#45 Built From Scratch: How A Couple of Regular Guys Grew The Home Depot from Nothing to $30 Billion

What I learned from reading Built From Scratch: How A Couple of Regular Guys Grew The Home Depot from Nothing to $30 Billion by Bernie Marcus and Arthur Blank. --- The creation of The Home Depot began with two words: "You're fired!" [0:01] Blinders on focus on the customer [5:45] Learning how not to manage people from Ming the Merciless [8:37] Meeting Ken Langone / the prehistory of Home Depot [11:00] 81% private / 19% public partnerships [18:40] Ken sells to Ming. Predicts Ming will fire Bernie [28:30] Getting fired was the best thing that ever happened [35:00] Bernie Marcus at 49 years old: little cash and a ruined reputation [38:15] How Bernie Marcus walks away from Ross Perot [38:50] The importance of equity [49:19] Do not work with people who don't know how to care about other people [51:00] How they got the money to open The Home Depot [55:30] The critical importance of selling at the right price [58:32] Knowing the right way to do something by seeing it done the wrong way [1:08:54] Mistakes can teach us we're never as smart as we think we are [1:11:25] ---- Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work. Get access to Founders Notes here. ---- “I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth Be like Gareth. Buy a book: All the books featured on Founders Podcast

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Senra?

  The creation of The Home Depot began with two words in the spring of 1978. You're fired. Twenty years ago, we were two out-of-work executives. Our situation was not a lot different than millions of others who were shown the door. We had little in the way of capital and faced some daunting, personal, and legal challenges as we tried to get our careers back on track. In our early years, we lived on the edge, with no balance sheet and a lack of financing. It took great romancing to establish the vendor base necessary to open and maintain the broad product selection for which we quickly became known. We were always pushing boundaries beyond where our industry's conventional wisdom suggested we could go.

• 0:45David Senra?

  Building The Home Depot was a tough uphill battle from the day we started in a Los Angeles coffee shop shortly after we were fired. No one believed we could do it. While we want to tell the story of The Home Depot because it's a great entrepreneurial tale, our larger goal is to convey what we learned along the way about customers, associates, competitors, growing a business, building a brand, and many other topics everyone in business needs to know. This book is the story of that virtually unparalleled growth and the values and culture that nourished it. Okay, so that is from the introduction of the book that I want to talk to you about

• 1:28David Senra?

  today, which is Built From Scratch: How A Couple of Regular Guys Grew The Home Depot From Nothing to Thirty Billion. And it's written by two of the many co-founders of The Home Depot. It's written by Bernie Marcus and author Blank. Before we get into the rest of the book, I just want to remind you that I need your support for this podcast. So, once we jump back into the book, I'm not going to interrupt our time together with ads. My goal here is to get you valuable information in the fastest possible time. And to do that, I need you to support this podcast directly. So, if you're a regular listener, if you're enjoying the podcast...

• 2:11David Senra?

  If you're learning from the podcast, if you care about the podcast, please become a member.

• 2:18David Senra?

  You'll get, not only will you help out the podcast and make it sustainable, but you'll get access to, you can, there's selfish reasons to help out the podcast. You get access to extra member-only podcasts that are available nowhere else. If you sign up right now, you'll unlock nine member-only podcasts. And you also get a new members-only podcast from me every week. And to support the podcast and to sign up and become a member, please go to founderspodcast.com/support or you can just look in the show notes and you'll see a link and you could just tap on it right there. The second way that you could support this podcast is by signing up for Founder's Notes. If you want to do that, you go to foundersnotes.co. And just like I take a lot of notes and highlights when I'm reading a book,

• 3:00David Senra?

  which is the result of Founder's Podcast, I do the same when I'm listening to podcasts that I'm learning from. So Founder's Notes are my podcast notes about entrepreneurship. I listen to podcasts with company builders, write down their key ideas and email them to you every Sunday. The result is you have tweet-sized bits of knowledge from some of the smartest people in the world, talking about what they learned by building their business. So sign up, test it out at foundersnotes.co. If you like what you see, upgrade to a paid subscription. And what Founder's Notes is going to do, it's going to help you, it's going to take, save you a lot of time. It takes 10 to 20 hours of audio and it's distilled down into the most valuable ideas that you can read in 10 to 20 minutes. Alright, so enough of that, let's get back into the book.

• 3:45David Senra?

  And I'm going to skip, see, since this book was written by two people, I'm going to skip over most of their early life, which is where I normally like to start off and spend time on the podcast. But I want to talk about a lot of the stories, I would call it like the pre-history of Home Depot, because it's all these events that had to occur for Home Depot to be able to exist. And we're going to start out.

• 4:13David Senra?

  Most of the book, I would say, is written by Bernie Marcus, which is, he was the CEO.

• 4:19David Senra?

  In addition to being one of, I think there's five co-founders. He was the CEO for a long time, and he kind of is the main character in the book. So, we're gonna start out when he is already in his 40s, and he is,

• 4:37David Senra?

  he's an executive in a lot of retail companies. And this is the experience that he's gathering before we get to the founding of Home Depot. But it's important to understand, so you understand how Home Depot came about. So, at the time, he's working for this retail company called Two Guys. A lot of the companies they work for, both him and Arthur, are conglomerates. So, I'm just gonna start here, because it informs how he winds up getting to Home Depot. And the important part is, the note I left myself is that when you're building a business, you should have blinders on, like horses do in their race. And your blinders should just be on what's best for the customer.

• 5:20David Senra?

  And yet, a lot of the examples that we talk about on the podcast is like, everybody focusing on competitors, which is not a good idea. So, it says, "As a conglomerate, Two Guys was a disaster. People in the company focused on their own careers, not the customers. As a result, the customers disappeared and careers sank. The history of retailing is filled with once great companies that disappeared off of the face of the earth, Two Guys included. I carried the lesson I learned about the importance of customers throughout the rest of my career."

• 5:53David Senra?

  And so, he leaves Two Guys, and he starts working for a company called Odell, and then eventually leaves Odell for another huge conglomerate called Daylin Corporation. And Daylin Corporation is gonna be the last job he has before he starts Home Depot. And so, we're gonna spend some time understanding a little bit what he was doing at Daylin, because it's really important to the story. But, I want to just read this paragraph, so you have an understanding. There's a lot of, I see myths in entrepreneurship propagated all the time, that like, "Oh, if you don't start a company when you're really young, it's gonna be too late." Well, one, if you do know what you want to do from a very young age, then yeah, you have an advantage. But, it's definitely not too late.

• 6:37David Senra?

  And so, this is... Bernie Marcus's life. The status of his life before he starts Home Depot. And it says, "I never had any real money to speak of in those days, despite holding lofty titles in some of America's best retail companies." And he's going to get to why this was and the importance of equity in a little bit. And by 1972, so this is roughly six years before he gets fired and about seven years before he starts Home Depot. And by 1972, I had an ex-wife, two kids in college, and a new wife, another child, and another child. "No matter what I was paid, it wasn't enough. Real money is in equity, and that I didn't have."

• 7:22David Senra?

  And I have another story coming up about that, too. "But when I was handed the reins to another Daylin chain," remember, Daylin's a conglomerate, "Handy Dan Home Improvement Centers, it forever changed the course of my life." So he's going to be running this, I think there's about, by the time he leaves the company, there's about 60-plus stores of these Handy Dan Home Improvement Centers, which are basically like smaller versions of what a Home Depot or a Lowe's is today. And there's two, I'm going to introduce you to two important characters in the lore of Home Depot. And the first is this guy named Sandy Sigaloff. And we need to think of him as like the anti-Bernie.

• 8:04David Senra?

  And this is the boss of this huge conglomerate called Daylin Corporation. And Bernie learns basically everything about what not to do when running a business. Him and Sandy are, they do not get along. And we'll see, I'm going to go into this great story in a minute. And the second person I'm going to introduce you to is this guy named Ken Langone. And let me, well, let me start here before I get into Ken Langone. Because when I, when the book, I ordered this book, it came in the mail. I looked at it and I made the mistake of judging a book by its cover. I'm like, "Oh, man, this might be corny, like, I don't know, like, am I going to waste my time?" And by the time I got to page, I would say 54,

• 8:48David Senra?

  I was genuinely worried about how many notes and highlights I had. It was that interesting because there's so... Usually when, when, what I like about when entrepreneurs write their autobiographies as opposed to books written about them, even though those are helpful as well, is there's just no fluff. So these guys just shoot off story after story after story. And it's, you don't, I don't actually have to sit there and like pick apart what they mean. They explicitly tell you. So, out of all the characters and the crazy stories in this book, which there are numerous ones, nobody sticks out more than this guy named Ken Lenko, who becomes eventually one of the co-founders of Home Depot. So, let's talk about Sandy first, and we're gonna get into Ken,

• 9:32David Senra?

  and we're gonna see how they all have led to the founding of Home Depot. So it says, this is Bernie now writing, he says, "He called himself Ming the Merciless. It wasn't a nickname used behind the boss's back. The sign on the CEO's office door at the Dalin Corporation impressed upon all who entered how proud Sanford C. Sandy Sigaloff was to be known as Ming. Ming, of course, was the villain in the old Flash Gordon movie serials of the 1930s. He was a nice-looking," they're talking about Sandy now, "he was a nice-looking, sharp-dressed man, very smooth, slick, and articulate. A chief executive who couldn't just fire an underling and get on with business.

• 10:16David Senra?

  When people leave Sigaloff, he once told me in a coffee shop, it was very important that he affect them economically, emotionally, and physically, so that people think twice before they ever turn on him. I was shocked at such tactics. When you treat people like that, it comes back to haunt you, I said. People are fearful of you. But Sigaloff wanted people to be fearful of him. He didn't want to let a person out with dignity. He wanted to see them destroyed. That was his style. He didn't call himself Ming the Merciless for nothing." So Bernie hates this guy, but he has to work under him for several years. So now we're gonna meet Ken Langone.

• 10:59David Senra?

  And, uh, well, let me just go right into it. Gary Earlbaum once ran a small chain of Philadelphia-based home improvement stores called Panorama. In 1976, Earlbaum and his investment banker, Ken Langone, talked about the future of Earlbaum's industry. So this is the home improvement industry in the mid 70s, okay? "Let's start with a benchmark of who is the best in the business," Langone said. "Who do you think are the best operators?" "The best is a company out of California called Handy Dan," Earlbaum said. That worried Langone. "Gee, Gary," he said, "if my memory serves me right, those guys are in bankruptcy."

• 11:41David Senra?

  If that was the fate of the best, little old Panorama didn't have a prayer. "I think that while the majority of Handy Dan is owned by a company named Dalen Corporation, 19% of it is owned by the public," Earlbaum said. So we're gonna get into this, which I had never heard of before. I guess in the 70s, a bunch of companies did this where they would sell up to 19% of the company and retain 81%. We're gonna learn more about why they did this and why it was a disaster. So it says, "Majority of Handy Dan is owned by a company named Dalen Corporation. 19% is owned by the company." And Earlbaum is telling Ken Langone, he said, "Listen, Dalen went into bankruptcy, but Handy Dan didn't."

• 12:21David Senra?

  Later that same day, Langone got his, uh, these books that he uses to... They're Moody Investor Service and Standard and Poor's manuals. So their books packed with data on publicly held companies. "Not only was Handy Dan not bankrupt, it was a solid company doing very well, despite the woes of its parent company." Handy Dan Home Improvement Centers began in 1955 as a small hardware store. Two decades later, it was under our management and had become one of the nation's most respected and successful home improvement chains. So, uh, Bernie is running Handy Dan Home Improvement Centers, which is just a subsidiary of this giant conglomerate called Dalen. And at the top of Dalen is Ming the Merciless Sandy Sigaloff.

• 13:07David Senra?

  So Langone's discovering this hidden jewel and he says Langone was further intrigued that it was selling for $3 a share and it appeared likely to earn $1.50 a share. Even in 1976 terms, that was awfully cheap. Earl Obama, so this is the guy Ken's talking to, had mentioned that he and I were good friends, so Bernie and him were good friends. A relationship began when I had considered acquiring Panorama. And while ultimately passed up the deal, a close personal relationship blossomed between us. Langone asked Earl Obama to call me and make an introduction. So now we're going to see this character. And this is, Ken's going to be present throughout this entire book.

• 13:48David Senra?

  But it says Bernie, Earl Obama said, "This guy Ken Langone wants to meet you. He is a very tough guy, really tough. This is one of the most aggressive people I have ever met. He's a tough businessman and he can be overbearing. But I swear, this is the most honest, ethical man that I have ever met in my entire life. And when he tells you something, you can believe it. I have more trust in Langone than I do anybody in the entire world." So he says, "Intrigued, I said I'd certainly take Langone's call. Half an hour later, the phone rang and I heard the following statement. I think you have the greatest company I have ever seen in my whole life. You run the greatest business I have ever seen."

• 14:33David Senra?

  That said, Langone was still suspicious of Handy Dan's numbers. "This doesn't make sense," he told me, "You're going to make $1.50 a share?" "Yeah, after taxes." "In that case," Langone announced, "I'm going to buy every share of stock I can in your company. And I would advise you to mortgage your house and buy the stock because this stock is going to go straight up." Langone, who later joined us as a co-founder of The Home Depot, was a man who formed instant irrevocable opinions about people. And I, he decided, was the kind of man with whom he could do business.

• 15:07David Senra?

  Would you mind if I came to see you sometime? Langone asked. Sure, sure, I said. Anytime you want, come out. Anytime you want to come out, fine. Good, Langone said. I'll see you tomorrow for lunch. Langone seemed very excited. He took the first flight out of New York the next morning and landed in Los Angeles by 11:30 a.m. in time for lunch. Still overwhelmed by the speed with which Langone operated, I took a more cautious approach. And this, he's about to describe Langone, based on what I've read about Ken. This is a great one sentence description. Langone was like a fire hydrant let loose.

• 15:48David Senra?

  Langone was the single brightest, most energetic person that I have ever met. I just want to pause here for a second. Bernie is writing this, I think today Bernie's in his 80s. And at the time he's writing this, he's in his 60s. He's had a lifetime of experience dealing with people and all kinds of businesses. Had an amazing life experience. And that's a hell of a statement. That out of everybody he met, he said, "Langone was the single brightest, most energetic person that I have ever met." He is intuitive, smart, and a real street fighter. Over lunch, Langone described his background and how he represented a group of investors who had every intention of buying up Handy Dan's stock. He asked pertinent questions.

• 16:31David Senra?

  The more he learned about the business, the more he realized how undervalued our company was, in part due to the Daylin bankruptcy. And his enthusiasm only grew. And this is a result of his enthusiasm? As soon as he returned to New York, he and his investors started buying every share of Handy Dan's stock that came on the market. More than 400,000 shares in all. At prices ranging from $3 to $12 a share. Now remember that, 400,000 shares, $3 to $12 a share. That's going to become important in the next few pages.

• 17:06David Senra?

  So Ken has made his move. He now, he owns, he winds up acquiring every outstanding stock. Now remember, they only sold 19%. So 81% of Handy Dan is still owned by Daylin. And the only stock that he couldn't get his hands on was owned, there's like 50,000 shares owned by a church. And Langone didn't buy that. So, it says, "Now that he possessed so much Handy Dan stock, Langone personally visited every one of the company's stores. We became fast friends, our relationship growing far beyond a common desire to see Handy Dan grow." It's very, I think Bernie, he might even explicitly said this in the book, I don't remember,

• 17:49David Senra?

  but there would be no Home Depot without Ken Langone. He said, "We generally enjoyed each other's company and socialized whenever possible." Now, we're gonna go back to the evil guy, Ming. Okay, so Sigaloff, of course, was more than a little curious about who was buying up all the Handy Dan stock. So I arranged a meeting. It was all handshakes and politeness on the surface, but that was as good as it ever got between Langone and Sigaloff. Neither liked the other, and they never would. Sigaloff viewed Langone with suspicion. Langone didn't care for Sigaloff's attitude toward me. "This is a really bad guy," Langone said after his first encounter with Sigaloff. "This is a guy that you can't trust and that would

• 18:34David Senra?

  kill you in a second."

• 18:37David Senra?

  Now, we're gonna get into this unique ownership structure that was taking place at the time. I don't know if it still exists today, but I've never come across it before. And how this is, how this, this had unintended negative externalities that lead to a big payday for Ken, a really bad day for Bernie, and the beginning, the birth of Home Depot. So it said, "Handy Dan wasn't the only US corporation in the 1970s that was held by an 81% private, 19% public partnership. A number of holding companies like Dayland sold 19% of their wholly owned subsidiaries, subsidiaries, whoo, can't talk today, sorry,

• 19:18David Senra?

  such as Handy Dan to the public. The holding companies kept 81% on the belief that the public would unlock value in the asset, creating a higher value so that the 81% would be worth much more than if they were completely private. For tax purposes, the companies had to own more than 80%. But a fascinating thing happened at at least three of these companies." So I'm gonna say a bunch of company names. They're not really important to the story. What's important is what happens to them. So Brunswick Corporation owned 81% of the Sherwood Medical and abruptly, abruptly bought back the 19% of the outstanding public shares and took it private again. This happens over and over again. They, they release these... 90%, something goes wrong and they buy back and go private again.

• 20:01David Senra?

  So Langone is noticing that this is happening and so he meets with a lawyer that did this transaction for two of the three companies. And he's like, is there any common theme in why this is being done? Why is the stock being reacquired? And this is the lawyer now, it says, "The economics didn't work," the lawyer said, "and the holding companies didn't realize as much value as they anticipated. In many cases, instead of asset values rising, the exact opposite occurred. The publicly held shares plummeted in value. Well, that and one other thing," the lawyer said. And what is that? And this is the most important part to understand. "This structure is a time bomb," the lawyer said. "We believe theoretically at least that if somebody were to get control of the 19% minority,"

• 20:45David Senra?

  remember that's what Langone has done in the Handy Dan case, "the only way the person who held the 81%, that's Ming Singaloff, could really exercise their fiduciary responsibility to the minority would be to vote it in direct proportion to the way the minority votes on any issue." Langone was thunderstruck. Not speechless, of course, just thunderstruck. And this is where he's clarifying. He's like, "Wait a minute, you mean," Langone asked, "that if 60% are 90% of that 19%, right? So a majority of the minority is a way to think about that." He said, "They wanted to do something. The only way that the 81% owner could sanitize their vote would be to vote directly proportionate to the minority? Does this mean that the motion would carry, which means that the minority controls the company?"

• 21:29David Senra?

  That's the most important sentence. "Yes," the lawyer said. "It seems convoluted, but considering fiduciary duties, that is the only way the majority owner can say, 'Hey, I didn't shout, I didn't force my will on anybody.'" Langone, who controlled virtually all the 19% of Handy Dan public shares, wasted little time in calling Sigaloff and asking for a meeting. A few days later in California, the two men shook hands and Singaloff, completely in the dark, asked, "What's up?" "Well, Sandy," Langone said, "I just wanted to see how you and I are gonna run this company going forward." The gauntlet was thrown down, the line drawn in the sand. Insert your own adversarial cliché and he will do. "What do you mean 'we'?"

• 22:14David Senra?

  Singaloff erupted. Langone filled Singaloff in on what the attorney told him. "This is why these other companies are all buying their shares back, because there's a potential bomb, time bomb here. I don't wanna have any trouble with you." This is Langone speaking. "I think what you and I ought to do is to stay in constant contact and communicate with one another the things we want to do with the company, to the best interest of anybody." A major control freak who had no intention of ceding a wit of influence to Langone, me, or anyone else, Singaloff was furious. "I don't believe that. It's crazy. This is stupid," Singaloff said. "I never heard of anything so dumb in my whole life."

• 22:54David Senra?

  "Okay," Langone said, using his most conciliatory tone and keeping as straight as face as possible. "I just hope it doesn't get to the point where one day, we have to test it." That day came sooner rather than later. A month after their first partners' meeting, Langone received a call from Singaloff. One of Singaloff's lieutenants, this guy named Jeffrey Channen, was going to be in New York and wanted to say hello. Langone alerted me because he expected the attorney's visit would be anything but innocence. So, this guy Jeff comes over and says, "So, on the appointed day, Jeff Channen arrived at Langone's office, took off his jacket and sat down.

• 23:36David Senra?

  He lost no time with idle pleasantries, saying that Singaloff was taking Handy Dan private again, and that Langone and his investors must sell out." "Jeff, cut the crap," Langone said calmly. "I control enough stock that you can't do any such thing. If that's why you are here, to threaten me, you have the wrong guy. Excuse me." Just then, Lingone picked up the phone and called Bob Preery. Preery arrived in a few minutes. So Preery is this guy. Before the meeting, Ken figured out something was going, like something nefarious was afoot. So he calls one of the most notorious corporate takeover attorneys that's in New York at the

• 24:18David Senra?

  time and says, "Hey, I need your meanest SOB. I want him standing by for this meeting we're gonna have." So he says, "Okay." That's this guy, Bob Preery. "Perfect. I'll call him when I need him." So he calls Preery. Preery arrived in minutes. And it said, "Who's this guy?" Channon demanded. "This is my lawyer," Lingone said. "Now, what do you want to talk about?" "Look, we really don't want any trouble," Channon said, backpedaling. "The stock is selling for about $8. $8 a share." "We know that you are boxed and you can't sell any stock," meaning there was very limited liquidity in these kind of markets when you only had 19% of the shares available. It says, "You have no liquidity. How about if we pay you $10 a share?"

• 25:00David Senra?

  "No way," Lingone said. This is hilarious. This part made me laugh when I first read it. "The price is $12." Channon was shocked. "Forget it." Wanting to leave Channon swimming alone with his personal barracuda, which is that mean guy, Bob Preery, Lingone left for the men's room. Barely two minutes later, Channon followed him in. "Okay," he said. "12 dollars." And this is when I start chuckling. "Jeff, you don't understand," Lingone told him. "I told him. "You offered to buy it for 10. I said, 'No.' "I offered to sell to you for 12 and you said, 'No.'" "Now you're back wanting to buy it at 12." "That offer is off the table. That's gone." "We had an offer and a denial. No deal." "What?" "I suggested a price of $12 in my office, right?"

• 25:44David Senra?

  Channon nodded, acknowledging Lingone. "And you declined." "Well, that's it. I don't want to sell it now." "You must have some price," Channon said. "Okay," Lingone said. "14 dollars." Channon left in such a blind rage that he almost banged his head on the door. About a week later, Singaloff called Lingone. "Let's not mess around," he said. "We will pay you $14." "Sandy, you guys don't get it," Lingone said. "I offered it to you for $14." Channon said, "No. That offer is now off the table." "I don't understand," Singaloff said. It is this simple. You had a chance, you turned it down. I have reconsidered my position. I don't want to sell.

• 26:27David Senra?

  Singaloff hung up the phone madder than hell. Singaloff wanted to change the Handy Dan board so that he controlled it, but I wouldn't allow it. This is Bernie Marcus talking now. Singaloff didn't like me and the feeling was mutual. I rejected everything about Singaloff. The way he dealt with people, how he talked down to people. He just didn't like how he ran his business. He was extremely mean. The difference between us was that I didn't need Singaloff. This is where Bernie is now making a monumental miscalculation. The difference between us was that I didn't need Singaloff. Singaloff needed me. He couldn't get rid of me even though he wanted it more than anything because every time he moved against me, he got a call from Ken Langone. Langone would call him and threaten him with a shareholder lawsuit.

• 27:11David Senra?

  And in that way, Langone kept Singaloff in line. Once Singaloff realized that Langone was correct about the explosive nature of Handy Dan's stock arrangement, he wanted Langone out of his business. He made several more miserly attempts to buy back the publicly held stock, all rebuffed by Langone. And the more Langone resisted, the more pressure Singaloff placed on me.

• 27:37David Senra?

  Okay, so when he's talking about, we find, at this point in the story, we find Bernie kind of between a rock and a hard place. He's got this good relationship with Ken. Ken owns almost, at this time, Ken and all his investors own 19% of Handy Dan. Because Ken is not selling to Singaloff, Singaloff is really putting the screws into Bernie. So Bernie's finally had enough. He has dinner with Langone and he says, "Hey, do me a favor, I said. Get Singaloff up my back, sell him the stock." Another miscalculation by Bernie, we're going to see here. And we're going to see how astute that Ken is. Not only a business, but about human nature. Which I really think like that's the crux of this entire podcast. Yeah, we're learning about companies, building companies, starting companies. But there's,

• 28:23David Senra?

  companies don't exist without people. Not only the people inside of them, but the customers that you sell to. And so fundamentally understanding human nature, I think, is valuable for us all because at this time Bernie didn't understand something about human nature that Ken clearly does. And so we're going to, he's going to lay that out for him now. Why he's, what he's asking is not what he actually wants. And it says Bernie, trust me, you don't really want me to sell him the stock because if I do, I'm signing your death warrant. You're a dead man. You don't know what you're talking about, I responded. Sigaloff doesn't know this business. I know this business. He needs me to run it. Bernie, look, the only thing of any value in the mess Sigaloff has on his hands is Handy Dan. As long as you were there, he is never going to be able to take credit for its success

• 29:07David Senra?

  or for the recovery of Daylin. Oh, you don't know what you're talking about, Bernie. I have never been more certain of my position than I am right now. I am telling you, I can read this guy like a book. He can't stand to see you succeed. The more you succeed, the more pain he feels. I felt very cocky about myself. This is now Bernie talking. That I ran the company as well as it could be run and that Handy Dan made so much money that Sigaloff would be stupid to get rid of me. Don't worry about me, I said. I'm a big boy. I can take care of myself. It's your funeral. So will you sell? Yeah, sure, Langone said. I'll sell, but I'm not going to mess around on price. On the spot, I called Ed Kaufman, Daylin's lawyer at home.

• 29:51David Senra?

  I told him that Langone was ready to make a deal, then I handed Langone the phone. I want to make you an offer, Langone said. You don't want it? This is the end of it, and let's leave it alone. If you want it, that is the price. Well, what's the price, Kaufman asked? It's $25.50 a share. Why the odd number? Because, Langone explained. It has to look like we had some real bargaining, real hard bargaining here. Kaufman said that he would call Langone right back. Five minutes later, the phone rang. Be in my office tomorrow morning to sign the, at 10, to sign the papers. The next morning, I picked up Langone. As we drove down the street, Langone tried again to dissuade me, to dissuade me, offering to cancel the deal. But I could not be dissuaded.

• 30:35David Senra?

  I honestly believe my position at Handy Dan would be more secure once Langone was out of the picture.

• 30:44David Senra?

  I think you can kind of see where we're going here. Remember at the very introduction, that Home Depot started

• 30:52David Senra?

  on the day he gets fired. Okay, so I'm going to skip ahead a little bit in the story. And this is, we're now in April of 1978. Okay.

• 31:10David Senra?

  Says, "April 14, 1978 is a day that Arthur and I will never forget." That's Arthur Blank, the co-founder of Home Depot. "We were scheduled to attend a Friday 1pm corporate planning meeting. The plan was to spend a couple hours reviewing our budget and plans for the coming year." That was what it was supposed to be. I still, remember, he had this lesson a few months earlier from Ken about human nature that he didn't understand yet. He understands it now. He says, "I still believe that if you did something well, if you made a lot of money, that people, even if they didn't like you, would tolerate you." How wrong I was. And so before I get into this, it's very important to understand that

• 31:51David Senra?

  he's about to get fired, as you have guessed by now. It's not because of poor performance. It's because of what Ken Langone said. This guy does not want you to succeed. If you succeed, he cannot take credit. His ego is bigger than, his ego is in control. Not his logical part of his brain. So what does that mean? It says, "By this point Handy Dan was 66 stores and had almost 155 million in sales." So this is the business that Bernie's running. Remember, he's running it, but he doesn't have equity in it. During fiscal year 1976, Handy Dan earned 7.8 million dollars.

• 32:32David Senra?

  While Daylin as a whole, so all the other businesses Daylin owned, made 7 million. Okay? So that's what Ken was talking about. Like, you're the one running the business. His ego is not gonna let you take credit for it. So he's gonna find a reason to fire you. "At 1pm sharp, we walked into a room. Sigaloff was there waiting, accompanied by an assortment of lawyers, accountants, and stenographers. It was an odd group for a planning meeting. Sigaloff finally had us where he wanted us. And today was Ming's version of corporate show and tell. To make a long story short, I was fired, and in rapid succession, so were Arthur and Ron Brill, both of which become co-founders of Home Depot."

• 33:17David Senra?

  Okay, so he's fired. I'm gonna skip over a part, because remember how he said earlier that Sigaloff wouldn't let people just leave, he'd have to destroy them? He's accusing him of like employment violations, they were fighting with like a labor union in one of their stores in San Jose, and then he just ties him up personally in lawsuits. So Ming ties up Bernie and he's telling him, "Hey, you have no money, I know you have any money, and you're gonna have to pay to use your own funds to fight this lawsuit. Meanwhile, I'm just gonna use company funds and I'm gonna bury you." Eventually, against his will and having to swallow a lot of his pride, he just stops

• 33:58David Senra?

  fighting the lawsuits. So he winds up, you know, basically leaving, and I'm gonna get there in one second, almost penniless, almost as broke as you can be. Think about it, he's gonna be 49 years old before he starts Home Depot with fired and no money.

• 34:20David Senra?

  So again, I think the reason I bring that up is because I do think that's also inspiring, because if you can, you know, some people at that point are like, "Oh, my life's over, I give up, what am I gonna do? My reputation's tattered, I have this guy trying to sue me out of existence, and I just lost my entire career." And yet, he got knocked down and gets back up and builds something even better. So I think it's encouraging for all of us. Okay, so before I get there, though, the note I left myself was getting fired was the best thing that ever happened, or getting kicked in the ass with a golden horseshoe. And this part really reminds me of, if you watch, I talked about in other Steve Jobs podcasts I've done, but it's also if you ever watch Steve Jobs commencement address,

• 35:03David Senra?

  he talks about how getting fired from Apple and then going to start next was, I think he said it compared to like getting hit with a brick in the head or something like that, but he talked about it's like it's medicine that the patient needed. It wound up being the best thing that ever happened to him, but at the time, he didn't realize that. So Bernie's gonna go through something very similar here, and we're gonna go back into a conversation he's having with Ken, because Ken is this crazy character, and he's actually really smart about what he's gonna tell him here. So he says, "It was late Saturday," okay, so he's on the phone now with Ken after this all happened. Kenny, a terrible thing has happened. You told me what would happen to me. You told me that I would get fired and it happened. And now he's trying to destroy my life.

• 35:47David Senra?

  But Langone wasn't at all sympathetic. Not one bit. And he wasn't interested in wasting time on "I told you so" either. What he actually said was more upsetting. "Oh, man, that's great. That's unbelievable," Langone said. "What the hell are you smoking?" I asked. "This is the greatest news I have ever heard," Langone continued. "This is... Oh, I'm so happy, I cannot tell you." "What is the matter with you, Kenny? Did you hear what I said?" "No, no, no, no. You don't understand," Langone insisted. "You have just been kicked in the ass with a golden horseshoe. This is the greatest opportunity. Now we can open up that store you talked about when we were in Houston." Langone actually thought being fired was a blessing.

• 36:32David Senra?

  "I thought he was crazy." "Kenny," I said, "I was just fired. There's nothing golden about that." "Are you kidding?" he said. "This is the greatest news I have ever heard." "I thought he was a raving lunatic, which he is." "What the hell is the matter with you?" I said. "I just got fired." Langone just breezed right over that. "You guys have been really hamstrung and haven't been able to do a lot of things you wanted to do, and it's pretty clear to me, as an investment banker and a financier, that you have a lot more capacity than what you can do here. Don't view this as a negative." "Bernie," he continued, "you never know where life is going to take you.

• 37:14David Senra?

  This is a great opportunity for you to do your own thing. Let's go into business together." The conversation continues. I'm going to skip over towards the end. It says, "Bernie," Langone said, "you have repeatedly told me how handy Dan and this whole industry is vulnerable. Too many small chains, no national companies, and the prices are too high. Do you still believe that?" "Yes." "Good. Then let's you and I meet as soon as we can." "I have no money," I protested. "Well, how much would you need?" I threw out a number. "Twenty-five million." At that, Langone let the subject drop without further comment and said goodbye.

• 37:57David Senra?

  And now this is Bernie Marcus at age 49 before starting Home Depot. With very little cash on hand, my reputation at issue, and at the age of 49, my future prospects shaky at best. That's how he's describing his situation. So Ken, as you can see, he just hung up and got right to work. Bernie referenced earlier that the speed at which Ken moves was disorienting to him. So I'm going to skip ahead. So they're looking for seed capital for Home Depot, okay?

• 38:37David Senra?

  And there's this really bizarre, unexpected story right in the middle of the book. They're meeting with a bunch of, that I want to share with you. They're meeting with a bunch of businesses and wealthy individuals, and they're trying to round up this money, right? And this name will probably sound familiar to you guys. And so this is the story of how Bernie walks away from Ross Perot.

• 39:06David Senra?

  And this week's Founder's Members episode, the extra episode for this week, is actually a story. So we're introduced with Ken when he's starting Home Depot. Well, there's an interesting story, almost like, I would say, like a prequel to Ken's career that is the bonus episode. It's fascinating, it doesn't really fit into, you know, what we're doing here, focusing on Bernie and Home Depot, but there's some lessons in there. There's some good lessons in there, so that's what I made the bonus episode on. Alright, so it says, "Because he was the only person Ken Langone knew with $2 million to spare, Ross Perot nearly became the majority owner of the Home Depot.

• 39:49David Senra?

  And this is probably one of the great what-if business stories of all time." So Ken took me to meet Perot in Dallas. My first impression was that of a gregarious and enthusiastic man who is a model of the American free enterprise system. Remember Ross Perot became, at least I became aware of him and famous. In the 60s and 70s, he founded this technology company called EDS, which a lot of people compare to like, EDS had the impact in the 60s and 70s that Microsoft had in the 80s and 90s. But I didn't know that. I only knew of Ross Perot when he ran for president and he garnered like, I think he had the most third-party votes ever in the history of US elections. And that was much after, that was, you know, after he was very successful. I think he was already, he might have been retired at the time.

• 40:32David Senra?

  Anyway, so that's the little background on Ross Perot. So it says, "He was a model of the American free enterprise system. He was a patriot for the entrepreneurial spirit who literally created something out of nothing. A former IBM salesman, and look at him now, I thought. Ken told Perot about how Arthur and I had built this great business, Handy Dan, and the injustice of Sigaloff that had committed against us. Ken told the story in a way that we could not, and Perot ate it up. There were a few structural and compatibility issues that I felt I needed to run by Perot right from the beginning to see if we would be compatible. Ross, I said, "I am not interested in doing anything with you unless I know that I'm going to deal directly with you.

• 41:16David Senra?

  I don't want to deal," this is Bernie talking to Ross, "I don't want to deal through intermediaries, and I will not become part of your existing organization. If I have a problem, I will call you, and you and I will agree on how we proceed. I am not going to a captain or a lieutenant. I am not interested in that nonsense. If we get caught up in corporate crap, I won't be a part of it. It was my way of throwing down a gauntlet, challenging Perot to accept me for who and what I was." "I like straightforward people," Perot said. "No, I wouldn't put anybody in between, I wouldn't put anybody in between us. You have my word." During this time, Perro hired a consultant named Brian Smith.

• 41:58David Senra?

  Perro gave our presentation materials to Smith for a second opinion. At our next meeting, the new man was alongside Perro. Perro introduced Smith and I could see a barrier already developing between me and Perro. So first meeting, "Hey, I don't want to deal with anybody else." "Yeah, okay, great. You're straight talk. You have my word." Second meeting, "Here's this new guy." Ken raised the issue later and Perro waved it away. He said that because of his intense travel schedule, "We would need someone who could act and make decisions in his absence." "Smith was that man." "Uneasy, I let it slide for the time being."

• 42:33David Senra?

  And this story really could be called, "My People Don't Drive Cadillacs," and we'll get there in one second. But Smith thought our retail concept was a bad idea. At the time, gross margins in the industry were about 44%, really big markups. But we were talking about gross margins being as low as 29%. We expected to make up the difference and more on volume. But Smith just couldn't get Perro's wallet wrapped around that concept. So I left it out, even though he's one of my favorite people I've ever covered.

• 43:03David Senra?

  Bernie winds up having a close relationship with Sam Walton. And a lot of the decisions they made for Home Depot, specifically lowering margins and then selling cheaper, lower prices but more volume, he borrowed directly from Sam. And the people running the business after Sam died, or retired the first time. Alright, so, but Smith couldn't get his head wrapped around that, okay? So Ken turned to Perro.

• 43:32David Senra?

  So he's jumping in because Smith is saying, "Hey, you know, I don't like to steal." Ken's in the meeting, so Ken talks to Perro. "I just don't agree with Brian," Ken said. "He doesn't understand the concept," meaning the higher volume, lower prices. Perro wasn't one who worried much about stepping on the views of his underlings. He wanted to do what was best for the business. Smith, meanwhile, remained resistant to the deal. For his $2 million, Perro would own 70% of the company, as yet unnamed. Ken would get 5% and we would own 25%. Out of our 25%, we could bring in a team of people such as Ron Brill and others. Ron worked for Bernie at HandyDance. And he winds up being one of the co-founders of Home Depot.

• 44:17David Senra?

  We made one final trip to Dallas intended to iron out a few final details. There were strong signals of future culture conflicts, however. We were more than a little discomforted, comforted by the military nature of EDS, including the corporate uniforms. Everybody had to wear a shirt and tie, and the only acceptable shirt color was white. During a discussion of what perks would go with my salary, I told Perot I had a small problem. While my salary and perks would be similar to those I enjoyed at Handy Dan, there was the matter of a company car. The lease, this is such a weird story. The leased car I had been driving was still being paid for by Handy Dan, but the company would repossess it unless I planned to take over the lease or buy it for the depreciated value.

• 45:02David Senra?

  This was a good deal for the company, for the new company. "We ought to try to save as much money as we can," I said. "I would like to buy it outright at the depreciated value. Would you like me to buy it, and then I will just charge it to our entity? Or do you want me to give, or do you want to give me a check and I will pay for it?" "That's fine," Perot said. "You can either do that or buy a new car. I don't really care." But then Perot decided to test me. "What kind of car is it?" Perot asked in that peculiar Texas drawl of his. "It's a Cadillac." Perot did not like that answer at all. "My people don't drive Cadillacs," he said. "My guys at EDS drive Chevrolets."

• 45:46David Senra?

  "That's fine," I said. "I think it's a good policy for you, but this is a new company we're forming, not EDS. And look, this is a four-year-old car, and I'm a big guy. It's cheaper to have an old Cadillac than it is to go out and get a new Chevrolet. So how do we pay for it?" Not that that question meant anything. "My people don't drive Cadillacs," Perot said again. And again. "My people don't drive Cadillacs." And when he said it for the third time, I realized this was never going to work. Perot was establishing who and what his position was and what mine was. Partners or not.

• 46:25David Senra?

  My mind flashed back to the day Sigaloff and I nearly came to blows during a board board of directors meeting. When we went into another room to hash out our disagreement privately, Sigaloff told me that he was the boss. He controlled my career and I needed to understand that. Then he demanded that I literally repeat that back to him. I said nothing of the sort. Nobody controls my life but me. Let me just interject here. So we, people are so bizarre, especially people that are,

• 46:56David Senra?

  let me rephrase. People that are insistent on controlling other people, I find extremely bizarre. The idea that you want a grown 45 year old man to repeat back to you that I'm the boss. It's just bizarre to me. Now I was looking across a different table staring at Ross Perot. My blood pressure rising, my face turning red. And I was hearing Sigaloff's words coming out of Perot's mouth. I am the boss, I control your life. I will tell you what to do and what not to do. Regaining my composure, I smiled. Ross, I have to talk to Kenny for a minute. Would you mind if we step outside? Ken was perplexed. Look Kenny, I whispered, I know Perot is a very important person in your life. And you have to understand something. If this guy is going to be bothered by what kind of car I am driving,

• 47:41David Senra?

  how much aggravation are we going to have when we have to make really big decisions? If we can't be free to run the business the way we know it has to be run, it isn't going to work. I am never going to have this man for a partner. I would rather starve to death.

• 47:55David Senra?

  You must be out of your mind. Are you crazy? My God, he's going to give you $2 million, Kenny said. Kenny, I wouldn't touch it with a 10 foot pole. I am out of here, I said, and I headed down the hall. And that is how we walked away from Ross Perot. The interesting thing that is that if Perot hadn't been so hung up on Cadillacs, his original 70% share of the Home Depot stock would be worth approximately $58 billion today.

• 48:25David Senra?

  So after that, they have to, they're, they're all talking, him, Arthur and Ken. And he says, I was the first to speak. What do we do now? Now we're going to raise the $2 million at 50%, Ken said defiantly. What are you talking about, Arthur said? Let's put together a group of investors where you won't have to worry about that. I'm going to get my 5%, Ken explained. You guys are going to have 45 and the next investors will get 50%. That doesn't make sense, Arthur argued. That means we'll have a better deal by wa- walking away from this deal. And this is a great quote from Ken. That's right, Ken said, in the retail business, when you can't sell something, you mark it down. In my business, when you can't sell something, we mark it up.

• 49:06David Senra?

  So, a short while later, this is the importance of equity. Remember, Bernie was talking about earlier, despite holding all these fancy titles, he just never really had money, even all the way up until the age of 49. And so Ken, what Ken does is, he sets up a meeting with a bunch of his investor friends. And he's doing a presentation on why they should give the Home Depot guys $2 million. He says, we felt like beggars, this is Bernie talking, asking these successful peoples to invest in our company. Not, not that that was necessary. They gave us a rousing reception. Why? These were the people who bought Handy Dan's stock between $3 and $9 a share and sold it at $25.50 a share.

• 49:51David Senra?

  Of course they loved us. Of course, while they had made tons of money, we were broke. The importance of equity. The irony wasn't lost on Ken. You guys made a ton of money on Bernie and Arthur, he told them. Take a portion of it, roll it into their new business. And sure, it's a real, real gamble. So what the hell? Let's drop it here and see if these guys can roll sevens again. In the end, they gave us $2 million in two years to open up any business that we chose. This is the way our company started.

• 50:24David Senra?

  Okay, so now I'm skipping ahead. Remember, he said he needed 25 million to start the company. Using 2 million to seed capital, and they're going around and trying to raise the rest. And so they do a deal with this Boston-based venture capitalist, or they do an almost-deal. And so the moral of the story I'm about to tell you is do not work with people who have no clue what it means to care about people.

• 50:48David Senra?

  So, they do a deal, they agree, 3 million dollars. Okay, everything's good. So now, he needs to drive. After they do the deal, they agree, but the money hasn't been deposited yet. And he has to drive. Bernie is now driving his new investor to the airport.

• 51:05David Senra?

  And this is the new investor. "Listen, there are things I didn't want to talk about in the office, because they are very sensitive, and I want to discuss them with you," he said. "What are they?" I asked. "First, I need two men on the board of directors." "That was easy, something I anticipated." "Okay, you got it." "Now, when I make an investment, I like people to invest with me, and I need an investment on your part." "What do you mean, 'investment'?" "Well, I need to have you invest." "We started the business. We left everything in California. They relocated to Georgia, by the way." "Especially our support systems," I said puzzled. "We are sacrificing our lives here." "No, I mean more than that," he said. "First of all, you should not have company cars."

• 51:49David Senra?

  "We had leased company cars because so much of our time was spent in cars, driving all over Georgia on company business, and none of us could afford to buy cars." Pat, this is another, all these guys, he's naming here, are the other co-founders of Home Depot. Pat was broke. I was broke. Arthur and Ron had no money either. So, at the time, they're ranging anywhere from late twenties to, I'm sorry, anywhere from thirties to forties, and they're all basically broke.

• 52:22David Senra?

  "That would be kind of tough for us," I said, "but if we could figure out a way to pay for auto expenses, maybe we can do that." "Okay," the man said, "another thing is that everybody needs to take a 10% cut in salary." I stared at him in disbelief. "Everybody?" "Yes." "Do you know what I just went through to hire these people? I hired them from all over the United States. I brought them here. I sold them on this dream. They took less money than they ever had made before, and they left their security, all of those things, and you want me to cut their salaries by 10%?" "Yes." "Well, I guess we could do that if it's so important to you. I don't think it's fair, but what choice do I have?" "Now," the man said, "is the best of all.

• 53:06David Senra?

  I am not paying your employees or managers medical insurance. I think they should get it on their own."

• 53:13David Senra?

  That was an issue reminiscent of the matter of principle that nearly caused a brawl between me and Sandy Sigaloff. Isn't it amazing how much Sandy influenced his life? The blood rose in my eyes. I swerved and pulled the car onto the shoulder of the highway. My gut told me this was a terrible mistake, and my premonition so far had been right. "Get out of the car," I said. "Get out of the goddamn car!" The man just looked at me. He thought I was crazy. We were in the middle of nowhere. Cars and trucks were zipping by. "I said, 'Get out of the car.' You are a stupid son of a bitch."

• 53:56David Senra?

  "Do you think I would get in bed with an imbecile like you? Get out of the car! You can walk to the airport for all I care." I then got out of the car, and as the man timidly got out, I tossed his luggage by the side of the road. "Please don't leave me here," the man pleaded. "I have to catch a plane." After several minutes, still fuming, I relented and allowed the man back in.

• 54:21David Senra?

  Don't talk to me for the rest of the trip. I will have nothing to do with you. We are finished. This partnership is over before it has begun. Here, again, was someone with whom I was going to have to live with, who had no clue what it meant to care about people. His $3 million investment would have been 15% of the Home Depot's original market value. Today, 15% of Home Depot's stock would be worth $12 billion. There are some things money alone can't buy, as several would-be Home Depot investors learned. Okay, so now I'm skipping ahead to how they actually got the money to open Home Depot.

• 55:03David Senra?

  They were after this, uh, they almost went out of business before they even opened, because they couldn't get money anywhere. No investors, besides the $2 million they had. So they're going to banks, and they had a previous relationship with a banker from Handy Dan, and it's a guy named Rip. Well, Rip is, uh, he's the one that got them the money, but he doesn't know this story yet, okay? So Rip turned 65. The company he's working for, I think it's called Security Pacific, basically making him retire. And Rip was really, really upset, and he didn't want to retire. But a few years prior, so, and I've jumped way ahead in the timeline, just because I need to explain how they actually got the financing. So, a few years, uh, before the story I'm about to tell you,

• 55:47David Senra?

  Rip gets them the money they need, okay? So now, when he's being pushed out, the, um, the CEO calls Bernie and says, "Hey, we're gonna do a going-away party for Rip. Would you come out and emcee the party?" And so he does that, of course, because Rip did him a huge solid by getting the, um, the money. But he didn't, Bernie at the time didn't know how Rip got him the money, okay? So, he's sitting up there, Bernie's sitting up there, at this party, going-away party for Rip, and the CEO does something really stupid.

• 56:19David Senra?

  And, uh, well, here, this guy's name's Flamsom. And so Rip, uh, excuse me, Bernie's talking to the CEO of Flamsom. "I love this guy. He's so terrific." Talking about Rip. "Well, you should love him after what he did for you," Flamsom said. "What do you mean?" I said, "after what he did for me." "He put his career on the line for you." "He then told me the story of how Rip originally presented our loan requests to the bank loan officers who turned it down cold." "The next time, he added points and other kickers and still was turned down." "Unwilling to give up on us, he came up with the letters of credit from our investors and they turned him down cold a third time." "Do you know what he did after that?" Flamsom asked me. "I guess not," I said. "He burst into my office, literally slamming the door open."

• 57:04David Senra?

  "Rip slammed the door shut and threw an envelope on my desk," he said. "Take this, take this," meaning his, uh, his, uh, his resignation letter. "Take this, uh, jo- take this and your job and shove it up your rear end." Flamsom was shocked by how angrily the normally mild-mannered, genial Rip Fleming had become. Rip said, "You don't need a banker. You need a computer." "Hire some young kid to come in here and do my job." "I buy people." "Bernie, Marcus, and Arthur Blank are good people." "And you have turned them and me down three times. You obviously don't need me here anymore." I looked at, and this is an important part.

• 57:48David Senra?

  "I looked at Rip," Flamsom continued, "and I realized that when he walked out the door, that $400 million worth of accounts were walking with him." "The clients Rip had brought into the bank loved and trusted him and would go wherever he went." "Turning down the Home Depot was no longer about denying a $3.5 million loan." "Suddenly, it was a $400 million decision." "I realized that I had no choice and tore up the envelope containing Rip's letter of resignation," Flamsom said. "I told Rip I would personally get the loan through the officers." "And that's why they loaned us the money and helped start this company."

• 58:26David Senra?

  Okay, so the next story is skipping ahead a little bit in the book. And it's the importance of selling products at the right price. And what turns out to be the first big break for Home Depot. By this time, they're in business. They have a few stores in the Georgia area.

• 58:42David Senra?

  And it says, "An exasperating incident with Pat reinforced for us just how critically important it is to sell products at the right price." Pat Farah is a co-founder of Home Depot and the one in charge. He's like their main merchant. "Business just wasn't booming." This is the description of what's happening at Home Depot at the very beginning. "It just wasn't happening. We were barely covering our expenses. Still having difficulty identifying with the market." So we were still, we were barely covering expenses and we didn't know anything about the market. "Cash flow was not good. Our financial resources were eroding."

• 59:13David Senra?

  "A vendor told Pat about a truckload of 3,000 fireplace screens that were manufactured for Montgomery Ward. Ward canceled the order, but the screens were already on a truck en route to Atlanta."

• 59:25David Senra?

  Thanks to some chilly winters, Atlanta was a strong market for wood-burning fireplaces.

• 59:32David Senra?

  And it says, there's 3,000 of these screens. And he says, so Pat wants to buy them all. And he says, "You can't sell all these." The vendor is telling that to Pat. "Don't tell me what I can't sell. What I can't sell. Just get a price," Pat said. He was able to secure a phenomenal price on these screens, which retailed for up to $139 each. So that's the price Montgomery would pay, or would sell them at. "Having already set the costs and arranged for delivery, Pat walked into my office with the news. These fireplace screens sell up to $139 at Montgomery Ward," he said. "The guy needed to dump them right away, and I brought the entire shipment for an average of $33 a screen." "How many screens is that exactly?" I asked, gulping air. Remember, they're having cash flow issues at the time. "3,000," Pat said effortlessly.

• 1:00:18David Senra?

  This was a commitment of almost $100,000. Pat made a truckload of fireplace screens into a life-or-death purchase for the Home Depot. Seeing that my partner was oblivious to the trembling in my voice and the fear in my eyes, I tried to see it Pat's way. Wow, so you're saying that we could discount these screens $50, sell them for say $89 and make a ton of money? No, Pat said, not that price. Besides, the ads have already been prepared. Okay, $79 is terrific. We're gonna do really well at 79. Well, no, Pat said. 69? No. 59? $59 is a terrific buy for the customer. It'll be great.

• 1:01:01David Senra?

  Pat marked them up exactly $2. Are you crazy? I asked. Have you lost your mind? Are you crazy? I don't know what you're going to do. We're gonna go broke. The minute the ad appeared, however, people began flocking into the stores and we blew through the screens in about four days. It was so incredibly cheap, people found it worth their while to drive 50 miles to see us. That was another critical moment for The Home Depot. It took an insane ad to bring folks into our stores to discover the Home Depot secret.

• 1:01:45David Senra?

  So they're expanding stores, they're opening up in the Atlanta, Georgia area, and they've expanded to, and they're expanding into South Florida at the time. And they realize, hey, we're having a, we're still having cash flow issue, they're making a little bit of money, but they're not, they can't fund their own growth. So they realize that they have to go public. It's the only way that they can, they can get the money. So let me read that part to you. There is a limit on how much you can expand on starting capital and on borrowed money. The company was succeeding. We were planning years ahead and knew that future financing would be necessary if we were going to expand. We had wonderful support in Ken Langone and his ability to market securities.

• 1:02:30David Senra?

  So it seemed obvious at the time, that the time was ripe for an initial public offering. And this is the downside to it. This was a big step. Going public meant losing the anonymity and cloak of secrecy a privately held business enjoyed. It meant listening to and considering Wall Street, which would become our ad hoc partner from the day we went public forward. But if we were going to grow, there was no other way. The only reason we would have waited any longer to go public was so that we wouldn't have to give as much of the company away. That and the fact that as long as we were private, the industry perceived us as failing. If everyone knew how much money we were making, there would have been more clones earlier.

• 1:03:15David Senra?

  When we went public in 1981, the home improvement industry woke up and choked on our sawdust. So this whole part about losing the anonymity, the cloak of secrecy that privately held businesses enjoyed, the fact that the industry still perceived them as failing and if everybody knew how much money they were making, there would have been more clones. That, when I read that part of the book, it's funny how reading so many of these books now, some things just connect, you know, it just pops into my mind. I don't know where it comes from, but it reminded me of this, one of the greatest quotes I've read anywhere and it's in the, it's in the book Becoming Steve Jobs.

• 1:03:58David Senra?

  And he's talking about the problems that Pixar's having with learning how to do computer animation. And I'm just going to read you this quote because I think it applies to almost, there's a million examples that it could apply to. And so he talked, this is Steve talking. He's like, "You can't find a book titled 'The Business Model for Animation.' The reason you can't is because there's only been one company, Disney, that's ever done it well and they were not interested in telling the world how lucrative it was." Same situation here where, I mean, they have to go public, but it's, it's really nice if you can conceal how much money you're making, because the more you broadcast and you make aware how much money you're making,

• 1:04:43David Senra?

  it's inevitable that the clones are gonna happen. So why, Home Depot is reluctant to do it here. Disney's not doing it back in, in Steve Jobs' time, because the same reason. Like, there's no, there's no book written on the business model of animation. Disney's not gonna wanna tell you how lucrative it was. And so, what that makes me think of today is where the internet has enabled, even though new company origination is, is at a 40-year low, there are, the new companies that are being built today are much more efficient than companies of old. And so, when I read this, all I think about is like, we can only study the companies you know about, right? Because you can't, you can't study what you can't see.

• 1:05:23David Senra?

  But I just have a feeling, like, there's millions and millions of these super profitable businesses out there hiding. And it's actually smart to hide, for obvious reasons. You don't, if, let's say you've, you don't wanna tell people how profitable you are, because you're gonna, then people, you know, the more competition, margins erode, and then you're, there's kind of like a market equilibrium at that point. So I don't know, I like that, that thought. And every once in a while, you find these weird, you know, super profitable businesses. Some, some, you know, tell on themselves, like Valve, who I covered on, I haven't stopped thinking about since I read their employee handbook, and I covered on one of the Founders Members episodes, that, you know, they make more per, profit per employee than any other company.

• 1:06:05David Senra?

  At least it's admitted to it. I think they make over a million dollars per, per year per employee in profit. But yeah, I guarantee you, there's a bunch, even these, you know, sometimes I randomly discover these small companies that, that publicize this, and you know, it'll be 50 people, less than 50 employees, and they're making 20 million a year in profit, or whatever the case is. So, I don't know, I, I, I really like that succinct explanation by Steve.

• 1:06:34David Senra?

  So, they IPO, so this, I went back and looked at the date that they IPO'd, and then I looked up all of their ages now, and then subtracted to figure out how old they were at the IPO, because again, it's really important.

• 1:06:49David Senra?

  And they range anywhere from 37 to 50 plus. The age of the co-founders when they IPO. And so this is just going to talk about, you know, for the reason the age is important because you know, they've been basically broke their entire lives.

• 1:07:04David Senra?

  You know, paycheck to paycheck kind of thing. And this is a description of, you know, not becoming, we talked about earlier how important equity is. And now they're not, they're going to be, you know, wealthy. And another example, how crazy Ken is and why, oh, so I don't think I mentioned it. So, um, he, next week, the, the, the next week's book is a book that Ken Langone wrote. So I haven't started reading it yet. I will have it done by next week. But I, if the stories in this book are any indication, I cannot wait till I find what's in that book. So, all right, it says in this, and let's go right to the book. It says, "In the conversation from private to pub, excuse me, in the conversion from private to public company, we had our first opportunity to take some equity out of the company.

• 1:07:49David Senra?

  This was our first opportunity to become liquid financially and pay off our own personal debts. I sold 73,000 shares of stock for 8.7 million. Arthur and Pat sold 54,000 shares of stock for 6.5 million. Today, the combined value of that stock we sold would be 41.6 million shares or more than 2.4 billion worth of stock. By the way, Ken didn't choose to sell any."

• 1:08:21David Senra?

  So, we started, we've talked now from the pre-history of Home Depot to the beginning of Home Depot, to then now IPO. And a big part of the book, if you're running a company with a bunch of people, they talk about how we manage, communities they serve, all this other stuff. I'm going to pick out two more stories, but I find most interesting is, you know, how, what were things like at the beginning?

• 1:08:48David Senra?

  But I do think it's fascinating, something we've been talking about a lot, a lot the last few weeks, is knowing the right way to do things by seeing it done the wrong way. And this is Bernie studying other retailers, including reading books about other retailers. And so he says, "Years ago, I read The Big Store: Inside the Crisis and Revolution at Sears. It's a behind-the-look at Sears Roebuck. It had a big effect on me, and for a number of years, I insisted that every executive in our company read the book. The Big Store told the story about how one particular chief executive of Sears, Ed Telling, hated to be in the stores. And that was apparently why he took the world's most revered retail

• 1:09:29David Senra?

  company into virtually every other business under the sun, from insurance to real estate. Sears bought all these other businesses that diluted its ability and energy, and management neglected its core business." This is another, remember that line, because there's another story I'm gonna tell after this. That's the same thing, when you're diluting your ability and energy, it's very dangerous for a business. "I wanted our people to read the book so that they understood how important our core business is. Telling, Ed Telling, hated being in the stores, and that was where the bread and butter was coming from. That's what paid his salary. He never understood that. In this company, we do understand that. That is why we insist that every executive of this company works in the stores upon joining us. The policy even applies to our attorneys. When

• 1:10:13David Senra?

  we hired our first in-house attorney, we said, 'Before you assume your regular duties with us, you'll be in the stores for two months.' He didn't believe it. 'Are you crazy?' He said, 'I'm a lawyer.' Well, if you're gonna be handling lawsuits, you're going to have to understand the problems of people in the stores. And to do that, you have to work in the stores, so that when you hear a problem, you can relate to it." He winds up doing that. But it's, and this is an important takeaway, but at Sears, they sat up above it all, in that ridiculous tower of theirs in Chicago, and never went down the elevator except to eat lunch or go home. They never had a clue as to what was going on in the stores because they never spent time in the stores. Arthur and I go into the stores alone and walk around, talking to customers and associates

• 1:10:57David Senra?

  on the sales floor, learning what's really important to The Home Depot. I love being there because that's where the real action is, not in my office.

• 1:11:11David Senra?

  And a few chapters later, they tell this fantastic story. And we're gonna see it's about not deluding yourself or your talents. But more importantly, success breeds arrogance, right? And this, the moral of this story is that mistakes can teach us that we're never as smart as we think we are. And I think this is applicable to different, all different sorts of people and all different sorts of businesses. So it says, "Every young company screws up." It's important for us to remember. "We were no exception. With our Atlanta and South Florida stores going great, we looked for ways to dramatically increase the size and scope of the Home Depot brand."

• 1:11:50David Senra?

  So, "We purchased a fledgling Texas-based chain by the name of Bowwater Home Centers." So there's a lot of just bizarre things in this story. And it's a disaster. "Bowwater was a $38.4 million acquisition of a chain with nine big-box hardware stores, somewhat like ours, but in markets we were not in." And when we say somewhat like ours, this is one of the weirdest things. "We can say on good authority that they were based on our earliest stores. That's because the American division of Bowwater Corp. tried to buy the Home Depot while it was still in the conceptual stages." "Their American CEO, Ralph Dillon, was very affable and understood what we were trying to do

• 1:12:33David Senra?

  and was very interested in our business concept. He sent his accounting staff in, although there wasn't much to see. This was all prior to the first store opening, so everything you could know about us was contained on 12 sheets of paper. There was no balance sheet, all the money was going out. All investors were really buying was talent. He saw that, liked what we were doing, and we made a deal. And then he went back to London and the holding company turned him down flat. But while they wouldn't approve of his investment in our company, they didn't say he couldn't start his own copycat chain. So that's what he did. He literally took our blueprint and started from scratch, opening Bowwater Home Centers in Texas and Louisiana. He had all of our numbers and our business plan. The only thing he didn't have was the experience of how to run it." So that's, first of all, it's really weird that...

• 1:13:18David Senra?

  They tried to sell the company before it's even started. Then the second thing is they have a deal and then it falls apart. And third, they use the blueprints to start a copycat. And then fourth, they buy the copycat. So this is really bizarre, but here's where a lot of the lessons are going to come from. So it says, "We weren't going to get to Texas for many, many years. So copying us so blatantly probably seems safe. Even with our blueprint, they just didn't know how to run the business. Still, we believe that their locations, under good management, could leapfrog our expansion plan, our expansion plan, several years ahead. And Dallas-Fort Worth was a key market we wanted to be in. We never anticipated the ancillary losses caused by sucking all of the great people

• 1:14:00David Senra?

  out of our existing stores and sending them to fix the black hole that was Bowwater. When you do that, you weaken yourself." Remember, he just talked about what Sears was doing by diluting their core business, "which is exactly what happened to our existing stores. One of the reasons Bowwater taxed us so greatly was the indirect drain it put on our existing systems. The Bowwater stores were in such disarray that we immediately sent some of our best talent from Atlanta and South Florida to fix them. That left gaping holes back in our own stores. So we didn't get anticipated revenues in the Bowwater stores and existing Home Depot

• 1:14:39David Senra?

  stores' sales went flat in the fourth quarter." So it says, "Culturally, we were as different as night and day. Home Depot store managers spend their days on the floor, wandering their stores, solving problems for customers and associates alike. Most Bowwater store managers were pencil pushers. They hid in offices. They weren't prepared to do the side-by-side, go-to-work that we expected. Our people sometimes took unusual steps to get across the cultural differences in the two retail cultures."

• 1:15:14David Senra?

  One of their managers arrived at a Bowwater store in Louisiana. He pointed to the manager's office and said with great fanfare, "That is not part of the Home Depot." Then he climbed aboard a forklift and literally plowed through the walls of the offices until they were dust. "We terminated all of the Bowwater corporate executives." Okay, so so far they spent 38.4 million, thinking, "Okay, how bad can it be? They have good locations, so we're paying for locations and the brand's already up and running." Well, it turns out that they didn't really have a lot of talent, so they're firing almost everybody. So all the corporate executives are gone, and about 95% of the original Bowwater crew gets fired too. "We eventually interviewed all the employees and explained one by one what the Home Depot was all about. Simultaneously, we kept the stores open and yet tore them apart,

• 1:15:59David Senra?

  remodeling and re-merchandising them into Home Depots, all the while using employees who resented us. In the end, we terminated almost 95% of the Bowwater crew." So this is the effect that's happening. For a time, remember it's draining their resources and their sales are flat, and they've only been a public company for a few years this time. "For a time, the Bowwater debacle severely tested our goodwill on Wall Street. Until we ultimately turned the situation around, it temporarily dampened the euphoria for the Home Depot. It's not easy being a public company. You have to answer to a ton of people, and you have to answer a lot of questions. You always have to run your business worrying about how much somebody else says you will make,

• 1:16:41David Senra?

  somebody who may not have enough knowledge to understand what your potential is. But against all those negatives, without public money, this company would still be a chain of four stores in Atlanta, Georgia." The reason who we are who we are today is because of the public money. So they go and while this is all happening, they know that they're in a bad situation, so they arrange meetings with a bunch of investors, and Bernie goes up there to try to own up to the mistakes. So he says, "We arranged a series of meetings in New York in which Bernie came clean with the fund managers and analysts who covered our company. Standing before each group," this is actually really smart what he does, "Bernie stood up and bluntly announced, 'I am the CEO of this company and I am a schmuck.

• 1:17:25David Senra?

  In precisely those words, we screwed it up, we should have closed the Bowwater stores.' After that, Bernie told them about the corrective measures that we put in place to prevent a repeat in the future. He assured them that the growth and profitability would continue, and they believed Bernie." Many CEOs would blame a Bowwater-type fiasco on the economy, blame it on this or that, blame it on that. We didn't blame it on anybody. We blamed it on ourselves. Excluding Bowwater, Home Depot's fourth quarter earnings would have been up approximately 35%. So think about that. They never bought the place. They would have reported a quarter to Wall Street of up 35%. Because they bought Bowwater, they came in flat. It says, "This happened soon after we

• 1:18:08David Senra?

  negotiated a $200 million line of credit. And thank God that deal was done and secure. We couldn't have made the same deal a month later." It would have been years before we would be able to get back, we were able to get, excuse me, be able to go back to the financial community and get this kind of money. And this is the takeaway. And it's even worse. Not only did, so they buy it for talent locations, talent didn't exist, and now the locations are crap. In retrospect, Bowwater wasn't even a good real estate deal, because we eventually closed all the stores we acquired and built bigger, better Home Depot stores close by. If we had just passed on Bowwater altogether, it probably would have gone out of business

• 1:18:48David Senra?

  anyway. Bowwater taught us, we're never as smart as we think we are. You have to look at yourself, your talents and abilities realistically. We thought we were better. We thought we could handle anything. Success was breeding a little arrogance, and we learned that sometimes you believe you can do more than you really can do. Bowwater was a great and hard lesson learned.

• 1:19:19David Senra?

  So that's where I'm going to leave this story. If you want the full story, buy the book. You can go to founderspodcast/books, and you can only buy this book and help out the podcast at the same time, but you can buy any of the other 40-plus books that have been featured so far on the podcast. If you've listened this far, thank you very much for listening. If you like the podcast, can you please tell a friend about it? That's really the best thing you could do, help get these ideas to more people. How most people find podcasts is through word of mouth, through recommendations by friends. So if you feel that I've earned a recommendation that this podcast is good enough that you would tell a friend, I would sincerely appreciate it. If you want to support the podcast, please

• 1:20:02David Senra?

  become a member, founderspodcast/ support, or you can just click the link in the show notes. You'll unlock nine members-only episodes, including the one about the prehistory of Ken Langone. Thanks for listening. Thanks for spreading the word. I will be back next week with another podcast.