Google Zeitgeist
October 15, 2012
The World We Design
>>Lorraine Twohill: Last session of today.
This is very uplifting session to bring us
home for the day.
Before we start, I wanted to quickly mention
Jeremy's Icebreaker is giving everybody a
gorgeous Icebreaker T-shirt.
You will find a card in your room you need
to bring to the concierge's desk to get your
T-shirt.
They are very, very cool.
Thank you Jeremy.
This final session is called The World We
Design.
We have a phenomenal moderator who is going
to join us on stage, I want to introduce Andrew
Ross Sorkin, who is a financial columnist
with the New York Times.
We are thrilled to have you here, Andrew.
Andrew is also the co-anchor Squawk Box on
CNBC and has written a very famous book, Too
Big to Fail.
So Andrew, please come on stage.
Thank you.
[ Applause ]
>>Andrew Ross Sorkin: Thank you very much.
We've had a great couple of sessions this
morning.
And we're going to be talking to a number
of very special and amazing people this afternoon,
who are going to be telling stories and hoping
to inspire us about new business models, habits,
social and sustainable mission and new ways
to think about stories through photographs
and motion pictures.
But before we do that, what I wanted to do,
if I could, was to take a moment to speak
briefly about a theme that I imagine we're
going to be hearing about a little bit this
afternoon from our presenters, especially
those who are starting and creating and running
emerging businesses and emerging enterprises.
It has to do a lot with their success and
the success as a result of what I'm going
to describe as long-term thinking and patience.
And the reason I wanted to bring up this idea
of long-term patience in terms of thinking
is here we are at Google, and at the Google
Zeitgeist event, and everybody here has their
-- I was about to say iPhone, I shouldn't.
I should say their Nexus device or their Samsung
device or whatever they have, Android device,
and we live in this very, very instant world.
We want instant gratification, we want response
time, we want to tweet, we want to FaceBook,
we want to do whatever.
But when it comes to business, and when you
think about your own enterprises and the decision
making that goes into it, one of my greatest
worries these days is that when you think
about markets and specifically capital formation,
there's become a remarkable sense of short-termism
that has creeped into every facet of business
thinking.
I want to give you some stats just to hopefully
make everybody think here for a second.
Consider these numbers.
The average stock today in the public markets
is held for -- can you guess?
22 seconds.
[ Laughter ]
>>Andrew Ross Sorkin: Okay.
Now, 70% of the stocks that trade in the market
on any given day, the volume you see on CNBC
at the end of the day is being moved by computers,
high frequency trading.
The other 30% of stocks, out there in the
world, the average hold time is seven months.
That's the number.
So take out high frequency trading, seven
months is the long-term holds.
Of the world's actively managed mutual funds
in this country, nearly 100% of the portfolios
are turned over every single 12 months.
Okay?
A survey of more than 400 corporate managers
recently found that almost four out of every
five respondents indicated that they would
decrease discretionary spending on areas such
as research and development, advertising,
maintenance, and hiring in order to meet short-term
earnings targets.
And more than half the respondents said they
would delay new projects, even if it meant
sacrificing value creation.
They say that -- they actually responded and
said that the object for doing so was to smooth
out earnings or to actually hit the quarterly
target.
Now, I say all of this -- by way of background
in that we live in a time right now where
we keep talking about shareholder democracy.
And we claim that we, all of us in this room
and the country, wants more shareholder democracy.
We want a bigger seat at the table.
We think that if we just had a seat at the
table, we would be the long-term thinkers.
But I would argue to you that we are the problem.
That we have become the ultimate ADD nation.
And in many ways, when you think about what's
happening in corporate America, we are getting
exactly what we are paying for.
Now I wrote this book Too Big to Fail, to
quote FDIC chairwoman Sheila Bair, she said
the overarching lesson of the financial crisis
was the pervasive short-term thinking that
helped bring it about.
And she's absolutely right and we absolutely
have a problem.
I was with a CEO last week, you all know this
CEO, a Fortune 50 company.
She has made some serious investments over
the last couple of years that have not paid
off, not yet.
They may or may not pay off in two years.
I will bet you within the next two years she
will lose her job or the company will be broken
up.
That can't be the right answer.
Now some say we need to incentivize managers
differently.
We need to give them more skin in the game.
That's what we say.
We want everybody to have skin in the game.
And every time I think about skin in the game,
I therefore think about Dick Fuld, the former
CEO of Lehman Brothers.
This is a number worth remembering.
Dick Fuld had a billion dollars of stock in
his company.
He had, quote, unquote, more skin in the game
than just about anybody in the business.
He rode his billion dollars of stock all the
way down to $56,000.
That's the number.
When you really think about what we can do
to incentivize people and motivate people
to make the right decisions, it is a very,
very tough task and money is not the only
answer.
Finally, Google, FaceBook and others, have
created governance systems to try to push
back on some of this pressure.
But in all honesty, my worry is it's only
going to really help at the margins.
Ultimately we are going to need a new level
of trust and patience, and that's something
that's only going to come from everybody in
this room, hopefully not just today, but when
you go back to wherever you came from, to
talk about that patience that's needed.
We're going to be hearing from some tremendous
people this afternoon.
I want to get some thought about some of these
issues.
Let me do this.
Let me introduce to you two women who are
very special.
They are my new friends this afternoon.
And they are doing very big things in the
not-for-profit world of sustainable and social
businesses in an effort to create profitable
businesses.
If you would join me, please, Leila Janah,
the CEO and founder of Samasource Social Business
-- please, please, it's a social business
that connects people --
[ Applause ]
>>Andrew Ross Sorkin: -- living in poverty
to microwork.
And basically what they do is they take small
computer-based tasks and try to build skills
in emerging markets in places that you would
not believe.
Samasource I should say has partnered with
many tech companies, including Google, Microsoft
and LinkedIn and she's going to talk a little
bit more about that in a moment.
Then Linda Rottenberg is the CEO of Endeavor,
a not-for-profit that identifies and supports
high impact entrepreneurs in emerging markets
--
[ Applause ]
>>Andrew Ross Sorkin: And this is a great
fact, Endeavor has helped its entrepreneurs
generate more than 90,000 high-quality jobs.
So I welcome both of them.
>>Linda Rottenberg: 200,000.
>>Andrew Ross Sorkin: 200,000?
Your bio is wrong, it says 90,000.
I apologize.
What I'm hoping that you can do, just to start
us off, is just explain a little bit about
what these institutions do.
Because I'm not sure the audience does.
But answer this while you are doing it, if
you could.
In a world when we think about where there's
been a real shift about how we think about
capitalism, in the past four years, and both
of your enterprises at some level are about
-- either making a profit or -- or using the
profit incentive, to make your businesses
grow or to make your enterprises grow, how
do you think about that?
How do you go to countries that have looked
at our version of capitalism here in the U.S.
and say, you know what, we just watched what
happened here and this may not work the way
we thought.
I am going to start with you, Linda.
>>Linda Rottenberg: Well, your question, also
about patience, really gets to the heart of
Endeavor's model.
So in the mid 1990s, I was living in Latin
America, I had fled from Yale law school knowing
only that I was never practicing the law.
I was struck by how many young people aspired
to government jobs.
I didn't understand this.
And how many taxi drivers had Ph.D.'s in engineering.
So I kept asking why is no one starting a
business?
And it was explained to me that in Latin America
and other emerging markets, if you weren't
from one of the top 10 families, there was
no way that you could start a company.
No one would give you support, there were
no role models, no venture capitalists, no
mentors, and then also they were seen as greedy
and corrupt.
Why would you aspire to do that, anyway?
I said no, no, no, I'm talking about entrepreneurs,
people who innovate, create jobs.
And I used the story about the computer.
And people would say, "Nice story, but guys
like me, we don't even have a garage."
So Endeavor was really set up to address this
issue.
What we said was just like you said, if we
wanted to be impatient, we would start a venture
fund and invest in three of these companies.
But we wanted to build an ecosystem.
We said we are going to do something non-traditional.
We're going to set up as a non-profit, of
by and for entrepreneurs.
Not just any entrepreneurs, the high impact
ones.
The ones with the greatest potential to scale,
create job, create revenues.
We said if we do our job right, these entrepreneurs
will not only change the way business is done
in their societies, but they will give back
and make us self sustaining.
Everyone said I was crazy.
I was literally the chica loca in Latin America.
And here's where we are today.
15 years later, Endeavor operates in 17 countries,
in Latin America, the Middle East, Europe,
Asia, and Africa.
We have screened 30,000 entrepreneurs.
Certified 722 -- 450 companies.
Once they become Endeavor entrepreneurs, we
help them build business plans, build advice
reports, access capital, in some cases fire
their mother-in-law.
Last year they generated $5 billion in revenue
and 200,000 jobs, but here's the more important
thing.
They are now becoming the mentors.
They are now becoming the angel investors.
So in fact one of my favorite days at Endeavor
was we were down in Brazil, the editor of
the Portuguese dictionary came to us and said
because of our work, they were going to add
the term "empreendedor" into the language.
So now there's something that people can aspire
to that has a positive connotation.
>>Andrew Ross Sorkin: And your investment
-- one of the things that's so interesting
to me is you are now investing in businesses
that you hope will turn a profit.
>>Linda Rottenberg: We are, yeah.
>>Andrew Ross Sorkin: You are hoping they
will become an NPO and take that profit turn
around and invest in other emerging businesses.
>>Linda Rottenberg: Yes, my colleague Bailey
Kempner is here.
We started something called Endeavor Catalyst.
It's actually acting as an endowment, so it's
taking donor capital and we talk about return
on donated capital, RODC.
And the idea is we are co-investing in our
entrepreneurs, raising $5 million from venture
capitalists and we will use the returns to
make Endeavor sustainable and to go to the
next countries where they don't yet have an
entrepreneurial ecosystem.
>>Andrew Ross Sorkin: Okay.
Leila take us through what you do, because
it's pretty crazy and pretty interesting.
>>Leila Janah: Sure.
Just to tell you how I got started.
When I was 17, I got a scholarship from a
tobacco company, from the Lorelei Tobacco
Company.
And I decided to use it and volunteer in Africa.
So I went to Ghana, in West Africa.
I was assigned to a small school in a little
village.
And I thought that I was going to go there
and save the world.
And yet my students were incredibly bright.
They spoke beautiful English.
They could tell me the name of U.S. senators,
which by the way some of my high school classmates
couldn't tell me.
And I thought this was the great untold story
of poverty and development.
There is a mass of untapped human potential.
I think this organization does a great job
of addressing that.
So I studied development.
I wasn't really thrilled with what I saw in
the traditional aid model, which is essentially
that we view poor people as these passive
recipients of handouts and we don't really
give them any credit.
So I formed an organization called Samasource.
Sama means equal in Sanskrit.
And we connect some of the world's poorest
people, people living on less than three dollars
a day, to work via the Internet.
This is a really interesting business model
that's only made possible by some of the recent
advancements in the last five years, Internet
connectivity and thanks to Moore's law, really
cheap computing devices all over the world.
There's one that launched last year, the $25,
Raspberry Pie.
So we've taken advantage of this new infrastructure
and this new connectivity to take people who
are living at the bottom, 4 billion on less
than three dollars a day and connect them
to what we call microwork.
We divide up big digital products, which are
typically outsourced like image tagging, like
transcription, like captioning, captioning
videos, and we send that work to people living
in slums and villages in poor parts of East
Africa, South Asia and Haiti.
And today -- we started four years ago, we
paid out 3,000 people, so 3,000 women and
youth who had never had formal work experience
before, have actually made this money doing
real work for companies like eBay.
We've paid out 3,000 women and youth and we've
also paid them over $2.5 million in real revenue
from for-profit companies.
And I think what's so interesting about this
new world that we live in is that people are
starting to realize that capitalism and charity
don't have to -- be this dichotomy that's
existed for so long.
People really want to embed the meaning that
they find in their charitable work on weekends
and evenings and in the latter half of their
lives into their businesses.
>>Andrew Ross Sorkin: So, for example, if
I am living I don't know where, you come to
me and you say you're going to train me to
tag photos; is that how this works?
>>Leila Janah: It's a little different than
that.
If we did that, probably no one would want
to work with us.
[ Laughter ]
>>Leila Janah: So we work with local recruiting
partners.
The work can be a little bit boring.
But here's how we do.
So we work with local NGOs that operate in
slums and villages that do things like training
people in leadership skills or teaching them
how to save money.
And those organizations become feeders for
us and they send people to our local partners.
We have a network of 16, some for profit,
some non-profit entrepreneurs that operate
existing computer businesses, internet cafes,
computer centers, in developing countries.
These people then, as an agreement with Samasource,
hire poor people to do the work in exchange
for us sending them the contracts that they
wouldn't be able to have access to in developed
countries.
>>Andrew Ross Sorkin: So here's the question.
Google is a client, if you will, or a partner,
right?
Microsoft is a partner.
Do they work with you so they can check off
a box that says social responsibility or social
mission or something?
Or do they work with you because ultimately
they're getting a good value for what you
are actually doing?
>>Leila Janah: So this is a great question.
At the beginning, my hypothesis was that businesses
would behave like consumers do.
Consumers in many cases are willing to pay
a premium for socially labeled goods.
Businesses, as I learned after starting my
business, are not.
Businesses pay us to deliver good quality
services, with competitive costs and competitive
turnaround times and we're competing with
for-profit outsourcing firms.
So what we have found is that the social mission
is really the icing on the cake.
The good quality services have to be there
first and then all other things being equal,
of course people would love to work with us,
they know that we're a non-profit.
>>Andrew Ross Sorkin: If you succeed, what
happens when an entire village is tagging
photos and doing all sorts of things, realizes
I can be an entrepreneur, and they get involved
with you.
The price by the way all of a sudden goes
up for you, so Google says, "I don't know
can I use you" or do I -- or do you consider
that success?
>>Linda Rottenberg: But success is a good
thing.
Look in our case.
We are seeing these tech and other entrepreneurial
ecosystems spawn up in Buenos Aires, in Amman,
places you would never -- Egypt after the
revolution.
In Greece now.
These are places that you wouldn't expect
business to be happening and --
>>Andrew Ross Sorkin: You just started in
Greece.
>>Linda Rottenberg: We just started in Greece.
>>Andrew Ross Sorkin: Very strange place to
start.
>>Linda Rottenberg: I know.
You call me crazy again.
And I said when the economy looks down, entrepreneurs
look up.
It's the best time to be in an entrepreneur
in Greece.
Chaos is a catalyst.
Chaos is your friend.
But what's interesting is we looked -- we
went to Argentina, Jordan, Turkey, Brazil,
we said all right.
We want to investigate all of these start-ups
that are happening, why?
We looked to the 200 start-up companies, too
early for Endeavor.
We take companies, you know, one to $20 million
in revenue.
We said we -- we asked them four questions.
Number one, who inspired you?
Number two, who mentored you?
Number three, who if anybody actually invested
in you?
Number four, did you ever work for an entrepreneurial
firm before?
5 years ago, there was no word, there was
no company, there were no role models.
What happened is they started referring back
to the companies.
We started seeing patterns.
Three or four companies, some of our ex-entrepreneurs,
have become the angel investors, the mentors,
the venture capitalists.
When you take them away, the ecosystem disappears.
So what happens is it's like the PayPal Mafia
effect or the Googlers, you can have a few
entrepreneurs paying it forward, it creates
the next generation of a multiplier effect
that happens very rapidly.
What you are doing at Samasource, we hope
they will be the one that entrepreneurs would
help.
Ours become the VCs.
That's success --
>>Leila Janah: I have a great story.
I just wanted to show you an actual worker
if we can bring up the slide.
Just to show you how this ecosystem works.
So this is a woman named Jacquelyn (saying
name).
She's 25 years old, she's from rural Kenya.
She's from a country where the vast majority
of people make less than two dollars a day.
That's, by the way, adjusted for purchasing
power.
That's what two dollars would buy you in the
U.S. in 2005.
That's where they she lives.
And yet 95% of people under 30 in Kenya can
read and write in English.
She's one of them.
So Jacquelyn came to us, then this next slide,
shows you what she's doing now.
She came to us, she had never had formal work
experience before.
She had to drop out of school because she
didn't have enough money to afford the school
fees.
And she got this job at one of our computer
centers in Nairobi about a year and a half
ago.
She made enough money to pay her rent, her
single mom's rent herself and put herself
and her sister through school.
That's how much more money you can make doing
computer-based work than doing basic formal
employment.
And then she left and actually the ideal scenario
is -- for us is for our workers to leave after
six months or a year and earn higher paying
work in the for-profit private sector, because
then we're not using non-profit funds to subsidize
people forever.
And so I hope that some day she becomes an
entrepreneur and works with Endeavor.
>>Linda Rottenberg: Actually one of my favorite
stories also grew up in the favela, slums
of Rio, and her mom was a maid and her father
was a janitor and she got a job at McDonald's.
She said, "You know what?
Why can't I do this franchising thing, but
for poor people?
Why can't poor people feel beautiful."
So she and her cousin Ziga started something
called the Beleza Natural Hair Salon.
We found her when she had two salons.
You think oh, that's a nice story.
They had actually concocted this product in
their kitchen.
Tested it on their husbands.
The husbands' hair fell out.
We found them and there were like four hour
and six hour waits at the salon, so we helped
them understand franchise and get mentors.
And today Beleza Natural, it's a $75 million
business.
They employ 1500 mainly women who grew up
in the poor areas of Brazil, and she wants
to take on Loreal and starting a new hair
clinic in Harlem.
These are the stories that if you tell them
it's amazing, young kids sitting in these
places today think, I can do it, too.
>>Andrew Ross Sorkin: When you think about
investing in these businesses now, you talked
about not return on equity, you said return
on donated capital.
>>Linda Rottenberg: Yeah.
>>Andrew Ross Sorkin: What's the threshold?
Especially when you are doing it, I assume,
side-by-side with -- I don't want to say real
venture capitalists, but venture capitalists
who want to make a profit.
>>Linda Rottenberg: Yeah.
Although we hopefully get the terms better.
Entrepreneurs are still getting unfair terms.
We are being of, for and by entrepreneurs.
We are neutral.
We don't set the valuation.
We actually did a notional fund.
We said okay, what would have happened if
looking back over 15 years we had done this
type of endowment that would invest in our
entrepreneurs.
The ROIC would have been 3x, 48% IRR.
These are for an emerging market venture fund,
that's great.
The difference is that when we hopefully become
profitable, we can move on to the harder places.
We can actually create these ecosystems where
we eventually we hope the venture capitalists
come.
We hope one day we are not needed in Brazil,
but we need an organization that kind of creates
the ecosystem in neutral way.
>>Andrew Ross Sorkin: Hardest country so far?
What's the country you would like to conquer?
>>Linda Rottenberg: We have Google.
Let's do Egypt, let's say Egypt.
>>Andrew Ross Sorkin: I'm curious on your
end, in terms of most of the things that we
talked about are low-skilled work.
Is the goal ultimately to raise the skill
level?
Meaning is that something that you want to
do or is that a different business?
>>Leila Janah: I think that would be a different
business.
Our goal is to tackle poverty.
Right now there are so many people who can
read and write in English, who can do our
work but just don't have access to it.
And so many companies have this work that's
just sitting there that we could do.
So our first goal is to expand the number
of people doing this low-skilled type of work.
And to Linda's earlier point, we look at a
similar measure.
We look at how many people we are able to
move over the poverty line and for much donor
capital.
What's so exciting about businesses like ours,
now you can track that.
In the digital age, I can tell you for a very
limited amount of your funds, we can actually
move somebody over the poverty line and all
of the evidence suggests that they don't go
back to it once they've had formal work and
training.
So our goal is to dramatically expand Samasource,
and then I have a broader vision for my organization,
which is to become like the virgin of social
enterprise.
I think that Sama could eventually become
an incubator for various other social businesses
that all use technology to address problems
related to poverty.
>>Linda Rottenberg: One interesting point
that gets to your point about how we do business
and capitalism.
I think you are hearing today these two non-profits
who are using the tools of the private sector,
right?
And we're aiming for profit, both with our
businesses and ultimately we want to be self-sustaining.
And we're generating profits, just turning
it back into ourselves.
But here's what businesses can learn from
the non-profit world.
It's something that I call psychic equity.
I think that so many times when you think
that you have all of these financial equity
to give, you don't take -- you don't take
the care to think about the -- the ownership
structure.
When people are waking up every day, are they
feeling like they're making a contribution?
I think these young people, these millennials,
are actually telling people they will take
a tradeoff in salary, in the -- in the power
they have, to actually make a difference.
And I think that comes --
>>Andrew Ross Sorkin: You think that's true?
You think that's not just a good sound bite?
>>Linda Rottenberg: Yeah, I think they care
about making an impact.
I think companies that tap into that, and
actually make their profits but give people
the sense of ownership and psychic equity
and un-silo things, I absolutely think if
you want to retain young people today, you
have to.
I do.
>>Andrew Ross Sorkin: We're going to be talking
to some people after this, who have done something
like that and have some interesting stories
to tell.
On your side, after our lunch today, we were
talking before this session, you were saying
that -- that you end up actually competing
against for profits.
How does that work?
>>Leila Janah: Well, it's tough, but we're
in a space that some people call it crowdsourcing
that's now filling up with new companies that
are finding ways to create marketplaces for
these basic what are called human intelligence
tasks.
Amazon runs one called Mechanical Turk, we
used to share office space with a firm called
CrowdFlower, which also does what we do.
So we're in a competitive industry.
Actually many non-profits are in a competitive
industry.
>>Andrew Ross Sorkin: What's the most advanced
thing that I could come to you for right now?
>>Leila Janah: Writing content.
Writing content for your website.
Maybe not the kind of content that you write,
but --
[ Laughter ]
>>Andrew Ross Sorkin: What kind of content
are you talking about?
>>Leila Janah: So, you know, Captioning an
image or a video.
We do -- we do a lot of really short form
content, so answering questions that, you
know, communities online don't want to answer.
Maybe fact checking for news stories.
So all sorts of content writing and basic
tasks that are in this category of basic human
intelligence work.
So requiring literacy and a little human ingenuity.
>>Andrew Ross Sorkin: Do you buy this assertion,
Linda's assertion on sort of social mission
in this generation?
I think we're all part of the same generation,
and I have to admit I'm a little skeptical.
>>Linda Rottenberg: It's not social mission.
We actually did a study and in fact, companies
that are aiming for profits scale faster.
I'm not saying that companies should become
Ben & Jerry's with that mission or talk with
their social.
In fact, people who see trade-offs who say
they're going for social profits oftentimes
have a hard time scaling.
That's all I'm saying.
Psychic equity, I think it's about making
people feel that everything they do has an
impact and that your business is making a
difference in the world.
>>Leila Janah: I buy it and here's why.
The Internet has dramatically broadened our
circle of empathy.
No longer is a woman in a slum in Kenya someone
who doesn't deserve the basic human dignity
that we can afford to provide her.
And I think that as the world shrinks more
and more people who graduate from college
are looking for meaning in their jobs and
they don't want to relegate meaning to weekends
and after hours nonprofit work.
They want meaning to be central to what they
spend the majority of their time doing.
That's certainly why I started my organization.
It's why we run what I call an investment
banker reform program.
We get a lot of consultants -- not to insult
any investment bankers in the room.
We have a lot of people who used to work at
McKenzie and Goldman and they said, you know,
I've spent my time the last three years making
lots of money for the man and now I want to
do something for mankind.
And I see that as a broad trend that is shaping
my industry and many others.
>>Linda Rottenberg: Can I say one more thing
about your original question and about the
patience?
When we started out no one believed there
were any of these entrepreneurs in emerging
markets.
So what I used to say when people, including
my parents, didn't know what I had done, I
had gone to law school and gone into retirement,
they thought.
I said, you know, what we're doing is bottling
up the magic of silicon valley and putting
it in places where there's ideas, but there's
no support.
That's what I'd say.
And today I'm asked so many times on college
campuses to do the inverse.
I say now that people in Jakarta and Rio and
Istanbul may believe in the American dream
more than our own kids do.
And people are saying, Look, there's no stability.
I can't become an entrepreneur.
IT's too scary out there.
What will happen?
And I think if we bottle up this energy that
half the Fortune 500 companies today were
founded in periods of downturn and this idea
that in fact when the world is a bit chaotic,
you have to think in the longer term, you
have to be more patient, and it's the best
time to start something up.
Because the idea that we're creating this
risk averse generation I think can be overturned
with examples of people in the for-profit
and nonprofit worlds that are trying to make
change.
>>Andrew Ross Sorkin: On that very promising
note we're going to leave it there.
Thank you to both of you, Linda and Leila.
This was tremendous.
Thank you, thank you.
Are you ready?
It is now my honor -- I apologize.
It is now my honor to introduce not only a
great writer, but a friend.
Charles Duhigg -- and a colleague by the way.
Charles Duhigg is an author and colleague
of mine at the New York Times Company.
He is the best-selling author of the Power
of Habit.
I promise you he will blow you away.
Why -- the subtitle -- I'm trying to sell
your book.
They get it for free.
Why we do what we do in life and business,
which explores the science of habit formation
in our lives.
I should also note if you don't read what
he's doing in the "New York Times," you should.
He runs this really a series that we've been
doing called the iEconomy which has been a
series examining Apple's manufacturing in
China, many of you have seen it, the challenges
of the patent system and many other things,
including tax strategies.
It's off the charts awesome.
I wish you luck, Charles.
>>Charles Duhigg: Thanks so much.
Thank you all for inviting me to join you
this afternoon.
I'm a reporter at the New York Times and the
author of this book the Power of Habit, which
will hopefully come up in back of me at some
point.
If you're familiar with this book it might
be because you read a piece in the "New York
Times" magazine about how Target was studying
shoppers' habits in order to determine if
some of their female customers were pregnant
or you might have seen a piece in Sunday in
the paper about how the Obama and the Romney
campaigns were studying voting habits in order
to try and entice low propensity voters into
the booths.
But what I want to talk to you about today
is I want to talk to you about a product that
you might not have heard about, or maybe some
of you have, named Febreze.
And I'm going to admit at the outset that
I'm going to try and trick you.
Because what I'm going to try and do is I'm
going to try and convince you that we are
living through this golden age of understanding
the science of habit formation.
We're learning more and more about how habits
work, and the same things that made Febreze
into a hit that you can use within your own
companies or within your own lives to make
the world a better place.
So you can tell me at the end if I'm actually
successful at this.
And in order to do this I first have to start
by telling about a rat.
So about a decade ago there was a woman named
Dr. Ann Graybiel at MIT who is a neurologist,
and for years she had been doing experiments
to try and get sensors into the craniums of
rats so she could measure what was going on
inside their heads as they went about their
daily business.
As you can imagine it took a long time and
a lot of rats to figure out how to do this,
but eventually she got to a point where she
could get about 150 sensors into a rat's cranium.
And she would do the same thing with every
single rat.
After the surgery she would take them and
put them in the world's simplest maze.
This maze works the same way every single
time.
There's a click, the partition moves and the
fat is free to move up and down.
Now if anyone has ever done this with a rat,
what you know is when you drop a rat in a
maze like this it looks like the world's stupidest
animal.
The rat will run up and down the center aisle
and sniff and scratch.
When it gets to the end it will actually see
the chocolate and then go the opposite direction.
This is actually one of the reasons why rats
are used in experiments is because it's considered
that if you can teach a rat something you
must be able to teach any animals anything.
So she would do this experiment, but for the
first time she was able to see what was going
on inside the rat's head.
This is a simplified neurological graph of
the first time that a rat is dropped in this
maze.
What you will notice is that its brain is
actually working hard the entire time.
So when the rat would scratch on the walls,
the scratching centers would light up, when
it would sniff, the sniffing centers would
light up.
It's actually trying to process as much information
as possible.
This is what learning looks like.
So Dr. Graybiel takes the rats, each one,
and drops them in 100, 150 times.
And as imagine, over time the rats learn how
to navigate through the maze faster and faster.
Click, the partition moves, the rat will make
a beeline to the chocolate and it actually
becomes a habit.
But what's really interesting is Dr. Graybiel
sees for the first thing what is going on
inside the rat's cranium.
As the rat gets faster and faster, as the
habit to find the chocolate becomes stronger
and stronger, the rat essentially thinks less
and less and less.
This graph at the bottom is a simplified neurological
graph of the 150th iteration of a rat running
through a maze.
And that dip you see right there is the same
dip that you would see if a rat went to sleep.
There was a scientist at Duke University a
couple of years ago who did a study to try
and figure out how much of your day was habits.
She followed a bunch of people around and
found that 40 to 45% of the actions we take
everyday aren't really behaviors.
They're actually just habits.
And if I could somehow stick 150 sensors into
your head which I would not recommend, then
when I saw you backing your car out of your
driveway or walking down the hall muttering
to yourself or making automatic decisions,
I would see your brain looking like this.
But what's interesting is if you notice there's
these two spikes in neurological activity.
When there's the click we see a burst of neurological
activity and then essentially the brain almost
goes to sleep.
Then the rat finds the chocolate and it's
if as the brain sort of wakes itself up again
to pay attention to what's going on.
This is the neurological signature of a habit.
This is what we've discovered in the last
six years.
And this is so important that it's become
enshrined in psychology and neurology as what's
known as the habit loop.
We now know that every habit has three components.
There's a cue, which is like a trigger for
an automatic behavior to start, and there's
routine which is the behavior itself, and
finally a reward.
And the reward is how your brain, and in particular
the part of your brain named the basal ganglia,
learns to remember this pattern for the future.
For centuries when people thought and talked
about habits they always focused on the routine,
on the behavior, but what we've learned is
it's actually the rewards and the cues that
shape how habits work.
That's how we influence how people behave
on the most automatic, almost subconscious
level.
Just to give you an example let me tell you
about an experiment that was done in Germany
where they took about 700 people and they
wanted to get them to exercise.
So they took one group and told them to choose
a cue, like go running at the same time everyday
or always put your clothes next to your bed.
And they told them when they got home from
working out they should eat a small piece
of chocolate, which of course is counterintuitive
because we all exercise to lose weight, not
to eat chocolate.
But what they found -- and the reason why
they found this is that people who did this
exercised twice as much habitually as other
people, and the reason why is because you
might think that you want to exercise, but
your brain thinks that you are a dirty liar
and that you hate exercise.
And so in order to convince your basal ganglia
that you should actually form this habit,
you have to pair the activity with a reward
you generally enjoy like chocolate.
Over time your brain will learn the endorphins,
the endocannabinoids, the neurotransmitters
that are released by a physical activity are
a pleasurable sensation and you'll start exercising
habitually more on your own.
But as I mentioned, the reason I'm telling
you about this is because I want to talk to
you about Febreze.
Does anyone in here use Febreze?
Is anyone a Febreze customer?
So Febreze, for those of you who don't know
what it is, is this chemical that I cannot
pronounce, but the initials are HPBCD, that
was discovered about 11 years ago by Procter
& Gamble.
This guy who was a smoker was working in the
lab one day and he used this chemical and
when he got home he noticed that he didn't
smell like cigarette smoke anymore.
What he figured out is this chemical, if you
aerosolize it you can spray it on to fabric
or other things and it will draw out the molecules,
the scent molecules, and as it evaporates
the scent will essentially disappear.
This was a huge deal for Procter & Gamble
because for years consumers were saying they
wanted some product that would not just mask
bad smells, but make them disappear.
So this guy goes to his boss and says, "I
think I can make this into a product," and
they give him seven and a half million dollars
and three years later he comes up with Febreze,
this product that they're going to sell.
The executives turn around and say we need
to give this to one of our marketing teams
because we think we can make a gazillion dollars
off of this.
So they give it to this guy named Drake Stimson,
a mathematician on Wall Street.
He has a whole bunch of psychologists, consumer
psychologists working with him, and they come
up what they think is a brilliant advertising
campaign.
It's modeled around a habit loop.
The cue is going to be if you have a bad smell
in your life you will spray Febreze and it
will get rid of the bad smell and everyone's
gonna get rich.
So they make a couple of test ads because
they wanted to test this out and they actually
showed them in three markets, including here
in Scottsdale, this was one of the test markets.
Let me show you one of them.
>>> Guess what the kids call dad's easy chair?
>>> The stinky chair.
>>> I have a stinky chair problem, too.
His name is George.
>>> Now there's a way to get bad smells out
of fabrics for good.
It's called Febreze.
It's new.
And you won't believe how many places you'll
find to spray it.
>>> Febreze will clean fabrics in a way you
never could before.
>>> It's not just covering up the smell.
>>> Exactly.
Just spray Febreze.
Its patented cleaning system finds the smells
trapped in fabrics and gently cleans them
away as it dries.
>>> Once it's dry the smell is gone for good.
>>> Febreze?
Check the laundry aisle.
>>> Check this out.
>>> It's safe from dress blues to teddy bears.
Febreze cleans bad smells out of fabrics for
good.
>>> I wonder if they'll call it the sleepy
chair now.
>>Charles Duhigg: What I like about this ad
is you forget that the late '90s had a visual
esthetic until you see it in that old commercial.
So they did this ad and this ad actually won
awards before it even aired.
This was considered a model for explaining
a new technology to consumers.
You watch this thing and know what Febreze
does.
It's pretty clear.
They roll it out in the three test cities,
they send people tons and tons of free product.
Actually, Drake Stimson told me that they
were so certain they were going to knock this
out of the park that one afternoon everyone
wrote down a list of what they were going
to buy with their bonus, and he wrote down
that he was going to buy a Ferarri and a Ferarri
for his girlfriend.
It was the height of like "I'm going to be
successful."
And he never bought the Ferarri.
It totally flopped.
Febreze was actually the largest flop in Procter
& Gamble's history, a company that's been
around for over a century.
They had spent more money trying to get Febreze
into a product than anything else and nobody
brought the stuff.
In fact, they considered killing the product
altogether.
So Stimson goes in and says, Look, give us
one more chance.
We just want to figure out what's going on
here, And he gets this team and they come
out here to Scottsdale and they interviewed
customers who had gotten free bottles of the
stuff.
In particular the dime dropped for them when
they interviewed this one woman who owned
a couple of cats.
Now, I don't know if anyone in this room owns
any cats.
Go ahead, raise your hand if you own cats.
A couple of people.
You know cats have a certain scent about them,
you know, you grow to appreciate.
This woman owned a huge number of cats.
[ Laughter ]
>>Charles Duhigg: In fact, she owned so many
cats that when the researchers walked into
her house one of them started gagging when
he went into the living room because the scent
of cat was so overpowering.
But what was weird is this woman is kind of
a neat freak.
Everything was fine except for the smell of
cats.
So they sit down with her and they say, "we
sent you some bottles of Febreze.
Have you used it?"
She says, "Yeah, I used it a couple of times."
And they say, "would you ever use it for the
cat scent?"
And she says, "A couple of time I've used
it for the cat scent."
And the guy who was gagging says, "what about
right now?
Would you consider using Febreze right now
for the cat scent?"
And she kind of smiles and says, "you know,
I don't like to brag, but I have the best
cats.
They hardly ever smell."
Which is of course when the team realizes
what's going on, which all of you know, which
is that if you have bad smells in your life,
you become desensitized to them.
They had built this entire advertising campaign
around bad smells, but people who have bad
smells don't know that they have bad smells,
right?
We spent our entire seventh grade year being
in fear of the fact that we smelled bad and
couldn't tell.
You were right, you smelled terrible and you
had no idea.
So as a result none of the marketing worked
because the cue was something that people
can't notice and the reward is meaningless
if you don't know that you have a problem
in the first place.
So they all go back to Cincinnati where Procter
& Gamble is based.
They go to the lab.
Now, Procter & Gamble has the largest library
of videotapes of people cleaning their homes
on earth.
This is stock footage because P&G won't let
me show any of the tapes.
They started by watching videotapes of people
vacuuming their home, and what they noticed
is this one woman in particular would start
in a corner and she would start vacuuming
backwards like this, and when she was done
she would go back to the beginning and she
would line up the wheels so they were exactly
parallel, and then come back so there were
these even grooves on the carpet.
And then when she was done with the entire
carpet, she just kind of looked at it and,
like, smiled.
And then -- I'm going to show you my favorite
photo of all time.
Because there's nothing I like more in the
morning than having some special time with
my daughter cleaning the mirrors throughout
our house.
I usually do my hair before we break out the
scrubber.
This is obviously a staged photo.
But what they actually found when they were
watching these tapes is that people had this
ritual.
When they were cleaning a mirror, they would
spray the mirror with a spray and then wipe
it like this.
And then and then look at their reflection
and smile at themselves.
But you're laughing because you've done this.
You know exactly what I'm talking about.
What they realized, but nobody had really
paid attention to before, is that cleaning
had its own habits, cleaning had its own rituals.
They figured out to sell Febreze, they could
piggyback on existing habits rather than trying
to create a new one.
They go back and come up with an entire new
market campaign that's built around a habit
loop.
This time it's when you're cleaning, at the
end of your cleaning ritual, pull out the
Febreze and spray it so that you can make
things smell as good as they look, which,
of course, there's no reward there, because
Febreze destroys scents.
So they went back into the laboratory and
they spent another $3 million inventing a
perfume that was strong enough to withstand
the chemicals of Febreze so they could pour
it into the bottles.
Then they go back to the same test markets,
and these are the ads they run.
[ Video.
]
>>> (Bell chiming.)
>>> Get your fix of freshness.
Febreze.
Anytime, anywhere, it's a breath of fresh
air.
>>> Mm.
>>> Shouldn't I be the one on the couch, doctor?
>>> No!
>>> Get your fix of freshness.
Febreze.
Anytime, anywhere, it's a breath of fresh
air.
>>Charles Duhigg: Here's what I'd submit to
you, if you came over from China and you saw
these ads and you had never met an American,
you would think that we were a country that
gets sexually aroused by smelling fabric and
that Febreze is a fetishist product that's
designed to apiece that.
Also mention one other thing.
The second ad it's clear what's going on.
She's a psychiatrist.
When they show that ad, when Procter & Gamble
shows that ad on the coasts, everyone knows
what's going on.
When they show it in the middle of the country,
it totally flops.
People have no idea what is going on in that
commercial.
[ Laughter ]
>>Charles Duhigg: Anyway, they roll these
ads out in the test markets and then they
end up going national with them.
And it's a hit.
Within the first year, Febreze sold $200 million
worth of product.
Today, Febreze is one of 13 Procter & Gamble
products that's a billion dollar a year product.
Procter & Gamble has hundreds of products.
Only some of them sell a billion dollars a
year, and Febreze is one of them.
And if you asked them why, they will tell
you because of these ads, because they created
a new -- they piggybacked on an existing habit
instead of trying to create a new one.
In fact, the campaign's been so successful
that now, a decade later, if you've seen the
ads for Febreze lately, they blindfold people
and they take them into these rooms that are
disgusting, and they can't smell anything.
For the first time, Febreze can actually admit
to people what the product does, which is,
it kills bad scents, instead of advertising
it as the most chemically advanced air freshener
on the face of the planet.
But the reason I'm telling you this story
is because you can grasp this understanding
of how habits work, I think to make the world
a better place.
To give you an example of this, let me just
tell you really quickly about Starbucks.
Starbucks has this basic problem, which is
that they sell customer service; right?
They kind of nominally sell coffee.
But what they actually sell you is someone
smiling when you walk in.
To do this, they have to hire thousands and
thousands of people who are 18 years old who
have never had a real job and get them to
deliver customer service.
What they found was that a whole bunch of
people at the beginning of the shift could
do a really good job of greeting a customer,
and at the end of the shift, they'd be exhausted
and if a customer comes in, they're rude,
they're rude back or they get drawn into workplace
drama.
This became a problem for Starbucks because
they had a couple of incidents.
Let me show you a tape of one of them.
And before I show this to you, just imagine
that you work for Starbucks; right?
You spend as much as sometimes $100 million
a year on advertising.
You work really hard.
You miss dinners with your kids.
But you believe in Starbucks.
You believe in teaching the brand, that this
is a place you can come and relax.
You come home, you turn on the television,
and this is what you see.
>>> She was a loyal customer of Starbucks,
loved the coffee, loved the service.
But that changed a few weeks ago.
This native New Yorker got steamed not by
what was inside her cup, but something written
on the outside.
That's when she called our Nina Pineda and
ordered a special brew of fully caffeinated
7 On Your Side.
>>> And then when you looked at it, what did
you think?
>>> I was shocked.
I didn't understand why.
Why would they do that?
>>> Vickie Reveron is talking about this Starbucks
cup.
On the side, a Starbucks employee wrote what
she ordered, a Carmel Frappuccino.
Instead of writing her name on the side, she
says he wrote the "B" word.
>>> It says (beep).
My name is not (beep).
It's Vickie.
[ Laughter.
]
>>Charles Duhigg: So have you ever casually
wondered what $100 million in advertising
sounds like going up in flames all at once.
It turns out it's, "My name isn't beep, it's
Vickie."
This is a huge problem for Starbucks.
Howard Schultz, who had just returned to being
the CEO of the company after being chairman,
calls together all his executives, because
they have to solve this problem.
And the way that they solve it is, they decide
that they have to increase workers' willpower.
And to do that, they have to teach them new
habits, willpower habits.
One of my favorites is, in fact, something
that they teach in their training manual called
The Latte Method.
And this is what it is.
They tell employees, when an angry customer
comes in, that's your cue.
And you use "latte," right, which they chose
because it's Starbucks.
Which is, you listen to their complaint, you
acknowledge their complaint, you thank them
for complaining, you take care of their complaint
by giving them a new cup of coffee or whatever
they want, and then you explain why this will
never happen again.
Now, I have a four-year-old at home.
I'm sure many of you have children.
If I could teach my son that when I come up
and I'm angry at him, he should listen to
Dada's complaints and acknowledge, Dada, I
understand that you're upset with me, and
thank me, Dada, for yelling at him.
If I could teach him The Latte Method, I think
this kid would go on to be president.
And, in fact, in the book that you'll get
tonight, there's actually the story of Travis
who is this kid whose mom was a prostitute,
and his dad, the first time he saw him overdosed
on heroin, he was seven years old.
And he dropped out of school, and he got a
job, actually, at McDonald's that lasted three
hours because a woman came in and he thought
she was rude to him, so he took the McNuggets
out of her box and threw it at her head.
This is a kid that, basically, life had failed
and was destined to be kind of a failure himself.
And then he started going to Starbucks, and
he learned these willpower habits.
And I actually talked to him a couple weeks
ago.
He's the manager now of two Starbucks, and
he oversees about 60 employees, about $1.2
million a year in revenue.
He just signed his first mortgage.
I guess the reason I'm telling you about this
is because I genuinely believe that the companies
you work for, if you learn this science, if
you try and share this science with your employees
or with your customers, with your families
or with your coworkers, you have this capacity
to change lives.
We understand now how habits work for the
first time.
When you teach people to diagnose the cues
and the rewards in their life, you give them
this tool to change these small patterns that
they feel powerless against otherwise, including
all of us.
And I hope that this is something that is
useful to you as you strive to make the world
a better place.
Thank you so much.
[ Applause.
]
>>Andrew Ross Sorkin: Charles Duhigg, everybody.
I should also note, Charles takes the advice
of his own book.
He lost about ten pounds, actually -- can
I say that? -- as a result of following the
habits.
And he created a whole cue system at the office.
We saw it in action.
Very cool.
It is my pleasure -- I apologize for doing
that to you.
It is my pleasure now to continue the conversation
we were having before with three other very
interesting people who started some very cool
companies.
And I want to invite them up as I'm speaking.
Neil Blumenthal and David Gilboa, you know
both them -- come on up.
They are the founders of Warby Parker.
And they're wearing their glasses.
The product is on their face.
Both of these guys went to business school
together.
And we're going to hear a really interesting
story.
I should also note that they give away a pair
for every pair that's sold, sort of a Tom's
model.
And we're going to talk a little bit about
that.
And Jeremy Moon, who's the CEO of Icebreaker.
All of you either have it or have the opportunity
to get one of these merino wool sweaters or
tee shirts today.
When he was 24 years old -- I hope I'm getting
this right -- 24 years old, back in 1994,
he was with an American girlfriend, I think.
And you were -- you were shown a prototype
fabric of 100% -- a merino grower showing
this 100% merino wool which you've developed
into a really cool product, and also has a
social mission behind it.
I wanted to try to continue the social mission
conversation for just a minute, and then I
want to get into the actual pieces of both
of your businesses, because you're really
disrupting, if you will, some of these industries
you're in.
But when you think about glasses and when
I think about whether I'm going to go buy
a pair of glasses, how important is it to
the business that you actually donate another
pair to someone who needs one?
>>Neil Blumenthal: So our research has shown
that for the consumer to actually buy the
glasses, it's actually not that significant.
So when we've done focus groups, interviews,
surveys, when we've observed people buying
glasses, the most important thing is how those
glasses look on their face.
So when we describe ourselves, we're a fashion
brand.
We're a lifestyle brand that designs beautiful
eyewear, because that's the foremost reason
why people buy glasses.
Second, they think about price.
Third, they think about quality and service.
And fourth, if at all, our social mission.
That's not to say that our mission, which
is to transform the optical industry and to
demonstrate that companies can scale, can
be profitable, and can do good, but it doesn't
necessarily sort of help us make that first
sale.
The strong business rationale helps us retain
and recruit top talent.
It helps keep us motivated and excited every
day, and we think that it helps customers
be more loyal and perhaps more likely to tell
their friends, but we're not sure that it
helps them actually make that first purchase.
>>Andrew Ross Sorkin: Okay.
But when you started the company, why did
you decide to do it this way?
>>David Gilboa: I think all of us on the founding
team, Neil and I and our two cofounders, were
just really passionate about creating an organization
that did something good in the world.
And we saw this massive industry, $65 billion
worldwide, that really hadn't had any innovation.
And we had the opportunity to disrupt that
industry, provide great value to consumers.
And that was exciting to us.
But we also just wanted to make sure that
we created an organization that we were excited
by just getting up and going to work to every
day.
And we wanted to just do something good in
the world.
>>Andrew Ross Sorkin: Okay.
But you have some big-name investors, some
of whom are in this room, who probably don't
traditionally invest in fashion companies
and who I imagine can't really be thrilled
that you're buying carbon offsets and giving
away glasses.
>>David Gilboa: We think kind of everything
we do on the social mission, whether it's
being carbon neutral as an organization, distributing
a pair of glasses for every one that we sell,
getting involved in the community, investing
in our employees through executive coaching
and a bunch of other things that certainly
add to the expense portion of our P&L actually
enhance our brand.
They allow us to attract and retain the most
talented employees.
They allow us to build closer relations with
customers.
And at the end of the day, they make us be
a better business that is going to generate
positive returns for those investors that
are motivated purely by financial returns.
>>Andrew Ross Sorkin: Jeremy, the same question
to you.
Look, the sweaters is gorgeous.
The tee shirts are gorgeous.
You're wearing one right now.
If I was going to buy one, I think I would
buy it because of how it looked.
But you guys have a whole other ethos that's
part of this.
>>Jeremy Moon: If we go back to that kind
of chance discovery for me, I met a farmer
who gave me a tee shirt from wool, which I
hated because I had to wear it when I was
a kid, and I was so shocked because it didn't
itch.
But then I got into it, and I discovered that
it was superior to the other products out
there, because it was renewable, and it felt
soft and it let my body breathe.
And I started doing sports in it with my friends.
And when I got into the outdoor industry,
I realized it all was made out of plastic.
Every brand which was about connecting people
with nature was using petrochemicals, polypropylene
or polyester.
Here was this kind of undiscovered fiber which
had just been ignored.
It was this brand-new idea that was 5,000
years old.
And it just needed to be packaged.
So I started off wanting to build a sustainable
product, but when I spent time with the farmers
and in the manufacturing, I really tried to
focus on building a sustainable company, because
I didn't want to just make clothes.
I didn't want to build a fashion company.
I wanted to build an alternative to -- based
on something real.
My thought was, in an age that's becoming
increasingly unreal, the value of what is
real goes up.
And I think that's kind of behind some of
these amazing founding stories and these new
birth of businesses that are being born, you
know, recently.
>>Andrew Ross Sorkin: I want to go back to
Warby Parker for a second.
I want to talk about glasses, the business
of glasses.
We're going to put the social mission aside.
We'll come back to it.
Glasses are typically ridiculously expensive,
couple hundred dollars a pair, if not more.
You sell them for $95.
How?
>>Neil Blumenthal: The big thing is, when
you look at this industry, it's dominated
by a few large players, one of which is Luxottica,
an Italian company that is basically vertically
integrated.
So over the last 30 some odd years, they've
been able to acquire every major company within
--
>>Andrew Ross Sorkin: But am I wrong in saying
virtually every major either glasses or sunglasses
company, whether it's Ray-Ban to you name
it is them?
>>Neil Blumenthal: Exactly.
So they own Oakley, Ray-Ban, Oliver Peoples,
Persol, Arnette.
They license every major fashion brand: Ralph
Lauren, Chanel, Prada, you name it.
They own LensCrafters, Pearl Vision, Sunglass
Hut, Sears Optical and Target Optical.
And then the icing on the cake is, they own
the second largest vision insurance plan in
the country.
>>Andrew Ross Sorkin: People talk about regulating
the tech industry.
I don't know about maybe the glasses industry.
Okay.
>>Neil Blumenthal: Our thought was, what if
we could design the frames that we love, use
sort of materials that, you know, we were
accustomed to buying but work directly with
the suppliers and then sort of bypass the
industry, bypass the middleman and go direct
to consumers by selling online.
And with that, we could cut -- sort of basically
sell the same product but for a fourth of
the price.
>>Andrew Ross Sorkin: What kind of margin
are they getting and are you getting?
>>Neil Blumenthal: Typically, glasses are
marked up between ten and 20 times.
And when you look also at the retail level,
often those margins are 3 to 5 X whereas typical
apparel or accessories is two to two and a
half X.
We're able to give all that sort of retail
markup to consumers.
And because we developed our own brand, we're
not licensing a brand, that licensing fee
we're able to give to consumers.
>>David Gilboa: Essentially, we're able to
offer a product that normally costs $500 for
$95 by cutting out the licensing fees and
all the middlemen.
>>Andrew Ross Sorkin: This is only a two-and-a-half-year-old
company, for those who don't know about it.
But those who do, it is a strong brand that
actually means something.
What did you want it to mean and how did this
happen in just such a little time period?
>>David Gilboa: So we really wanted to design
just glasses that we loved.
I lost a pair of glasses.
They cost me $700.
And I couldn't figure out why glasses cost
more than an iPhone or an Android phone.
And so we -- we decided, you know, to -- We
realized that we could create our own brand
that really stood for beautiful design, convenience,
but at a great price point for customers.
And then we wanted to build a business that
did something good in the world.
And we think it's an inherent good to offer
a product that normally costs $500 for $95,
but wanted to think about all the stakeholders
that we touch.
So our employees, the environment, close to
a billion people around the world don't have
access to eyeglasses, and they can't function
the way that all of us do.
>>Andrew Ross Sorkin: Why do you think nobody
did this before?
Why -- like, why did nobody else try to undercut
Luxottica?
>>Neil Blumenthal: I think you see most disruption
is caused by outsiders.
It's not the insiders.
They're sort of benefiting from the status
quo.
We were consumers.
We had that experience walking into an optical
shop, getting really excited about a pair
of glasses, and walking out feeling like we
got punched in the face.
And we sort of -- We knew what it actually
cost to manufacture glasses.
I used to run a non-profit that would train
low-income women in the developing world to
start their own businesses actually selling
glasses in their communities.
And one of the things that we found is that
people would rather be blind than wear a donated
pair of 1970s cat eyes, because you just -- you'd
look ridiculous.
And, frankly, fashion matters no matter where
you live in the world.
You don't want to be ridiculed by your neighbors
and friends.
I'd see coming off the production line glasses
that we were selling in Bangladesh and parts
of rural India alongside some of the biggest
names out there, Marc Jacobs, Lanvin, you
name it.
>>Andrew Ross Sorkin: Jeremy, you just said
something really interesting before.
I don't know where you want to go.
>>Jeremy Moon: Well, I just want to jump in.
The rules of business have changed.
So I started Icebreaker 16 years ago.
And I had to go around with my samples and
say, look, it doesn't itch, and get people
to wear it.
And it was bit by bit.
Now you don't have to do that.
If you guys wanted to start a business 16
years ago or even ten years ago, you had to
be -- you had to be a wholesaler.
You couldn't afford to open your own stores.
There was no online commerce.
So the rules of business have totally, fundamentally
changed.
And now, as a traditional wholesale company,
we can have our own stores.
We've got ten stores in the U.S.
We can have an online business.
We can supply thousands of outdoor stores
around the world.
And we can do it all at once.
So there's a massive scramble going on at
the front-end which is creating a total rebirth
of what these business models are.
>>Andrew Ross Sorkin: You said something interesting
to me, because it was directly opposite what
he just said, which was that you don't think
of yourself as a fashion business.
Why not?
>>Jeremy Moon: Well, companies are defined
by their founding moments.
And for me, it was about wanting to create
a natural alternative in an age of synthetics.
And synthetics for me meant stuff which was
disposable.
So, look, I'm no purist here.
I fly on airplanes.
I wear Gortex.
But I didn't want to wear polyester and all
those fabrics that stunk -- I need some Febreze
-- and all the problems that were associated
with it.
So any people in the outdoor industry would
know the downside of them.
So we kind of want to be the opposite.
So when I launched Icebreaker, the brand was
about people in nature, it was about men and
women.
It used to be only about kind of sweaty men
climbing mountains.
So we wanted to redefine what the outdoor
industry was about.
And also, we wanted to make products that
lasted.
So I wanted products to last for five or seven
years.
Our products have styling, but they're not
fashion.
I want them to look good with what you want
to wear in three years.
So we're trying to build in values.
So our product is more expensive than a typical
outdoor product, and I think it's better valued,
because it lasts longer and you can do more
in it.
So it depends what you optimize for.
So we're optimizing for long-term customer
value, not short-term value.
>>Andrew Ross Sorkin: Let's talk about the
future of retail a little bit.
You started your business, as he just said,
online.
And in many ways, you're going backwards;
right?
You're starting stores now.
You're starting your first store in New York
City.
What's that about?
Does it have to happen that way?
>>Neil Blumenthal: We do think the future
of retail is some intersection between bricks
and mortar and e-commerce.
When we were thinking about business, the
thing that we couldn't sort of get over was,
would people buy glasses online if they couldn't
try them on first.
And that was sort of -- we would have sort
of countless nights sort of talking, sort
of trying to figure this out.
And we came out with this idea to do a home
try-on program where people could select five
frames, we ship it to them free of cost, and
they have five days to try on those glasses
at home before actually purchasing and before
we put the prescription lenses in and ship
it to us.
We thought that would sort of eliminate the
barriers to purchase, it would help reduce
return rates and -- when somebody scratched
the lenses.
The lenses are sort of part of the cost of
goods sold.
What happened is that when we launched, we
launched to features in Vogue and GQ, and
the company just took off like a rocket ship.
We hit our first year's sales targets in about
three weeks, sold out our top 15 styles in
four weeks, and had a wait list of about 20,000
people.
And we had to immediately shut down the home
trial program.
And people started calling up and saying,
"Hey, I heard you're in Philly."
At the time, we were full-time students at
Wharton.
"Can we come by your office?"
And we said, "You can come by our apartment."
And people would come in, and we'd lay the
glasses on the dining room table.
And at first we thought this was going to
be a very suboptimal experience.
But what we found was it ended up being a
very special experience, because these customers
had a chance to meet the people behind the
brand, which is pretty rare these days.
And we sort of created these amazing, like,
super advocates.
So when we moved back to New York and set
up our office, we set up a showroom in the
office.
We've now moved on to our second office where
we have a showroom.
And about 600 square feet.
Last month, we did over $220,000 worth of
sales, you know, selling a $95 product on
a sales per square foot basis, there's only,
like, two retailers that are really beating
that, like, Tiffany's and Apple.
So we now had sort of the customer service
component, like, wow, this sort of helps.
And that we can do it profitably, why not
try to experiment and do this in other ways.
So we partnered with some sort of cool boutiques
around the country that sell, you know, many
leading sort of contemporary apparel lines
and we'll rent sort of a wall from them to
display our glasses and pay for a staff person
there to take people's orders on a tablet,
runs actually through our Web site.
We ship it to them.
And now we're opening up our first flagship
store right on Prince and Greene in Soho,
next to Ralph Lauren, across from Apple, because
we think that this will help sort of really
anchor the brand, because there's never been
a major fashion --
>>Andrew Ross Sorkin: Is the dream of online
only, of online only retail, is that dead?
I mean, does there have to be -- maybe you
can speak to this.
Does there have to be a touch component, as
Apple proved, that people want to actually
touch the stuff?
>>Jeremy Moon: This is my position at the
moment.
So we're selling in 40 countries.
And 80% of the business is still wholesale.
But I know, you know, that my role is to learn
what's -- I need to change about myself and
about my company; right?
So it's -- the next five years is about changing
that percentage to at least 50% direct.
We just see this triangle: Wholesale at the
top.
The role of wholesale is to give everyone
the first touch.
The role of retail is a high-touch personal
experience.
The roll of online is, obviously, convenience
and depth of storytelling and repetitive.
So there's harvesting and nurturing, which
is more the online.
It sounds like I know what I'm doing.
If you know what you're doing, can you help
me?
[ Laughter ]
>>Jeremy Moon: It's a work in progress; right?
But I've got a clear vision of how we need
to evolve the brand and the model.
Can I just pull up one slide?
>>Andrew Ross Sorkin: Go for it.
>>Jeremy Moon: So the company's a little bit
different, because this is our fiber factory.
So it's not a normal sheep that sits there
eating grass.
And he lives in the Southern Alps.
If you go to the next slide.
So we buy about -- if you go to the next one.
We buy a quarter of the merino wool, which
covers 2 million acres.
Now, if I can tell that story to my customer,
they realize they're not just having some
mass-produced product.
There's this whole kind of back story about
a product that's born in nature.
And if I can't show them that, I'm just another
tee shirt guy.
I'll show you a final slide.
So the whole thing, then, is about transferring
that story into stuff that you can wear.
But I want people to actually feel that experience.
Now, in the wholesale environment -- and I've
got that much of REI -- you can't do that.
In your own retail stores, like in Soho, we're
around the corner, or online, you can do that.
So it's actually coming about storytelling
vehicles.
The thing is, the stories have to be true.
And the founding stories that you're telling
are what people connect with.
There's this new age of storytelling being
born.
>>Andrew Ross Sorkin: In the last session
with Leila and Linda, Linda in particular
talked about -- and Leila, both of them did
-- this sort of new generation of social purpose
and social mission.
And I wanted to end on this issue, which is
profits.
When you think about your business, is there
a cap on profits for yourself, either a salary
that you take, the way you think about the
business?
You obviously -- Everybody here is involved
in a sustainable business.
How do you think about that issue?
>>Neil Blumenthal: Do you want to take that?
>>David Gilboa: Yeah, I mean, we actually
take probably the opposite point of view,
where we're out to prove that a business can
be scalable and really profitable while doing
good in the world.
And so we don't think that organizations should
have to make a choice, and that the next great
brands of our generation are going to be built,
you know, as businesses that solve real problems
and create value for customers, but also do
good in the world.
And --
>>Andrew Ross Sorkin: But let me ask, Neil
was saying to me during lunch that a lot of
the people that have come to work for you
come to work for you because of the social
-- the social mission.
That is the purpose.
>>Neil Blumenthal: Absolutely.
>>Andrew Ross Sorkin: If they see this company
making billions of dollars -- God bless you
if you do -- how does that change the dynamic?
>>David Gilboa: I think it's all about the
impact that we have.
And we try to be really transparent.
And, you know, I think both our employees
and our customers are demanding transparency
and authenticity.
And so as an example, last year we published
an annual report which wasn't like a typical
annual report.
It was pretty sparse on financials.
But we gave people an inside view on the impact
that we were having and kind of little tidbits
about our team, you know, the breakdown of
the types of bagels that we eat at our weekly
team meetings, and -- we -- we just wanted
to kind of provide a window into how our company
operated.
And that was tweeted out thousands of times
and it drove our three highest consecutive
days of sales and drove an engagement between
us and our consumers.
And I think just millennials in general want
information.
They want to understand the impact they're
having.
And we want to provide that to people in our
organization and people outside of our organization.
>>Andrew Ross Sorkin: Jeremy, I'll leave you
the last word.
>>Jeremy Moon: I love the tension of profitable
sustainability.
So I don't want to -- both those things are
critical; right?
We must have profitable businesses.
I love Eric's piece of advice: "Do not run
out of cash."
It's a good piece of advice.
So we in the business view profit as like
the lifeblood.
But how we make that is what is important.
So I believe that our customers have a shared
value.
It's not everyone.
It's for people who care.
We're trying to create a conscious business.
We're appealing to people with a conscience.
So we have to deliver a product with integrity.
People will pay a premium for that.
The thrill is to try to make profit and sustainability
an and not an or.
>>Andrew Ross Sorkin: Gentleman, thank you
for the conversation.
This was really very special.
Thank you very much.
You're off.
We've got more people coming.
It is now my pleasure to introduce Trey Ratcliff.
Trey Ratcliff is a photographer, an artist,
and a writer and an adventurer.
Some of you may know him.
You should if you don't.
He posts a new photo on his Web site called
StuckInCustoms.com, every single day.
These are gorgeous photos.
He's best known for being a pioneer in what's
called HDR photography.
HDR stands for high dynamic range, which is
a technique whereby multiple levels of light
are captured for a particular scene and then
combined into a single photograph.
And one fact that makes -- I think makes you
particularly interesting as a photographer,
he's blind in his left eye.
Is that right?
>>Trey Ratcliff: Right eye.
It doesn't matter.
>>Andrew Ross Sorkin: Okay.
Trey, everybody.
[ Applause.
]
>>Trey Ratcliff: All right.
I love to use technology to make beautiful
things.
Today, you know, what I'm going to talk about,
I'm going to give you the story about how
I stumbled across this new kind of photography,
how it changed my life and how I believe it
can change your life, too.
Maybe you're like me and you came to this
haunting realization that you've only got
one shot at life, so you might as well make
it awesome.
I believe that a life worth living is a life
worth recording.
So here's a few examples of this new kind
of photography.
There's a quote about me, not a good one,
that I have done more to damage the integrity
of photography than anyone else in the world,
end quote.
What is this evil thing that I've done, I
hear you wondering?
Well, basically, I've given permission to
millions of people around the world, and I
give permission to you today to -- to break
all of these hallowed rules of photography
and go ahead and post-process the hell out
of your photos.
Because I think this is really kind of fun.
I give you permission to have fun and find
your own childlike sense of creativity.
I think that photography is something that
you can easily add into your life, whatever
you have to be doing, you can augment what
you are currently doing with photography.
You can kind of find this elusive right brain
that's kind of been there along with you the
whole time.
I don't think that post-processing is evil.
In fact, I think that the use of artifice
in your craft is virtuous.
So here I am, this is the spawn of evil.
This is me as a kid.
[ Laughter ]
>>Trey Ratcliff:
I was born blind in one eye.
I still am.
And so I see the whole world in 2D.
This turned out to be sort of a weird thing
but actually a tremendous advantage.
Because we all kind of see the world in 2D
now, don't we?
With flat screens?
We look at screens all day.
We actually see a 3D world in a 2D device.
So this has been a fun challenge for me, one
that I kind of keep examining, how do you
take a 3D world and present it in 2D?
Because the brain loves to see Z depth, it
likes to know how far away opportunities and
challenges are and paths and all of these
kind of things that are very deep inside our
brains.
So -- so fast forward a few years, I go to
university and I fall in love with algorithms,
I major in computer science.
And this is another vector along with the
2D that came to inform this style of photography
that I stumbled into.
The question is about light.
So if you are in a given situation, you want
to try to capture it, how it really feels
while you're there.
Maybe you go into places and you take photos,
they come out flat, you are just disappointed,
like, ah, what a bummer.
But actually there's a disconnect that's happening.
Your camera, even a good camera, can probably
only capture three stops of light.
So what's a stop?
A stop is a little measurable segment of light.
Whereas your eye, the human eye can see about
11 stops of light.
That's a huge disconnect.
Three stops of light versus 11 stops of light.
In any given situation into which you might
find yourself, there can be anywhere from
8 to 15 stops of light.
So the philosophy behind this method, before
I get to practically how it's done -- the
philosophy is you are taking your camera,
you are using it to sweep through all of the
available light.
You capture it, you go back, you dump all
of that light back on your computer and then
you bend the light to your will.
