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.
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.
Every few years, a new ad channel opens before the market catches on. That's axon.ai right now. The AI ad platform behind one of the biggest runs in tech with access to over a billion daily active users. Full screen video ads in mobile games watched for a median of 35 seconds. Businesses are profitably spending hundreds of thousands of dollars a day on it. And most advertisers don't even know it exists yet. The window is open at axon.ai/allin.
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.
I can go back through some of the history and the failures and successes, but I'll go through what we've grown since the early 1960s. And then we had 300 employees. Now we have more than 130,000. And in 60 countries and we have increased in value 9,000 times over that period.
When did you join the business?
1961 full-time. I'd been working. Well, my father we lived on a farm and he told me at age six he didn't want me to be a country club bum. So made me work in all my spare time which I hated and so I was always in trouble. And he was kind of tough on me rightfully so. And thank God he did. Years later I asked him, 'Pop, why were you so much tougher on me than you were on my younger brothers?' And he said, 'Son, you plumb me out.'
When you came into the business, what was the scope of the business? What was the business operating?
We had two main businesses. One was to design and make fractionating trays that separate liquids by differences in boiling points. And our largest business was a crude oil gathering system in Oklahoma. So my father and I, I had finished a few years earlier from MIT and I was working for Arthur D. Little, a leading consulting firm. And at age 25 I was doing management consulting. I have to laugh at the absurdity, but they were paying me for it believe it or not. So my father called me and said, 'Son, I want you to come back and join the business.' And as tough as he had been on me, and as I say rightly so, I declined. So he called me a few weeks later and said, 'Son, either you come back to run the company or I'm going to have to sell it because my health is bad and the companies aren't doing well and I don't have long to live.' So I agreed. Why? First reason: I got three degrees at MIT in engineering and I sucked as an engineer. I mean, get that. How'd you get through MIT? Because I was real good at the math and the science and the theory. But I was no good at making or operating things. So I figured out pretty quickly that I wasn't going to make it as an engineer. So I needed to be an entrepreneur. And because I was good at principles and that's why we led. So I was always looking for principles that would help me contribute and succeed. And that's what transformed our company.
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?
No, it was. Could I take a few minutes and go through those first two businesses?
Okay. The first one was making fractionating trays, designing those. We had a president then who was one of our principles: you don't want to be negative, top down, and obsessed with controlling everybody. So he would send out memos every week demanding what they spent, how did you spend it, what did you do. So they were frustrated. Matter of fact they started ignoring him. The whole culture was protectionist. When they sold the internals for fractionating tower, they wouldn't tell them the design. We need to know the design so we can correct it. No, they wouldn't give it to them. And what's even worse, to satisfy the European market, they didn't even build a plant there. They had multiple subcontractors do parts of a tray and then bring them all together and assemble with another contractor. You can imagine how that was for speed and cost. So we were losing our ass, if you excuse the expression. And so I changed the management and changed the philosophy. First thing we're going to focus on is creating value for our customers. Second, we're going to empower our employees so they want to do this. Third, we're going to build a plant in Italy to satisfy the European market, and we're going to do it all ourselves. And so we became profitable and started adding related products. And so we started growing.
Yeah. You come in at 25 plus or minus a little bit and you see the problems at the business. It's not profitable. It's not being well managed and you overturn the management team. How did you have the confidence at this age coming with the experience you had to take that level of action that quickly? Well, it was life or death. And my father said, 'You can run this business any way you want. The only thing you need my approval on is to sell.' That's the way he talked me into coming back after I said I didn't want to. And then in 1970, what really helped is my younger brother David joined the business and then he continued that growth.
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?
Well, that's it. I was learning all these different principles and what I saw we were doing not just here but in other things is we were building capabilities. That is, I looked at it, we need to be capability bounded, not industry bounded. Like you could say we were in crude oil gathering, we're in the oil industry, so everybody was saying you need to be an integrated oil company. You need to be in everything. And I was applying division of labor by comparative advantage. You need to be in the part of the value chain where you can create more value than others. Otherwise you're going to fail. And that's what we're seeing happening now. There's more specialization by comparative advantage. So I started this principle called creating virtuous cycles of mutual benefit. And that led us to start this never-ending cycle of growth, innovation, success, and failures. When we did it right, we learned from them and made us better. We're still going through that. We have a lot of failures. When you apply creative destruction in new things, if you're not failing at everything, you're not doing anything new.
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?
Well, I had a bunch of them with that company. It was called Koch Engineering then. We got into refining, we created petroleum coke. So I said, let's come up with a way to use that as base to make activated carbon. We spent a fair amount of money on that. We had a whole bunch of those and we've had many more.
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.
Yeah. Well, that's when enough is enough. When we lose our ass enough. No, it's when we decide we don't have the capability to create superior value for our customers that we're going to be rewarded for. And sometimes it can be the structure of a business, like the company that Chase founded, Koch Disruptive Technologies. It does tremendous things but it is a structure that makes it hard to make it profitable. So these are principles we've learned. We didn't apply that. What were the principles that we didn't apply that caused us to fail? That's what I mean we learned from failure. So the businesses we're in now, and Jason there's Koch people here, you all can catch me up if I miss them. We have engineered projects, engineering construction, we build solar plants, commodity trading and distribution, fertilizers, refined products, chemicals and polymers, glass, forest and consumer products, four different investment firms with different comparative advantages, electrical products, and software systems for management.
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?
It depends. As you see when you read the book, we went through a chapter on creative destruction and what Schumpeter called all the different ways to do that. One is to create a new management approach. That's our biggest one. So the question is when we bought Molex, makes electrical connectors, which has done fantastic. At first it wasn't doing great. So we said if we can get them to apply these principles, it will turn them around. The problem when we do that is they tend to learn the lingo and call everything by these names but still do what they always did. That's what was going on there. So finally we changed the management, and once we did that and they started applying these principles, they took off and now they're knocking it out of the park. But let me go back to failures. I'm understating our great strength in failures. I'll give you our worst failures and what caused them. It caused us by violating the principle of hiring people first on values and second on talent. For years I told our people, if you want to hire somebody with bad values because you like them, hire them slow and stupid so we can catch them real quick and get them the hell out. Maybe get them to go to work for our competitors. But anyway, that was huge. And then we made that even worse by taking people who had terrible values and made them leaders. We call that rather than wanting everybody to be contribution motivated, they were destructively motivated. They wanted power or control and would hide their failures and make up successes. I'll give you two examples. One goes back to 1973, the war in the Middle East. They got us into all kinds of wild reckless trade that could have bankrupted the company. Then later, shows you that repetition penetrates even the dullest of mind. I needed this to happen a bunch of times. Finally, I got it. Don't punish me anymore for my stupid mistakes. So at about the same time, in refining, we put leaders in who were destructively motivated, and they were destroying those businesses. It didn't almost bankrupt, but it almost wiped out all of Koch's earnings in the late 1990s.
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?
At first we tried to get them to do it through sheep dipping. That is you take everybody in, you give them a big seminar, now go do this. From Polanyi, if you want to read a book that's hard to read, read Human Action. This is even harder called Personal Knowledge by Michael Polanyi, who was a chemist and then became a philosopher. He goes through what it takes to develop personal knowledge. You have to rewire your brain to have it work differently. You have a habit. You don't need to think about it. If you want to change like, do I brush my teeth first or comb my hair first? No, I want to start combing my hair first. And all of a sudden you're back brushing your teeth first because you're not thinking about it. Your brain is part of your body. So we said, okay, we've got to start with a group that's really interested in this. They're struggling, they're having problems, and here are the principles and we'll coach them, help them start doing it. If they work with intensity on it and then they succeed, then we don't need sheep dipping because other businesses and capabilities say, gosh, I'd like to do that. Then we have more demand for people who can help them. The hardest thing is to have our people in strategy or our principle-based management group who are really good at helping them. They're in more demand than anybody.
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.
But see, that approach creates perverse incentives. We try to align our incentives to reward people according to their overall contribution to Koch's future. For example, if they have an experiment, and that doesn't mean doing something where you buy all these hogs and lose hundreds of millions of dollars. That's not an experiment. A good experiment is where the value you learn from this failure is higher than the cost of the experiment. When we do that, we're evaluating whether the person is building capability for the future. We put so much emphasis on building capability. Part of it is the culture, and what Chase did with Koch Labs when he started Koch Disruptive Technologies, he said Koch Labs: I want every business to be a laboratory for what we find, to help us source these opportunities and then try them out in that business. Being in all these different businesses that touch almost every part of the economy gives us a big advantage. That affected the whole culture. On your business, don't you want to be part of Koch Labs? We're an experimental discovery group, not just a bunch of grunts grinding stuff out.
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, how about this? We were a much smaller company and we bought Georgia Pacific for 20 billion.
Well, can just tell us what Georgia Pacific is for those who don't know.
It's a wood products company. It's got two big pieces: building products and consumer products. It's got a third one, but I'm generalizing.
Sorry. No, no, I'll shut up. Shut up.
No, no, no. But anyway, on that one.
So, when did you buy it and how big of a betting the company move was that?
2005. Well, we were much smaller in 2005. I can't remember how much smaller but it was a lot smaller.
Okay, we were applying the principle of virtuous cycles of mutual benefit. We were saying what's one of these cycles? Chemical process industries and wood creating pulp and stuff. Matter of fact, we found in my father's thesis he did a study in Maine on this very thing on pulping. I found it later, but that was his MIT thesis. So we said, let's look at the Oh, and they were saying they need to spin off some of those parts, the pulping part. And we said, let's buy that as an experiment, and we did real well with it. So we said, wow, they have other because that was a commodity business and they were trying to get their price to earnings ratio. It was like six, and if they became more of a consumer products, they could get it up to nine. So we proposed to them: we buy the commodity part, pay them a high enough price that then they can be all consumer products and get their price. We showed them the economics and they said that's fine but we'll be sued for constructive fraud because we have all these lawsuits. We can't do it but we like the value. So we went home and said, okay, what if we just offered the whole thing? A couple of them were getting ready to retire, the senior officers, so they were really liking it and they were kicked out of all the board meetings from then on. Anyway, we sold them and that was a time when money was tight so nobody came in and topped us. I'll give you a funny story. We sent one of our people in to be the CEO, Joe Moeller, who had been president of a company. They had it totally top down bureaucratic. They were in Atlanta, they had a 51-story building. Was it 51? You can correct me.
That's right. Yeah, you got it.
I help you. And they had a private elevator to get up there. You didn't have to wear a coat and tie, but if you came up to visit all the management was on this 51st floor and you had to put on a coat and tie and get permission to come up there. So Joe immediately kicked them all out. Well, we fired a bunch of them and set the remaining ones down to work with their groups on the regular floor. Then turned it all into offices, meeting rooms open to anybody. That's how you get culture change. A lot of it is signals like that, particularly when a bunch of them get fired for being so bureaucratic and hierarchical.
Would you say that that business unit operates like the rest of Koch Industries today?
I mean, I'll just say that is such a rare and difficult thing to pull off. There are countless stories of acquisitions where the acquirer thinks they have culture and know how to transfer it, and no one seems to be able to do it. This was one of the insights from Warren Buffett: find great managers, let them continue to operate as owners, get some profit share, durable moat, long-term investment, just leave them.
And that's see that wouldn't work for us the stuff we bought.
