Los Angeles Times - 26.08.2019

LATIMES.COM MONDAY, AUGUST 26, 2019A

It’s not quite what you’d
expect from a Koch. Cer-
tainly not while speaking be-
fore the gray-haired Rotary
Club in Wichita, Kan.
But there was Chase
Koch, scion of one of Ameri-
ca’s mightiest private indus-
trial dynasties — a family
revered by the political right,
reviled by the left and feared
by just about everyone —
joking about his knockabout
years down in Texas.
It was back in the early
2000s, Chase said, after he
graduated with a marketing
degree from the proudly
anti-Ivy League Texas
A&M. (His father, Charles,
and uncle, David, studied
engineering at MIT, as did
his grandfather Fred.) Re-
luctant to tap the Koch net-
work for a job, he was hunt-
ing for work, banging out
Led Zeppelin covers with his
band and, as he put it,
“screwing around in Austin.”
Times change — and,
with time, the Kochs do too.
Chase, 42, now sits on the
board of Koch Industries
and is president of Koch
Disruptive Technologies,
the conglomerate’s venture
capital arm. He’s at the
sharp edge of efforts to pre-
pare for a knowledge-based
future in which cheap com-
puters, data and artificial in-
telligence might threaten
the firm’s dominance.
He’s also positioned to
control one of the world’s
most powerful closely held
companies, and he repre-
sents the future of the con-
servative political network
that has put the Kochs
among the country’s most
influential families.
(David Koch died Friday
at age 79. A year ago, he had
stepped down from the
brothers’ network of busi-
ness and political activities,
with a letter from Charles
Koch citing deteriorating
health.)
Few people are aware of
just how big the Koch empire
is or the industries it inhab-
its. Much as Warren Buffett
grew Berkshire Hathaway
Inc. from its textile-mill
roots, Koch Industries keeps
about 90% of its profit and
pumps the money back into
its businesses or buys new
ones. It’s now a sprawling
network of subsidiaries re-
porting back to head-
quarters in Wichita. They in-
clude forestry products
(Georgia-Pacific), fertilizer
(Koch Ag & Energy Solu-
tions), fabrics (Invista),
commodities trading (Koch
Supply & Trading) and
ranching (Matador Cattle).
The brothers invested
well. The $21-million com-
pany that Charles joined in

1961 is worth about $139 bil-

lion, a 662,000% return, or

roughly 16% annually over al-

most six decades. Charles

and David own about 84% of

the company. (Elaine Mar-

shall owns most of the rest,

gaining control of the stake

after the 2006 death of her

husband, E. Pierce Mar-

shall.) Historically, these in-

vestments were in industrial

assets — refineries, chemi-

cal plants, sawmills.

But over the last few

years, they’ve been more fu-

turistic, especially in the

venture capital arm led by

Chase Koch. The conglom-

erate has invested billions of

dollars in software, network

technology, big data, AI,

medical technology and 3-D

printing.

“It’s actually really smart

for them to do this,” said

Hans Swildens, chief execu-

tive of Industry Ventures,

which manages more than

$3.4 billion of institutional

capital. “If you owned a large

number of industrial busi-

nesses, and you were looking

at all the new technologies

that were coming out and

how they would affect your

business, the best thing that

you can do is embrace

those.”

Jim Hannan, an execu-

tive vice president who over-

sees about half of Koch In-

dustries’ subsidiaries, said

tech “has led to a much more

common set of issues and

opportunities across all our

businesses.”

At the same time, big

industrials are struggling

to grow.

“We are rapidly moving to

a digital economy,” said Nick

Heymann of William Blair &

Co. “Most of the net worth in

the last 20 years in this coun-

try has been created outside

tangible manufacturing

businesses.”

For Charles Koch, it was a

question of survival. At a

2017 leadership meeting, he

pushed his managers to em-

brace technology and pre-

pare for a knowledge-based

future. His message: “Do

it or we’ll end up in the

Dumpster.”

Falling technology costs

are generating new threats

to established industries.

There’s “a level of compe-

tition that these players did

not face,” said Sanjay Aggar-

wal of Boston-based venture

capital fund F-Prime Capi-

tal. “Now you can have start-

ups out of a garage building

an autonomous vehicle.

That was just not possible

earlier.”

Cheap computing power

and data will fundamentally

change every industry, said

Koch Industries’ chief finan-

cial officer, Steve Feilmeier.

The firm said it has invested

more than $17 billion in tech-

nology companies since 2013,

with big bets in cloud com-

puting and enterprise data

analytics. Investments have

included acquisitions as well

as strategic stakes. If it’s go-

ing to be disrupted by a new

technology, Koch wants to

be doing the disrupting and

“investing in it in a way

where we better understand

it,” Feilmeier said.

The focus on tech isn’t as

big a shift as it appears, said

Christopher Leonard, au-

thor of “Kochland.”

“If you go back to the

1970s, this company was a

knowledge company,” he

said. “Yes, they owned oil re-

fineries, but they also filled

the basement with IBM

computers to study the

crude-oil market, the gaso-

line market, to figure out

how to run the refineries at

the most optimum level.”

Data analytics have been

embedded in the Koch DNA

for decades, Leonard said.

“I’m not at all surprised that

they’re making bigger moves

into that space. It builds on

their expertise.”

Trying to reposition a

huge industrial conglomer-

ate around digital technol-

ogy doesn’t always have a

happy ending.

General Electric Co.

“made this big effort and got

over its ski tips to make itself

the platform for industrial

digital analytics, and it got

way more expensive more

quickly” than former CEO

Jeff Immelt anticipated,

William Blair’s Heymann

said.

Byron Trott, the founder

of merchant bank BDT

Capital Partners, who has

worked with Koch Indus-

tries for more than 25 years

and advised on several ac-

quisitions, doesn’t see the

Kochs’ company running

into the same problems. GE

faced short-term pressures

that come with being publi-

cly traded, he said, while

“Koch is doing this because

they are really, really good at

thinking long term.”

Chase Koch’s group has

made some of the more am-

bitious bets outside Koch In-

dustries’ traditional areas of

expertise, such as investing

in InSightec Ltd., a manu-

facturer of ultrasound-

based surgical tools that can

eliminate the need for inci-

sions. He’s the only member

of the family from his gener-

ation that works at the com-

pany. His sister Elizabeth

Koch runs a publishing

house, Catapult Books, and

David’s children are much

younger.

Still, Chase took a some-

what unconventional path.

After graduating, he

spent several years playing

in a band covering Led Zep-

pelin, Phish and the Grateful

Dead, and trying to find his

way in Austin’s start-up

scene. Although he previ-

ously held summer jobs at

Koch, including his first at a

cattle ranch at age 15, he

spent the years after gradu-

ation avoiding his father’s

shadow.

“I was too proud to tap

into the Koch network,” he

told the Wichita Rotarians.

Although he was

schooled in his family’s poli-

tics from a young age — he

recalls Saturdays as a 6-

year-old listening to books

on tape by Milton Friedman

— it’s unclear whether he

shares the political philoso-

phy of his father and of his

uncle, who ran for vice presi-

dent as the Libertarian

Party nominee in 1980.

“I start with the idea that

to learn and grow, you’ve got

to be open to other people’s

ideas,” Chase Koch told Poli-

tico last year. Politics, while

important, is “not at all what

I’m passionate about.”

That raises questions

about what will become of

the Koch political network,

which gives his father out-

size influence in the United

States. “There is no compar-

ison for any CEO in corpo-

rate America in terms of po-

litical influence when com-

pared to Charles Koch,”

Leonard said.

The Kochs sponsor can-

didates, think tanks, advo-

cacy groups and academic

groups pushing a conserva-

tive, free-market agenda.

Recently, there have been

disagreements with the Re-

publican Party under Presi-

dent Trump on issues such

as free trade and immigra-

tion. Americans for Prosper-

ity, the Kochs’ primary polit-

ical advocacy group, is shift-

ing focus toward “finding

nonpartisan solutions,” ac-

cording to a June memo, and

it’s prepared to support can-

didates who get things done

regardless of party.

In July, the Kochs part-

nered with liberal investor

and philanthropist George

Soros to found the Quincy

Institute for Responsible

Statecraft, a think tank

dedicated to promoting

peaceful U.S. foreign policy.

Leonard said he isn’t con-

vinced the moves constitute

a real change to the Kochs’

political goals.

“It feels like an adaptable

reaction to the moment,” he

said, “even as Koch keeps its

eye on the long-term strate-

gy of doing one thing, which

is constraining the reach of

the federal government, dis-

mantling the administrative

state and pushing back the

reach of government as far

as possible.”

When Chase returned to

Wichita to rejoin Koch In-

dustries after his years in

Austin, he began a rotation

of high-level jobs, including

stints in mergers and acqui-

sitions, tax structuring,

agronomics and trading. It

was designed as an MBA-

like experience to familiarize

him with various parts of the

operation.

Koch Industries won’t

detail its succession plan be-

yond saying that one is in

place and that roles are filled

by those most qualified. If

Chase eventually succeeds

his father in running the firm

and the political network,

he’ll become one of the coun-

try’s most influential people.

Maloney writes for

Bloomberg.

ACTIVISTSprotest campaign contributions by the Koch brothers near the apartment of billionaire and Republican financier David Koch in New York City in 2014.

Spencer PlattGetty Images

Koch Industries betting on tech

Corporation prepares for a threat to its dominance posed by cheap computers, data and AI

CHASE KOCH, left, president of Koch Disruptive Technologies, is shown with his father, Charles Koch, CEO

of Koch Industries, in Colorado Springs, Colo., in June. Chase Koch now sits on the board of Koch Industries.

David ZalubowskiAssociated Press

By Tom Maloney

MONDAY BUSINESS

THE AGENDA: TECHNOLOGY