Charles & Chase Koch on How They Quietly Built a $150B Empire

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 really drill a point home. When I 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? I know it's a large private business, but being in Wichita, 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 about 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 obviously throughout, but one of the absolute core differences is that whole approach to capabilities. I would encourage anyone that's in a business and 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: 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 early days of Koch, that's what we demonstrated we were good at. We were getting great customer feedback. But then with the capability approach, we started in energy, crude oil gathering, pipelines, refineries. Can we point those capabilities into natural gas? Can we point into chemicals? Let's experiment there. Can we point into fertilizers? Because we learned about natural gas. Then the Georgia Pacific opportunity comes along. It's wood products, doesn't seem similar, but it's the same core capabilities. We bought Georgia Pacific and along the way it was somewhat of a happy accident that we started learning about consumer products and branding. Branding became a new capability through acquisition. It started with where we think we can add value and collect new capabilities along the way. I think that's a really simple way to think about Koch and how we're different. One other thing I'll mention too, because I've been asked many times, is it sort of like Berkshire Hathaway where you have all these different businesses in a conglomerate? I would say no. Obviously Warren Buffett and his team have done an unbelievable job operating the business the way they have, but we think about our business very differently. Instead of operating them all as independent businesses in silos, think of it as a republic of science. We're not a conglomerate. We're an integrated set of capabilities.

So does that give you a flavor? You'll appreciate this being an analyst guy. To go a little deeper on what happened in the late 90s in our agriculture business, we called it a 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 crops that would end up on grocery store shelves as bread. We got into 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 if we control the entire value chain, we can make it successful. That completely violates probably all 41 principles in the book: 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.

Because when they knew there were losses in some of these and then they wouldn't tell us, they wanted to go ahead anyway. We had a deal, like Purina dog food. One of the things acquired was the large animal feed business, mainly hog. We 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 we 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 you start not asking why not, and this is the kind of trouble you get yourself in.

That's it. Here's another take on what he's saying that 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? That's hard to get your head around because most businesses come at it from the top down, 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. It's about bottom-up empowerment with principles, empowering your talent, your team, your leaders with these principles. Then 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, 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 a salary to do that. If they make a mistake, they fail, they're worried about losing their job. In most scaled organizations, middle management and even senior management, when founders or owners don't operate it anymore, say I'm going to take the less risky path, the less creatively destructive thing, because I don't want to lose my job. I want to keep my job, get my bonus, move on to year two, and go home to my kids and my wife.

Yeah. I think the KDT example is a really good one because 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, you 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. I'm going to keep trying as long as you don't go 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 hell of a lot longer to materialize. If we would have judged it based on 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 to it. And by the way, we were learning so much as Koch from seeing the technologies coming around the corner that might disrupt our core business. We valued that learning and rewarded the people bringing that knowledge in. If you just look at it on the bottom line basis in the first couple years, you'd say shut this down. But over time, all these different things and the returns are starting to come because we thought long term about it. It all came from that experimental discovery principle and creative destruction. If we're not in the game on technology and we don't see what's coming, something's going to happen. Especially with how fast technology is moving today, some of our businesses are going to become dinosaurs.

Yeah.

Sorry. No, no, no. I'll shut up. Shut up, you old guy.

It was a massive bet.

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, thinks they know how to transfer culture, and literally 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 of that business, they get some profit share, they've got a durable moat, so he can make a long-term investment and just leaves them.

Pop, wouldn't you say that the common theme on all of these? We had 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, making products in your iPhone, medtech, 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. It was all about revenue growth. This was a technology company that had been public for 30 plus years. The stock price rewarded them for that. 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 that learns and applies the principles. Almost every time when we fail, it comes down to ignoring the principles. You can reverse engineer these stories: 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 with you that really shows how we apply this at Koch. He talked about our talent vision being culture first, skills second, values first, skills second. I always add a third dimension: values first, skills second, credentials last. That is a very different mindset than most companies. Most companies look at it and say I want the guys that have the degree from the Ivy League school. By our experience, it's also one of the reasons why we stayed in Wichita, Kansas. We can basically hire the farm team, kids that have grown up on the farm, have that contribution motivated mindset, work their tails off, want to come in to make a contribution as opposed to coming in with an entitlement mindset. Case in point, our CIO today, his name is Jared Benson. His first interaction with Koch was painting stripes in our parking lot. No college degree whatsoever. But he found his way into Koch because he demonstrated he knows a little bit about data science and could help us. This is 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 and that wave coming, built a whole capability to protect us from cyber attacks, and now he's CIO of the company, a guy with no college degree. That kind of mindset in terms of our talent vision, values first, someone who just wants to come in and make a difference.

Yeah, obviously there's the book. This is his fifth book, it's my first. But good profit, science of success. We have it.

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

Right? But yeah, no, there is a discipline. It comes down to the leaders taking it seriously. The leader's first responsibility is to help their people.

Yeah.

Yeah. And this—

I'm a chip off the old block.

Do I get to tell my story?

So, he'll correct. He'll correct me 10 times as I tell the story. [laughter] But, um,

Um, so I didn't start when I was six. I started when I was 15, so he cut me some slack, but it's because I was a pretty competitive tennis player. And so

That's first first time. Um so um but at 15 I got burned out, you know, tennis like typical story where I wanted to hang out with my friends. I wanted to have a good time. I was tired of playing six hours a day. So I started throwing tennis matches intentionally to get out of it, out of these tournaments. So, I go home and party with my friends and he said, 'Look, your attitude is terrible. You can either give 100% on the tennis court and apply yourself or I'm going to get you a job.' I said, 'I'm sick of tennis. I'm done with it.' And so the job was figured out the next morning for me.

Well, you know, I may be old and slow, but I'm not that slow.

I was born at night, but not last night.

But yeah, so

Yeah. No, seriously, there really is.

But basically, all my stuff was packed for me.

And it was thrown in the back of a truck and 6 hours later I showed up at a feed yard and I lived in a single wide trailer the whole summer with my boss. I slept on the floor, worked seven days a week, and just shoveled cow shed and dug post holes.

And so that was my

Let's keep it manageable here. So, um,

So anyway, but the interesting part of that story, even though I went from literally being like, you know, kind of country club rich kid to doing that within 24 hours, it was an absolute transformation for me that the fact that he made me do that and I chose, but I didn't know what I was exactly choosing. But after a month or two into this job, I started actually feeling better about myself. I hadn't really made a contribution up till that point in life. And then I'm actually working with a team. I'm getting paid minimum wage. I'm working my tail off. I'm adding value even though it may be just menial work. And as I go back to a letter that his father wrote to him and his other three brothers.

Your older brother?

This letter about basically like when I pass on you're going to get what seems to be a large sum of money. I hope you don't squander it. I hope you don't use it for and I hope you actually apply yourself because I want you to feel the glorious feeling of accomplishment. And it's a really amazing letter. He has it hung in his office. But that was the first time I felt that even though it was working at a feed yard. I was like this feels good actually. I could have gone down the path of just staying on the tennis circuit. I have no idea where I'd end up in life had I not gone down that path. And so I basically worked every summer for Koch from that summer on. I worked in the gas liquids plant. I worked in our refineries all the way through junior year in college. I always had a Koch summer job. But that was an absolute transformation for me in my life.

Well, let me let me make

Um with whatever you said. [laughter]

No, I mean that's my job that's what I do. Now origination and partnerships and about the time I met you that's when I started getting into technology and trying to build a new community so that we could get access to the most disruptive founders. But one quick story I want to tell because I think it'll be helpful for your audience as well that we haven't touched on yet is the principle of comparative advantage because another meaningful total shift in my job at KO and my role at KO but also in my personal life was when I was running a business. This was later on. We talked about the late '90s, the gas to bread spread and all that. This was a separate business with Koch Fertilizer. I spent 10 years in that business really understanding the operations of a business. So, I worked in sales and marketing and the accounting, the finance, like every piece of it, the trading and I ran a lot of the smaller business units, but at one point my boss at the time wanted to add a whole natural gas trading business to it. So, he's like, 'Hey, I'm going to put a parent company called A and Energy Solutions, and I want you I'm going to throw you the keys to the fertilizer business. You're ready to run it.' And so I was promoted to president of Koch Fertilizer at that time. And about nine months in, I realized that I was not the guy for the job. And I walked into my boss's office and fired myself. And it was humiliating, right? It's like especially being the boss's son and thinking, oh my god, I'm a failure. I couldn't make this work. The business was still doing fine, but I wasn't doing a good job as a leader. And I knew there was someone else that had the comparative advantage to be a great operator, CEO, president type role. And so I learned through that failure that I wasn't an operator and I wasn't a good optimization type leader and I was a builder. All I wanted to do was go work on the innovation stuff. That was about the time I met you and I learned about Climate Corp and all that. I just wanted to go focus on that and go build this stuff, this whole idea of creative destruction that would disrupt the core business that I was running. And so that whole thing around understanding your comparative advantage, what you're good at and what you're not relative to others that could be doing that job was a huge deal. And my hope was that that was a little bit of an example for other KO leaders as well. It's like if you're not in the right job, you don't have to fire yourself, but figure out what your power alley really is and where you can contribute and add the most value. So that experience for me was amazing. If you look at what happened after that, we got a great president to continue to transform the fertilizer business. It's one of our most exciting businesses today and we keep growing with it. So that did better than it would have done had I stayed in the role. But then all of this led to Koch Disruptive Technologies which we talked about which is a totally innovation platform for KO to see around corners. So that one move made one large business much better and also created a whole new thing. And so I always think about it's like we have 130,000 employees what if that one principle comparative advantage what if everyone deeply understood that and redesigned their role to where they are truly in their power alley and what would the results of the business be if we could do that. You're never going to be perfect but that's the vision that we have and how we are thinking about individuals.