Forbes - January 20 2014 USA

The rugged and revolutionary Olympus OM-D E-M1.  No matter where life’s 05;96+<*05. ( *(4,9( 

 ( : 9 < . . , +  ( : @ 6 < ( 9 , 

adventures take you, the Olympus OM-D E-M1 can always be by your side. Its magnesium alloy body is dustproof, splashproof, and freezeproof, so it’ll survive the harshest of conditions. And the super-fast and durable 1/8000s mechanical shutter and 10 fps sequential shooting will capture your entire journey exactly the way you experienced it. www.getolympus.com/em1

Move into a New World

The rugged and revolutionary Olympus OM-D E-M1.  No matter where life’s 05;96+<*05. ( *(4,9( 

 ( : 9 < . . , +  ( : @ 6 < ( 9 , 

adventures take you, the Olympus OM-D E-M1 can always be by your side. Its magnesium alloy body is dustproof, splashproof, and freezeproof, so it’ll survive the harshest of conditions. And the super-fast and durable 1/8000s mechanical shutter and 10 fps sequential shooting will capture your entire journey exactly the way you experienced it. www.getolympus.com/em1

Move into a New World

“The OM-D lets me get great shots because it’s  rugged and durable. In this shot, shot, I was shooting when the dust was the thickest because it enhanced the light. I even changed lenses and I’ve yet to have a dust  problem with my OM-D system.”  system.”  -Jay Dickman, Olympus Visionary Shot with an OM-D, M.ZUIKO ED 75-300mm f4.8-6.7 II

• One of the smallest and lightest bodies in its class at 17.5 ounces* • Built-in Wi-Fi • Full system of premium, interchangeable lenses *E-M1 body only

CONTENTS — JANUARY 20, 2014

VOLUME 193 NUMBER 1

FORBES

30 30 UNDER

88 | NEXT-GENERATION ENTREPRENEURS

 Four hundred and fifty  faces of the future.

11  � FACT & COMMENT BY STEVE FORBES

The lies continue.

LEADERBOARD 14  � SCORECARD 2013: a very good year. 16 � BEING REED HASTINGS The man running the show at Netflix has a story that any screenwriter would be proud of. 18  � THE YEAR’S HOTTEST STARTUPS A panel of VCs and entrepreneurs selected these businesses from more than 300 contenders. Plus: FORBES makeover.

20 � THE MOST OVERPAID ACTORS Adam Sandler tops the list. Plus: Up-And-Comers.

22  � ACTIVE CONVERSATION A CEO eggs on the haters.

THOUGHT LEADERS 24  � CURRENT EVENTS BY PAUL JOHNSON

Dealing with Iran: impossible?

78 | THE YOUNG AND THE RECKLESS

 Is Snapchat more than Silicon Valley’s next vanishing act? COVER PHOTOGRAPH BY MICHAEL GRECCO FOR FORBES 2 � FORBES

JANUARY 20, 2014

26  � CAPITAL FLOWS BY GEORGE LEEF

More college does not beget more economic prosperity.

IBM Cloud supports

24 of the top 25 Fortune 500 companies.  When you’re among the highest-performing businesses in the world, you can’t afford to roll the dice on underperforming alternatives. That’s why more and more of the best companies are tapping into 100-plus Software as a Service (SaaS) business solutions in the IBM Cloud. Start powering your cloud at ibm.com/getstarted This is Cloud on a S marter Planet.

IBM, ibm.com, Let’s Build a Smarter Planet, Smarter Planet and their logos are trademarks of IBM Corp., registered in many jurisdictions worldwide. See current list at ibm.com/trademark. ©International Business Machines Corp. 2013.

CONTENTS — JANUARY 20, 2014 28  � INNOVATION RULES BY RICH KARLGAARD

Enduring success: soft-edge excellence.

STRATEGIES 30 � THE BIGGEST BET EVER George Soros, John Paulson and Leon Cooperman are facing off against Sheldon Adelson over the future of gambling in America. BY NATHAN VARDI

34  � THE BIG EASY’S MOVIE MONEY PIT Louisiana politicians decided handouts would turn the state into a Tinseltown rival. Now they’re stuck with them. BY DOROTHY POMERANTZ

34 | IT’S A FLOP  Louisiana’s Hollywood tax-break horror show.

30 | HIGH ROLLERS, HIGH STAKES  A bevy of billionaires battle over online gambling.

43 | THE FORBIDDEN COIN China’s Bitcoin crackdown is dashing the dreams of a cryptocurrency entrepreneur.

TECHNOLOGY 38  � INSIDE A BEATING SILICON HEART Designers have used computers for years to build elaborate machines. But what about modeling complex experiences? Dassault Systèmes is leading the charge. BY JOANN MULLER

43 � CHINA BITES INTO BITCOIN A speculative frenzy turned BTC China into the world’s biggest Bitcoin exchange. Then Beijing dropped the boom. BY KASHMIR HILL

ENTREPRENEURS 46  � SECOND LIFE Reggie Aggarwal almost lost his event platform to bad luck and overspending. Here’s how he clawed his way past $1 billion. BY KARSTEN STRAUSS

50 | UNDER THE GUN  Profiting from a futuristic  firearm is a tricky shot.

50 � READY, FIRE, AIM TrackingPoint makes a $27,500 rifle so smart that it can’t miss. So why has the company been misfiring? BY ABRAM BROWN

46 | SAVING CVENT  In the event of emergency, reinvent.

INVESTING 54 � TURN DOCTOR BILLS INTO RETIREMENT INCOME Creating super-IRAs out of health savings accounts. BY WILLIAM BALDWIN

56 � MONEY FROM NOTHING Looking for high yields? Consider buying the funds that sell the call options on your stocks. BY JOHN DOBOSZ

57  � PORTFOLIO STRATEGY BY KEN FISHER

A big (bull) surprise for 2014.

58  � INVESTOR CHECKUP BY JOHN BUCKINGHAM

Beating back the bubble babble.

4 � FORBES

JANUARY 20, 2014

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CONTENTS — JANUARY 20, 2014

60  � INTRINSIC VALUE BY DAVID PEARL

Cap ex comes out of the closet.

FEATURES 72 � REINVENTING WALL STREET Troubled UBS has been transformed into a wealth management juggernaut. BY HALAH TOURYALAI

30 UNDER 30 72 | THE NEW UBS Winning the war for the wallets of the world’s wealthiest.

54 | IT’S WHAT THE DOCTOR DIDN’T ORDER  How to use an HSA to  play the stock market triple tax free.

78 � NOW YOU SEE THEM... Will Snapchat cofounders Evan Spiegel and Bobby Murphy become the youngest self-made billionaires ever—or will Snapchat fade into business infamy? BY J.J. COLAO

88 � 30 UNDER 30 LIST Introducing the brightest stars under the age of 30 in 15 different fields. EDITED BY CAROLINE HOWARD AND MICHAEL NOER

LIFE 104 | ELLISON’S EDEN  Is economic viability a  forbidden fruit for the tech honcho’s Hawaiian hideaway?

104  � PARADISE 2.0 Can Larry Ellison model the future on the Hawaiian Island of Lana’i? BY LAURIE WERNER

112  � THOUGHTS On New Year’s diets.

EXCLUSIVE! BRUNO MARS’ 30 UNDER 30 PLAYLIST If you really do want to be a billionaire, start with these 22 songs, handpicked by our guest DJ, Grammy-winner (and 30 Under 30 nominee) Bruno Mars, to enjoy while reading this issue. To listen along, go to forbes.com/under30.

“Move On Up” - Curtis Mayfield “Mirror in The Bathroom” - The English Beat “More Than a Woman” - Bee Gees “Devil’s Pie” - D’Angelo “Waters of Nazareth” - Justice “God Only Knows” - The Beach Boys “Shake a Lil’ Somethin’ ” - 2 Live Crew “Little Red Rooster” - Luther Allison “Am I High” - N.E.R.D “Butter” - A Tribe Called Quest “Da’ Dip” - Freak Nasty “Me Name Jr. Gong” - Damian Marley “Kung Fu Fighting” - Carl Douglas “All Me” - (feat. 2 Chainz & Big Sean) “Get On the Floor” - Michael Jackson “Animal” - Miike Snow “Somebody to Love Me” - Mark Ronson & The Business Intl. “Won’t Fade Away” - Lewis Taylor “Salute To Kareem” - Red Hot Chili Peppers “Midnight Rider” - The Allman Brothers Band “Sweat (A La La La La Long)” - Inner Circle “Young Girls” - Bruno Mars 6

�

FORBES

JANUARY 20, 2014

95 | SUPER BOWL MVP  Bruno Mars’ halftime  performance could be an even bigger hit than his latest album—if the weather cooperates.

INTRODUCING FEDEX ONE RATE.

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FORBES

EDITOR-IN-CHIEF

Steve Forbes CHIEF PRODUCT OFFICER Lewis D’Vorkin FORBES MAGAZINE EDITOR Randall Lane EXECUTIVE EDITOR Michael Noer ART & DESIGN DIRECTOR Robert Mansfield FORBES DIGITAL VP, INVESTING EDITOR Matt Schifrin MANAGING EDITORS Dan Bigman – Business, Tom Post – Entrepreneurs, Bruce Upbin – Technology SENIOR VP, PRODUCT DEVELOPMENT AND VIDEO Andrea Spiegel EXECUTIVE DIRECTOR, DIGITAL PROGRAMMING STRATEGY Coates Bateman EXECUTIVE PRODUCER Frederick E. Allen – Leadership Tim W. Ferguson FORBES ASIA Kerry A. Dolan, Connie Guglielmo, Kashmir Hill SILICON VALLEY Janet Novack WASHINGTON Michael K. Ozanian SPORTSMONEY Mark Decker, John Dobosz, Luisa Kroll, Deborah Markson-Katz DEPARTMENT HEADS John Tamny OPINIONS Kai Falkenberg EDITORIAL COUNSEL BUSINESS Mark Howard CHIEF REVENUE OFFICER Tom Davis CHIEF MARKETING OFFICER Charles Yardley PUBLISHER & MANAGING DIRECTOR FORBES EUROPE Nina La France SENIOR VP, CONSUMER MARKETING & BUSINESS DEVELOPMENT Miguel Forbes PRESIDENT, WORLDWIDE DEVELOPMENT Jack Laschever PRESIDENT, FORBES CONFERENCES Michael Dugan CHIEF TECHNOLOGY OFFICER Elaine Fry SENIOR VP, M&D, CONTINUUM FORBES MEDIA Michael S. Perlis PRESIDENT & CEO Michael Federle CHIEF OPERATING OFFICER Tom Callahan 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, 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)

 JANUARY 20, 2014 — VOLUME 193 NUMBER 1 FORBES (ISSN 0015 6914) is published biweekly, except monthly in February, April, June, July, September and December by Forbes LLC, 60 Fifth Ave., New York, NY 10011. Periodicals postage paid at New York, NY and at additional mailing offices. Canadian Agreement No. 40036469. Return undeliverable Canadian addresses to APC Postal Logistics, LLC, 140 E. Union Ave., East Rutherford, NJ 07073. Canada GST# 12576 9513 RT. POSTMASTER: Send address changes to Forbes Subscriber Service, P.O. Box 5471, Harlan, IA 51593-0971. CONTACT INFORMATION For Subscriptions: visit www.forbesmagazine.com; write Forbes Subscriber Service, P.O. Box 5471, Harlan, IA 51593-0971; or call 1-515-284-0693. Prices: U.S.A., one year $59.95. Canada, one year C$89.95 (includes GST). We may make a portion of our mailing list available to reputable firms. If you prefer that we not include your name, please write Forbes Subscriber Service. For Back Issues: visit www.forbesmagazine.com; e-mail [email protected]; or call 1-212-367-4141. For Article Reprints or Permission to use Forbes content including text, photos, illustrations, logos, and video: visit www.forbesreprints.com; call PARS International at 1-212-221-9595; e-mail http://www.forbes.com/reprints; or e-mail [email protected]. Permission to copy or republish articles can also be obtained through the Copyright Clearance Center at www.copyright.com. Use of Forbes content without the express permission of Forbes or the copyright owner is expressly prohibited. Copyright © 2014 Forbes LLC. All rights reserved. Title is protected through a trademark registered with the U.S. Patent & Trademark Office. Printed in the U.S.A.

8 � FORBES

JANUARY 20, 2014

IN BRIEF The Social Network

On Our New App BY LEWIS D’VORKIN

What’s a magazine? At FORBES we think it’s an experience, not sheets of paper. Increasingly, consumers do, too. It’s about turning, clicking, tapping or flipping to discover, read, learn or be entertained. These actions seem natural. The magazine we’ve produced for 96 years has nearly 1 million subscribers. On Flipboard, only a few years old, our stories attracted 1.8 million readers in October and racked up 44.5 million flips. Still, magazine experiences must evolve for new behaviors. In the age of social media they need to be far more social. Most magazines remain solitary experiences. A reader’s relationship is with the brand, the editors who pick the stories and the authors who write them. There’s never been a way for readers to easily share, connect or be part of a community. We’re changing all that. Last January we launched an iPad app that made it easy to clip and share text, photos, charts or whatever. Pinch the screen with two fingers. Select and frame the content. Tap a Twitter or LinkedIn or Facebook button to share. With this issue we’re taking a big leap forward. Now FORBES enthusiasts can be part of a first-of-its-kind mini social network. Clippings are included in an image stream for all app subscribers to see. Tap any clip in the stream and go directly to the content— or share it again. Editors select stories for each issue. The community curates them for others. “Stream,” as it’s called, was developed by MAZ, our app partner. A startup founded by ex-Apple and ex-Adobe designers and engineers, MAZ understands the challenges of building new experiences with economic efficiency. Most media companies hire large, expensive staffs to re-create their magazines for tablets and smartphones. The MAZ solution repurposes PDFs used in print magazine production by layering on actionable buttons. Last March our Billionaires issue contained 2,000 links to Forbes.com posts. “If you think about it,” says MAZ founder Paul Canetti, “we’ve been sharing content the same way for 20 years. Copy text, paste text, get text—words or links. ‘Stream’ is part of the online world’s massive shift from text-based media to visual-based media.” For this 30 Under 30 issue on iPads and iPhones, there’s audio, too. Bruno Mars has curated a 22-song playlist to accompany this special issue. Clip, share, join the stream— and listen in. It’s a special experience. F

FORBES

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

THE LIES CONTINUE BY STEVE FORBES, EDITOR-IN-CHIEF

THIS YEAR  Democrats will soon

be wondering if ObamaCare covers political shellackings. Nothing is more personal than health—for us, our children, parents, grandchildren, friends. Messing with people’s medical care arouses worries and anger as no other subject can. And this is where the Obama Administration made a fateful miscalculation. We’ll tolerate some spin on taxes, spending, regulation and scandals, but we have zero tolerance for lying or cynically twisting the truth regarding issues that affect our access to health care and the doctors we trust. It’s the White House’s brazen abuse of the truth regarding ObamaCare that will lead to a Democrat debacle in November. We’re all too familiar with the President’s lies about our being able to keep our policies and doctors. But the contempt for the public continues. Remember when millions of people and small businesses received cancellation notices from their insurers and the President declared that, okay, you could keep your insurance in 2014? Another lie. Here’s an astonishing excerpt from a letter sent to individual policyholders of Horizon Blue Cross Blue Shield of New Jersey: Horizon BCBSNJ wanted to let customers keep their policies in 2014, based upon President Obama’s declaration that he would allow cancelled plans to be renewed. The federal government, however, notified the New Jersey Department of Banking and Insurance that current policies cannot be renewed without major

changes that would have changed the plans dramatically and led to large price increases.

Fighting Last War? If you had told any financial observer in 2008 that the Federal Reserve would expand its balance sheet fivefold in five years, you’d have encountered astonished disbelief, followed by the assertion that if ever such a thing unfolded a Weimar Republic-like hyperinflation would ensue. After all, in the inflationbeset 1970s and early 1980s, when the Consumer Price Index was roaring ahead at a 13% annual clip and interest rates were headed for the moon— short-term rates peaked at 21.5% and long-term Treasurys at 15.75%—the monetary base (currency plus bank reserves on deposit at the Fed) had increased 225% from 1970 to 1981, a 12-year period. Contrast that to the 400% surge in the monetary base since 2008. While there are valid arguments that Washington has been changing the CPI to understate the rise in the cost of everyday products and services, there’s no gainsaying the fact that we are, thankfully, nowhere near the horrors of the 1970s. What gives? What gives is that we focused too much on the bloat of the monetary base and not nearly enough on the unprecedented suppression of both short- and long-term interest rates. Never before had our central bank knocked down the overnight cost of money to near 0%. And never before had it attempted to beat the longer-term cost of money to a fraction of its real price. (In the early 1960s the original Operation Twist— named after the dance made famous by Chubby

JANUARY 20, 2014 FORBES

| 11

FORBES

FACT & COMMENT — STEVE FORBES

Checker—was mercifully short-lived. It had been undertaken in a misbegotten effort to strengthen the dollar.) Only a handful of economists, most notably FORBES columnist David Malpass, have pointed out that this monetary version of price controls is a form of credit allocation. The federal government easily got all the cash it wanted at ultracheap rates, i.e., deficits without tears. Big companies had no trouble accessing credit and putting their balance sheets in pristine order. But credit to small and new businesses dried up, a drought magnified enormously by bank regulators who told their charges to reduce risk and to document six ways to Sunday any loans to a nonbig borrower. Remember, small and new businesses are the source of most new jobs. Through its quantitative easings the Fed effectively sucked up much of the financial market’s shortterm credit that normally would have gone to these businesses. Malpass observes: “The U.S. private sector has been facing one of the tightest money/regulatory policies in history.” The fact that the Fed has started to taper, albeit at a tepid pace, is good news. It will mean the beginning of rebuilding our warped credit markets. There are two other, very obvious factors that explain why there has been no explosion in higher consumer prices. One is higher taxes and an ever more convoluted and corrupt tax code; the other is the chaotic uncertainty that ObamaCare has visited on business and the American people. The suppression of interest rates has been mimicked by other countries, with equally distressing results. These have been magnified by even stupider regulations and higher levels of taxation than those we suffer. (Make no mistake, the Fed’s undermining of the dollar since the early part of the last decade has wrought immense havoc. For instance, without a weak dollar there would never 12 � FORBES

JANUARY 20, 2014

have been a housing bubble.) Of course, since virtually no central banker today—not to mention political leaders or economists—understands monetary policy, an inflation disaster could still eventually unfold. For now, though, credit suppression of a kind we’ve never seen before and growth-crushing levels of taxation and regulation will keep us from en joying vigorous, sustainable growth. So don’t get too giddy over our “improving” economy. We’re not suffering pneumonia, but we’re still being worn down by a persistent flu.

HitlerCare Belgium is on its way to allowing doctors, with parental consent, to kill children deemed to be afflicted with “constant and unbearable physical suffering.” The kids must also sign off on this, as if a child has the capacity to reason like an adult. We are on the malignantly slippery slope to becoming a society like that envisioned by Nazi Germany, one in which “undesirables” are disposed of like used tissue. While the Nazis carried this ideology of death to its ghastly logical conclusion, the belief that it would be good for the human race to improve itself—as breeders do with horses, dogs, cows and other animals and plants— was also widespread in numerous other countries, including the U.S., before WWII. It was called eugenics, and under its banner countless hundreds of thousands of people, particularly those deemed mentally handicapped, were forcibly sterilized to prevent them from fathering or birthing children. Before the war Nazi Germany killed upwards of 8,000 children judged to be “mentally deficient” or incurably ill. The Holocaust and other Nazi atrocities sidetracked the eugenics movement. But now it’s making a comeback in new garb—we want to kill only to reduce suffering. Several countries already allow adult euthanasia. In Holland, which legalized

the practice in 2002, it was suspected that doctors and hospital administrators were occasionally killing patients to free up hospital beds. Procedures have (supposedly) been tightened. Belgium also passed a euthanasia law in 2002, and Quebec is about to enact one. Of course, advocates claim they only want to end the misery of those writhing in unspeakable pain. But this raises the question: Why don’t we do more medically to relieve such suffering? The number of adults euthanized in Belgium soared 25% between 2011 and 2012; the annual toll is now seven times what it was when the law was enacted and accounts for 2% of all deaths. A similar percentage in the U.S. would result in more than 50,000 killings. To put this in perspective, the total number of people murdered each year in the U.S. is about 16,000. In Holland euthanasia officially accounts for 3% of deaths (proportionately that would be 75,000 in the U.S.), but in practice, the percentage is far higher. And now we’re on the way to killing children in the name of compassion. As euthanasia becomes more accepted—and we become more numb to the horror of murdering people like this—we’ll descend to the next abomination: pressuring the sick to discontinue treatment for a likely fatal illness in the name of “saving scarce resources” for people who have more years ahead of them. After all, an enormous percentage of medical costs are wracked up by people who have less than six months to live. Britain already has its own version of a death panel, which has a formula for determining who gets expensive treatment and who doesn’t. Let’s be clear. We’re not talking about adults deciding they don’t want “heroic” methods applied when they’re suffering a fatal illness; we’re talking about the conscious taking of a life by people who are trained to cure us of illness. The true mark of a civilization is in how it treats its most vulnerable members. F

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October 29 Michael Dell takes his namesake computer company private in a $25 billion deal.

November 4 Hedge fund billionaire Steven A. Cohen’s SAC Capital agrees to pay $1.8 billion in fines and penalties after pleading guilty to securities fraud.

November 7 Twitter’s IPO confirms that Evan Williams is a billionaire and boosts Jack Dorsey’s fortune by $450 million in one day.

November 15 E-tailer Zulily goes public, propelling founder Mark Vadon into the billionaire ranks.

+200% ROBERT PERA

ELON MUSK  +$4 BILLION YEAR-END NET WORTH: $6.6 BILLION TESLA MOTORS TAKES OFF IN 2013, DESPITE A FEW SPEED BUMPS ALONG THE WAY.

RICHARD SCHULZE

+166% +160%

ELON MUSK

+148%

WILLIAM ERBEY

WILLIAM ERBEY +$1.8 BILLION YEAR-END NET WORTH: $3.1 BILLION OCWEN FINANCIAL HAS A BIG YEAR CATERING TO UNDERWATER HOMEOWNERS.

MARK ZUCKERBERG +$11.3 BILLION YEAR-END NET WORTH: $23.5 BILLION FACEBOOK SHOOTS PAST ITS IPO PRICE IN JULY AND JOINS THE S&P 500 IN DECEMBER.

MARK ZUCKERBERG

+93%

SHELDON ADELSON

+67%

JEFF BEZOS

+51%

JEFF BEZOS +$12 BILLION  YEAR-END NET WORTH: $35.6 BILLION AMAZON CEO’S FORTUNE HAS MORE THAN DOUBLED IN THE PAST TWO YEARS.

November 12 Francis Bacon’s Three Studies of Lucian Freud  sells for $142 million, the most ever for an artwork at auction. The next night Steven A. Cohen sells art for more than $80 million, including an Andy Warhol for $20.3 million.

June 28 Jon Oringer becomes a billionaire eight months after Shutterstock’s IPO.

������

August 3 Red Sox owner John Henry buys the Boston Globe for $70 million; two days later Jeff Bezos pays $250 million for the Washington Post .

������

August 15 Private equity billionaire Josh Harris and a partner buy the New Jersey Devils for $320 million. ������

September 2  Eike Batista, the world’s seventh-richest person in 2012, then worth $30 billion, ceases to be a billionaire as stock in his oil and gas company, OGX, plummets.

�������

�������

�������

SOURCES: INTERACTIVE DATA VIA FACTSET RESEARCH SYSTEMS; FORBES. NET WORTH DATA THROUGH DEC. 10, 2013.

JANUARY 20, 2014  FORBES

|

15

LEADERBOARD

655 Netflix’s  highest-ever price/earnings ratio, in

 March 2013, when its stock was at $192. PATH TO SUCCESS STOCK PRICE

����

BEING REED HASTINGS

���

Netflix’s subscriber base has doubled to 40 million since 2010, and its stock price quadrupled to $375 last year, making it the  best-performing stock on the S&P 500. Its CEO’s long journey to that triumph has been a tale any screenwriter would be proud of.

INTERNET TV

���

Launches an original series, House of Cards, in February 2013—a huge hit. It wins three Emmys. Now Netflix plans to spend $3 billion on new content.

���

���

CATASTROPHE

INTO AFRICA

Graduates from Bowdoin College in 1983. Joins the Peace Corps and teaches math in Swaziland for two years. ���

Hastings tries to split Netflix into two companies in 2011: Qwikster for DVDs and Netflix for streaming. Loses 800,000 subscribers, share price plummets, and three weeks later he gives up the plan. Rumors spread that he will be fired.

CEO IN TRAINING

Obtains a master’s in computer science at Stanford in 1988 and starts Pure Software to make debugging tools. Loses confidence as CEO; tries to fire himself. Company sells for $750 million in 1997, giving him the cash to start Netflix.

��� SOURCE: INTERACTIVE DATA VIA

STREAMING

FACTSET RESEARCH SYSTEMS.

�� ��������

�������

��������

GROWING PAINS

Netflix settles a classaction lawsuit in 2006 over delayed mailings to expensive heavy users. Faces a tech crisis in 2008 when a software glitch keeps it from sending out DVDs.

Unveils streaming service in 2007, and within three years is sending movies to Xbox, Apple TV and other devices. Joins the S&P 500 in 2010. Profits from domestic streaming surpass DVDs in 2013.

   S    E    G    A    M    I

FROM APOLLO 13  TO NETFLIX

Cofounds Netflix in 1997 to mail out DVD rentals for a monthly fee after getting hit with $40 in late charges on an  Apollo 13  rental.

16

�

FORBES

JANUARY 20, 2014

IPO

Netflix goes public in 2002—revealing how profitable the business can be. Blockbuster starts mailing DVDs two years later. Netflix gains its millionth subscriber in 2003.

BOOBY PRIZE

BEATING BLOCKBUSTER

Creates the Netflix Prize for a better system to predict what people want to watch. Pays out $1 million to the winner in 2009 but decides implementing the solution wouldn’t be profitable enough.

In 2006 Netflix ships its more than 42 million DVDs to 6.3 million subscribers. Blockbuster falters and announces in 2013 that it’s closing its last stores and shutting down its mail-order service.

   Y    T    T    E    G     /     O   Z     M   E     L    D     E   N     I     L    A     G   N     U   R     G   E     E   H     I     N   O    L     N   E     O   C     C   R     Y   A     B   M

What could power tomorrow’s

GLOBAL STOCK GROWTH? More than 2 billion people will soon have disposable income for the first time. By 2025, 53% of the world’s population will have entered the middle class. The majority will be in the developing world, notably Asia.1

U.S. household net worth is

at its all-time high U.S. consumer spending — over 70% of GDP 2 — is likely to increase as rising employment and real estate prices further strengthen household finances.3

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Before investing in any mutual fund, consider the investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. 1 McKinsey Institute as of June 2012. 2 The World Bank. 3 Haver Analytics as of June 2013. Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2013 FMR LLC. All rights reserved. 666521.4.1

 44%

LEADERBOARD

 Amount by which T-Mobile’s net subscriber  growth in the third quarter of 2013 exceeded both AT&T’s and Sprint’s. FORBES MAKEOVER

T-MOBILE’S JOHN LEGERE Our fashion pros call up a new look for the telecom CEO. The award-winning designer and entrepreneur got his start at Louis Boston before serving as director of menswear design for Ralph Lauren. He launched his namesake brand in 1987 and is currently the chief creative director for Men’s Wearhouse. JOSEPH ABBOUD:

KATHY IRELAND: The

supermodel turned supermogul is the chief executive and chief designer of kathy ireland Worldwide, a design and marketing firm she launched in 1993. Women’s Wear Daily  has named her one of the 50 most influential people in fashion.

Before

After

THE VERDICT JA: He’s

so much more put

together. He’s kind of casually cool, not trying too hard. KI:

JACKET

He keeps his youthful attitude

KI: Accenting

the blazer with a windowpane plaid shirt gives an

while enhancing his strong presence as a passionate CEO.

exciting pop of pattern. JA: It just feels like a more expensive  jacket with a little more shape, and

SHIRT JA: I’m

not sure when it happened

he’s obviously a guy who can wear a leaner cut.

that if you’re a CEO and you want to be cool you wear a T-shirt. That was a black date in fashion history.

SHOES JA: The SHOES KI: His

suede shoe with a sneaker

bottom is a cool way to do something a little casual but not feel like

shoelaces are too long—a

safety problem and a style deterrent.

he should be playing basketball.

JA: Matching

KI: Combining

for a guy his age anyway.

with the taupe suede shoes helps him stay fresh and hip.

his laces to his shirt is trying too hard. I’m not buying that

the crisp trousers

THE “AFTER” IMAGE IS A SIMULATED IMAGE OF WHAT JOHN LEGERE WOULD LOOK LIKE IF HE HAD ACTUALLY PARTICIPATED IN THE FORBES MAKEOVER, WHICH HE DID NOT. NOR DOES HE ENDORSE ANY PRODUCTS PICTURED HERE.

ENTREPRENEURS

THE YEAR’S HOTTEST STARTUPS  A FORBES panel of venture capitalists and entrepreneurs picked these new U.S. businesses from more than 300 contenders, judging them on breakthrough ideas, fast growth, solid funding and promise for the future. For more, go to forbes .com/hotteststartups. 18

�

FORBES

JANUARY 20, 2014

BLUE APRON

ESTIMIZE

Former venture capitalist Matt Salzberg and two partners began delivering unusual ingredients and easy recipes to your door for $9.99 in August 2012. With $8 million from investors they’ve now reached 300,000 meals a month and can serve 80% of the U.S. population.

Crowdsourcing comes to stock picking. Estimize’s users estimate companies’ future earnings, and its 18,000 forecasters have beaten Wall Street’s seers 69% of the time. It has won a deal to get its data onto Bloomberg’s 300,000 terminals.

COINBASE

HOMEJOY

It’s the easiest way to buy and transfer Bitcoin. With $31 million in backing, it helps 17,000 merchants, including OkCupid and Reddit, use the virtual money and has more than 600,000 users. It takes a 1% cut per transaction on the hypervolatile currency.

Mopping your home for $20 an hour may not sound lucrative, but brother and sister Adora and Aaron Cheung already have their cleaning service operating in 31 cities after raising $40 million in funding. They pay their cleaners a fair $15 an hour and plan to scale up big in 2014.

 .    M    O    C  .    N    O    T    T    I    U    V    S    I    U    O    L  .    W    W    W    ;    N    O    T    T    I    U    V    S    I    U    O     D    L     E    Y     M    B     H    )     E    0     B    2  ,     O    2    1     R    $    (     E     I    S     L    E     A     T    O     A    H     N    S  .     Y    M     B    O     S    C     P  .    A     U    I     T    R     R    E     A    D     T     S    U    ;    C    S     O    T     D    C     E  .     V    W     E    W     Z     A    W    ;     C    A     I    I     R    R     E    E    :     T    D     N    U     A    C     T    S     S    T     I     S    C     S    Y     A    B     N    )    5     O     I    9     H    0  ,     S    1     A    $    (     F    ;    H     S    C     I     T    T     E    A     C    W     A  .     E    M     D    O     H    C  .     P    1     E    6    9     S    1     O    S     J    T    :    R     R    O     O    P     T  .     C    W     E    W     R     I     D    W    ;     E    1     L    6    9     Y    1     T    S     S    T    ;    R     N     O    O     S    P     L     I    Y  .     E    B   S     N    )  .    5   E    G     R    8    3   A     N    $    (    I    M     O     R    S   Y     E    N   T    T     M    A    E   E     A    J    G     C    :    :    D   )     R    N   T     E    A   F     H    )    E     P    0   L    (     A    5    E     R    3    $     G    (    G    A     O    T    M     T    R   I     O    I    R     H    H    E     P    S  ,    :    )    V     R    5   O     E    9   E    4     V  ,    K     O    2    A     E    $    (    M    ;     K    P     A    T    E   A     M    K   :     O    C   P     E    A   O     C    J    T

 N E  T   J   E  T   S  I    N  C   . I    S  A  B  E  R  K   S  H I   R  E  H A  T  H A   W A  Y   C   O  M P  A   N Y   . A  L  L  A  I   R   C  R  A  F  T   O F  F  E  R  E  D B  Y   N E  T   J   E  T   S  ®  I    N T  H E   U  N I   T  E  D  S  T  A  T  E   S  F   O R  F  R  A   C  T  I    O  N A  L   S  A  L  E   , L  E  A   S   ,E   O R   U  S  E   U  N D E  R  T  H E   M A  R   Q  U I    S   J   E  T   C  A  R  D ®  A   N D P  R  I    V  A  T  E   J   E  T  T  R  A   V  E  L   C  A  R  D ™  P  R   O  G R  A   M  S  A  R  E 

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14

LEADERBOARD

 Number of Adam Sandler’s films that have grossed more than $100 million domestically.

ASK 50 BILLIONAIRES

HOLLYWOOD

THIN CATS

THE MOST OVERPAID ACTORS

How many days do you exercise each week? 11.1%

0

31.1%

1

NEARLY EVERY DAY

Adam Sandler is one of the few movie stars who can still demand a paycheck north of $15 million per film. But is he worth it? Not according to our calculations, based on how much an actor’s last three movies earned at the box office per dollar of pay. Jack and Jill, in which he played twins, grossed $150 million but cost so much to make that it lost Sony money, and That’s My Boy was a major bomb. A consolation: 2012’s animated Hotel Transylvania was the biggest hit of his career.

8.9%

28.9% 20.0%

2 or 3

AROUND 5

RESPONSES TO AN ANONYMOUS POLL OF 50 MEMBERS OF THE FORBES WORLD’S BILLIONAIRES LIST.

UP-AND-COMERS

TO YOUR HEALTH Struggling to get fit after your holiday binges? These entrepreneurs  want to help you.

Michael Horvath and Mark Gainey STRAVA Horvath, 48, and Gainey, 45, created their app in 2009 to let you track a run or a bike ride with your smartphone; its biggest draw is that paying members get to compete with other local users, as well as set training goals. In 2013 they doubled their worldwide user base and tripled their revenue. They’ve raised $25 million in funding.

Eric Carreel and Cédric Hutchings

1. ADAM SANDLER

RETURNS1 $3.40 FOR EVERY $1 PAID

2. KATHERINE HEIGL

$3.50 FOR EVERY $1 PAID

 27 Dresses  in 2008 made her the new queen of romantic comedies … until flops like Killers and One for the Mo ney.

3. REESE WITHERSPOON

$3.90 FOR EVERY $1 PAID

She’s in the middle of reinventing her career to produce her own movies. Expect her to give herself a big pay cut.

4. NICOLAS CAGE

$6.00 FOR EVERY $1 PAID

We didn’t include animated movies; if we did, his DreamWorks hit, The Croods, would make him look better.

WITHINGS

Five years ago the two Frenchmen launched a Wi-Fienabled scale that sent weight, fat-to-lean ratio and other data to your smartphone and coached you on improving your results. Now 54 and 37, they’ve added other devices, including blood pressure monitors, and they raised $30 million in a funding round this past summer.

5. KEVIN JAMES

$6.10 FOR EVERY $1 PAID

He was one of the film industry’s most bankable actors until he flopped in 2012 with Here Comes the Boom.

6. DENZEL WASHINGTON

Jeff Hyman

RETROFIT

A visit to a weight-loss resort inspired Hyman, 45, to start a service that gives its users personalized programs to lose 10% to 15% of their weight in 12 months, interacting with coaches through Skype. He says more than 90% of his clients have shed an average of 20 pounds within a year, and half of them are men. Retrofit has raised $15.7 million, and it nearly tripled its customer base in the past year.

20 � FORBES

JANUARY 20, 2014

$8.30 FOR EVERY $1 PAID

As one of Hollywood’s most respected actors he can demand a huge paycheck, but he doesn’t always win at the box office.

7. STEVE CARELL

$10.00 FOR EVERY $1 PAID

He had a major misfire with The Incredible Burt Wonderstone.  It grossed just $22 million worldwide. 1

AVERAGE PROFIT TO THE STUDIO BASED ON THE COSTS A ND REVENUES OF EACH OF THE ACTOR’S LAST THREE MOVIES IN THE THREE YEARS ENDING JUNE 2013.

   P    A     /    N    O    I    S    I    V    N    I     /    N    O    S    M    A    I    L    L    I    W    D    D    O    T    :    L    L    E    ;    R    S   A    E   C    G   ;    A   S    E    M    I    G    Y   A    T   M    T   I    E   Y    G   T     /    T    I    E    L    G    L    /    U    I    R    C   E    S   P    P    N   I    H   H    C    O    J    S    :    A    N   C    O   I    O   N    P   O    S   M    R   :    E   N    H   O    T    I    T    W   G    ;    N    S   I    H    E   S    G   A    A   W    M   ;    I    Y   P    T   A    T    /    E   N    G   O     /    I    S    Z   I    R   V    N    A    I    I     /    W     Z   A   I     T    T   N    I     N   S   T     A   D   S     R   I    O     E   R   G    T     M   S   A     O   A   N     P   :    A     Y   L    V    I    E     H   G     T    E   :    S     O   H   E     R   ;    M     O   V   A     D   O   J    D   ;     Y   N   S     B   A   E     S    L    G     R    /    A     O   A   M     T    P   I     C   D   Y    T     A    ;     /    T     L    Z   E     L     I    L    G     /     D   U    H     N   C   Z     Y   S   E     R   :    U    G     H   R   I     T    E   R     A   L    D     K   D    O    N     Y    R     B   A  .     S    S    ;    E     R   M   O     E    T     M   O    C   R     O   S   E    B     C    L   -    W     D   E   A    :     N   N   E    :     A   -    P   G     P   O   A     U   T   C

 Stories of Innovation

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$349 MILLION

LEADERBOARD

Total amount of venture capital  invested in food tech companies like Hampton Creek in 2012, up 37% from the year before. ACTIVE CONVERSATION HOW SMART IS INVESTING IN ART? @TODDNEV

 Buy art that makes you happy. That’s the return. @WINZONLINE

 Art has yielded me the highest return of all investment classes. Own over 70 pieces  from three continents … lack of liquidity, though. @AMOURCOLETTE

MAKING THE EGG OBSOLETE

NHL WOES

FORBES, DECEMBER 16, 2013

FORBES, DECEMBER 16, 2013

37,172 VIEWS ON FORBES.COM

11,796 VIEWS ON FORBES.COM

Josh Tetrick sees the future in mayonnaise, staff reporter Ryan Mac reported. The CEO of the San Francisco startup Hampton Creek is pushing an eggless version that he says is far healthier and cheaper than the usual slop and is a first step to a new sustainable food industry. Investors, including Bill Gates and Peter Thiel, have agreed to the tune of $6 million. When commenters started weighing in on the article online, Tetrick jumped right in. “Nothing against San Francisco or its food, but with everybody dieting, who eats mayonnaise anymore?” asked Bodo. Tetrick shot back, “Over $11B in sales last year—and growing.” Gear Mentation wrote, “An egg substitute is great, as long as it has at least as much balanced protein.” Tetrick’s response: “Plants contribute over 60% of the per capita supply of protein around the world. Closer to the Hampton Creek HQ (in North America), animals contribute about 70% of our protein. The plants we use have it.” Joseph Brunner: “News flash to liberals and tree huggers: God created eggs over billions of years. It’s the perfect protein and lutein source. We don’t want your do-gooder plant goo substitute.” Tetrick: “God also created plants, I think :).” Zan Shin commented, “Since the energy input to food energy output is so much lower, and billionaires like Gates are helping subsidize startup costs, the price should also be dramatically lower than real eggs. And  yet nowhere in the article is this mentioned.”Tetrick didn’t respond to that one. Meanwhile, the Washington Post drew an almost 400-word article out of a single sentence in the story. Under the headline AL GORE GOES VEGAN, WITH LITTLE FANFARE it reported, “Gore’s recent decision to forgo animal products surfaced as an oand reference in a FORBES magazine piece,” and added, “Gore’s office did not immediately respond to a request for comment.”

Pro hockey is a great business—in Canada. In the U.S., it’s mostly a moneyloser, staff writer Tom Van Riper revealed. When a reader suggested that the U.S. is a growth market to be carefully tended, fellow commenter K. Webb pounced: “For the U.S. to be considered [that] you would expect there to be a number of cities capable of profitably sustaining an NHL team that currently don’t have one … . There aren’t any.” Ronald Pudzs added, “What I don’t understand is why the NHL would expand … in the southern states before fully developing hockey in the north. Teams in Seattle or Portland would create so much more excitement.” Susie Crawfish knew just who to blame: “NHL Commissioner Bettman keeps blocking NHL expansion in Canada. Could you forward him this article, please?”

22

�

FORBES

JANUARY 20, 2014

 It’s about the art, not investment. Whatever it may yield is simply a bonus. 365 WAYS TO GET RICH ZA-ZAAM FLAH

The problem is where do  you get the little money that is required to get more money? KELVIN LASWAI

 366: Shut down your  Facebook and get a job! PEDRO SOUSA

 Plenty of entrepreneurs use  Facebook (and other social media) to make money. Just saying. LUCIEN HOOPER TURNED $1,000 INTO $42 MILLION @BILL_SPUR

 As soon as I finish my timetravel machine, I’ll go back and make this investment.

FAVORITE TWEET @RosabethKanter (on new GM CEO Mary Barra):  It’s official. Girls like cars. And car companies like women driving them.

THOUGHT LEADERS PAUL JOHNSON — CURRENT EVENTS

DEALING WITH IRAN IMPOSSIBLE? WHETHER OR NOT the

agreement reached with Iran in Geneva last November prevents Iran from creating a nuclear weapon, the question still remains—why did Iran want to make one in the first place? Possessing a nuclear bomb isn’t the same thing as having a nuclear capability. Pakistan has had nuclear weapons for nearly 20 years but has failed to create an effective means of delivering them to anything beyond small local targets. Yet a quarter of the nation’s armed forces are permanently occupied in protecting these weapons from theft by domestic and foreign terrorists. The chief consequence of Pakistan’s possessing nuclear weapons is that it has intensified hostile relations with India. Pakistan has the means to deliver one or two horrific blows to India— at the cost of its own existence. Having an A-bomb is a kind of suicide pill for a second-rate power like Pakistan. Germany and Japan, two of the world’s largest and most efficient economies, have never sought to create nuclear weapons. Indeed, both have made a point of not doing so, saving them a great deal of money and simplifying their foreign and defense policies enormously without significantly weakening their positions as major powers. The universal political consensus in both countries is that the veto on nuclear weapons should remain fixed indefinitely. Other than such active superpowers as the U.S. and China, it’s hard to think of any country that could be shown to benefit from having a nuclear capability. A possible exception would be Russia. Its 8,500 or so atomic warheads and

delivery systems serve to enforce Vladimir Putin’s bullying and muscle-man displays. Other than its wealth in natural energy Russia’s economic power is unimpressive. The country would be better served by investing its resources in its defective infrastructure instead of in the pretense of being a military superpower. Sadly, such a revolution in global thinking is inconceivable to the blinkered men currently in control. They prefer to retain the means of destroying any country on the planet than to create a truly modern economy that would benefit their people. WISHFUL THINKING

Iran wants nuclear weapons for reasons that are closer to metaphysics or theology than strict military policy. Yet there’s one flaw in this argument: If Iran stands to benefit so little from these weapons, why are its two chief enemies, Israel and Saudi Arabia, so opposed to and horrified by the pact reached in Geneva? The obvious answer is that because of the geographic concentration of their military, economic and demographic resources both powers (as well as others in the region, notably

Qatar) are particularly vulnerable to a single, devastating blow. In terms of practical realities it’s doubtful that Iran could manage to explode a single nuclear weapon in Israeli or Saudi airspace any time in the near future. But Israeli and Saudi military planners can’t afford to make a mistake that could jeopardize their nations’ survival. Iran’s going nuclear is as much a psychological problem as it is a military problem. What would it take for the Israelis and the Saudis to feel secure? Iran would have to formally renounce its basic foreign policy aims, which include the destruction of the Jewish state and the Sunni kingdom, and demolish all of its nuclear installations, including those relating to purely peaceful energy. That’s a tall order— and one not likely to ever be met. However, both the Israelis and the Saudis are realists and will likely settle for something less than 100% security. A major issue is the Geneva agreement, which is riddled with loopholes that work in Iran’s favor and depends—to an unusual degree in international protocols—on the good faith and personal word of the signatories. Since the mullahs took over a generation ago, Iran has had a long record of wild threats and bloodthirsty menacings. It is in roughly the same position Hitler’s Germany was in at the end of the 1930s. Nobody trusts Iran, and striking a deal with its leaders depends entirely on what you have at risk. If you are jeopardizing your entire nation and people—as the Israelis and the Saudis are—then, short of a miracle, a deal is not going to happen. F

PAUL JOHNSON, EMINENT BRITISH HISTORIAN AND AUTHOR; DAVID MALPASS,  GLOBAL ECONOMIST, PRESIDENT OF ENCIMA GLOBAL LLC; AMITY SHLAES,  DIRECTOR, THE 4% GROWTH PROJECT, GEORGE W. BUSH INSTITUTE; AND LEE KUAN YEW,  FORMER PRIME MINISTER OF SING APORE, ROTATE IN WRITING THIS COLUMN. TO SEE PAST CURRENT EVENTS COLUMNS, VISIT OUR WEBSITE AT WWW.FORBES.COM/CURRENTEVENTS.

24

|

FORBES JANUARY 20, 2014

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THOUGHT LEADERS GEORGE LEEF — CAPITAL FLOWS

MORE COLLEGE DOES NOT BEGET

MORE ECONOMIC PROSPERITY IN HIS FIRST ADDRESS to Congress

President Obama argued that the U.S. needs to put far more people through college so that our economy will remain competitive with those of other nations. He set forth a goal of again having “the highest proportion of college graduates in the world.” Failure to raise our educational attainment level, on the other hand, “is a prescription for economic decline.” The President’s thinking is shared by many others. Economic success, both individually and at the national level, tends to correlate with education. People (and countries) with little education are mostly poor, while people (and countries) with very advanced education are mostly wealthy. Therefore, it’s tempting to jump to the conclusion that partaking of more education will boost an individual’s income and that a country can increase prosperity by “investing” more in education. Resist that temptation, which is based on fallacious reasoning. True, education correlates with prosperity and economic growth, but one of the crucial lessons of logic is that correlation does not necessarily imply causation. We must apply it here. People who have high intelligence and ambition often earn college and advanced degrees. Sometimes that formal education is important in their later success, but many say that their education had very little to do with it. Conversely, some extremely successful people dropped out of college or never attended at all. And as those ridiculous Occupy Wall Street protests taught us, huge numbers of college graduates are unemployed or employed only in jobs GEORGE LEEF, A FORBES CONTRIBUTOR, IS THE DIRECTOR OF RESEARCH AT THE JOHN W. POPE CENTER FOR HIGHER EDUCATION POLICY.

26 � FORBES

JANUARY 20, 2014

Wolf shows that when governments attempt to speed up economic progress by spending more on formal education, they mostly squander resources. One example Wolf gives is Egypt, which “invested” heavily in higher education. That did not lead to rising economic output, however, because little of the students’ learning at their universities coordinated with the skills and knowledge needed for entrepreneurship and improving efficiency in the Egyptian economy. Instead, it created a that don’t call for anything more than mass of people with university degrees basic trainability. who expected high-paying jobs that did Conclusion: Having a college educa- not and could not exist. tion is neither a necessary nor a sufThe key point is that formal educaficient condition for personal success. tion doesn’t necessarily lead to knowlMany people prosper without college, edge and skills the individual can use and many who have B.A. degrees or productively. higher nevertheless struggle in lowThat was true in Egypt and is equally paying jobs, often saddled with high true with many American college graduates. Hordes of academically weak and disengaged kids have MORE SEAT TIME, been lured into college with the CREDITS AND DEGREES idea that getting a degree—any degree, from anywhere—means DON’T AUTOMATICALLY they’ll enjoy a hefty gain in TRANSLATE INTO MORE earnings. Unfortunately, many PRODUCTIVE PEOPLE of them coast through without adding anything to their human student loan debts. capital. They may have a degree, but What that means for nations is that that and $3 will get them a coffee at it isn’t possible to generate economic Starbucks, where they’re apt to work. progress just by “investing” in educaPeople are good at figuring out tion. More seat time, credits and dehow to maximize their human capital, grees don’t automatically translate into but government inducements to take more productive people. certain kinds of approved education Don’t take my word for it. I recleads many to waste time and money. ommend reading the book by British Instead of boosting the nation’s proeducation professor Alison Wolf, Does ductivity, that depresses it, just as make-work jobs and needless govern Education Matter? (Penguin Books, 2002). The American education estabment projects like the famous “bridge lishment ignores that book because it to nowhere” do. exposes (and this is its subtitle) myths The best education policy: Leave it about education and economic growth. to individual choice in a free market. F

REFRESHINGLY TRANSPARENT

 .     M     7     6     6     A     U     S     9     #    e     t    a    c     fi     i     t    r    e     C    r    e     i    r    r    a     C    r     i     A     A     A     F  ,    r     i     A    e     t     i    u     S     t    e     J    y     b     d    e     t    a    r    e    p    o    s     t     h    g     i     fl     l     l     A  .     d    e    v    r    e    s    e     R    s     t     h    g     i     R     l     l     A     ®    e     t     i    u     S     t    e     J     3     1     0     2     ©

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THOUGHT LEADERS RICH KARLGAARD — INNOVATION RULES

ENDURING SUCCESS SOFT�EDGE EXCELLENCE  A COMMON existential debate exists

within most companies and among most managers. It’s between the hard (financial rigor) and soft (sustaining cultural values) edges. Which side— hard or soft—should command the CEO’s attention? There’s a right answer for every company, and it will vary from year to year. But from my observational perch, it’s apparent that far too many CEOs invest too little time in their soft edge. In the long run their companies will pay for this mistake. There are three main reasons for this error. ƀ " ", ! #- -#, .) +/(.#3ź The metrics around hard-edge advantages, such as speed, cost, supply chains, logistics and capital efficiency, are well understood. The data are relatively easy to gather, search, analyze and manage. ƀ /--/& ",Ɛ! #(0-.'(. yields a faster return. Spending money on technology that trims costs or cuts time in a supply chain seems like a no-brainer. ƀ -Ż -Ż "# )*,.#(! )Ŭ,-Ż boards of directors and shareholders speak the language of finance. These people, the company’s hard-edgers, are experienced and comfortable with numbers. To these left-brain business titans, the soft edge looks like the realm of artists, idealists, hippies, poets, shrinks and do-gooders. This sets up a Mars versus Venus dynamic. Does the hard edge, therefore, have the more convincing case in the fight for time and money? No, just the easier case. Let me make the cas e for investing some time and money in your company’s soft edge. ƀ ).Ɛ! ..,#/.-Ż -/" - .,/-.Ż teamwork, taste and story, lead to greater brand recognition, higher 28

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Dell’s Comeback

profit margins, higher stock market multiples, more loyal customers and more committed employees. Softedge excellence is the ticket out of Commodityville. ƀ )'*(#- -.,)(! #( ." -). ! , better prepared to survive a big strategic mistake or cataclysmic disruption that would sink companies without it. Loyalty, passion and commitment are the dividends of a strong soft edge. ƀ ,Ɛ! -.,(!." #- -)&/.&3 necessary to stay alive and compete, but it provides a fleeting advantage. The hard edge is easier to clone than soft-edge strength, especially as technology and software become cheaper and more accessible. Apple’s great design and loyal fan base—softedge advantages—are the essence of Apple’s enduring appeal more than its supply chain and capital efficiency, great as those are. What gives Starbucks its ultimate edge? The best coffee? No, say people who love coffee. Cheaper locations? Quite the opposite. It’s Starbucks’ soft-edge excellence, which includes trust, brand and cheerful employees, that creates a consistently satisfying experience.

Dell Computer (now just Dell) was the fastest-growing American stock in the 1990s. An investment of $1,000 on Jan. 1, 1990 was worth nearly $1 million by decade’s end. During the 1990s Dell blew past its competitors Gate13Ż )'*+ ( 1&..Ɛ%,ź Dell’s hard-edge excellence was an extension of founder Michael Dell’s operational and supply-chain focus. Dell was legendary for its tight control of costs, mastery of logistics and speed of delivery, among other flawlessly executed skills. No personal computer vendor could match Dell’s offerings of choice, cheap prices, good ()/!" +/&#.3 ( -. �,3ź Dell’s spotless execution was perfect for an era in which IT departments )/!". - ( &*.)*- ), '*&)3-ź But Dell’s advantages were trumped by a sudden shift toward smartphones and tablets and by employees bringing their own technology to work. Now Dell is a private company. As such, it has a second shot at greatness, without shareholders second-guessing its every wiggle. The early signs are encouraging. Dell is paying off its loans ahead of schedule, and employee morale is on the upswing. That’s a start. But Dell also needs to rediscover its soft edge. It needs to enchant us with new products and services. It needs to make us care about the company and its mission and to cheer for its success, as we once did. Steve Jobs recaptured Apple’s soft edge. Michael Eisner made Disney exciting again. Dell can do the same, and I hope it does. F

RICH KARLGAARD IS THE PUBLISHER AT FORBES. HIS NEXT BOOK, THE SOFT EDGE: WHERE GREAT COMPANIES FIND LASTING  SUCCESS , WILL BE OUT IN APRIL. FOR HIS PAST COLUMNS AND BLOGS VISIT OUR WEBSITE ATWWW.FORBES.COM�KARLGAARD.

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STRATEGIES GAMBLING

The Biggest Bet Ever George Soros, John Paulson and Leon Cooperman have secretly moved into battle mode against Sheldon Adelson. The stakes: the future of gambling in America. BY NATHAN VARDI

I

n November George Soros, John Paulson and Leon Cooperman, three of the most successful hedge fund managers ever, quietly participated in a rights offering and became major shareholders in Caesars Acquisition Co., a spinoff from casino company Caesars Entertainment that has ownership in Caesars’ online gambling assets. Their stakes—previously unreported—are all part of an unprecedented bet on the future of the $60 billion casino business in America, as states from New Jersey to Delaware and Nevada legalize a practice that the Department of Justice said was illegal just two years ago. They were joined by billionaire private equity managers Leon Black, David Bonderman, Marc Rowan and Joshua Harris, whose two respective buyout firms are the biggest shareholders in Caesars Entertainment and doubled down by investing a combined $484 million in Caesars’ online gambling vehicle. Already a roster of billionaires, from brothers Lorenzo and Frank Fertitta, who control the Ultimate Fighting Championship, to MGM Resorts’ biggest shareholder, billionaire Kirk Kerkorian, are betting big on online gambling ’s comeback. There’s just one problem with all of this: Sheldon Adelson. The very week that Caesars’ online gambling play started trading on the Nasdaq, Adelson, the nation’s fifthrichest man—and one of the country’s biggest political donors—thanks to his vast casino holdings, unleashed an army of lawyers and lobbyists on Washington and state capitals, telling FORBES he will “spend whatever it takes” to stop online gambling in America. His advocacy group—the Coalition to Stop Internet Gambling—is already up and running, and is working to get state attorneys 30

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general to sign a petition against online gambling. He’s hired former New York governor George Pataki, together with former Arkansas senator Blanche Lincoln and former Denver mayor Wellington Webb to lead the lobbying effort. “There is no reason to put a casino on everybody’s kitchen table, in the bed of every young person, whether they are underage or of age, or on mobile phones,” says Adelson. “I don’t want people to get addicted.” So far the markets are betting he’ll lose.

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Shares of Caesars’ online gambling spinoff are up more than 30% from their rights offering price. But while Adelson’s moralistic stance may be laughable to opponents, given the potential long-term threat a shift to online gambling poses to his industry, they still take it seriously. His Las Vegas Sands, with a recent stock market valuation of $60 billion, is worth more than all the other U.S. casino companies combined. Adelson spent some $100 million unsuccessfully trying to get a Republican into the White House in 2012.  “What I have heard Adelson say is, ‘I am very rich, and I don’t like Internet gaming,’ and those things are true,” says Mitch Garber, CEO of Caesars Acquisition Co. But “Sheldon’s eyes are closed to the fact that all goods and services are ultimately going to be purchased on the Internet.” For years online gambling in America “Sheldon’s belonged to offshore eyes are companies willing to closed to the take on the federal fact that all government, which declared all online goods and gambling to be ilservices are legal. In 2003 online going to be poker took off when purchased on Christopher Moneymaker, an unknown the Internet.” accountant from Tennessee, qualified in an online tournament for the main event at the World Series of Poker and won poker’s top prize, together with $2.5 million. Online poker companies became big sponsors of poker programming on cable outlets like the Travel Channel and ESPN. By 2005 the company that ruled the U.S. online poker market, Gibraltar-based PartyGaming, conducted an IPO on the London Stock Exchange that made its American founder, Ruth Parasol, the nation’s richest self-made woman. A year later then billionaire Calvin Ayre, who ran a sports-betting website from Costa Rica, was featured on FORBES magazine’s cover with the headline “Catch Me If You Can.” But in the fall of 2006 Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA), strengthening the Justice Department’s tools to go after online gambling firms operating in the U.S. Some companies, like PartyGaming, quickly ceased their U.S.

operations, leaving the then $1.4 billion U.S. online poker market dominated by two offshore companies, PokerStars and Full Tilt Poker, which profited immensely because of the high-margin nature of the business. But federal prosecutors and agents kept investigating the companies, seizing their funds and eventually in 2011 shutting down the websites of the major online poker companies that cater to the U.S. and indicting their founders. In the weeks that followed Full Tilt collapsed amid accusations made by the U.S. Attorney in Manhattan that it was operating a Ponzi scheme. PokerStars settled the civil charges the government filed against it by paying $731 million, but its founder, Isai Scheinberg, who is not a U.S. citizen (he’s Israeli-Canadian), has not come to the U.S. to face the criminal charges filed against him. The government also indicted Ayre, a Canadian who has also not returned to the U.S. Not long after shutting down the offshore operators, the Department of Justice reversed its long-held opinion that all forms of online gambling are illegal, unleashing states that wanted to regulate and tax online gambling except sports betting. Sensing profits, the billionaires followed. Why the turnaround? Expensive lobbyists and lawyers are a big part of the answer. Since 2007, for instance, former New York senator Alfonse D’Amato has been paid to be chairman of the Poker Players Alliance. That Washington lobby group received funding from the Interactive Gaming Council, a Vancouver group backed by firms including Full Tilt Poker. The American Gaming Association, the casino industry’s powerful lobby, is now backing online gambling with everything it’s got. The stakes are huge: Private equity firms Apollo Global Management and TPG are still trying to salvage their 2006 LBO of the company that left it saddled with $28 billion in debt. They see online gambling as a way to make up for Caesars’ missing out on Macau, the biggest casino revolution in decades. So while Adelson’s limitless money—and his willingness to spend it—may slow the momentum for online gambling by blocking its spread into big states like California and Florida, the odds of him stopping it or bullying his rivals out of the game are slim. He’s got lots of chips, but all the other players at the table do, too. F

EXECUTIVE SUMMARY NET LOSSES

The New Jersey Nets’ move to Brooklyn was a brilliant financial maneuver, boosting the team’s value 48% to $530 million, ninth highest in the NBA. In Jake Appleman’s Brooklyn Bounce: The Highs and Lows of Nets Basketball’s Historic First Season in the Borough

(Scribner) we see how the Nets hoped to move away from “the idea of New Jersey” and toward making “Brooklyn” more a state of mind than a mere spot on a map. Unfortunately, the book doesn’t dig very deep. Instead, Appleman offers a game-by-game rehash of the season. It’s more than  just box scores; the author weaves in quotes and stories from his time reporting on the team—but it adds little to the up-and-down narrative fans already know. Still, for Nets faithful dealing with the current diffi cult season, it’s at least a return to a more optimistic time. —Chris Smith

JANUARY 20, 2014  FORBES | 31

PROMOTION // ENERGY

Today’s Green Data Center Good for the Bottom Line and the Planet By Nancee Ruzicka

T

he explosion of online and cloud-based services has propelled the data center from a back-office data storage and retrieval facility to always-on critical infrastructure generating corporate revenue. Today, data centers are massive facilities that require up to 100 megawatts to operate on a 24/7 basis. Building a greener data center is good for the planet, but when done right, it’s also good for business.

Geothermal power valve

Footprints in Carbon Data centers are facing a number crunch. The industry uses 2% of all electricity generated worldwide and data centers inject 259 million metric tons of carbon into the atmosphere. The cost of power is unpredictably rising, accounting for 20% to 60% of operating expenses over the life of a data center. Operators have recently been challenged by the C-suite to get their arms around the cost of power. To do this, many have implemented energy-efficient servers and have started to measure power consumption. These efforts have not gone unnoticed, but are they sufficiently reducing the cost and carbon footprint of the data center?  According to a stu dy con duct ed by Nature Climate Change, in an article entitled “Characteristics of Low-Carbon Data Centers,” the optimal solution is a data center operating at low energy, in a low-carbon region.

CEO Jeff Monroe reports that since opening its first data center facility module in January 2012, “capacity doubled by September 2013, and we expect to see this same exponential growth in 2014, with no slowdown in sight.” Verne Global provides the facility with the mechanical and physical security and network connectivity required for businesses of any size that want to locate data center servers and infrastructure on its campus. Yet cost is perhaps the most compelling reason to look to the North. Because of its renewable sources and unique location, Landsvirkjun, the National Power Company of Iceland, and Verne Global can offer 15-year visibility into energy pricing, something that is unheard of in today’s global energy markets. BMW recently relocated some of its high-performance computing applications to Verne’s campus, reducing the cost of running those applications by 82% and eliminating 3,570 metric tons from its carbon emissions. The electric grid in Iceland is optimized for power-intensive industries, and Landsvirkjun delivers around 1,400 megawatts on a constant basis to international industries located there. According to Bjorgvin Sigurdsson, EVP of Marketing and Business Development at Landsvirkjun, “As the size and complexity of data centers increase, the long-term security of the power supply offered in Iceland becomes even more compelling than the environmental qualities of the renewable power production.”  Verne Global is pois ed to beco me a c entral loca tion for hosting, disaster recovery and optimized data center operations. With plenty of power to spare, a geologically and physically secure location, natural outside cooling and up to 30 terabytes in fiber connectivity to Europe and North America, the data center industry may eclipse the Northern Lights as Iceland’s brightest star.

Location, Location, Location Deciding where to establish a data center around low energy consumption and using renewable power sounds challenging. Verne Global has built a data center campus— on a decommissioned NATO base in Iceland—that is powered entirely by hydro, geothermal and o nshore wind renewable sources and is 100% cooled by outside air. Companies across Europe and North America are starting to find this to be an optimal location. Verne Global

Landsvirkjun hydropower station

THE MOST INNOVATIVE DATA CENTER IN THE  WORLD

The first zero-carbon footprint data center is here. Connected to the world via multiple, reliable networks, chilled by the cool Icelandic air and powered by 100% renewable energy, Verne Global’s data center is the smart and sustainable choice for your biggest data challenges. Power you can rely on, future you can predict.

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Powering the Futur� Iceland is one of the world's select few countries to produce all its energy from renewable sources – falling water, the heat of the earth and the force of the wind. Landsvirkjun generates three quarters of all electricity in Iceland, primarily for clients in energy intensive industry and data services. We offer Europe's most competitive energy contracts, with long -term agreements, advantageous prices and exceptional security of supply. e cool climate, plenty of power and room for development make Iceland an exciting location for the data industry. www.landsvirkjun.com/datacenters

STRATEGIES REINVENTING AMERICA

The Big Easy’s Movie Money Pit Louisiana politicians decided handouts would turn the state into a Tinseltown rival. Now they’re stuck with them. BY DOROTHY POMERANTZ

I

t’s 86 degrees out in Garyville, La., and the crew of the new movie Selfless is a sweaty mess. While star Ryan Reynolds and director Tarsem Singh perfect a shot inside an airconditioned set, a small army of technicians dawdles outside, bitching about the humidity. Not that anyone is listening. Producers are more than willing to trade crew discomfort for buckets of money, and the lucrative 35% tax credit Louisiana offers on film budgets is catnip to them. “If we had filmed it in L.A., we would have had to film it in way fewer days,” 34

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says producer Ram Bergman, who is working on his fourth movie in Louisiana in eight years. “The only advantage of L.A. is housing.” Intended as a way to draw industry to Louisiana’s floundering economy, the result is a giveaway program that’s created a gold rush for producers and sharp locals, but probably won’t create permanent jobs like a real tax cut might. Just outside New Orleans producer Herbert Gains turned part of a sprawling NASA complex once used to build space shuttle fuel tanks into a 250,000-square-foot shooting facility where Summit Entertainment recently filmed

Trailer king: Andre Champagne worries about the fate of the taxpayer-fed movie boom in his home state.

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STRATEGIES

REINVENTING AMERICA

long line of Mardi Gras kings and queens, the sci-fi flick Ender’s Game. Producers who once would have needed to bring hundreds of built a business buying credits from filmmakcrew members out from Los Angeles can now ers and selling them to locals. “The tax incenbring just department heads and hire the tive program is like a gill net,” says French. rest of the crew locally. In 2012 film and TV “California is losing jobs. The industry is companies spent $717 million in the state, up moving away because it’s better elsewhere.” 85% since 2010. Movies like Twilight: BreakWhen Louisiana simplified the credit in 2009, making it still easier for producers, ing Dawn, Green Lantern and 21 Jump Street Hollywood arrived en masse. Here’s the way have been filmed there, as were TV shows the credits work now. A producer brings a  American Horror Story and Ravenswood . $35 million budget, for example, to someone Louisiana has been a stand-in for New York, like French and shows what portion will be Texas and Pennsylvania. spent in the state. French then buys the tax According to the Louisiana Department of Economic Development, putting on this buffet credit for roughly 85% of the value the producer will eventually earn when his money cost the strapped state treasury $168 million is spent. French then resells the tax credit in 2012. It’s not a break-the-bank number, but to someone with a liability, and the producit is the kind of price tag that has led a numer gets his money up front. Louisiana has no ber of states, including Arizona, Wisconsin and Connecticut, to slice programs amid ques- cap on its tax credits, so if you’re paying Will Smith $20 million to aptions of whether they were pear in your film, you get  jump-starting an industry WHERE THE JOBS ARE THERE’S LITTLE CORRELATION BETWEEN a tax credit on that exor just fattening filmmakTAX BREAKS AND LONG-TERM ENTERTAINpense. (Smith then has a ers, with little long-term MENT-INDUSTRY EMPLOYMENT. Louisiana tax liability.) gain. In November a new   ENTERTAINMENT TAX It’s a juicy setup, and study called on New York STATE JOBS INCENTIVES locals know it. Andre to rethink its program CALIFORNIA ������� SMALL Champagne, owner of after finding that Albany NEW YORK ������ LARGE Hollywood Trucks, is gave away $374 million in TEXAS ������ MEDIUM one of the biggest boostfilm tax credits in 2013— FLORIDA ������ MEDIUM ers. A local boy who 21.5% of all tax credits ofGEORGIA ������ LARGE moved back to Louisifered by the state. ILLINOIS ������ LARGE ana from Los Angeles in “In order for this to PENNSYLVANIA ������ LARGE 2007 to help the producmake sense, you have to MICHIGAN ������ LARGE ers of a small horror film be building an industry VIRGINIA ������ SMALL navigate the state, he that will eventually stand OHIO ������ LARGE now has 400 trucks (inon its own,” says Susan cluding air-conditioned Christopherson, a pro“eco-friendly” trailers for Hollywood headfessor of city planning at Cornell University, liners). It’s no surprise he has formed a trade who has been studying what the folks in Los group that lobbied the legislature to keep the Angeles call “runaway production” since the 1980s. “Otherwise you’re just creating anothcredits in place. “This fiscal session was the er division of the public sector.” hardest,” says Champagne. “Like any couThat’s exactly what’s happening in Louipon, you have to determine at what point do siana. The state’s plan to bribe moviemakyou tighten it. But not now. It would have a ers dates back to 2002. The initial program catastrophic effect.” Earlier this year Chamoffered up to a 35% tax credit but was ridpagne convinced Governor Bobby Jindal and dled with caveats. Ray producer Stuart Benthe legislature to retreat from proposed cuts  jamin whined about the program in the press to the break. Jindal declined to comment to FORBES. in 2003, saying he was lured to the state with No matter. He probably knows what Bergpromises he could easily sell his credits to loman, the Selfless  producer, will tell you about cals, which proved difficult under the system the likely fate of Hollywood on the bayou. (though he was eventually able to sell them). “Movie people are nomads,” Bergman says. Clever money men like Will French saw “We go where the best deal is.” F an opportunity. French, who comes from a SOURCE: MPAA.

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TRENDING What the 53 million Forbes.com users are talking about. For a deeper dive go to FORBES.COM/BUSINESS

PERSON

MARY BARRA The Detroit auto show should be a memorable coming-out party for GM’s first female CEO, who will have a slew of innovative new products to showcase. COMPANY

BEST BUY Left for dead not long ago, the electronics retailer got up off the mat in surprising fashion last year, becoming one of the best-performing stocks of 2013. Now to keep the rally going. FLASHPOINT

ADIZ China’s new East China Sea Air Defense Identification Zone is turning into the world’s most combustible hot spot, with repercussions for economies across Asia.

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TECHNOLOGY SOFTWARE

Inside a Beating Silicon Heart Designers have used computers for years to build elaborate machines. But what about modeling complex experiences? Dassault Systèmes is leading the charge. BY JOANN MULLER

D

r. Julius Guccione, a 50-yearold cardiac researcher at the University of California, San Francisco, was mesmerized the first time he saw a virtual image of a beating heart. He’d been using math models to research the heart his entire career, but now Dassault Systèmes, a French design and simulation software company, had created a complete, three-dimensional view of the electrical impulses and muscle-fiber contractions that enable the human heart to perform its magic.  If it were a model of his own heart, Guccione would have seen it racing. “This is something doctors have been trying to get to since before the 1900s,” he said. The advent of technologies like magnetic resonance imaging and echocardiography, he said, have been a “dream come true” for measuring abnormal motion in a patient’s heart. But by modeling a beating heart in 3-D, the hope is that one day doctors will be able to diagnose and treat patients based on the unique forces at work within each patient and even rehearse open-heart surgery on an individual before opening up his chest.  “The heart isn’t just made of tissue; it also has an electrical current. I compare it to a machine,” says Dassault Systèmes Chief Executive Bernard Charlès, whose company has been creating digital mock-ups of machines like airplanes and automobiles for more than 30 years. With $2.8 billion in revenue and 11,000 employees (3,000 in North America), it’s the leader in the $16 billion market for

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product life-cycle management (PLM) software, which engineers at companies such as Boeing and Gap use to manage the development of everything from jumbo jets to jeans, saving both time and money. As the Living Heart project suggests, Charlès, 56, is steering the company in new directions as part of a plan to double its revenue in five years. Instead of just peddling software for designers and manufacturers, Dassault Systèmes is recasting itself as a “3D experience company” whose simulation technology can be applied to just about anything. Last year it combined its nine software brands, including Catia, Simulia and Enovia, into one 3D Experience Platform, which clients can use to model and simulate not only the way a product is designed or manufactured but even how it is bought, feels or is used. Charlès’ favorite example: a woman with an armful of groceries who swings her leg under the bumper of her Ford SUV, causing the liftgate to open automatically. Catia software helped realize that “experience.” Dassault Systèmes has already branched out beyond aerospace and automotive design to a total of 12 sectors, including life sciences, architecture and construction, energy and consumer packaged goods. Even some fashion designers are using Dassault Systèmes’ 3-D tools to design their collections (though they don’t like to admit it, Charlès says). SHoP Architects and its virtual construction arm, SHoP Construction, are known for pushing the limits of technology on projects like the new Barclays Center in Brooklyn, which features an undulating latticework “wrapper” made of 12,000 unique prefabricated, preweathered steel panels. SHoP used Dassault Systèmes’ 3D Experience software to transform the way designers and engineers worked together on the project, streamlining the process by creating a single model that all teams could work from, including plumbers, electricians and carpenters. The 3-D model logged changes made by any of the construction teams in real time, so every team, regardless of trade, was always working from the most current information. That helped reduce material costs by 25%. SHoP is now testing a cloud-based ver-

Dassault Systèmes and UCSF collaborated on this 3-D simulation of a beating human heart. One day they hope to model each individual patient’s heart before surgery.

JANUARY 20, 2014  FORBES | 39

TECHNOLOGY

SOFTWARE

sion of Dassault Systèmes’ technology to manage its next project—modular, prefabricated houses to replace homes lost in Hurricane Sandy. By sharing 3-D design data directly with the Long Island factory that will build the housing modules, SHoP says it will be able to erect a finished home in just 48 hours, instead of the customary four to six months. At the Museum of Fine Arts in Boston, Harvard professor Peter Der Manuelian is converting its impressive collection of photos, diaries, drawings and documents from Egypt’s Giza pyramids into 3-D models so he can take students inside the tombs for a realistic view of the Fourth Dynasty. Armed with that rich data and a 3-D printer, he’s even recreating ancient Egyptian artifacts that had long since vanished. “If you can imagine it, you can simulate it,” says Steve Levine, chief strategy officer of Dassault Systèmes’ Simulia, who heads up the Living Heart project. He admits there’s a chicken-and-egg problem: You need to start with good data in order to produce an accurate simulation. In the case of the Living Heart project, Dassault Systèmes lifted geometric data about the electrical and mechanical properties of the heart from about a dozen different sources—academic researchers, cardiologists, medical device companies and regulators—then combined it into one massive database. “People had been working on different pieces of this in great detail, but no one has attempted to work it together,” Levine said. Matching up data about the heart’s electrical impulses with its mechanical ones—called coupled multiphysics—was a meticulous job. Using a standard 48-processor workstation, Dassault Systèmes’ scientists needed about four hours to calculate the precise biomechanical forces of a single heartbeat, tracking how electricity is conducted through every strand of muscle fiber to replicate the true motion of a human heart. Once they accurately described the physics, the model operated on its own. “We do nothing more than pulse it the way nature does,” said Levine. The next step is personalized 3-D heart models. Doctors would start with the Dassault Systèmes model of a normal heartbeat, then modify it to reflect the behavior of the 40

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patient’s own heart as detected by an MRI or echocardiogram. If a portion of the heart was damaged after a heart attack, for instance, they would observe how the physics had changed and simulate various treatment options to ensure proper blood flow. Dassault Systèmes was established in 1981 as a spinoff from France’s Dassault Aviation, the privately held manufacturer of Falcon  jets founded in 1929 by Marcel Dassault. At the time it was working on software for wind-tunnel testing, which naturally led to similar work for the auto industry. It sold its software under the Catia brand, through a distribution agreement with IBM. Over the years Dassault Systèmes added to its PLM software portfolio through a series of acquisitions, including Enovia and SolidWorks. The company went public in 1996, though 41.5% is still privately held by Dassault Group. In 2010 it acquired IBM’s PLM sales force, taking responsibility for its own growth. Revenue has been growing 10% a year, outpacing competitors like Siemens PLM, Autodesk and PTC. And Dassault Systèmes’ stock, like its rivals’, has been on a tear, up 175% since 2009, as investors look to jump on the 3-D printing bandwagon. Dassault Systèmes is ideally positioned. As Charlès says, “If you want to print a letter, you have to write it first.” Today almost 70% of Dassault Systèmes’ $2.8 billion in revenue is recurring from software licenses and maintenance, providing a cushion to explore new markets. Despite a third-quarter slowdown attributed to a weak economy, Charlès is expecting sales to bounce back in the fourth quarter and in 2014. The launch of its cloud-based software, Lighthouse, early next year should open new markets and spur companies to speed up their 3-D modeling efforts, he believes.  Years ago manufacturers and their vendors were all located in the same village because they needed to be, says Charlès. But in an age of virtual design and cloud collaboration, “the world of the making” is changing rapidly, he says. “Innovation will still come from scientific breakthroughs, yes, but also from social trends and virtualization, which have opened us to ideas we never thought were possible before. The frontiers of industry are changing because the nature of collaboration is changing.” F

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ANDY RUBIN The co-inventor of Android has just been put in charge of Google’s new robotics division. If we’re all enslaved by Skynet in 20 years, blame him. COMPANY

FACEBOOK Big tweaks to your feed: Video ads are now showing up, and a new algorithm is supposed to chase away junk stories. Doth Zuck tweak too much? IDEA

WEARABLES The gadget hype cycle is peaking for smart watches, bracelets and glasses. Gartner sees the market tripling to $7 billion by 2018; we don’t buy the buzz.

For people with a higher risk of stroke due to Atrial Fibrillation (AFib) not caused by a heart valve problem

Ask your doctor if ELIQUIS is right for you. ELIQUIS is a prescription medicine used to reduce the risk of stroke and blood clots in people who have atrial fibrillation, a type of irregular heartbeat, not caused by a heart valve problem.

IMPORTANT SAFETY INFORMATION: Do not stop taking ELIQUIS without talking to the doctor who prescribed it for you. Stopping ELIQUIS increases your risk of having a stroke. ELIQUIS may need to be stopped, prior to surgery or a medical or dental procedure. Your doctor will tell you when you should stop taking ELIQUIS and when you may start taking it again. If you have to stop taking ELIQUIS, your doctor may prescribe another medicine to help prevent a blood clot from forming. ELIQUIS can cause bleeding which can be serious,   and rarely may lead to death.  You may have a higher risk of bleeding if you take ELIQUIS and take other medicines that increase your risk of bleeding, such as aspirin, NSAIDs, warfarin (COUMADIN® ), heparin, SSRIs or SNRIs, and other blood thinners.  Tell your doctor about all medicines, vitamins and supplements you take. While taking ELIQUIS, you may bruise more easily and it may take longer than usual for any bleeding to stop. Get medical help right away if you have any of these signs or symptoms of bleeding: - unexpected bleeding, or bleeding that lasts a long time, such as unusual bleeding from the gums; nosebleeds that happen often, or menstrual or vaginal bleeding that is heavier than normal - bleeding that is severe or you cannot control - red, pink, or brown urine; red or black stools (looks like tar) - coughing up or vomiting blood or vomit that looks like coffee grounds - unexpected pain, swelling, or joint pain; headaches, feeling dizzy or weak ELIQUIS is not for patients with artificial heart valves. Before you take ELIQUIS, tell your doctor if you have: kidney or liver problems, any other medical condition, or ever had bleeding problems.

Tell your doctor if you are pregnant or breastfeeding, or plan to become pregnant or breastfeed. Do not take ELIQUIS if you currently have certain types of abnormal bleeding or have had a serious allergic reaction to ELIQUIS. A reaction to ELIQUIS can cause hives, rash, itching, and possibly trouble breathing. Get medical help right away if you have sudden chest pain or chest tightness, have sudden swelling of your face or tongue, have trouble breathing, wheezing, or feeling dizzy or faint. You are encouraged to report negative side effects of  prescription drugs to the FDA. Visit www.fda.gov/medwatch, or call 1-800-FDA-1088. Please see additional Important Product Information on the adjacent page. Individual results may vary.

Visit ELIQUIS.COM or call 1-855-ELIQUIS

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FACTS

The information below does not take the place of talking with your healthcare professional.  Only your healthcare professional knows the specifics of your condition and how ELIQUIS ® may fit into your overall therapy. Talk to your healthc are professional if you have any questions about ELIQUIS (pronounced ELL eh kwiss).

What is the most important information I should know about ELIQUIS (apixaban)? Do not stop taking ELIQUIS without talking to the doctor who prescribed it for you. Stopping ELIQUIS increases your risk of having a stroke. ELIQUIS may need to be stopped, prior to surgery or a medical or dental procedure. Your doctor will tell you when you should stop taking ELIQUIS and when you may start taking it again. If you have to stop taking ELIQUIS, your doctor may prescribe another medicine to help prevent a blood clot from forming. ELIQUIS can cause bleeding  which can be serious, and rarely may lead to death. This is because ELIQUIS is a blood thinner medicine that reduces blood clotting. You may have a higher risk of bleeding if you take ELIQUIS and take other medicines that increase your risk of bleeding, such as aspirin, nonsteroidal anti-inflammatory drugs (called NSAIDs), warfarin (COUMADIN®), heparin, selective serotonin reuptake inhibitors (SSRIs) or serotonin norepinephrine reuptake inhibitors (SNRIs), and other medicines to help prevent or treat blood clots. Tell your doctor if you take any of these medicines. Ask your doctor or pharmacist if you are not sure if your medicine is one listed above. While taking ELIQUIS: • you may bruise more easily • it may take longer than usual for any bleeding to stop Call your doctor or get medical help right away if you have any of these signs or symptoms of bleeding when taking ELIQUIS: • unexpected bleeding, or bleeding that lasts a long time, such as: • unusual bleeding from the gums • nosebleeds that happen often • menstrual bleeding or vaginal bleeding that is heavier than normal • bleeding that is severe or you cannot control • red, pink, or brown urine • red or black stools (looks like tar) • cough up blood or blood clots

• vomit blood or your vomit looks like coffee grounds • unexpected pain, swelling, or joint pain • headaches, feeling dizzy or weak ELIQUIS (apixaban) is not for patients with artificial heart valves.

How should I take ELIQUIS (apixaban)?

Take ELIQUIS exactly as prescribed by your doctor. Take ELIQUIS twice every day with or without food, and do not change your dose or stop taking it unless your doctor tells you to. If you miss a dose of ELIQUIS, take it as soon as you remember, and do not take more than one dose at the same time. Do not run out of What is ELIQUIS? ELIQUIS. Refill your prescription before you ELIQUIS is a prescription medicine used to reduce run out. Stopping ELIQUIS may increase your the risk of stroke and blood clots in people who risk of having a stroke. have atrial fibrillation. What are the possible side effects of It is not known if ELIQUIS is safe and effective ELIQUIS? in children. • See “What is the most important information I should know about ELIQUIS?” Who should not take ELIQUIS? • ELIQUIS can cause a skin rash or severe Do not take ELIQUIS if you: allergic reaction. Call your doctor or get • currently have certain types of abnormal medical help right away if you have any of bleeding the following symptoms: • have had a serious allergic reaction to ELIQUIS. • chest pain or tightness Ask your doctor if you are not sure • swelling of your face or tongue • trouble breathing or wheezing What should I tell my doctor before taking • feeling dizzy or faint ELIQUIS? Tell your doctor if you have any side effect that Before you take ELIQUIS, tell your doctor if bothers you or that does not go away. you: These are not all of the possible side effects of • have kidney or liver problems ELIQUIS. For more information, ask your doctor or pharmacist. • have any other medical condition Call your doctor for medical advice about side • have ever had bleeding problems effects. You may report side effects to FDA at • are pregnant or plan to become pregnant. It 1-800-FDA-1088. is not known if ELIQUIS will harm your This is a brief summary of the most important unborn baby information about ELIQUIS. For more infor• are breastfeeding or plan to breastfeed. It is mation, talk with your doctor or pharmacist, not known if ELIQUIS passes into your breast call 1-855-ELIQUIS (1-855-354-7847), or go to milk. You and your doctor should decide if www.ELIQUIS.com. you will take ELIQUIS or breastfeed. You Manufactured by: should not do both Bristol-Myers Squibb Company Tell all of your doctors and dentists that you are Princeton, New Jersey 08543 USA Marketed by: taking ELIQUIS. They should talk to t he doctor Bristol-Myers Squibb Company who prescribed ELIQUIS for you, before you have Princeton, New Jersey 08543 USA and any surgery, medical or dental procedure. Tell your doctor about all the medicines you Pfizer Inc New York, New York 10017 USA take, including   prescription and over-theCOUMADIN® is a trademark of Bristol-Myers Squibb counter medicines, vitamins, and herbal Pharma Company. supplements. Some of your other medicines may affect the way ELIQUIS works. Certain medicines may increase your risk of bleeding or stroke when taken with ELIQUIS.

This independent, non-profit organization provides assistance to qualifying patients with financial hardship who generally have no prescription insurance. Contact 1-800-736-0003 or visit ww w.bmspaf.org for more information.

© 2013 Bristol-Myers Squibb Company ELIQUIS and the ELIQUIS logo are trademarks of Bristol-Myers Squibb Company. Based on 1289808 / 1298500 / 1289807 / 1295958 December 2012 432US13CBS03602

TECHNOLOGY CRYPTOCURRENCY

China Bites Into Bitcoin  A speculative frenzy turned Bobby Lee’s BTC China into the world’s biggest Bitcoin exchange. Then Beijing dropped the boom. Easy come, easy go. BY KASHMIR HILL

B

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itcoins were worth nothing in 2009, when the digital cryptocurrency was first minted on the computer of its mysterious creator, Satoshi Nakamoto, who claimed to live in Japan. Four years later the value of one Bitcoin surpassed $1,100, thanks in large part to a surge in speculative interest from China. A little-known Shanghai company called BTC China met the demand and quickly became the world’s largest Bitcoin exchange, with more than 100,000 of the virtual coins, or $100 million, traded on a single day, nearly double the market share of its closest competitor, Japan’s Mt. Gox. BTC China attracted headlines and a $5 million investment in the fall from Silicon  Valley’s Lightspeed Venture Partners as well as its China arm. But its rapid growth, and that of Bitcoin, also attracted the attention of the Chinese government. Unwanted attention, as it turned out. In December the People’s Bank of China decreed that merchants may not accept Bitcoin and forbade banks and payment processors from converting Bitcoin into yuan. The price of Bitcoin fell below $500 in response. Bitcoin is still widely embraced by technophiles and libertarians (and porn and pot-dealing websites) because the currency is all digital, easily transported across borders and resistant to state controls. A Bitcoin is “mined” on privately owned, specialized computing equipment and passed around by

a global, peer-to-peer network of computers. Transactions are trackable, but the parties to each transaction are not. Bitcoin has attracted entrepreneurs and investors excited about its legitimate use: cutting out the middlemen in online payments. In December venture capital firm Andreessen Horowitz placed the biggest Bitcoin bet so far with a $25 million investment in San Francisco’s Coinbase, a platform for buying, selling and storing Bitcoins in the U.S. “As the world becomes more digital, paying physically with bills, gold or credit cards will seem archaic. Everyone will have Bitcoins,” says BTC China CEO Bobby Lee. But China’s actions over the past weeks have put BTC China’s future in doubt. After Chinese regulators held a closed-door meeting to warn financial companies against working with exchanges, BTC China was swiftly abandoned by two payment processors. “There are 300 payment processors in China. We’re going to go down the list and find one that will work with us,” says an optimistic Lee. He doesn’t think the government is trying to put him out of business but rather put the screws on Bitcoin to cut down on the rampant speculation. “They haven’t declared exchanges illegal. That gives us room to ma-

His investors hope BTC China CEO Bobby Lee has the gravitas to make the case for Bitcoin to Beijing regulators.

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TECHNOLOGY

CRYPTOCURRENCY

neuver, so there’s still hope.” Lightspeed’s Jeremy Liew is keeping a distant focus. “Anyone investing in Bitcoin companies and Bitcoin specifically should be doing so with the expectation that there will be a lot of volatility driven by regulatory announcements. We invest over 5- to 10-year horizons, not over two-week horizons,” says Liew. “For Bitcoin to be credible, we need executives who have the gravitas to make its case to regulators. That’s Bobby.” Lee, 38, was born in the Ivory Coast to parents who had moved there from China to set up a flip-flop factory. He was sent to an elite boarding school in the States, graduated from Stanford and spent eight years as an engineer at Yahoo in California. He moved to China in 2006 to work as an engineer at EMC. In 2011 he became Wal-Mart’s chief technology officer in China, charged with helping to build its commerce site. Lee first heard about Bitcoin in the spring of 2011 while visiting his family in California. Lee’s brother, Charles, was using some of his computer equipment to mine Bitcoin at home. Lee thought he would do the same back in China and bought a bunch of graphics cards from his brother. He started mining in July, the same month he started at WalMart. Neither lasted long. “It was a hot summer, and the computers created a lot of heat,” says Lee. “My wife said it was too noisy and hot, and so I turned it off in October.” He mined 25 coins, which struck him as a “waste” because they were worth  just $300 total at the time and he had spent $1,000 on mining gear. When Wal-Mart decided to partner with an existing e-commerce site in 2012 rather than build its own, Lee found himself jobless. His mind returned to those Bitcoins gathering digital dust on his computer. His brother had founded a competing cryptocurrency called Litecoin, but Lee wanted to focus on bringing Bitcoin to China. BTC China had popped up two years earlier as the country ’s first site for Bitcoin trading. “It was just two guys working part-time on it,” says Lee. They were charging a 0.3% trading fee, but seeing  just a few hundred trades per day. Lee sought out its cofounders to convince them it could be bigger. Lee became CEO in April. They relaunched the site in June and went out looking for venture capital. When they 44

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landed the round from Lightspeed in September, they eliminated their fee. That kicked off a bidding frenzy fueled also by the free Bitcoin p.r. that came when the FBI took down Bitcoin-only drug site Silk Road and Baidu announced it would accept Bitcoin for security services, plus the positive buzz around U.S. Senate hearings on the digital currency. But then the People’s Bank of China, responding to what it says was a wave of consumer concerns, declared in December that Bitcoin wasn’t a recognized currency and shouldn’t be used in the market, prompting Baidu and other Chinese firms to stop taking it as payment. As the extent of the realworld ban became clear, the price of a Bitcoin dropped to $345 on BTC China. Lee initially saw the declaration as just a speed bump. Chinese citizens were still free to trade Bitcoin. BTC China stayed on the good side of the government’s concerns about money-laundering by asking customers for official identification. BTC also reinstated trading fees to cut down on the frenzy. But days later the government crushed hopes of a thriving trading business when it unofficially barred payment processors from working with Bitcoin exchanges. Suddenly BTC China and others would no longer be able to move their customers’ funds from yuan to Bitcoin and back—which is what exchanges exist to do. “We’re reading the tea leaves,” says Shanghai Bitcoin entrepreneur Jack Wang. “But it looks like they’re going to squeeze the exchanges until they’re not able to operate.” China’s move is not without precedent. Eleven years ago Chinese Web service Tencent created a virtual currency called Q Coin for use in games. It became increasingly valuable offline and started trading on exchanges along with renminbi and gold. The government declared such use illegal in 2007, sending its real world value crashing to nothing. China is still letting people play with Bitcoin in its country, but by cutting off ways to convert it to real money, it is turning it into the digital Monopoly money that skeptics have always dismissed it as being. “If necessary, we’ll go into other Bitcoin services,” says Lee. The company plans to launch a secure online Bitcoin wallet called Picasso at the end of December. “This is not the end. It may be the end of a chapter, but it’s not the end of our company.” F

GADGETS WE LOVE ROAMING EMPIRE

KnowRoaming (know roaming.com), a Toronto startup, feels the pain of every business traveler fumbling around with SIMs and rented phones while abroad. It developed a smart sticker to apply to your SIM card that automatically connects your phone to a local network overseas, so you pay like a local instead of getting slammed with roaming charges. KnowRoaming has deals in most countries and can save you up to 85% on prepaid data and voice. Available soon for iOS and Android. —Bruce Upbin

EDUCATION FOR LIFE

ENTREPRENEURS DIGITAL PLATFORMS

Second Life Reggie Aggarwal almost lost his event platform to bad luck and overspending. Here’s how he clawed his way past $1 billion. BY KARSTEN STRAUSS

H

is 15th high school reunion should have been a boastfest. Reggie Aggarwal had been class president and had gone on to become a lawyer and a hotshot entrepreneur. Instead, he had to admit to old acquaintances that his company was a  joke in the industry—and that he was broke, owed money to investors and had moved back in with his parents. “I was kind of the Indian George Costanza,” he says. Eleven years on it’s a different story. Cvent, the McLean, Va. event registration and management company Aggarwal launched in 1999, has roared back from the dead. Last August it went public on the NYSE, raising $117 million; its recent market cap was nearly $1.6 billion. Over the most recent four quarters the company lost $1.3 million on $104 million in revenue. Customers like Wal-Mart, Siemens and WellPoint use the cloud-based platform to search, field bids, book reservations and register attendees for more than 200,000 venues in 90 countries. The platform is free; registration costs a small fee. Cvent’s mobile app for managing and navigating conferences runs from $6,000 to $10,000. It also charges venues to advertise on the platform’s search pages. Second chances are the stuff of Steve Jobs and Michael Dell. But Rajeev K. Aggarwal? As an entrepreneur, he says, “you just don’t know how to give up.” By all rights he probably should have. Born in Kansas and raised in northern Virginia by parents who’d emigrated from India, Aggarwal majored in finance at the University of Virginia and got a law degree from Georgetown. Cvent grew out of his frustration trying to organize gatherings for the Indian CEO High Tech Council, his networking group. He was 46

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sending hundreds of individual e-mails, managing replies and organizing food preferences for meals—while trying to practice law at Coopers & Lybrand. Aggarwal raised $700,000-plus in seed funding from angels and friends, his own pocket and multiple credit cards. Linking up with Chuck Ghoorah, David Quattrone and Dwayne Sye—Cvent’s executive vice president of sales and marketing, CTO and CIO, a team still in place—he launched a simple event-registration company to help businesses send digital invites to conferences and meetings. It was late 1999, and the tech boom was nearing its peak. Competitors like Evite.com and Mambo.com were getting funded big-time. “We decided to jump in,” says Aggarwal, now 44. Cvent raised $17 million within a year, mostly from Aggarwal’s Indian CEO contacts. He thought he’d take the industry by storm. Within eight months Cvent grew from 5 employees to 125. “We blew through that $17 million and were down to $400,000 in the bank—and

“I was kind of the Indian George Costanza”: Pride—and shame at disappointing investors —drove Aggarwal.

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ENTREPRENEURS DIGITAL PLATFORMS

then that perfect storm hit: Sept. 11, the dot-com meltdown and reality,” says Aggarwal. “We’d only built a $1.5 million revenue company.” Business stalled. Clients began canceling events, and new prospects felt solicitation in the wake of such a tragedy was in poor taste. The company was burning through $1.1 million a month. Cutting 100 staffers, along with all nonessential spending, served as a makeshift tourniquet. Sanju Bansal, the company’s first investor and a director, says the board wondered whether Aggarwal was fit to lead. His passion helped him keep his job. “The people that were left, they weren’t loyal to just the idea—they were loyal to Reggie,” Bansal recalls. Ghoorah was constantly cold-calling, while CFO Thomas Kramer chased down invoices. Aggarwal took no salary and personally signed for Cvent’s office lease for a lower rent—shackling his own credit rating to the survival of the company. “It was the toughest time in my life because I’d never been knocked off my horse like that,” says Aggarwal, a prolific hand-talker. He was ashamed of letting down his invesHe took no tors, most of whom were friends and close salary and associates. personally Worse, he says, was signed for the having to jettison his rent. “It was dream of fast growth the toughest and market dominance. Cvent had to time in my refocus on scoring cli- life. I’d never ents in the midmarket  been knocked range, while remaining cash-flow-positive. off my horse “We knew we had like that.” something here; we  just went about it the wrong way,” says Ghoorah. Cheap became the new religion—still widely practiced today. All employees fly coach and share hotel rooms. The IT staff is skeletal. Aggarwal finally got around to hiring an assistant two years ago—about when he took on a company lawyer. The on-site coffee barista came aboard only after a test run in Cvent’s New Delhi office reduced employees’ going out for java by over 80%. “It’s in our culture,” says Aggarwal. Cvent planted a flag in India back in 2002, largely to cut costs and handle support services. It’s done much more than that, growing from fewer than 10 employees to 800; it now over48 | FORBES

JANUARY 20, 2014

sees sales, client services and product development. An exchange program lets American employees spend six weeks in Delhi and Indian workers hang out in McLean. Another comeback lesson was learning to focus more on its hires. After Cvent started turning a corner in 2003, it began recruiting new college grads—kids who are hungry, energetic, tech-savvy, cheap and relative blank slates. “What you tell them they’ll believe and think that’s the only way to do it,” Aggarwal explains. New employees—like the 100 brought on last year from the likes of the University of Virginia, Virginia Tech, James Madison University, Penn State and Duke—attend an eight-week boot camp at Cvent University. With the business stabilized, Aggarwal started thinking big again. He bulked up the sales and marketing team—600 of his current 1,400 employees—and pivoted beyond the middle market, nabbing clients like Yahoo, Marriott,  Visa and AARP. Between 2008 and 2012, Cvent claims, its revenue compounded at an annual rate of 34%; $5 billion in transactions took place via its system last year. Its closest (and larger) competitor? Active Network of San Diego, which lost $39 million on $450 million in revenue over the latest four quarters—and recently agreed to be acquired by a private equity firm. In 2011 Aggarwal went to investors again, raising $136 million mostly to pay off his longsuffering original backers. Insight Venture Partners provided half the capital in the round and declined to cash out in last summer’s IPO. “You had a big category, it was early in the category, and they were the dominant player,” says Jeff Lieberman, a managing director at Insight. “It’s like a sales and marketing machine.” With a lot of elbow room. “We estimate that $103 billion is spent at hotels from meetings and events,” says analyst Debbie Wong at Frost & Sullivan. Cvent hopes to scoop up more business by acquiring mobile app developers Seed Labs and CrowdCompass, as well as ticketing company TicketMob. It opened a London office last July; a Frankfurt location is on the way. Expansion is certainly squeezing margins. “This is the first time in a very long time that we’re taking our profitability down to go after market share,” says Aggarwal. That’s okay; his investors expect bigger things. First investor Sanju Bansal has put in a total $2.3 million over the years and estimates he has seen a 30 times return. He’s letting his money ride. F

FOUNDERS’ TOOLBOX EXIT SIGNS

On the heels of a sizzling IPO market, there’s more hope for entrepreneurial paydays: a robust M&A market for U.S. deals under $1 billion. As of Dec. 17 there were 2,410 deals, valued at $287 billion—flat compared with the same period a year earlier but higher prices for 9% fewer acquisitions and a larger portion of activity worldwide. Winners: energy and real estate. Next year looks even better, says Thomson Reuters analyst Matthew Toole, who compiled the numbers. Based on a recent survey, he adds, “Corporate dealmakers see an increase of 17% for M&A, driven by financials/real estate, media/telecom and technology.” Why? The strong stock market, a pickup in the economy—and record amounts of cash on corporate balance sheets. —Emily Inverso

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ENTREPRENEURS WEAPONS

Ready, Fire, Aim TrackingPoint makes a $27,500 rifle so smart that it can’t miss. So why has the company been misfiring? BY ABRAM BROWN

C Call of duty: Tech chief John Lupher had to step in as acting CEO.

ustomers who want to test-drive TrackingPoint’s Precision Guided Firearm often come to an outdoor firing range in Texas Hill Country with Chase Sutton. A bearded, 300-pound wildlife biologist and safari guide turned luxury-gun salesman, Sutton helps average Joes become G.I. Joes with  just a 20-minute lecture and a demo. Peer through the scope and line up a small white dot (the center of the crosshairs) onto an orange disc 1,000 yards away. Then push a red button to lock the gun’s guidance system on

the target, pull the trigger and … nothing. I’ve fumbled and moved the weapon off-target. One more try and the rifle fires itself without warning the precise moment it has calculated perfect alignment. A loud metallic clang registers a hit. “Once you get these guns into someone’s hands,” says Sutton, smiling widely, “they really sell themselves.” Not always. In its first year of operation TrackingPoint was hit with quality snafus that set it back—and caused a ruckus in the C-suite. The Pflugerville, Tex. company says it’s fixed all the problems. “Reliability and accuracy are what this company stands for,” says acting CEO John Lupher, 50, who had to step into that role in November. As the guy who designed the gun, it was his game to win or lose. Backed by $35 million in funding from founder John McHale, his buddies and Austin Ventures, TrackingPoint started 2013 with a bang. When it released its three versions of the gun, priced from $22,500 to $27,500, videos went viral online—four YouTube clips have a million or so views—pushed by rich fanboys who wanted one (Governor Rick Perry is a big fan) and an angry outburst from the antigun crowd.

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ENTREPRENEURS WEAPONS

But the launch was anything but smooth. TrackingPoint had a tough time deciding its target customer—the military or the affluent enthusiast? That, coupled with the product flaws, caused undisclosed losses last year on estimated revenue of $7 million. TrackingPoint was created from a missed opportunity—a missed shot, actually. McHale, 58, was spending time hunting, having sold four high-speed network and cybersecurity companies to the likes of Cisco and the old Compaq. On a trip five years ago to Tanzania he had stalked a Thomson’s gazelle and got within 350 yards of it, close enough to shoot. “My central nervous system just couldn’t hold the gun steady enough,” he says. He missed and spent the rest of the safari stewing about it. When he got home he looked up a tech guy in Austin. Lupher’s electronics-design firm had designed software for early versions of Siemens’ cordless handsets and Motorola’s DVR box. Assuming McHale wanted a supergun just for his own use, Lupher designed a prototype (a Remington hunting rifle hooked into a laptop). But it came together so well that the two agreed there might be a business in it. Lupher left his shop, took 11 employees with him and threw in with McHale, figuring it would pay off: “John’s sold over a billion dollars’ worth of companies he has personally founded.” What distinguishes the gun is its scope and trigger mechanism. TrackingPoint doesn’t make the actual .300 Winchester Magnum rifle; it comes from Surgeon Rifles of Prague, Okla. The scope has a laser rangefinder that gauges distances; gyroscopes, an accelerometer and a magnetometer measure how much you’re moving the gun. Zoom in through a 14.6-megapixel camera, and once you select a target, fixed or otherwise (there’s a stationary mode and a mover mode), a digital-signal processor calculates an equation 54 times a second to find the best time to fire. Built-in, Linux-based Wi-Fi means you can livestream a hunt onto your iPad. But who would buy such a sophisticated and expensive toy? “We didn’t know exactly where the market for this technology was,” says Lupher. A demo for troops at Fort Benning brought some interest. The U.S. Army has an outstanding order for a few rifles. (The military declined to comment.) But given the endless stretch of time required for 52

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Pentagon procurement, TrackingPoint decided to look elsewhere—mainly to a population of 13.7 million hunters. Many discovered the gun through the videos, gun blogs and the mainstream press. To show off the line, TrackingPoint’s three salesmen toured gun and safari clubs throughout Texas (half of whose 10 million households have firearms), as well as Las Vegas for the SHOT Show and a charity gun event at the vineyard of Nascar tycoon Richard Childress. Other advertising venues weren’t an option: Google, for example, won’t put firearms on its AdWords program. An interested customer starts by filling out an online form. More than 2,000 have applied, the tiniest fraction of the $4 billion commercial gun and ammo industry in the U.S. Roughly half of all applicants get considered, once the sales guys do Google and Trulia searches on prospective customers and track them through public records. “If someone has a $600,000 house and a BMW, they’re a good bet,” says Sutton. Less affluent buyers get entered into a database for later consideration, when TrackingPoint offers cheaper models. Once a buyer sends payment the company runs a background check and ships the gun to a licensed dealer for pickup. Problems with the rifles surfaced last fall, as customers sent in videos documenting their complaints. Most had to do with a failure of accuracy in extreme hot and cold temperatures. After just six months as CEO, Jason Schauble, a Remington vice president handpicked by McHale, was out of a job, replaced by Lupher. He revamped the clean room and instructed designers to tweak the optical system by adding a different prism that allows greater temperature stability. That seems to have solved it. Now one in 20 products is tested before shipping, up from one in 100. What’s next? Vann Hasty, who oversees product development, is debuting a smart semiautomatic rifle at a lower price point in the first quarter. The ideal customer: deer and varmint hunters. But Hasty, plucked from Amazon’s top-secret design labs, has another pie-in-the-sky notion. A multiblade drone sits in his office, the basis, perhaps, of an airborne tool that can relay video of game on the ground below to a hunter’s iPad. All that futuristic stuff sounds cool. First, though, TrackingPoint needs to get past all those misfires. F

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INVESTING TAXES

Turn Doctor Bills Into Retirement Income Some clever customers are creating super-IRAs out of their health savings accounts. BY WILLIAM BALDWIN

WOULD YOU LIKE A TRIPLE-TAX-FREE

form of retirement saving? By that we mean: (1) You get a deduction when you put the money in. (2) It compounds tax free. (3) It comes out tax free. The powerful tax-saving vehicle is a health savings account. An HSA is a kitty, funded by you and/or your employer, that you are supposed to use to cover deductibles and copays in a high- deductible health insurance policy. Supposed to use, but don’t have to use. That’s the starting point for this investment scheme. Amounts you don’t draw down carry over from one year to the next, and balances can build up. You can use the account to play the stock market. Most HSA users find themselves with plenty of medical bills to pay and spend the money almost as fast as it comes in. But a sliver of the 9 million Americans with HSAs stuff their accounts and make no withdrawals. Even though HSAs have been around for only a decade and the ceiling on contributions has been in the neighborhood of $7,000 a year, some accounts have gotten quite plump. HSA Administrators, an account custodian in Richmond, Va. that caters to compulsive savers, says it has many with more than $100,000. HSA Bank, a Wisconsin-based unit of Connecticut’s Webster Bank that works with 54

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both individuals and big employers, claims to have seen one balance just shy of $1 million. To get the most out of this tax shelter you have to run up medical bills over the next several decades that, cumulatively, exceed your account balance. You also have to be aware of a peculiar rule that says you can make retroactive claims, explains Eric Remjeske, whose Minneapolis firm, Devenir, helps HSA providers design investment menus. Let’s say you get a $1,000 doctor bill you owe because you haven’t met the steep deductible in your insurance plan. Keep your HSA debit card in your wallet, advises Remjeske. Whip out another credit card, maybe one with reward points, whose balance you scrupulously pay in full every month, for the doctor. Now what? Put the doctor bill in a shoe box until you’re retired. The $1,000 you didn’t withdraw from the HSA has grown to, say, $3,000. Now you take the money out, and match it against the ancient bill plus $2,000

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of other medical costs incurred in the meantime. In effect, you have created $3,000 of retirement income with no tax on it. That’s as good as a Roth IRA account— no, better, better, because the money was deducted on the way in, a benefit not avail available able on your Roth savings. HSA contributions from your employer,, and your own, if deducted from employer your paycheck, never appear in your income. If you are self-employed, the HSA contribution reduces your adjusted gross income, a powerful form of tax deduction. In justifying your HSA withdrawals you can’t claim any medical expense you have already used as an itemized deduction on your tax return. But for most people the itemized deduction is unobtainable anyway, because medical expenses count only to the extent they exceed 10% of income. What if you are so healthy, or do so well with your investments, that your HSA tops your lifetime medical costs? That would be a nice problem p roblem to have. If it affl icts you, the triple tax shelter turns into a mere double. HSA money withdrawn after age 65 and not matched against medical costs is taxed like a 401(k) payout, as ordinary income. But there are a lot of unreimbursed medical bills that can go into that shoe box after being paid with funds from outside your HSA. The main one that can’t is the premium to buy the high-deductible plan. Almost anything else goes in, provided that the patient was covered at the time by a high-deductible health insurance policy: copays, deductibles, doctor bills that you owe because the doctor is not in your network, braces for your kids, nursing home insurance, eyeglasses. eyeglasses. Once you are in Medicare, you can no longer contribute to the HSA, but you can use the money on insurance premiums, including Medicare and Medigap policies. Is the look-back feature a loophole? Consider it a feature, not a bug. Legislators set up the system to reward patients for selecting insurance that makes them cost-conscious. If they also persuade people to save for their old age, they will defer the day when nursing home costs send Medicaid into bankruptcy. To open an HSA, you have to be covered by a high-deductible plan. That’s one that inflicts a certain minimum level of pain on patients: The deductible (the amount you shell out before insurance kicks in) has to be at least

$1,250 for an individual policy and $2,500 for a family policy. HSA-compatible policies are widely available on ObamaCare’s exchanges, according to HSA Consulting Services. Advice from Remjeske of Devenir and Patrick Jarrett of HSA Administrators: MAXIMIZE THE MATCH. If you can’t afford to top out both your HSA and your 401(k), arrange your dollars so that you don’t miss an employer contribution in either place. CONSIDER THE HSA AN EMERGENCY

TRENDING the HSA, the entire amount can be tapped without tax What the 53 million or penalty. Once withdrawn, the money can’t Forbes.com users be put back in, however. are talking about. CONTRIBUTE AT WORK. This way both For a deeper dive go to FORBES.COM/INVESTING you and your employer save on payroll taxes. (Self-employed participants lose this benefit.) COMPANY If you don’t like the investment choices in the JPMORGAN CHASE employer plan, you can move the money later. Bank takes FDIC to  Your our court over Washington SHOP FOR INVESTMENT OPTIONS. OPTIONS. Y Mutual liabilities. employer plan may offer only expensive mutual funds, aimed at recouping the overhead PERSON BEN BERNANKE on the $2,000 typical account balance. If you In the departing have graduated graduated to a higher level, consider chairman’s last big doing a trustee-to-trustee transfer of most of move, the Federal your money. Reserve finally tapers. For $36 a year you can have an account at IDEA HSA Bank that gives you access in turn to a COMEBACK KIDS zero-fee account at TD Ameritrade. TD’s $10 Stocks that were left out trading commission goes to $0 for a long list of 2013’s rally—Rio Tinto, Philip Morris, Cirrus of exchange-traded funds, including many Logic—may emerge as that rate as best buys on the FORBES ETF 2014 winners. scorecard. If you have a six-figure sum you want to put into a single open-end Vanguard fund, HSA Administrators is not a bad choice.    E Its fee ($109 a year, in this case) gets you into    S    G    A    M    I  Vanguard’  V anguard’ss cheapo Admiral Admiral share class. class.    Y    T    T    E    G MAYBE OPEN TWO HSA’S. For 2014 the     /    I    K    S maximum contribution for a couple with a    W    O    A    I family policy is $6,550, plus $1,000 for each    L    M    S    N of them over 55. To land the second $1,000    A    D    N    E catch-up allowance, the couple must have    R    B two accounts. FUND. If your shoe box is as big as

DON’T WAIT TOO LONG TO CASH IN.

Amounts left behind in an HSA become taxable income on either the decedent’s final return or the tax return of nonspouse heirs. But note that a surviving spouse can treat an inherited HSA as his or her own, and that HSAs can cover the expenses of spouses. If you are married, you can go to your grave clutching that shoe box, provided that your widow(er) knows to use it quickly. F JANUARY 20, 2014  2014  FORBES

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calls gets you $400 (500 shares x $0.80) minus transaction costs of about $10. If Intel is trading INVESTING below $25 on the third Friday in February, the FUNDS calls expire worthless; you keep the $400 plus your shares. Intel has a 3.7% dividend yield, with the 500 shares producing income of about $450 a year. year. The $400 from selling calls boosts your yield to 6.8%. Of course if Intel rises above $25 before expiration, you have to sell at $25— but you keep the $400 and any dividends alLooking for high yields? Consider buying funds that ready paid. A similar “expire worthless” stratsell the call options on your stocks. egy can be employed selling puts, but you need to have enough cash to make good on your promise to buy stock at a certain price. BY JOHN DOBOSZ Too complicated? A low-hassle alternative is to invest in “buy-writ “buy-write” e” closed-end funds, IMAGINE SOMEONE handing you money which employ covered-call strategies on infor something you own in exchange for the right to buy it at a certain price for a limited pe- dividual stocks or indexes or sectors. Expenses run about 1% a year, and payouts are riod of time. It would be unusual to strike this typically 7% to 10% a year. Monthly cash diskind of deal for your car or watch, but in the tributions come in the form of ordinary incase of stocks it happens all the time. You can come, capital gains and return of capital, so sell call options on stocks you already own and simply pocket the option premium if the option these funds are best kept in an IRA. In the sort of bull market we’ve had since is never called. Indeed, your goal is for the op2009,, broad market buy-write funds will un2009 tions to expire worthless and never be called. derperform, since selling call options caps upA growing number of investors are findside potential. But most of the funds sell for 9% ing conservative options selling (or “writing”) a great way to wring extra income out of portfolios. to 13% below their net asset value, making them a good buy, says Alex Reiss, closed-end fund “We’re “W e’re boosting our returns by more than three percentage points per year. ... Who wouldn’t want analyst at Stifel Nicolaus. One fund he likes is Nuveen Equity Premium Opportunity, which to do that?” asks Alan Salzbank, 58, of Gargoyle trades at a 9.7% discount to NAV. It is tilted toAsset Management. The RiverPark/Gargoyle ward technology, with 75% of stocks from the Hedged Value Fund is up 25.7% in 12 months. To sell a “covered” call on a stock (covered, S&P 500 and 25% from the Nasdaq 100. It sells because you already own the shares you’re calls on those indexes that are about 2% out of promising to deliver) you must have at least 100 the money, giving stocks room to appreciate. shares. Say you have 500 shares of Intel tradMichael Jabara, an analyst at Morgan Stanley, ing at $25 and a February 2014 call to buy at likes AllianzGI NFJ Dividend Interest & Premi$25 (the strike price) is going for $0.80. Selling um Strategy. Strategy. Its portfolio is 75% value stocks and 25% convertible bonds, OPTIONS INCOME AT A DISCOUNT which “contribute adTHESE BUY-WRITE FUNDS BOAST IMPRESSIVE PERFORMANCE AND TRADE BELOW THE VALUE OF WHAT THEY OWN . ditional yield and offer TOTAL 2 2 upside in a rising marNAV 12-MONTH RETURN   RETURN FUND / TICKER DISCOUNT YIELD1 1-YEAR 5-YEAR3 ket while providing downside support in FIRST TRUST ENHANCED EQUITY INCOME � FFA –����� ���� ����� ����� a falling market,” he BLACKROCK GLOBAL OPPORTUNITIES EQUITY TRUST � BOE –���� ��� ���� ���� says, noting that the BLACKROCK ENHANCED CAPITAL & INCOME � CII –���� ��� ���� ���� fund sells at a 3.6% disING GLOBAL ADVANTAGE & PREMIUM OPP � IGA –���� ��� ���� ���� count to its NAV. DisEATON VANCE TAX-MANAGED TAX-MANAGED DIVERSIFIED EQUITY INCOME � ETY –���� ��� ���� ���� counts tend to get narEATON VANCE ENHANCED EQUITY INCOME � EOI –���� ��� ���� ���� rower when market NUVEEN EQUITY PREMIUM OPPORTUNITY � JSN –��� ��� ���� ���� sentiment improves, EATON VANCE TAX-MANAGED BUY-WRITE OPP � ETV –��� ��� ���� ���� and widen as investors DOW �� ENHANCED PREMIUM & INCOME � DPO –��� ��� ���� ���� ALLIANZGI NFJ DIVIDEND INTEREST & PREMIUM STR ATEGY �NFJ �NFJ –��� ���� ���� ���� become more bearish. F

Money From Nothing

DATA AS OF DEC. 13. 1AT MARKET PRICE. 2AT NAV. 3ANNUALIZED. SOURCES: BLOOMBERG; LIPPER.

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INVESTING KEN FISHER — PORTFOLIO STRATEGY STRATEGY

 A BIG BI G �BUL �B ULL� L� SUR SURPR PRIS ISE E FOR 2014 CONSENSUS SENTIMENT , par-

ticularly among professionals (who as a group are almost always wrong), tightly clusters around a 6% S&P 500 return for this year year.. When sentiment clusters like that my research shows stocks almost always do much better or much worse. Expect better!  Yes,  Y es, this bull market has has moved well past pessimism. But residual skeptics still temper the euphoria that classically death-knells stocks. More standard measures of optimism tend to hit halfway through a bull— and that should be sometime in 2014. Happy times, indeed! Can things go wrong? Of course. But don’t bet on it. My biggest 2014 2014 positive sursurprise? How well the world will work when quantitative easing finally dies. As I’ve detailed multiple times, virtually everyone gets this wrong and backward. QE isn’t expansive or bullish—just the reverse. When it ends the party finally gets going good, as yield spreads widen and bank lending, money supply and economic growth finally take off—the exact U.K. U. K. experience after they ended their dismal version of this idiocy. America’s broad money supply has grown slower in this expansion than any you’ve lived through. That loosens soon. Enjoy the ride. Among my lousier 2013 picks: CHINA MOBILE (CHL, 52) (from Jan. 21 at $58), which missed earnings estimates. Expectations are lower now. now. I like that. As China’s 8% growth keeps rippling inland, so will mobile demand. Expect moderate growth and a stock that performs almost exactly the same because it didn’t in 2013. It sells at 11 times my 2014 earnings es-

timate with a 3.8% dividend yield. Glad I didn’t pick Brazil’s EMBRAER (ERJ, 31), the world’s fourth-largest aircraftmaker. It also lagged in 2013. That should reverse in 2014 2014.. Investors hate it—I love that. Second, I like Brazil. Third, it’s got a stellar CEO in Frederico Curado. And in emerging markets, airlines (Embraer’s customers) grow (unlike developed nations). Fourth, Embraer is superstrong in the corporate market and in smaller planes. Fifth: In the long term improving extractive technologies make

like Lipitor, Lipitor, Diflucan and Zoloft, to its new leukemia drug, Bosulif, Pfizer’s A-to-Z product line will generate moderate growth from aging baby boomers (and emerging markets). It sells at 12 times my 2014 EPS estimate with a 3.1% dividend yield. U.K.-based GLAXOSMITHKLINE (GSK, 52) is a similar A-to-Z druggie, which should have a similarly good 2014 but with shorter average patent lives and more nondrug consumer items (like Aquafresh and Sensodyne). It’s trading at 16 times my 2014 earnings estimate with a 5% dividend yield. AFFILIATED MANAGERS MANAGERS GROUP (AMG, 208), a capable owner of asset-management firms (my industry), is grossly overvalued with overly positive investor sentiment and a history exceeding its future. But selling short a strong stock in a bull market is a fool’s game—unless you buy equal amounts of an even stronger one as a single stock package. Expect LEGG MASON (LM, 43), a slightly larger asset-manager-owner, to best AMG. Why? It’s cheap. Inves-

THE WORLD WILL WORK BETTER THAN YOU THINK AFTER AF TER MONETARY MONETARY EASING ENDS fossil fuels ever cheaper, lending upside leverage to jet usage. Finally, fact: FORBES’ publisher, Rich Karlgaard, would give a lot to pilot a Phenom 300, which tells me something. Embraer sells at 90% of revenue and 17 times my 2014 earnings estimate. Regular readers know I like drug stocks as this bull market matures. I prescribe PFIZER (PFE, 31). From big brand names like Advil and Viagra to post-patent-protected post-patent-p rotected blockbusters

tors really hate it. It’s got a new, very focused and success-oriented CEO (Joe Sullivan). And it owns legendary names (like Batterymarch, Batterymarch, Brandywine, Permal and Royce). Amazingly Ama zingly,, 85% of analysts have a hold or sell rating on it—a rare display of extreme negative consensus. Buck that with these two, a buy and a short sale together together,, giving your 2014 portfolio a parlay that should help keep the bulls running. F

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

JANUARY 20, 2014  2014  FORBES | 57

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INVESTING  JOHN BUCKINGHAM — INVESTOR CHECKUP

BEATING BACK

THE BUBBLE BABBLE WITH STOCKS AT or near alltime

highs, financial publications and market pundits are providing plenty of hot air as they inflate a bubble by talking about a stock market bubble. All of that chatter is a plus from a contrarian perspective, even as valuations on the major U.S. equity market averages are near the high end of their historical ranges. The trailing-12-month P/E ratio of 25.5 on the S&P 600 Index (small caps) and 23.3 on the S&P 400 Index (midcaps) are well above median end-of-year P/E ratios dating back to 1995 of 21.9 and 20.9. Compared with the relative richness of smaller stocks’ valuations, large caps still look cheap. The S&P 500 now trades at 16.9 times earnings, which is actually below the 19-year median of 18.3, while the current dividend yield of 1.93% is higher than the 1.80% median. Even at current prices, I’m still finding attractive stocks. There are certainly many growth stocks trading for rich valuations, but the beauty of active portfolio management is that you don’t need to own them. For instance, if you look at the S&P 500 you see that one of its most popular components is Netflix, the video subscription service, which trades for more than 300 times earnings. Sometimes stocks do grow into their multiples, but I find Netflix hard to justify at these levels. Something much easier to digest is the modest valuation of a world-class franchise like APPLE (AAPL, 545) , which trades for 14 times earnings and also rewards shareholders with a healthy 2.1% dividend yield. Believe it or not, if Apple were awarded the

same earnings multiple as Netflix, the consumer electronics superstar would change hands at nearly $12,000 per share. Plump multiples also abound among the various S&P 500 travelbooking websites. Expedia, Priceline and TripAdvisor all trade for more than 30 times earnings. Unlike many tech startups that have recently gone public, each of these companies actually makes a profit, but there are much less expensive stocks in the

IF APPLE WERE AWARDED THE SAME P�E AS NETFLIX, IT WOULD SELL FOR NEARLY $12,000 technology sector, especially among its largest members. For example, networking equipment company CISCO SYSTEMS (CSCO, 21), software king MICROSOFT (MSFT, 36), microchip titan INTEL (INTC, 25) and IT solutions provider IBM (IBM, 180) all trade for about 4 times earnings while also providing dividend payouts well above that of the S&P 500. In the case of Intel, you’re looking at a generous 3.6% yield. The list of inexpensive large-cap

JOHN BUCKINGHAM IS CHIEF INVESTMENT OFFICER AT AL FRANK INVESTMENT MANAGEMENT AND EDITOR OF GO TO FORBES.COM/INVESTORCHECKUPFOR MORE YEAR�END TAX ADVICE. 58

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JANUARY 20, 2014

companies in the S&P 500 is not only limited to the tech sector. I’m a fan of stocks in the capital goods sector like agricultural equipment maker DEERE & CO. (DE, 89) and construction equipment concern CATERPILLAR (CAT, 88), two names that also offer low earnings multiples and rich dividend payouts. And the commodities space has bargain stocks, including oil driller ENSCO (ESV, 56), which trades for less than 11 times earnings and yields 4%, and mining and energy conglomerate FREEPORT-MCMORAN COPPER & GOLD (FCX, 35), which sports a P/E of 12 and a dividend payout of 3.6%. Rounding out my baker’s dozen of undervalued stocks are retailer KOHL’S (KSS, 55), utility operator ENTERGY (ETR, 62), medical device maker BAXTER INTERNATIONAL (BAX, 67) and banking giant WELLS FARGO (WFC, 45), nearly all of which boast below-average P/E ratios and aboveaverage dividend yields. Keep in mind that even as the Federal Reserve tapers its bond-

buying program, interest rates are still near historic lows, with money market funds yielding 0.01% on average today, compared with 4.5% at prior market peaks in 2000 and 2007. This fact, along with the inexpensive valuations of my holdings, abates any worries that I may have about a bubble in stocks. Don’t be dissuaded by the strong performance of the past year. Cheap stocks are still out there. F

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ARQ853KR/11ES45

INVESTING DAVID PEARL — INTRINSIC VALUE

CAP EX COMES OUT OF THE CLOSET HERE’S A TREND for 2014: Capital

expenditures, otherwise known as cap ex, will come back with a vengeance. It’s been in hibernation since the financial crisis as skittish companies either hoarded cash or paid it out in dividends. In fact the change is already happening but not publicized. According to Ned Davis Research a record $642 billion was spent on cap ex in the 12 months ended June 30. But don’t expect cap ex companies to make a big deal of it just yet. Investors continue to adore dividends, and capital-spender stocks tend to sag. For example, from March 2011 through November 2013 the top decile of S&P 500 companies ranked by cap-ex-to-sales underperformed the bottom decile by 15%. Holding back on cap ex makes sense in the short term when the outlook for economic growth is poor. Even if the cost of capital is low, why build a new plant if there’s no demand? But that’s changing, and the purse strings are loosening. Already we are seeing more mergers because the market is starting to recognize value in other uses of cash. In a slow growth environment, if you can’t grow organically, a well-planned acquisition makes a ton of sense. So does investing in your business. In the long run most successful companies have to reinvest—spend to grow. The market’s recent run-up has been fueled by expanding multiples. That game is over, especially with interest rates poised to rise. In 2014 companies that reinvest in an effort to increase free cash flow will thrive. The key, of course, is finding companies where the ROI from incremental

cap ex exceeds the cost of capital. Here are three low-profile cap ex companies, all based in New England towns, that I believe will produce double-digit growth in free cash flow and outpace the broad market. TERADYNE (TER, 17) of North Reading, Mass. manufactures test equipment for the semiconductor, wireless and hard-disk-drive industries. With $1.7 billion in revenues it has used its cash flow primarily for capital expenditures and acquisitions. Cap

THE MARKET’S RUN HAS BEEN FUELED BY EXPANDING MULTIPLES. THAT GAME IS OVER ex has nearly tripled from the lows of 2009 to $111 million per year, and the company has gained market share in most areas while the number of players in the semiconductor test industry has shrunk to three. Teradyne’s acquisitions have also been successful. The most recent one, LitePoint, generated an ROI of more than 16% in the first year of ownership. Today the stock sells for 11 times forward earnings. Similar in size, HEXCEL (HXL, 43),

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in Stamford, Conn., is one of a few global suppliers of aerospace-grade composite materials. It has spent significant capital to support the production ramp-up of the Boeing 787, the Airbus A350 and the Airbus A380. These aircraft use far more composite materials and are lighter and more fuel-efficient than the aircraft they replace. Boeing and Airbus have multiyear backlogs for the new aircraft, and Hexcel operates under long-term supply contracts with no risk of substitution. The stock ran up nearly 60% in 2013, but it’s still a good investment—even at 20 times forward earnings. Just up the road from Hexcel, in Danbury, is PRAXAIR (PX, 127), one of four global industrial gas suppliers. The $37 billion (market cap) company spent significant capital on growth projects worldwide, like building air separation units for coal gasification projects in China. These projects are generally supported by favor-

able 15-year contracts that protect Praxair from swings in raw material prices and other input costs. If priced correctly, these projects should realize long-term returns on capital at a healthy spread over Praxair’s cost of capital. The expected double-digit growth in free cash flow will come from a combination of these investments and a cyclical recovery in Praxair’s core businesses. Hedgies have bid up the stock, but it’s still a great long-term buy. F

JAPAN SPECIAL ADVERTISING SECTION

JAPAN 2014 The Sky Is the Limit

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apan’s economy has faced serious econ omic challenges in recent years, but the emergence of “Abenomics”—the expansionist economic policies of Japanese Prime Minister Shinzo Abe—has put Japan back in the global spotlight. Our repor t on Japan highlights several leading CEOs who are eage r to seize the day and capitalize on opportunities that enable them to gain ground both at home and abroad. These CEOs are actively engag ed in growing their businesses across various sectors around the world. Whether they are running longstanding family businesses or conglomerates with diverse interests, they are looking for new avenues of expansion. They are evaluating the potential of markets in both developed and emerging regions and adapting their strategies to operate efficiently and invest wisely. Most of all, they are keeping an eye on meeting the needs of customers. From manufacturing high-quality, innovative goods such as cameras, printers, components for industrial machinery and food, to providing transportati on services and conducting global marketing, investing and trading activities, the sky appears to be the limit. In spite of global economic uncertainties and fierce market competition, these companies exude a sense of confidence that they will continue to thrive in business in Japan and beyond.

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Index 03 Tetsuro Tomita East Japan Railway Company www.jreast.co.jp/e 04 Fujio Mitarai Canon Inc. www.canon.com 07 Yuzaburo Mogi Kikkoman Corporation www.kikkoman.com 08 Masahiro Okafuji ITOCHU Corporation www.itochu.co.jp/en/ 10

Akihiro Teramachi THK CO., LTD. www.thk.com

Throughout this special section, yen figures have been converted to U.S. dollars at a rate of Y1 02/$1.

36th Annual Special Japan Section

Writers John Ashburne Julian Ryall Cecilia Ma Zecha Photography Takashi Mochizuki Design David Tan

Please visit the Japan Special Advertising Advert ising Section online at www.forbescustom.com/   japan2014

JAPAN SPECIAL ADVERTISING SECTION // 3

On the Express to Success JR East Combines Homegrown Expertise With Global Ambition

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n a clear day, from the top floor of the JR East Head Office in Tokyo, you can see Mount Fuji, a World Heritage Site. However, as company President and CEO Tetsuro Tomita enthusiastically explains, the company’s vision for the future stretches far beyond the legendary peak. The East Japan Railway Company—or JR East, as it is commonly known—was founded 27 years ago when the nationally owned Japan National Railways (JNR) was privatized. From its original office in the eastern easte rn part of Japan’s Japa n’s main island, Honshu, the company has expanded to offices in New York, Paris, Brussels, Singapore and will do so in London. JR East’s primary business is developing and operating spectacularly fast, safe trains, and its maintenance record is unimpeachable. unimpeachabl e. Outside the realm of transportation, the company also is involved in a wide range of business enterprises, including travel travel agency services, shopping centers and office buildings, hotels and restaurants management, and more. “We have contributed to the entire region we serve,” reflects Tomita. “Yet we believe our view must be globalized, not only out of business necessity with the decreasing domestic population, but also for the needs of our employees. employee s. They must learn to adopt more open, wider views for their own personal pe rsonal development.” development.” Under the slogan “Nobiru”—the Japanese phrase for growth— the company is tackling new business domains. For example, it is actively participating in overseas railway projects and developing an overseas railway consulting consulting business, Japan International Consultants for Transportation Co. Ltd. (JIC). It is largely focusing on the Asia-Pacific re gion, whose railway-related market is estimated estima ted to reach around ¥6.3 trillion in 2020. In this growing market, JR East already has signed an agreement with Thailand to provide equipment and know-how for Bangkok’s new “Purple Line.” “We have far more to offer than just merely selling trains. We have massive expertise in running railway network systems too,” explains Tomita, whose company conveys more than 6 billion passengers per year, safely and amazingly on time. “Asian population

centers will grow, and so will the need for intercity and urban train systems. We are willing to serve those needs.” Tetsuro Tomita JR East also is expandPresident and CEO, ing railcar manufacturEast Japan Railway Company ing. It acquired the Tokyu Car Corporation to form the subsidiary Japan Transport Engineering Company, or J-TREC, as it is commonly known. J-TREC works in tandem with the Niitsu Rolling Stock Plant in Niigata Prefecture to manufacture stainless-steel commuter railcars and the state-of-the-art E7 Shinkansen high-speed trains. By early 2015, the E7 series are scheduled to run between Tokyo and Kanazawa in two and a half hours. JR East is aggressively adopting new technologies from abroad. “Our global outlook is anything but a one-way street,” says Tomita. “We grow as a company when we bring in advanced advanc ed external technologies and expertise.” For example, he cites the implementation of a proven European communication-based train control (CBTC)—a wireless car-control system—on the company’s Joban Local Line, in Northeast Tokyo, and the German high-technology brakes on the latest Shinkansen trains, including the 320-kph (198-mph) E5 Hayabusa. “Because it is sometimes more important to slow down than speed up,” Tomita adds. Furthermore, JR East is determined to create attractive urban centers by concentrating useful services and functions in and around its stations. “Based on our current infrastructure, we will develop one-stop Smart Stations that will go beyond transport and retail functions,” says Tomita. “Our future stations will have everything from kindergartens to clinics and local government offices. It is our social mission.” Though JR East has come a long lo ng way, for Tomita, Tomita, there’s the re’s no end of the line in sight. “We “ We Japanese have been building and operating railroads railroad s for 140 140 years,” he says. “We love them. But we can’t stand still. Innovation is essential. Globalization is essential. essential.””  At home and abroa abroad, d, JR East is on the fast track to the futur future. e.

 After graduating from the University University of Tokyo, Tokyo, Tetsuro Tetsuro Tomita Tomita joined the Japan National Railways (JNR) in 19 197 74. When JNR was privatized in 1987, 1987, he joined the larg est of the new off shoots, East Japa n Railway Company. He rose to the position of Executive Vice President, successively heading two of the company’s major divisions. In April 2012 he was named President and CEO. www.jreast.co.jp/e

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From Hollywood to the End of the Universe Thriving New Business Domains Drive Canon Toward 2016

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hen we catch up with Fujio Mitarai, Chairman & CEO of Canon Inc., one beautiful late autumn afternoon at Canon’s Tokyo headquarters, the CEO is in a bullish mood. “Ask me any questions you like,” he says with a smile. “There’s nothing to hide here.” Mitarai has just come from chairing a meeting of the small camera maker turned corporate giant’s “global summit.”  At this annu al event , Canon welc omes memb ers from its global marketing and manufacturing companies. Executives convene in Tokyo to exchange information and opinions, see new products on display and learn the details of the company’s midterm plan, which sets 2016 goals. Mitara i is more than willing to give Forbes an exclusive preview. “Looking at the three years ahead for Canon, I believe the global economy has bottomed out,” says the CEO with conviction. “And having hit rock bottom, the economy is now headed toward recovery. With that expectation in mind, I have prepared Canon’s new growth strategy.” The thrust of Mitarai’s approach is based on developing the company’s core strengths. “I have laid emphasis on looking at our current business—for example, our cameras—and based on what we currently have, we need to create new domains using that existing technology. Then we develop those area s into full-fledged business operations. “To give you an example, we launched our all-new cinematography product lineup two years ago, and in the three years to come, we hope to achieve a very large expansion of this business. We aim to be one of the top players in the filmmaking industry globally.”

ing Emmy® Award, praising “Canon’s Work on Improvements to Large Format CMOS Imagers for Use in High-Definition Broadcast Video Cameras.” But Canon’s success in this segment is not limited to the movie Fujio Mitarai industry. In Japan, in  August of last year, a 4K Chairman and CEO, Canon Inc. capable high-resolution Canon digital cinema camera was used by JAXA, the Japan  Aerospace Exploration Agency, for a mission to re cord the Comet ISON aboard the H-IIB Launch Vehicle No.4 with the H-II Transfer Vehicle “KOUNOTORI4” (HTV4) bound for the International Space Station.

Pushing the Boundaries of Knowledge Through Astronomy “We are very proud of how we have applied innovative optics technology to the field of astronomy,” says Mitarai. The Subaru Telescope, located 4,200m (13,780 feet) above sea level at the summit of Mauna Kea in Hawaii, is capable of capturing light emitted from a gala xy located 13 billion light years from Earth. It couldn’t do that without Canon technology.

Movie Mecca’s Seal of Approval Canon is off to a good start with the firm’s Cinema EOS System, a lineup of professional cinematography products that includes lenses and cameras, which has been wowing the theatrical motion picture, television programming and television commercial production industries. Several highprofile Hollywood directors are enthusiastically embracing these new products. Within a year of entering the industry, Canon won major Hollywood plaudits when the National Academy of Television Arts & Sciences honored the company with a Technology & Engineer-

The Cinema EOS System is fast becoming a Hollywood directors’ favorite.

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 At the hea rt of the flag ship telescope operated by the National Astronomical Observatory of Japan (NAOJ) is the Hyper Suprime-Cam, which sets a new standard for wideangle optical devices. Using a custom-designed Canon lens system seven times wider than any built before, it can now capture in just a year images that once would have taken seven years. It captured the entire Andromeda galax y in a single shot. Canon’s lucrative camera-based business is not all Hollywood and astronomical observation. Some of it has a particularly ear thbound application. “We are also developing high-image-quality, highperfor mance network cameras that transmit full HD images,” says Mitarai. “I believe there is great future potential growth in the network camera mar ket as it meets the recent needs of security managem ent, and as options for visual transmission become more multifaceted.”

images from any p oint of view. “The potential applications for MR in the fields of design, manufacturing, education, exhibition, entertainment and medical care are boundless,” says Mitarai. “Some automotive manufacturers have already adopted and installed our MR systems, which we launched in July 2012. During the pro duct design phase, our head-mounted and hand-held displays allow users to view full-scale CG images that are responsive to their position and orientation, enabling spe edy evaluation of design and usabilit y. Also, MR systems can contribute to reducing development times and minimizing costs.

Innovation Across Multiple Fields and Markets The world at large thinks of cameras and offi ce equipment when it thinks of Canon, but in reality the global corporation is developing hitherto unexplored technologies and business domains in other areas, most notably in the fields of commercial printing, medical diagnostics and mixed reality. “Thanks to our integration with the blue-ribbon Dutch company Océ [acquire d by Canon in 2010], we are beginning to see exciting developments in the commercial high-speed printing domain and with wide-format printing systems,” says Mitarai. “In the coming three years, we hope to t ap into a large potential market in packaging, outdoor banners and billboards. “In the retail photo printing market, our innovative DreamLabo commercial photo printer has allowed users to create photo albums with high-speed, high-quality photos and detailed text offerings via the Internet. “In the medical diagnostics industry, Canon U.S. Life Sciences has developed a genetic analysis system and equipment providing a variety of new diagnostic technologies. Once CLS products become viable, we will initiate production at Canon in Virginia,” adds the CEO. “Another highlight of our medical systems is near-painless, stress-free photo-acoustic mammography that we are jointly developing with Kyoto University. This technology visualizes the state of angiogenesis associated with cancer using ultrasound and light, and we hope to launch it within a few years.” MR (mixed reality) is another cutting-edge technology, one that seamlessly merges the real and virtual worlds in real time, allowing users to interact with full-scale, realistic

The MR system enables industrial designers to rapidly develop and share virtual prototypes.

“Based on the ver y foundation of our existing business and adding on top of that our new business growth, I hope to attain an annual growth rate of around 7% or 8%, though of course that depends upon the global economic situation.”

Three Regional Headquarters System Mitarai’s enthusiasm and confidence is infectious, and his pride in Canon’s panoply of technological excellence is evident. Yet the CEO is only too aware that the company, with assets measured at US$4,546 billion in 2012, must match its technical skills with organizational innovation. His response is the Three Regional Headquarters management system, a vision that he developed while president of Canon U.S.A. (1979 to 1989), in which the Japan, U.S. and Europe HQs are given autonomous control. “Each region has its own unique qualities and strengths, and will naturally conduct its own research and design,” he explains. “Océ and CLS are good examples. In this manner, our regional headquarters will create unique products, which they will market worldwide.” For Canon and Fujio Mitarai, the sky’s not even the limit.

 A native of Kyushu, Japan, M itarai decided not to follow his father and brothers into medical school, but instead joined Canon, where his uncle served as the first president. Five years later he was posted to the U.S., where he stayed for 23 years, eventually becoming President of Canon U.S.A. Back in Japan, he was later appointed President, CEO and then Chairman of Canon. www.canon.com

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A Taste for Success The Story of Kikkoman Corporation’s Rise to Global Eminence

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uzaburo Mogi strides into the boardroom with a spring in his step and a sparkle in his eye. At 78 years of age, the Honorary CEO and Chairman of the Board of Kikkoman Corporation cuts a debonair figu re. Mogi is a revered elder statesman of Japan’s business world, and it is his personal vision that has seen Kikkoman Corpor ation blossom from a rural soy sauce manufacturer into a global corporate group of 64 separate companies, capitalized at ¥11.6 billion (US$118.5 million), with a presence in more than 100 nations. Kikkoman’s history of manufacturing soy sauce began in the Edo Period (1603-1867). Then, in 1917, eight families me rged to create Noda Shoy u Co. Ltd., the forerunner to Kikkoman Corporation. “In the mid-1950s, Japan was entering a period of high economic growth and many industries were forecas ting double-digit annua l growth. However, our industr y couldn’t grow at a comparable rate, since the consumption of soy sauce, a daily necessity, could only be expected to increase relative to population growth,” Mogi explains. “So, we adapted two key strategies. The first was diversifica tion to acquire new product categories and increase business. We started our venture with Del Monte, producing tomato ketchup and juice, and began Manns Wine, our domestic wine business . Our second strategy was internationalization, and we turned our attention to the U.S., reaching out to general America , not just the Japanese American community.” Then came Mo gi’s masterstroke. “We cannot achieve any real globalization of our business,” the young executive told a colleague one day in 1965, “unles s we build a factor y in the U.S. to initiate local production.” Mogi made his proposal to the company board and the president, Keizaburo Mogi, his father. After long deliberation, they agreed. The die was cast. Mogi was 38 when Kikkoman Foods, Inc.’s Wisconsin

plant opened on June 16, 1973, on the western shore of Lake Geneva in the American Midwest. The dollar was pegged at ¥360, so building an overseas plant was a colossal investment. To build a production factory in the U.S., they had to invest more money than Kikkoman’s capital at  Yuzaburo Mogi the time. Honorary CEO and Chairman of Within months, dis- the Board, Kikkoman Corporation aster struck. “The Oil Crisis that took hold in October of 1973 was a severe challenge,” Mogi explains. “This wreaked havoc all over the world, and the U.S. was no exception. Our U.S. factory was affected by an increase in production and transportation costs.” As a result, Kikkoman Foods, Inc. plunged into the red. Yet Mogi never wavered. “I was young, you see, brave,” he laughs. “I knew price s would eventually st abilize. By the end of the third year, we were in the black. By August 1977, we had balance d out our cumulative loss, a feat achieved within just four years of start-up.” The rest, as they say, is history. Last year the Wis consin plant celebrated its 40th anniversary. With growing markets in Europe, Asia and Oceania, Kikkoman Corporation is a 21st-century global success story. Yet for Yuzaburo Mogi, it is far more than just a business triumph. “I really believe that takin g Japan’s food culture to the world and bringing other nations’ foods to Japan creates under standing,” he says. “When we eat the same things, we become friends.” And with that the legendary businessman takes his leave and strides of f into the sunlit Tokyo morning.

Yuzaburo Mogi is a descendant of one of the founding families of Kikkoman, which is one of the oldest continually running businesses in Japan. He became company President in 1995, was named Chairman in 2004 and assume d the title of Honorar y CEO and Chairman of the Board of Directo rs in 2011. Mogi holds an MBA from Columbia University. www.kikkoman.com

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Ambitious, Profitable ITOCHU Corporation Sets the Bar Ever Higher

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e have turned our words into accomplishments,” says Masahiro Okafuji, President and CEO of ITOCHU Corporation. When he took up the position of CEO in 2010, Okafuji set about reba lancing ITOCHU’s profile to emphasize the non-resource sector, which consists of businesses that are not dependent on natural resources. In a move that evokes the company’s roots in the textile business, he aggressively set about focusing on the consumer-related arena—business lines such as tex tiles, food and ICT—making it the corporation’s basic earnings platform. It was a savvy move. ITOCHU has posted record-high net income for two consecutive years, and CEO Okafuji is still pushing ahead, pedal to the metal, to boost profitability. Going back to basics also applies to ITOCHU’s new approach to working hours.  As 2013 neared its close, Okafuji issued a company-wide directive severely limiting late-night overtime work, a common practice at Japanese corporations. The new system was dubbed asagata kinmu, or “early work hours.” The aim is to finally end the habit of excessive overtime, allowing employees to concentrate on self-improvement and family life. Given ITOCHU’s size and status, Japan’s news media and business community soon took notice. For this workaholic nation, it was a radical move. ITOCHU is clearly not afraid of change. “Trading companies only exist where there are customers,” explains Okafuji, “and we operate across so many fields. We are like water; we change our shape acc ording to the container. Just as it would be fundamentally wrong for us to narrow ourselves down to one single kind of product, our sales organization and strategies and even our corporate personality must also be flexible. This new system was prompted primarily by a consideration of our customers’ needs. Early-morning calls will no longer g o unanswered.” ITOCHU’s customer-based, worker-friendly stance should only help strengthen the global corporation’s competitive edge. “We have set the goal to become the number-one

trading company in nonresource businesses,” Okafuji boldly says. “I believe all companies must continually set goals and strive toward them in deed as well as in word.” Coming from the Masahiro Okafuji CEO who unabashedly President and CEO, talks about standing ITOCHU Corporation shoulder-to-shoulder with the two top-ranking trading companies in Japan, it almost sounds like a call to arms. How does Okafuji plan to achieve his ambitious goals? “The non-resource sectors include machinery, chemical products, construction and real estate and information, in addition to lifestyle and consumer arenas,” he explains. “Now we especially want to focus on the machinery area, and then on information, construction and real estate, and chemical products.” Nor is ITOCHU hesitant to take on the challenge of entering new arenas. Automobiles and shipbuilding are among the many areas being targeted. “The current depreciation of the yen seems to be bringing about a huge growth of the market in are as where we have long been cultivating technology,” he explains. “ITOCHU’s share in many areas will dramatically increase on the back of a weaker yen. It’s actually happening now.” The emphasis ITOCHU puts on fully leveraging its diverse human resources may well become key to the company’s further growth. ITOCHU was the first of Japan’s general trading companies to appoint a female executive officer, and its current medium-term management plan clearly mandates further development of female role mod els. This is yet another example of how ITOCHU dares to challenge the c onventional Japanese corporate mind-set. Okafuji admits that, historically, the amorphous nature of Japan’s general trading companies has deterred investors, who find it hard to grasp the workings of the so-called invisible giants. This may soon change, given ITOCHU’s widely noted management innovations and its forecast for dynamic growth in 2014.

Masahiro Okafuji joined ITOCHU in 1974 after graduating from the University of Tokyo. He was appointed Executive Officer in 2002, Managing Executive Officer in 2004, Director and Executive Vice President in April 2009, and President and CEO in April 2010. www.itochu.co.jp/en/ 

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A Linear Path to Success THK Focuses on Forward Motion

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s President and CEO of THK CO., LTD., Akihiro Teramachi knows that Japan has faced serious economic challenges in recent years, but he firmly believes that trying times c an bring out the best in a company. He is confident his firm will continue to provide the technology, know-how and support that will keep its customers moving forward. “THK is a company that’s focused on creation, on making new advances, and we will never ease off in our efforts to forge ahead with new research and development,” says Teramachi in an interview at the company’s Tokyo headquar ters, the hub of a global organization that spans four major territories around the world. “We will continue to aggressively develop new fields in order to contribute to our clients’ progress and growth.” For all its expertise, THK is something of a behind-the-scenes player, producing vital technology for the industrial machinery used to manufacture a wide range of products, including vehicles and electronics and appliances. THK developed the world’s first Linear Motion Guide, an essential component that enables industrial machines to execute smooth and highly precise movements. LM Guides help ensure rapid, high-precision manufacturing processes, and they also help conserve energy. In its field, THK is the undisputed market leade r.  As Jap an’s ec onomy pic ks up the pac e—along wit h interconnected economies throughout the rest of the world— Teramachi is confident that THK will be able to both develop new markets and expand operations in areas where it already has a presence. “We will continue to help our clients all over the world by steadily and reliably meeting their needs, in every industrial field that uses linear motion,” he says. “Not only in advanced markets, but also in developing markets, thanks to our globalization efforts and forays into new business areas.” China has become a vitally important market for THK, which has 34 sales offices and five production bases located all over the country. Although some observers are voicing caution about China’s future, Teramachi remains optimistic.

“The Chinese economy may have come to the end of its period of high growth and may be moving into a period  Akihiro Teramachi of more stable, regular President and CEO, THK CO., LTD. growth,” he says. “There have been predictions that China will surpass the U.S. as the world’s preeminent economy. That may not happen, but when you take into consideration China’s massive population and the anticipated growth in per-capita GDP, it’s clearly reasonable to expect more growth. “I’m confident that China will remain a promising and growing market, although it may undergo short-term fluctuations,” he adds. Teramachi emphasizes the importance of situating THK’s manufacturing facilities in the same markets where the products are consumed. But THK’s most important challenge is to continue to develop high-quality, innovative but affordable products. “We have to keep striving to provide our products at reasonable prices,” he says. To do that, the company says it is necessary to scrutinize its activities from the perspective of its customers. “There are many factors that affect businesses in every market in the world—differences in laws, cultures, customs, language and many other areas—but these are all issues from the standpoint of the businesses supplying the products. “The other perspective is that of customers seeking highquality, reasonably priced products that are available when and where they need them. That’s a universal need,” Teramachi emphasizes. “THK has set out to become the number-one company in the world at identifying with the client’s point of view and providing products and services that meet the customer’s needs and desires.” The advent of “Abenomics”—the aggressively expansionist economic policies of Japanese Prime Minister Shinzo Abe—has put Japan back in the global economic spotlight, Teramachi says, adding that THK intends to preserve its for ward momentum and use its pioneering spirit and commitment to excellence to solidify and enhance its vital role in the global economy.

 Aki hiro Teram ach i at ten ded Kei o Uni ver sit y and joined THK CO.,LTD., a co mpa ny fou nde d by hi s fat her, in 1971. He became a D irector in 1982, was made Vi ce President in 1994 and took over as CEO i n 1997. www.thk.com

REINVENTING WALL STREET Thanks to some fortuitous timing Sergio Ermotti ended up  with the top job at UBS, but he really hit the jackpot when he found that his former boss was already transforming the troubled bank into a wealth-management juggernaut. BY HALAH TOURYALAI

THERE IS AN ADAGE ON WALL STREET: “IT’S BETTER TO BE LUCKY THAN GOOD.”

And if ever there was a banker with luck on his side it’s Sergio Ermotti, the suave, impeccably dressed global chief executive of Switzerland’s UBS.  Less than six months after he joined the bank to run its European, Middle East and African businesses in April 2011, a rogue trader in UBS’ London office lost $2.3 billion on a series of derivatives trades. The scandal forced the bank’s 67-year-old chief executive, Oswald Grübel, to resign. Suddenly, Ermotti was next in line to run the 152-yearold Zurich-based bank. By November he was CEO, and by 2012 he was the highest-paid member of the bank’s executive board. Good timing; great luck. But Ermotti, 53, is also good—very good. Born in the Italian-speaking canton of Ticino in southern Switzerland, he has had a singular focus on banking since age 15 when he took an apprenticeship at Switzerland’s Corner Banca, where young Ermotti learned to sell stocks and trade them. Eventually he got a certificate in Swiss banking and earned a master’s degree in management from Oxford. In 1987 Merrill Lynch hired him, and he spent the next 16 years climbing Merrill’s ladder in Europe and New York, eventually becoming global equities boss. Charming and likable, with movie star looks, Ermotti parlayed the Merrill experience into the role of deputy group chief executive at Italy’s largest private bank, UniCredit. After being passed over for chief executive he took the  job running Europe, Middle East and Africa at UBS. Given the state of global financial services in 2011, one might think that landing atop a European bank was as much a curse as a blessing. The financial crisis left Europe’s banks crippled, and most of them are still busy untangling and deleveraging their balance sheets. But once again Ermotti got lucky. As chance would have it Robert McCann, Ermotti’s former boss and mentor at Merrill Lynch, was already busy revamping the Swiss bank’s U.S. operations. McCann, 55, had spent 26 years at Merrill, first in trading and finally running its 18,000-advisor 72

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brokerage arm. The two men knew each other well. Back in 1996 it had been McCann who plucked the 36-year-old Ermotti out of the obscurity of Merrill’s European operations, brought him to New York and promoted him to head global derivatives trading. Ermotti would work for McCann for the next six years. “He was a good mentor to me,” recalls Ermotti. By the time Ermotti took the top  job at UBS, McCann had been building up the bank’s brokerage force for two full years. This stroke of luck meant UBS’ American wealth management business was turning around, giving Ermotti an engine of growth as his team furiously shed risky investment-banking assets. In the last three years UBS’ entire wealth management operation brought in $137 billion in net new client money. It is now the largest private banker in the world, with $1.7 trillion in assets. In 2013 the bank is expected to earn $3.8 billion on revenues of $31.6 billion. And it’s a strong bank: In terms of Basel III’s stringent capital requirements UBS has already surpassed its target and now has a common equity tier one ratio of 11.9%. At the same time McCann and his non-U.S. counterpart Jurg Zeltner were expanding the wealth management business, the bank was going through a massive downsizing. In 2012 UBS announced it would fire 10,000 employees in investment banking, and it has already culled more than $300 billion in risky assets from its balance sheet. “Many said it was impossible to shrink the bank to greatness, but now we have silenced our critics,” says Ermotti, describing the bank’s strategy as centered on wealth management, yet “complemented by a focused and less capital intensive investment bank.” Ermotti the trader is executing perhaps the smartest trade in financial services today, reducing expo74

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Robert McCann gave up golf to rescue Swiss bankers on U.S. soil.

sure to capital-intensive and regulatory-heavy businesses like trading and investment banking, and moving quickly into less risky businesses that provide smaller but steadier streams of income. The math is fairly simple: Shares of BlackRock, the world’s largest asset manager, sell at a trailing price/earnings multiple of 20 while the world’s preeminent investment bank, Goldman Sachs, has a P/E of 11. BlackRock’s shares are up nearly 500% in the last decade, Goldman’s are up 79%, but large, diversified banks like UBS and Bank of America have seen their shares fall about 50%. A decade ago UBS was neck and neck with Germany’s Deutsche Bank,

ranking third among global banks in terms of balance sheet assets, with $850 billion. Citigroup and Japan’s Mizuho ranked first and second, with about $1 trillion in assets each. Today UBS’ $1.2 trillion in bank assets doesn’t even put it in the top 20. Industrial & Commercial Bank of China ranks first with $3 trillion in assets, and Deutsche Bank ranks eighth with $2.4 trillion. But in banking today, sheer size is largely irrelevant: The real battle is to control the world’s $135 trillion in private wealth—a number that is set to take off as China and other developing economies grow rich. Of course, the former Union Bank of Switzerland has long been a major

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player in private banking, also known as wealth management. In fact, today most of the firm’s client assets outside of the U.S. still come from its stronghold in Europe, currently run by Zeltner, 46. McCann’s wealth management unit was acquired by UBS when it purchased PaineWebber in 2000. One of Ermotti’s smartest moves after taking over in 2011 was refusing to sell UBS’ U.S. business—despite persistent Wall Street chatter that it would be wiser for the bank to focus on its home turf. In fact, far from jettisoning it, Ermotti further empowered McCann to rally his asset-gathering troops. Says Ermotti, “If we call ourselves the preeminent wealth management firm globally, then it would be impossible not to be a strong player in the biggest market in the world, the Americas.” When McCann arrived at UBS in 2009 as CEO of Wealth Management Americas, UBS was bleeding advisors and assets. In a three-year span the broker head count dropped from 8,248 to 6,796, and $32 billion in client assets fled. The division mounted losses of nearly $900 million. Even worse than the losses were the constant blows to the bank’s reputation, which scared away potential customers and honest employees. In 2008 UBS had a run-in with the feds for a tax-evasion scheme. The bank was forced to pay $780 million and essentially admit that its finan-

cial advisors committed tax fraud by helping their American clients hide money overseas. Like Merrill, UBS was waist-deep in toxic subprime debt and was ultimately required to repurchase $22 billion in auction-rate securities that had blown up during the credit crunch. Then came the rogue-trader incident that cost Grübel his job, and in 2012 the bank was nabbed in a global conspiracy to rig interest rates. For that bit of malfeasance UBS paid a record $1.5 billion fine for a single count of wire fraud. Most recently, UBS is facing a slew of lawsuits after its brokers were revealed to be some of the biggest peddlers of overleveraged Puerto Rican municipal bond funds. Former Merrill lifer McCann knows all too well how important

“ADVISORS COULDN’T BELIEVE IT WHEN I RESPONDED TO THEIR CALLS. SOME HUNG UP ON ME, THINKING IT WAS A GOOF.” reputation is in the money business. His stellar 26-year career at Merrill Lynch was capped by a shotgun marriage to Bank of America in 2009. It was heartbreaking for McCann, who rose from a trainee in 1982 to star trader to vice chairman of the company. “I had been committed to Merrill Lynch, and Merrill Lynch didn’t exist anymore,” he says, seated on an olive microfiber sofa in his corner office on the 14th floor of UBS’ midtown Manhattan building. McCann took eight months off. He did some soul searching, played golf and took a film class with his wife at New York University. When Grübel came calling from Switzerland to ask him to fix UBS’ operations in the

U.S., it was a lifeline for the workaholic banker. McCann’s first move was to reassemble his A-team of old Merrill Lynch buddies, including Merrill’s key private-client execs, Robert Mulholland and Brian Hull; marketing head Paula Polito; its general counsel, Rosemary Berkery; and the former global securities lending chief, John Brown. To get the rank and file to buy in and thereby avoid “mini-Merrill” criticism, he elevated several UBS executives, and retained Tom Naratil, who was CFO of the Americas. “All of us had nothing more to prove in our careers and had already accomplished a lot,” says Polito. “It was more about reuniting as a team under Bob one more time and doing something that could be extraordinary if we could pull it off.” When the team arrived broker morale was terrible, partly because of the bad press but also because the advisors felt the home office in Switzerland was both ignoring them and burdening them with crappy products. One example: a UBS credit card that was foisted on brokers and their clients in 2005. The Visa card sported such stringent antifraud restrictions that it declined payment as much as 50% of the time, according to Berkery, who now heads up UBS Bank USA. One of UBS’ own advisors warned Berkery not to use the card. “That’s a bad sign,” she says. The credit card was so jittery that McCann’s own wife was declined when she used it. Within a month of McCann’s arrival he decided to fly in UBS’ top 270 advisors for a lavish dinner at New York City’s Gotham Hall. In his postprandial speech he pledged to spend his first 100 days at the bank listening to their problems, fixing them as quickly as possible and figuring out a new strategy. And, indeed, for the next three months McCann and his pals from Merrill— known internally as the “renewal” JANUARY 20, 2014  FORBES

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team—spent their days on the phone with their brokers, hearing out their problems and immediately fixing the ones they could easily address, socalled “Quick Wins.” Some 400 changes were made under Quick Wins. The paranoid credit card was terminated, approval of marketing material was moved down the ranks and the limit for fast credit line approvals for high-networth clients was lifted from $4 million to $5 million. The renewal team also created a financial-advisor council that relayed advisor’s gripes directly to McCann. Martin Halbfinger, an advisor with $3 billion in assets, was one of the first to head the council. The rule was that complaints would be responded to within one day. “There used to be a black hole to which we’d funnel our complaints, but suddenly we were all amazed how that turned around,” Halbfinger says. “People couldn’t believe it when I responded to their e-mails or calls about problems. Some of them hung up on me, thinking it was a goof,” McCann recalls. Ninety-nine days after that crucial Gotham Hall meeting McCann’s renewal team presented its grand strategy: a strict focus on high- and ultrahigh-net-worth clients in the 25 largest American cities. They would be clientoriented and focused on financial advice. “It was incredibly important that the message was clear,” says McCann. Another thing would become clear. McCann wouldn’t tolerate slackers. Anyone generating less than $250,000 in fees and commission annually saw his or her pay reduced. McCann recently upped the threshold to $325,000. He also went after institutional bloat. McCann began shutting down some branches, consolidating others and eliminating layers of management, including 25 managing directors. Nonfinancial advisor employees have been reduced from 11,200 in early 2009 to 9,191 in 2013. The unit’s 76

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cost-to-income ratio has dropped to 87% from nearly 100% in 2009. In an effort to jump-start asset inflows, McCann aggressively recruited top advisors with big sign-on bonuses. In 2012 alone UBS spent $679 million bringing in new brokers. “That’s 10% of the annual net income of McCann’s unit. It shows you how much emphasis McCann is putting on the right producers,” says Alois Pirker, an analyst at Boston-based Aite Group. It is also starkly different from the industry’s usual “amass the biggest army” approach. McCann employs 7,000 financial advisors. Bank of America Merrill Lynch, Morgan Stanley and Wells Fargo have between 15,000 and 18,000 each. But McCann’s troops are higher-quality, with the average broker generating $1 million in annual revenue, versus $848,000 for Morgan Stanley and $865,000 for Wells Fargo. Only Bank of America Merrill Lynch, McCann’s old employer, has an average broker production rivaling that of UBS. Says Brad Hintz, an analyst at Sanford C. Bernstein: “UBS goes after the best of the best advisors and ar-

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gues that scale can be overcome by quality.” It’s working. In just the U.S. net inflows amounted to $36 billion in the last two years, and in 2012 McCann’s division posted a record pretax profit of $873 million, up 40%. Results should be even better in 2013. Attrition has been stanched, dropping from 15.3% in 2009 to 2.2% in 2013. McCann’s success has been rewarded. He’s on UBS’ global executive board and is the second-highest-paid executive at the bank, earning $9.4 million last year, just behind Ermotti. He doesn’t just run UBS’ brokerage force in the Americas anymore; Ermotti put him in charge of its U.S. investment-banking and asset-management business. Still, no one thinks a Pittsburgh native like McCann, who is two years older than Ermotti, has any chance of nabbing the top job at the giant Swiss bank. And given how much UBS has riding on wealth management and keeping its American growth engine chugging, Ermotti needs to keep finding new ways to keep his lucky charm happy. F

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Evan Spiegel, 23, and Bobby Murphy, 25, have turned Snapchat and its disappearing photos into the hottest app in America for teenagers. Hot enough, in fact, to spurn a $3 billion offer from Facebook. Will they become two of the youngest billionaires ever— or fade quickly into business infamy? BY J.J. COLAO PHOTOGRAPHS BY MICHAEL GRECCO FOR FORBES

JANUARY 20, 2014

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THIRTEEN MONTHS AGO Facebook’s Mark Zuckerberg,

the richest twentysomething in history, reached out to Snapchat’s Evan Spiegel, who oversees a revenue-less app that makes photos disappear, with an invitation, delivered to his personal e-mail account: Come to Menlo Park and let’s get to know each other. Spiegel, now 23 and the brashest tech wunderkind since, well, Zuckerberg, complete with his own legal battle against a college buddy who helped him start his company, responded to his role model thusly: I’m happy to meet you … if you come to me . And so, armed with the premise of meeting with architect Frank Gehry about designs for Facebook’s headquarters, Zuckerberg flew to Spiegel’s hometown, Los Angeles, arranging for a private apartment to host the secret sitdown. When Spiegel showed up with his cofounder Bobby Murphy, who serves as Snapchat’s chief technology officer, Zuckerberg had a specific agenda ready. He tried to draw out

he enjoyed it. Spiegel, who had deactivated his Facebook account, frantically called Murphy for his review. It was, Murphy responded glumly, a near-exact copy. But a funny thing happened on the way to obsolescence. The day after its launch Poke hit number one on the iPhone app store. But within three days, on Dec. 25, Snapchat had pulled ahead, boosted by the publicity, as the Facebook app disappeared from the top 30. Laughs Spiegel: “It was like, ‘Merry Christmas, Snapchat!’ ” Which helps explain what happened in the fall when Zuckerberg reengaged Spiegel, basically ready to surrender on terms so generous, on paper, they seemed preposterous: $3 billion in cash, according to people familiar with the offer, for a two-year-old app with no revenue and no timetable for revenue. (Facebook refused to comment for this article.) Even more preposterous, of course: Spiegel turned Zuck down. It was the most scrutinized business decision of the past year, complete with head-spinning math. FORBES estimates that Spiegel and Murphy each still owned about 25% of Snapchat at the time, which means they were both forgoing a $750 million windfall. “I can see why it’s strategically valuable,” one leading venture capitalist tells FORBES. “But is it worth $3 billion? Not in any universe I’m aware of.” The roots of that decision, however, were obvious to anyone who knew about the primer that Spiegel and Murphy had bought for their team. Chapter 6 in the Art of War specifically addresses the need to attack an enemy where and when he displays weakness. Spiegel and Murphy sense an opening and insist that rather than selling, they’re aiming to upend the social media hierarchy, armed with a $50 million war chest raised in December at a lower (but still heady) valuation of just under $2 billion. “There are very few people in the world who get to build a business like this,” says Spiegel. “I think trading that for some short-term gain isn’t very interesting.” For those keeping score, a “short-term gain” for a 23-yearold who still lives in his dad’s house now apparently equals three-quarters of a billion dollars. In going for the long gain, Spiegel will either become the next great billionaire prodigy or the ultimate cautionary tale of youthful hubris.

WHEN SPIEGEL MET ZUCKERBERG, “IT WAS BASICALLY LIKE, ‘WE’RE GOING TO CRUSH YOU.’ ” the partners’ vision for Snapchat—and he described Facebook’s new product, Poke, a mobile app for sharing photos and making them disappear. It would debut in a matter of days. And in case there was any nuance missed, Zuckerberg would soon change the large sign outside its Silicon Valley campus from its iconic thumbs-up “like” symbol to the Poke icon. Remembers Spiegel: “It was basically like, ‘We’re going to crush you.’ ” Spiegel and Murphy immediately returned to their office and ordered a book for each of their six employees: Sun Tzu’s The Art of War. Snapchat represents the greatest existential threat yet to the Facebook juggernaut. Today’s teens have finally learned the lesson their older siblings failed to grasp: What you post on social media—the good, the bad, the inappropriate—stays there forever. And so they’ve been signing up for Snapchat, with its Mission: Impossible-style detonation technology, in droves. FORBES estimates that 50 million people currently use Snapchat. Median age: 18. Facebook, meanwhile, has admittedly has seen a decline among teenagers. Its average user is closer to 40. Zuckerberg understood this, which might explain the gamesmanship. When Poke debuted, on Dec. 21, 2012, Zuckerberg e-mailed Spiegel, telling him that he hoped 80

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 A LANKY 6-FOOT-1, dressed in a button-down shirt,

designer jeans and plain white sneakers, Evan Spiegel hasn’t molted the carapace of an awkward teen. Sitting at Snapchat’s new Venice Beach headquarters for his first-ever in-depth media interview, he shifts abruptly from raucous laughter to icy glares, constantly grabbing fistfuls of gummy bears and Goldfish crackers. His conversation is pocked with

plenty of examples of “like” and “whatever.” And while Spiegel proves extremely opinionated on subjects like politics, music and other techies, he’s reluctant to discuss even the most basic CEO topics, like his ideal management team or his long-term vision for Snapchat. If you’re patient enough, however—one of my conversations with him lasted two and a half hours—you’ll get the full backstory, one that shares an uncanny similarity to that of his frenemy, Zuckerberg. Like Zuck he was a child of relative privilege, the firstborn child of two successful lawyers (mom Melissa went to Harvard Law and practiced tax law before Spiegel was born, while litigator dad John, a Yale Law grad, has represented the likes of Sergey Brin and Warner Bros.), living in tony Pacific Palisades, just east of Malibu. And like Zuck he was a middle school nerd who found refuge in technology, building his first computer in sixth grade, experimenting with Photoshop in his school’s computer lab and spending weekends at a local high school’s art lab. “My best friend was the computer teacher, Dan,” Spiegel laughs. In high school he began to display the moxie that Zuckerberg would later exhibit, promoting Red Bull at clubs and bars and using his parents’ divorce as a leverage tactic. He first moved in with his dad when he gave him a free hand in outfitting his room and who could come over. “I had some notorious parties,” he smirks. But when Pop reportedly refused to shell out for the lease on a BMW 550i, he moved in with Mom. Days later the BMW was his. Except for college, he’s been based in his dad’s home, a stone-faced mansion a half-mile north of the ocean, ever since. “A lot of things have changed very quickly, so it’s nice to have that one constant,” he says by way of justification. “It’s also pretty grounding.” He entered Stanford’s product-design program and in 2010, during his sophomore year, moved into the Kappa Sigma fraternity house. Bobby Murphy, a senior major in mathematics and computational science, lived across the hall. “We weren’t cool,” Murphy says of the fraternity. “So we tried to build things to be cool.” While Spiegel speaks animatedly, albeit measuring what he’s saying, Murphy, the Berkeley son of state employees (his mother emigrated from the Philippines), sits placidly, one leg tucked under the other. “I’d describe him almost like a monk,” says David Kravitz, Snapchat’s first hire. “I don’t think I’ve ever seen him upset.” At Stanford it was Murphy who first hired Spiegel, recruiting him to design an online social network inspired by Google Circles. It went nowhere. Still, Spiegel was getting noticed. Intuit’s Scott Cook was impressed by an answer he gave while guest lecturing at Peter Wendell’s popular graduate level class, “Entrepreneurship and Venture Capital.” “After class concluded, I commented on the intelligence and reasoning in this particular student’s

response,” says Cook. “And Professor Wendell said, ‘Well, you will be surprised to know he isn’t an M.B.A. student. He is an undergraduate who is auditing this class.’ ” Cook quickly hired Spiegel to work on an Intuit project that broadcasts Webbased information via SMS texts in India. Spiegel, however, was in too much of a rush to remain content as an apprentice. In the summer of 2010 he and Murphy developed Future Freshman, a suite of online software to help parents, high schoolers and guidance counselors manage college admissions. “It ended up being this unbelievably full-featured website,” Murphy recalls. One problem: “We got, like, maybe five people on the service,” says Spiegel. That’s when fate, in the form of another fraternity brother, Reggie Brown, stepped into Spiegel’s room to discuss a photo he wished he hadn’t sent someone. The ensuing set of events makes The Social Network look like C-Span2. WHILE OWNERSHIP of Snapchat remains hotly disputed,

all sides seem to agree on the genesis: Brown said something to the effect of “I wish there was an app to send disappearing photos.” Brown refused to speak to FORBES, citing the pending litigation, but his side of the story comes through via numerous court documents, including a leaked deposition. According to Brown, Spiegel became “physically animated” and repeatedly called Brown’s remark “a million dollar idea.” (Spiegel acknowledges he was excited, but won’t comment about the “million dollar idea” line.) That night they set out to find a developer. Brown claims two candidates declined; regardless, they settled on Murphy, who had just graduated. The original roles were fairly defined: Murphy as CTO, Brown as chief marketing officer, Spiegel as CEO, honing the idea as part of a design class he was taking. The first iteration was a clunky website that required users to upload a photo and set a timer before sending. The eureka moment only came when the idea migrated to mobile. “At some point it was like, ‘Hey, there’s a camera on your phone,’ ” Spiegel says. “ ‘Wouldn’t that be easier?’ ” The class culminated in a presentation to a panel of venture capitalists. Brown came up with a name for the app, Picaboo, and Murphy put in 18-hour days to get a working prototype. “The feedback was basically, ‘Hmmmm. Well, thank you for showing us your project,’ ” recalls Spiegel. One investor suggested he partner with Best Buy. Many wondered why anyone would want to send a disappearing photo. The first version debuted in the iOS App Store on July 13, 2011 … to yawns. “The Instagram fairy tale”—the app had 25,000 downloads on the first day—“that was not us unfortunately,” Murphy laments. The team had worked around a potentially fatal flaw—the fact that recipients can take a screenshot, rendering a disappearing image permanent—by building in a notification if your picture has been captured, a JANUARY 20, 2014  FORBES

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SOCIAL METRICS How does Snapchat stack up against the established darlings of social media? Let us count the ways.

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potent social deterrent. Still, by the end of the summer Picaboo had only 127 users. Pathetic. Brown toyed with positioning the app as a sexting tool. (“Picaboo lets you and your boyfriend send photos for peeks and not keeps!” reads a draft of a press release he wrote.) Murphy’s parents implored him to get a real job. And Spiegel apparently began pushing to shake up the team. According to Brown’s deposition, he overheard Spiegel and Murphy plotting to replace him. The breaking point came when equity was being finalized. On Aug. 16 Brown, back home in South Carolina, called his two partners and laid out his case. He wanted around 30%, according to Murphy’s deposition, and listed his contributions: the initial idea, the Picaboo name and the nowfamous ghost logo. Spiegel and Murphy countered that he didn’t deserve anywhere close to that. When Brown claimed that he had “directed [the] talents” of Spiegel and Murphy, Murphy remembers, an enraged Spiegel hung up. Spiegel and Murphy changed administrative passwords for the app and cut off contact except for a few tense e-mails about a pending patent. Brown was out, relegated to Snapchat’s version of a cross between the Winklevoss twins and Eduardo Saverin. (Ironically, in their battle with Brown, Snapchat has hired the legal team that pursued the Winklevoss claim against Facebook.) Now a two-man operation, Picaboo changed its name to Snapchat after receiving a cease-and-desist letter from a photo-book company with the same name. “That was like the biggest blessing ever,” says Spiegel. But even as he and 82

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Murphy added photo caption capabilities, they seemed destined to replicate their Future Freshman experience: a technically competent product that virtually no one wanted. Spiegel returned to Stanford for his senior year; Murphy took a coding job at Revel Systems, an iPad point-of-sale company in San Francisco. But that fall Snapchat began to exhibit a pulse. As user numbers approached 1,000, an odd pattern emerged: App usage peaked between 9 a.m. and 3 p.m.—school hours. Spiegel’s mother had told her niece about the app, and the niece’s Orange County high school had quickly embraced Snapchat on their school-distributed iPads, since Facebook was banned. It gave them all the ability to pass visual notes during class—except, even better, the evidence vanished. Usage doubled over the holidays as those students received new, faster iPhones, and users surged that December to 2,241. By January it was at 20,000; by April, 100,000. But with growth came server bills. While Spiegel helped cover some of it with money from his grandfather, Murphy had to fork over half his paycheck. As monthly expenses approached $5,000, the guys needed a bailout. Lightspeed Venture Partners’ Jeremy Liew came to the rescue. His partner’s daughter relayed how Snapchat had become as popular as Instagram and Angry Birds at her Silicon Valley high school. But Spiegel and Murphy proved difficult to track down; their website had no contact information, and no one was listed on the company’s LinkedIn page. Liew finally did a “whois” lookup to find the owner of the Web

SNAPCHAT NUMBER OF USERS DECEMBER 2013 (EST.)

$6.87 BIL

50 MIL REVENUE

NUMBER OF USERS SEPTEMBER 2011

LAST FOUR QUARTERS THROUGH SEPTEMBER 2013

INSTAGRAM

127

NUMBER OF USERS SEPTEMBER 2013

150 MIL NUMBER OF USERS OCTOBER 2010

25,000

$534.5 MIL 0 FACEBOOK

TWITTER

NUMBER OF USERS OCTOBER 2013

230 MIL

SNAPCHAT

domain, linked the obscure LLC that it was registered under to Spiegel and eventually tracked him down via Facebook. “His profile picture was with Obama,” shrugs Spiegel. “So I thought he seemed legit.” In April 2012 Lightspeed put in $485,000 at a valuation of $4.25 million. “That was the greatest feeling of all time,” says Spiegel. “There is nothing that will replace that.” On the day the money went through, he sat in a machine-shop class busily refreshing the Wells Fargo app on his iPhone. In a final homage to Zuckerberg, when the money appeared he walked up to the professor and dropped out of the class and Stanford, a few weeks from graduation.

TWITTER

NUMBER OF USERS AUGUST 2006

FACEBOOK

1,800

NUMBER OF USERS OCTOBER 2013

1.2 BIL

SNAPCHAT HAS MOVED THREE TIMES since the initial in-

vestment, as the company has grown to a still-lean 35 employees. The latest offices, in a former art studio a block from the Venice boardwalk, are appropriately anonymous, with just a small ghost logo to identify it. Most of the development that has made it a viral sensation, however, took place in 2012, when the company was headquartered at Spiegel’s

NUMBER OF USERS DECEMBER 2004

1 MIL JANUARY 20, 2014  FORBES

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dad’s house. “He convinced us to drop out of Stanford and move down to L.A. over the course of a single conversation,” says Daniel Smith, who was hired along with Kravitz. The team worked around the clock, sleeping where they worked. (Smith lived in Spiegel’s sister’s room, with enough girlish orange and pink polka dots, Spiegel remembers, “to give you an anxiety attack.”) “Bobby had a habit of pushing code changes and then going to sleep,” says Spiegel, who then found himself on debugging duty. “I’d wake up in the morning and go, ‘Oh my God!’ ” Adds Murphy: “I still have nightmares about him stomping down the stairs.” The arrangement proved oddly effective. Says Lightspeed’s Liew: “They can call ‘bulls--t’ on each other, which makes their ideas better.” What emerged was an app that, rather than a tool for the likes of Facebook, can potentially challenge it. By both luck and design, Snapchat addresses three red flags for Facebook. First, it’s more intimate and exclusive. Just as Facebook took the anonymous Internet and boiled it down to real people you knew, Snapchat narrows your world from Facebook “friends,” which range from longforgotten schoolmates to nagging aunts, to your network of phone contacts. People, in other words, you actually talk to. Second, it’s perceived as young and cool. Most teens can probably find a grandparent on Facebook. Snapchat’s mobile-first roots give it credibility with the app generation, which increasingly view PCs the way their parents viewed black-and-white televisions.

Murphy, who have evolved Snapchat into something fun and easy. To view a snap users hold a finger on their phone screens, a feature designed to make it still more difficult for people to photograph the image with another camera. Disappearing video is now an option. And while teens have embraced a medium unreachable by prying parents or future employers, grownups are catching on. All told, Snapchat users send 400 million photos and videos each day, matching the daily uploads to Facebook and Instagram combined. “We certainly didn’t invest in this to flip it,” says Mitch Lasky, a Snapchat board member and partner at venture capital firm Benchmark Capital, which led Snapchat’s $13.5 million fundraising round a year ago (they also raised $60 million in June from Institutional Venture Partners)—and invested in Twitter way back in 2009.  ALL THE ASTOUNDING GROWTH, valuations and

talk of an independent future misses one key ingredient: revenue. Asia offers a possible blueprint ( see box, opposite ). There, a handful of wildly popular mobile messaging services that upsell users with “in-app purchases.” Spiegel’s party line, when discussing revenue, feels as if it’s read from a script: “In-app transactions followed by advertising, that’s the plan we’re sticking to.” Drilling down through some of the companies that Spiegel cites raises more questions than answers. China’s WeChat, a massive messaging app owned by the Chinese Internet behemoth Tencent, encourages users to subscribe to celebrity greetings and purchase physical goods. But it’s mostly a texting app, and the messages don’t disappear. Korea’s KakaoTalk and Japan’s Line make most of their money via mobile games, which don’t seem a natural fit with Snapchat. And, of course, digital goods, like premium sticker packages, emoticons and animations, are also moneymakers in Asia, though Spiegel seems to disapprove. “It’ll make sense in a Snapchat way,” he says. “But it will not be stickers.” Advertising is similarly tricky. Snapchat’s core strengths in gaining users (your privacy is protected and your images disappear!) cripple the targeted advertising that most social media companies rely on (Snapchat knows little more than e-mail, age, phone number—plus your ads disappear!). But it has one advantage that virtually no other digital advertiser can claim: guaranteed engagement. Users must keep their fingers on a photo or video to view it—and that applies to any ads thrown their way. Snapchat can tell advertisers with absolute certainty whether their ads were viewed, a rare data point in the metric-driven world of

WHEN THE MONEY APPEARED, SPIEGEL WALKED UP TO HIS PROFESSOR—AND DROPPED OUT. And in the age of Snowden, parental Facebook monitoring and “revenge porn” (exes who publicly post nude pictures of former lovers), the self-destruction feature has become increasingly resonant. “This isn’t a silly little messaging app,” insists Liew. “It allows people to revert back to a time when they never had to worry about self-censorship.” An entire subindustry—so-called ephemeral, or temporary, social media—has emerged behind it. Besides Poke (which has largely faded), there’s Clipchat (a Snapchat-Twitter hybrid), Wickr (disappearing texts) and dozens of other apps pushing the boundaries of digital communication back toward what a telephone call used to be—a way to communicate with little risk it will come back to bite you. All of them, however, are stuck chasing Spiegel and 84

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ASIA CALLING Evan Spiegel points to mobile-messaging apps popular in the Far East as potential business models for Snapchat. Here are the leaders. LINE. Social messaging platform is big on letting users share games and cute digital stickers, which to-

gether made up 80% of its $154 million revenue in the third quarter. Created in 2011 by engineers at the Japanese arm of South Korea’s Naver Corp., it now claims 300 million registered users. Monthly actives are a mystery, but one investor in a rival app suspects 27%. LINE is reportedly planning an IPO in 2014 at a valuation of $8 billion and recently set up offices in the U.S. to court celebrity ambassadors. WECHAT. China’s mega holding company Tencent denied reports that it blocked some of

its 270 million active WeChat users, a third of whom were said to be outside China, from sending words like “Falun Gong” earlier this year. It’s now targeting Italy, Mexico and Brazil for expansion and has experimented with deposits and payments, setting up 300 WeChat vending machines in Beijing’s subway, where users could buy discounted snacks through the app. Seven-year-old, game-focused messaging platform booked $65 million in sales in first half of 2013 after splitting proceeds with game developers, Apple and Google. Offers 250 games and free group calls and is said to be on nearly every phone in South Korea, one of the most wired countries on Earth. Claims to have 110 million registered users. KAKAOTALK.

KIK MESSENGER. Founded after former BlackBerry intern became frustrated that the devicemaker

wouldn’t make its BBM messenger work with other phones, then left to create Waterloo, Ont.-based Kik, which did. Now has more than 100 million registered users, half of whom are in the U.S. and many of whom are teens. Unique in being a Web-based messenger with 30 “Cards,” or interactive mobile sites, like YouTube and games; 26-year-old founder says it’s evolving into a mobile browser with messaging as its core. With $27.5 million in VC funding, it plans to make money through ads and premium services. WHATSAPP. World’s most popular messaging app has 400 million monthly active users and was the

first messaging service to synch with the phone’s address book; is on almost all smartphones in Spain but largely unknown in the U.S. The profitable, subscription-based service —it costs $1 annually after the first free year—took $8 million from Sequoia Capital in 2011 and has since shunned funding, media and advertising. No immediate plans to expand to games and stickers, but simply send messages, photos and video to any mobile phone. —Parmy Olson

digital advertising. Like Facebook the company can also charge businesses for setting up branded accounts. Acura, Taco Bell and the New Orleans Saints already use the app to debut new products and show behind-the-scenes footage. The company’s Stories feature, which lets users display a compilation of snaps taken over the last 24 hours, is useful for brands looking to tell a longer story. Example: Online retailer Karmaloop uses the feature to show clips of posing models sprinkled with discount codes and new items. Others, like frozen yogurt chain 16 Handles, have experimented with “exploding coupons.” Spiegel and Murphy, slow in their college days to adapt to

emerging platforms, also seem keen to not make that mistake again. In September, for example, Snapchat debuted on the Samsung Galaxy Gear smartwatch. “People haven’t thought about use cases on new computing platforms,” says Thomas Laffont, managing director of Coatue, the hedge fund that provided the latest $50 million infusion. “In one tap you take a photo, one more and you can share it. Imagine [the difficulty] trying to post on Instagram from a Google Glass device.” Ah, Instagram. Zuckerberg’s Poke might be languishing, but he still has the last billion-dollar app to come out of Stanford. Kevin Systrom’s $1 billion sale last year, in fact, is often held up as the reason Snapchat was right to turn down Facebook’s preemptive billions. (Instagram would JANUARY 20, 2014  FORBES

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be worth as much as ten times more now.) Zuck is going after Snapchat again with a tweak to Instagram— Instagram Direct, a Snapchat knockoff with a key difference: The images don’t vanish unless users go in and delete them. Spiegel and Murphy have another headache. Brown’s lawsuit, which asks for one-third of the company plus punitive damages, might go to trial this year. “It’s definitely over a billion dollars we’re seeking,” says Luan Tran, one of Brown’s three lawyers. Insiders say Snapchat is eager to try the case, but videos of depositions, presumably leaked by Brown’s team, show Spiegel and Murphy far more equivocal and forgetful than their opponent. “I’m just hoping it gets resolved so it doesn’t prove to be a distraction,” says Benchmark’s Lasky. The proverbial “adults” have been brought in, including Philippe Browning, the vice president of monetization, nabbed from CBS, and COO Emily White, poached from the business division of, yes, Instagram. But, tellingly, the company prevented FORBES from interviewing either of them. So for now the doubters carry the day. “There’s an almost ritual incantation when these things reach 50 million daily active users and people say, ‘Well they’re not making any revenue,’ ” says Lasky. “It’s unfair to expect these things to generate revenue while growing so quickly.” To his point, the same was said about Twitter and Facebook. But it was also intoned by the dot-com oracles on the eve of catastrophe 15 years ago. Will Snapchat wilt like MySpace, get out at a peak valuation the way Mark Cuban sold Broadcast.com or prove the next great social media IPO? We should get our answer within two years, just in time for Spiegel to turn the ripe old age of 25. F 86

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30 UNDER 30: TECH Amit Avner | 28 Cofounder | Taykey Michael Buckwald, David Holz | 25, 25 Cofounders | Leap Motion Eric Butler | 26 Security expert Tracy Chou | 26 Software engineer | Pinterest Patrick Collison, John Collison | 25, 23 Cofounders | Stripe Adam D’Angelo | 29 Cofounder | Quora Greg Duffy | 27 Cofounder | Dropcam Steven Eidelman, Ben Jacobs | 28, 26 Cofounders | Whistle Kelsey Falter | 23  Founder | Poptip Lisa Falzone | 28 Cofounder | Revel Systems Ryan Farris | 29  Engineering manager | Parker  Hannifin AJ Forsythe | 25 Cofounder | iCracked  Adam Ghetti | 27  Founder | Ionic Security Meron Gribetz | 28  Founder | Meta Michael Heyward | 26 Cofounder | Whisper Alexa Hirschfeld, James Hirschfeld | 29, 27 Cofounders | Paperless Post Morgan Knutson | 29  Designer | Dropbox Sahil Lavingia | 21  Founder | Gumroad  Ted Livingston | 26  Founder | Kik Messenger Erie Meyer, Aminatou Sow | 29, 28 Cofounders | Tech LadyMafia Eric Migicovsky | 27  Founder | Pebble Sean Rad | 27 Cofounder | Tinder Christian Reber | 27  Founder | Wunderlist David Moinina Sengeh | 26  Biomechatronics researcher | MIT  Media Lab Evan Spiegel, Bobby Murphy | 23, 25 Cofounders | Snapchat Robby Stein | 28  Director of product | Yahoo Ilya Sukhar | 28 Cofounder | Parse Amir Taaki | 25 Cofounder | Dark Wallet David Wang | 28  Hacker | Evad3rs John Zimmer | 29 Cofounder | Lyft

JUDGES: MIKE ABBOTT General partner | Kleiner Perkins Caufield & Byers STEVE CASE CEO | Revolution CATERINA FAKE Founder | Findery

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Introducing the brightest young stars in 15 different fields. These energy and innovations of the moment, much as Atari joysticks and

3O UND EDITED BY CAROLINE HOWARD AND MICHAEL NOER

FROM LEFT:

Trip Adler, Nic Borg, Jamail Larkins, Meg Gill, Lucas Duplan, Shiza Shahid, Nate Levine, Palmer Luckey, Brian Wong, Divya Nag.

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PHOTOGRAPHER: Jamel Toppin CREATIVE STYLE DIRECTOR: Joseph DeAcetis PRODUCER: Robyn Selman PRODUCTION ASSISTANT: Mehrunnisa Wani HAIR AND GROOMING: Mary Reid FASHION ASSISTANT: Alexa Rizk

unders, brand-builders and do-gooders embody the e the decade that almost all of them were born in.

ER 3O

REPORTERS: ART & STYLE: Susan Adams, Hannah Elliott EDUCATION: Caroline Howard ENERGY & INDUSTRY: Christopher Helman, Joann Muller, Aaron Tilley FINANCE: Nathan Vardi, Agustino Fontevecchia, Halah Touryalai FOOD & DRINK: Randall Lane, Vanna Le GAMES: David M. Ewalt HOLLYWOOD & ENTERTAINMENT: Dorothy Pomerantz, Kate Pierce LAW & POLICY: Daniel Fisher, Miguel Morales MARKETING & ADVERTISING: Jennifer Rooney MEDIA: Jeff Bercovici, Emily Inverso MUSIC: Zack O’Malley Greenburg SCIENCE & HEALTH CARE: Matthew Herper, Andrea Navarro SOCIAL ENTREPRENEURS: Erin Carlyle, Prerna Sinha SPORTS: Tom Van Riper, Alex Morrell TECH: Steven Bertoni, Andy Greenberg, Connie Guglielmo, Kashmir Hill, Alex Knapp, Alex Konrad, Ryan Mac, Parmy Olson, Bruce Upbin

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HOLLYWOOD & ENTERTAINMENT Megan Amram | 26 Writer-comedian Oliver Bogner | 20  Executive producer | Bogner  Entertainment, Relativity Television Bing Chen | 27 Global creator development & management lead | YouTube Ryan Coogler | 27  Director-writer Lena Dunham | 27  Actress-writer-producer Megan Ellison | 27  Founder | Annapurna Pictures Dave Franco | 28  Actor-writer-producer Todrick Hall | 27  Actor-writer-director-singer Ian Hecox, Anthony Padilla | 26, 26  Founders | Smosh Grace Helbig | 28  Actress-comedian Stephanie Herman | 29 VP, casting | Twentieth Century  Fox Television Michael B. Jordan | 26  Actor Anna Kendrick | 28  Actress Jennifer Lawrence | 23  Actress Tom Leach | 28 VP, development & current  programming | One Three Media Deborah McIntosh | 29  Agent | WME Global Mickey Meyer | 29 Cofounder | JASH  Kelly Osbourne | 29 TV host Tiler Peck | 24  Ballerina | New York City Ballet Aubrey Plaza | 29  Actress Issa Rae | 28 Writer-producer-director Heather Regnier | 28 Writer-comedian Simon Rich | 29 Writer Jason Ruiz | 28  Animator Taylor Schilling | 29  Actress Nev Schulman | 29  Filmmaker-producer Quvenzhané Wallis | 10  Actress Andy Weil | 29 VP, comedy development | Universal Television

OLIVIA WILDE ACTRESS� SOCIAL ENTREPRENEUR 29 Fundraising is the bane of every dogooder’s existence, often requiring going back to the same rich donors over and over again to convince them to keep giving. Actress Olivia Wilde thinks there’s a better way. That’s why she cofounded Conscious Commerce. The company pairs brands with causes to help corporations become better global citizens. So profits from a bestselling dress at Anthropologie might go to a girls’ school in India, while a limitededition bag at Alternative Apparel could fund a hospital in Haiti. “I’ve always been a huge proponent of voting with your dollars,” says Wilde. “I’m inspired by the movement of entrepreneurs from my generation who are encouraging people to think about where their dollars are going.” This year Conscious Commerce raised $100,000 for New Light, a community-development project serving the women and children of a red-light district in Kolkata, India. Conscious Commerce now shares time with Wilde’s acting, but she’s getting raves for her recent performance in Drinking Buddies .

JUDGES: MICHAEL EISNER Founder | The Tornante Company TODD LIEBERMAN Partner | Mandeville Films DANA WALDEN CEO | Twentieth Century Fox Television OLIVIA WILDE WEARS: SKIRT BY TOCCA; TOP BY RODARTE; JEWELS BY JENNIFER MEYER; BOOTS BY JIMMY CHOO.

Wilde (b. 1984) gets all wrapped up in VHS tape, the central player of the video-coming-of-age indie classic  Sex, Lies, and Videotape.

Rebel Wilson | 27  Actress-writer-producer

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SPORTS Muthu Alagappan | 23 Consultant | Ayasdi Jonathan Amoona | 29  Associate | Winston & Strawn Alana Blanchard | 23 Surfer Michael Bradley | 26  Midfielder | AS Roma Drew Cannon | 23  Basketball operations analyst | Boston Celtics Sidney Crosby | 26 Center | Pittsburgh Penguins Andrew Daines | 27 Cofounder | Preplay Sports Mike Disner | 28  Director of football administration | Arizona Cardinals Kevin Durant | 25  Forward | Oklahoma City Thunder Brittney Griner | 23 Center | Phoenix Mercury Rob Gronkowski | 24 Tight end | New England Patriots Bryce Harper | 21 Outfielder | Washington Nationals LeBron James | 29  Forward | Miami Heat Alex Kline | 19  Founder | The Recruit Scoop, Rivals Shane Kupperman | 28  Director of basketball operations | New Orleans Pelicans Rory McIlroy | 24 Golfer Lionel Messi | 26  Forward | FC Barcelona Andy Murray | 26 Tennis player Kei Nishikori | 24 Tennis player Megha Parekh | 28 Vice president | Jacksonville  Jaguars Derrick Rose | 25  Point guard | Chicago Bulls Ronda Rousey | 26  MMA fighter Maish Simon | 27 Cofounder | Pogoseat Jonathan Toews | 25 Center | Chicago Blackhawks Mike Trout | 22 Outfielder | Los Angeles Angels of  Anaheim Lindsey Vonn | 29 Skier Darrell Wallace Jr. | 20  Nascar driver Shaun White | 27 Snowboarder Caroline Wozniacki | 23 Tennis player

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MARIA SHARAPOVA TENNIS PLAYER 26 This winter the world’s fourthranked tennis player heads back to her hometown, the resort of Sochi, Russia, to serve as an NBC correspondent for the 2014 Winter Olympics. There’s a reason the network wants her face on the games: Sharapova sells. She was the world’s highest-paid female athlete last year, earning $29 million, of which $23 million came from deals off the court. A four-time grand-slam winner, she’s piled up endorsements over the years from, among others, Porsche, Motorola, Tiffany and Nike, which created a Maria Sharapova apparel line. Last year she launched her first independent business, a candy line called Sugarpova, with 12 flavors of premium candies (not to mention  jewelry and accessories featuring the Sugarpova lips logo) and estimated revenues of $6 million. “Business has always been a passion of mine,” she says. “And I have always had a sweet tooth. … A tennis career is such a small part of life.”

JUDGES: PETER GUBER Co-owner | Golden State Warriors JOSEPH A. BAILEY III Managing director | RSR Partners SHAWN MCBRIDE SVP | Ketchum Sports & Entertainment MARIA SHARAPOVA WEARS: ALEXANDER MCQUEEN, PALE BLUE PIQUET TOP, SAKS FIFTH AVENUE; DOLCE & GABBANA, BL ACK SKIRT, SAKS FIFTH AVENUE; JENNIFER MEYER, JEWELRY.

Sharapova (b. 1987) swings a vintage racket from the era when female champs Martina Navratilova and Tracy Austin held court.

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30 30 FINANCE UNDER

Luis Alvarado | 29  Investment research analyst | Wells Fargo Private Bank George Bachiashvili | 28  Founder | Georgian Co-Investment Fund  Lucy Baldwin | 29  Managing director | Goldman Sachs Sam Barnett | 24  Founder | SBB Research Group Ganesh Betanabhatla | 28  Managing director | Talara Capital Tracy Britt Cool | 29  Financial assistant to the chairman | Berkshire Hathaway Rushabh Doshi | 29 Trader | DW Investment Management Leigh Drogen | 27  Founder | Estimize Fred Ehrsam | 25 Cofounder | Coinbase Eric Eisner | 29 Vice president | Bank of America Merrill  Lynch Global Banking & Markets Stephen Ensley | 29  Principal | Hellman & Friedman Brian Feinstein | 28  Partner | Bessemer Venture Partners Eugene Gokhvat | 28  Portfolio manager | BlueCrest Capital Management Cameron Horwitz | 29  Research director | U.S. Capital Advisors Kevin Kaiser | 26  Managing director | Hedgeye Risk  Management Katie Keenan | 29  Associate | Blackstone Group Eric Khrom | 28  Founder | Khrom Capital Management Maximilian Kuss | 27  Founder | European Media Holding AG John Locke | 29  Principal | Accel Partners Carryn McLaughlin | 29 Vice president | JPMorgan Chase Chaitanya Mehra | 28  Portfolio manager | Och-Ziff Capital  Management Neil Mehta | 29  Founder | Greenoaks Capital Vivek Ramaswamy | 28  Investment analyst | QVT Financial Adam Rodman | 29  Founder | Segra Capital Management Matthew Schoenfeld | 26  Associate | Morgan Stanley Sam Shikiar | 28 Vice president | Goldman Sachs Jeffrey Sun | 29  Executive director | Morgan Stanley Andrew Silverman | 28 Vice president | Goldman Sachs Chris Yetter | 29  Head of Latin American Investments | Falcon Edge Capital

LUCAS DUPLAN FOUNDER, CLINKLE 22 Just over a year after receiving his undergrad computer science degree from Stanford, Duplan is running one of the most hyped and controversial startups in the nation, Clinkle, which seeks to disrupt the way financial transactions are done—with a digital wallet used on mobile phones. He has shocked Silicon Valley with his ability to raise $30 million from the likes of Richard Branson, Peter Thiel and Andreessen Horowitz for an unreleased secret product and attract talent like former Netflix CFO Barry McCarthy, who is now Clinkle’s COO. At the same time Duplan has been slammed by tech bloggers, who have pointed to the large number of departing employees—one of whom anonymously posted a harsh criticism of Duplan—and made fun of some of his decisions, like the over-the-top video ad Clinkle produced. “At the end of the day only one thing will matter: Do people like and use our product?” says Duplan. “Our focus is not on the press or who is backing it. Our focus is on product.”

JUDGES: JIM BREYER Partner | Accel Partners ANTHONY SCARAMUCCI Founder | SkyBridge Capital ADAM ZOIA CEO | Glocap LUCAS DUPLAN WEARS: SWEATER ($556), SHIRT ($280) AND PANTS ($327) BY PAUL AND SHARK; PAULSHARK.IT. SHOES: HIS OWN.

“Greed is good” and outsize mobile phones are shorthand for 1980s-era Wall Street for young financiers like Duplan (b. 1991).

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Pete Cashmore | 28  Founder | Mashable Kelly Evans | 28  Anchor | CNBC Dan Fletcher | 26 Cofounder | Beacon Matt Galligan | 29 Cofounder | Circa Tavi Gevinson | 17 Cofounder | Rookie Axel Hansen, Jonah Varon | 22, 22 Cofounders | Newsle Jake Horowitz, Chris Altchek | 26, 26 Cofounders | PolicyMic David Karp | 27  Founder | Tumblr Ezra Klein | 29 Columnist | Washington Post Dan Koh | 28 General manager | HuffPost Live Chris Lavergne, Alex Magnin | 25, 29  Founder, COO | Thought Catalog  Libby Leffler | 28 Strategic partnerships manager | Facebook Uzoamaka Maduka | 26 Cofounder | The American Reader Claire Mazur | 29 Cofounder | Of a Kind  Brit Morin | 28  Founder | Brit + Co. Matt Mullenweg | 29  Founder | Automattic Carolyn Penner | 28 VP of communications | Twitter Tiffany Pham | 27  Director of business development, strategic initiatives and partnerships | CBS Olenka Polak | 20 Cofounder | MyLingo

TRIP ADLER COFOUNDER, SCRIBD 29 An avid surfer and sometime streetbusking saxophonist with a Harvard degee in biophysics, Adler is a man of many interests. He thinks readers ought to be able to indulge their own diverse curiosities as well—and be able to “think about what to read, not what to buy,” as he says. Scribd, the digital content-sharing platform he cofounded in 2007, is betting big on subscriptions: $8.99 a month for unlimited e-book downloads. It has already partnered with more than 100 publishers for a catalog of more than 100,000 titles and has ambitions that extend well beyond books. “We want to be the world’s digital library,” he says. Profitable, with revenues in the “tens of millions” and a user base of 80 million, Scribd no longer has to rely on VC funding. “Our challenge now is how to take our profits and reinvest them to continue to grow our revenue,” he says.

JUDGES: ARIANNA HUFFINGTON Cofounder | Huffington Post Media Group BEN SHERWOOD President | ABC News SHANE SMITH Cofounder | Vice Media TRIP ADLER WEARS: JACKET ($595), SHIRT ($295) AND SLACKS ($450) BY CALVIN KLEIN COLLECTION; AVAILABLE AT CALVIN KLEIN MADISON AVENUE STORE. BELT ($40) BY NAUTICA; NAUTICA.COM. SHOES ($780) BY PRADA; PRADA.COM.

Sterling Proffer | 27  Director of platform | Vice Rachel Rosenfelt | 28 Cofounder | The New Inquiry Melissa Rosenthal | 25  Director of creative services | Buzzfeed  Callie Schweitzer | 25  Director of digital innovation | Time Nikhil Sethi, Garrett Ullom | 25, 24 Cofounders | Adapt.ly Shane Snow | 29 Cofounder | Contently Jason Stein | 29  Founder | Laundry Service Brian Stelter | 28  Host, Reliable Sources | CNN  Eric Stromberg | 25 Cofounder | Oyster Fernando Vila | 28 VP of programming | Fusion

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Tom Wolfe’s hardcover The Bonfire of the Vanities  was fly in 1987. Now Adler (b. 1984) is busy disrupting the book business.

FORBES

30 30 MUSIC UNDER

Peter Asbill, Elliott Breece | 29, 29 Cofounders | Songza Avicii | 24  Musician Justin Bieber | 19  Musician J. Cole | 28  Musician Miley Cyrus | 21  Musician Donnie Dinch | 29  Founder | WillCall Drake | 27  Musician Derrick Fung | 26  Founder | Tunezy Calvin Harris | 29  Musician Hunter Hayes | 22  Musician Kim Kaupe | 28 Cofounder | ‘ZinePak Lady Gaga | 27  Musician

BRUNO MARS MUSICIAN 28

When halftime rolls around at Super Bowl XLVIII, it’s safe to say Bruno Mars won’t be worried about the score. “Hawaii doesn’t have a team, so I bounce around,” says the Honolulu native. “I go for the underdog.” That term hardly describes Mars, who will play the halftime show in the tradition of Paul McCartney, U2, Michael Jackson and other music legends. Mars is the first artist in ten years to headline before turning 30, but he’s already got two platinum albums and 14 past Grammy nominations (including one win), with 4 new ones this year. His best preparation for the upcoming performance at MetLife Stadium may have been hosting Saturday Night Live in 2012, despite having about as much experience with sketch comedy as Hawaii has with snow. Says Mars: “You gotta be fearless, man. … If I’m ever gonna sing in a blizzard, it may as well be at the Super Bowl.” To listen to Mars’ curated playlist, created exclusively for FORBES’ 30 Under 30, go to forbes.com/under30. JUDGES: KEVIN LILES Founder | KWL Enterprises JOHN OATES Musician | Hall & Oates MICHAEL RAPINO CEO | Live Nation Entertainment

Kendrick Lamar | 26  Musician Ryan Lewis | 25  Producer Lorde | 17  Musician Miguel | 28  Musician Janelle Monáe | 28  Musician One Direction | 19, 20, 20, 20, 22  Musicians Wilson Owens | 28 Cofounder | Royalty Exchange Jordan Passman | 27  Founder | ScoreAScore Katy Perry | 29  Musician Rihanna | 25  Musician James Sider | 29  Founder | BandPage Allen Stone | 26  Musician Taylor Swift | 24  Musician Sam Tarantino, Josh Greenberg | 27, 26 Cofounders | Grooveshark Alex White | 27 Cofounder | Next Big Sound  Wiz Khalifa | 26  Musician Zedd | 24  Musician    G    N    E    F  .    Z    I    A    K    Y    B    H    P    A    R    G    O    T    O    H    P

Mars (b. 1985) sports a post- Saturday NIght Fever  meets Prince look.

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FOOD & DRINK Elizabeth Alpern, Jeffrey Yoskowitz | 29, 29 Co-owners | The Gefilteria Adam Altnether | 27 Co-owner | Craft Restaurants Matt Brockman, Ross Brockman, Tyler Mosher | 27, 25, 25  Founders | Downeast Cider House Borahm Cho | 29 Cofounder | Kitchensurfing  Emily Doubilet, Jessica Holsey | 29, 29 Cofounders | Susty Party Shore Gregory | 29  President | Island Creek Oysters Eden Grinshpan | 27  Host, Eden Eats | Cooking Channel Luke Holden | 29  Founder | Luke’s Lobster Yuki Ieto | 29 Chef | Pubbelly Sushi Jesse Katz | 29  Head winemaker | Lancaster Estate and Roth Winery Joseph “JJ” Johnson | 29 Chef de cuisine | The Cecil Vincent Kitirattragarn | 29  Founder | Dang Foods Oliver Kremer | 27 Cofounder | Dos Toros Taqueria Adam Lowy | 28  Founder | Move for Hunger Aditi Malhotra | 28  Founder | Tache Artisan Chocolate Carlton McCoy | 29 Wine Director | The Little Nell Hotel Jack McGarry | 24 Co-owner | The Dead Rabbit Leslie Pariseau | 28  Deputy editor | Punch Thomas Pastuszak | 29 Wine director | The NoMad Restaurant Alex Pemoulie | 28  Founder | Thirty Acres Jason Pfeifer | 29 Chef de cuisine | Maialino Eric Railsback | 28 Cofounder | Les Marchands Wine Bar & Merchant,  Lieu Dit Winery Ali Rosen | 28  Founder | Potluck Video Erica Shea, Stephen Valand | 29, 28 Cofounders | Brooklyn Brew Shop Rob Spiro | 29 Cofounder | Good Eggs

MEG GILL COFOUNDER, GOLDEN ROAD BREWING 28 Beer, it’s clear, isn’t just for dudes. Women are drinking more of it. And as Meg Gill proves, they’re making more of it, too. Amid America’s craft beer explosion—more than 2,000 at last count—FORBES reckons that Gill, 28, is the youngest female brewery owner in the country. And her Los Angeles-based Golden Road Brewing is one of the fastest-growing; it produced 15,000 barrels last year and expects to double that output this year. “It’s all about finding those relationships to help support the story behind the beer, the beer itself and all the love that goes into getting the beer into the right vessel,” says Gill, who spent her time at Yale in the decidedly beer-unfriendly realms of classics study and varsity swimming. Yet she credits the former with her unique outlook on suds: “Latin is about putting pieces of the puzzle together, and the same thing is true of getting beer on the shelf.” Gill, who sold beer from an R.V. before cofounding Golden Road with an industry veteran, Mohawk Bend owner Tony Yanow, reaches those shelves by putting her high-end brews—$7.99 for a 16 oz. four-pack— inside aluminum cans. Revenues exceeded $10 million in 2013, and Gill plans to expand her dozenplus offerings outside her southern California base in 2014.

JUDGES: DANNY MEYER CEO | Union Square Hospitality Group LEE SCHRAGER Founder | South Beach and New York Wine & Food festivals ALICE WATERS Founder | Chez Panisse MEG GILL WEARS: JACKET ($950) BY STRENESSE SS; STRENESSE.COM. SKIRT ($371) BY EKATERINA KUKHAREVA; KUKHAREVA.COM. PUMPS ($148) BY COLE HAAN; AVAILABLE AT DILLARD’S; DILLARDS.COM.

Ben Towill, Philip Winser | 29, 29 Cofounders | Silkstone Group Christina Turley | 29  Director of sales and marketing | Turley Wine Cellars Jason Wang | 25 CEO | Xi’an Famous Foods Catherine Zamoiski | 29  Director of marketing | Pret A Manger

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Two decades before Gill (b. 1985) was legal to drink, Cheers  made suds safe for prime-time TV.

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GAMES Maria Alegre | 28 Cofounder | Chartboost Alexander Bruce | 27 Owner | Demruth Anthony Burch | 25  Lead writer | Gearbox Software Terry Cavanagh | 29  Director | Distractionware Limited  Brian Cho | 28  Partner | Andreessen Horowitz  Jessie Coombs | 28 Senior producer | Microsoft Game Studios Matthew Davis | 28 Cofounder | Subset Games Zach Gage | 28 Game designer Alexander Garfield | 28 CEO | Evil Geniuses John Graham | 27 Cofounder | Humble Bundle Keith Guerrette | 28  Lead FX artist | Naughty Dog  Stephanie Harvey | 27 Game designer | Ubisoft Montreal Justin Ignacio | 23  Broadcast production manager | Twitch Tom Jubert | 29  Narrative designer Ludwig Kietzmann | 29  Editor-in-chief | Joystiq Andrew Kim | 22  Industrial designer | Microsoft Jaedong Lee | 23  Professional gamer David Louche | 19 Game designer Justin Ma | 28 Cofounder | Subset Games Matthew Malone | 29  Designer | Branch

PALMER LUCKEY CEO, OCULUS VR 21 Virtual reality for the masses is no longer just science fiction, thanks to this 21-year-old videogame fan. Engineering prodigy Palmer Luckey started developing his own head-mounted virtual-reality displays when he was still in high school and was in college when he created the first prototype of a consumer-priced VR headset called the Oculus Rift. “You put it on,” says Luckey, “and you feel like you’re inside of the game, rather than looking at it on a screen.” Endorsements from game industry legends such as Valve’s Gabe Newell and id Software’s John Carmack helped Luckey raise $2.4 million in a 2012 Kickstarter campaign. (Carmack was so impressed he even left id to work for Luckey as his CTO.) The year-old company has raised over $91 million from venture capitalists, employs 50 people and has released an early version of the device to software developers, who are already showing off some innovative VR games and applications. Consumers will be able to buy their own headsets—which will initially work only with PC and mobile games—for a goal price of $300 sometime later this year.

JUDGES: MARTIN RAE President | Academy of Interactive Arts & Sciences JOHN ROMERO Cofounder | Loot Drop JULIE UHRMAN Founder | OUYA PALMER LUCKEY WEARS: JACKET ($800) BY STONE ISLAND; STONEISLAND.COM. SWEATER ($450) BY STONE ISLAND SHADOW; STONEISLAND.COM. JEANS ($165) BY JACK OF SPADES; JACKOFSPADES.COM.

Alexander Martin | 22  Founder | Droqen Matt Nava | 27 Creative director | Giant Squid  John Nesky | 28  Feel engineer | thatgamecompany Sean Plott | 27 CEO | Day[9]TV  Amir Rao | 29 Studio director | Supergiant Games Matt Thorson | 25 Game developer | Matt Makes Games Greg Wohlwend | 29  Founder | aeiowu Justin Wong | 28  Director of partnerships | Twitch Davey Wreden | 25 Creative mistress | Galactic Cafe

Luckey (b. 1992) blasts this Atari 2600 joystick, the only way to play Space Invaders, the runaway hit of gaming’s “golden age.”

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Eren Bali | 29 Cofounder | Udemy Katie Beck | 27 COO | 4.0 Schools Catharine Bellinger, Alexis Morin | 23, 23 Cofounders | Students for Education Reform Dan Berkowitz | 28  Manager | Youth Orchestra LA Tyler Bosmeny, Dan Carroll, Rafael Garcia | 27, 26, 26 Cofounders | Clever Andrew Buher | 28 COO | NYC Department of Education Sam Chaudhary, Liam Don | 27, 27 Cofounders | ClassDojo Jennifer Chen, Joyce Meng | 27, 27 Cofounders | Givology Sayamindu Dasgupta | 29  Ph.D. | MIT Media Lab Katelyn Donnelly, Saad Rizvi | 27, 28 SVPs | Pearson Aaron Feuer, Xan Tanner, David Carel | 22, 22, 23 Cofounders | Panorama Education Alejandro Gac-Artigas | 25  Founder | Springboard Collaborative Brad Hargreaves, Matt Brimer | 27, 27 Cofounders | General Assembly Jeremy Johnson | 29 Cofounder | 2U  Jeremiah Kittredge | 27  Founder | Families for Excellent Schools Garrett Neiman | 25 Cofounder | CollegeSpring  Greg Rosenbaum | 25  Producer | SXSWedu Alison Johnston Rue | 26 Cofounder | InstaEDU  Elliot Sanchez | 27  Founder | mSchool Kane Sarhan | 26 Cofounder | Enstitute Beth Schmidt | 29  Founder | Wishbone Mandela Schumacher-Hodge | 28  Director | Startup Weekend Education Elizabeth Ratner Slavitt | 27 Content scaling lead | Khan Academy Zakiya Smith | 28 Strategy director | Lumina Foundation Evan Stone, Sydney Morris | 29, 28 Cofounders | Educators 4 Excellence Andrew Sutherland | 24  Founder | Quizlet David Tjaden | 26 Chair, student program | National Education  Association Caryn Voskuil | 27  Manager, school model innovation | Rocketship Education Tony Wan | 28  Managing editor | EdSurge News

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NIC BORG COFOUNDER, EDMODO 27 In the white-hot world of online educational startups, Nic Borg’s Edmodo is among the hottest, raising $25 million in 2012 to total $57 million since it was founded in 2008. Edmodo, a.k.a. “Facebook for the classroom,” targets K-12 kids, parents and teachers and has nearly 30 million users—over a million of them teachers—in more than 210,000 schools, including public schools in Chicago and Denver. Edmodo doesn’t create “content” but rather is a free, privacy-protected platform where teachers, students and administrators can compare and share lesson plans, homework and tests. It is also a showcase for app developers, and Edmodo currently offers over 600 apps, from which it takes a revenue share. Says Borg, “While the ed tech industry has evolved rapidly over the past few years, we have only seen the tip of the iceberg. We’ll start to better understand how technology can be used to improve student learning outcomes at scale.”

JUDGES: MICHAEL HORN  Cofounder and executive director, education program | The Clayton Christensen Institute M. NIGHT SHYAMALAN Oscar-nominated director and screenwriter | author of  I Got Schooled  LUYEN CHOU SVP, global product strategy | Pearson NIC BORG WEARS: JACKET ($795) AND SHIRT ($225) BY TODD SNYDER; PANTS ($260) BY J BRAND; ALL AVAILABLE AT WILKES BASHFORD; WILKESBASHFORD.COM.

Borg (b. 1986) puzzles over a Rubik’s Cube, which became a worldwide craze in the 1980s.

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DIVYA NAG COFOUNDER, STEM CELL THERANOSTICS AND STARTX MED 22 Divya Nag is attacking one of medicine’s biggest problems: the fact that most types of human cells—like those in the heart or liver—die when you keep them in a petri dish. This makes testing new drugs a risky, costly and time-consuming business: 90% of medicines that start clinical trials turn out to be too unsafe or ineffective to market. But a new technology, the induced pluripotent stem cell, may help. Nag’s company, Stem Cell Theranostics, was created from technology funded by a $20 million grant from the California Institute of Regenerative Medicine and is closing a venture round. It turns cells— usually from a piece of skin—into embryoniclike stem cells, then uses them to create heart cells. These cells can live in petri dishes and be used to test new drugs. Someday they might even replace heart tissue that dies during a heart attack. Three large pharmaceutical companies are customers, though revenues are small. Nag, who was already publishing in prestigious scientific journals when she was an undergraduate, dropped out of Stanford to pursue her dream. No regrets: “Our technology was so promising and I was so passionate about it that nothing else made sense to me,” she says. “It was very clear this was what I wanted to do.”

JUDGES: GEORGE M. CHURCH Professor of genetics | Harvard Medical School MIKAEL DOLSTEN President of worldwide research and development | Pfizer DANIEL KRAFT Executive director | FutureMed DIVYA NAG WEARS: JACKET ($909) BY EKATERINA KUKHAREVA; KUKHAREVA.COM. TANK TOP ($340) BY DIESEL; DIESELBLACKGOLD.COM. PANTS ($240) BY NAKED AND FAMOUS; BARNEYS.COM. PUMPS ($148) BY COLE HAAN; AVAILABLE AT DILLARD’S; DILLARDS.COM.

Nag (b. 1991) looks Back to the Future, the hit mid-’80s flick that separated science from fiction and put it into pop culture consciousness.

SCIENCE & HEALTH CARE Christina Agapakis | 29  Postdoctoral researcher | UCLA Ludmil Alexandrov | 27  Ph.D. candidate | University of Cambridge Genevera Allen | 28  Assistant professor of statistics | Rice University Greg Alushin | 29  Early independent scientist | National Heart,  Lung, and Blood Institute Jocelyn Brown | 25 Senior program associate | Rice 360°:  Institute for Global Health Technologies Raghu Chivukula | 29  Resident physician | Massachusetts General Hospital Paige Cramer | 29  Associate principal scientist | Merck Sharp & Dohme Adam de la Zerda | 29  Assistant professor of structural biology | Stanford University School of Medicine Nicholas Downing | 28  Medical student | Yale University School of Medicine Richard Gaster | 29 CEO | Gaster Hall Technologies Mitchell Guttman | 29  Assistant professor of biology | California Institute of Technology Daniel Paul Hashim | 27  Founder | Carbon Sponge Solutions Rachel Haurwitz | 28 Cofounder | Caribou Biosciences Elaine Hsiao | 28 Senior research fellow | California Institute of Technology Cigall Kadoch | 28  Assistant professor of pediatric oncology | Dana-Farber Cancer Institute Aleksandar Kostic | 29  Postdoctoral fellow | Broad Institute of MIT & Harvard Anna F. Lau | 29 Clinical microbiology fellow | National Institutes of Health Allison Lewko | 29  Assistant professor of computer science | Columbia University Joshua Liu | 25 Cofounder | Seamless Mobile Health Jonathan Ostrem | 29 Consultant | Wellspring Biosciences Michael Pesko | 29  Assistant professor | Weill Cornell  Medical College Surbhi Sarna | 28  Founder | nVision Medical Josh Sommer | 26  Executive director | Chordoma Foundation Zirui Song | 29  Medical student | Harvard Medical School Marc Succi | 25 Cofounder | AugMI Labs Livio Valenti | 28 Cofounder | Vaxess David Weinberg | 28  Faculty fellow | UCSF Daniela Witten | 29  Assistant professor of biostatistics | University of Washington Luhan Yang | 28 Cofounder | Egenesis

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SOCIAL ENTREPRENEURS Chase Adam | 27  Founder | Watsi Kamel Al-Asmar | 29  Founder | Nakhweh Esra’a Al Shafei | 27  Founder | MidEast Youth Mark Arnoldy | 27 Cofounder | Nyaya Health Christopher Ategeka | 29  Founder | CA Bikes Seth Bannon, Ben Lamothe | 29, 29 Cofounders | Amicus Bryan Baum | 24 Cofounder | Prizeo Clara Brenner | 28 Cofounder | Tumml Khalida Brohi | 25  Founder | Sughar Julie Carney | 27 Cofounder | Gardens for Health Karan Chopra | 29 Cofounder | Gadco Dan Friedman | 22 Cofounder | Thinkful Khalil Fuller | 21 CEO | Learn Fresh Eric Glustrom, Boris Bulayev, Angelica Towne | 29, 28, 27 Cofounders | Educate! Isaac Holman, Josh Nesbit, Nadim Mahmud | 27, 26, 28 Cofounders | Medic Mobile Tevis Howard | 29  Founder | Komaza Joel Jackson | 28  Founder | Mobius Motors Lauren Bush Lauren | 29  Founder | Feed  Talia Leman | 18  Founder | RandomKid  Daniel Maree | 26  Founder | Million Hoodies Seth Maxwell | 25  Founder | Thirst Project Kennedy Odede | 29  Founder | Shining Hope for Communities Krishna Ramkumar | 28 Cofounder | Avanti David Schwartz | 27 Cofounder | The Real Food Challenge Ajaita Shah | 29  Founder | Frontier Markets Kavita Shukla | 29  Founder | Fenugreen Yannick Sonnenberg | 25 Cofounder | elefunds

SHIZA SHAHID COFOUNDER, MALALA FUND 24 When Malala Yousafzai, the young Pakistani daring to advocate for girls’ education, was shot by the Taliban in 2012, Shahid, who had met Malala in 2009, got on a plane. She helped oversee Malala’s medical care in London. “While I was there by her side,” says Shahid, “she woke up and said, ‘I want to continue my campaign.’ ” The Stanford grad and McKinsey consultant became the 16-year-old’s chief strategist on the spot. “How do we leverage her voice in a way that drives all this energy around Malala into meaningful action?” Her answer is the Malala Fund, founded to turn her vision for girls’ education into reality. Grants to date: $400,000, half from the World Bank and half from Angelina Jolie and Brad Pitt. A documentary on Malala’s work by Davis Guggenheim is expected for release in 2014.

JUDGES: RANDALL LANE Editor | FORBES magazine CHERYL DORSEY President | Echoing Green JEFF SKOLL Founder | Skoll Foundation SHIZA SHAHID WEARS: DRESS ($1,466) BY EKATERINA KUKHAREVA; KUKHAREVA.COM. JACKET ($1,235) BY MONCLER; MONCLER.COM.

Malala Yousafzai | 16 Cofounder | Malala Fund  Mohamed Zaazoue | 26  Founder | Healthy Egyptians

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Shahid (b. 1989) carries on the spirit of 1985’s all-star Live Aid concert to aid the hungry and homeless in Africa.

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30 30 LAW & POLICY UNDER

Josh Blackman | 29  Assistant professor of law | South Texas College of Law Amanda Brown | 28  National political director | Rock the Vote Adam Chandler | 29  Attorney | Department of Justice Leif Dautch | 28  Deputy attorney general | California Department of Justice David Demirbilek | 28  Minority counsel | Senate Homeland Security & Governmental Affairs Committee Audrey Gelman | 26 Vice president | SKDKnickerbocker Jake Heller | 29 Cofounder | Casetext Solomon Hsiang | 29  Assistant professor of public policy | University of California, Berkeley Tim Hwang | 27  Partner | Robot Robot & Hwang  Cristina Jimenez | 29  Managing director | United We Dream Noorain Khan | 29  Associate | Wachtell, Lipton, Rosen & Katz  Derek Khanna | 25 Tech-policy scholar, activist Eric King | 24  Head of research | Privacy International Aaron Letzeiser | 24  Founder | Medical Amnesty Initiative Yihong “Julie” Mao | 27  Attorney | New Orleans Workers’ Center for Racial Justice Blake Masters | 27 Cofounder | Judicata Jonathan Mayer | 26 Cybersecurity fellow | Center for International Security & Cooperation Teryn Norris | 25 Commercialization and manufacturing specialist | Department of Energy Corey Owens | 29  Head of public policy | Uber Jonathan Fantini Porter | 29 Chief of staff | Department of Homeland Security Jessica Schumer | 29 Chief of staff | Council of Economic Advisers,  Executive Office of the President Amie Stepanovich | 28  Director, domestic surveillance project | Electronic Privacy Information Center Nabiha Syed | 28  Attorney | Levine Sullivan Koch & Schulz 

NATE LEVINE FOUNDER, OPENGOV 22 As a Stanford sophomore Nate Levine saw opportunity where governments have historically been flat-footed. “Governments struggle to access [their own] data, because there aren’t good tools out there,” Levine says. With that in mind he cofounded OpenGov in 2012 at age 20. OpenGov’s software platform helps governments make intelligent, data-driven decisions and exchange financial information with their constituents. The startup has raised over $7 million— $4 million in 2013 alone—and works with more than 50 municipalities, school districts and other local government organizations, involving over 7 million people nationwide. As OpenGov expands— possibly into the for-profit sector— Levine is focused on building new tools to revolutionize how cities share data with one another and how they approach the budgeting process. Says Levine, “Better access to information allows officials to focus on the hard problems of governing. It’s especially important now that governments are being asked to do more with less.”

JUDGES: RONAN FARROW 30 Under 30 alum and news anchor | MSNBC GRETA VAN SUSTEREN Host, On the Record  | Fox News Channel WILLIAM ESKRIDGE JR. John A. Garver Professor of Jurisprudence | Yale Law School NATE LEVINE WEARS: JACKET ($129) BY TOMMY HILFIGER; AVAILABLE AT TOMMY HILFIGER FIFTH AVENUE STORE. SWEATER ($395), SHIRT ($295) AND PANTS ($295) BY BURBERRY; BURBERRY.COM. LOAFERS ($130) BY CALVIN KLEIN; CALVINKLEIN.COM.

The Internet has transformed old-school campaigning: This 1984 Reagan-Bush pin predates Levine (b. 1991) by nearly two elections.

Trevor Timm | 29  Executive director | Freedom of the Press Foundation Rebecca Vallas | 29  Deputy director of government affairs | National Organization of Social Security Claimants’ Representatives Heather West | 29  Policy analyst | Google Cody R. Wilson | 25  Founder | Defense Distributed  Lauren Wilson | 26  Policy counsel | Free Press Daniel Zolnikov | 26 State representative | Montana House District 47 

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Ahmed Abdelrahman | 29  Fashion designer | Thamanyah Jensen Adoni | 24 Shoemaker | Modern Vice Rosie Assoulin | 28  Fashion designer Michelle Campbell | 28  Jewelry designer Ian Collings | 28  Industrial designer | Fort Standard  Asher Dunn | 27  Furniture designer | Studio Dunn Alan Eckstein | 28  Design director | Timo Weiland  Crystal Ellis, Stephanie Beamer | 29, 29  Furniture designers | Egg Collective Sarah Flint | 25 Shoe designer Alex Gartenfeld | 27  Interim director | MOCA North  Miami Wes Gordon | 27  Fashion designer Nikolai “Niki” Haas, Simon Haas | 29, 29  Furniture designers | Haas Brothers Colin P. Kelly | 29  Industrial designer | Redscout Aimee Kestenberg | 27  Handbag designer Jemima Kirke | 28  Painter-actress Becca McCharen | 29  Fashion designer | Chromat Leandra Medine | 25  Fashion blogger | The Man Repeller Shauna Miller | 27  Fashion blogger | Penny Chic Oscar Murillo | 27  Artist Victo Ngai | 25  Illustrator Lotta Nieminen | 27 Graphic designer Aaron Poritz | 29  Furniture designer

CARTER CLEVELAND FOUNDER, ARTSY 27 When Carter Cleveland was a Princeton computer science student back in 2008, he went online searching for a picture to decorate his dorm room. “I assumed there would be a website with all the world’s art on it,” he recalls. There wasn’t. So he set out to build one, with a Pandora-like feature that recommends artists to users. His company, Artsy, displays more than 85,000 pieces of art from 400 foundations and museums (including the National Gallery of Art and the Getty) and 1,400 galleries. Though his first impulse was simply to create a repository of images, he quickly realized the site could make a lot of money from commissions (60% of the art on the site is for sale). Investors such as Twitter’s Jack Dorsey, Google’s Eric Schmidt and mega-art dealer Larry Gagosian have pumped $14.5 million into the company. Cleveland says Jeff Bezos is his inspiration: “We’re going to become Amazon for the art world.”

JUDGES: JEFFREY DEITCH Art advisor PETER BRANT Art collector ISAAC MIZRAHI Fashion designer CARTER CLEVELAND WEARS: SUIT ($2,150) BY DUNHILL; DUNHILL.COM. SHIRT ($195) BY THOMAS PINK; US.THOMASPINK.COM. BELT ($130) BY TORINO LEATHER; TORINOLEATHER. COM. SHOES ($350) BY PAUL EVANS; PAULEVANS.COM. PRODUCTION ASSISTANT: ANASTASIIA MISHYNA

GROOMING: SUZANA HALLILI FOR MAKE UP FOR EVER

Eric Singer | 27  Eyewear designer | Shwood  Travess Smalley | 27  Digital artist Lucien Smith | 24  Artist Danielle Snyder | 28  Jewelry designer | Dannijo Tanya Taylor | 28  Fashion designer Torey Thornton | 23  Artist Jacob Willis | 27  Fashion designer | Second/Layer

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Cleveland (b. 1986) hearts Keith Haring, the iconic 1980s graffiti artist and social activist who died of AIDS in 1990.

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BRIAN WONG COFOUNDER, KIIP 22 Imagine you just posted a 5-mile run to the RunKeeper app when an ad on your iPhone pops up offering you a free liter of Propel Water. Or you just finished a particularly fiendish level of Candy Crush and you are offered free Sour Patch Kids as a reward. These “moments of achievement” and “serendipitous rewards” are a big part of the future of advertising, at least according to Wong, who cofounded Kiip in 2010, a year after graduating from the University of British Columbia at age 17. “We track almost half a billion of these achievement moments every month,” he says. “These are moments that brands can be a part of and own.” In three years Kiip has raised $15.4 million and is now used by more than 500 major brands to reach 70 million users through 1,500 games and apps. Procter & Gamble, Pepsi and Disney are clients. He expects to be profitable next year.

JUDGES: ADAM BAIN President of global revenue | Twitter JAMES D. FARLEY JR. Executive VP of global marketing, sales and service | Lincoln, Ford Motor Co. HELAYNE SPIVAK Director | VCU Brandcenter BRIAN WONG WEARS: JACKET ($295) BY MICHAEL KORS; AVAILABLE AT DILLARD’S; DILLARDS.COM. SWEATER ($75) BY PV PATRICK ASSARAF; AVAILABLE AT WILKES BASHFORD; WILKESBASHFORD.COM. SHIRT ($79) BY VINCE CAMUTO; VINCECAMUTO. COM. TROUSERS ($348) BY BROOKS BROTHERS; BROOKSBROTHERS.COM.

Wong (b. 1991) sees the light behind Apple’s 1984 Super Bowl commercial, advertising’s first full-on cultural phenom.

MARKETING & ADVERTISING Katrina Bekessy | 29  Director of technology & design | R/GA Mallory Blair | 25 Cofounder | Small Girls PR Derek Blais | 29 Senior art director | BBDO Canada Raymond Braun | 23  LGBT marketing lead | Google/YouTube Victor Cheng, Roger Lee | 27, 27 Cofounders | PaperG Katrina Craigwell | 28 Global manager of digital marketing | GE David Dinetz, Dylan Trussell, Colt Seman | 26, 26, 28  Founders | Culprit Creative Andrew Dumont | 26  Director of business development | Moz  Whitney Fishman | 29 Tech and consumer insights director | MEC Teddy Goff | 28 Cofounder | Precision Strategies Rich Greco | 28  Head of design | Droga5 Jack Hanlon | 29 Cofounder | Kinetic Social Amy Karr | 26  Experience designer | Starcom MediaVest Group Joanna Kennedy | 24 Senior social media specialist | RPA Greg Kimball | 26  Manager of digital strategy and communications | L’Oréal Jack Krawczyk | 29  Director of product management | Pandora  Media Michael Kuzmich | 28  Associate director of motion graphics | Firstborn Douglas Lusted | 21 Cofounder | WestonExpressions Jeff MacDonald | 26 Creative technologist | The Martin Agency Charles Merritt | 28  Partner | 80amps Mitch Orkis | 27  Director of client development | Vizeum US Khoa Phan | 23  Freelance Vine animator Matthew Rubinger | 25  Director of luxury accessories | Heritage  Auctions Maude Standish | 29 Cofounder | Tarot Rachel Tipograph | 26 Global director of digital and social media | Gap Elliott Wiener | 28  Director of consumer insights | Razorfish Farryn Weiner | 28 Global director of digital and social communications | Michael Kors Worldwide Elyse Winer | 28  Marketing and communications manager | MC10 Inc. Pranav Yadav  | 28 CEO | Neuro-Insight

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Paradise 2.0 Can Larry Ellison model the future on the Hawaiian Island of Lana’i? BY LAURIE WERNER

W

hen Oracle CEO Larry Ellison bought 98% of the Hawaiian island of Lana’i in June 2012 (for a price estimated at $300 million to $500 million), shock waves rippled through the sleepy, picturesque backwater. The island’s 3,100 residents were long inured to the semifeudal ownership structure—since the 1860s there had been a succession of lords of the manor, including pineapple king James Dole and, in 1985, after taking over Dole’s then floundering parent company, billionaire David Murdock. But Ellison came in with even deeper pockets and bigger plans, guaranteed to change the face of the island, a place that proudly has no traffic lights, very few paved roads in 141 square miles and, as one resident describes it, “not  just a slow pace—no pace at all.” What a visitor will see now on Lana’i, 8 miles off the coast of Maui, is an old Hawaii that exists today only in patches on the larger islands. Locals still gather in the small, unassuming cafes such as Blue Ginger that ring Dole Park in the main town, Lana’i City, to gossip or “talk story” in the mornings. The scenery is so lush that golfers often take breaks between shots to simply soak in the views. The powdery beaches, bordering waters dotted with sea turtles, are often completely deserted. That will undoubtedly change if the projects now in discussion go forward. Ellison has researchers working on a desalination plant intended to increase the pumping capacity of fresh water to 10 million gallons a day from its present 2.5 million, and there are ongoing renovations at the two Four Seasonsmanaged hotels, the Resort Lana’i at Manele 104

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Bay and The Lodge at Koele, with a third luxury hotel under consideration. And that’s just the beginning. Also on the to-do list: Expand compact, 1930s-era Lana’i City with its brightly colored, plantationstyle cottages and develop a university campus. Following Ellison’s purchase of Lana’i’s main air carrier, Island Air, a new runway and airport facilities are in the works to allow the first direct flights from the mainland. Oh, yes—and plans call for developing industrial areas, expanding solar power facilities, introducing electric cars and ultimately doubling the population to around 6,000. Not surprisingly, residents regard the planned rollouts warily. Many worry about preserving the character of the island. Says one resident, “A friend recently told me that whenever she goes to the sacred places her family showed her, she wonders how will she feel when there are signs pointing them out. The branding people have already been here asking how they should ‘sell’ the island. That’s a very uncomfortable feeling for us.” Still, the islanders knew something had to change. In the last few years of the Murdock regime the island’s economy was crumbling. In the early 1990s Murdock had moved the pineapple plantations overseas and shifted

N  C  E  L   W O  S   C  K   C  W  O I   M  S   ;   E  R  F   O R  N  O D  M A  T  H  O L   Q P  :    U  J  I   E   S  T  N  N   /   A   G  S  E  Z  T  E  T  R  Y  L  I   M A  A  G   G  /   E  N   S  E   W  S   C   O M  ;  

Sea change: cliffs at Lana’i’s Sweetheart Rock; the island’s new landlord, Larry Ellison; the swimming pool at Manele Bay.

the economic focus to tourism, opening the beachfront Manele Bay and the English hunting-style The Lodge at Koele in the cooler, higher elevations of the island. A modest third hotel, the 11-room Hotel Lana’i, had been built for Dole managers in 1923. But all of the properties were foundering and with them the livelihood of the island. “In the beginning Murdock had incredible vision,” says Mary Charles, who leases the Hotel Lana’i. “But in 2008 the world blew up; he was losing tons of money [reportedly $20 million to $30 million a year], and he lost interest. The population was dwindling, businesses were closing, maintenance in the hotels and the community was deferred. Many of us were ready to throw in the towel.” Murdock, who declined to be interviewed for this article, had a plan to generate income for the island:

a windmill farm that could sell power to the main island of Oahu. The resistance from many in the community was thunderous, evident in the “No Windmills on Lana’i” signs still lingering in some front yards. But the resistance wasn’t unanimous, and the clash between the pro- and anti-windmill factions tore apart the once close-knit community. “We had the signs, protesters—it got very ugly,” explains Alberta de Jetley, publisher of the monthly newspaper Lana’i Today. “The argument was no longer rational. People couldn’t get their minds around the fact that the power was going to Oahu but that we would still have benefited.” With that economic path blocked, Murdock decided to sell. Rumors swirled about possible buyers. Bill Gates, who had rented out all of Lana’i’s hotel rooms and booked all of its airline seats for his wedding in 1994, JANUARY 20, 2014  FORBES

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was often mentioned. So were groups of Chinese and Russian developers. Given the  jitters over the prospect of foreign developers, the announcement of Ellison as buyer was met with euphoria. “Larry Ellison was a godsend,” says De Jetley. “He has enough money to take us to another level and help us become sustainable.” The island’s introduction to Ellison has had some rocky moments, however. The first news of his plans came from an interview on CNBC. “He was quoted as saying that he would use the island as a laboratory,” explains Robin Kaye of the community advocacy group Friends of Lana’i. “Many people were offended by that. We live here. We’re not animals in a study. I understand what he meant. But still. … There was some sensitivity.” What Ellison meant, apparently, was that he wanted to create a world-class model of sustainability on the island. “He saw Lana’i as an opportunity to engage in conversations that are happening around the world—food security, sustainable energy—rather than sit on the sidelines and create a fund,” explains Kurt Matsumoto, a Lana’i native who managed the hotels here for Murdock and was brought in as COO for Ellison’s management company, called Pulama (meaning “cherish”) Lana’i, a canny message to locals that he hopes to enhance the island and not destroy it. “He appreciates the natural beauty of the island,” says Matsumoto. “But I think his main motivation is the opportunity to come in and make a difference.” (The notoriously press-shy Ellison declined to comment for this article, but in the past he has described his attachment to Lana’i, dating back to his 20s: He flew a Cessna over Lana’i’s pineapple fields, admiring the area’s beauty, and even then expressed a desire to buy the island.) After the purchase Ellison immediately made goodwill gestures to the community: reopening and improving the community pool that Murdock had closed to save money, introducing youth recreational and educational programs, refurbishing buildings in town and expanding one of the few grocery stores, Richard’s Market. Renovation work also began immediately on the hotels. Murdock’s Chinese furniture and antiques in the Resort Lana’i at Manele Bay’s public areas were jettisoned in favor of a sleeker, more cosmopolitan style with 106

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neutral colors and more open architecture, giving on to views of the bay and its spinner dolphins and whales. The restaurants were also upgraded, as Ellison lured a branch of Nobu to the island, which opened in December 2012 in time for his Christmas visit. Those renovations at Manele Bay were the focus of a recent community meeting, one of the regular gatherings with company representatives instigated by Pulama Lana’i’s Matsumoto. In this one, with chairs grouped in a circle and the affable Lynn McCrory, Matsumoto’s senior vice president of government affairs, leading the discussion, hugging community members and imploring them to eat or take home the prodigious supply of baked goods, the questions from the 40 attendees ranged from where the construction workers would be living to which new retailers would come into Manele Bay (among the names being bandied about were Burberry and Jimmy Choo). Most residents I talked with heartily approve of the meetings and the selection of Matsumoto to head the Ellison effort. “Kurt knows how to communicate, how the local people solve problems,” says Butch Gima, president of community advocacy group Lana’ians for Sensible Growth. “It was refreshing to know that a multinational corporation had the foresight to choose someone local.” But not everyone is mollified by the backand-forth. Joelle Aoki, executive director of the Coalition for a Drug Free Lana’i, says that she’s grateful for the positive changes. “But every time I come out of those meetings, I feel anxious,” she says. “I’m very concerned about the ability of the Lana’i community to keep their way of life. Then what if midway through he decides to sell it?” Kurt Matsumoto insists that Ellison’s interest is long term, that the population growth would be an organic, gradual progression, explaining that just because they have access to significant funding doesn’t mean they would or could make all of these projects instantly appear. So it will be years before it’s clear whether Lana’i will become the Pacific Eden that Ellison envisions. What is clear is that the community will be watching every step. “I would say that the mood right now is cautious optimism,” states Robin Kaye. “And that is 180 degrees from where it was. Previously it was despair.” F

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FINAL THOUGHT

THOUGHTS

Wanna waste money? Buy diet books. Wanna make money? Write one. Wanna waist away? Eat less. —MALCOLM FORBES

ON NEW YEAR’S DIETS The two biggest sellers in any bookstore are the cookbooks and the diet books. The cookbooks tell you how to prepare the food and the diet books tell you how not to eat any of it. —ANDY ROONEY

Seeing is deceiving. It’s eating that’s believing. —JAMES THURBER

The diet book is one of those fool-and-money separation devices that seems, like roulette or slot machines, never to lose its power. —CHRISTOPHER HITCHENS

The one way to get thin is to reestablish a purpose in life. “The gap between what we would like to be and  what we are is widening. American advertising and the mass media portray a relentless urge for fitness. But the truth is that we are not a nation of joggers, iron-pumpers and whisper-thin fashion models. Rather, we are, increasingly, a nation of broad  bottoms and bulging middles.” —FROM THE NOV. 17, 1986 ISSUE OF FORBES

OTHER THOUGHTS FROM THAT ISSUE: BOONE BLASTS “Boone Pickens is mad. After forcing Phillips Petroleum and Unocal to load up on debilitating debt, the self-proclaimed champion of shareholder rights is now blasting Enron Corp., the natural  gas pipeline company, for buying back 16% of its shares from Irwin  Jacobs and Leucadia National, the greenmail specialists.”  THE FRIENDLY SKIES OF USAIR? “Rumor is going around that dealster Carl Icahn has made merger overtures to USAir on behalf of his TWA. Yet another rumor has it that Icahn wouldn’t mind in the least if USAir were to make a counteroffer to take TWA off his hands.” 

—CYRIL CONNOLLY

Think of weight gain as merely a rounding error. —RICHARD HYFLER

Gluttony is an emotional escape, a sign that something is eating us.

Before long it will  be the animals who do the dieting so that the ultimate consumer does not have to.

—PETER DE VRIES

—MIMI SHERATON

 And be not drunk with wine, wherein is excess; but be filled with the Spirit. —EPHESIANS 5:18

SOURCES: THE COLUMBIA DICTIONARY OF QUOTATIONS; THE INTERNATIONAL THESAURUS OF QUOTATIONS; THE 2,548 BEST THINGS ANYBODY EVER SAID; THE QUOTABLE HITCHENS: FROM ALCOHOL TO ZIONISM; SIMPSON’S CONTEMPORARY QUOTATIONS.

112 � FORBES JANUARY 20, 2014