How We Grew Koch Inc. to $150 Billion Without Going Public: Charles & Chase Koch

What an honor to be here. Thank you for hosting us, Forbes. And welcome. This will be put out as the all-in interview. So I'm really excited to share this conversation with everyone on the internet and to get some time with Charles Koch, Chase Koch. Chase and I have known each other since 2013.

Yep.

When we overlapped in the agriculture industry, got to know each other. We've been business partners. And Charles and I have gotten to know each other a few times over the years. But I'm really excited for this conversation tonight. So Charles, thank you for being here.

It's an honor.

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In Silicon Valley, entrepreneurs and even mature company CEOs always like to learn about the story of other businesses and the success of those businesses. And I've always felt like Koch Industries was that untold story. Probably the most profitable private family-owned business in the world. Maybe I'm off on a couple points, but certainly up there. And one of the most impressive business stories because of the evolution of the business, which I'm hopeful we can hear a little bit about how that evolution came to be tonight. And just for some statistics, if Koch were publicly traded, the revenue would put it easily in the top 25 of the Fortune 500. It's a family-owned business based out of Wichita. Founded in 1940 by Fred Koch with businesses ranging from energy, agriculture, chemicals, building products, consumer products, even cloud computing and a very active minority investment portfolio with 120,000 plus employees. That statistic might be off across 60 countries. Very unique operating model which we'll get into today including principles around disruptive innovation of the business, reinvesting 90% of profits in new businesses and growth, meritocratic values. And I'm hopeful that tonight we can take an opportunity to hear about the evolution of the business and talk about some of those principles. Maybe we can get started Charles if you could give us a sense of the scale of the business, what are the business lines that you operate today, and maybe provide a little more color to those high-level statistics I shared today.

When did you join the business?

When you came into the business, what was the scope of the business? What was the business operating?

You come into the business, couple hundred employees you said at the time 300 employees, and how did you think the mandate was to grow the business? Was it just to keep it stable?

Okay, sounds great.

Can I ask a question?

And then you're now running a profitable operation. You've got a European business. And at that point did you start to think about expanding into other products and other?

Where did you learn that lesson? So what was the first major failure that you know they always say you got to plan until you get punched in the face. What was the first punch in the face?

How did you make the decision to shut it down or walk away at some point? A lot of entrepreneurs have this problem. They build something, they're too in love with it and they don't know when to say enough is enough.

Dave, let me just hit one point. No, you got it, you did a great job. I mean basically eight wholly owned business unit platforms that he described, and then four investment businesses. But I just wanted to drill a point home. When I came out and started hanging out with you and the whole tech community and trying to build that network, a lot of people had the same question that you did about who is Koch? What are you guys all about? Being in Wichita, Kansas, we don't know that much about it. I think this point that is so different about Koch versus almost any other company out there is what my father said on being capability bounded, not industry bounded. How do you get from a small crude oil gathering company in southern Oklahoma to all of those businesses? The principles throughout, which we'll talk about, but one of the core differences is that whole approach to capabilities. I would encourage anyone in a business trying to scale to think about it from that lens. What capabilities have I demonstrated that I can add value to customers, and then point it at new industries where I can experiment? This is one of our principles as well: experimental discovery, not trying to do everything at once and conquer the world, but experiment and test. Does the customer value my product or not? Along the way, those core capabilities for us started off as operations, logistics, trading in the very early days of Koch. We demonstrated we were good at getting great customer feedback. But then we had the capability approach to say, okay, we started in energy, crude oil gathering, pipelines, and refineries. Can we point those same capabilities into natural gas, can we point those into chemicals, let's experiment there, can we point those into fertilizers? Because then we learned about natural gas. Then the Georgia Pacific opportunity comes along. It seems like wood products don't seem similar, but it's the same core capabilities. We buy Georgia Pacific and along the way it was somewhat of a happy accident that we started learning about consumer products and branding. So branding became a new capability for Koch through acquisition. It started with where do we think we can add value and do a good job, and collect new capabilities along the way. So that's a simple way to think about Koch and how we're different. One other thing I'll mention: I've been asked many times, is it sort of like a Berkshire Hathaway where you have all these different businesses and conglomerate? I would say no. Warren Buffett and his team have done an unbelievable job, but we think about our business very differently. Instead of operating them all as independent businesses and in silos, think about it as a republic of science. We're not a conglomerate. We're an integrated set of capabilities. Is it fair to say that you wouldn't consider an acquisition or a new business line if there wasn't some relatedness to an existing competency at the company?

So you'll appreciate this being an a guy. To go a little deeper on what happened in the late '90s in our a business, we called it the strategy the gas to bread spread. We wanted to be in every element of the value chain from pulling natural gas out of the ground, converting it into fertilizer, making nitrogen products to grow the crops that would end up on grocery store shelves. We got in pizza crust, all this crazy stuff. When you look back, what the hell were you doing? But it was what he was saying about leadership thinking we can do anything and control the entire value chain, completely violates all 41 principles: experimental discovery, knowing where your capabilities are, right people, right roles. We called it the gas to bread spread. Some people called it the ass to bread spread too. And there's another one, integrity, because when they knew there were losses in some of these they wouldn't tell us, they wanted to go ahead anyway. We had a deal within that, like Purina dog food. One of the things that was acquired was large animal feed, mainly hog. Did no diligence. This is one of our principles: apply the scientific method, disprove your hypothesis as much as you try to prove it. We closed that acquisition and within days found out we had hundreds of millions of out-of-the-money hog contracts because we didn't even look at the contracts. This is really important for founders that want to grow. You have this growth at all cost mindset and start not asking why not, and this is the kind of trouble you get yourself in.

So let's go back to the management piece. How do you take these principles which you've applied successfully to iterate because for me failure is all about iteration to success, finding paths that work, finding businesses that work, and ultimately finding people that work. But how do you drive that culture that represents the principles? Because you could create a book and give it to all your employees and say here's 41 principles, but to actually live them, to realize them, to hold people not just responsible but accountable to them, how did you do that as you develop these over the decades?

So the best thing is success will drive social mimicry.

Here's another take on what he's saying that I think really connects about culture to your question. The essence of principle-based management and all the principles in this book is what if you could have a business and a culture small, medium, or large where everyone knew what to do without being told? Most businesses come at it from top down. There's the iconic leader that's the smartest guy in the room building the strategy and telling everyone what to do. One of the most important principles is to flip that on its head: bottom-up empowerment with principles. Empower your talent, your team, your leaders with these principles so that you use the collective knowledge of everyone, not a couple smart guys at the top.

Most people in most enterprises that aren't owner operators don't want to fail. They want to keep their job. They want to move up the ladder by being repeatedly successful. If you want to create a culture of creative destruction, of failing and learning from failure, it's very hard to get individuals who live on an income to do that. What you typically see in most scaled organizations is middle management and even senior management when founders or owners don't operate it anymore, saying I'm going to take the less risky path. I'm going to do the thing that's least likely to fail because I don't want to lose my job.

Yeah. I think the KDT example is a really good one. You asked about motivating and what if you fail and get fired. We tried to take a little bit of the Silicon Valley approach of experimental discovery. You learn more, you pivot, have a failure, but now I know what I don't want to do. I'm going to pivot my strategy to what may be working. As long as you don't sink the company with some massive bet. KDT was a great experience. When we made those first investments in venture, the losers fall out first and the winners take a lot longer to materialize. If we had judged it based on, okay guys, you got three or four years to figure this out, we would have shut down KDT. But it was that experimental discovery principle and mindset that we applied. Oh by the way, we were learning so much as Koch from seeing the technologies that were coming around the corner that might disrupt our core business. We valued that learning and rewarded the people bringing that knowledge in. If you look at it on the bottom line in the first couple years, you'd say shut this down. But over time the returns are starting to come because we thought long term. It all came from that experimental discovery principle and creative destruction. If we're not in the game on technology and don't see what's coming, something's going to happen. Especially with how fast tech is moving today, some of our businesses are going to become dinosaurs.

How much of that risk were you willing to take and did you take on acquisitions? So doing homegrown experiments on new business ideas and strategies and products can be lower cost. But if you're going to do an acquisition, do you have less room for fail?

Well, can just tell us what Georgia Pacific is for those who don't know.

Go ahead.

Shut up, you old guy.

So, when did you buy it and how big of a betting the company move was that?

It was a massive bet.

That's right. Yeah, you got it.

Would you say that that business unit operates like the rest of Koch Industries today?

For how long?

And that's see that wouldn't work for us the stuff we bought.

Bob, wouldn't you say that? The common theme on all of these because we have the same story on Molex, similar but different than Georgia Pacific. This was a technology company, a connector and cabling company, one of the largest in the world. Makes products in your iPhone, medtech products, your automobile. When we bought that in 2013, it was a paradigm that needed to be changed. You described Georgia Pacific top down versus bottom up. There was a lot of that too, but it was topline thinking versus bottom line thinking. All about revenue growth. It was also a public company for 30 plus years. What the market rewarded them for was the stock price. The public versus private discussion is interesting. What we've learned is it takes a hell of a lot longer than you think to change the culture. In almost every case, it requires changing leadership that has the paradigm of bottom-up empowerment and learns and applies the principles. Almost every time we fail, it comes down to ignoring the principles. The book is about: you can reverse engineer these stories and see we missed that principle, we missed this principle. But it comes down to talent and the right people with the right mindset. I want to share one story that really shows how we apply this at Koch. He talked about our talent vision: start with culture first, skills second, values first. I always add a third dimension: values first, skills second, credentials last. Most companies look at it and say I want the guys from the Ivy League school. There are incredibly smart folks from that, but by our experience and also one of the reasons we stayed in Wichita, Kansas, is that we can hire the farm team. Kids that have grown up on the farm have that contribution motivated mindset, work their tails off, and want to make a contribution as opposed to an entitlement mindset. Case in point: our CIO today, Jared Benson. His first interaction with Koch was based striping lines in our parking lot. No college degree whatsoever. He found his way into Koch because he demonstrated he knows a little about data science and could help us. About 20 years ago, he came in, proved himself, was running circles around a lot of the team. Contribution motivated mindset, adding value. He saw the cybersecurity risk wave coming, built a whole capability to protect us from cyber attacks, and now he's CIO of the company, guy with no college degree. That mindset of our talent vision, values first, someone that wants to come in and love the job and make a difference.

Do you actually codify these principles and everyone at the company has a handbook that lists them out and then they're part of the assessment process for quarterly or annual reviews with people?

Yeah, there's the book. This is his fifth book, it's my first. So 'Good Profit: The Science of Success', we have...

Hey Brian, the one we did is pretty good too.

But yeah, there is a discipline. It comes down to the leaders taking it seriously. The leader's first responsibility is to help their people.

Okay, I'm going to put my analyst hat on for a second. My observation: I would create a theory that we could test right now that being in Wichita, being founder or owner operated, and having the ability to be isolated from a monoculture. I feel like Silicon Valley a lot of companies replicate each other. There's a term being used a lot now: over-socialization. You have to operate like everyone around you or you're not part of it. You have to fundraise in the right way, hire people this way, vesting schedule, equity. Everyone's the same. If you don't, you're kind of a weirdo. But by being in Wichita, you don't have that problem. You can think your own way, challenge yourselves, debate, come up with your own principles without feeling like everyone else is conforming. But they can because there's a bunch in Silicon Valley that are a challenge.

So they're not all that way.

But is it always been a competitive advantage? Did you ever think to move the headquarters to New York City or...?

That'll be a...

What about being owner operated or founder operated? There's this argument that the best...

Silicon Valley companies are founder-led for as long as possible because founders are willing to destroy the business creatively, think about what's over the hill, make tough decisions, reinvent the company, and take short-term financial loss for the long term. Have you been able to distill that down into the organization? That's the thing most public companies that are not owner-operated struggle with: short-term incentivized managers who can't take big risks.

Can a public CEO who doesn't have a big ownership stake adopt these principles and transform the culture? If you can sell it like Buffett did—he had a different principle: buy companies and let them run it. That made him successful, along with buying insurance companies for liquidity.

Right. Chase, I want to go back to your getting involved in the business. How did you get started? Were you always a believer in the principles from a young age? Were you around the organization as a kid?

I'm a chip off the old block.

No, this is the most remarkable transformation. We've been talking about them all. This is the primo.

Do I get to tell my story?

So, he'll correct me ten times as I tell the story. But I didn't start when I was six; I started when I was fifteen. I was a competitive tennis player, nationally ranked, but I got burned out and started throwing matches. My dad said, 'Your attitude is terrible. Either give 100% on the tennis court or I'll get you a job.' I said I was sick of tennis, so the next morning my job was figured out. I was sent to a feed yard, slept on the floor, worked seven days a week shoveling cow shit and digging post holes. It was a transformation. For the first time I felt like I was contributing. I worked every summer for Koch from then on through college.

One important principle is comparative advantage. When I was running the fertilizer business, about nine months in I realized I was not the guy for the job. I walked into my boss's office and fired myself. It was humiliating as the boss's son, but I knew someone else had the comparative advantage to be a great operator. After that, I focused on building and innovation, which led to Koch Disruptive Technologies. That one move made the fertilizer business better and created a whole new platform. Imagine if all 130,000 employees understood their comparative advantage and redesigned their roles to be in their power alley.

How do I self-actualize and find my path of purpose, happiness, and success using these principles in a world that feels radically transforming and constrained? Many people today are struggling for that sense of purpose and fulfillment.

What keeps most people from realizing their gift?

I'm not having my kids listen to Milton Friedman on tape at 10 years old.

In fifth grade I had to write a paper on a philosopher. Dad said we'd work together on Aristotle. I learned a lot, turned it in, and the teacher gave me an F, saying I didn't write it. Dad called the teacher and said, 'Do you not want me to help my son learn?' The teacher agreed and changed it to an A.

The work at Stand Together has taken off. Can we go back to the origins of your social change work? What did you get right and wrong? The narrow view of Koch comes from a broad public perception of political activity that's been amplified.

Where are we in the cycle? There's a rising number of political leaders declaring themselves socialist. Are we on an upswing?

What are your principles for changing people's minds?

Kids graduating with debt, high costs of living, negative equity—people are struggling. They look at spaceships and wealth disparity. How do we address this economic crisis?

Does capitalism work long term? Koch Industries succeeded by compounding advantage, but compounding eventually eats the system. How do we counter that?

How does AI become an enabler of self-actualization versus making the wealthy richer and taking jobs?

Chase, what was it like writing the book with your dad? What lessons did you learn?

It's the most important project I've ever worked on. I learned more in 18 months than the last 18 years. Writing forces deep learning. He applied principles to the process, like openness and creative destruction of his previous books. He could have been the boss, but he brought me in for a fresh perspective and technology. He's a stickler for words—we had 27 versions of one chapter. It was frustrating but rewarding.

What do you want your legacy to be?