Talk about the broader kind of culture of startups and technology in Chicago. Back in the late-nineties days of “Internet 1.0,” everybody pretty much failed. What’s different now?
I think there’s a couple of differences. Look, you couldn’t explain to me why the market is performing the way it is. You couldn’t explain to me Bitcoin. I sold mine a while ago. I do think that the big wave was connectivity. Here’s the biggest difference. In the old days, you had two elements. You had scale and you had targeting, and you had to do one or the other. If you wanted scale, you had to have a very broad message. This is why TV is so screwed, because it’s one-size-fits-all. It’s a thirty-second commercial. And with digital I can do fifty slices, and I can target you specifically. That’s the big change.
Mass customization is what I call it. And it’s really customized, individual targeting at a scale that was never possible before, all enabled by the fact that we’re all connected by these devices. Everybody is walking around with a connective device, and we look at it 160 times a day, three-and-a-half hours a day. And it measures everything. It’s not a phone. It’s a digital tracker. And we can see where you are, and what you’re doing.
And the biggest change is that you can be global overnight. You have no distribution costs. And when you take capital out—the mainframe doesn’t cost you anything more, because you rent it by the minute from Amazon, and you take distribution out—and the next thing we’re taking out is transportation. 3D printing—thirty percent of the plastic parts that go into a car dealership every week cost more to ship the part than the part costs. So you can bet we’re going to be pressing a button in the inventory department, and when we need that piece of plastic, we’ll print it right there. We’ll have no transportation costs. Transportation costs today are fifty percent of the delivery cost of most finished goods.
These are sea changes. And by the way, it’s going to make it so hard on the transportation industry, it’s hard to imagine. You know, Amazon has stores with no cashiers. There’s eleven million cashiers in this country. And you know what? We thought the ATM was challenging. Now, who wants to deal with a teller? Who even wants to go to the bank? It’s like scan your check and deposit it, right? That’s just the beginning.
All of these things—everything in our lives is about speed and convenience and access.
Amazon has buttons that you put on your washing machine, and when you’re out of Tide, you press the button, and they ship you another container of Tide. You think you know what you paid for it? You think you care? You think you’re going to wait until Wednesday and maybe there will be a coupon in the newspaper for Downy, and you’ll go Saturday? Fuck that. You know? Replenishment, automated replenishment, satisfying demand in real time, right now—these are changes.
And what is so astonishing is when we experience this hyper speed, we apply it to the whole rest of our life, like overnight. It’s like, wait, I can get a flu shot at Walgreens this afternoon in five minutes? You think I’m going to wait three weeks for my internist? And then I’m going to go and pay ninety bucks and have a nurse do it and I’ll never even see the internist? Are you crazy? I’m going to Walgreens. It’s free! Then we say, “Well, why would I wait for anything?”
We’re ordering a tremendous amount of stuff online. The shocking thing is fifty percent of the time, we go pick it up. Why? You’re supposed to be a couch potato. “No. I want it now. I want to go get it.” You’re going to see kiosks now, in the middle of the parking lots at, like, Northbrook Court, and mom will drive up, because she doesn’t want to take the kids out of the car and the kiosk will have pre-assembled the packaging from three different stores that she shopped at. They’ll tell her it’s available, and she’ll swing by and she’ll never even get out of the car.
Which is tough. Which means the malls are under tremendous pressure. There’s about 1,000 malls in this country. A hundred of the malls represent fifty percent of the value. A hundred of them. Nine hundred of them are screwed, and they don’t know what to do. They’re trying to re-envision themselves, in every respect. They’re desperate to establish identities. And one of the reasons they’re so desperate is that the big chains that supported the malls for so many years are over-stored.
To cover the United States, you need about 800 stores. Most of the big chains—TJ Maxx, whoever they are—900 to 1,200 stores. They’re just ripping these stores out. And when they decide who to rip out, it’s based on how they regard the personality, the demographics, the affluence of a given mall. If it’s a crappy mall, they’re gone.
These malls are trying to figure out, how do they tell a story. We have GGP, we have all the mall guys—Bucksbaum—trying to have us help them figure out what does the future of the mall look like? What other uses can it be? What do you do with it? And because so much of what we used to buy every week—seventy percent of what you buy every week at the grocery store is the same stuff—that’s going to be automatically fulfilled. Now, you’re not going to be schlepping all of these commodities. You’re going to go there for an experience, and the footprint is going to be a fraction of the size.
This is why Amazon bought Whole Foods. Whole Foods and Costco turned shopping into entertainment again, not a chore. And Amazon knows that, and Amazon also knows a lot of other things. That transaction was staggeringly smart. All of these behaviors are changing. They’re changing in ways that are really materially different, and they enable small companies to be successful on a scale that also was never possible before. You know, we have companies here doing a million dollars, two million dollars of revenue. Three or four people.
What is the startup environment in Chicago right now?
I think that it’s pretty good. I think the three things that I would tell you that are encouraging me is, first of all, from a sheer volume standpoint, number of employees, number of businesses, it continues to grow. Everybody wants to be an entrepreneur, which is good news. And hopefully it will be good news in terms of incenting the kids to stay in school and learn a different set of skills. Number one is that there’s sheer growth.
Number two is the focus is B2B. It seems more serious. It seems that these are being operated by better teams, including serial entrepreneurs. And they’re taking on more serious programs and problems. They’re not like dealing with cats and dogs.
And lastly, I think as much as we complain about it, I think there’s plenty of capital—both startup capital, and growth capital. Maybe nobody’s writing fifty-million-dollar checks. Big deal. The truth is the model here that will be successful for the next ten or twenty years is, you get a company to ten or twenty million bucks, somebody buys it for fifty million bucks, and they fold it into Kraft, or Mondelēz or whatever, and you go to do your next thing. We don’t bet $300 million on something that, if it doesn’t hit, loses $300 million. That’s still not the culture.
That’s not our model. We’re not building once-in-a-lifetime moonshots. I’m trying to build a sustainable thing where five out of ten companies, as opposed to two out of ten, which is the best venture record in the world. It’s like baseball. I’m trying to build something where four or five of these companies become economically viable enough that they can be folded in or combined with other existing businesses, in an economy, by the way which is pretty diverse.
One of the things that Rahm says that is exactly right is, we have no single sector of this economy that’s more than twelve or thirteen percent. You go to Boston, and if you’re not in healthcare, forget it. You go to L.A.—if you’re not in media, forget it. Or New York—fashion, maybe finance. But here we have CPG [consumer packaged goods]. We have logistics. We have a lot of different opportunities. You can build a lot of different companies and a lot of different areas.
I think that we  haven’t lost the crazy discipline around it. We’re tough to get into. We’re tough to do. These incubators are proliferating, these coworking spaces. Frankly, I think a lot of them will fail. They’ll fail because it’s not about the real estate. It’s about everything else that we add. And so you’re starting to already see some contraction. You’re also starting to see a proliferation of highly verticalized things, like food and fashion and music. Very tough. Very tough to make a living in a vertical—there’s just not enough business. There’s not enough businesses. There aren’t one-hundred businesses showing up every month saying, “I want to be in the music business.”
What does 1871 look like in ten years?
I don’t know that there will be an 1871 in ten years. I think that companies, in order to survive in the global economy, companies are going to have to get over this reluctance that they have to internalize true innovation and to really do this stuff. What happened in the last fifteen years is that they went to sleep on R&D. They didn’t spend a dime on R&D, because that hit the P&L. They’re trying to make it up now, through M&A—they’re desperate—but they don’t know how to do it.
Right now, we’re the enabler. We bring the startups to these big companies. But over a period of time, they have to take this expertise inside. And then 1871 will be a different entity or whatever it is. I think if 1871 lasts a decade, a decade and a half, that would be extraordinary.
And we have to keep going. We have to provide resources around blockchain, around AR, VR. Around these new technologies. Because standing still is not sufficient. When we started, we were about mobile apps. And we were also about mobile apps in a vertical, where if somebody came in and said, “I want to do a food startup,” we’d say, “You’re in the wrong place.” They were really snobby the first year.
And now, what industry and what business isn’t technology-enabled? There’s nothing. Now it’s just a question of focusing in on the things that we can really bring value to, ignoring the things that I don’t think are going to be viable and big, and then hiving off things like medicine, which we do down the hall at Matter [a dedicated healthcare incubator], and hiving off a few of these other things. That’s the story.
Talk about your personal experiences with failure.
Haircuts. Haircuts have been the largest set of failures that I’ve had. Whenever I get my hair cut, I regret it almost instantly.
First of all, entrepreneurs are always looking forward. They learn from their prior experiences but they don’t dwell on them. It has been ridiculous. I’ve had twelve or thirteen successful businesses over fifty years. For better or for worse—when people ask me this all the time, I say that I regard even the things that didn’t grow to the level that I expected or hoped—I’ve been really smart about it. I didn’t raise $100 million and piss off like half the city of Chicago. Or we found a reason or we pivoted or we morphed. I’m very astute at the way these things operate.
When I sold the schools, it was two years before the entire for-profit industry blew up. Before Dick Durbin was like, “You guys are all scumbags.” We’re like, “Dick, these are the biggest corporations in Illinois. Do you really want to be driving them crazy?” I sold into Laureate at the right time. I’ve been fortunate.
CCC is thirty-five years old. Cobalt, which is my company in Seattle—twenty-five years old. To build sustainable businesses over these periods of time, you’ve got to be really lucky. You have to have great management teams. One of the things I’ve done is, in every single business, I take some of the people from the prior business into the next business. Give them a chance to step up one level. You have to do that, if you’re selling an existing business. You can’t really strip everybody out.
But you know, failure has not been the lesson for me. What has been the lesson for me is how hard you have to work, how persistent you have to be, how you have to understand that you can’t build a company in your own image. You have to have people who just want a job. As long as they do their job, that’s OK. They don’t have to be zealots. They don’t have to be insane, neurotic entrepreneurs.
My lessons have been about teams and about success, perseverance, and also about a deal that I made a long time ago. And every time Tom Alexander or the people here talk about work-life balance—I don’t have work-life balance. But two years before I joined my law firm, I met with the senior partner of Cravath, Swaine & Moore, the fanciest law firm in New York, and this guy told me something that has stayed with me for literally every day of my life since then.
He said, “There are three buckets. There’s your work, there’s your family, and there’s your recreation.” And he said, “I love my work so much that it is my recreation. And I understand that I have to spend time with my family, or I won’t have a family. But I don’t go to the golf course all day Saturday and Sunday and pretend that I’m with my family because my kids are at the pool. I actually devote time to my family.”
And that’s a deal I made, and I wouldn’t change it. I exercise, for sure. I exercise seven days a week and I read an astonishing amount of stuff. But the idea that I would go bowling with the guys or have a golf weekend—that just has never been a part of my life. And that was as important a lesson to my success as anything, because I work one-hundred hours a week. And you can’t do that. You can’t even do the math to understand what that means, because there’s no time to go to the bathroom if you work one-hundred hours.
But I do, because it’s my pleasure, and it’s my joy. And when I get home and it’s 11:00 at night and I’m writing my Inc. column, this is sort of my recreation. And I also feel like it’s really important. When you write—and you know this—you want to put something out there that you can believe in, and that you actually think is going to create value and it’s worth doing it. This is hard. This is hard work.