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PLUS: INSIDE DYSON’S INNOVATION FACTORY

“WE’RE CHANGING THE ENGINES ON A 747 MIDFLIGHT.”

TECH’S MAD GENIUS THE DECADE’S TOP INNOVATOR HAS A STEALTH PLAN TO QUADRUPLE IN SIZE—

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Contents // September 13, 2016

VOLUME 198 NUMBER 3

ON THE COVER 84 | NONSTOP BENIOFF In an age that celebrates manic entrepreneurs, none is more frenetic than the Salesforce founder, whom we consistently rate as America’s most innovative CEO. Come along for a wild ride with Marc Benioff as he tries to turn hyperactivity into a new model for tech growth and corporate activism.

BY ALEX KONRAD

PLUS: THE WORLD’S MOST INNOVATIVE COMPANIES

COVER PHOTOGRAPH BY ROBERT GALLAGHER FOR FORBES MARC BENIOFF WEARS A SUIT BY BERLUTI AND A SHIRT BY CANALI. STYLE DIRECTOR: JOSEPH DEACETIS GROOMING BY REBECCA BUTZ

6 | FORBES SEPTEMBER 13, 2016

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*Available at participating Lincoln Black Label Dealers only. **2017 MKZ equipped with available 3.0L engine and AWD. Horsepower rating achieved with 93-octane fuel.

IT ’ S LI K E LE AV I N G T H E O F F I C E E A R LY O N A F R I DAY. A N D CO M I NG BACK O N A W ED N ESDAY.

I T ’S L I K E T HAT. TH E 2017 M K Z. Work isn’t going anywhere. You, however, are a different story. From the comfort of an impeccably crafted Lincoln Black Label* interior, you’re now in command of more than just your schedule. A 400 horsepower,** twin-turbo engine will make sure of that.

Lincoln.com/MKZ

SEPTEMBER 13, 2016 48

17 | FACT & COMMENT // STEVE FORBES Health care: the huge, ignored issue.

LEADERBOARD 24 | THE BIGGEST CITY ON EARTH In just a few decades China’s Pearl River Delta has transformed itself into a megalopolis of 68 million people. How did it happen?

26 | NEW BILLIONAIRE: CREATOR OF WORLDS Nvidia’s Jen-Hsun Huang, one of the primary pioneers of the chips that power computer games, sets his sights on artificial intelligence.

28 | ELECTRONIC CASH KINGS: THE TOP-EARNING DJS Pulsating dance music has gone thoroughly mainstream—and the genre’s top talents are enjoying the accompanying revenue gusher.

30 | DEAL TOY: SPRINT’S SPECTRUM SAGA Seeking to build up its broadband assets, in 2013 Sprint made a play to consolidate its ownership of Clearwire. The connection was choppy.

32 | SEAL THE DEAL: ON THE CASE Even in a digital age, an elegant business-card case is an essential old-school appurtenance with which to show off your name in style.

34 | FORBES @ 100: NEWSPAPERS’ HALCYON DAYS In October 1969 FORBES examined the country’s biggest dailies and found that the industry had “never been healthier.” Well, that was then.

36 | RICHEST BY STATE: CONNECTICUT’S TOP HEDGIE In a state crawling with top hedge-fund talent, Ray Dalio reigns supreme. Plus: Hollywood’s new, distaff Gordon Gekko.

38 | CONVERSATION Readers offer their unfiltered thoughts on Instagram’s Kevin Systrom, newly a billionaire. Plus: debating the Dallas Cowboys.

THOUGHT LEADERS 42 | CURRENT EVENTS // PAUL JOHNSON The world’s exterminators.

44 | INNOVATION RULES // RICH KARLGAARD Why economic growth stinks.

STRATEGIES 48 | SOLAR SURVIVOR Sungevity’s asset-light, customizable approach is a lone ray of hope in a dreary industry.

BY CHRISTOPHER HELMAN

TECHNOLOGY 54 | THE TWO-WHEELED COMMUTER CAR? Already massive in China and popular in Europe, electric bikes are making inroads in the U.S. An MIT engineer thinks his throwback design will win over urban commuters.

BY SHELBY CARPENTER AND SUSAN ADAMS

54 10 | FORBES SEPTEMBER 13, 2016

Capital Creates Light in New Places Nearly a decade ago, First Solar had a bold idea: make solar power an affordable alternative to conventional energy. Since then, Morgan Stanley has helped First Solar raise capital to expand into new markets. Now, regions from the Atacama Desert in Chile to rural India have access to clean, renewable energy. With our help, First Solar is enabling a world powered by reliable and affordable solar electricity. Good business—it’s something to see.

© 2016 Morgan Stanley & Co. LLC. Member SIPC. CRC 1526781 06/16

·¹¼±«¸½¾«¸¶¯Ãʧ­¹·ʵǤ¼½¾½¹¶«¼

SEPTEMBER 13, 2016

ENTREPRENEURS 58 | A STEP ABOVE Three-year-old shoe company Jack Erwin disrupted the footwear market by cutting out the middleman. Can it make the next leap forward?

BY SUSAN ADAMS

62 | VEGAN VETERANS For more than 40 years Follow Your Heart has been quietly selling food to the health-conscious. Now VCs are backing fast-growing competitors.

BY LARISSA ZIMBEROFF

INVESTING 68 | THE BEST ETFS FOR INVESTORS The good deals are a function of three cost numbers.

We do the arithmetic for you.

BY WILLIAM BALDWIN

74 | FIXED-INCOME WATCH // RICHARD LEHMANN Rethinking income investing.

76 | INTRINSIC VALUE // JOHN REESE Escape volatility in Graham-and-Doddsville.

58

80 | TECH INTELLIGENCE // JON D. MARKMAN Software as a stock strategy.

WITH PFIZER THE ROAD TO DISCOVERY: THE PATH TO INNOVATION MAY BE LONG, BUT BIOMEDICAL SCIENTISTS MUST REMAIN DRIVEN BY OPTIMISM OF WHAT LIES AROUND THE BEND. 86

FEATURES 100 | THE REINVENTION FACTORY

126

James Dyson has built one of the world’s most innovative companies by wooing engineers to the English countryside and giving them the freedom to fail—hundreds of times. His approach has made him one of Britain’s richest men and revolutionized products from vacuum cleaners to hair dryers. Next up? Better batteries.

BY CHLOE SORVINO

86 WITH PFIZER

126 | THE SUPER-SIZER Greg Flynn, a Tesla-driving West Coast dealmaker, isn’t the kind of guy you’d expect to be running a bunch of Applebee’s and Taco Bells. But using plenty of patience, persistence and institutional capital, he’s built America’s largest franchise restaurant empire—and made a lot of money.

BY AMY FELDMAN

LIFE 136 | ISLE OF YOU For $10,000 a night, guests can rent Thanda Island off the coast of Tanzania and live in complete luxury—and absolute privacy.

BY ANN ABEL

144 | THOUGHTS On invention.

12 | FORBES SEPTEMBER 13, 2016

Each Pfizer medicine takes an average of 12 years to discover, develop, study, test, and retest before it’s ready for patients. Why do we work so hard to find new medicines? Because when patient lives are at stake, there’s always more to do.

Research and development is only one part of a medicine’s journey. Get the full story at Pfizer.com/discover.

© 2016 Pfizer Inc. All Rights Reserved.

Driven to discover the cure

INSIDE SCOOP EDITOR-IN-CHIEF

Steve Forbes CHIEF PRODUCT OFFICER Lewis D’Vorkin FORBES MAGAZINE EDITOR Randall Lane

New Digital Ideas Inspired by Print

BY LEWIS D’VORKIN

EXECUTIVE EDITOR Michael Noer ART & DESIGN DIRECTOR Robert Mansfield FORBES DIGITAL VP, INVESTING EDITOR Matt Schifrin SENIOR VP, STRATEGIC PARTNERSHIPS Andrea Spiegel VP, DIGITAL CONTENT STRATEGY Coates Bateman VP, PRODUCT DEVELOPMENT Salah Zalatimo VP, WOMEN’S DIGITAL NETWORK Christina Vuleta ASSISTANT MANAGING EDITORS Kerry A. Dolan, Luisa Kroll WEALTH Frederick E. Allen LEADERSHIP Loren Feldman ENTREPRENEURS Tim W. Ferguson FORBES ASIA Janet Novack WASHINGTON Michael K. Ozanian SPORTSMONEY Mark Decker, John Dobosz, Clay Thurmond DEPARTMENT HEADS Avik Roy OPINIONS Jessica Bohrer VP, EDITORIAL COUNSEL BUSINESS Mark Howard CHIEF REVENUE OFFICER Tom Davis CHIEF MARKETING OFFICER Jessica Sibley VP, SALES EAST & EUROPE Janett Haas VP, SALES, WESTERN & CENTRAL Ann Marinovich VP, ADVERTISING PRODUCTS & STRATEGY Achir Kalra SENIOR VP, REVENUE OPERATIONS & STRATEGIC PARTNERSHIPS Alyson Papalia VP, DIGITAL ADVERTISING OPERATIONS & STRATEGY Penina Littman, DIRECTOR OF SALES PLANNING & ANALYTICS Nina La France SENIOR VP, CONSUMER MARKETING & BUSINESS DEVELOPMENT Michael Dugan CHIEF TECHNOLOGY OFFICER FORBES MEDIA Michael S. Perlis PRESIDENT & CEO Michael Federle CHIEF OPERATING OFFICER Terrence O’Connor CHIEF ADMINISTRATIVE OFFICER Michael York CHIEF FINANCIAL OFFICER Will Adamopoulos CEO/ASIA FORBES MEDIA PRESIDENT & PUBLISHER, FORBES ASIA Rich Karlgaard PUBLISHER Moira Forbes PRESIDENT, FORBESWOMAN MariaRosa Cartolano GENERAL COUNSEL Margy Loftus SENIOR VP, HUMAN RESOURCES Mia Carbonell SENIOR VP, GLOBAL CORPORATE COMMUNICATIONS FOUNDED IN 1917 B.C. Forbes, Editor-in-Chief (1917-54) Malcolm S. Forbes, Editor-in-Chief (1954-90) James W. Michaels, Editor (1961-99) William Baldwin, Editor (1999-2010)

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14 | FORBES SEPTEMBER 13, 2016

EIGHT YEARS AGO this summer my colleagues and I at True/Slant, the startup I founded, had an idea: Build the tools for journalists, topic experts and marketers to publish content side by side on a new kind of news site. Editorial writers would join an incentive pay model. Marketers would pay us to be part of a credible news environment.

Everyone would be transparently identified and labeled. It worked. We did exactly the same when we got to FORBES six years ago. The FORBES digital audience has since quadrupled to a record 52.7 million domestic visitors as measured by comScore. Brands have published thousands of stories on Forbes.com, engaging with digital readers in an entirely new way.

Our editorial model upset traditional journalists.

The marketer-as-content-creator idea really got them riled up. Today many newsrooms have varying flavors of paid contributors. Nearly all ad departments have built programs for brands to create digital content. Through constant innovation, FORBES BrandVoice, our industryleading program for what’s now called native advertising, is booming. It helps account for 35% our digital revenues, which in turn make up 75% of our total ad revenues.

And then there’s print. Our rapidly expanding native ad program in FORBES magazine stands by itself. In November 2010 marketers began publishing two-column stories (so far 43 in all) next to related editorial content. Then we introduced two-page spreads, both stories and data-rich information graphics (see p. 86). Then we launched cover executions for AT&T, Fidelity, KPMG and others that brought fresh hoots and hollers. Over six years 25 major brands have published in our magazine.

Get ready for BrandVoice 360. It’s the next stage in marrying editorial and branded content across multiple platforms at the same time. In the past few months our designers have been hard at work mixing and matching print, video and digital editorial elements with related BrandVoice content, again with clear and transparent labeling. In today’s media universe, context, integration and packaging across print, desktop, video and mobile can help busy readers get what they need as they move from one device to another.

Interestingly, BrandVoice 360 was inspired by six years of native ad executions in our magazine. Imagine that. Old media making new media come alive. What a concept. F

honolulu excites the senses, the kahala refreshes the soul Ah, tranquility. Relaxed, reďŹ ned accommodations at Oahu’s legendary secluded beach resort located just minutes from Waikiki and Honolulu.

Time is precious. Spend it graciously.

1.800. 3 67. 2 525

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FACT & COMMENT “With all thy getting, get understanding”

HEALTH CARE THE HUGE, IGNORED ISSUE

BY STEVE FORBES, EDITOR-IN-CHIEF

ONE OF THE MOST astonishing things about this crazy presidential election is what hasn’t happened: Health care is virtually a nonissue, even though there is massive unhappiness and anger over what’s unfolding.

ObamaCare is collapsing. Reeling from unexpected losses, private insurers are fleeing the ObamaCare exchanges or are jacking up premiums at a sickening rate. Customers are stunned by the ugly reality that, although premiums are subsidized, sky-high deductibles mean they pay more for health care than ever before.

Severely restrictive networks compound patient unhappiness. More and more doctors are refusing to treat Medicaid patients because of the absurdly low reimbursement rates. ObamaCare’s nonprofit co-ops were supposed to provide cheaper coverage because they are nonprofits, but 16 out of 23 of them are financially busted and 6 more are on the verge of collapse.

Ominously, underlying medical costs are also rising, despite glib promises that ObamaCare would cut prices.

No one—Democrat, Republican, independent or just-don’t-care—is happy with the situation. Yet this issue is barely mentioned at campaign hustings.

If asked, some Democrats say that, really, ObamaCare is fine and just needs some nips and tucks. Other, more honest Democrats acknowledge the mess and declare that we need a truly socialist single-payer system. A strange mind-set, that: The government has been making a hash of health care—and the prescription is more government! The scandal-ridden, veteran-killing VA system is also conveniently ignored. Nonetheless, anyone listening to Hillary Clinton quickly detects that she ultimately agrees with Bernie on this, that Washington should take over the entire U.S. medical insurance system and turn hospitals and clinics into rigidly regulated, Washingtondominated utilities, making doctors virtual bureaucrats.

And where are the Republicans on all of this? They

ritualistically call for repeal of ObamaCare and then ... don’t do much else.

Under the prod of Speaker Paul Ryan, House GOPers came up with some exciting, well-thought-out ideas on how to respond to ObamaCare’s implosion, giving patients more power in the health care market while providing a comprehensive safety net in the form of tax credits or direct payments to people for obtaining basic, affordable coverage. Yet one would be hard put to find a GOP candidate—and certainly not Donald Trump— who’s leading with these ideas on the campaign trail.

Health care makes up almost 20% of our economy.

It is profoundly personal. Sensible reforms could turn what is a growing and seemingly hopeless financial liability into the most dynamic growth sector ever. Yet, for all intents and purposes, it remains a nonissue.

There is nothing that better illustrates the bankruptcy of American politics today.

Our Freedoms Go Up in Smoke Tyranny is about control. Even in democracies the natural tendency of government, unless stopped, is to expand its powers and extend its tentacles into every facet of its citizens’ lives—always in the name of helping them. Control means curtailing people’s opportunities to make choices and restricting the scope of their freedom of action. Left to their own devices bureaucracies would bar you from doing anything without first receiving a permission slip from them.

Our Founders understood that it’s the steady accumulation of petty, tyrannical restrictions that leads to the ultimate loss of freedom.

An example of tyranny by small steps is the FDA’s recent decree concerning small manufacturers of premium cigars and the makers of e-cigarette devices. Several years ago Congress gave the FDA extensive powers to

SEPTEMBER 13, 2016

FORBES | 17

FORBES

FACT & COMMENT

STEVE FORBES

regulate the tobacco industry, ostensibly to ďŹ ght teenage cigarette smoking.

The FDA’s massive list of rules was released in May and took effect in August. All the chatter about protecting health to the contrary, the net effect will beneďŹ t large companies by crushing their smaller competitors under the weight of complying with expensive new rules. Most egregiously, the regs will harm public health by crippling the most effective alternative to traditional cigarettes: tobacco-free “vapers,â€? or e-cigarettes. ƀLJ Ć? #! , .. -Ĺş Vapers have been a godsend to millions of smokers who had previously had no success in quitting. Essentially, e-cigarettes allow users to inhale nicotine—the ingredient that gives a smoker pleasure—but without the carcinogens that make traditional cigarettes so deadly. In the same manner they keep millions of young people who would normally take up cigarette smoking from doing so. There’s no credible evidence whatsoever that vapers are a gateway to cigarettes. If anything, they’re a prophylactic. Yet the FDA has hit this lifesaving industry in the solar plexus.

All devices made after Feb. 15, 2007 are now subject to FDA approval, an enormously expensive and time-consuming process. Given the agency’s bias, makers may still not get approval. Meanwhile, for those who want to quit smoking—well, too bad.

Why that 2007 date? It’s arbitrary.

It’s when Congress took up legislation to give the FDA new powers over the tobacco industry.

Vaping is a fairly new technology.

The few products available in early 2007 were vastly inferior in convenience and safety compared with those available today. Competition has given consumers better and better offerings.

Perversely, the FDA will, in effect, be junking today’s good stuff in favor of the relatively low-quality products made nearly a decade ago. ƀLJ , '#/'LJ #! ,-ź Each year a number of artisan cigar manufacturers 18 |

FORBES SEPTEMBER 13, 2016

bring out a variety of new-blend stogies.

They are usually handmade or made from vintage machines that date back to the 1930s. Such cigars aren’t cheap— each costs $10 or more. These manufacturers are the cigar equivalent to microbrewers, who have so enriched the quality—not to mention the fantastic array of choices—of today’s beers.

The FDA’s new regs will put most of these cigar companies out of business by subjecting each new blend to a costly, complicated approval process that involves some 5,000 hours of testing and could take years to complete. Makers must prove that each new cigar is “substantially equivalent to� (whatever that means) the blends sold before.

Traditional beermakers must be dreaming up ways to get the FDA to level similar regulations on those pesky microbrewers. ƀLJ #* LJ-')% ,-ź Many of these folks love to experiment with new blends.

Tobacconists gladly mix different varieties of pipe tobacco for them. This pleasure is being hit with a regulatory jackhammer. Under the new rules tobacconists who mix pipe tobaccos in their shops must go through an FDA registration process as if they were tobacco manufacturers.

What’s happening to tobacconists and premium cigar makers is a prime example of no activity being too small to avoid regulatory tyranny. (There is a push in Congress to explicitly exempt the makers of premium stogies from the FDA’s dragnet, though the chances of passage are remote.)

But what hit the makers of e-cigarette devices is a murderous scandal.

Our vast regulatory state springs from the Progressive era of more than a century ago, with its almost religiouslike faith in government by experts. Adherents overlook the inconvenient truth that government cannot be divorced from politics and pressure groups.

The FDA’s antipathy to e-cigarettes emanates not from objective science but from the superstitions of certain antismoking jihadists. F

Restaurants: Go, Consider, Stop Edible enlightenment from our eatery experts and colleagues Richard Nalley, Monie Begley and Randall Lane, as well as brothers Bob, Kip and Tim.

z Theo’s Restaurant & Oyster Bar 1048 Third Ave., at 62nd St. (Tel.: 917-475-1721)

In a sleek and attractive setting Michelin-starred chef Nicolas Poulmentis serves some of the city’s freshest and best prepared ďŹ sh offerings. His approach is simple: source the best from around the world—South African king prawns, Portuguese langoustines, Alaskan king crab legs. Begin the meal by sharing a tray of these, then try the grilled wild pink snapper from Hawaii. Also delicious are the lobster mac ’n’ cheese, the artisanal linguine fruit de mer and the cast-iron seafood-pot soufflĂŠ.

z Le Bilboquet

20 East 60th St. (Tel.: 212-751-3036) Excellent food and a sleek, modern and glamorous space make this a winner. The white asparagus with its superb hollandaise sauce, the soft-shell crab and the branzino are all cooked to perfection.

For dessert you can’t go wrong with the vacheron caramel, the proďŹ teroles or the tarte tatin.

z White Street

221 West Broadway, at White St. (Tel.: 212-944-8378) This is a handsome space with touches of old New York formality and friendly and efficient service. The fare is as beautiful to taste as it is to look at. Favorites: the salmon and the steak tartares, the calamari salad, the halibut, the cod and the chicken roulade. The French fries with spicy mayonnaise are not to be missed. The ice cream sandwich with peanuts, vanilla ice cream and chocolate bourbon swirl is divine.

z Nello

696 Madison Ave., between 62nd & 63rd streets (Tel.: 212-980-9099) Rents are high in this neighborhood, but that doesn’t justify the absurd prices charged at this classic Italian eatery. The food is pretty basic and perfectly good, but deďŹ nitely not great— and for $47 the linguini vongole (with clams) and the grilled calamari on a bed of mesclun greens should be better than average. Ditto the panna cotta and the crème brĂťlĂŠe at $21 a pop.

The service is professional, the ambience handsome and the people-watching stellar.

z Campeon

9 East 16th St. (Tel.: 212-675-4700) This Mexican bar/restaurant is a favorite with those who savor south-of-the-border avors.

The bar serves a mean mojito, and the hand-cut French fries are irresistible. Both are the perfect accompaniment to the house special, the Cuban, a sandwich of slow-smoked pork layered with pickles, smoked jalapeĂąo, avocado, Oaxaca cheese and serrano pepper aioli. Also delicious are the mahimahi tacos. End with the cinnamon-dusted nachos with ice cream.

Heavy Metal

SM

844.LUX.CARD | luxurycard.com

Luxury Card marks are property of Black Card LLC. BLACKCARD is a registered trademark used under license. Luxury Card products are issued by Barclays Bank Delaware.

MasterCard and the MasterCard logo are registered trademarks of MasterCard International Incorporated.

Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular or, if available, a summary prospectus containing this information. Read it carefully.

Past performance is no guarantee of future results.

Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies. *Source: Haver Analytics, Fidelity Investments, as of July 31, 2015. Past performance is no guarantee of future results. Sectors are defined by the Global Industry Classification Standard (GICS) and are based off the top 3,000 U.S. stocks by market capitalization.

Annualized Total Return by Sector (1985–2015): Health Care (14.93%); Consumer Staples (14.47%); Energy (11.15%); Consumer Discretionary (11.13%); Industrials (10.94%); Technology (10.73%); Utilities (10.49%); Financials (10.41%); Materials (10.04%); Telecom (9.16%).

Standard Deviation of Annual Total Returns (1985–2015): Technology (25.45%); Materials (20.73%); Consumer Discretionary (19.27%); Financials (19.26%); Energy (19.08%); Telecom (18.93%); Industrials (17.72%); Health Care (15.93%); Consumer Staples (14.32%); Utilities (14.02%).

Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2015 FMR LLC. All rights reserved. 727880.2.0

LeaderBoard

September 13, 2016

THE BIGGEST CITY ON EARTH 24 ZOMBIES! ALIENS! NEW BILLIONAIRES! 26 SPRINT’S SPECTRUM SAGA 30 CARD HOLDERS THAT MEAN BUSINESS 32 FORBES @ 100: THE GOLDEN AGE OF NEWSPRINT 34 CONNECTICUT’S RICHEST HEDGIE 36

Electronic dance music DJ Steve Aoki completed another long travel stint this summer: a sevenday jaunt between the U.S. and Europe that involved five transatlantic flights and three performances over eight hours in Spain. One of EDM’s pioneers, Aoki has taken advantage of the genre’s increasing mainstream appeal— he scored parts of the Angry Birds movie— while playing nearly 200 gigs this year. All that work earned him $23.5 million and the No. 5 spot on our list of the top-earning Electronic Cash Kings.

PAGE 28

PHOTOGRAPH BY BRIAN ZIFF SEPTEMBER 13, 2016 FORBES | 21

AS IMPRESSIVE AT 0 AS IT IS AT 60.

With daring curves, a commanding race-inspired stance, and handling so responsive it feels like the car is an extension of you, the Q60 is beautiful to behold and even more extraordinary to drive.

Š2016 INFINITI.

LeaderBoard MEGACITIES

The Biggest City on Earth IN THE SOUTHEASTERN corner of China, where the Pearl River meets the sea, nine cities that were mere fishing villages 40 years ago have crept together into what is now the largest urban area in the world, a megalopolis that is home to 68 million people, about 5% of China’s population.

Known colloquially as “the PRD” (Pearl River Delta), the “city” covers 16,000 square miles, approximately the size of New Hampshire and Vermont combined.

Befitting the PRD’s status as the 13th-largest economy in the world (see below), China is investing heavily in its infrastructure; 23 enormous projects crisscross the region. Among the most impressive: the 34-mile-long Hong Kong–Zhuhai-Macau Bridge. When it’s done next year, the span will reduce the drive time from Hong Kong to Macau from 5 hours to a commutable 45 minutes.

SHENZHEN-ZHONGSHAN TUNNEL By 2022 PRD denizens will be able to journey between the eastern and western sides of the Pearl River in under 30 minutes—cutting the current travel time by more than half.

GDP 2015 ($BIL) UNITED STATES CHINA JAPAN GERMANY

NATION IN WAITING

UNITED KINGDOM

If it were an independent country, the Pearl River Delta would boast the world’s 13th-largest economy, with a nominal GDP of $1.3 trillion.

Watch your back, Australia.

FRANCE INDIA ITALY

JIANGMEN 1990

379,397 2000

1.9 MIL

BRAZIL

2014

4.5 MIL

CANADA SOUTH KOREA AUSTRALIA

HIGH-SPEED RAIL A new intercity line will zip passengers and cargo across the delta and around the broader region at speeds up to an eye-watering 217mph.

When the Guangzhou-Shenzhen–Hong Kong link opens in 2018, it will transport 99,000 people daily along the route and make the trip from Hong Kong to Shenzhen—currently a 2.5-hour crawl—in just 14 minutes.

GREATER PEARL RIVER DELTA RUSSIA SPAIN MEXICO INDONESIA NETHERLANDS TURKEY SAUDI ARABIA ARGENTINA 0

$6,000

$12,000

SOURCES: WORLD BANK; CBRE RESEARCH. CLOCKWISE FROM TOP LEFT: CULTURALEYES/ALAMY; ZORABCDE/GETTY IMAGES; LARRY LEUNG/EPA/ALAMY; THOMAS LEE/ BLOOMBERG; XAUME OLLEROS/BLOOMBERG; PHILIPPE LOPEZ/AFP/GETTY IMAGES; EPA/ALAMY

24 | FORBES SEPTEMBER 13, 2016

$18,000

POPULATION: 1990 2000 2014

GUANGZHOU

DONGGUAN

FOSHAN

GUANGZHOU

SHENZHEN

ZHONGSHAN

BILLIONAIRE RESIDENTS

BILLIONAIRE RESIDENTS

BILLIONAIRE RESIDENTS

BILLIONAIRE RESIDENTS

BILLIONAIRE RESIDENTS

2

5

17

33

1

WILLIAM DING $12 BIL The founder of Internet pioneer NetEase introduced China’s first free dual-language e-mail platform in 1997.

INTERCITY RAILWAY Come 2030, nearly 1,000 miles of new track and 23 local train lines will whisk passengers hither and yon across the Pearl River Delta region as fast as 125mph.

The Pearl River Delta’s most populous city.

ZHAOQING GUANGZHOU HUIZHOU

2000

1.1 MIL

POPULATION:

1990

2014

1990

4 MIL

302,636

3.5 MIL

2000

2000

1.7 MIL

8.1 MIL

DONGGUAN

2014

2014

13.1 MIL

4.7 MIL 1990

552,328

FOSHAN

2000

3.9 MIL

1990

2014

901,455

8.3 MIL

2000

4 MIL 2014

7.4 MIL

SHENZHEN 1990

ZHUHAI

1.08 MIL

1990

6.5 MIL

2000

269,457

2014

2000

10.8 MIL

The world’s third-busiest container port.

1.1 MIL 2014

HONG KONG

1.6 MIL

MACAU SHENZHEN

MA HUATENG ZHONGSHAN 1990

393,353 2000

$22.3 BIL Known as “Pony Ma,” he attended Shenzhen University before cofounding Tencent in 1998 with classmates. Thanks in large part to Tencent’s WeChat, China’s dominant mobile portal and messaging service, Ma recently became the world’s ninth-richest tech mogul.

1.4 MIL 2014

3.2 MIL

CHEUNG YAN $1.13 BIL China’s “queen of trash” is rich on paper (literally)—she helms Nine Dragons, one of Asia’s leading producers of paper and packaging materials.

HONG KONG–ZHUHAI-MACAU BRIDGE Despite a “boundary control” on a man-made island built to regulate access to the gambling mecca of Macau, the trip across the 34-mile bridge is expected to be shorter than the current drive by 85%.

SEPTEMBER 13, 2016 FORBES | 25

BY KATHRYN DILL

DONGGUAN

LeaderBoard NEW BILLIONAIRE

UNICORN METER

Cashing In STRIPE, THE MOBILEpayments startup, gets paid plenty of respect in a poll of our Midas List of the world’s top venture capitalists.

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Jen-Hsun Huang became a billionaire by helping to build artificial universes.

Now he wants to build artificial intelligence.

WITHOUT JEN-HSUN HUANG, zombies would be less frightening, blood spatters less realistic and alien worlds less detailed. His Nvidia doesn’t make videogames; it makes the high-end computer chips—the graphics processing units, or GPUs—that help a computer render ultra-detailed images at lightning speeds.

“Huang has been an effective visionary and evangelist for these chips,” says Craig A. Ellis, an analyst at B. Riley & Co., an investment bank.

Nvidia’s dominance of the high-end graphics-card market for PCs (it has a 70%-plus share) has pushed its sales up 40% in the past five years, to $5 billion.

One of its latest innovations, the $700 GTX 1080, is twice as fast as its predecessor and more power-efficient than anything its rivals make. Nvidia’s stock has reached record highs, and those buoyant shares have increased the value of Huang’s 4% stake in the Santa Clara, Calif. company to around $1.4 billion.

Huang’s family fled tumultuous Thailand for America in the 1970s. Huang worked his way through a Kentucky boarding school (scrubbing the bathrooms was among his chores there), then picked up a Stanford engineering degree before starting Nvidia in 1993. Back then, the company designed graphics processors for PCs and workstations but found it difficult to compete in what was a crowded field in the ’90s—leading Huang, now 53, to pivot toward gaming.

With PCs increasingly being replaced by mobile devices, Huang is eagerly looking around for Nvidia’s next move—and believes he has found it in making chips that power the artificial intelligence in autonomous cars. “One of Nvidia’s hallmarks is the way it finds new growth opportunities,” Ellis says.

26 | FORBES SEPTEMBER 13, 2016

SCORECARD

HAGEDORN FAMILY +$140 MILLION NET WORTH: $1.7 BILLION Scotts Miracle112 SCOTTS Gro CEO Jim 110 MIRACLE-GRO Hagedorn 108 7/11/16=100 announces 106 acquisitions of 104 two companies S&P 500 102 that make 100 equipment 98 for marijuana 7/11/16 8/12/16 growers. (The pot business is “the biggest thing I’ve ever seen in lawn and garden,” he told FORBES in July.) Since the story was published, shares have risen 17% to their all-time high.

NEW BILLIONAIRE BY JENNIFER WANG; UNICORN METER BY ABRAM BROWN ILLUSTRATION BY ARRON SACCO; STEPHEN WEBSTER (BOTTOM RIGHT)

World Maker

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MATT HOFMANN WESTLAND DISTILLERY | 27

OWL’S BREW | 29

Owl’s Brew makes teas crafted for mixing in cocktails. This month the company is launching a line of “radlers,” tea-and-beer concoctions like amber ale blended with Darjeeling.

SCORECARD

MICHAEL DELL +GRAND CENTRAL TERMINAL NET WORTH: $20 BILLION Dell’s investment group, MSD Capital, which holds the majority of his assets, reportedly buys a stake in the historic Manhattan train station for $63 million.

28 | FORBES SEPTEMBER 13, 2016

HENRY “HOBY” WEDLER FRANCIS FORD COPPOLA PRESENTS | 29

The blind sensory scientist just earned his Ph.D. in organic chemistry from UC Davis.

His blindfolded tastings are considered one of the country’s top wine experiences.

LEFT: DAFYDD OWEN/PHOTOSHOT/NEWSCOM; BOTTOM: GARY MILLER/GETTY IMAGES; ILLUSTRATIONS BY PATRICK WELSH

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Westland’s newest whiskey is aged in barrels made from protected Oregon oak trees: They can’t be chopped down; the wood must be harvested after they fall naturally.

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LeaderBoard DEAL TOY

Spectrum Saga CLEAR VALUE Sprint upped its voting power in Clearwire to 50.4% from 48.6% when it bought a chunk controlled by Clearwire cofounder Craig McCaw in 2012. The pickup gave Sprint negotiating leverage over minority investors, including Comcast and Intel. Clearwire’s spectrum assets were a prized commodity as telecom players made landgrabs amid the rollout of next-gen data services such as 4G.

OPENING BID Sprint put Clearwire in play in December 2012 with a $2.97-per-share offer for the remainder of the company, valuing it at nearly $10 billion. The proposed deal was a key component of Sprint’s plan to sell a 70% stake in itself, for more than $20 billion, to Softbank, the tech conglomerate of Japanese billionaire Masayoshi Son.

30 | FORBES SEPTEMBER 13, 2016

BLURRED LINES Dish Network upended Sprint’s plans for a quick, cozy deal with Clearwire and Softbank. The satelliteTV company bid $25.5 billion for Sprint in April 2013 in an effort to bridge the gap between TV and phone services (prefiguring AT&T’s $49 billion takeover of DirecTV in 2015).

STRAIGHT FLUSH Cost wasn’t much of an impediment to Sprint, despite its insistence that its initial $2.97 offer was final. The per-share price to get past Dish escalated first to $3.40 and ended up at $5, valuing Clearwire at $14 billion.

SPRINT STUMBLES Son thought Softbank’s deal for Sprint, which closed a day after the Clearwire transaction, would be a precursor to a merger of the wireless carrier with rival T-Mobile, producing a powerful third player in a business dominated by AT&T and Verizon. When regulators kneecapped that deal in 2014, Son ousted Sprint CEO Dan Hesse and installed protégé Marcelo Claure. The stock has languished ever since.

BY STEVE SCHAEFER PHOTOGRAPH: SAM KAPLAN FOR FORBES

Sprint already owned a bare-majority stake in Clearwire in 2013, but acquiring the rest was anything but easy.

O V E R S EAS Bearing the prestigious Hallmark of Geneva, this timepiece is the ideal companion for an extraordinary voyage that reveals a unique perspective on the world. It is the only watch of its kind.

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LeaderBoard SEAL THE DEAL

On the Case Protect your good name with a stylish business-card holder.

FOR SUCH AN analog anachronism in a digital age, the business card still makes a great first impression. And in some cultures, there’s important etiquette to consider. In Japan, for instance, a business card (or meishi) has its own ritual, including presenting the card with two hands and with your name facing the recipient. Upon receiving a card, one takes a moment to read the name and offer a slight bow. It’s also considered rude to offer a card that isn’t pristine. That’s where the card case comes in. A stylish card holder—ideally with a pocket for giving and receiving—sends an important message to anyone you meet: Your name matters.

3

4

2

7

32 | FORBES SEPTEMBER 13, 2016

1. Leather BMW 7 Series card holder by Montblanc ($205).

2. Honeycomb calf card holder by A. Testoni ($155).

3. Calfskin card holder by Valextra ($295).

4. Damier check pocket organizer

by Louis Vuitton ($410).

5. Sport calf-leather card holder

by Coach ($75).

6. Alligator-skin card holder by Ghurka ($750).

7. Calfskin card holder by Fratelli Rossetti ($190).

BY MICHAEL SOLOMON

6

1

PHOTOGRAPH BY DAVID ARKY; CREATIVE STYLE DIRECTOR: JOSEPH DEACETIS; STYLE ASSOCIATE: JUAN BENSON

5

SIGN OF THE TIMES

LeaderBoard

Black Gold Rush To a new wave of Alaskan prospectors, the potential of the North Slope, where oil had been discovered in 1968, seemed boundless. It was the largest U.S. oil find, an estimated 12 billion barrels.

Extraction would require ingenuity, and one pioneering entrepreneur, Ferris Hamilton, a Princeton-educated helicopter pilot, developed a new oil rig transportable by chopper.

FORBES @ 100 As FORBES’ September 2017 centennial approaches, we’re unearthing our favorite covers.

Printing Money: October 1, 1969

DESPITE THE ADVENT of television a couple decades earlier, the economics of newspaper publishing remained relentlessly, surprisingly golden. Conventional wisdom had predicted papers’ demise, but as of late 1969 the industry had “never been healthier, not even in the heyday of Joseph Pulitzer and William Randolph Hearst.”

TV had indeed generated more advertising spending than both magazines and radio since 1949. Yet newspapers still attracted far more: about $5.3 billion (some $37.7 billion today), more than one and a half times the amount spent on TV, thanks to the increased size of classified sections and new papers established in America’s growing suburbs.

Although the industry for the most part remained privately owned by prominent local families, by the late 1960s it included several sizable publicly traded businesses, including Gannett—which published papers in 25 (mostly midsize) cities.

The future of print? “Profitable as newspapers are today, chances are they will be more profitable still in the years to come,” our story concluded. That prediction held up—well, for 30 years, anyway, until the advent of the Web plunged newspapers into drum after drum of red ink.

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NUMBERS GAME

Tax-Dodge Artists With fame comes wealth—and the ever eager taxman.

British entertainers were hit particularly hard. They stood to keep just a 13th of their earnings after Her Majesty took her bite, so they began striking deals to trade years of future earnings for stock in companies such as then publicly traded Constellation Investments. Constellation (and other businesses like it) would bank artists’ earnings at a lower tax level—leaving Vanessa Redgrave, for one, to swap some $700,000 in earnings for $2 million in equity.

34 | FORBES SEPTEMBER 13, 2016

BY ABRAM BROWN RON GALELLA/GETTY IMAGES; DENNIS MICHAELS/NEWSCOM; ANTON STARIKOV/ALAMY; PATRIZIA WYSS/ALAMY

A different age: Chemical fertilizers and insecticides are celebrated for helping to feed the world.

LeaderBoard RICHEST BY STATE

Connecticut

Money quote: “Greed is good.”

FAST-FORWARD

Move Over, Gordon 1987: Finance’s unprecedented success—and its excess—attracts the attention of director Oliver Stone.

The movie he creates, Wall Street, becomes a classic for its indictment of corporate raiders such as Gordon Gekko (Michael Douglas) and his protégé, Bud Fox (Charlie Sheen). Stone’s film presents a macho, malecentric world—not an inaccurate depiction at the time.

2016: Where Gekko once triumphed, another unapologetic capitalist, Naomi Bishop (Anna Gunn), now reigns.

The investment banking titan is the lead character of the newly released Equity, a film project financed by women on Wall Street. “There was so much in this script that I could identify with,” says Candy Straight, an independent director of Neuberger Berman’s mutual funds. She and some two dozen other women from such banks as Goldman Sachs and Citibank contributed millions to get behind Equity, which was independently financed before Sony Pictures Classics agreed to distribute it.

TRICKY MARKETS AREN’T all that’s bothering Ray Dalio. His Bridgewater Associates, the world’s biggest hedge fund firm, came under fire last month after a New York Times story brought to light a sexual harassment complaint filed by an ex-Bridgewater staffer with a state human rights commission earlier this year. The male former employee alleged he was harassed by a male supervisor for more than a year and feared speaking up because of a culture of intimidation rooted in a Bridgewater policy of recording all meetings. Dalio, 67, calls such Big Brother–style management “radical transparency”—one of 210 principles espoused in his 106-page manifesto, which each Bridgewater employee receives—and dismisses the Times story as “sensationalistic innuendo.” (The ex-employee later withdrew the claims and has reached an agreement with Bridgewater.)

Dalio can’t dismiss his flagship Pure Alpha fund’s bad performance so cavalierly. In a rough year for hedge funds it has lost 11.7%; the average fund is up 2.96%. Hope is far from lost, however; Pure Alpha has, famously, achieved positive returns for 15 straight years.

In an industry loaded with maniacally driven traders, Dalio is regarded as more so than most. He started playing the markets at age 12, getting tips from golfers for whom he caddied on a Long Island course.

In 1975, after earning a Harvard Business School degree, he launched Bridgewater from his two-bedroom apartment. It now oversees some $150 billion in assets.

Money quote: “I like money.”

SCORECARD

SILVIO BERLUSCONI –AC MILAN NET WORTH: $6.2 BILLION The former Italian prime minister sells Italy’s beloved soccer team in an $828 million deal to a group of Chinese investors. How do you say Goooooaaalllll! in Mandarin?

36 | FORBES SEPTEMBER 13, 2016

FAST-FORWARD BY DAVID M. EWALT; RICHEST BY STATE BY CHASE PETERSON-WITHORN TOP: ALAMY; BOTTOM RIGHT: CAMILLA MORANDI/CORBIS VIA GETTY IMAGES; ILLUSTRATION BY CHRIS LYONS

POPULATION: 3.6 MILLION 2015 GROSS STATE PRODUCT: $258.5 BILLION (0.6% GROWTH) GSP PER CAPITA: $71,997 (RANKS NO. 3 NATIONWIDE) RICHEST: RAY DALIO, $15.9 BILLION

For us, making the world a more beautiful place starts right at home.

Every year, PPG makes the communities where we live and work brighter through efforts like our COLORFUL COMMUNITIES™ program. This global initiative brings together PPG volunteers with local nonprofit groups to revitalize neighborhoods and make people feel great about where they live. It’s a big job. But we’re just the people to get it done.

See all the ways we’re keeping the world beautiful at ppg.com/makeover The PPG Logo is a registered trademark and We protect and beautify the world is a trademark of PPG Industries Ohio, Inc. © 2016 PPG Industries, Inc. All Rights Reserved.

LeaderBoard CONVERSATION

RIDE ’EM KATHLEEN CHAYKOWSKI’S Aug. 23 cover profile of 32-year-old Instagram founder—and new billionaire—Kevin Systrom tracked his company’s history from a six-person startup in 2010 to its current exalted status as the (artfully composed, sepia-filtered) jewel in Mark Zuckerberg’s crown: Spectacular user growth has boosted Instagram’s value to $50 billion. “To put that in perspective,” observed Michael Zhang at the photography news site PetaPixel, “Nikon, founded 99 years ago, is currently valued at $5.7 billion.” Reader Molly Vorwerck, meanwhile, tweeted her admiration for Systrom’s global reach, citing a certain Instagrammer known to his 3 million followers as @franciscus: “Even the pope’s a fan!”

THE INTEREST GRAPH Is the U.S. in a higher-ed bubble? Our Aug. 23 issue would indicate so, with online readers clamoring for admission to our annual ranking of the schools most worth the investment.

America’s Top Colleges 2016

727,337 views

Regarding our list of the world’s most valuable teams: Apparently fans and detractors alike have strong opinions about the topranked Dallas Cowboys. Who knew? @MITCHELLMILO1: Proud to say I’m a lifelong fan of the wealthiest team in sports.

How about those Cowboys!

@ZAAPERROR: This is not April Fool’s. How are the Cowboys more valuable than Real Madrid and Barcelona?

@EQUILIBRIUM42: Jerry Jones should sell now. American football is a 20th-century sport. #concussions

J. HAYES: The Cowboys can make bank but can’t find a decent quarterback. Imagine if they actually start winning.

Dallas Cowboys Head the World’s Most Valuable Sports Teams 158,360

“Once the money is made, growing, preserving and passing it on to the next generation becomes paramount.”

America’s Top Wealth Advisors 121,068

The Inside Story of Pokémon Go’s Evolution from Google Castoff to Global Phenomenon 64,216

Instagram, the $50 Billion Grand Slam Driving Facebook’s Future

48,947 Turnaround U: Here Are Tomorrow’s Hot Colleges

“Google had the wisdom to let Hanke seek outside investors … and make the smartest mobile-gaming deal of all time.”

@A1_BELK: Jerry Jones is the legend behind this—without winning a Super Bowl in 20 years!

@TPM_DYLAN: So much money for such a lackluster team.

@TYSON_KEHLER13: I wish I could be worth $4 billion to be terrible at football.

Inside Manhattan’s Most Elite Address: the Billionaires, Financiers and Heirs of 834 Fifth Avenue 36,825

“Gaining access is tough; the moneyed bastion of billionaires and Wall Street executives has just 24 units.”

From James Frey to Jonah Lehrer, How Scandal Affects Book Sales

THE BOMB 706 VIEWS

38 | FORBES SEPTEMBER 13, 2016

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PROMOTION

Gulfstream’s Service Center in Westfield, MA

BY TONY VELOCCI

Building Customer Value Companies that excel at delivering value to customers tend to have some things in common.

For example, they are able to identify and clearly communicate the value of their product or service.

They also have a keen understanding of how to optimize the total customer experience.

Gulfstream Aerospace, one of the most iconic names in business aviation, is a case in point.

The product support that Gulfstream provides its customers is as much a part of the company’s DNA as the family of aircraft it has been producing for 50 years. Small wonder that pilots and operators have consistently named Gulfstream the top-ranked productsupport provider more than any other original equipment manufacturer (OEM).

An Inherent Sense of Urgency All of Gulfstream’s 4,000-plus product support professionals are empowered to take ownership of a problem and respond with a sense of urgency to resolve it to the customer’s satisfaction as quickly as possible, explains Steve Cass, Vice President, Technical Marketing and Communications. “We know we have to earn our customers’ trust 24 hours a day, every day of the year,” he says.

“As a result, we continue to look for ways to differentiate ourselves and deliver greater value to our customers, and product support is a way we do that.”

As important as Gulfstream professionals are to sustaining an extremely high level of

product support for the more than 2,500 Gulfstream aircraft operating worldwide, no less critical is the unique infrastructure that Gulfstream has built. The manufacturer maintains the largest company-owned product support network for business jets, which includes a $1.6 billion spare parts inventory and 11 company-owned service centers worldwide. General Dynamics Corp., Gulfstream’s parent company and one of the aerospace industry’s most successful enterprises, helps make these global resources possible, according to Cass.

“General Dynamics’ financial strength allows us to invest in what it takes to meet our customers’ expectations,” he says.

Gold Standard As part of its larger commitment to supporting the Gulfstream fleet, the company implemented the Field and Airborne Support Teams (FAST). This mobile support network is on call 24 hours a day to speed a rapid-response technical team when an operator encounters a mechanical problem.

Two dedicated G150 jets in Savannah, Ga., along with specially outfitted utility vehicles located throughout the U.S. and Europe, can

transport technicians and spare parts directly to the customer. Such quick-action support is an innovation that Gulfstream introduced to the industry nearly 15 years ago.

Personal Interaction Proactive communications is yet another tool the company uses to support and stay connected with its operators. It hosts customer forums throughout the year on issues affecting safety and dispatch reliability, as well as the operation and maintenance of Gulfstream jets.

“Last year, our team traveled to 17 cities around the world and gave operators the opportunity to have contact with even more Savannah-based technical experts through a live feed from our broadcast studio, Studio G,” notes Tim Steinhauser, Director of Customer Relations. “Using this advanced technology, we bring our product support, programs and engineering teams face-to-face with our customers worldwide.”

www.gulfstream.com

ńŏ Fc Fc) e Fe Fkc Customer trust is earned one extraordinary experience at a time. Business aircraft owners and operators consistently rank Gulfstream the number one brand in business aviation*, a testament to our dedication to creating and delivering the world’s finest aviation experience.

SCOTT NEAL | +1 912 965 6023 | scott.neal@gulfstream.com | GULFSTREAM.COM G650ER, G650, G600, G500, G550, G450, G280 and G150 are trademarks or registered trademarks of Gulfstream Aerospace Corporation in the U.S. and other countries. *According to JETNET iQ Brand Reputation of Aircraft Manufacturers surveys since 2011.

THOUGHT LEADERS

PAUL JOHNSON // CURRENT EVENTS

THE WORLD’S EXTERMINATORS tinue to rise. It would be wrong to use the expression “population explosion.” Rather it is a slow, persistent increase, basically because of medical advances at all levels of society.

HEADING DOWN A SLIPPERY SLOPE Throughout history there have been big movements of people across continents, usually brought about as a result of war, famine or one group of people feeling they would have the chance to make a better life for themselves and their children elsewhere.

The EU brought a shared prosperity and ease of movement to citizens throughout much of Europe, making it a magnet for people living in neighboring poorer countries.

But as war engulfed Syria—and other parts of the Middle East—and the breakdown in law and civil society there became total, what had been a stream of immigrants entering Europe became a raging flood of refugees fleeing for their lives. They overwhelmed Europe’s borders in search of safety, jobs and a better life.

And hidden among the legitimate refugees have been those who create mayhem through acts of terrorism, creating fear and distrust and fanning the flames of nationalism.

This crisis could largely have been avoided had there been a strong U.S. President in the White House. When Barack Obama had the chance and support to set up a safe zone within Syria, along the lines of the one set up in northern Iraq for the Kurds, he chose to do nothing. Now much of Syria is a ravaged shell, where various factions battle for control of its bombed-out cities.

Without a U.S. President who is willing to take the lead and pull various groups together, there can be no path forward to counter these destabilizing forces. The past has shown us what happens when we do nothing. Let us hope that November’s election brings about a sea change, so that those who think to once again engulf the globe in war are given pause—one way or another. F

PAUL JOHNSON, EMINENT BRITISH HISTORIAN AND AUTHOR; DAVID MALPASS, GLOBAL ECONOMIST, PRESIDENT OF ENCIMA GLOBAL LLC; AND AMITY SHLAES, WHO SERVES AS PRESIDENTIAL SCHOLAR AT KINGS COLLEGE AND CHAIRS THE COOLIDGE FOUNDATION BOARD, ROTATE IN WRITING THIS COLUMN. TO SEE PAST CURRENT EVENTS COLUMNS, VISIT OUR WEBSITE AT WWW.FORBES.COM/CURRENTEVENTS.

42 | FORBES SEPTEMBER 13, 2016

THOMAS KUHLENBECK FOR FORBES

NEWSPAPER HEADLINES create the impression that the world is going through a uniquely troubled, bloodsoaked phase. This is misleading.

In fact, the cold logic of demographic statistics reminds us that the world is enjoying the longest period in its history free from general war.

Whatever the reasons for it—and the existence of nuclear weapons among the major powers is probably key— there has been no conflict between the great nations since 1945. For nearly three-quarters of a century this precarious peace has been maintained.

The great wars are the spectacular killers. During World War I 8.5 million men were killed in action, not counting those wounded or disabled. Germany lost 1.8 million, Russia 1.7 million, France 1.4 million, the British Empire 908,400 and the U.S. 116,500. Minor participants such as Italy (650,000) and Turkey (325,000) sustained heavy losses. Another big loser was Armenia: About 1.5 million of its people perished in the genocide perpetrated by the Turks under the darkness of war.

Yet it’s a melancholy fact that the influenza pandemic that swept the world in 1918–19 claimed twice as many victims as the First World War. Most of them would have survived had penicillin and similar “miracle” drugs, still a generation away, been available.

The Second World War probably had a bigger death toll than the First, particularly when we count the civilians killed in air raids. Yet the number who died—more than 20 million—was certainly exceeded by the number of those killed in what might be called the apparatus of totalitarianism.

Hitler not only exterminated more than 6 million Jews in his holocaust but also equal or larger numbers of Poles, Slavs and Russians.

Stalin—when we total up the lives lost in his artificially induced famine, the transporting of entire populations, the Gulag Archipelago and the mass executions—was responsible for the deaths of more than 20 million people, most of them Russians.

Pol Pot, the Cambodian mass-killer, heads the genocidal list, having murdered about a third of his country’s entire population. But Mao Zedong, during his career as China’s head of state, managed to kill via execution, famine and brutal social engineering more than 70 million of his fellow countrymen. This appalling statistic, certified by the most penetrating of his biographers, Jung Chang, means that Mao was responsible for the deaths of more people than both world wars combined.

Despite these terrifying atrocities, global population totals con-

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RICH KARLGAARD // INNOVATION RULES

THOUGHT LEADERS

SOME BUMMER NEWS you might have missed: The U.S. is in its weakest recovery since 1949. Since the Great Recession ended in mid-2009, average GDP growth has been only 2.1%. Worse, growth is trending lower. Second-quarter growth this year was a sickly 1.2%.

Let’s see how this compares with annualized GDP growth in past expansions.

6.4% 4.7% 5.0% 4.7% 3.8%

4.1%

3.7% 2.6%

3.6% 2.7%

2.2%

Like a bouncing ball, the bounce has been lower with 1949- ’54- ’58- ’61- ’70- ’75- ’80- ’82- ’91- ’01- ’09each recovery. Why? This ’53 ’57 ’60 ’69 ’73 ’80 ’81 ’90 ’01 ’07 ’16 SOURCE: U.S. DEPARTMENT OF COMMERCE, BUREAU OF ECONOMIC ANALYSIS. being an election year, we’d love to blame the party we hate. But growth under Truman (D) was higher than it was under Eisenhower (R), Kennedy (D), Johnson (D) and Nixon (R). The Carter (D), Reagan (R) and Bush I (R) years were a bit slower but better than Clinton’s (D), which were better than Bush II’s (R), which beat Obama’s (D).

If the politics can’t explain the entropy, can taxes? That’s not so clear.

Taxes were nominally high but functionally low under Truman and Eisenhower—i.e., very few people paid the nosebleed rates. Taxes were nominally low but functionally high under George W. Bush. See why this is muddy?

Is the culprit global risk? No. Growth was actually higher during the Cold War, when the U.S.S.R. was a legitimate threat to world peace, and during the Korean War, the Cuban-missile-crisis era and the Vietnam War than it is now.

THE ANSWER IS ...

Three explanations cover the entire slope of slowing growth since 1949. ƀLJThe rest of the world has caught up to the U.S. Amid the wreckage of World War II the U.S. was the last major economy left unscathed.

West Germany began a miraculous recovery under its ďŹ rst postwar chancellor, Konrad Adenauer (1949–63), as did Japan. And by the 1970s both countries had blossomed into economic rivals to the U.S. The 1970s also marked China’s renaissance. Deng Xiaoping became the country’s paramount leader in 1978 and made a historic visit to Singapore later that year. Singapore’s growth under the leadership of Lee Kuan Yew convinced Deng that China could prosper with a similar model—a hybrid of Western capitalism and nationalist authoritarianism.

Deng put his model into practice in 1979, and China averaged 10% in annual growth until 2011. It has since had an annual growth of 7%-plus. ƀLJAbandoning the gold standard in 1971. The result has been a U.S. RICH KARLGAARD IS THE PUBLISHER AT FORBES. HIS LATEST BOOK, TEAM GENIUS: THE NEW SCIENCE OF HIGHPERFORMING ORGANIZATIONS, CAME OUT IN 2015. FOR HIS PAST COLUMNS AND BLOGS VISIT OUR WEBSITE AT WWW.FORBES.COM/KARLGAARD.

44 | FORBES SEPTEMBER 13, 2016

dollar that is often too cheap or too dear—i.e., it’s neither stable nor predictable. This has given the Federal Reserve more power than it should have.

As George Gilder and Steve Forbes have written, a wobbly dollar, combined with the Fed’s ďŹ nger on the lever, makes long-term investors nervous. Why invest in long-term projects when the currency risk is high? Better to invest in shorter payback deals, such as software companies and currency trades. Thus, the U.S. now ďŹ nds itself oddly starved for investment capital in areas like infrastructure, even though stock prices are high and the balance sheets of public companies are solid. ƀLJ " LJ 2*&)-#)(LJ#(LJ , &LJ, !/& .#)(Ĺş As documented by Patrick McLaughlin and Richard Williams of the Mercatus Center at George Mason University—I’ll use round numbers for simplicity—the amount of federal regulation has grown 1,700% since 1950. The economy has grown 700% over the same period while the population has slightly more than doubled.

Thus there is 8.5 times as much regulation for every person and 2.2 times as much regulation for every dollar produced today than there was in 1950. Much of this sand in the gears of commerce is “restrictive,� claim McLaughlin and Williams. A restrictive regulation is exactly what it sounds like—the Nurse Ratched of regulations. It contains such words as “no,� “shall not� and “must.� (An aside: When my kids were little, they called parents who used restrictive words “fun suckers,� because they sucked the fun out of everything. Restrictive regulations should be called “innovation suckers.�)

Write McLaughlin and Williams: “More than 1 million restrictions in the Code of Federal Regulations are either duplicative, have costly unintended consequences, are obsolete or perform poorly. For the past 30 years Presidents have promised regulatory cleanup, yet none has successfully taken on the challenge.�

Every President has been a pro-regulation innovation sucker. But George W. Bush and Barack Obama are in a league by themselves.

They’ve kicked restrictive regulation into overdrive. The grim result speaks for itself. F

THOMAS KUHLENBECK FOR FORBES

WHY ECONOMIC GROWTH STINKS

M ANUFACTURE DE H AU TE H OR LOGER IE

Verticals September 13, 2016

STRATEGIES SOLAR SURVIVOR 48

TECHNOLOGY THE TWO-WHEELED COMMUTER CAR? 54

ENTREPRENEURS A VEGAN BUSINESS BEEFS UP 62

MONEY & INVESTING A-PLUS ETFS 68

Ariel Nelson and Lane Gerson had no footwear experience when they went into business together. Three years later, their company, Jack Erwin, sells elegant high-end shoes for $220 or less—like these, handmade in Spain with leather (“the kind you want to caress,” one customer exults) from French and Italian tanneries. PAGE 58

SEPTEMBER 13, 2016 FORBES | 47

STRATEGIES

ENERGY REVOLUTION

Sungevity CEO Andrew Birch is a solar evangelist after giving up a lucrative investment banking career to get a degree in photovoltaic engineering.

Solar Survivor Sungevity’s asset-light, customizable approach is a lone ray of hope in a dreary industry.

S

olar skepticism is easy. To start with, solar is a temperamental technology. It works, after all, only when the sun shines. It provides less than 1% of America’s electricity. Many investors are fleeing. Shares of three big installers of residential solar panels—Sunrun, SolarCity and Vivint Solar—have lost more than 50% of their value in the past year. SunEdison, which makes

48 | FORBES SEPTEMBER 13, 2016

photovoltaic panels and builds big solar installations, went bankrupt in April.

Making the skies still cloudier: massive overcapacity among state-subsidized Chinese manufacturers of those panels. A couple years ago it was a big deal when the costs of new rooftop solar-panel systems dropped low enough (at least in green states like California) to compete with grid power. Prices have kept

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STRATEGIES

ENERGY REVOLUTION

falling, and by the end of this year the industry will be facing a photovoltaic glut. That’s bad news for any BEFORE PRICES OF PHOTOVOLTAIC PANELS PLUNGED, ELECTRICITY FROM RESIDENTIAL American panel manufacturer, such SOLAR SYSTEMS WAS FAR MORE EXPENSIVE THAN THAT FROM THE POWER GRID. BUT as Elon Musk’s SolarCity, which is AS “THE CHART” BELOW ILLUSTRATES, THE TWO HAVE ALMOST REACHED PARITY. spending $750 million in taxpayer c/kWh c/kWh money to erect a panel factory in up350 25 state New York. That could set up a U.S. RETAIL ELECTRICITY 20 300 scenario similar to the one in which 15 Solyndra burned through $535 mil250 10 lion constructing a factory for its inSOLAR SOLAR 5 novative cylindrical solar panels be200 fore going bankrupt in 2011.

0 2015 2020E 2025E 2030E So it’s intriguing when the head 150 of a solar company says he wel100 comes the wave of cheap Chinese gear. “It’s great for us. Our costs go 50 U.S. RETAIL ELECTRICITY down, and a lot of savings will be passed on to the customer,” says An0 2005 2010 2015 drew Birch, CEO and cofounder of SOURCES: SUNGEVITY, WITH DATA FROM U.S. ENERGY INFORMATION ADMINISTRATION, BLOOMBERG, GTM RESEARCH, U.S. CENSUS BUREAU. Sungevity. The company, based in Oakland, Calif., is one of America’s (to be renamed Sungevity) will contribute $200 biggest solar installers, having sold about 9,000 million cash in exchange for 41% equity in the systems in the past year at $19,000 a pop. That company. Why throw good money into a bad accounts for the majority of its roughly $200 sector? “We looked at over 100 companies to million in revenue in the last year. invest in. We weren’t targeting solar,” says DarThe industry might have a bleak outrell Crate, Easterly’s chairman and the former look, and Sungevity still isn’t profitable after CFO of money manager Affiliated Managers nine years, but Birch, a 40-year-old Scot who Group. “The platform nature of this business is worked for BP’s solar division before starting what we think leads to success.”

Sungevity with Danny Kennedy, 45, and Alec Unlike SolarCity, for example, SungeviGuettel, 48, sees a brightly lit future. Sungevity will go public later this year in a merger with ty doesn’t have any capital-intensive factories, a fleet of installation trucks or a financing diNasdaq-listed Easterly Acquisition (a so-called vision. And it doesn’t want them. Instead the blank check company, which is essentially a company cultivates what it calls an “ecosyspublicly traded private equity fund). Easterly

(Solar) Power to the People

LET THERE BE LIGHT ON TOP OF A 30% FEDERAL INVESTMENT TAX CREDIT, THESE STATES HAVE ADDED THEIR OWN SOLAR SUBSIDIES, RESULTING IN BIGENOUGH SAVINGS OVER GRID POWER TO PAY BACK THE COSTS OF THE AVERAGE $19,000 ROOFTOP SYSTEM IN AS LITTLE AS FIVE YEARS.

California

Massachussets

Hawaii

New Jersey

Arizona

Vermont

5.7 years

5.7 years 27% reduction

4.9 years 25% reduction

6.7 years 25% reduction

7 years 22% reduction

7.3 years 22% reduction

New Mexico

New York

Delaware

New Hampshire

Connecticut

Louisiana

7.3 years 21% reduction

6.8 years 21% reduction

7.9 years 18% reduction

7.4 years 18% reduction

8.1 years 12% reduction

7.2 years 12% reduction

TO PAYBACK

38% reduction IN ANNUAL ELECTRICITY EXPENSE

SOURCE: GTM RESEARCH.

50 | FORBES SEPTEMBER 13, 2016

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STRATEGIES

cial media networks like Facebook.

Birch envisions Sungevity scaling up with demand. The company figures there are 35 million American households that could save money by going solar. With prices of more efficient panels falling, it sees that number growing to 88 million by 2020—more than half the country’s homes. Research by Camron Barati, an IHS Technology solar analyst, supports Sungevity’s perspective. He forecasts residential installations quadrupling within five years.

To win over more customers, Sungevity has moved cautiously offline, partnering with home retailer Lowe’s to set up Sungevity kiosks in its stores. Sungevity has predesigned basic solar energy systems that fit millions of homes in prime markets, so Lowe’s shoppers can instantly view mock-ups of their roofs at the kiosks.

Overseas Sungevity has cobranded its solar system in the Netherlands in partnership with E.On, Europe’s biggest power utility. “Any company that wants to compete in solar would have to build all this,” Birch says of Sungevity’s platform. “But because we’ve already built it, they can get into the business straightaway. We’ve given them the tool kit to sell solar.”

It’s still hard for some to believe solar could finally be set to blossom. To sway a skeptic, Birch walks to a whiteboard in his conference room to draw “The Chart”—for the thousandth time. He sketches two lines. One shows how much Americans have been paying for electricity for the past few decades, and the other illustrates the cost of solar power, which has taken a swan dive since the 1970s. At the point on the chart indicating today’s market conditions, the lines very nearly intersect.

That’s Birch’s point. If trends continue, solar will be competitive with natural gas by the end of the decade. “These lines have to cross, it’s just a question of when,” he says.

“And when they do, you’re going to have a solution to climate change and to the world’s energy needs. You’re going to have a near infinite supply of energy.”

FINAL THOUGHT

“If sunbeams were weapons of war, we would have had solar energy centuries ago.” —GEORGE PORTER 52 | FORBES SEPTEMBER 13, 2016

BY THE NUMBERS

PHYSICIAN, NETWORK THYSELF LIKE EVERYTHING ELSE IN MEDICINE, THE DIGITAL AGE DOESN’T COME CHEAP. WITH WASHINGTON PUSHING A TRANSITION TO ALLELECTRONIC RECORDS, DOCTORS ARE SPENDING MORE THAN EVER ON TECHNOLOGY—NEARLY $33,000 PER DOC IN 2015, UP 40% SINCE 2010.

HEALTH CARE I.T. SPENDING (MULTISPECIALTY PRACTICES) 2010

$23,240 per physician 2011

$27,285 2012

$29,497 2013

$28,944 2014

$29,885 2015

$32,592 INCLUDES SPENDING ON EQUIPMENT, MAINTENANCE, SUPPLY AND I.T. STAFF. SOURCE: MEDICAL GROUP MANAGEMENT ASSOCIATION.

HERO/GETTY IMAGES

tem” of outside suppliers and contractors. Its founders drew inspiration from Michael Dell’s mass-customization approach: “Source the right components in the bundle and change them as better ones emerge,” says Kennedy, an Australian and a former Greenpeace activist.

“Give them what they want while leading the horse to water.” And do it all online.

Sungevity sources battery systems from Germany’s Sonnen, which has been making them a lot longer than Tesla has been making Powerwall residential batteries. “But we’re totally agnostic,” says Birch. Meaning if a customer wants a Powerwall to go with a Tesla, no problem.

The Web platform in which Sungevity has invested hundreds of millions of dollars (from the likes of Apollo Investments and GE Ventures) represents a sophisticated departure from the way companies usually sell customers on solar. Used to be, if you were interested in solar panels, someone had to climb up on your roof to measure it. Today, in the 14 solarfriendly states where Sungevity operates (like California, Colorado, New Jersey and North Carolina), entering an address on Sungevity.com immediately sets in motion a behindthe-scenes digital dance: Sungevity’s software hoovers up every available image of a house from Google Earth, Google Street View, Bing’s Bird’s Eye and even lidar surveys (like radar, but with lasers).

A combination of algorithms and humans then analyze a home’s angular measurements, and within five minutes Sungevity has a rough-and-ready plan to fit as many panels on the roof as possible. “It’s essentially rooftop Tetris,” says Sungevity designer J.T. Cook, who works on 50 systems a day for potential customers. Sungevity coaxes them into solar ownership with vital stats like how much money they’ll save versus grid power and how much carbon they’ll keep out of the atmosphere. Phone reps at Sungevity’s Kansas City call center help close deals.

Once customers are hooked, Sungevity keeps them in its orbit with a smartphone app that talks to your system and relays data on how much juice it sucks in from the sun daily. Friends can compare data and geek out over their carbon-free lifestyle choices on so-

ENERGY REVOLUTION

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TECHNOLOGY

TRANSPORTATION

The Two-Wheeled Commuter Car? Already massive in China and popular in Europe, electric bikes are making inroads in the U.S. An MIT engineer thinks his throwback design will win over city dwellers.

BY SHELBY CARPENTER AND SUSAN ADAMS

54 | FORBES SEPTEMBER 13, 2016

and a thumb switch on the left handlebar can select medium or high power. Start pedaling and a sensor in the crank activates the motor.

The harder the rider pumps, the greater the motorized help, making San Francisco’s hills feel like flats.

Faraday has plenty of competition in the small but growing market. Last year e-bike sales in the U.S. came to $400 million, up from $100 million in 2012, according to figures compiled by Edward Benjamin, chairman of the Light Electric Vehicle As-

TIMOTHY ARCHIBALD FOR FORBES

I

t’s 75 degrees, a warm day in San Francisco, but Adam Vollmer isn’t sweating as he mounts a steady grade toward Mission Dolores Park.

“I used to hate biking to work,” he says as he pedals along. “There’s this hill by my house that just pitches straight up a wall. Now it’s not so bad.” That’s because Vollmer, a 36-year-old mechanical engineer with the trim build of an endurance athlete, can always get a boost from his bike’s hidden motor.

As the CEO and founder of Faraday, a four-year-old electric-bike company, he believes he can carve out a profitable slice of the nascent U.S. market for e-bikes. The target customer for his $2,500 machines: people like himself who want to get from point A to point B in a dense urban environment where driving and parking can be a nightmare. Many commuters favor e-bikes over manual models because they allow you to zip to work at speeds of up to 20mph without breaking a sweat. Others simply think they’re fun. And aging boomers, who may have given up riding because of arthritic knees or poor fitness, find that e-bikes are getting them back on the road.

Faraday riders have options. If they don’t push the blue power button on the back of the controller, a rectangular box the size of a large wallet that sits below the seat, the Faraday works like a regular bike. Once the motor, which is embedded in the bike’s front hub, is turned on, the head- and taillights illuminate

Easy rider: Faraday Bicycles founder Adam Vollmer and his electric Porteur glide up a hill in San Francisco.

sociation, an e-bike trade group. That’s tiny compared with Europe’s 2015 sales of $5 billion and China’s sales of $10.8 billion. But Chinese commuters use e-bikes because of economic necessity and choking pollution.

Europeans have long accepted bikes, including electronic models, as a way of commuting. In the U.S., where car culture prevails and cycling has traditionally been viewed as recreation, e-bikes are just now catching on.

“The U.S. is roughly ten years behind Europe,” says Benjamin. Even so, more than 150

e-bike brands crowd the American market (see graphic, p. 56).

The two biggest U.S.based e-bike makers, both eight years old: Pedego, in Fountain Valley, Calif., and ProdecoTech, in Oakland Park, Fla. Even carmakers have signaled an interest in e-bikes. Back in 1997 Lee Iacocca tried to start an e-bike company, EV Global Motors, but he wanted to sell the bikes through car dealers. It flopped within three years. Last October, at GM’s global business conference in Milford, Mich., the company showed a rendering of a concept e-bike. “As we look at the trend in urbanization,” says a GM spokesman, “we want to make sure we are exploring all the possibilities to help people move around.”

Likewise in 2015, Ford developed prototypes for three foldable ebikes, one aimed at commuters who combine different modes of transport to get to the office, another at delivery services and a third at recreational users.

What sets Faraday e-bikes apart is their elegant design. While competitors tend toward the clunky and utilitarian, Faraday’s two models, the Porteur and the Cortland, echo British touring bikes from the 1960s. Both sport steam-bent lacquered bamboo fenders and brown leather handgrips. Helped by improving infrastructure, including dedicated bike lanes and paths in cities like New York, Minneapolis, Miami and even Los Angeles, Vollmer’s sales are popping, from $1 million SEPTEMBER 13, 2016 FORBES | 55

TECHNOLOGY

TRANSPORTATION

in 2014, the first year Faraday shipped bikes, to $2 million in 2015. He expects revenue of $4 million this year and projects he’ll turn a profit in 2017.

In 2008, with mechanical engineering degrees from Stanford and MIT, Vollmer landed at IDEO, the Palo Alto design firm famous for crafting Apple’s first mouse. When a group called the Oregon Manifest invited IDEO to enter a contest to reinvent the modern bicycle in 2011, he assembled a team and got to work, putting in extra hours on nights and weekends. “We were aware of electric bikes as an emerging fringe category,” he says. “We went out and tried a lot of electric bikes and found them really uninspiring.” His goal was to design a bike that was

tucked into an alley between the headquarters of Airbnb and Pinterest in San Francisco’s SoMa neighborhood. Vollmer explored producing the bikes in the U.S., but he quickly learned that almost all the world’s bike manufacturing has moved to Asia. “We would have had to build our own factory,” he says. Faraday staffers design the frames and electronics, the parts are sourced in Asia and the bikes are assembled in Taiwan.

Most Chinese e-bikes, which cost around $300, use heavy, cheap lead-acid batteries that run out of charge in 20 miles. Since 2003 virtually all European and American e-bikes rely on lightweight lithium-ion battery packs that can go up to 100 miles and that fit inside a slightly enlarged down tube (the piece that slopes from the handlebars to the pedals). Faraday bikes THE GLOBAL E-BIKE MARKET IS BIG, BUT THE U.S.’ SHARE use front-hub motors, IS SMALL AND FRAGMENTED AMONG MANY PLAYERS. but many e-bikes, like $10.8 bil TOP 10 those made by Stromer, FARADAY 1% U.S. E-BIKE the Swiss company that EASY MOTION (BH) 3% SELLERS, IN GREEN POWER 3% UNITS, PLUS sells the most expensive SPECIALIZED 5% FARADAY 2015 E-BIKE TREK 5% ones on the market at a SALES top price of $9,500, house JETSON 5% OTHER 43% $5 bil the motor in the rear hub.

SONDERS 6% Trek’s ten U.S. models use PEDEGO 7% motors mounted next to the crank; the company’s ACCELL 9% $400 mil offerings include $3,000 PRODECOTECH 13% CHINA EUROPE USA mountain bikes popular SOURCE: ELECTRIC BIKES WORLDWIDE REPORTS. SOURCE: LIGHT ELECTRIC VEHICLE ASSOCIATION. with older riders who don’t have the pep for the efficient, fun to ride and beautiful. Driving strenuous sport but find they can keep going past the Tesla showroom one day, the team under motor power. settled on the name Faraday, for the 19thFaraday, like most U.S. e-bike brands, uses century British pioneer of electromagnetic so-called pedal-assist technology, meaning technology. the motor kicks in only after the rider starts Faraday won the contest, and in exchange pedaling. “People want the sensation of riding for a small equity stake, IDEO agreed to supa bike, and they want exercise,” Vollmer says. ply initial funding and design services to help “They just don’t want to work up a terrific Vollmer get the company off the ground. He sweat.” His market: “People who have an aphas since run two Kickstarter campaigns that preciation for bikes, who ride a little already.” together brought in another $365,000 and That’s Vollmer, who concedes he still takes has raised funds from angel investors such as out his dusty 2006 Mazda if he wants to head Twitter cofounder Biz Stone and former Tesla to the Napa Valley for the weekend. “But from sales v.p. Matt Eggers. Vollmer and his six Monday through Friday,” he says, “I do everyemployees work in a 1,500-square-foot office thing I can to avoid driving my car.”

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Bike Peddlers

FINAL THOUGHT

“Nothing is too wonderful to be true, if it be consistent with the laws of nature.”

—MICHAEL FARADAY

56 | FORBES SEPTEMBER 13, 2016

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ENTREPRENEURS

JAMEL TOPPIN FOR FORBES

LUXURY

A Step Above Three-year-old shoemaker Jack Erwin disrupted the footwear market by cutting out the middleman. Can it make the next leap forward?

BY SUSAN ADAMS

A

riel Nelson’s decision to get a buzz cut in the middle of a sweltering New York summer four years ago was a turning point in his career. After a frustrating May 2012 shopping expedition for dress shoes, he and his friend Lane Gerson, then 29 and 30 years old, had decided to start a direct-to-consumer footwear company. The European brands they loved, such as John Lobb and Edward Green, retailed for $1,000 or more. Why not make the kind of shoes they wanted to buy but couldn’t afford?

“The idea was, let’s make beautiful men’s 58 | FORBES SEPTEMBER 13, 2016

dress shoes for $100 and sell them for $200,” Gerson says. They named their nonexistent company Jack Erwin, the first names of their fathers, who “wouldn’t pay more than $200 for a pair of shoes.” But Gerson, then a controller at CAD BLU, a 3-D printing firm, and Nelson, who was a manager at Beyer Farms, a beverage distribution company, knew nothing about the shoe business. “It was a completely naïve and totally simplistic plan,” Gerson admits. After three months of research, all the duo had learned was that they had no idea how to take the first step in this would-be venture.

But then Nelson found himself sitting next

Walking the line: Ariel Nelson and Lane Gerson have expanded Jack Erwin to include driving loafers and boat shoes, but have kept the prices under $225.

MADISON AVE | RODEO DRIVE | FORUM SHOPS | AVENTURA MALL

ENTREPRENEURS to a Frenchman named Bertrand Guillaume in a cramped barber shop on Manhattan’s West 26th Street. The 42-year-old Guillaume was venting about his job as the senior manager of product development in the shoe division of Ralph Lauren. He accepted Nelson’s invitation for drinks, where he told the friends that their idea wasn’t nuts. “At Ralph, shoes would land in the warehouse for around $90, the wholesaler would sell to Barneys for $225 and the shoes would sell at retail for more than $600,” Guillaume says. “I knew they could sell a shoe with great craftsmanship for $200. It was a brilliant idea.”

At a time when sellers of everything from eyeglasses (Warby Parker) to mattresses (Casper, Tuft & Needle) are undercutting traditional retail channels by excising middlemen, Jack Erwin fills a gap in the market for handcrafted, European-made shoes. Though the partners say they had their contemporaries in mind—style-conscious Millennials who prefer penny loafers and cap-toed lace-ups to Converse or Nike—they’re pleased that the brand has also been discovered by older men looking for a bargain.

Before production could begin, the team needed to come up with designs for their last, the mold around which the shoe is constructed.

They agreed that Jack Erwins should have sturdy leather soles and a slightly elongated shape that tapers to a subtle curve. Guillaume recommended they work with a factory in São João da Madeira, Portugal, which would source materials for the initial run of 3,000 shoes.

In December 2012 Nelson lost his day job when his company went under. The two started scrambling for cash. After family, friends and friends of friends enthusiastically invested $650,000 in startup costs, Gerson quit his job.

“Once we took other people’s money,” he explains, “it was all or nothing.” To drive initial sales, Nelson and Gerson sent an e-mail blast to more than 3,000 contacts, offering a lifetime discount of 10% on purchases. The first few thousand Jack Erwins debuted online in October 2013. They sold out in two months. (By the end of 2014 first-year revenue came to $2 million.)

In early 2014 Guillaume, who had been moonlighting in exchange for a small stake in the company, joined full-time. He guided a move from Portugal to four factories in Almansa, Spain, where the craftsmanship is a step above

LUXURY

and the factories accept independent sourcing of materials like laces and insoles. Independent sourcing meant smaller markups and more savings. From an initial cost of $90 per pair of $195 lace-ups, they’ve brought the cost below $80.

Still, to expand, the company needed more cash. An e-mail from the original blast had landed in the in-box of Adam Levin, a venture capitalist at Crosslink Capital in San Francisco.

A fellow Millennial who wanted nice shoes, he loved the Jack Erwin concept. In 2014, together with two other California VCs, Crosslink invested $2 million.

Then Jack Erwin got an inquiry that startled the team. Caleres, the publicly traded shoe company that owns Dr. Scholl’s and Naturalizer, among other brands, and has sales of $2.6 billion, wanted to invest. By September 2014 Caleres led a financing round totaling $9 million.

Still the partners kept operations lean, working in a 1,200-square-foot, two-bedroom New York apartment where Nelson and Gerson lived as roommates. Earlier this year they upgraded to a 5,000-square-foot loft in Manhattan’s Tribeca neighborhood with raw wood floors, exposed brick and a miniature Australian shepherd named Pancake, who belongs to Molly, a customer service rep. Aside from a midtown pop-up store that ran for five months last year, the brand’s only brick-and-mortar presence is a 400-square-foot Tribeca space where customers can try on samples and order online.

Three years into their journey, Nelson and Gerson say sales are brisk. Revenue more than doubled in 2015, to $5 million, and the staff has expanded to 20. Gerson says he and Nelson are electing to fund growth rather than turn a profit.

Though the plan is to keep the selection small, this summer they introduced two casual offerings, a $125 boat shoe and a $115 suede driving loafer in eight colors.

How big can Jack Erwin get? Direct-toconsumer competitors are already nipping at its heels. Boston-based M.Gemi, which launched last year, offers Italian-made lace-ups for $278.

Paul Evans, based in New York, also sells Italianmade dress shoes, starting at $399. But no one has yet tried to muscle in on Jack Erwin’s $200 niche. “I believe there are hundreds of millions of dollars in opportunity here,” Nelson says, “and we are poised to become the big player.”

FINAL THOUGHT

“I still have my feet on the ground. I just wear better shoes.” —OPRAH WINFREY 60 | FORBES SEPTEMBER 13, 2016

MARGIN PROPHET HOW TO FIRE YOUR BOSS RON ALVESTEFFER IS CEO OF SERVICE EXPRESS, WHICH DOES ON-SITE MAINTENANCE FOR CORPORATE DATA CENTERS. BASED IN GRAND RAPIDS, MICH., THE COMPANY EMPLOYS 321 PEOPLE AND HAS 34 OFFICES IN 16 STATES.

You have an unusual story about becoming CEO. I was hired in 1997 as sales manager. We had an inventory issue, and I told the owner, “You built this company, but we’re growing and we need to scale. That’s what I’m good at. I need you to leave the company and let me grow it.” He looked at me for a second and said, “You know what? Good idea.” I like to say I fired him.

What changes did you make?

Twice a year we have “vision talks.” Employees write down their personal, professional and financial goals.

What are some goals people have achieved?

Someone bought a car, another bought a house, one ran a marathon.

Why would I tell my boss I want to run a marathon?

So we can support you. I have a saying: Tell me your goals, and I work for you. Don’t tell me your goals, and you work for me.

Aren’t you encouraging people to ask for big raises?

I hope so. But we don’t just hand out raises. We say, “What value would you need to bring to the company for me to pay you that amount of money?” —Susan Adams

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ENTREPRENEURS

SMALL GIANTS

Vegan Veterans For more than 40 years Follow Your Heart has been quietly selling health-conscious foods.

Now VCs are backing fastgrowing competitors.

BY LARISSA ZIMBEROFF

T

62 | FORBES SEPTEMBER 13, 2016

movies. Goldberg was soon joined in California

by Paul Lewin, a college buddy.

Goldberg became a vegetarian, and Lewin followed. When the health food store went up for sale in 1973, they pooled their money with Michael Besançon and Spencer Windbiel, who worked in the store’s cafe, and bought it for $15,000. Soon after, the four partners learned that the FDA had shuttered the company that supplied the store’s eggless mayo, so Goldberg was sent to the kitchen to develop a replacement. It took until 1976 to find a suitable tofu-

Founders Bob Goldberg and Paul Lewin: “We get approached every day, mostly by venture capitalists.”

ROBERT GALLAGHER FOR FORBES

he founders of Follow Your Heart are now in their 70s. Their first product, in the 1970s, was Vegenaise, an eggless mayo. Since then the company has survived a bitter partnership dispute and the loss of its biggest client, Trader Joe’s, which once accounted for almost 20% of revenue. The company owns a 104,000-square-foot solar-powered headquarters and production facility in Chatsworth, Calif. and expects $50 million in revenue this year— but its world has changed.

Suddenly, vegan products are hot, and venture-backed competitors have surfaced. The largest, Hampton Creek, has raised $120 million and claims to have 500 products in its pipeline. Sir Kensington has raised $8.5 million and recently introduced its own eggless mayo. Kite Hill has $18 million to create a line of nut-based cheeses. The competitors have dramatically increased awareness of the product category, but they also have the potential to leave Follow Your Heart in the dust. “Hampton Creek has been very effective at promoting their products, and they have put a lot of money into that aspect of their business,” says Bob Goldberg, cofounder and CEO of Follow Your Heart. “We wanted to grow in a way that we could handle.”

Goldberg was an Indiana University music major who had moved to California at the prompting of his Army buddies, fellow musicians with whom he’d played trumpet at officers’ clubs. Between West Coast gigs he started hanging out at a Canoga Park natural food store endorsed by Johnny Weissmuller, the Olympicmedal-winning swimmer and star of Tarzan

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ENTREPRENEURS based concoction. And it took a few years to get the formulation good enough that they could partner with Nature’s Best, a southern U.S. distributor, to sell it in supermarkets.

Along the way the founders began to disagree about how quickly to expand. Besançon dreamed of building a national chain of health food stores. When a Santa Barbara store came up for sale, Goldberg agreed to buy it, hoping the second location would appease Besançon.

Instead, Besançon filed a lawsuit seeking the involuntary dissolution of the corporation, a process that forces a sale when warring partners can no longer agree. “It’s almost like being in a marriage,” Goldberg says. “You’re fighting, but you don’t expect to get hit with an action for a divorce. You expect some warning.”

The legal battle involved bitter disputes over the valuation of the company. In 1985 a judge told the founders he could render a verdict that no one would like or they could compromise.

The founders went to lunch and wrote valuations on a piece of paper, passing it back and forth until they agreed. Goldberg and Lewin ended up buying the company for more than $250,000.

For the next 15 years the combatants hardly spoke. Besançon eventually fulfilled his dream of helping build a national chain—Whole Foods, where he spent 18 years. “We’ve come to grips with it—that nobody was right and nobody was wrong,” he says. “It was probably one of the more painful times of my life.” Today they are friends again, speaking often and even vacationing together. Besançon’s son manages the Follow Your Heart store where the partnership began.

During the litigation, Goldberg had come up with a Plan B. Sensing that competition would limit the potential of vegetarian and vegan stores, he concluded that the best way to deal with retail competitors was to supply them. Vegenaise became the company’s anchor product.

In the mid-’90s Trader Joe’s started selling four of Follow Your Heart’s products, including eggless egg salad and cottage tofu. Over the next two decades the chain became the company’s biggest customer, accounting for 18% of its business. Then, late on a Friday in 2010, a supplier alerted Follow Your Heart to a salmonella outbreak linked to its products. Follow Your

SMALL GIANTS

Heart informed the FDA that it was voluntarily recalling several of its dressings, including at least one carried by Trader Joe’s. (The chain declined to comment.)

When an FDA press release mentioned Trader Joe’s, the chain was angry, Goldberg says, because it hadn’t been informed early enough to try to keep its name out of the press. Trader Joe’s ultimately terminated all contracts with Follow Your Heart. “They went overboard,” Goldberg says. “I think we did the right thing, and I think we got punished for it. We had a 22-year relationship that was flawless.”

The split forced Follow Your Heart to focus on its branded items, which ultimately left the company better able to respond to the changing tastes of American consumers. Lewin and Goldberg have been watching the rise of companies like Hampton Creek, whose Just Mayo sales reportedly more than doubled to over $10 million in the past year, with keen interest. “Every time a competitor comes to market, they’re going to get some of the business that’s yours,” Goldberg says. “I think it’s a mistake to react to that and much more important to make the best products we can.” (Hampton Creek meanwhile has recently been accused in news reports of buying large amounts of Just Mayo back from supermarkets to inflate its sales figures. The company denies the charge.)

Follow Your Heart has captured some of the excitement with several new products, including algae-based VeganEgg, which was introduced last fall at a conference in Las Vegas. “We had just set it up and started to scramble it when a food scientist took a snapshot and posted it to Twitter,” Goldberg says. “An hour later our site crashed.” It’s now being sold in conventional stores and at Whole Foods. Expected product launches this year include a ready-to-use liquid version of VeganEgg, a palm-based Parmesan “cheese” and a gluten-free flour tortilla.

As the company has grown and its category has expanded, Follow Your Heart has been getting phone calls from would-be investors. “We get approached every day, mostly by venture capitalists,” says Goldberg, who thanks them politely and tells them he’s not interested. “I can see it making us a bigger company,” he says, “but not a better company.”

FINAL THOUGHT

“Ideals are the engine of progress.” —THE DALAI LAMA 64 | FORBES SEPTEMBER 13, 2016

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PERSON

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IDEA

ZENTREPRENEURS A new breed of founder is suddenly everywhere: one whose business ideals combine the practical (low debt, sensible growth) and the spiritual (service to others, the notion of the journey superseding the destination).

COMPANY

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INVESTING

FUNDS

The Best ETFs for Investors The good deals are a function of three cost numbers. We do the arithmetic for you.

O

ne thousand six hundred and seventy-four exchange-traded funds are vying for your dollars. Don’t throw up your hands at the absurd complexity of it all. Just a few dozen of these funds are worth your attention.

The essence of ETF selection is finding what’s cheap in whatever category your money is aimed at. You want broad exposure to domestic stocks? Then Charles Schwab & Co. has the top-scoring fund, a product that costs a $10,000 saver only $23 over a decade. Foreign stocks?

Vanguard has a fund with a $24 price tag.

High-grade U.S. bonds? Schwab and Vanguard have the cheapest entrées to the market, but an iShares fund from BlackRock is close behind.

Savers can be thankful for the price war in the $2.2 trillion U.S. ETF business. The big, established players will get into battles over a

68 | FORBES SEPTEMBER 13, 2016

basis point—that being $1 of annual fees on a $10,000 account. Fidelity, a latecomer, has a lineup of sector funds (health care, energy and others) on which it just slashed the fee from 12 basis points to 8.4. More than a few exchangetraded funds have, by dint of some extracurricular income, gotten their net costs down into negative territory.

Note what is not relevant to our Best ETF rankings. We pay no mind to who’s managing the fund or what its past performance was. Why? The vast majority of ETF assets are passively managed. The funds, that is, are mechanical collections of stocks or bonds preassigned to some index. You’re not buying an international fund or an inflation-proof bond fund because it did well last year. You’re buying it because you need more of that category in your portfolio.

So your focus should be on cost factors— three of them.

The biggest is the expense ratio, the percentage of assets taken off the top every year to keep the doors open. Some ETFs shave 100 basis points or more. Schwab U.S. Broad Market (SCHB) charges 3.

Next is the trading cost, the amount lost to a marketmaker when you get in and out. If a $50 ETF share has a 3-cent spread between its bid and ask prices, and you’re investing $50,000, you’ll lose $30 (plus brokerage commissions) on every round-trip.

The third cost component is one you will almost never hear about, outside of this FORBES survey. It’s the cost offset from securities lending. Fund operators lend out stocks (and, rarely, bonds) to short-sellers, collect a fee for their trouble and give some or all of the money back to shareholders in the fund.

This is a big deal. BlackRock delivers $340 million a year of the booty to its ETF investors. At some small-company funds the lending

ROBERT BABBONI FOR FORBES

BY WILLIAM BALDWIN

5G Whiter Paper

INVESTING

FUNDS

income is more than enough to cover the expense ratio, meaning that the fund operators are in effect paying you to let them manage your money.

You couldn’t do as well with a do-ityourself portfolio. The reason is that small investors don’t have the clout to get any stock-lending revenue. The broker pockets the money.

Add up the three components and you get the cost score featured in the Best ETFs survey. The tables at right and on page 72 display efficiency standouts in 11 categories.

The sources for the raw data behind our calculations were Morningstar (most of the inputs), Bloomberg (bid/ask quotes captured over four days) and fund vendors (securitieslending income).

Settling on a category and knowing which funds deliver it best is a starting point. Now contemplate these five principles of smart ETF management.

Beware exotic flavors. The point of passive investing is to buy a little of everything, in proportion to market capitalizations.

That’s too boring for some fund operators, who have concocted a slew of “smart beta” and “low volatility” funds to feed investors’ yearning to beat the market. They are selling passive investing with a special sauce. Their fees are high.

Some of these strategies would have done well in certain periods in the past. Can you expect a repeat performance? If your smartbeta stocks are destined to beat the market, who is making you rich by owning dumbbeta stocks?

Compare the mutual fund. The important market indexes, like the S&P 500, are available in both ETF and mutual fund versions. With mutual funds you are buying and selling from the fund operator, and if the fund is no-load you buy and sell at net asset value.

There’s no transaction cost.

With an ETF, in contrast, you are buying from and selling to a marketmaker. You lose the spread between what the middlemen are willing to pay when buying and what they charge when selling.

Short-term investors, then, are better off playing with mutual funds, at least if they can dodge any rules (or penalty fees) designed to curb speculation. They foist the cost of in-andout investing on fellow shareholders.

70 | FORBES SEPTEMBER 13, 2016

BEST ETFS: DOMESTIC STOCKS YOUR COST OF PUTTING AWAY $10,000 FOR A DECADE IS ROCK BOTTOM AT THESE VENDORS. A NEGATIVE COST REFLECTS A LENDING-FEE BONANZA. TICKER

ASSETS ($BIL)

10-YEAR COST1

SCHB

$6.8

$23

VTI

63.8

48

SCHWAB US LARGE-CAP

SCHX

6.1

55

ISHARES CORE S&P TOTAL US STOCK MKT

ITOT

4.5

77

VANGUARD 500

VOO

49.4

80

ISHARES CORE S&P 500

IVV

77.6

118

104

EXCHANGE-TRADED FUND DIVERSIFIED AND LARGE-COMPANY STOCKS SCHWAB US BROAD MARKET VANGUARD TOTAL STOCK MARKET

LARGE STOCKS/SPECIAL WEIGHTS SCHWAB US LARGE-CAP VALUE

SCHV

2.4

SCHWAB US LARGE-CAP GROWTH

SCHG

2.9

108

SCHWAB US DIVIDEND EQUITY

SCHD

4.2

121

VANGUARD VALUE

VTV

22.5

126

VANGUARD GROWTH

VUG

21.4

131

ISHARES CORE RUSSELL US GROWTH

IUSG

0.9

141

SMALL AND MIDSIZE STOCKS ISHARES MICRO-CAP

IWC

0.7

–115

SCHA

3.7

–95

VANGUARD EXTENDED MARKET

VXF

4.1

–13

VANGUARD SMALL-CAP

VB

13.7

–7

SCHWAB US MID-CAP

SCHM

2.5

47

SPDR RUSSELL 2000

TWOK

0.1

82

–93

SCHWAB US SMALL-CAP

SMALL AND MIDSIZE/SPECIAL WEIGHTS VANGUARD SMALL-CAP GROWTH

VBK

4.7

VANGUARD SMALL-CAP VALUE

VBR

7.9

70

VANGUARD MID-CAP VALUE

VOE

5.3

94

VANGUARD RUSSELL 2000 GROWTH

VTWG

0.1

103

WISDOMTREE SMALLCAP EARNINGS

EES

0.4

113

VANGUARD MID-CAP GROWTH

VOT

3.4

117

SCHWAB US REIT

SCHH

2.9

119

FIDELITY MSCI REAL ESTATE

FREL

0.2

169

VANGUARD REIT

VNQ

36.5

200

REAL ESTATE INVESTMENT TRUSTS

1

FOR $10,000 INVESTMENT GROWING AT 5%, CUMULATIVE EFFECT OF EXPENSE RATIO, BID/ASK SPREAD AND COST REDUCTION FROM

SECURITIES-LENDING INCOME. SOURCES: MORNINGSTAR; BLOOMBERG; FUND VENDORS; FORBES.

Long-term investors are better off in ETFs. Since ETFs do not have to buy and sell stocks to meet purchase and redemption orders, their portfolios should do slightly better over time.

ETF investors also have a tax advantage if they are investing outside a retirement account: They avoid unwanted capital gain distributions.

Consider the commission. We don’t include commissions in our cost calculations because they vary from broker to broker and are often zero. But you should be aware of them. They can make small trades in ETFs uneconomic.

Before jumping on a commission-free ETF trading offer, make sure it isn’t steering you into an expensive fund.

Today seems so easy when tomorrow is all figured out.

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TD Ameritrade, Inc., member FINRA/SIPC. © 2016 TD Ameritrade IP Company, Inc.

INVESTING

FUNDS

BEST ETFS: FOREIGN STOCKS AND U.S. BONDS

Timing does matter for a sleepy fund.

Avoid crowded trades. Someone who buys an ETF DIVERSIFIED FOREIGN STOCKS when most invesVANGUARD FTSE DEVELOPED MARKETS VEA $35.2 $24 tors are buying, or VANGUARD TOTAL INTERNATIONAL STOCK VXUS 6.2 75 sells when they are VANGUARD FTSE ALL-WORLD EX-US VEU 13.7 85 selling, is going to SCHWAB INTERNATIONAL EQUITY SCHF 6.1 117 incur a transaction VANGUARD TOTAL WORLD STOCK VT 6.0 163 ISHARES CORE MSCI EAFE IEFA 12.0 202 cost well above the slim bid/ask FOREIGN/REGIONAL AND SPECIALIZED spread showing on VANGUARD FTSE ALL-WORLD EX-US SM-CP VSS 2.7 -57 a computer screen.

VANGUARD FTSE EUROPE VGK 11.7 69 When there’s net VANGUARD FTSE PACIFIC VPL 3.0 124 selling, GastinVANGUARD FTSE EMERGING MARKETS VWO 40.2 125 ISHARES CORE MSCI EUROPE IEUR 1.0 163 eau explains, the SCHWAB EMERGING MARKETS EQUITY SCHE 1.9 164 marketmakers lower their bids SHORT-TERM BONDS to below net asset SCHWAB SHORT-TERM US TREASURY SCHO 1.1 134 value. That’s beVANGUARD SHORT-TERM BOND BSV 18.3 149 cause they have to VANGUARD SHORT-TERM CORPORATE BOND VCSH 13.4 166 unload these unDIVERSIFIED AND MEDIUM-TERM BONDS wanted shares by SCHWAB US AGGREGATE BOND SCHZ 3.2 88 redeeming them VANGUARD TOTAL BOND MARKET BND 32.0 100 in kind. They wind ISHARES CORE US AGGREGATE BOND AGG 40.4 123 up with shares of LONG-TERM BONDS the portfolio comVANGUARD LONG-TERM BOND BLV 1.9 169 panies that then VANGUARD LONG-TERM CORPORATE BOND VCLT 1.5 174 have to be sold.

VANGUARD LONG-TERM GOVERNMENT BOND VGLT 0.7 179 All this activity is INFLATION-PROOF BONDS risky and expenSCHWAB US TIPS SCHP 1.2 124 sive. The reverse is VANGUARD SHORT-TERM INFL-PROT SECS VTIP 2.4 138 true when there’s a ISHARES 0–5 YEAR TIPS BOND STIP 0.7 170 flood of buy orders FOR $10,000 INVESTMENT GROWING AT 5%, CUMULATIVE EFFECT OF EXPENSE RATIO, BID/ASK SPREAD AND COST REDUCTION FROM for an ETF. SECURITIES-LENDING INCOME. SOURCES: MORNINGSTAR; BLOOMBERG; FUND VENDORS; FORBES. How do you know what the crowd is doing? Professionals can see order Time your trading. The best time to go into flow on their quote machines. Amateurs can or out of an ETF is between 3 p.m. and 4 p.m., get a sense of what is going on by looking at the says Gary Gastineau, who is a consultant to the “intraday indicative value,” which is an estimate industry. Liquidity is better in the busy hour. of a fund’s net asset value. You’d get the number A review of 1,380 quotes on Bloomberg bears for that Vanguard Emerging fund by typing out his theory: We found average spreads to be VWO-IV into Yahoo. twice as wide in the middle of the day (14 cents If the indicative value is above both bid and versus 7 cents). ask, there is probably a lot of selling under way.

You don’t have to worry about timing for a That’s a time to be a buyer. Do your selling, if fund that has 16 million shares a day of volume you can, when prices are floating above indicaand shows a one-penny bid/ask spread, like tive value.

Vanguard FTSE Emerging Markets (VWO).

THE CHEAPEST OF THE CHEAP APPEAR HERE. FOR A DIRECTORY OF 480 FUNDS COVERING MORE CATEGORIES, GO TO FORBES.COM/BESTETFS. ASSETS 10-YEAR EXCHANGE-TRADED FUND TICKER ($BIL) COST1

1

FINAL THOUGHT

“When money realizes that it is in good hands, it wants to stay and multiply in those hands.” —IDOWU KOYENIKAN 72 | FORBES SEPTEMBER 13, 2016

GO, CONSIDER, STOP

CAUTIOUS COUNSEL PETER TUZ HELPS MANAGE $400 MILLION AT CHASE INVESTMENT COUNSEL IN CHARLOTTESVILLE, VA. HE SEEKS STOCKS WITH STRONG EARNINGS GROWTH AND DOWNSIDE PROTECTION.

đ

UNITEDHEALTH With a U.S. focus, the company is insulated from tumultuous world events such as Brexit.

Revenues were up 28% in the second quarter, and its decision to phase out of the Affordable Care Act, a drag on profits, makes sense.

đ

DISNEY ESPN has issues, and CEO Bob Iger’s vague succession plan isn’t helping. While execution gaps like these are reason for concern, its movie studio earned nearly $800 million in a decent third quarter.

đ IBM

Warren Buffett is betting on Big Blue, but be wary: Revenue has fallen for 17 straight quarters, and the lift from its financially engineered profit growth is waning.

—Rachel Reisman

INVESTING

RICHARD LEHMANN // FIXED-INCOME WATCH

RETHINKING INCOME INVESTING

TRADITIONAL INVESTING CONCEPTS LIKE BUY AND HOLD, LADDERING, ANNUITIES AND RATINGS ARE NO LONGER WORKING banks worldwide so that now its policy options are limited for fear of triggering a worldwide crisis.

There is no easy remedy for income investors. The chances of another financial crisis are present, but it may be postponed for years.

Waiting it out is not an option unless you don’t need the income. Buying only “safe” securities with no yield is also not the answer. Besides, “safe” can no longer be quantified by a letter grade—witness what happened in 2008 to securities rated AAA. Market volatility has replaced credit rating as an income investor’s chief concern.

Wall Street has observed all this but from a different perspective.

Their perspective is fee income. For them volatility is a good thing because it stimulates trading, something income investors tend to resist.

They are urging investors to pursue capital gains or high-dividend-pay-

ing stocks in lieu of low-yielding bonds. They also are promoting mutual funds with steady monthly dividends, which are sometimes independent of actual earned income. That works—until it doesn’t, at which time you will see how much your principal has eroded.

One security you won’t hear rolling off your advisor’s tongue is preferred stock. Unlike common stocks, preferreds provide a steady income that is rarely suspended when earnings fall. They are not promoted by Wall Street, mainly for technical reasons. They are thinly traded so institutional investors can’t buy them, and they cannot be easily selected without analysis, something most brokers aren’t trained to do. I have been pounding the table about preferreds for years because I consider their yields and risk/reward ratios the best choice for income investors today. Even those bearing an investment-grade rating offer yields well above those for comparable bonds. In fact, many are actually bonds repackaged as trust preferreds so they can be exchange-traded.

To get the best yields look for preferreds that can be called anytime and sell near their call price. The call feature keeps the price well below where they would otherwise trade, but in my experience actual calls are infrequent. I built a number of client portfolios with such securities three years ago, and many have still not been called. You should also consider closedend preferred stock funds with steady monthly income. Look for a fund that has enough current dividend income and unrealized capital gains to sustain the dividend rate—a discount from net asset value would also be nice.

Here are some choices to consider: ASSURED GUARANTY MUNICIPAL HOLDINGS (AGO F 25.72) YIELDING 5.4%; GMAC CAPITAL TRUST (ALLY A 25.26) YIELDING 8.04%; U.S. CELLULAR STRATS (GJH 10.10) YIELDING 6.29%; JMP GROUP (JMPB 25.39) YIELDING 7.9%; JOHN HANCOCK PREFERRED INCOME FUND II (HPF 22.90) YIELDING 7.34%.

As I advise my subscribers, set your maximum buy price at no more than the call price plus the next dividend. F

RICHARD LEHMANN IS EDITOR OF THE FORBES/LEHMANN INCOME SECURITIES INVESTOR NEWSLETTER AND PRESIDENT OF LEHMANN LIVIAN FRIDSON ADVISORS. FOR MORE INFORMATION FOLLOW HIM AT FORBES.COM/LEHMANN.

74 | FORBES SEPTEMBER 13, 2016

THOMAS KUHLENBECK FOR FORBES

IT IS BECOMING CLEAR that traditional investing concepts are no longer working, for the most part, for investors seeking income. I speak of such concepts as buy and hold, portfolio laddering, annuities, ratings defining safety, CDs and money market funds.

This is not a temporary situation; it is the new normal brought about by our government’s failure to exercise fiscal policies to remedy the problems arising from the 2008 financial crisis. Congress has been in gridlock since then, leaving the door open for the bureaucracy to make policies with little regard or understanding of their economic impact. Will the 2016 election outcome change this?

Not anytime soon, no matter who wins.

The policy changes made by the Federal Reserve Bank have proven to be antigrowth. But its mandate is full employment and financial stability through monetary policies. Growth is more a function of fiscal policy, and that is the mandate of Congress and the White House.

What we have today is a Fed that is trying to use its monetary tools to effectuate fiscal policy to remedy the failure of Congress and the president to compromise. This has brought us growth-stopping sequestration, zero interest rates, an overpriced stock market and dangerously overleveraged debt markets. Worse still, the Fed’s experiments in financial-market manipulation are being copied by central

INVESTING

JOHN REESE // INTRINSIC VALUE

ESCAPE VOLATILITY IN GRAHAM-AND-DODDSVILLE

SUCCESSFUL INVESTORS HAVE THE MENTAL STRENGTH TO STEER CLEAR OF THE SHORT-TERM GUESSING GAME cious to get good stocks on the cheap. The formula works, therefore, because it doesn’t always work.

Tempting as it may be for you to cut bait and follow the crowd, focusing on short-term performance rather than on value and fundamentals usually leads to trouble. That’s why Graham wrote in The Intelligent Investor that an investor needed to be “armed with mental weapons that distinguish him in kind—not in a fancied superior degree—from the trading public,” most of whom are short-term-minded speculators. In other words, good investors don’t succeed because they are better at guessing what the market will do in the short term; they succeed because they have the mental strength to steer clear of the short-term guessing game and stay focused on value, fundamentals and the long term.

While the market has changed over the past several decades, Graham’s advice still rings true. Using investment strategies based on that advice as well as the philosophies of value gurus like Greenblatt and Buffett, I have identified four promising stocks: VALERO ENERGY (VLO, 54) is a $24 billion international manufacturer and marketer of transportation fuels and other petrochemical products. Its price-to-sales ratio is a low 0.3, and its long-term earnings-per-share growth is 23.7%. In addition, our model, based on Ben Graham’s value approach, scores the stock highly due to its low P/E (8.6), reasonable price/book (1.2) and long-term debt, which is less than net current assets.

LEAR CORP. (LEA, 115), an $8.13 billion leading supplier of electrical systems to the global automotive industry, recently reported strong second-quarter earnings, upped its full-year outlook and announced continued stock buybacks. This midcap stock looks attractive according to my John Neff-inspired guru model, which favors the stock’s low P/E of 9.1 and free cash flow per share of $9.09.

WESTINGHOUSE AIR BRAKE TECHNOLOGIES (WAB, 72),

doing business as Wabtec Corp., is a leading supplier of technology-based products and services for rail, transit and other global industries. The company’s cost-reduction initiatives have bolstered second-quarter operating margins, and our Buffett-based investment model favors WAB’s stable earnings-pershare, return-on-equity and return-on-capital metrics. The Buffett model estimates a longterm return of 15% on the stock.

BRIDGESTONE (BRDCY, 17), the tire-and-rubber company, is expanding operations with plans to open a second location in Nashville in the first quarter of 2017 and add 450 employees.

Our Graham-inspired investment model likes the company’s modest price/earnings and price/book ratios of 10 and 1.3, respectively, as well as the firm’s debt ($1.6 billion) in relation to net current assets ($8.5 billion). F

JOHN REESE IS FOUNDER AND CEO OF VALIDEA.COM AND VALIDEA CAPITAL MANAGEMENT, LLC, AND AUTHOR OF THE GURU INVESTOR (JOHN WILEY, 2009).

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THOMAS KUHLENBECK FOR FORBES

IN 1984 WARREN BUFFETT delivered a speech at Columbia Business School that has become something of a manifesto for value investors. In the speech, entitled “The Superinvestors of Graham-and-Doddsville,” Buffett talked about a small group of investors who worked under Benjamin Graham (the man known as the “Father of Value Investing”) and David Dodd at the Graham-Newman Corp. in the mid1950s. Three of the firm’s four associates—Walter Schloss, Tom Knapp and Buffett—established easily traceable and tremendous track records after leaving the firm (they nearly doubled the S&P over periods ranging from 13 to 28 years).

In his speech Buffett also highlighted the track records of several other Graham/Dodd disciples, including Buffett’s future Berkshire partner Charlie Munger, all of whom posted exceptional results of their own. His conclusion: “A concentration of winners that simply cannot be explained by chance can be traced to this particular intellectual village.” In other words, value investing pays off in the long term.

In The Little Book That Beats the Market, Joel Greenblatt wrote that if his value-oriented “Magic Formula” always worked, everyone would start using it and compromise the formula’s success. The share prices of those stocks identified, he said, “would be pushed higher almost immediately,” making the bargains disappear. But because the strategy sometimes falls short, many investors bail, allowing the tena-

Dust Off Your Running Shoes, Yoga Mat—Even Your Hockey Stick

Innovations in Hip Replacement Surgery Get You Back in the Game

BY K. H. QUEEN

Last year, hip pain forced Rhoda Pitcher to plan each day around her limitations. She couldn’t walk without limping, couldn’t run to catch an important flight and avoided her favorite yoga poses. Hip replacement surgery with Dr. Richard A. Berger changed her life.

DR. BERGER, assistant professor of orthopedics at Rush University Medical Center in Chicago, uses an innovative, minimally invasive approach to hip replacement, which he helped to create, that results in less pain and a more stable joint. Patients who undergo this new anterior hip surgery have an easier short-term recovery and a better long-term prognosis without the usual worry of dislocation. They leave the hospital within a few hours walking on their own, return to work much quicker—most within a week—and can play their favorite sports within weeks with no limitations.

“Before my surgery, everything required strategic thinking,” says Pitcher, 61, managing partner of a management consulting company that bears her name. “In February 2015, I was in Hawaii on one of the most beautiful beaches in the world, and I couldn’t walk more than a block without intense pain. I was taking significant amounts of anti-inflammatory drugs to reduce the pain because otherwise I couldn’t function.”

Pitcher suffered from bone-on-bone arthritis, avascular necrosis (death of bone tissue due to lack of blood supply) and hip dysplasia. After 13 years of pain in her left

Rhoda Pitcher, post-surgery

hip, eight years of pain in her right hip and several nonsurgical treatments with little relief, Pitcher was ready for hip replacement surgery.

Dr. Berger says. “I assemble the new hip in the patient like a ship in a bottle. When we’re done, no muscles, ligaments or tendons have been cut.”

A Pioneer in Minimally Invasive Procedures

Muscle-Sparing Approach Means Better Recovery

As soon as Pitcher met Dr. Berger, she was impressed by his expertise. She knew it would be worth it to travel from her home in Seattle to his office in Chicago for the procedures.

Dr. Berger is one of only a few surgeons nationwide who performs hip replacement surger y using this new anterior hip approach, called a modified WatsonJones anterior approach, a technique he helped develop. Dr. Berger, who earned a mechanical engineering degree from MIT, also invented and holds a patent on instruments used in the procedure. Only 2% of hip replacement surgeries are done with this method, which avoids cutting muscles, ligaments or tendons. In the last decade, Dr. Berger has replaced about 5,000 hips using this approach.

“We remove the old hip in little pieces and slip the new hip in, also in pieces,”

The older methods of doing hip replaceme nt , w h ic h h av e b e e n a r ou nd for decades, include the posterior approach and the direct anterior approach. These methods result in damage to the muscles, ligament and tendons around the hip, as the structures are either cut or torn away from the bone using a special table. Such tissue damage results in not only more pain, but a longer and less complete recovery.

Sparing soft tissue is important because when muscles, ligaments and tendons are cut and sewn back together, they are never the same afterward, Dr. Berger explains.

“When you cut muscles, ligaments and tendons, they don’t heal with muscles, ligaments and tendons—they heal with scar tissue,” he says. “Scar tissue doesn’t function like the original structure. It feels strange, and it’s not as effective.”

Photos at left and top right courtesy of Christopher Pitcher, CEO, The Sights and Sounds Media House

PROMOTION

PROMOTION

and the hip never functions as well,” he says.

“When you don’t have a lot of scar tissue, it’s easy to go back in and do another minimally invasive surgery.”

That’s great news for younger patients with hip problems. The average age of Dr. Berger’s patients is in the early 50s; his youngest patient to date was 19. One former patient, a 29-year-old former semi-pro hockey player, is back playing recreational

“

Rhoda Pitcher

Because of the additional pain, swelling and soft tissue trauma resulting from the older techniques, patients remain longer in the hospital after surgery. This can also lead to increased costs and a potentially heightened risk of hospital-acquired infections.

A recent study found that medical errors during hospitalization are the third-leading cause of death, following heart disease and cancer. Outpatient hip replacement avoids the dangers of a hospital stay that is needed with the older, more invasive techniques of hip replacement.

In addition, recovery from these older approaches generally takes longer. During this time, patients must avoid crossing their legs and knees to prevent dislocation.

They also are told to avoid leaning forward when sitting down, reaching down to pull up blankets while lying in bed and bending at the waist beyond 90 degrees. Some of these restrictions are lifelong. With Dr. Berger’s technique, patients are in the clear from these protocols within the first two weeks.

Less Pain, Fewer Restrictions, Better Function In contrast, the modified Watson-Jones technique results in less pain and swelling, no restriction on activ ities and a hip that functions like a normal one, Dr. Berger says.

“The new hip is not just better than the arthritic hip,” he says, “it’s as good as your hip was 20 years before, when it was normal.”

Another advantage to the lack of scar tissue is that it’s easier to replace the artificial hip when it eventually wears out in 20 to 25 years, Dr. Berger says.

“When you have a lot of scar tissue, a second surgery is a bigger ordeal for the patient

training, cycling and walking more than three miles a day.

“I never needed a cane,” she says. “I never needed crutches.”

Back in Seattle, Pitcher went to physical therapy. “I looked about 800% better than the other patients because they didn’t have the doctor I had,” she says.

Two months after her hip surgery on her second hip, Pitcher walked ten hours in a

I assemble the new hip in the patient like a ship in a bottle.

When we’re done, no muscles, ligaments or tendons have been cut.”

DR. RICHARD A. BERGER

league hockey—something he thought wouldn’t be possible following hip replacement surgery.

“In previous generations, if you had a bad hip, you likely got a cane, then a walker, and then eventually a wheelchair,” says Dr. Berger. “You lived with it. Today’s generation is unwilling to accept that, and they shouldn’t have to. They want to go running, biking, yoga—all the things they did when they were young. They don’t want to be limited by hip dysfunction and hip pain. They don’t want to take medications routinely.

They don’t want to just do better than they were before surgery. They want to get back to normal.”

Much-Improved Quality of Life After each hip surgery, Pitcher walked out of the hospital without help within a few hours, and she was working within a week.

After ten days, she was walking a mile.

Within five weeks, she was doing strength

single day at Disneyland with her family.

She also returned to a yoga class, where she was able to do some of the poses she had previously avoided. “There was nothing I could not do,” she says. “I cried tears of complete joy. It was one of those sweet, incredible moments I’ll never forget.”

She can now do a deep squat all the way to the ground and get back up without using her hands or upper body. On her February 2016 trip to Maui, Pitcher walked 125 miles. “I felt amazing,” she says. “You should see me run through an airport.”

People who know Pitcher say she looks amazing. It’s the look of someone now walking normally and living pain free.

“It’s changed the quality of my life dramatically,” Pitcher says. “It is an amazing experience. Now I can walk with elegance and grace. It’s a beautiful thing to navigate the world and dance it, rather than limp.

How incredible it is to have that quality of life back. It’s a miracle.”

INVESTING

JON D. MARKMAN // TECH INTELLIGENCE

SOFTWARE AS A STOCK STRATEGY FIVE YEARS AGO last month VC/engineer Marc Andreessen wrote one of the most valuable essays in the history of technology: “Why Software Is Eating the World.” He argued in a controversial Wall Street Journal editorial that software companies were “poised to take over large swaths of the economy,” pointing to the success of Netflix disrupting the entertainment business and Facebook the media business.

Now it turns out his prediction was not only right but also understated. Software is gobbling the world at a stunning pace. This month, for the first time, the five largest U.S. companies by market cap are software makers: Apple, Alphabet, Microsoft, Amazon.com and Facebook. More will follow.

Right in front of our eyes, in ways so subtle sometimes we don’t comprehend, software is changing the way we consume and value everything.

Take travel. Booking site Priceline is now more than twice as large as the biggest U.S. airline, Delta—$70 billion in market cap to $27 billion.

Investors used to value manufacturing and transportation—factories, planes and trains. But software has commoditized production, making a robotic plant in Vietnam as efficient as one in Detroit. Now distribution is more valued than production. Politicians are pointing in the wrong direc-

THOMAS KUHLENBECK FOR FORBES

CODE SPEEDS LIFE UP. ME WANT STUFF, ME PUSH BUTTON—STUFF HERE tion when they complain trade deals have gutted U.S. employment. They should be waving their fingers at software.

Software hasn’t just made business more efficient—it has also stripped away all the meaningless moving parts, uncovering the bare essence.

Look at the car business. Software has pushed production to the background, severing physical vehicles from the concept of mobility.

Ride-hailing companies Uber and Lyft shook a 100-year-old industry to its core with code that provides a friction-free layer between contract drivers and consumers. Now Ford and General Motors say they expect to be “mobility as a service” providers in the future, instead of just manufacturers. They see the writing on the road.

With iTunes, Apple turned physical CDs into software you bought.

Then it disrupted its own model with a streaming monthly licensing service devoid of ownership. Music companies have been reduced to low-margin content providers. Now even Apple is being eclipsed by the software-only model of music-streaming pioneer Spotify.

JON D. MARKMAN IS PRESIDENT OF MARKMAN CAPITAL INSIGHT, AN INVESTMENT RESEARCH FIRM BASED IN SEATTLE.

80 | FORBES SEPTEMBER 13, 2016

There’s so much more, as growth in computing power has escalated. Alphabet formed a joint venture with U.K. drugmaker GlaxoSmithKline to help build tiny, implantable robots capable of zapping nerves to fight chronic diseases like arthritis. Microsoft is developing software to store digital data on synthetic DNA. Transformational software will solve long-standing medical mysteries without chemistry, and data storage will become infinite for pennies.

More prosaically, Amazon.com used software to turn retail into a service—upending the biggest industry in America. Its logistics and customer-satisfaction code has created Prime subscribers so loyal that they actually pay for the right to buy things.

Count it up: Five years after Andreessen’s essay it’s clear that travel, drugs, storage, entertainment, finance, hospitality and retail are all in software. Code helps companies build long-term relationships with customers rather than engage in a single, simple transactional moment. And code speeds life up, allowing consumers to embrace their inner caveman. Me want stuff, me push button—stuff here!

To take advantage of the intensifying software revolution, the safest bets are megacaps Alphabet, Amazon, Microsoft and Facebook.

Technology creates defensible monopolies as network effects ensure that the big get bigger.

Yet for risk takers, there are still some young companies with potential to beat the odds.

CARE.COM (CRCM, 10.9) is trying to disrupt the childcare and elder-care business with a Pricelinelike set of software and websites. Shares have been cut in half in the past two years, but revenue is stabilizing. 2U (TWOU, 34.8) is trying to disrupt the university business by helping to provide four-year degrees at major colleges to remote students, as well as student-acquisition services to the schools. Shares have doubled since its 2014 initial public offering, with a lot of volatility and fundamental progress in between.

GRUBHUB (GRUB, 38.6) wants to be the Uber of takeout, developing surprisingly effective tools while trying to consolidate the industry. It’s early days, but it might just work. Mangia. F

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NOAH LICHTENSTEIN

Venture Partner, Cowboy Ventures

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Features September 13, 2016

Dassault Systèmes president Bernard Charlès uses a handheld joystick to navigate through a 3-D panorama of Shenzhen, China. While engineers have long used his company’s imaging software, Charlès hopes to sell similar software to architects, packaged-goods companies and even fashion designers. The French firm ranks 57th on our list of the world’s 100 most innovative companies.

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TECH’S MAD GENIUS: BILLIONAIRE MARC BENIOFF 84 DYSON’S REINVENTION FACTORY 100 AMERICA’S RESTAURANT KING 126 PHOTOGRAPHED BY OWEN FRANKEN FOR FORBES SEPTEMBER 13, 2016 FORBES | 83

CREDIT TK

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SEPTEMBER 13, 2016

NONSTOP BENIOFF In an age that celebrates manic entrepreneurs, none is more frenetic than the Salesforce founder, whom we consistently rate as America’s most innovative CEO. Come along for a wild ride with Marc Benioff as he tries to turn hyperactivity into a new model for tech growth and corporate activism.

BY ALEX KONRAD

S PHOTOGRAPHED ON LOCATION IN HAWAII

BY ROBERT GALLAGHER FOR FORBES. MARC BENIOFF WEARS SHORTS AND SHIRT BY TOMMY BAHAMA; HAT BY DORFMAN-PACIFIC SCALA. STYLE DIRECTOR: JOSEPH DEACETIS

alesforce cofounder Marc Benioff spends several months a year in Hawaii, where he owns a sweeping beachfront house on the Big Island and pals around with billionaire Michael Dell and aging rock star Neil Young. Little surprise, then, that for a retreat with 400 of his top executives in August he has summoned them to an air-conditioned ballroom near the white sands and volcanic cliffs down the shore.

In this expected venue an unexpected scene plays out: Benioff, his massive 6-foot5 build wrapped in a white Hawaiian shirt patterned with blue palm trees, his head topped with a Mauna Kea baseball cap, begins speaking to his cofounder in German.

“Ja, ja, ja,” Benioff grins.

Two months hence, at Salesforce’s gargantuan Dreamforce conference, which draws 170,000 people to San Francisco, Benioff will unveil the product he claims will steer the company to a new decade of growth. Its name: Salesforce Einstein, which explains the schmaltzy German—and the extravagant predictions. “If this is not the next big thing, I don’t know what is,” says the CEO of the world’s fourth-biggest enterprise software company.

Einstein, whose details are being revealed here for the first time, explains a lot of things. Why Benioff spent $390 million two years ago to acquire a hotshot young lieutenant, 35-year-old Steve Loughlin, and his responsive e-mail and calendar

SEPTEMBER 13, 2016 FORBES | 85

FORBES

BrandVoice

WITH PFIZER

THE ROAD TO DISCOVERY The path to innovation may be long, but biomedical scientists must remain driven by optimism of what lies around the bend. ’ve always loved science.” Talk with virtually anyone who does pharmaceutical research and development (R&D) work and they will express this love in similar words.

Their devotion is what enables them to sustain themselves during the often decades-long, frustrating, yet ultimately rewarding path to new drug development.

It’s a journey that begins with basic research into fundamental aspects of medical science, with the goal of gaining knowledge relating to cancer, genetics, viruses, the immune system or other branches of biomedicine. Scientists use this accumulated knowledge to develop research studies that can lead to practical clinical solutions.

I

86 | FORBES SEPTEMBER 13, 2016

In immuno-oncology, major knowledge advancements are helping scientists understand how to identify genetic factors within individual patients that cause cancer and drive tumor growth. Using this knowledge, researchers are working to develop potential “precision medicine” treatments that direct the body’s immune system to attack cancers while sparing healthy tissue.

“It’s an incredibly long path,”said Nathan Ihle, an oncology researcher with Pfizer. “You have to be persistent... there’s always going to be another hurdle to overcome.”

A 2014 report by the Tufts Center for the Study of Drug Development stated that eight of 10 R&D projects were abandoned due to efficacy failure, safety concerns or other issues, and other estimates place the success rate of developing new drugs at only about 8 percent.

Pharmaceutical companies are stepping up efforts to improve these odds.

The success rate is low because scientific hypotheses must be rigorously tested, refined, retested, refined and retested again in the laboratory. “There’s a saying that the reason we call it re-search is because you have to do

it again, do it again, do it again,” said Charlotte Weigel, a rare disease research scientist with Pfizer. “Until you hopefully have this breakthrough moment and you learn something very important and move the project in a very positive direction.”

After years of preclinical experimentation, laboratory breakthroughs may lead to drugs that can be tested in humans through clinical trials.

Every new drug candidate must go through four clinical trial phases— each designed to address a specific research question, with adjustments made as necessary to the drug candidate and dosage after each phase.

The clinical trial phase lasts 6 to 11 years on average, according to FDAReview.org.The FDA approval process—the last step before an investigational drug is approved to market—takes another several months to as long as two years. All in all, including preclinical work, a medicine’s journey from lab to patient takes 15 years, the Tufts Center estimates.

In 2015, a record 51 new drugs were approved, according to the FDA. Weigel says a researcher must be a critical thinker and an optimist at the same time.“I think being an optimist helps you work through those times where things are not going as quickly as you want,” she explained.

“It also helps if you are motivated by smaller victories because it’s the accumulation of all the small victories that leads us ultimately down the path to success.”

Despite this long road and frequent setbacks, researchers forge ahead with a sense of urgency, knowing their work is a piece of a larger bank of scientific knowledge built by those whose work preceded theirs and, it is hoped, will be enhanced by discoveries to come.“Making a new medicine—that’s the drive,” says Pfizer neuroscientist Robert Bell.“When I wake up and go into the lab every day, that’s what I’m thinking about. Our number-one goal is to bring medicine to patients. That’s very rewarding.”

INTO THE LAB Before a new medicine or vaccine is brought to market, there are countless scientists conducting years of behind-the-scenes exploration. Here are five Pfizer researchers working on targeted therapeutics in an effort to offer potential new treatments and new hope to patients around the globe.

Nathan Ihle Principal Scientist, Oncology R&D Group Nathan focuses on developing targeted cancer therapies by studying the pathways tumors use for growth and survival while searching for methods to shut those pathways off without triggering undue side effects. This type of highly tailored treatment may offer the prospect of robust and long-term responses, or even possible cures.

Sabine Wellnitz Director in the Bacterial Vaccines and Technology Group, Vaccine R&D Sabine is part of the team developing new vaccine candidates for various infectious diseases. If you go back in time, the discovery and development of new vaccines has helped to change our society—eradicating certain diseases, lowering the mortality rate, and easing the financial burden to public healthcare systems and across the economy. This is a personal driver for Sabine, who remains motivated by the important impact vaccines have had on public health.

Wei Li Senior Principal Scientist in the Inflammation and Immunology Research Unit Wei is focused on autoimmune diseases, like rheumatoid arthritis, psoriasis, lupus and others. She is striving to better understand the exact molecular mechanisms of each of these largely disparate conditions in the hopes of moving beyond broad immunosuppression and toward more precisely targeted therapies that may improve people’s lives with fewer side effects.

Robert Bell Senior Principal Scientist in the Neuroscience Research Unit In hopes of treating neurodegenerative diseases, such as Alzheimer’s, Robert studies the brain’s immense network of blood vessels to better understand how damage to this network contributes to these devastating diseases. These findings may help identify new targets of disease processes and may lead to developing potential new medicines that could either treat these problems or even prevent them from occurring in the first place.

Charlotte Weigel Senior Scientist, Rare Diseases Research Unit Ninety-five percent of the more than 7,000 conditions categorized as rare diseases do not have FDA-approved therapies. These figures add daily urgency to the work of Charlotte, who dedicates her efforts to researching a small molecule that could potentially address the protein whose dysfunction causes cystic fibrosis. Weigel and her team of researchers are working toward the goal of giving patients and their families the potential treatment for which they’ve been hoping.

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cated, the bets bigger and more audacious. “We’re changing the engines on a 747 in midflight,” Benioff says.

In case people doubt whether the frenetic founder thinks he can land the plane, they can just look at the San Francisco skyline: Salesforce’s new, 1,000-foot-tall headquarters, soon to be the tallest building west of the Mississippi, is more than halfway built. Just in the past six months, Salesforce bid aggressively to acquire LinkedIn (Microsoft won out), then spent a combined $3.4 billion to buy Demandware and Quip. On the side Benioff has raised millions for Hillary Clinton, put his company out front in crusades for equal pay and LGBTQ rights, invested in more than 130 startups and, with his wife, Lynne, donated hundreds of millions to children’s health, family homelessness and education.

Benioff, who’s worth $4 billion, calls it an “integrated life.” One friend, Coca-Cola CEO Muhtar Kent, terms it “positive discontent.” A psychologist might call it manic.

Whatever the name, a few weeks with Benioff is exhausting, exhilarating—and instructive. For young entrepreneurs today, a hyperactive worldview has increasingly become a point of pride. Benioff, at 51 a bit older and further down the road, will be a test of whether this kind of style can build a proper tech giant.

IT’S A CLICHÉ TO FOCUS ON THE appetites of someone the size and shape of a retired NFL lineman, but Benioff ’s

CLOUD CONFLICT A RECENT ACQUISITION NOW HAS SALESFORCE BATTLING TITANS IN FOUR SOFTWARE CATEGORIES. CUSTOMER SERVICE

SALES

MARKETING

COMMERCE

TOTAL REVENUE FOR EACH MARKET (IN $MIL)

$10,354

$5,992

$5,691

$4,251

1 2 3 4 5

SOURCE: GARTNER

product, and why Salesforce has gobbled up at least half a dozen artificial intelligence startups in the months since.

Why the CEO of one of those acquisitions, MetaMind’s Richard Socher, a longtime Stanford academic specializing in AI, will now build the company’s first-ever pure research lab. And why after 17 years running Salesforce, Benioff can still get excited about his own products like a kid who’s found a new toy.

Benioff announces a big product or two every year at Dreamforce, but Einstein is something different. Einstein will integrate AI into almost all of Salesforce’s products, injecting predictive suggestion and insights into service, marketing and sales, as well as its newest efforts in collaboration and commerce. As such, Benioff tells his executives, Einstein won’t just slot in as another “cloud” for them to sell. Instead, Einstein will serve as a new nerve system across the entire business. “We are going to catch our competitors by surprise.”

Salesforce is hardly the first tech giant to bet big on AI. Google CEO Sundar Pichai is positioning his company for an “AI-first world,” while Microsoft has been wedding intelligence to business data for nearly 20 years. But bet against Benioff at your own risk. Since 2011 FORBES has ranked the most innovative companies in America— and every single year Salesforce has placed in the top two.

Salesforce pioneered software as a service, ending the era of downloads and CD-ROMs. Benioff backed that up with successful bets on social media, marketing and mobile, establishing his company as a market leader in nine different product categories, reaching top positions in each of them—market positions dubbed “magic quadrants” by tech researcher Gartner when it plots those universes on graphs. Its products now interface with thousands of apps, touch many millions of business users around the world and bring in $8 billion in annual revenue. Salesforce’s consistent growth, combined with Benioff ’s effusive salesmanship, has made it a longtime Wall Street darling, its $54 billion market cap outstripping net margins that have fluctuated between 2% and none at all.

As much as the outsize, garrulous Benioff likes to boast about these accomplishments, he realizes that Salesforce has long punched above its weight and remains a tweener in the software world, worth a mere third of IBM or Oracle, where Benioff got his start, and a fraction of the likes of Microsoft and Google. The company’s core sales-software business—it has 45% of the market, nearly quadruple the share of its closest rival, Microsoft—continues to grow.

But Salesforce can serve only so many sales reps.

Meaning Benioff must continue to innovate and do so at scale. Over the next five years it will be hard to match the quadrupling of sales that Salesforce managed in the previous five years. The balancing act gets more compli-

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SALESFORCE

dining style pretty much matches every other aspect of his life. He’s very particular, and he devours. When, say, a tuna crudo catches his eye, he orders double; when he orders a burger, it’s no fries but extra onions and a heavy dose of mustard.

For this meal, taken high above New York’s Columbus Circle, in his longtime favorite, the Mandarin Oriental, he’s eating his off-menu cheeseburger and regaling talent manager Guy Oseary, who now comanages a venture capital firm with Ashton Kutcher, and me with tales of his $2.8 billion takeover of Demandware, which his company announced that morning.

But he’s also devouring the talk, asking us which local startups are worth meeting and what new technologies he should be mindful of. It’s classic Benioff, who collects young go-getters—including Airbnb cofounder Brian Chesky—finding (and funding) some of these mentees via Twitter, like Next Thing Co., a maker of a $9 computer.

Benioff calls this approach “the beginner’s mind,” drawn from Zen principles. (He even multitasks religions, following Buddhism while still attending Jewish synagogue.) His

acle hotshot, score millions in funding from Ellison to build the first step in Ellison’s vision for “on-demand software”— what would become known as software as a service and eventually just the “cloud.” Goldberg was tackling financial software. Benioff wanted to go after sales.

Armed with a couple million from his former boss, Benioff and Harris set out to build Salesforce. They’d be competing with Benioff ’s predecessor at Oracle, Thomas Siebel, who’d left in 1990 and later built the dominant sales automation software. Salesforce would provide a Web browser to pull up and track customer info living on databases and license it online without a physical product.

Salesforce was far from a sure thing. Siebel still dominated, and for a while Benioff worked on another idea for a platform business, which he had to shutter during the dot-com crash. At one point, with new investors balking, it looked as if Salesforce itself might shut down. But he plowed ahead, building a community around his early customers with his signature conference, Dreamforce, which he launched in 2003 with just 1,300 attendees. “He was able to juggle an amazing amount of things, flying at a 50,000-foot view,” Harris says.

By the time the company went public in 2004, Benioff had developed an obsession with branding (the company’s first motto, “No Software,” played up its differences from Siebel and other rivals, even if it wasn’t strictly true) that continues today.

At the Mandarin he gestures toward midtown, where a skyscraper overlooking Bryant Park will soon display a big, sky-blue Salesforce sign, joining towers in Indianapolis, London and the new building in San Francisco. In Japan he made a mistake, he says, not to demand signage out front. “We got a killer deal on that [New York] building,” he says, sounding like that other billionaire who loves to talk up branding and real estate. “It’s going to have a big sign. It’ll be awesome. It’ll be killer at the top.”

Another rule Benioff says he learned quickly at Salesforce: Everything revolves around the customer. That includes big parties and goofy costumes for demos at Dreamforce, which is now so grandiose that in 2015 Benioff needed to rent a cruise ship to fit everyone (this year the ship is replaced with a U2 concert). His Zen practices play out here, too: Benioff ’s habit of seemingly nightly customer dinners do more than reinforce loyalty—they give him intel on his own company. “What’s the word on us locally?” he’ll ask anyone, including this reporter. If he hears about any competitor—especially a bite-size startup—offering something Salesforce cannot, he’ll pause midsentence to pass the name to John Somorjai, his longtime M&A chief. “This is not playtime,” Benioff says quietly as he adds another to the list. “This is the real deal.”

“Benioff can be a little childlike in his wonder of trying new things in a way that the average corporate CEO has maybe lost.” insatiable curiosity developed back in the 1970s when he watched his father manage inventory and check ledgers for the family’s department store business in San Francisco.

As a 17-year-old he developed and sold his own Atari videogames that promised exploration into unknown worlds, earning enough in royalties to pay his way at USC. “He can be a little childlike in his wonder of trying new things in a way that the average corporate CEO has maybe lost,” says Yelp’s Jeremy Stoppelman, another mentee.

He’s been on both sides of the mentor relationship.

When Benioff joined Oracle out of college, founder Larry Ellison took him under his wing. He quickly emerged as Oracle’s youngest-ever vice president, who bridged engineering and sales and eventually ran one of the company’s most important sales groups. “Marc’s a natural salesperson, but I would say he’s a more natural manager,” Ellison says. “He was good at the vision, while the details were left to others.”

The grand thinking impressed Parker Harris in 1999, when Harris was working on a small startup with two friends and got a meeting invite from the young Oracle exec.

Benioff had watched his friend Evan Goldberg, another Or90 | FORBES SEPTEMBER 13, 2016

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His constant pursuit of information extends to his own body. The CEO doesn’t go anywhere without a FitBit, which he pairs with a Peloton bike. Michael Dell tells the story of competing with Benioff in a celebrity FitBit challenge: Dell suspected his friend of attaching the device to his dog before playing fetch. “He can be sneaky,” Dell says. And exhausting. One time Benioff took a test to check the makeup of the bacteria in his gut. Thirty speedread research papers later he was inundating his friend

David Agus, the USC cancer researcher and doctor to the late Steve Jobs, with messages. “You’ll wake up early in the morning and there are ten texts from during the night,” Agus says.

EACH SUMMER BENIOFF VISITS one of Salesforce’s international regions to go deep on its business, before retiring to Hawaii for July and August to clear his head. This year it’s two weeks in Japan—he sets up residence in the

FIVE DEGREES OF BENIOFF

A GLIMPSE OF MARC BENIOFF’S WIDE, WIDE CIRCLE OF ACQUAINTANCES, PARTNERS AND PEERS. FRIENDS NEIL YOUNG

DAVID BLAINE

ACTIVISM RICHARD BRANSON

BARACK OBAMA

PHILANTHROPY

SAM HAWGOOD

RICHARD CARRANZA

ALEX DAYON

LENNY KRAVITZ

CAREER

LARRY ELLISON

STEVIE WONDER

MENTOR

LYNNE BENIOFF

YOSHIKI

HILLARY CLINTON

SUZANNE DIBIANCA

RON CONWAY

TRAVIS KALANICK

GUY OSEARY

MARC BENIOFF BRIAN CHESKY

KEITH BLOCK

PAUL POLMAN

JEREMY STOPPELMAN

PARKER HARRIS

TONY ROBBINS

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Grand Hyatt’s penthouse, complete with a private pool for his young family in tow—which is how I find myself in an obscure back room in Tokyo’s Roppongi Hills district, listening to a particularly campy karaoke rendition of Styx’s particularly campy “Mr. Roboto.”

“You’re wondering who I am,” Benioff booms, his face deep in concentration. “Machine or mannequin?” Not quite satisfied by the first version, he sings the song twice.

For Benioff these multitasking trips combine his “integrated life” with his “beginner’s mind” knowledge-seeking. In just the 36 hours I spent with him in Japan, he squeezed in everything from a reception with Salesforce’s biggest Japanese accounts—his sales reps awkwardly placing orchid leis on the dark-suited CEOs from local titans such as Canon Marketing Japan, Fujitsu and Japan Post as a Hawaiian band played ukuleles—to a tasting of the private wine label of Japanese rock star Yoshiki at the karaoke bar.

Two years before, he had hired Shinichi Koide, who’d led HP Japan and held top roles at SoftBank and IBM Japan, to scale the business and double local head count

Japan, Haruo Murase, congratulated his old friend on losing a deal that would have diluted the stock and potentially clashed with Benioff ’s values. But Benioff was thinking big; his plans for LinkedIn, he responds, would’ve been much bolder than what will happen to it now. “People may be relieved, and maybe I was crazy,” he tells me later in his hired SUV, as he uses his phone to flip through random customer videos about using Salesforce. “When I get something in my head, it’s hard for me to just let it go.”

In its place the Demandware and Quip deals followed.

The former manages e-commerce for retailers; the latter makes software for collaborating on documents online. It’s a lot. Three years in, Salesforce has barely digested its $2.5 billion deal for e-mail marketer ExactTarget, and it’s less than a year since the announcement of a new platform, Lightning, that overhauled its user interface. Customer migration to it is far from finished. Salesforce remains far and away the leader in its core customer relations management business, but Benioff ’s frenemy Satya Nadella at Microsoft looks set to make a push with a reorganized enterprise software suite and, soon, all that LinkedIn data. “They could give Salesforce a run for their money,” Forrester analyst Kate Leggett says.

Benioff will fight back with Einstein, which will publicly debut at Dreamforce in October. His other pet project that he’ll plaster all over Dreamforce, dubbed Trailhead, offers instruction and virtual badges to train customers to build their own business apps off Salesforce. At Trailhead’s first event in San Francisco in June, something of a public test for its presence at Dreamforce, Benioff mostly likes what he sees, but he wants still more women added to its keynote speeches and branding with a heavier dose of Salesforce’s favorite word, customer. “I probably should be yelling at more people to get their attention,” he says over another onionsmothered burger afterward.

As in his early days at Oracle, Benioff thrives on delegation and trust. At the offsite in Hawaii, the big theme is ohana, Hawaiian for family. Benioff ’s is now thousands strong, and with Harris, product chief Alex Dayon and sales boss Keith Block, he says, he finally has a leadership team in place that allows him to focus on whoever most urgently needs his help.

Right now, though, his ohana has holes. Benioff has been cycling through chiefs of his marketing cloud unit.

And then, abruptly, his wunderkind lieutenant Loughlin, head of the Einstein project, announces he’s leaving for a likely venture capital job. It’s hardly the most auspicious news two months before rollout. But Benioff ’s human

Benioff laments losing LinkedIn to Microsoft: “Maybe I was crazy. When I get something in my head, it’s hard for me to just let it go.”

2,000. But he wants Koide to operate more autonomously and, like Benioff himself, flatten his org chart to have more executives report directly to him. “I can only advise here, or it won’t work,” Benioff tells me as we race in an SUV from a customer lunch to see Koide in Salesforce’s offices near the Imperial Palace. “He needs to know he can go even faster than us.”

Despite taking the unusual step of opening for business in Japan the same year it launched in San Francisco, Salesforce is still just fourth in the software market there, with $400 million in estimated revenue. For Salesforce to quadruple, he needs markets like Japan to grow by factor of 7.5—a figure that would allow it to pass Oracle, SAP and the local leader, Microsoft. By the time Benioff leaves town, he expects a plan to do that.

Add that goal to a fistful of others, each more audacious than the last. Benioff ’s biggest so far was his plan earlier in the year to make a shock acquisition of LinkedIn. Microsoft won the professional network for $26.2 billion; a regulatory filing hinted that Benioff would have topped that. His customers don’t share Benioff ’s disappointment: At a lunch in Tokyo, the chairman of Canon Marketing 94 | FORBES SEPTEMBER 13, 2016

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of being a founder/CEO is the freedom to bet the farm or at least take big chances— it’s a lot easier to risk breaking something you built yourself. Combine that with Benioff ’s need for nonstop action and his civic-minded liberalism and you get, over the past year, a nearly unprecedented attempt to leverage a public company to affect policies that aren’t specific to it or its industry.

“I strongly believe the business of a business is to improve the world,” Benioff says.

Last year, for instance, he took on Indiana governor Mike Pence, now Donald Trump’s running mate, threatening to reduce Salesforce’s operations in the state if local Republicans didn’t back down on a “religious freedom” bill that would have sanctioned discrimination against gay people. They mostly capitulated. He’s rallied business leaders for a similar effort in Georgia and also in North Carolina (one that’s still going on). Griping to the Wall Street Journal, North Carolina lieutenant governor Dan Forest called Benioff a “corporate bully.”

Similarly, he prioritized pay equality after two senior female executives questioned whether Salesforce, like many of its tech peers, was compensating men more for the same jobs. Benioff couldn’t imagine such a thing possible at his own company—but he loves his data. When he was proved wrong, he added a combined $3 million to salaries overnight. The presidential race? The Clinton supporter has retweeted attacks against Trump. He also delved into the Black Lives Matter movement, with a tweet that seemed to applaud tech’s role in the protests. After facing backlash, he deleted the comment and said he’d step back from weighing in publicly. But privately he has made moves to appoint Salesforce’s first diversity czar.

His philanthropy is similarly active. To tackle Silicon Valley’s housing crisis, he and his wife have pledged millions of dollars for low-income housing, and, in a typical Benioff move, rather than leave it at that 96 | FORBES SEPTEMBER 13, 2016

T H E T O P 1OO

THE WORLD’S MOST INNOVATIVE COMPANIES THESE 100 REVOLUTIONARY FIRMS ARE RANKED BASED ON AN “INNOVATION PREMIUM”—THE ADDITIONAL VALUE INVESTORS PLACE ON THE COMPANY ABOVE ITS ENTERPRISE VALUE. RANK

COMPANY

INDUSTRY / COUNTRY

1

INNOVATION PREMIUM

TESLA MOTORS

82.40

AUTOMOBILE MANUFACTURER/U.S.

2 SALESFORCE

75.52

APPLICATION SOFTWARE/U.S.

3 REGENERON PHARMACEUTICALS

72.85

BIOTECHNOLOGY/U.S.

4 INCYTE

70.81

BIOTECHNOLOGY/U.S.

5 ALEXION PHARMACEUTICALS

69.95

BIOTECHNOLOGY/U.S. A CAR THAT PAYS FOR ITSELF In July Elon Musk announced “Part Deux” of Tesla’s plan: building an autonomous vehicle that owners can summon by app and send out as an on-demand, self-driving taxi, offsetting the car’s costs.

6 UNDER ARMOUR

68.92

APPAREL, ACCESSORIES & LUXURY GOODS/U.S.

7 MONSTER BEVERAGE

68.80

SOFT DRINKS/U.S.

8 UNILEVER INDONESIA

67.93

HOUSEHOLD PRODUCTS/IDN

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he’s now raising more money from friends (“We’re high-tech beggars”). He wants every CEO to join him in personally adopting a middle school. And he and his wife have given $250 million to two University of California, San Francisco children’s hospitals, both of which now bear their name.

While the pendulum of California outsider politician has swung from Hollywood actor (Reagan, Schwarzenegger) to tech CEO (Fiorina, Whitman), Benioff swears he won’t jump on the bandwagon.

“I couldn’t imagine a more incompetent politician than myself,” he says.

Plus, why walk away from his current influence? To the extent that Salesforce continues to gallop, his platform will grow in lockstep. He already uses his CEO mentorship as a chance to spread the word of his company’s 1-1-1 plan, a commitment to donate 1% of Salesforce employees’ time, technology and resources to nonprofits and charitable causes, with versions popping up at Atlassian, Twilio and Yelp (Benioff says he’s still working on Uber). “I have a list of unicorns, and I’m checking them off one by one,” says Salesforce’s chief philanthropy officer, Suzanne DiBianca.

And on top of all this Benioff still finds time for more activity. One night he directmessaged me via Twitter, his favorite source for talent leads. “Should you be asleep?”

When I replied that I was working on some coverage of the Pokémon Go craze, Benioff quickly sent a screenshot of his player in the game, named SalesforceOne. That interchange opened the floodgates.

“Beware of late-night tweeting,” he warned.

Over the next few weeks he would shoot me overnight pictures with friends, with President Obama, with singer Stevie Wonder. He offered to preread this story “just between us” and offer comments. (No thanks.)

“I don’t think he ever sleeps,” says Unilever CEO Paul Polman, a friend. Rest seems to be a casualty of the integrated life, as the ever self-aware Benioff understands all too well. At one point he sends me a FORBES cover he appeared on five years ago, looking clean-shaven and cherubic. “Don’t forget,” he noted, “how much I’ve aged.” It’s only half a joke. F

T H E T O P 1OO RANK

COMPANY

INDUSTRY / COUNTRY

9 VERTEX PHARMACEUTICALS

67.89

BIOTECHNOLOGY/U.S.

10 BIOMARIN PHARMACEUTICAL

67.43

BIOTECHNOLOGY/U.S.

KOREA’S GOOGLE Naver is South Korea’s largest Internet company (profitwise) and by far its dominant search engine.

11 AMAZON.COM

63.80

INTERNET RETAIL/U.S.

12 ARM HOLDINGS

63.70

SEMICONDUCTORS/U.K.

EVERYTHING UNDER THE SUN Rakuten Ichiba, Japan’s largest e-commerce portal, has adopted Amazon.com’s approach of using a vast catalog: It offers products from 44,000 vendors (and has joined the race for drone delivery).

13 NAVER

63.28

INTERNET SOFTWARE & SERVICES/S. KOR

14 FLEETCOR TECHNOLOGIES

62.09

DATA PROCESSING & OUTSOURCED SERVICES/U.S.

15 NETFLIX

60.34

INTERNET RETAIL/U.S.

16 SHANGHAI RAAS BLOOD PRODUCTS

60.17

BIOTECHNOLOGY/CHN

17 RAKUTEN MAKEOVER MAGIC South Korean consumer-goods powerhouse LG H&H is known for an array of unique beauty products like wine-based facial moisturizer and fermented cosmetics.

60.02

INTERNET RETAIL/JPN

18 ASIAN PAINTS

59.77

SPECIALTY CHEMICALS/IND

19 LG HOUSEHOLD & HEALTH CARE PERSONAL PRODUCTS/S. KOR Continued on page 108

98 | FORBES SEPTEMBER 13, 2016

INNOVATION PREMIUM

59.48

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ressed in a blue polka-dot oxford and striped Reebok sneakers, James Dyson abruptly veers off a paved path that cuts through his company’s 15-acre compound. The beanpole-thin 69-yearold billionaire pushes his way into some shrubbery and presses his nose right up to the reflective glass that encases his new, topsecret laboratory, a sleek two-story cube that looks like it was beamed directly from Santa Clara to the Cotswolds. To his delight, he can’t make out what his engineers are doing inside. “I hope they are working,” he says, chuckling.

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on the other side of the glass dozens of young engineers are unpacking their gear and settling into their quarters. Their job at D9, as the building is cryptically known, is to experiment fearlessly, fail constantly and document those failures in company-issued black-and-yellow notebooks, which form the basis for still more experiments, still more failures—and also a corporate sideline in patent litigation. Very rarely this unending cycle of failure results in a revolutionary new product: the bagless vacuum cleaner (5 years, 5,127 prototypes), the 360 Eye robot (17 years, 1,000-plus prototypes) and the Supersonic hair dryer (4 years, 600 prototypes). But those successes add up: Dyson’s 58 products generated $2.4 billion in sales last year and an estimated $340 million in net profits, even after Dyson reinvested 46% of the company’s Ebitda in R&D, more than rivals such as Electrolux and Techtronic. Dyson owns 100% of the company, which is worth some $4.8 billion.

104 | FORBES

SEPTEMBER 13, 2016

BRAIN WAVES. Built in 1998 to look like a wave above the trees, Dyson’s main headquarters, Research Design & Development center, is a stunning site in bucolic Malmesbury. Inside are 129 laboratories plus administrative offices.

T H E T O P 1OO

DY S O N

D9 is the gleaming cornerstone of Dyson’s ongoing efforts to lure engineers straight out of college to work for him at the company’s headquarters near Malmesbury, an ancient market town of 5,400 two hours west of London. The average age of his engineers is 26 (he has 3,000 worldwide and wants to hire another 3,000 by 2020), and their youth is no accident. “The enthusiasm and lack of fear is important,” Dyson says. “Not taking notice of experts and plowing on because you believe in something is important. It’s much easier to do when you’re young.”

Dyson’s own fearlessness enables him to constantly test new products, although

RANK

COMPANY

INDUSTRY / COUNTRY

INNOVATION PREMIUM

20 VERISK ANALYTICS

59.47

RESEARCH & CONSULTING SERVICES/U.S.

21 AMOREPACIFIC

59.14

PERSONAL PRODUCTS/S. KOR

22 COLOPLAST

57.48

HEALTH CARE SUPPLIES/DNK

BEST FACE FORWARD Amorepacific got its start selling camellia oil in the 1930s. The company generated $5.2 billion in revenue last year, cashing in on the worldwide Korean skin-care craze.

23 MARRIOTT INTL

56.53

HOTELS, RESORTS & CRUISE LINES/U.S.

24 ILLUMINA

55.98

LIFE SCIENCES TOOLS & SERVICES/U.S.

25 RED HAT

55.87

SYSTEMS SOFTWARE/U.S.

“We’re battling the status quo.

We still feel small, agile, pioneering.”

106 | FORBES

SEPTEMBER 13, 2016

55.63

HEALTH CARE DISTRIBUTORS/U.S.

27 VISA

55.52

DATA PROCESSING & OUTSOURCED SERVICES/U.S.

28 SYSMEX

54.44

HEALTH CARE EQUIPMENT/JPN MOVING MARKETS The New York Stock Exchange uses Red Hat’s software to power its trades.

29 BAIDU

54.24

INTERNET SOFTWARE & SERVICES/CHN

30 MASTERCARD

54.03

DATA PROCESSING & OUTSOURCED SERVICES/U.S.

31 HINDUSTAN UNILEVER

53.99

HOUSEHOLD PRODUCTS/IND

32 HERMES 53.68 APPAREL, ACCESSORIES & LUXURY GOODS/FRA PEOPLE’S REPUBLIC PIONEER In the 1980s MasterCard became the first payment card introduced in China.

33 TRANSDIGM GROUP

52.11

AEROSPACE & DEFENSE/U.S.

34 PERRIGO PHARMACEUTICALS/IRE

51.97

RED HAT: SANKARSHAN MUKHOPADHYAY; MASTERCARD: IMAGINECHINA/SPLASH NEWS/NEWSCOM

his perfectionism often gets in the way of releasing them. He is best known for creating the first bagless vacuum cleaner three decades ago, and his company still gets 70% of its sales from vacuum cleaners, many of which are now lightweight, handheld and battery-operated. But Dyson has also had hits with the Airblade hand dryer; the Dyson humidifier; and the Pure Cool Link, a fan that doubles as an air purifier. The latest wonder from his workshop is the Supersonic blow-dryer. Dyson spent $71 million (and went through 1,000 miles of human hair) developing the $400 device, which is supposed to eliminate heat damage and cut down on uncontrollable flyaways. It launched in Japan in April and comes to the U.S. any day now.

Dyson is hoping that all those new engineers he is hiring will accelerate the company’s pace of innovation: Dyson is planning to invest hundreds of millions of dol-

26 AMERISOURCEBERGEN

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DY S O N

WELCOME TO ... CUBA In March Priceline’s Booking.com became the first U.S. travel site to let Americans reserve Havana hotel rooms without a travel agent or tour guide.

RANK

COMPANY

INDUSTRY / COUNTRY

INNOVATION PREMIUM

35 PRICELINE GROUP

51.88

INTERNET RETAIL/U.S.

36 ADOBE SYSTEMS

51.67

APPLICATION SOFTWARE/U.S.

GORGEOUS RESULTS Ulta Beauty is slated to open 100 new locations this year. It attracts customers with a mix of cheap and expensive cosmetics.

37 CERNER

51.41

HEALTH CARE TECHNOLOGY/U.S.

38 ULTA BEAUTY

51.39

SPECIALTY STORES/U.S.

39 CHIPOTLE MEXICAN GRILL

51.14

RESTAURANTS/U.S.

40 ALMARAI

50.99

PACKAGED FOODS & MEATS/SAU

41 FAST RETAILING COMPANY KNOWS BEST In a counterintuitive burst of social responsibility, Almarai, Saudi Arabia’s biggest dairy company ($3.7 billion in sales), created a video encouraging breast-feeding. It has clocked 12 million views since February.

50.99

APPAREL RETAIL/JPN

42 STARBUCKS

50.76

RESTAURANTS/U.S.

43 UNICHARM

50.56

HOUSEHOLD PRODUCTS/JPN

44 SIRIUS XM

49.03

CABLE & SATELLITE/U.S.

45 ILIAD

48.49

ALTERNATIVE CARRIERS/FRA

THE SEEDS OF DYSON’S determination and

resilience were planted on the shores of Norfolk in northeast England, where he grew up the youngest of three siblings.

His father taught classics at Gresham’s, an elite boarding school founded in 1555; his 108 | FORBES

SEPTEMBER 13, 2016

46 MAGNIT BEANS AND BREAD Offerings from Starbucks’ new partner, Princi, an artisanal Italian bakery, will be available at the coffee chain next year.

RETAIL/RUS

48.49

FROM TOP: RAMON ESPINOSA/AP; LEIGH VOGEL/GETTY IMAGES; FAISAL AL NASSER/REUTERS/ALAMY; ANDREW AITCHISON/ALAMY

lars to develop at least 100 new products by 2020, nearly double what it now has on the market and equivalent to the number of products introduced since its founding. “We are reinventing ourselves all the time,” Dyson says. “We’re battling against the status quo. We still feel small, agile, pioneering.”

While Dyson is mum on specifics, he reveals that many of the new products will be related to personal care or lighting. The lighting systems are the brainchild of his eldest son and heir apparent, Jake, 46, who spent two years at Dyson before leaving in 2002 to start his own business selling selfcooling LED light fixtures. “I wanted to go out and do my own thing and prove to myself I could do this,” says Jake, who returned in April, bringing his LED technology and ideas with him.

But Dyson’s biggest bet is on batteries. In his view the current rechargeable lithium-ion (li-ion) batteries that power most of the world’s gadgets (including his own) don’t hold a charge long enough and need to be safer (they occasionally catch fire). True to his nature, rather than incrementally improve existing li-ion technology Dyson is forging a new path: experimenting with solid-state li-ion batteries that use ceramics. To this end Dyson made the first acquisition in the company’s history in October 2015, spending $90 million for Sakti3, a battery startup in Ann Arbor, Mich. And that’s just the beginning. Dyson vows to spend $1.4 billion building a battery factory and investing in R&D over the next five years, a huge gamble for a company its size. But Dyson is undeterred, claiming that soon it will be making the world’s longest-lasting, most reliable batteries, taking dead aim at the global li-ion battery market, which research firm Lux estimates at $40 billion. “Batteries are quite exciting and sexy things,” Dyson says.

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“The more uncertain things are, the more fearful markets become—the stronger gold performs.”

PHILIP N. DIEHL President of U.S. Money Reserve

WYLZZ\YL [V YLK\JL [OL PUÅ\LUJL VM IHURLYZ VU [OL Federal Open Market Committee of the Federal Reserve. The bankers generally support higher rates. Interest rates are already near zero and likely to stay very low for the foreseeable future. Gold thrives in that environment.”

THE ELECTION YEAR

Outlook for Gold

By Michael Roney

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ncertainty usually creates a troublesome environment for global markets. In 2016, the transactional angst stirred by terrorism and faltering economies has been augmented by another event that occurs only once every four years: the U.S. presidential election.

Gold traditionally has served as a reliable store of value in times like these. “The more uncertain things are, the more fearful markets become—the stronger gold performs,” says Philip N. Diehl, former director of the U.S. Mint and current president of U.S. Money Reserve, one of the nation’s largest distributors of precious metals.

Diehl has over 20 years of insider expertise on how economic and monetary policy and politics move THYRL[Z VќLYPUN H ZLHZVULK WLYZWLJ[P]L HNHPUZ[ an election-year backdrop. He recently weighed in on how the major presidential candidates’ monetary HUK ÄZJHS Z[HUJLZ JV\SK HќLJ[ [OL NVSK THYRL[

Monetary Policy Diehl believes that the election of either Donald Trump or Hillary Clinton would support gold prices, but for different reasons. “I don’t think anybody knows what Trump’s monetary policies would be, and markets hate uncertainty, which favors gold,” he notes.

“Clinton is likely to align herself with ‘monetary doves’ like Federal Reserve Chair Janet Yellen, who favor low interest rates. We might also see

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Fiscal Policy “Fiscal policy making has been off the table over the last eight years—except for a short period at the beginning of the Obama administration when the stimulus package was enacted,” Diehl says.

However, based on campaign rhetoric, he predicts that a new administration, whether led by Trump or Clinton, is likely to be more proactive. “New spendPUN VY TVYL [H_ J\[Z ^PSS TLHU HU PUJYLHZL PU KLÄJP[ ZWLUKPUN ;OH[ ^PSS PUJYLHZL JVUJLYUZ HIV\[ PUÅHtion, which reinforces demand for gold,” he points out. “Traditional gold buyers tend to be conservative HUK ZLUZP[P]L [V PUÅH[PVU MLHYZ ZV [OL`»SS YLHJ[ ¹

Post-Election Economics Diehl says that there are two scenarios for a positive gold outlook after Election Day on November 8.

“There’s so much uncertainty about what Trump’s policies will be, and even who he’s going to turn to for advice. If he’s elected, I think it will roil markets all over the world, and that supports gold prices,” he explains.

“If Clinton is elected, there will be more certainty about which direction she’ll go, but you’ll have economic, monetary and regulatory policies that many in the business community won’t like. That could also support gold, but without as much of the turmoil.”

A Unique Opportunity 0[»Z JSLHY [OH[ [OPZ LSLJ[PVU `LHY VќLYZ IV[O YPZRZ HUK opportunity for wealth preservation. Amidst the uncertainties of 2016 and beyond, anyone looking [V OLKNL HNHPUZ[ WV[LU[PHS PUÅH[PVU ZHMLN\HYK HZZL[Z from stock market volatility, protect against further declines in the value of the U.S. dollar or simply add H Z[HIPSPaPUN LSLTLU[ [V H ÄUHUJPHS WVY[MVSPV ZOV\SK view gold as an essential purchase.

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DY S O N

mother, who dropped out of school at age 17 to join Bomber Command during World War II, raised the kids. His father died of cancer when Dyson was 9. After the loss Dyson began pushing himself. He took up the bassoon despite hearing it was the most difficult instrument in the orchestra to learn. At 14 he started running competitively, often waking up at 6 a.m. to train, sprinting up sand dunes (better for resistance training, he learned). In the evening he would typically run for another two hours until after midnight.

It was the one thing that came easily to him in those days.

“Suddenly I had something in which I could kick people’s asses occasionally,” writes Dyson in his 1997 autobiography.

A self-described poor student, he went to the Byam Shaw School of Art in London, where he met his wife,

Deirdre. He later gained entrance to a graduate program at the Royal College of Art even though he never completed his undergraduate degree. While in school, Dyson developed an offbeat design for an aluminum roof. That led to a meeting with Jeremy Fry, a well-regarded inventor who had installed a similar roof. The two hit it off, and Fry eventually offered Dyson his first full-time job at his manufacturing company, Rotork. Dyson helped design the company’s first sea trucks, essentially high-speed cargo boats, and peddled them to armies around the world, including Egypt’s, which used them to fight Israel during the 1973 Yom Kippur War. When Dyson wasn’t at Rotork, he spent time fixing up his 300-year-old farmhouse near Bath. It was hauling ce-

BLANK SLATES. Inside Dyson’s labs engineers try, try and try—a thousand times if necessary. Clockwise from top left: a chamber for acoustic testing to make sure the products are quiet; an engineer fiddles with a model of the impeller used in Dyson’s motors; human hair blown out by the Supersonic dryer is ready for inspection; the motor development team simultaneously tests 332 motors.

112 | FORBES

SEPTEMBER 13, 2016

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THINK, TEST, TINKER, TRY

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T H E T O P 1OO

ment during that renovation that inspired one of his earliest trademark build-a-better-mousetrap ideas: a modernized wheelbarrow. His version used a ball instead of a wheel because it distributed the weight more evenly and didn’t get stuck in mud.

In 1974 he quit his job and started making Ballbarrows with bank loans and help from his brother-in-law, who had recently inherited money. Two years later, with interest rates sky-high and debt of more than $270,000, they sold a 33% stake to an investor. In 1979 Dyson was forced out, in part because he wanted to extend the loans to fund more inventions while the others wanted to pay down the debt.

Still, that first startup gave Dyson a tremendous gift. Colored powder sprayed on the Ballbarrows (even then he loved making his tools pop) collected on the factory equipment. Just before he was kicked out, he had an idea to suck up the annoy-

RANK

COMPANY

INDUSTRY / COUNTRY

INNOVATION PREMIUM

47 AUTODESK

48.10

APPLICATION SOFTWARE/U.S.

48 TENCENT HOLDINGS

47.97

INTERNET SOFTWARE & SERVICES/CHN

49 SHANGHAI ORIENTAL PEARL MEDIA

47.84

CABLE & SATELLITE/CHN

50 LINDT & SPRUENGLI

47.82

PACKAGED FOODS & MEATS/SWI

51 RECKITT BENCKISER GROUP VIEW FROM THE TOP Shanghai Oriental Pearl Media’s 1,500-foot tower houses the city’s history museum as well as a hotel, a rotating restaurant and an observation deck from which the Yangtze River, 50 miles to the north, can be glimpsed on a clear day.

We need to talk.

I think it’s time we go our separate ways.

47.75

HOUSEHOLD PRODUCTS/U.K.

52 CIELO DATA PROCESSING & OUTSOURCED SERVICES/BRA

I want to change and adapt. I want my business to go places.

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Open up a world of possibilities. With Workday, your team gains the insights they need to make better decisions and create new growth opportunities. It’s the perfect match for your business and the only system with a 98% customer satisfaction rating.

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47.72

LI JINGWANG/GETTY IMAGES

DY S O N

53 CTRIP.COM

47.68

INTERNET RETAIL/CHN

54 MEAD JOHNSON NUTRITION

47.49

PACKAGED FOODS & MEATS/U.S.

55 SHIMANO

47.10

WHEELS AND REELS Shimano makes high-end bicycle parts as well as fishing gear.

LEISURE PRODUCTS/JPN

56 KONE

46.95

INDUSTRIAL MACHINERY/FIN

57 DASSAULT SYSTEMES

46.93

APPLICATION SOFTWARE/FRA ANDREW PATERSON/ALAMY (TOP); LENSCAP/ALAMY

58 EXPEDIA

46.72

INTERNET RETAIL/U.S.

59 PROSIEBENSAT.1

AGING ALCHEMY An essential element for fine bourbon: the barrel in which it ages. So BrownForman has fittingly named its first new bourbon brand in 20 years, Coopers’ Craft.

46.10

BROADCASTING/GER

60 BROWN-FORMAN

45.70

DISTILLERS & VINTNERS/U.S.

ing dust by installing a handmade industrial fan with a rapid spinning mechanism on the factory’s ceiling. Around the same time he was battling his family’s refurbished Hoover vacuum (he couldn’t afford a new one). It would give out as the bag filled up.

On a Sunday in October 1978, after watching the movements of the factory’s cyclone-inspired contraption, Dyson rushed home and tore the bag off his vacuum. He replaced it with a cardboard version of what he’d made in the factory. It worked well enough to spur Dyson to try and create a mass-market version.

He and his mentor, Jeremy Fry, each put up $53,000 initially. And for the next five years, while he spent thousands of hours (and dollars) making those famous 5,127 prototypes, his artist wife kept the family afloat by selling illustrations to British Vogue and teaching still-life classes.

When it was finally done, in 1983, Dyson’s bagless vacuum was so powerful

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DY S O N

that its inner-cyclone mechanism separated air and dust at a speed of 924mph and could pull cigarette smoke from the air. To pay off the debts, he decided to license the technology. It took another two years to sign his first big customer. Apex, a Japanese company, agreed to pay him $78,000 up front and a 10% royalty for the development of its $1,800 G-Force vacuum. Things didn’t go so well in the U.S., where initial licensing agreements unraveled and led to a tangle of lawsuits.

After all the hassle Dyson was itching to introduce his own brand. Using cash that came mostly from the Japanese deal and a $1 million bank loan, he rolled out the iconic yellow-and-silver Dyson Dual Cyclone in

1993. Despite a hefty price tag of $300, twice as expensive as the competition, it was a hit, becoming Britain’s bestselling vacuum cleaner and sucking in a total of $1.6 billion in sales through 1997. Around this time Dyson hired Martin McCourt, who’d worked at Duracell and Toshiba, as finance director. McCourt was promoted to CEO in 2001. Eleven years later current CEO Max Conze, a 17-year veteran of Procter & Gamble, took the job of running the company on a day-to-day basis.

LIBERATED FROM THE NITTY-GRITTY, Dyson refocused on

inventing. In 1998 he recruited five Ph.D. students from the University of Kent and tasked them with build-

A DYSON FOR EVERY ROOM

CSYS TASK LIGHTS. Brainchild of Dyson’s son Jake, the LED lights are cooler than others and are supposed to last 144,000 hours.

360 EYE. Dyson says its new robotic vacuum has twice the suction of any rival.

DUAL CYCLONE. Dyson’s original bagless vacuum, first sold in 1993, became a huge hit.

116 | FORBES

TOWER FAN. Bladeless fan is supposed to be 60% quieter than past models and use 10% less power.

SEPTEMBER 13, 2016

V8. Dyson’s new $600 cordless vacuum has twice the battery life of its predecessor.

SUPERSONIC. With tiny motor at hair dryer’s end, air flows through top, reducing heat damage.

THE ANIMAL. Asthma- and allergy-friendly, it has an optional tool to remove allergens from a mattress.

Enough speed for a stadium full of selfies.

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T H E T O P 1OO

ing Dyson’s first robotic vacuum cleaner. Once again he spent years and went through 1,000 prototypes before he was satisfied. He scrapped the first model because of technology hurdles and high costs. “We’re never afraid to sort of take that step back and go, ‘It’s not right. We don’t launch it,’ ” says Mike Aldred, Dyson’s lead robotics engineer.

The quest for perfection might be Dyson’s biggest strength and his greatest weakness. iRobot beat Dyson to market by 14 years, introducing the first robotic vacuum cleaner in 2002.

Last year iRobot sold about 2 million of them, according to Euromonitor, for between $375 and $900. Dyson’s robotic vacuum, dubbed the 360 Eye, was finally unveiled in the U.S. this past summer. Priced at $1,000, it combines 360-degree vision with a proprietary navigation system that helps it better maneuver around dining room chairs

RANK

COMPANY

INDUSTRY / COUNTRY

INNOVATION PREMIUM

61 SBA COMMUNICATIONS EYEING BETTER PROTECTION Essilor’s new Smart Blue Filter is a colorless lens that shields your eyes from the damaging blue light generated by computer and smartphone screens.

45.28

INTEGRATED TELECOMMUNICATION SERVICES/U.S.

62 ESSILOR

45.16

HEALTH CARE SUPPLIES/FRA

63 ALLERGAN

44.94

PHARMACEUTICALS/U.S.

64 KEYENCE

44.90

ELECTRONIC EQUIPMENT & INSTRUMENTS/JPN

65 ORIENTAL LAND CO. A BIG COMPANY, AFTER ALL The Oriental Land Company owns and runs Tokyo Disneyland and marine-themed Tokyo DisneySea, licensing the name from the Walt Disney Co. Each year the parks draw more than 31 million visitors.

LEISURE FACILITIES/JPN

44.24

ESSILOR: DPA/ALAMY; ORIENTAL LAND: YOSHIKAZU TSUNO/AFP/GETTY IMAGES

DY S O N

Old Dominion’s focus on premium service means every item arrives with one of the lowest claims ratios and one of the best on-time records in the industry.

Old Dominion Freight Line, the Old Dominion logo, OD Household Services and Helping The World Keep Promises are service marks or registered service marks of Old Dominion Freight Line, Inc. All other trademarks and service marks identified herein are the intellectual property of their respective owners. © 2016 Old Dominion Freight Line, Inc., Thomasville, N.C. All rights reserved.

66 TATA CONSULTANCY SERVICES

44.09

IT CONSULTING & OTHER SERVICES/IND

67 INTUITIVE SURGICAL

43.85

HEALTH CARE EQUIPMENT/U.S.

68 FASTENAL

43.26

TRADING COMPANIES & DISTRIBUTORS/U.S.

69 ROPER TECHNOLOGIES

43.23

INDUSTRIAL CONGLOMERATES/U.S.

ADVERTISING ARCHIVE/EVERETT COLLECTION

70 SMITH & NEPHEW

43.20

HEALTH CARE EQUIPMENT/U.K.

71 EXPERIAN

43.05

RESEARCH & CONSULTING SERVICES/U.K.

72 COLGATE-PALMOLIVE

19TH-CENTURY DISRUPTORS Colgate’s ubiquitous toothpaste was sold in a jar throughout the late 1800s until the company introduced the collapsible tube in 1896.

42.96

HOUSEHOLD PRODUCTS/U.S.

OD Domestic offers:

• More than 220 service centers nationwide • Competitive transit times and pricing • Proactive shipping solutions

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and under beds. The company refused to comment on how many it’s sold.

Dyson’s passion for invention is embodied in those yellow-and-black notebooks—each stamped “Confidential”— that his engineers carry around. In them they are expected to write down every idea they come up with, from how to smooth hair faster to ways to tweak the battery-operated vacuums. When the books are filled, they’re stored in a vault that engineers can access if they want information or ideas from a past entry.

But crucially the journals are often used as the primary evidence for Dyson’s patent applications and frequent lawsuits.

The company spends about $6.5 million a year on patent litigation. While many cases are settled out of court for undisclosed sums, it’s public knowledge that Hoover agreed to pay Dyson more than $6 million in 2002 for patent infringement of its cyclone technology.

T H E T O P 1OO

DY S O N

And lest anyone dismiss Dyson as a dreamy-eyed tinkerer, it’s clear he knows how to play politics. The man who owns approximately 7,500 global patents was instrumental in getting the U.K. to revise its tax laws to favor patent holders. Dyson, whose holding company had been registered in Malta, a tax haven, penned a 2010 report, titled “Ingenious Britain,” at the behest of soonto-be prime minister David Cameron on how to make the country a leading tech exporter. In it he supported the socalled “patent box,” which would reduce income taxes on patented products to 10%, and incentives for research and development. The patent box became effective in April 2013. One month earlier Dyson had incorporated his holding company in the U.K. to take full advantage of the new laws. Since then the company’s taxes as a percentage of revenue have dropped by a fourth. “As a result we can reinvest more, so it’s helping us,” Dyson says.

RANK

COMPANY

INDUSTRY / COUNTRY

INNOVATION PREMIUM

73 SUN PHARMACEUTICAL INDUSTRIES

42.82

PHARMACEUTICALS/IND

74 ACUITY BRANDS HIGHER FLIERS Ray-Ban, Luxottica’s now legendary brand, launched in the 1930s with green lenses that helped U.S. Air Force pilots fight headaches and altitude sickness.

42.49

ELECTRICAL COMPONENTS & EQUIPMENT/U.S.

75 MOLSON COORS BREWING COMPANY

42.43

BREWER/U.S.

76 FANUC

42.18

INDUSTRIAL MACHINERY/JPN

77 INDITEX

42.06

APPAREL RETAIL/SPA

78 LUXOTTICA GROUP

42.06

APPAREL, ACCESSORIES & LUXURY GOODS/ITA

79 SABMILLER

42.03

BREWER/U.K.

120 | FORBES

SEPTEMBER 13, 2016

80 BARD

42.03

HEALTH CARE EQUIPMENT/U.S. MOST IMPORTANT MEAL OF THE DAY After releasing glutenfree Cheerios last year, General Mills is adding a pumpkin-spice spin on the beloved brand.

81 GENERAL MILLS

41.97

PACKAGED FOODS & MEATS/U.S.

82 NOVOZYMES

41.61

SPECIALTY CHEMICALS/DNK

83 EDWARDS LIFESCIENCES

41.30

HEALTH CARE EQUIPMENT/U.S.

84 EQUIFAX

40.92

RESEARCH & CONSULTING SERVICES/U.S.

85 GEBERIT

40.71

BUILDING PRODUCTS/SWI

FIXING A BROKEN HEART By replacing a valve that deteriorates in more than 2 million elderly Americans, Edwards’ transcatheter aortic heart valve keeps the body’s most crucial organ from missing a beat.

EDWARDS: TIM RUE/CORBIS/GETTY IMAGES

BATTERIES HAVE BECOME something of an obsession for Dyson, who envisions a “huge number of product opportunities” that come from marrying better batteries with his products. To make his point, Dyson jumps up from his desk in Malmesbury, grabs a red-and-purple cordless vacuum cleaner from atop a couch and runs it along the floor to show how much easier it is than a standard plug-in. Battery-powered vacuums now make up two-thirds of the 9 million his firm sells annually. “It’s really taken over, and I think it will continue,” Dyson says. “But we need to have better battery technology.” Dyson’s wireless vacuums can run for only about 40 minutes before needing a recharge, which can take up to three and a half hours.

That’s what led Dyson to pay $90 million to buy the promising battery startup Sakti3. The firm had developed, in a small lab setting, solid-state battery-cell prototypes that use a ceramic wafer on which stacks of film are deposited instead of the liquid electrolyte in con-

Capital Creates 23.2 Trillion Steps That’s how many steps Fitbit’s millions of users have ¾«μ¯¸ ½³¸­¯ ¾²¯ ¶«¿¸­² ¹° ¾²¯ ­¹·º«¸Ãʤ½ Ǥ¼½¾ ¾¼«­μ¯¼ʧ ³¾¬³¾ ­«¸ ²¯¶º ³¾½ ¿½¯¼½ ½¾«Ã ¹¸ ¾¹º ¹° ¾²¯³¼ Ǥ¾¸¯½½ ±¹«¶½ʧ ¸® ¾²¯ ­¹·º«¸Ã μ¸¹Á½ ¾²«¾ ¾¼«­μ³¸± º²Ã½³­«¶ activity can motivate its users to do more of it. When ¾²¯ ­¹·º«¸Ã «½μ¯® ¹¼±«¸ ¾«¸¶¯Ã ¾¹ ²¯¶º ³¾ ±¹ º¿¬¶³­ʦ Á¯ Á¯¼¯ º¶¯«½¯® ¾¹ ¶¯«® ³¾¬³¾ʤ½ ʦ ¼«³½³¸± ·¹¼¯ ¾²«¸ ·³¶¶³¹¸ʧ ²¯ ­¹·º«¸Ã ³½ ¸¹Á ¯Âº«¸®³¸± ³¾½ ¼¯«­² «¬¼¹«® «¸® ­¹¸¾³¸¿³¸± ¾¹ ®¯À¯¶¹º ³¸¸¹À«¾³À¯ º¼¹®¿­¾½ ¾²«¾ ²¯¶º ·«μ¯ Ǥ¾¸¯½½ ·¹¼¯ °¿¸ʧ ¯«®Ã ¾¹ ¾«μ¯ ¾²¯ ¸¯Â¾ ½¾¯º$ ¹ «¼¯ Á¯ʧ «º³¾«¶ ­¼¯«¾¯½ ­²«¸±¯ʧ ·¹¼±«¸½¾«¸¶¯Ãʧ­¹·ʵǤ¾¬³¾

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ventional batteries, making them much safer. Solid-state can also store over 30% more energy for the same volume or over 50% more for the same mass, according to one of Sakti3’s patent applications, which means products could be smaller and lighter than they are with today’s most advanced liquid lithiumion batteries. Sakti3 claims these batteries will last twice as long as anything else currently on the market and need far less time to recharge.

Dyson is one of several companies, including Toyota, Nissan and Bosch, that are betting on solid-state batteries to replace current rechargeable batteries, though many are focused just on automotive applications. But if Dyson can scale up this battery production for use in household products, let alone cars down the road, it will be “groundbreaking,” says Daniel Abraham, a battery expert at Argonne National Laboratory in Illinois.

But Tesla’s high-profile founder, Elon Musk, who is spending billions to improve the current liquid lithium-ion batteries, doesn’t seem to agree. At a recent press conference he said he’s not too worried about solid-state, at least when it comes to cars: “From when it works in the lab to when you actually get to high volume is at least four to five years. We don’t know of anything even in the lab that would be better than what we are doing here.”

Perhaps the biggest obstacle is the exorbitant cost. At the moment it would cost at least $2,000 to make one solidstate battery to power a cordless vacuum, according to several battery experts. Dyson claims it can reduce these costs drastically and manufacture these batteries economically in the not-so-distant future. Others aren’t so sure. “We don’t see solid-state batteries being competitive for at least another decade,” says Chris Robinson, research associate at Lux Research, who tracks solid-state battery developments.

But don’t tell that to a true Dyson disciple. Says Bruce Brenner, Dyson’s director of energy-storage development, “We are spurred on by the impossible.” F 122 | FORBES

SEPTEMBER 13, 2016

RANK

COMPANY

INDUSTRY / COUNTRY

INNOVATION PREMIUM

86 CAPITA

40.40

HUMAN RESOURCE & EMPLOYMENT SERVICES/U.K.

87 FALABELLA

40.38

DEPARTMENT STORES/CHL

88 LIBERTY GLOBAL

40.18

CABLE & SATELLITE/U.K. MI CASA, SU CASA Retail giant Falabella is betting on Mexico, funneling $600 million over the next five years toward opening home-improvement stores.

89 LARSEN & TOUBRO

40.00

CONSTRUCTION & ENGINEERING/IND

90 ASSA ABLOY

39.85

BUILDING PRODUCTS/SWE

91 HANGZHOU HIKVISION DIGITAL TECHNOLOGY

39.75

ELECTRONIC EQUIPMENT & INSTRUMENTS/CHN

92 CONSTELLATION BRANDS 39.74 DISTILLERS & VINTNERS/U.S.

93 COCA-COLA CO.

39.70

SOFT DRINKS/U.S.

BOTTOMS UP Liquor giant Constellation Brands bought San Diego-based Ballast Point for $1 billion last November. Its beer is America’s fastest-growing craft brew.

94 OMNICOM GROUP

39.67

ADVERTISING/U.S.

95 PAYCHEX

39.49

DATA PROCESSING & OUTSOURCED SERVICES/U.S.

96 STARWOOD HOTELS & RESORTS WORLDWIDE

39.47

HOTELS, RESORTS & CRUISE LINES/U.S.

97 ITV

39.38

BROADCASTING/U.K.

98 CHURCH & DWIGHT

39.33

HOUSEHOLD PRODUCTS/U.S.

99 GRIFOLS

39.04

BIOTECHNOLOGY/SPA PLENTY OF PILLOW MINTS Marriott won a bidding war to acquire Starwood in March, paying $13.6 billion for the hotel group.

100 AVIC AVIATION ENGINE CORP. AEROSPACE & DEFENSE/CHN

39.04

FALABELLA: ALBERTO ORBEGOSO/EL COMERCIO DE PERU/NEWSCOM; CONSTELLATION: K.C. ALFRED/ZUMA PRESS/NEWSCOM

DY S O N

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morganstanley.com/unexpected

TIMOTHY ARCHIBALD FOR FORBES

FRANCHISES

126 | FORBES

SEPTEMBER 13, 2016

I THE SUPER SIZER

Greg Flynn, a Tesla-driving West Coast dealmaker, isn’t the kind of guy you’d expect to be running a bunch of Applebee’s and Taco Bells. But using plenty of patience, persistence and institutional capital, he’s built America’s largest franchise restaurant empire—and made a lot of money.

CREDIT RIGHT

BY AMY FELDMAN

n 1997 Greg Flynn, an overeducated 33-year-old commercial real estate investor based in San Francisco, got a phone call from his father. Donald Flynn was on the Greek island of Corfu and had decided to buy a villa, a fixer-upper. He needed his son to send him $2 million ASAP. The elder Flynn, a lawyer, had been funding a retirement of world travel out of the cash thrown off by two Burger Kings he owned in San Francisco. Greg kept an eye on them while his father gallivanted. One was a gold mine, a drive-through on busy Van Ness Avenue that generated $2.5 million in annual sales. “That one restaurant paid for the rest of his life,” Flynn says. Including the villa. At the time financial firms were happy to give successful franchisees loans against their receivables.

Flynn quickly got $2 million at a then-low 8% and sent the money to Greece.

Flynn had known there was money in franchising, but until his dad’s Corfu purchase he hadn’t realized how much. Now 51, he says, “It’s one of the things that opened my eyes to the opportunity.” Since then, with backing first from Goldman Sachs and then from the Ontario Teachers’ Pension Plan, he’s built Flynn Restaurant Group into the U.S.’ largest restaurant franchisee. The company owns 800 Applebee’s, Taco Bell and Panera Bread outlets and expects revenue of $1.9 billion this year.

FORBES estimates the company is worth about $1.5 billion and that Flynn’s stake is worth roughly $200 million.

Flynn hasn’t just made money; he’s changed the structure of the franchise industry. While franchisees have traditionally been small, local operators, Flynn created the mold for a new class of giant, well-funded players who are determined to remain private. According to the trade publication Franchise Times, ten U.S. restaurant franchisees topped $500 million in revenue last year (see box, p. 128). Flynn was the first of this class. His company is backed by big institutional money, a development that initially frightened Applebee’s. Before Flynn the chain had scores of franchisees and owned and operated hundreds of locations itself. Now the company—and many others in the industry— has embraced an asset-light model in which it owns no locations and has just 31 franchisees SEPTEMBER 13, 2016 FORBES | 127

GREG FLYNN

AMERICA’S BIGGEST RESTAURANT FRANCHISEES

1

2

3

4

5

FLYNN RESTAURANT GROUP SAN FRANCISCO

NPC INTERNATIONAL OVERLAND PARK, KANS.

DHANANI GROUP SUGAR LAND, TEX.

MANNA LOUISVILLE, KY.

PIZZA HUT, WENDY’S

BURGER KING, POPEYES

CARROLS RESTAURANT GROUP SYRACUSE, N.Y.

REVENUES: $1,900 MIL GREG FLYNN STARTED BUYING APPLEBEE’S OUTLETS ALMOST 20 YEARS AGO. LATER, HE GOT BACKING FROM GOLDMAN SACHS. NOW HIS BIGGEST INVESTOR IS THE ONTARIO TEACHERS’ PENSION PLAN.

$1,223 MIL

$871 MIL

STARTED IN 1962 BY INSURANCE SALESMAN TURNED PIZZA HUT OWNER GENE BICKNELL, NPC IS NOW THE WORLD’S LARGEST PIZZA HUT FRANCHISEE AND IS CONTROLLED

BY OLYMPUS PARTNERS.

SHOUKAT DHANANI, WHO STARTED OUT RUNNING CONVENIENCE STORES, HAS A HISTORY OF TURNING AROUND STRUGGLING RESTAURANTS AND HAS BEEN EXPANDING RAPIDLY SINCE 2010.

BURGER KING $859 MIL HERBERT SLOTNICK STARTED CARROLS IN 1960 AS A NEW YORK LICENSEE OF CARROLS DRIVE-IN RESTAURANTS. TODAY IT OWNS MORE THAN 700 BURGER KINGS.

WENDY’S, CHILI’S $814 MIL RETIRED BASKETBALL PLAYER ULYSSES “JUNIOR” BRIDGEMAN MADE A FORTUNE AS A FAST-FOOD FRANCHISEE, PUTTING HIM ON FORBES’ LIST OF HIGHEST-PAID RETIRED ATHLETES. IN APRIL COCA-COLA ANNOUNCED THAT BRIDGEMAN WOULD BECOME A COKE BOTTLER.

6

7

8

9

10

SUMMIT RESTAURANT GROUP RICHARDSON, TEX.

MUY! COS. SAN ANTONIO, TEX.

COVELLI ENTERPRISES WARREN, OHIO

YADAV ENTERPRISES FREMONT, CALIF.

SUN HOLDINGS DALLAS

PIZZA HUT, WENDY’S

PANERA BREAD, DAIRY QUEEN

JACK IN THE BOX, T.G.I. FRIDAY’S

BURGER KING, POPEYES

$624 MIL ALBERT COVELLI BECAME A MCDONALD’S FRANCHISEE IN 1959; TODAY HIS SON SAM RUNS THE FAMILY BUSINESS, WHICH HAS SWAPPED OUT MCDONALD’S FOR PANERA AND DQ.

$602 MIL

FOUNDER AND CEO GUILLERMO PERALES, A MEXICAN IMMIGRANT WHO STARTED WITH A SINGLE GOLDEN CORRAL LOCATION IN 1997, BUILT SUN HOLDINGS INTO THE LARGEST LATINO-OWNED FRANCHISE OPERATOR IN THE U.S.

IHOP, APPLEBEE’S $631 MIL $756 MIL THE LARGEST IHOP FRANCHISEE, SUMMIT RESTAURANT GROUP IS CONTROLLED BY ARGONNE CAPITAL.

MUY! COS. IS THE LARGEST MANAGEMENT-OWNED FRANCHISEE IN THE U.S. AND A MAJOR YUM BRANDS OPERATOR.

FOUNDER ANIL YADAV WAS ONCE A TEENAGE FRY COOK AT JACK IN THE BOX. NOW YADAV ENTERPRISES IS A MAJOR FRANCHISEE OF THE CHAIN.

$559 MIL

RANKINGS AND REVENUES FROM FRANCHISE TIMES 200; REVENUES AS OF DEC. 31, 2015. SOURCES: FRANCHISE TIMES; FORBES RESEARCH.

running its 1,873 U.S. restaurants. Flynn is by far the largest, and although at first the company did not want Flynn, Applebee’s has come to rely on him. During the recession, when Applebee’s needed a big buyer to take a lot of locations off its hands, Flynn was the only candidate.

Operators like Flynn have the scale and capital to control 128 | FORBES

SEPTEMBER 13, 2016

their own destiny in ways little guys can’t. After the financial crisis, for instance, Applebee’s shelved a planned redesign.

Flynn, along with another big franchisee, had the resources to go ahead with it anyway.

Flynn owns more than 25% of the chain’s U.S. restaurants and has a seat on its franchise business council, giving him a

WENDY’S: AP; CHILI’S: JOHN CROWE/ALAMY; PIZZA HUT: BRENT LEWIS/THE DENVER POST/GETTY IMAGES; DAIRY QUEEN: ANDREW BURTON/GETTY IMAGES; BURGER KING (YOP): ERKAN MEHMET/ALAMY

APPLEBEE’S, TACO BELL, PANERA BREAD

GREG FLYNN voice in operational decisions. He’s a schmoozer and salesman who can talk to anybody. Confrontation is not his style.

“I have a strict policy that we will never fight with a franchisor. I will get out of a system before I fight with them,” he says. “We have a symbiotic relationship.”

Persistence and persuasion are keys to his success. He’s also an astute operator who gives his managers the leeway and funds to run their restaurants. At Flynn-owned Applebee’s, for instance, torn seats get fixed and extra bartenders get hired fast. Small improvements spread over 480 restaurants can generate significant revenue. Had you invested in Flynn Restaurant Group when Goldman Sachs did in 2001 and held, your money would have increased 26 times. Over the same period the S&P 500 has not quite doubled.

started law school at NYU, Flynn postponed admission to the Stanford M.B.A. program and spent a year earning a master’s in American history at Yale. After that he did a brief stint at Goldman Sachs and the couple moved west. Flynn received his M.B.A. from Stanford in 1994, then raised $1.5 million for a real estate fund based in San Francisco. Today Flynn Properties—which, like Flynn Restaurant Group, is part of Flynn Holdings—is on its 18th fund. Flynn says 11 of those funds have been fully realized and have given investors an average annualized return of 31.8% after fees.

Flynn views his real estate business, which focuses on large office buildings in San Francisco and Seattle, as a trading operation. With West Coast prices sky-high, Flynn has mostly cashed out, just as he did in 2007. In real estate, he says, “we are market timers. We buy at what we think Hoping to jazz up its aging brand, Applebee’s has been trying out GREG FLYNN cannot keep is the foot of the cycle, and a new, hipper look at a location Greg Flynn owns in Pooler, Ga. still. I met him at his airy then we just get out of the corner office, decorated with African and Asian masks along business for a while.” The restaurant and real estate businesswith plaques commemorating deals, on the 18th floor of the es are separate. With the restaurants, Flynn generally leases historic Standard Oil Building in downtown San Francisco, a the property. property he has bought and sold twice. The day before, he’d In early 1999 Flynn bought his first Applebee’s locations. run San Francisco’s annual 12-kilometer Bay to Breakers The economy was booming and so was casual dining. Flynn race, even though he was recovering from a broken shoulder found eight outlets in the Seattle area, cold-called the owner suffered while mountain biking. (While many entrants make and struck a deal to buy them for $14 million, borrowing $12.8 the run in costume or in the nude, Flynn did it in regular million. From the start he was thinking big. That same year running gear.) Wiry and intense, he fixes a listener with his he met Julia Stewart, then head of Applebee’s U.S. operations bright blue eyes and speaks rapidly in a level tone, frequently and now CEO of the chain’s corporate parent, DineEquity, in emphasizing a point with his hands. Ask him something he Glendale, Calif. “I remember him even then saying, ‘I intend can’t answer and he immediately jumps up to find the details to be your number one franchisee,’ ” she says. Two years later on his computer.

Flynn doubled down, purchasing another 62 units from the Flynn grew up in Ross, Calif., a small Marin County town, same owner for $48 million. Flynn used his Goldman Sachs the youngest of three children and the only boy. His mother, connections to persuade the firm’s private equity arm to put Roberta, was a homemaker and science fiction writer (part up $40 million. of her “Catscape” trilogy was published in the magazine Corporate Applebee’s was not happy. The last thing Lloyd Amazing Stories) who as a young copywriter in her father’s Hill, then the company’s chairman, wanted was a franchiad firm had written a Dr Pepper commercial featuring a see with big ambitions. Hill, who retired from Applebee’s then-unknown Johnny Carson. His father, Donald, was a in 2006, was smarting from a power struggle with publicly prominent tax lawyer who got into fast food largely because traded Apple South, which had been its largest franchisee he couldn’t stand to be shown up by his formerly underbefore selling its restaurants in 1998. “We were not interested achieving brother Gary, who’d opened a successful McDonin going back to a situation with someone with a Goldman ald’s in the 1970s. “He was suddenly the rich guy,” Flynn Sachs connection, who could go public and be a competisays, “and my father was apoplectic.” tor to us in the public arena,” he says. Flynn recalls, “When Flynn himself hardly grew up deprived. He got a bachI went to Applebee’s for consent, Lloyd Hill paced the room elor’s degree in history from Brown, then went to work in and tore his hair out.”

First Boston’s real estate group. When his future wife, Julie, Flynn, however, turned on his sales skills, assuring Hill he 130 | FORBES

SEPTEMBER 13, 2016

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RIGHT AT HOME

BY THE NUMBERS LOCATIONS

500 IN 8 COUNTRIES

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AVERAGE NET REVENUE PER FRANCHISEE ENTITY ‡1

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AVERAGE GROSS MARGIN ‡2

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Right at Home’s Success with 8NLSN HFSHJp initiative has become a central focus in the company’s philanthropic philosophy, and the brand has been proud to welcome franchisees like the Love’s that fully embody the principles of this mission.

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‡1

Net Billing 2015 for 237 Franchisee Entities who own, collectively, 367 Franchised Businesses open 12 months or more as of December 31, 2015. 86 or 36% of these Franchisee Entities attained or surpassed the represented level of financial performance.

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Average gross margin in 2015 of 367 Franchise Businesses open 12 months for more as of December 31, 2015; 189 or 51% of these Franchise Businesses attained or surpassed the represented level of financial performance.

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GREG FLYNN

O

OO OO O O

O O O

O

O O O

O WASHINGTON O O O O O OO OOO O OO

OO OO

FLYNN BOUGHT HIS FIRST 47 PANERA LOCATIONS LATE LAST YEAR, MAINLY IN NORTHERN CALIFORNIA AND WASHINGTON.

O

O O

PANERA BREAD HAS 33 FRANCHISEES AND 2,007 TOTAL LOCATIONS.

OREGON

O

O O OO

O

NORTH DAKOTA

O MINNESOTA O O O O

IDAHO

O

O O O

SOUTH DAKOTA

O

O

O

WYOMING O O O O O OO O O OOOO OO O O O O OO O O OO OO O OOO OO O O O O OOOO O O O O

OO OO

O O O O

O

UTAH

O O O O OO O O OO O OO O O O OO OO O O O OOO OOO OO O OOO O OO

FLYNN IS THE THIRD-LARGEST TACO BELL FRANCHISEE WITH 270 LOCATIONS —JUST 5 BEHIND THE NUMBER TWO FRANCHISEE.

NEVADA

CALIFORNIA O O O O O

O Applebee's OTaco Bell OTaco Bell & Pizza Hut Express O Taco Bell & KFC O Taco Bell & Long John Silver’s O KFC O Panera

OO

COLORADO

O

OOO O O O O O OO O O O OO O O O

O

O O O

O O O ARIZONA

O

O

FLYNN’S FLAGSHIP FISHERMAN’S WHARF APPLEBEE’S IS LOCATED IN ONE OF THE FEW AREAS IN SAN FRANCISCO ZONED FOR CHAIN RESTAURANTS.

WISCONSIN O O O OO O O O O O O O O O OO O OOOOO O O O O O

MICHIGAN

O

O O

O O

O

ALABAMA O

O O

MISSISSIPPI

NORTH CAROLINA O O O O O O OO O O O OO OO O OO O OO O O SOUTH CAROLINA OO O O OO O O OO O O

O

TENNESSEE ARKANSAS

O

NEW MEXICO

O O O O OO OO OO O O OO VERMONT O O O O O O O O O HAMPSHIRE O NEW NEW YORK OO O O OOO O O OOO O O O O OOO O MASSACHUSETTS OO OO O O OO OO O OO O O CONNECTICUT OO RHODE ISLAND O

O O O O PENNSYLVANIA O O OO O O O O O OO OOO O OO O O OO O O O OO O O O OO O O O O NEW JERSEY OO OOOOO O OO OOO OO O OO OOO O OOO O O OOO OO O O O O OO O O OOOO O O O O O O O OOOO O O O O OHIO OO O O O OO O O

DELAWARE O

OO O O O ILLINOIS O OO O O O OO O O O OOO O O MARYLAND

O O O O WEST OOO OO O INDIANA O O O O O O O O VIRGINIA OO O O O O O VIRGINIA O O O OO OO O O OO O O OO O O MISSOURI OOO O O O OO KENTUCKY O O

OKLAHOMA

O

O

OO O O OOO OOO O O O O O O O O O O O O O O O O O O O O O O O O O O O O O OO O OO

O

GEORGIA O O O O O O

O

O

OO OO

LOUISIANA TEXAS

THE FLYNN EMPIRE CONSISTS OF 682 RESTAURANTS HE’S BOUGHT AND 118 HE’S BUILT.

MAINE

FLORIDA

O

FLYNN’S RESTAURANT OPERATIONS SPAN 29 STATES AND BRING IN $1.9 BILLION IN REVENUE.

FLYNN’S ACQUISITIONS HAVE BEEN OPPORTUNISTIC. WHEN HE’S IN THE MARKET, HE BUYS NO MATTER WHERE IN THE U.S. THE RESTAURANTS ARE LOCATED.

SOURCE: FLYNN RESTAURANT GROUP.

wanted to run the restaurants. “I wasn’t convinced that he could do it, but he convinced me he meant it,” Hill says. Ultimately, Applebee’s consented—cautiously—requiring Flynn to agree to buy no more than 11% of Applebee’s units.

In 2004 Flynn acquired 13 Pittsburgh restaurants that had been owned by two former Pittsburgh Steelers. Two years later on a flight home from Kansas City, where Applebee’s was then headquartered, he sat next to a woman who owned six Applebee’s in California’s Sonoma and Napa counties. By the time the plane landed, Flynn had a deal to buy them.

By 2006 Applebee’s was under pressure from activist investor Richard Breeden, former chairman of the Securities & Exchange Commission, and the company became a takeover target. Then, in 2007, just before the country plunged into recession, Julia Stewart, then CEO of pancake-house chain IHOP, who had been passed over for the top spot at Applebee’s, led a $2 billion leveraged buyout that combined IHOP and Applebee’s.

132 | FORBES

SEPTEMBER 13, 2016

As part of the deal, Stewart sold 525 company-owned Applebee’s outlets. Meanwhile, as the economy faltered, many franchisees decided they wanted out. Flynn went on an acquisition spree, snapping up restaurants cheap.

In tough times, when profits are low, restaurants are often priced according to what it would cost to build a new one. On average between 2008 and 2010 Flynn paid just $500,000 each for restaurants that would have cost about $1.8 million to build. Between 2008 and 2012 he increased his Applebee’s holdings from 142 to 438. “When the recession hit, there was one group, us, who could buy,” Flynn says. As he bought, the number of Applebee’s franchisees shrank from 43 at the end of 2007 to just 31 today, and the 11% limit was forgotten. “They realized it was ridiculous to cap this franchisee. We’re what they want. We run the restaurants really well, open new restaurants and work collaboratively on everything,” he says. “So it went from a guarded relationship to a partnership.”

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GREG FLYNN FIVE YEARS AGO Flynn began looking to diversify beyond Applebee’s. His American history master’s thesis was on someone who didn’t: John Roach, a 19th-century shipbuilder who had contracted with the U.S. Navy to build a steam-powered fleet and went broke when the government stiffed him on a big part of the bill. Surveying the landscape, he saw that Taco Bell owned the Mexican category in fast food. In fast casual—which offers fresher food without table service—he saw only two big players, Panera Bread and Chipotle, and the latter doesn’t franchise.

The Taco Bell deal came together first. A division of publicly traded Yum Brands, Taco Bell called him when it decided to sell off hundreds of company-owned restaurants in 2012. Flynn was repeatedly outbid. Then a restaurant broker told him that Southern Bells, a franchisee with 76 units in Indiana, Illinois and Kentucky and nearly $100 million in rev-

“I have a strict policy that we will never fight with a franchisor. I will get out of a system before I fight with them.

We have a symbiotic relationship.” enues, was for sale, and Flynn grabbed it for an estimated $75 million. Less than four years later Flynn Restaurant Group became the country’s third-largest Taco Bell franchisee, with 270 Taco Bell and related Yum Brands locations. Brian Niccol, chief executive of Taco Bell, says, “One of the reasons I really enjoy working with Greg is he is allocating capital to building new stores. When we have development opportunities, he has the means to do it.”

Simultaneously Flynn sought a way in to Panera, which has around 2,000 outlets and has done well at lunchtime, especially since it launched mobile and online ordering and catering.

Panera’s stores average $2.5 million in revenues, which puts them near the top of the fast-food heap. But Panera is a tightly controlled operation, and breaking into the small club of franchisees is difficult. In 2012 Flynn bid on a group of Panera outlets in North Carolina. The deal went to contract but was preempted by Panera itself, which had the right of first refusal and outbid him. He increased his bid but still lost out.

Then Panera decided to sell off some company-owned locations. As with Applebee’s before, Flynn had to first charm management. He worked his connections (a Goldman buddy had become Panera’s chief financial officer) to get a meeting with CEO Ron Shaich. In June 2014 he flew to Boston (Shaich lives in nearby Brookline, although Panera HQ is in St. Louis) to make the pitch in person. The two men spoke for more than two hours. Shaich says he was impressed by how well Flynn understood his business and by his tenacity. “For half a decade he had been trying to get into the Panera system,” Shaich says.

134 | FORBES

SEPTEMBER 13, 2016

It also helped that Flynn had recently recapitalized, and his new majority owner was the most patient of patient investors, the giant Ontario Teachers’ Pension Plan, which had bought out Goldman Sachs’ stake, investing a total of $300 million. “It was pivotal that we got rid of private equity,” Flynn says. Otherwise, he adds, “I don’t think [Shaich] would have said yes.”

Last November Flynn bought 47 Paneras, mostly in northern California and Washington State, almost all from the company, becoming the chain’s first new franchisee in almost a decade. Early this August Flynn was wrapping up another large acquisition of Panera cafes that will add more than $100 million in sales and make Flynn Restaurant Group the chain’s second-largest franchisee.

TIMES ARE tough again at Applebee’s. The brand is aging and is being squeezed between less-expensive counter-service places (Chick-fil-A, Chipotle) that have eaten its lunch business and the horde of competitors (Chili’s, Olive Garden) fighting for sit-down dollars. In the second quarter Applebee’s domestic same-restaurant sales fell 4.2% compared with the same period in 2015, the fourth consecutive quarter of increasing declines. From the time of the Applebee’s and IHOP deal through February 2015, DineEquity’s stock had roughly tripled in value to $109 (trouncing the S&P 500 index’s 48% rise during that period) but has since fallen 30%.

Hoping to reverse the sales slump, in May, at a cost of $75 million, the brand rolled out a new menu featuring steaks, chicken and fish grilled over a wood fire. It’s also rolling out a new look, adding some hipster touches to Applebee’s familyfriendly neighborhood-tavern vibe: wooden tables, exposed brick walls and interior lights spelling out the word “BAR.” Flynn tested a prototype at his location in Pooler, Ga., near Savannah. Not only does he have the cash to experiment, but DineEquity’s Stewart also trusted him to tinker with the design.

I joined Flynn for lunch on the first day of the rollout of the new menu; we drove to his location at Fisherman’s Wharf in his top-of-the-line Tesla model S P90D. Out front he greeted a guy in a bumblebee suit (Apple-BEE’s, get it?) dancing around trying to drum up business.

The location, opened in 2013, is the first and only Applebee’s in San Francisco. Flynn spent years searching for the right spot. The 12,000-square-foot, third-floor space, formerly home to a local dining institution called A. Sabella’s, has floor-to-ceiling arched windows overlooking the bay. As we ate—salmon for me, chicken and steak for him—I was surprised by how good the meal was. “The food is much, much, much better,” Flynn said, declaring the roasted zucchini and red peppers side dish better than he could cook at home.

Flynn says he doesn’t make a lot of money on the location.

So why create it? Because he wanted to make a big statement in his hometown. And because he could. “We spent millions to build it, but the rent isn’t that bad,” he says, “and the views are great.” F

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FORBES LIFE

TRAVEL

Isle of You For $10,000 a night, guests can rent Thanda Island off the coast of Tanzania and live in complete luxury—and absolute privacy.

BY ANN ABEL

Water world: The exotic rim-flow pool on Thanda Island was designed by owner Dan Olofsson, who has a degree in engineering.

I

t was Ernest Hemingway who lured Dan Olofsson to Africa. “I read all his books,” says the Swedish technology entrepreneur who heads the consultancy Sigma, and they lodged in his imagination.

So when he and his wife, Christin, decided in the early 2000s to build a winter home someplace warmer than their native Scandina-

136 | FORBES SEPTEMBER 13, 2016

via, they considered the Caribbean but eventually set their sights farther south. “There’s fantastic wildlife and nature in South Africa,” the 65-year-old Olofsson says. “You don’t have that in a lot of places.”

Their plans grew to include a guest lodge at what is now the well-regarded Thanda Safari Private Game Reserve, which opened in 2004. (“Thanda” is Zulu for “love.”) Soon after, the Olofssons set out to acquire a private-island counterpart to their safari lodge and settled on one in the Shungi Mbili Island Marine Reserve in southern Tanzania. After years of negotiation and sustainability-minded construction it was rechristened Thanda Island and welcomed its first paying guests in August.

The property, which has five bedrooms and rents in its entirety for $10,000 a night (for up to ten people), is roughly 20 acres ringed by coral reefs in protected waters that teem with sea life, including whale sharks, dolphins and five species of turtles. The closest inhabited land is Mafia Island, home to more spectacular marine life, trustworthy dive centers and traditional villages. Thanda Island’s hospitality director,

FORBES LIFE Antigone Meda, likens it to Zanzibar 30 years ago—and while Zanzibar now has 200-room hotels, Mafia has about 200 hotel rooms. (Thanda guests who don’t helicopter in from Dar es Salaam fly to Mafia, where Thanda staff greet them and ferry them over in a sleek mahogany boat that would do James Bond proud.)

The Olofssons envisioned the island as a private paradise where they could escape with their three children and eight grandchildren. But the Tanzanian government wouldn’t let them buy it unless it would contribute to tourism in the country and protect marine wildlife. The couple complied but remained committed to building a private family home.

And here they were inspired by another 20thcentury American icon.

“We were at the Kennedy compound in Hyannis Port around the Fourth of July three or four years ago,” Olofsson recalls. “Looking around, we liked the New England style. Our South African property is more Zulu style. Here we wanted something different, and we decided on New England.” The resulting house on Thanda, with its white wainscoting, peaked rooflines and pastel palette, mixes the American and the Scandinavian, with a few African flourishes like bird’s-nest lamps in the living room and colorful fabric on the chairs in the library.

The design is intentionally hard to classify. Olofsson invested millions—“Less than 10,” he clarifies, though he is unsure of the exact amount—to build something that exists in very few places in the world. That’s in addition to the island itself, with its perfect white sand and clear turquoise waters just feet away from the house.

The Olofssons were very hands-on with the villa and two freestanding beach bandas (openair bungalows, which allow the island to accommodate groups of up to 28 people), with Christin designing the interiors and Dan, a civil engineer by training, collaborating with the architects. He was also the visionary behind the villa’s most striking feature, a glass rim-flow swimming pool that gleams with blue mosaic tiles and rises up from the deck to form a luminous cube. “This pool was quite exciting to design,” he says. “I felt like I was just out of university, even though that was 40 years ago.”

The food is far better than might be expected in such a remote location. Much of it is caught

TRAVEL

nearby. Staff will harvest some of the abundant oysters on demand and serve them with champagne. While importing luxury foods and wine comes with a carbon footprint, the island was designed to be self-sufficient. It’s constructed with sustainable materials, and there’s a field of solar panels and a desalinization plant. The house and all its infrastructure were also built in such a way that would allow them to be taken apart and leave no trace on the island.

That eco-consciousness is important to Olofsson, who has invested heavily in conservation in the marine reserve. Thanda is working with the Tanzania Marine Parks department and a leading NGO, Sea Sense, on research projects involving sea turtles, whale sharks and coral reefs. It’s a continuation of the commitment Olofsson, the biggest Swedish philanthropist in Africa (and plenty generous at home), made when he established the Thanda Foundation in South Africa in 2005. Among other achievements, its Star for Life arm has put 110,000 children through HIV-prevention education programs. “We are at a point in our lives where we’re able to give back to society, and I think when you’re there, you have to do it,” he says.

While Thanda has made a point of hiring most of its staff from Mafia Island and is working to improve education there, marine conservation is the main focus. Not that guests would suspect that much of the wildlife is on the endangered species list. There are frequent turtle and dolphin sightings on the boat ride from Mafia, and it’s not uncommon for guests to find themselves swimming among half a dozen whale sharks, the biggest fish in the sea.

That, it turns out, is Thanda Island’s greatest luxury: the access to such an ecosystem—and a solicitous staff to make it easier to commune with it. (They’ll even drag a copper bathtub onto the beach for a sunset soak.) “Being a big family on an island to yourself,” Olofsson says, “there is a special feeling to that.”

And if it’s a rainy day, there’s still plenty to enjoy—Thanda Island is home to what was the largest Hemingway collection in Sweden, now sitting on shelves spanning 20 feet in a clean, well-lighted place.

FINAL THOUGHT

“The cure for anything is salt water: sweat, tears or the sea.” —ISAK DINESEN 138 | FORBES SEPTEMBER 13, 2016

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THOUGHTS

On Invention “In some cases, inventions prohibit innovation because we’re so caught up in playing with the technology, we forget about the fact that it was supposed to be important.”

“I just invent, then wait till man comes around to needing what I’ve invented.”

—BUCKMINSTER FULLER

“Give me but a firm spot on which to stand, and I shall move the earth.”

—DEAN KAMEN

—ARTHUR CONAN DOYLE

“Invention, it must be humbly admitted, does not consist in creating out of void but out of chaos.”

—MARY SHELLEY

“WE ARE KEPT KEEN ON THE GRINDSTONE OF PAIN AND NECESSITY.” —H.G. WELLS

“You could lock the Gasman in a padded cell with some dental floss and a bowl of Jell-O, and he’d find a way to make something explode.”

“ONLY AN INVENTOR KNOWS HOW TO BORROW.”

—JAMES PATTERSON

—RALPH WALDO EMERSON

—ARCHIMEDES

“THE WORLD IS MOVING SO FAST THESE DAYS THAT THE MAN WHO SAYS IT CAN’T BE DONE IS GENERALLY INTERRUPTED

BY SOMEONE DOING IT.” —ELBERT HUBBARD

“ONE OF THE ONLY WAYS TO GET YOURSELF OUT OF A TIGHT BOX IS TO INVENT YOUR WAY OUT.”

“It is naturally given to all men to esteem their own inventions best.”

—THOMAS MORE

—JEFF BEZOS

“Invention arises directly from idleness, possibly also from laziness.

To save oneself trouble.”

“TO INVENT, YOU NEED A GOOD IMAGINATION AND A PILE OF JUNK.” —THOMAS EDISON

—AGATHA CHRISTIE

FINAL THOUGHT

“IN THE BEGINNING GOD CREATED THE HEAVENS AND THE EARTH.”

“Initiate; don’t imitate.”

—GENESIS 1:1

—B.C. FORBES

SOURCES: THE WESTERN CANON: THE BOOKS AND SCHOOL OF THE AGES, BY HAROLD BLOOM; THE TIMES BOOK OF QUOTATIONS; A CASE OF IDENTITY,

BY ARTHUR CONAN DOYLE; AN AUTOBIOGRAPHY, BY AGATHA CHRISTIE; GOODREADS.COM; THE WORKS OF ARCHIMEDES; THE TIME MACHINE, BY H.G. WELLS.

144 | FORBES SEPTEMBER 13, 2016

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