when companies took a contract with him they could not breed,” says Philippe Dumont, a lawyer and seed industry veteran who has spent the past decade working for Bayer. “It shows a superior foresight.” It also helped secure Stine, in 1997, one of the most pivotal and lucrative deals in agricultural history. At the time Monsanto—with Fraley, then president of the company’s genomics group, leading the charge—had developed the biotechnology to insert genes into crop seeds, making them resistant to glyphosate, the plant-killing herbicide in the company’s dominant weed killer, Roundup. For farmers the “Roundup Ready” soybean seed would be an “if you really industry-changing innovation that want to be fair reduced time and labor battling weeds. here, you need But a fancy biotech trait ofered limited yield improvement—and each year, Fraley says value if the genetic base of the seed 20% to 30% to really to go get two corn seed still needs was inferior and overall yields sufered. beneft a farm’s bottom more [lawyers],” more innovation, and Roundup Ready technology combined line, estimates Bruce he smirked. he buys into Stine’s with Stine’s industry-leading soybean Rastetter, CEO of Sum- vision: “We absolutely genetics was a natural ft. mit Group, which grows think it’s possible to When a battalion of Monsanto corn and soybeans on 20,000 acres of double yields.” lawyers and dealmakers descended land in Iowa and Nebraska. “It’s going on Stine Seed to fnalize the deal, they to take some time,” says Rastetter, who e’re willing to give Stine found Stine alone in the company’s is experimenting with Stine’s model. the beneft of the doubt for conference room at a Ping-Pong table “I don’t see extremely quick adoption, Wa simple reason. He’s al- (Stine still rarely loses). “If you really but I do think there’s an early-mover ready revolutionized agriculture. Twice. want to be fair here, you need to go get advantage to doing it and learning to do In 1994 the U.S. government granted its two more [lawyers],” he smirked. it well.” frst patents on the full genetic makeup Neither party will disclose the Stine is hardly alone in his beliefs. of a soybean. Previously only asexual agreement’s terms, but that deal Monsanto is doing similar work, and plants like rosebushes or apple trees contributed to the phenomenal suc- he’ll have to battle with it for market could be patented, not self-pollinating cess of the Roundup Ready soybean share should crop growers fock en crops like corn and soybeans. Stine seed, a technology that’s now used masse to high-density planting. “We’ve Seed was frst in line to get its top-per- in 96% of the soybean acreage in the worked a lot in that space but also in the forming varieties patented. It wasn’t a U.S., likely generating in excess of design of the plants and equipment,” coincidence: As early as the 1970s Stine, $10 billion for Monsanto since 1997. says Robert Fraley, Monsanto’s chief who had taken one business law class Stine will only say he receives a cut technology ofcer, who has been doing at McPherson College, a small liberal from his company’s contributions business with Stine since the early 1980s. arts school in Kansas, was stipulating in to Roundup Ready soybeans, and its With the world adding 800 million to contracts the royalties companies had relationship with Monsanto extends 900 million bushels of corn demand to pay for using his seed and prohibiting well into the future.

102 | FORBES APRIL 14, 2014 ©Siemens AG, 2013. All Rights Reserved. siemens.com/answers By combining intelligent hardware and software, and software, hardware By combining intelligent easily to brewery also enables the Siemens system the better beer styles and make between transition production the it has a distribution area hours. Today, use of working possible. thought never owners most forward- some of the with Siemens is working ciency and productivity, efﬁ improve to companies thinking Because economy. the grow and to less with more make to it’s it’s right, just about making things not about making America. and for business people, for for right things

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is brewing something big. big. something is brewing American American manufacturing FORBES reinventing america — Stine Seed

That lead was solidifed in 2013, then—and wouldn’t for several more ing program using the seeds. The con- when the protections of patented seeds decades—but he sufered from dys- tracts Stine drew up prohibited this. like Roundup Ready withstood a chal- lexia and also mild, high-functioning Some still infringed and faced legal lenge in the U.S. Supreme Court. The autism. Knowledge of those diagnoses confrontation if caught, but largely case—which held portentous implica- was all but nonexistent at the time. the strategy worked. The company tions for all seed developers, including Back then, he says, he just thought he expanded throughout the 1980s, gob- Stine—went in Monsanto’s favor, af- was “retarded.” bling up smaller seed companies and frming intellectual property rights for “I’m a data and information and conducting soybean research in other plant genetics. Stine’s business model facts person; I’m not a people person. I climates around the country. The had been blessed by the highest court in don’t understand how people’s brains breeding process grew more advanced the land. work and why they do what they do,” and automated, and by the early 1990s says Stine. But, as a consequence of the company was testing 150,000 soy- tine’s savvy is homegrown. After his learning disabilities, Stine always bean varieties annually and producing graduating from McPherson worked slowly and carefully. He also the highest-yielding seed on the market. Sin 1963, he did two quarters of possessed a canny, fuid mental aptitude The Stine network of 1,700 dealers was graduate work at Iowa State, then for data and math. His “disabilities” selling Stine soybean products in 15 went home to work on his father’s were actually advantages that let him states under 160 brands. By the time it modest farm. The family was poor see things in ways others did not. got its 1994 patent Stine had become and the work both long and hard—ris- “Those qualities he has have en- the largest private seed company in the ing at 6 a.m. and fnishing at 6 p.m. abled him to do in business what he country, the bulk of its revenues still was the norm, except in summer, has done. He has the right combina- coming from royalties from licensing its when the hours were even longer. tion of everything,” says son Myron, award-winning soybean genetics. After learning about some anomalous who has worked alongside his fa- “There’s always wrinkles in his sci- soybean plants with ther at the company ence and negotiations that catch you of extra seeds in a nearby for 20 years. “When guard,” says Monsanto’s Fraley. “He’s feld, Stine became “it’s very simple. you put him in the not afraid to speak his mind. But at the obsessed with breed- you take good room with a bunch very bottom of it all, he has made a huge ing higher-yielding parents, and of people, he’s going diference in the industry and he’s done seeds to boost profts. to outpace everybody it in his very unique and special way.” Even if the process has you make lots of intellectually.” As we stand high atop his tower, the grown more involved offspring. it takes Stine founded the wind streaking into us, “unique and and advanced, the a minute and a frst private soybean special” seems a vast understatement. strategy behind breed- half to learn.” research and devel- “Now here’s what’s going to happen. I’ll ing has changed little opment frm in the sit here,” he says, perched on the top bar in ten millennia. “It’s U.S. in 1968. By the of the guardrail, unfazed by the steep very simple. You take good parents, and mid-1970s, under a new company plummet behind him or the violent you make lots of ofspring,” says Stine, called Midwest Oilseeds, Stine was gusts. “And you sit next to me. And then who learned the basics in under an hour operating the most widely used soy- we’ll negotiate.” from an Iowa State technician. “It takes bean genetics company in the U.S., He’s kidding, of course. It’s a long- a minute and a half to learn what there is licensing the robust seeds it bred for running gag he’s played on acquain- to learn about plant breeding.” royalties. Though the company also tances, business competitors and even At the time public universities dom- began breeding corn seed genetics, his wife, Molly, who had sufered the inated breeding, and for good reason: soybeans remained its most proft- misfortune of the elevator actually Profts were limited, since intellectual able niche. breaking and had to climb down the property rights for soybean plants It was around this time that Stine ladder—in heels. didn’t exist—and wouldn’t for another recognized the necessity of protecting But the joke, conducted amid full 30 years. Additionally, it was a labor- his valuable genetics. If a farmer could view of his empire, serves as a playful intensive, painstaking endeavor, un- buy your seed one year and then simply reminder: Harry Stine, the dyslexic suitable to most businessmen or dawn- use the ofspring or seeds from the farm boy turned cunning negotiator, to-dusk farmers but perfect for Stine, plants it grew the next year, he could data savant and agriculture visionary, innately curious and capable of intense cut the seed developer out of the loop is on top of the world. And he’s got focus, despite a childhood flled with while retaining the powerful genetics. plans to stay there. Says Stine: “I’m academic struggles. He didn’t know it Moreover, he could start his own breed- having too much fun.” F

104 | FORBES APRIL 14, 2014

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The Ballad of Balcones Want to fnd the best single malt whiskey in the world? Look under a bridge in Waco. by abram brown quarter-mile from downtown liance) and then by the single malt’s frst- Waco, Tex., in a neighborhood place fnish in the 2012 Best in Glass compe- of long abandoned storefronts, tition, a British contest that names the best is a small, rusted-metal shed whiskey released each year. Balcones was the hidden beneath the 17th Street frst American distiller to capture the high- ABridge. The onetime welding shop sits in be- est honor, defeating such venerable brands as tween the overpass’ enormous support pillars, Johnnie Walker, Macallan and Balvenie. next to a white trailer. It’s a safe bet none of the So how did a small distillery in Waco rise to drivers know they’re speeding over the world- the top of the whiskey world in only six years? wide headquarters of Balcones Distilling, the In part Balcones’ success is the result of Amer- maker of the fnest new whiskey in America. ica’s love afair with all things artisanal. Only Founder Chip Tate stands inside across 68 craft distillers existed a decade ago. Today from two handmade copper stills. He is a small there are 623 across the country, at least one in best in Glass: In just man who takes pride in his whiskey and in his every state. six years Chip Tate’s balcones Texas Single thick black beard, which he combs often. Tate It’s a crowded space, but Balcones has al- malt has already earned dips a glass pipette into a vat and pours the ready been able to stand out. Partly it is due many accolades, liquid into tasting glasses. It is the unmatured to Tate’s story as a Texas pioneer. He has long including world whisky orbes form of his Texas Single Malt Whisky—the been fascinated by mixing diferent ingredi- of the year for 2013. or f drink that put Balcones on the map. ents. As a child in rural Virginia he made ex- Ter f Balcones’ arrival was frst heralded by its plosives: bottle rockets and tennis ball can- distiller-of-the-year awards in 2012 (from nons. After college, when he wasn’t debating

Whisky Magazine and the Craft Distillers’ Al- The Big Questions as a Union Presbyterian Michael Thad car

106 | FORBES APRIL 14, 2014

FORBES LIFE SPIRITS

Seminary student in Richmond, he brewed Last year the company produced rough- beer or baked: “I was basically a monk.” ly 5,000 cases (with capacity now at 12,500), In 2007 Tate was a Baylor enrollment ad- hand-bottled down to the wax seal, and took TRENDING ministrator dreaming of leaving the ivory tower in a little more than $1 million in revenue. (Bal- for the copper still. With a wink and a nudge he cones’ whiskeys typically run $60 to $70 a bot- What the 60 million will admit some initial experiments—presum- tle.) Tate knows he must think bigger—a larger Forbes.com users are talking ably moonshine made at his Waco home—led distillery, greater distribution and more prod- about. For a deeper dive go to him to believe he could make it as a legitimate ucts—to fulfi ll his ambitions for the company. FORBES.COM/LIFESTYLE distiller. A rudimentary handbook called Whis- “It’s a great problem to have, but it is a real ky: Technology, Production and Marketing be- problem,” Tate admits as he throws open the came his bible; instruction at the Bruichladdich door to a six-story building a short drive from Distillery on whiskeymaking fundamentals, his current distillery. The future home of Bal- one meant for prospective brand ambassadors, cones is only in slightly better condition than was newfound gospel. the one under the bridge. It has sat empty To launch Balcones—named after the since belonging to a storage company whose fault that bisects Texas and provides the area vaults once housed the valuables of Waco’s with a source of drinking water—Tate raised wealthiest citizens. In the next year Balcones $100,000 in startup capital, and a real estate will add two new stills that will boost produc- PERSON buddy found him the shack under the bridge. tion to 100,000 cases. Assuming sales contin- ANNE RICE For Balcones’ fi rst release, Tate drew in- ue apace with greater production, that would Is there still a bloodlust spiration from a dessert sauce of raw sugar, mean estimated revenue of about $20 million. for vampire books? The honey and fi gs he had served at a dinner party. As Tate trudges through a set of dimly lit success of Twilight has inspired Rice to resurrect And that’s exactly what he fermented to cre- hallways he reiterates his desire for Balcones to her beloved Lestat in a ate Rumble. Early customers appreciated its stay relatively small and independent. “Some- new novel to be published rum- and brandylike qualities. Rumble was thing that’s the magnitude of a Macallan or a this fall. But is she late to released along with Baby Blue, an unusual Balvenie,” he adds. “We’re not trying to make her own party? whiskey made with heirloom blue corn that the Hamburger Helper of the whiskey world.” COMPANY tastes of apricot, sweet tea, smoked chilis and, If Balcones wants to stay independent it GOQII most oddly, cotton candy. Balcones has devel- will need to grow closer with its distributors. Plenty of wearable fi tness oped another blue-corn-based whiskey called A little over a year ago the company hired its gadgets track mileage, Brimstone made with Texas scrub oak to add fi rst brand ambassador, whose job is to talk up heart rate and calories smoke the way Islay whiskys use peat. the various whiskeys with distributors. And burned, but GOQii’s band connects customers with Tate had always been a Scotch man, while it shouldn’t be too hard to persuade an actual coach—in India. though, and longed to bring a single malt to a room of salesmen that a scarce whiskey is Think of it as outsourcing market. For what would become Balcones’ truly popular—just ask the marketing team your personal trainer. signature whiskey, Tate selected a main in- behind Pappy Van Winkle—Balcones’ rapid gredient with a fortuitous-sounding name: growth has already caused it to lose at least IDEA CITIZENSHIP FOR SALE Golden Promise, a Scotch-malted barley that one distributor who couldn’t grow with it in Want an EU passport? Buy hadn’t been used regularly in four decades. Texas. Today it is in roughly 20 states, as well one. Every country in the His single malt ages in custom American- as in the U.K., Norway, Sweden, Japan and European Union can sell and-French wood barrels (made by a cooper Australia. Tate would soon like to add Canada, citizenship, but Bulgaria in rural Missouri). The end result has hints of France and Korea . reportedly makes it easy: For roughly $250,000 and vanilla, plum and pear. Inside his of ce—the white trailer next to a two-day visit, you can It has helped Balcones win one award the shed—Tate rummages for a new treasure: become a Bulgarian. after another. Last year Balcones received one of only three bottles left of a rum he ex- Whisky Magazine’s Craft Distiller of the Year perimented with. He isn’t blind to the neces- award (again) and then cleaned up at the Wiz- sity of continued innovation, and once he has ards of Whisky competition in London, where bigger stills the rum is at the top of the list of the single malt claimed World Whisky of the the new products he wants to make. “There’s Year, World Single Malt of the Year and Amer- an American brandy tradition that hasn’t been ican Single Malt of the Year. (Baby Blue also explored fully. And I think rye’s a very inter- took home a gold medal; Brimstone received esting grain. I’ve got plans, man.” He thought- a silver.) As a result, demand for Balcones now fully sips the rum. “No one wants to be the greatly exceeds its supply. troll under the bridge forever.” F

108 | FORBES APRIL 14, 2014 FORBES | maRkEtplacE

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The wages of sin are death, but by the time taxes are taken out, it’s just sort of a tired feeling. —PauLa PouNdstoNe

The wisdom of man never yet contrived a system of taxation that would operate with perfect equality. —aNdrew JacksoN

Income tax returns are the most imaginative fction being written today. —hermaN wouk

Governments last as long as the undertaxed can defend them against the overtaxed. —BerNard BereNsoN

No taxation without “ ‘I talk to a new client interested in expatriating every week. misrepresentation. Many people can’t pay the federal tax rate and live in the style —samueL hoFFeNsteiN they want.’ So said Francis Mirabello, the head of the personal law department at the Philadelphia ofce of Morgan, Lewis & Bockius, speaking at a Bermuda conference on ofshore A taxpaying Always money. Expatriating? Give up U.S. citizenship? Who in his right public that doesn’t overpay mind would give up his U.S. citizenship? Lots of people. You understand the your income could practically fll a Boeing 747 with well-heeled U.S. citizens law is a taxpaying who have taken on foreign citizenship rather than submit to taxes. That public that can’t what Learned Hand called ‘enforced exactions’ at a level that way, you’ll amounts to virtual confscation.” comply with —From the Nov. 21, 1994 issue oF ForBes the law. get a refund. —LawreNce GiBBs — meyer LaNsky OTHER THOUGHTS FROM THAT ISSUE: AMERICAN GOTHIC “You know it’s going to be an unusual interview I’m proud to be paying taxes when the chief executive of the company you’re visiting demands—without prompting—that you independently confrm that he isn’t a suspect in the in the United States. murder of his sister-in-law.” The only thing is—I could be just

THE BIG BLACK HOLE “In a recent national survey, young adult as proud for half the money. Americans indicated they had more faith in UFOs than in Social Security.” —arthur GodFrey

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