#405 How Rockefeller Worked

This episode covers the insanely valuable company-building principles of John D. Rockefeller—and nothing else. I spent over 40 hours reading (and rereading) this obscure biography of Rockefeller that costs $1,000 I then spent several days editing down 25 pages of notes from the book. I deleted everything that was not How Rockefeller Works Episode sponsors: ⁠ Ramp⁠⁠⁠⁠⁠⁠⁠ gives you everything you need to control spend, watch your costs, and optimize your financial operations —all on a single platform. Make history's greatest entrepreneurs proud ⁠⁠⁠by going to Ramp and learning how they can help your business control your costs and save time and money.⁠⁠⁠ ⁠⁠⁠⁠https://ramp.com⁠⁠⁠⁠ Automate compliance, security, and trust with Vanta.⁠ ⁠⁠⁠Vanta helps you win trust, close deals, and stay secure—faster and with less effort⁠⁠⁠⁠. ⁠⁠⁠Find out how increased security leads to more customers by going to Vanta⁠⁠⁠. Tell them David from Founders sent you and you'll get $1000 off. ⁠⁠⁠https://www.vanta.com/founders⁠⁠ ⁠⁠⁠ Collateral⁠⁠ transforms your complex ideas into compelling narratives. Collateral crafts institutional grade marketing collateral for private equity, private credit, real estate, venture capital, family offices, hedge funds, oil & gas companies, and all kinds of corporations. Storytelling is one of the highest forms of leverage and you should invest heavily in it. You can do that by going to ⁠⁠https://collateral.com

• 0:00Speaker 00

  So I have a collection of these obscure Rockefeller biographies. Probably have like 10 of them. Many of them were published decades ago. But I just recently reread what I feel is the best, the single best biography of Rockefeller. It's called John D., The Founding Fathers of the Rockefellers, written by David Freeman Hawk. And it was published all the way back in 1980. The reason I think this is the best biography of Rockefeller is because it has the most concise description of how he actually built Standard Oil, which is what you and I are actually interested in. So I just recently reread it. I stripped away all the biographical details and made a list of about 100 different ideas that Rockefeller used to build what Charlie Munger said was the greatest company ever created. And so this episode's gonna be really simple. I'm just gonna run through these ideas with you.

• 0:43Speaker 00

  The first idea, "To Rockefeller, business resembled a form of war. It was very natural for him to start a letter with the words, 'I am in the midst of a hard battle today.'" He would transmit all of his messages in code and he would cover his entire operations with secrecy. And when he was much older, he admitted this. He said, "It is all too true, but I wonder what general ever sends out a brass band in advance with orders to notify the enemy that on a certain day, he will begin an attack." Rockefeller also had a very complicated relationship with his father, but there was a piece of advice that his father gave him that he followed for the rest of his life. His father told him, "Never mind the crowd. Keep away from it. Tend to your own business."

• 1:26Speaker 00

  Rockefeller was relentlessly focused on his business to the exclusion of all else. In fact, this is what Rockefeller said about this. "Do not many of us who fail to achieve big things fail because we lack concentration. The art of concentrating the mind on the thing to be done at the proper time and to the exclusion of everything else." From the very beginning of his career, Rockefeller was obsessed with numbers. He thought that numbers told the true story of a business. And he would go over every single number of his business. He actually did this. He had this habit before he started his own company. Says Rockefeller would inspect every line of every bill and admonish others who failed to do so. He refused to be taken

• 2:10Speaker 00

  Advantage of and something that reoccurs throughout his career is he had this really intense disrespect for sloppy business practices and sloppy businessmen. He also had extreme self-confidence from a very young age. There's actually a great story that illustrates this. So Vanderbilt Cornelius Vanderbilt was 45 years older than Rockefeller. He's the richest person in America and he wants to meet Rockefeller. And Rockefeller would only meet with Vanderbilt if Vanderbilt came to Cleveland and met Rockefeller inside of his office. And so this quote gives you insight into the self-confidence and the belief in himself that Rockefeller had in terms of he knew he was really good at business. It says, "By the time I was a man, long before it, I had learned the underlying principles

• 2:53Speaker 00

  of business and the rules of business as well as many men acquire them by the time they are 40. I needed no one to advise me about the nature of transactions, which I had been carrying on since childhood." Another very interesting thing that Rockefeller would apply to his business, he would speak in religious terms. Remember this for the end. This is very important. So he would not say, "Hey, we're going to enter into a contract." He says, "We would have a covenant." And he said fidelity to a contract, or what he calls a covenant, fidelity to a covenant was the sign of a real man. Rockefeller was methodical. He would move ahead slowly, cautiously. He would say little and he would observe everything around him.

• 3:38Speaker 00

  All of those traits are going to repeat over and over again across decades. He was obsessed with neatness and orderliness. His first love in business was actually accounting and bookkeeping, which he learned as a teenager. And this is what he said about that. He said, "It is fascinating to know at all times the resources and the liabilities to keep an exact record of just how a business stood." Rockefeller had immense self-control. Many employees said that he never lost his temper, raised his voice, uttered a profane word or acted discourously. And some of these employees worked with Rockefeller across decades. Another trait that Rockefeller had is he actively sought out problems. The art of living as he saw it consisted of facing problems and solving them. This is what he said.

• 4:23Speaker 00

  "It has been that way all my life. Find a problem, work at it, solve it as well as I can, put the administration of that problem in good hands, and then go on to the next one." And so Rockefeller was raised in the country. When he's a teenager, his dad takes him to the city, drops him off, and makes him fend for himself. So Rockefeller's going to be arguably the most successful founder of all time. And he starts in a city where he knows nobody. He has no contacts. And the first problem he has to solve is that I absolutely need to find a job to support myself. Now, the way he does this will give you an insight into how he approached building his business less than a decade later. This is what Rockefeller did. From the city directory, he drew up a list of firms that he considered suitable to work for.

• 5:08Speaker 00

  Each morning after breakfast, he started out and started canvassing the firms. He knew no one important in the city, had no letters of introduction. He would open the door of a bank, a railroad, a commission house, a shipping firm, and ask to see the man in charge. If denied that, he would speak to whoever would lend an ear. He continued his rounds until the offices closed for that day. He did this six days a week, week after week. After visiting every important firm in the city, he began the rounds again. He has this relentless persistence. It is slow, methodical, and it just wears you down. Another thing that he understood was really important is that he would leverage technology

• 5:49Speaker 00

  to create a product or service that could not exist before the invention of that technology. And so his first job was at this commission house. They sold commodities on commission. It's called Hewlett and Tuttle. And what he notices about this business is that it couldn't have existed before the invention of two of the main technologies of that day, which is the railroad and the telegraph. Because the telegraph would give the commission merchant instant news of price changes in the wholesale markets, and then the railroad would let him take advantage of the favorable swings in price by carrying his shipments swiftly to the buyer. The reason I bring that to your attention is because what Rockefeller learns there, he is going to use that exact same idea in his oil business to find the best times to buy and sell oil. You will see him embrace and leverage technology throughout his career.

• 6:33Speaker 00

  Another thing Rockefeller thought and acted like an owner before he was an owner. He says, "Even when he's an employee, I scrutinized every bill. If it had a list of items, I went over each one. I verified it. I carefully added the totals. The bill had to be accurate in every detail before I okayed it to be paid." Rockefeller was so thorough and precise that people that worked with him called him stripped. And that strictness that you see as a teenager lasted his entire career. Rockefeller wants to know the facts and then he wants to relentlessly, he has this relentless dedication to improving every aspect of his company. In fact, the way that Rockefeller has this relentless dedication to improving every aspect of his company reminds me of my friend Kareem, who's the co-founder and CTO of Ramp. Kareem is one of the greatest technical minds working in finance today.

• 7:17Speaker 00

  I spent a lot of time talking to Kareem and every single conversation that we have centers around his obsession with crafting a high-quality product and using the latest technology to constantly create better experiences for his customers. Like Rockefeller, Kareem believes that nothing is ever good enough and can always be improved. Kareem is running one of the most talented technical teams in finance and they use rapid, relentless iteration to make their product better every day. So far this year Ramp has shipped over 300 new features. Ramp is completely committed to using AI to make a better experience for their customers and automate as much of your business's finances as possible. They are always seeking constant improvement. In fact, you'll hear Rockefeller do this many times today. Many of the fastest-growing and most innovative companies in the world are running their business on Ramp.

• 8:01Speaker 00

  Make sure you go to ramp.com to learn how they can help your business save time and money. Let AI chase your receipts and close your books so you can use your time and energy building great things for your customers. Because at the end of the day, that's what this is all about. Building a product or service that makes someone else's life better. That's what I'm trying to do. That's what Rockefeller did. And that's what Ramp has done too. Get started today by going to ramp.com. Now, another trait that Rockefeller had is this maxim that says, "The good ones know more." This is not an issue of talent or intelligence. This is an issue of effort. They just collect more information. They know more about what they're doing. So, it says, "A fascination with business that can only be called a passion held him to the office." "Figures in the ledgers were to him like words to a poet."

• 8:45Speaker 00

  "The yearly account books resembled volumes of history." This is what he said. "I used to go over the old books." So essentially, he's reading the history of the firm. "And soon, he knew more about the firm than the founders did." "And over time, he knew more about the commission business, past and present, than anyone else in Cleveland." Another belief that Rockefeller would use throughout his entire career, and one that he learned when he was still a teenager, was that all is not how it seems on the outside. You see this idea in life stories all the time, that the sequence that experiences happen in is really important. There is no Standard Oil monopoly without this happening. Since they are shipping commodities all over the country, this is before he gets into the oil business, obviously,

• 9:28Speaker 00

  he has to study the business of transportation. The business of transportation is going to be his main edge in building Standard Oil. This is what he said at this time. "My eyes were open to the business of transportation." A large part of Rockefeller's time went to dealing with freight agents and boat captains. He learned how to negotiate with them. He saw that posted rates, what they were saying publicly, that they say were fixed, were not fixed, and they could all be negotiated. All was not as it seemed on the outside. A favored shipper at the end of the month would receive a rebate on that rate, the public rate, that could amount to a substantial sum. That is exactly what he does when he's shipping oil with the railroads. When he leaves and goes out and starts his own commodity house,

• 10:13Speaker 00

  he realizes he picked the wrong partner. And one thing that he's going to learn from this experience and then never do again is he will refuse to partner with people who had modest goals. His first partner was too easily satisfied when Rockefeller was after something big from day one. And so, one of the most important things that Rockefeller ever got good at was borrowing money. He borrowed as much money as he could at the beginning of his career. In fact, his partner called Rockefeller, quote, "The greatest borrower I ever saw." This was such an important part of his life story. There's an entire chapter in the book called "The Greatest Borrower I Ever Saw." And the reason this happens is very interesting. He starts learning how to borrow because he just started his own commission house.

• 10:57Speaker 00

  There is a bunch of other commission houses. So he's like, how do I have an edge over my competitors? And one edge that he discovered is, hey, I will front you the money in advance on the produce that you're growing or shipping. He essentially is inventing commodity loans before they existed. He cannot front money he does not have, so therefore he must learn how to be a good borrower. Now, the way he borrows is the way he does everything. Rockefeller was a familiar face at all Cleveland banks. The visits were not always pleasant. They often turned down his request for money. What if the president of a bank refused to make me a loan? That was nothing, obviously his direct quote from Rockefeller here. What if the president of a bank refused to make me a loan? That was nothing. He might lecture me on the folly of making a loan for the purpose for which I was seeking

• 11:42Speaker 00

  it. That made no difference to me. That simply meant that I must look elsewhere until I got what I wanted. This is one of my favorite sentences in the entire book. That persistence, always low keyed, but relentless. Rockefeller would focus in on the highest priority. So when he gets into the oil refining business, it has no barriers to entry. Costs about $1,000 to start a refinery and only requires a few people to run it. And one thing that he notices is like, wait, the transportation is our largest expense. It, at this time, this is nuts. It costs more to ship a barrel of oil than to refine it. So if transportation is your highest priority, that means the location of your refinery is key.

• 12:27Speaker 00

  The site that he chose for his refinery was genius. He selected a location that was next to both the railroad and on the banks of a river. Why? That means he could ship by rail or boat. Shipping by water was 50% cheaper than shipping by rail. And so something that jumps off the pages is, hey, transportation is our top priority. If something is your top priority, you should spend the majority of your time thinking about how to develop an edge there. This is so important. I have another obscure biography of Rockefeller. The title of that biography is Rockefeller's Secret Weapon. It's an entire book about this rebate on transportation and Rockefeller's obsession with it.

• 13:11Speaker 00

  So that idea, focus in on the highest priority, spend the majority of your time thinking about how to develop an edge there. From the very beginning, Rockefeller is obsessed with control. He wants to control as much of his business as possible. He has a single refinery at this time, and he opens a workshop in the refinery and starts making his own barrels. So he does not have to rely on other people. He continues to study the business. This goes back to the maxim that the good ones know more. And he keeps borrowing like hell because he's like, I cannot survive, I will not survive if I'm a single refinery. And so his idea is like, I'm going to borrow like hell to get big fast. This is going to start a war between him and his current partners. This is one of the best things that ever happened to Rockefeller. And so his partner comes to him and says, we've been taking too many loans in order to extend this oil business.

• 13:56Speaker 00

  Rockefeller replies, we should borrow whenever we can safely and extend the business by doing so. His partner replies, if that's the way you want to do business, we better dissolve and let you run your own affairs to suit yourself. Rockefeller replies, we have an opportunity now to expand. It may not last long. And Rockefeller's response to this tells you a lot about him. So he's going to force a breakup from these small-minded partners, and he does this in secret. He does everything in secret. In fact, there's a great line from one of his other biographies that says, secrecy shrouded all of his operations. So there's actually a book called Conspiracy. It's written by Ryan Holiday, and there's this, he's got this great description in that book about this story in Rockefeller's career. I'm going to read from that book now.

• 14:40Speaker 00

  It says, "There's a story about a young John D. Rockefeller who found himself stuck with bullying corrupt business partners. He wants to break with them, but he can't because they control the votes. They are squeezing his business. They abuse him. They talk about forcing him out. What is he to do? Quietly, Rockefeller lines up financing from another oil man and waits. There's a confrontation. One of them tries to threaten him. You really want to break this up? Yes. He calls their bluff." They go along knowing that the firm's assets will have to go to auction. They're sure they'll win. Rockefeller doesn't have that kind of money. He bids, they bid, he bids, they bid. Rockefeller wins the auction. A few weeks later, the newspapers announce his new partnership, revealing who had backed his bid.

• 15:23Speaker 00

  And the news that Rockefeller is, at 25 years old, an owner of one of the largest refineries in the world. On that day, his partners, and here's a quote from Rockefeller, "woke up and saw for the first time that my mind had not been idle while they were talking so big and loud." They were shocked. They'd seen their empire dismantled and taken from them by a young man they had dismissed. Rockefeller had wanted it more. And of course Rockefeller learns from every single experience he has. So Rockefeller will find the right partners. And this is what he said about this time in his life. "How fortunate that I bought out all those men.

• 16:01Speaker 00

  I point to that day when I separated myself from them as the beginning of the success that I have made in my life." Another surprising attribute that he had that was essential to his success in work was the fact that he was quietly charismatic and he was able to get people to come around to his side. Rockefeller could charm birds out of a tree. This is how it's described in the book. "He trapped the prey before it knew the seduction had begun." And Rockefeller knew that he had this skill. This is how he describes it and he describes it in story form. "I dreamt that I was sitting on a lawn and I was told that a ruffian wanted to see me. And they all advised me not to see him, that he meant no good. And I said, 'I'll see him.'

• 16:43Speaker 00

  And he appeared and I said to him nicely, sweetly, 'Sit down.' And he sat down next to me. And I talked to him nicely and quietly. Well, I talked to him and I won him over. And he departed all good." And part of this is the fact that Rockefeller cultivated an unaggressive exterior. People that worked with him for decades described him in a very similar way. They said he was patient, gracious, he never said an unkind word. He always was the same in his manner and he treated everyone the same regardless of their status. Now, this is the important part. This was a mask. This goes back to his incredible self-control. This is excellent writing describing the mask of Rockefeller. Behind that placid exterior lay traits he tried hard to hide.

• 17:27Speaker 00

  He exuded self-confidence, but his wife knew of the numberless nights he spent worrying about the future. Publicly, he never said an unkind word about anyone. Privately, he delivered lethal judgments about all his business associates. The outwardly modest man carried an enormous ego. To the press, he always used "we" when talking of his company's success. But in private, "I" often came forth. It was as if, as a youngster, he had willed himself to give the world a face, not necessarily his own. A face not necessarily his own. That is a mask. And again, the fact that it so rarely slipped throughout his multi-decade career speaks to this enormous self-control that he had.

• 18:09Speaker 00

  Another thing, unbelievable trust in his own judgment. Says, "Older men were constantly telling him how to run his business and criticizing his decision. He moved forward with what his partners called a hide like a rhinoceros. He wanted to collect information and never give any information. He sat quiet in meetings. He encouraged his partners to, quote, 'let the other fellow talk.'" Rockefeller collected more information than anybody else. He studied all sides of the oil industry. He traveled to the oil regions and got to know the business from that end. He talked to producers, the men who drew oil from the ground, to the people that carried the crude from the wells to the railhead, to jobbers who bought the crude, to railroad men who shipped it to refiners.

• 18:49Speaker 00

  He went to New York, Philadelphia, and Pittsburgh to meet his competitors and to study their operations. This is an excellent description of Rockefeller. Rational, thoughtful, systematic, committed, and diligent. He also cultivated an intense curiosity, a spirit of calculation, and an attention to opportunity. That might be the most important phrase in that entire sentence, "an attention to opportunity." His competitors were amateurs by comparison, and he saw them for what they were. This goes back to his lifelong trait that he saw problems as opportunities. So there's two problems that are preoccupying him. How can Cleveland overcome its disadvantage as a refining center relative to the other geographic oil regions? And number two, how could Rockefeller and Andrews, which is the company he's going to

• 19:34Speaker 00

  build before Standard Oil, which is going to turn into Standard Oil, surpass its competitors in Cleveland? And it says, "His travels revealed no easy answers. Refining was still such a relatively simple operation that even the most efficient operator could gain only a slight advantage over competitors. Because their shipments were still too small to use as a bargaining lever against the railroads, they had little control over transportation costs, which was their biggest expense." Other refiners, this is so key here, other refiners complained about these restrictions, but they accepted them as facts to live with. Rockefeller refused to do so. There's a great line in his biography, Titan, that says he was not one to persist in a flawed situation.

• 20:17Speaker 00

  Rockefeller had worked out a strategy that would carry his company to success. The surest way to raise profits was to increase the volume of production. To that end, he borrowed more money and started building another refinery. All of these problems that he is seeing, which he realizes, once solved, they will open up extreme economic opportunities to whoever can solve them. And so he starts doing things that his competitors don't. So he's like, "Hey, we need to find a way to control the prices of our raw materials. They are refining crude oil. How can we get an advantage on how much we spend on crude oil?" So he hires a guy named John Andrews and sends him to Oil City and gives him one objective, a single objective.

• 21:02Speaker 00

  You are to oversee our purchases of crude. This is important because the cost of crude fluctuated wildly. There's extreme volatility in their business. And so says Rockefeller regarded its timely purchase, buy as the price was bottoming out, and buy in large lots, as a central element in his strategy. He gave Andrews little discretion in this business. Rockefeller says that Andrew's job was mainly, quote, "to keep me posted here on the crude market each day as frequently as there's any change." The bulk of Rockefeller's borrowing in the early days went to buy crude. When the price dropped, he would make massive purchases. These purchases were so large, they made everyone else around him nervous. This is what Rockefeller said.

• 21:45Speaker 00

  "We must try and not lose our nerve when the market gets to the bottom, as some people almost always do. We will surely make a great mistake if we do not buy." Every single element of his strategy is bold and it is daring. The next phase of Rockefeller's strategy was equally daring. Other refiners were satisfied to let wholesalers handle their export business. Rockefeller was not, so then he hires, this is his brother, sends him to New York. "You're going to open an office and we are going to be our own wholesaler." Why? Because Rockefeller was studying the business. The good ones know more, and this is what he discovered. Statistics showing a sudden change in the distribution of refined oil prompted Rockefeller's action.

• 22:28Speaker 00

  In the previous year, less than half of all refined oil had been sold abroad. But in 1866, exports jumped to about 70% of the total output. Other refiners spotted the shift in the market, but only Rockefeller acted on it at once. You and I have already talked about the fact that Rockefeller would not allow himself to have partners that he thought were second-rate, that he thought were too satisfied already. So he goes and recruits, which is going to be his most formidable partner, this guy named Henry Flagler. And so not only is Flagler as talented as Rockefeller, he also brings contacts and money into the business. Flagler brought in not only himself, but money from this guy named Stephen Harkness. Stephen Harkness had made a fortune previously in whiskey.

• 23:12Speaker 00

  Harkness joins as a silent, inactive partner. He's an older, wiser, richer businessman, so Rockefeller would consult with him on many of Rockefeller's largest decisions. And if you think about everything that I just described to you, what is he doing? What is Rockefeller doing at this time? Okay? He's increasing our refining output. We're buying large amounts of oil at opportune times. We're eliminating middlemen at every opportunity, and we're hiring A players. And so once Flagler's inside of the company, what does he do? Rockefeller gives Flagler one job. You see how he keeps doing this over and over again? "You are going to focus on your top priority." What does he want Flagler to focus on? Concentrate fully on our highest priority: transportation.

• 23:52Speaker 00

  Flagler had a single objective: control as much as possible the costs of transportation. Rockefeller has a true partner. Theirs was a true partnership. This is what Rockefeller wrote about Flagler decades later in his autobiography. "For years and years, this early partner and I worked shoulder to shoulder. Our desks were in the same room. We both lived on the same street. We met and walked to the office together. We would walk home for lunch. And then we'd walk back after lunch to the office and home again at night. On these walks, when we were away from the office interruptions, we did our thinking, talking, and planning together." Flagler was Rockefeller's alter ego. This is another person obsessed with being the very best, very different from the amateurs that they were competing against. This is what Rockefeller wrote about this.

• 24:36Speaker 00

  "Another thing about Flagler, for which I think he deserves great credit, was that in the early days, he insisted that when a refinery was to be put up, it should be different from the flimsy shacks, which it was then custom to build. Everyone was so afraid that the oil would disappear and that the money expended into buildings would be a loss, that the meanest and cheapest buildings were erected for use as refineries. This was the sort of thing Flagler objected to. While he had to admit that it was possible the oil supply might fail and that the risks of the trade were great, he always believed that if we went into the oil business at all, we should do the work as well as we knew how, that we should have the very best

• 25:17Speaker 00

  facilities, that everything should be solid and substantial, and that nothing should be left undone to produce the finest results. And Flagler followed his convictions of building as though the trade was going to last, and his courage in acting on his beliefs laid strong foundations for later years." Flagler was also just as bold and just as aggressive, and he wanted to win. There's one of my favorite things about Flagler is the fact that he kept a sign on his desk that said, "Do unto others as they would do unto you, and do it first."

• 25:54Speaker 00

  So the basic team that's going to shape the company's growth for the next few decades has already been formed. This is when they organize into an actual corporation so they can issue stock. And Rockefeller is the one leading the strategy. He had one other element, the final element in Rockefeller's strategy, is that only a fraction of the profits would be distributed as dividends among the five stockholders. He wanted the rest retained in the business. This is so important. Rockefeller always wanted a large fortress of cash. Let me read this quote from the biography Titan. "It is impossible to comprehend Rockefeller's breathtaking ascent without realizing that he always moved into battle backed by abundant cash. Whether riding out downturns or coasting on booms, he kept plentiful reserves and

• 26:38Speaker 00

  won many bidding contests simply because his war chest was deeper." That is unbelievably important. Before we move on, I want to tell you about two tools that can make your war chest deeper. The first one is Vanta. Vanta's value prop is very clear. Vanta helps your company prove that you're secure so more customers will use your product or service because many companies will not sign contracts unless you're certified. And the failure to do so causes you to lose out on sales. Losing out on sales is the opposite of making your war chest deeper. That is why the average Vanta customer reports a 526% return on investment after becoming a Vanta customer. Vanta helps you automate compliance, security, and trust. Vanta helps your company pass audits without tons of manual work.

• 27:20Speaker 00

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• 28:05Speaker 00

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• 28:49Speaker 00

  So another idea that Rockefeller would use over and over again, he is in a highly volatile market. And so when the market for his product is temporarily depressed, Rockefeller would look for other sources of income. And one thing that you see a lot in these stories is the fact that they take a lot more risk earlier in their career, even if they tell a different story later on. Rockefeller took a hell of a lot of risk early in his career. He took less, obviously, later on. So even though later on Rockefeller would say that he despised speculators, early in his career, he speculated in oil futures. And he may have not survived if he didn't do this. And speculating in oil futures is a very tricky business, and it was so important to him that he actually moved to New York to focus on it during a downturn. He did this for two years.

• 29:33Speaker 00

  This is 1867 and 1868. The reason I'm telling you those years is because in 1868, one of the largest oil future speculators blew up and took down several other houses with it. Rockefeller took that as a warning and stopped speculating. Another important way that he worked is he was constantly looking for points of leverage. So even as Standard Oil is getting bigger, it's still not a monopoly yet. But they are spending an inordinate amount of their time trying to pry the largest possible rebates from railroads. So when they think about who to target for the largest possible rebates, they concentrate on the Erie Railroad. Why? Because it was one of the smaller railroads at the time and therefore more hungry for traffic.

• 30:17Speaker 00

  This deal at Rockefeller is going to work out with Jay Gold, who controls the Erie at the time, is going to be a magnificent source of hidden profits. Looking for points of leverage and finding hidden sources of profits is something he's going to do over and over again. And the reason it's so important to go over all these back to back is because what you notice when you study Rockefeller's, he's going to stack one advantage on top of another. So remember earlier, the fact that he said, "Yeah, I'm going to borrow heavily so I can invest in growth." Then he would use his size to get an advantage on transportation costs over his smaller competitors. And he knew he could do that because remember when he was working on the commission house, he noticed, "Hey, posted rates of transportation, all is not as it appears on the outside." So he starts doing this deal with Jay Gold, who controls the railroad. Jay's interests happen to temporarily align with Rockefeller. Why?

• 31:01Speaker 00

  Because he wants to tie the largest Cleveland refiners to the Erie railroad to get the traffic he needs. Because as his traffic increases, that allows him to manipulate the stock, which is what Jay Gold actually wants to do. He's not trying to build for the long term. And the reason I say this is Rockefeller stacking one advantage on top of another and how everything works together. Jay Gold only invited the three biggest refiners into this hidden source of profits, where he's going to offer rebates on all traffic sent over the railroad. And so if Rockefeller didn't borrow heavily to invest in growth, if he didn't focus on transportation, if he didn't do all the things that you and I have been discussing, he wouldn't have been offered this opportunity. This changes his career. And so here's an example of one of the rebates. Let's say the posted rate on the Erie is 60 cents a barrel. Rockefeller and the other two largest refiners

• 31:44Speaker 00

  would get a rebate back for 10 cents on every barrel they ship. Later on, Rockefeller's going to maneuver himself into such a dominant position that he would get a rebate for any barrel of oil he shipped over the railroad and a rebate for any of his competitors shipped as well. Those profits are going to be enormous in the future. Even at this time, they're huge. Remember, we're in the 1860s. So these rebates are adding $50,000 a year in profit each year at a time when most other refiners couldn't even break even. Most of them were losing money. So at this point, Rockefeller has built this virtuous flywheel, and he's just pushing it. We're going to raise more money to increase production. We're going to use increased production to get better rates on transportation on other refiners.

• 32:27Speaker 00

  We're going to use increased profits to buy competitors. And we're going to continue to find secret sources of income. And here's one example of a secret source of income. So after getting these better rates, Rockefeller would go around to other refiners, his competitors, and say, hey, you should send your oil through me and I'll give you a better rate per barrel than you can get on your own. So now they're making money on every barrel their competitors ship to. So at this time, let me give you an example. Rockefeller's company is refining about 1,500 barrels a day, but they're shipping 4,200 barrels a day. Rockefeller didn't stop there. He believed in developing a network of secret allies. Rockefeller would use his cap table as a weapon.

• 33:10Speaker 00

  He would give prominent Cleveland bankers the opportunity to buy Standard Oil stock cheaply. He wanted it to make it in their interest to loan to Standard Oil and more importantly, to not loan to Standard Oil's competitors. Rockefeller knew the power of relationships, the fact that relationships around the world, that relationships drive everything. So he's constantly trying to press his advantage in that department. He would buy companies of other well-connected people so their connections would become his connections. There's one guy that he does this with. He approaches a guy named Oliver Payne and he offers to buy his company for $400,000 and to give him a position in Standard Oil. The company was only worth $250,000, but Payne came from a politically connected

• 33:54Speaker 00

  family in Cleveland and Payne's connections helped attract more money into Standard Oil. So now Rockefeller set himself up to a perfect position to take a bold and daring action. His idea is you need to take out your competitors early. You need to add their size to yours and then use your size to stack more advantages on top of each other. This is the Cleveland massacre. In four weeks, Rockefeller bought 23 companies. Historians later dubbed this swift and astonishing campaign, the Cleveland massacre. Rockefeller saw it otherwise. This is his description of it. "This procedure was without precedence." It goes back to the fact that he's an independent thinker. He's comfortable trusting his own judgment. "We find here the strongest and most prosperous concern in the business." He's describing himself.

• 34:38Speaker 00

  He's saying, "My company is the strongest. It is the best." Which had made, and he's talking about his company, which had made money- In each year of its existence, turning to its less fortunate competitors, these amateurs, who it well knew had been losing money, again, going back to he collects more information about each company in his industry, he does this forever, and then saying to them, "We will stand in for the risks and the hazards of the refining business." Standard turned to these men with whom it had been in sharp competition and said, "Come with us and we will do you good. We will undertake to save you from the wrecks of this refining business." That's another thing that he talks about over and over again. He wants to apply order to chaos. He wants to cooperate and control. He does not want to compete. "And we will

• 35:21Speaker 00

  give you a return on the capital which which you have in plant and land." Now, I think it's probably obvious, but I want to be very direct on this. Rockefeller was a ruthless competitor. Several Cleveland refiners claimed that Rockefeller had directly threatened them. One refiner told Rockefeller that he wasn't afraid of him, to which Rockefeller replied, "You may not be afraid to have your hand cut off, but your body will suffer." And then this is the way Rockefeller did this. You start at the top, focus on your fiercest competitor. Rockefeller made a list of the top refiners. He started at the top and worked his way down the list. By the time he was halfway down the list, the rest had no choice but to sell out. Going back to having secret allies and using his cap table as a weapon,

• 36:05Speaker 00

  some tried to hold on and figured they could survive by expanding. But when they went to the banks to borrow money to expand, they found all of the bankers were already in Rockefeller's pocket. The note I left myself when I read this part is the best description of Rockefeller: ruthless, efficiency, and hyper competence. What's amazing to me is he would offer to buy you out. Of these 23 people, he would offer stock or cash. You choose. Only five took the stock. And something he would repeat over and over again, "Do not sell your stock." You keep it at all costs. Rockefeller said, "Sell everything you've got, even the shirt on your back, but hold on to that stock." What's crazy is Rockefeller's wealth grows more in retirement than it did when he was

• 36:47Speaker 00

  active, and it did this because he never sold his stock. And instead, this is his, this quote about this, "Let it feed upon itself." I think something like between the years of like 1905 and 1915, by literally doing nothing, his net worth increases by $100 million. It's $100 million in 1910. Just let it feed upon itself.

• 37:13Speaker 00

  Another tactic of how he worked, the secret ally and the hidden company. So Rockefeller would find these highly profitable but smaller companies that would usually have a lot of success because they carved out a niche in the oil industry. So one example is a refinery that specialized in canned oil for export to Europe. Rockefeller would buy the companies, but he'd have them operate as if nothing had changed. They'd keep the same name, no connection to Standard would ever be revealed publicly. The hidden company was a technique that Standard would use to build its empire. The secret ownership of other companies was so well-preserved that often a refiner that was enraged by Standard's ruthless tactics would refuse its offer to buy him out and sell instead to a local competitor, unaware that he had in fact sold out to

• 37:58Speaker 00

  Standard Oil. Rockefeller would identify what his most valuable asset was, and he would not diversify. So this over and over again, Rockefeller believed his Standard stock to be the most valuable thing to own, and he always bought more of it. Reason I'm bringing this up again, he would do this even during drastic downturns. When there was a boycott organized by companies taking crude out of the ground against Rockefeller, they essentially shut off his supplies to his raw materials. This goes on for several months. It's so drastic, it takes Standard Oil's employee count from 1,200 all the way down to 70. And so several of Rockefeller's partners inside of Standard Oil panicked and offered to sell their stock to him. And so in one case Rockefeller told one of his partners, "You're a member of the Standard Oil company. You should wait."

• 38:42Speaker 00

  His partner waited until after lunch and then asked Rockefeller again to buy his stock, so Rockefeller wrote the check. Rockefeller again would use this idea over and over again. You should build a network of secret allies and identify markets full of second-rate talent. So Rockefeller organizes this loose confederation of competing refiners called the National Refiners Association. This is one of my favorite ideas that he ever has done. So the goal was very simple. We're going to operate out in the open. It's not going to be secret. We're going to join together in this loose confederation. We're going to buy crude as a group and we're going to negotiate transportation with the railroads as a group too. This is before he's a monopoly. In fact, the information he gets from this association helps him become a monopoly. And so Rockefeller's actually chosen to be the head of the association.

• 39:27Speaker 00

  That's really important because then he gets to know every single business. He has to see their books. He's the one allotting the quotas. And what was interesting about this is he expected this association to fail from the very beginning. Why? Because his industry was full of second rate talent. He said that this association was in large part made up of, quote, "men untrained in business matters, many of whom came from a great variety of occupations not well calculated to prepare them to meet the demands of high-grade progressive businessmen and competition." It was apparent that these men would not keep their covenants. There's that word again. Remember Rockefeller calls contracts covenants. He said fidelity to a contract, fidelity to a covenant was a sign of a real man. He's saying these are not real men.

• 40:10Speaker 00

  It was apparent that these men would not keep their covenants. They would observe a covenant as long as it worked to their advantage, but would flinch and back away when the carrying out of the covenant seemed temporarily to their disadvantage. So Rockefeller says, "I'm going to use this, this refiners association for my purpose." As president, he came to know the inside of every member's operation. He became acquainted with every leader in his industry. He now knows, hey, this guy, because he sees their books and their operating costs and how much they're refining and how much they need to ship. He's like, oh, this guy's a serious competitor. He's a competent operator. Therefore, I'm going to find a way to buy him out and make him a partner in Standard Oil. This other guy, he's already dead and he doesn't even know it. I'll make him sweat and then I'll eventually eliminate him from the board. It's one of the most important ideas in the book.

• 40:55Speaker 00

  It's so crazy. Now, for the competent people, he understood that he could not force them to cooperate, that you have to align your interests. And so this is how he aligns the interests and he would transform competitors into collaborators. This is what Rockefeller said, "In all the history of the world, men have not made a success of a concern into which they were forced or driven." You cannot have a winning cooperation except by willing partners. And so he explains how he approached those he wanted in his company. We say to these men, let us look at the facts together. We think it is to your interests and to ours to work together. Do not be in a hurry. Think it over. Take your time. He would open his books to them. Those who looked over his books came away astonished at the high profits in hard times. And so his pitch is very clear.

• 41:40Speaker 00

  You can own a part of the best oil company in the world, or we can continue to compete. And if you do come in, you're given autonomy and authority. Remember Rockefeller is essentially creating a company of founders. There's no other way that founders are going to work for him if they don't have authority and autonomy. And so he describes the setup. Policy would be set by the home office, but considerable authority would be given to the division leaders. These are the founders he's recruiting into his company. The divisions would, to a large degree, be semi-autonomous. Each of the key men in the local refining areas would have a voice in setting company policy. So he's got one guy in Pittsburgh, one guy in Philadelphia, another guy in New York, another guy in the oil regions. You're running your divisions there. And then you come back to the home office and you sit in on company strategy meetings.

• 42:22Speaker 00

  And so when Standard's offer was presented in that light, independent thinking men, founders, found it hard to refuse and none did. And so I have a very similar and kind of wild story. So I was having dinner with a founder that wound up selling his company, I think it was like for six billion or eight billion or 10 billion. It was something in that range. And the story he told me is one I'll never forget because he talked about the fact that he was, he always thought of himself as an entrepreneur. He never thought he would work for anybody else. And so he is in this head-to-head battle with this very formidable founder. This founder is still running his company and this is a public company to this day. And the fight has been going on for a while. And the founder I'm having dinner with is telling me the story after the fact. And he was raising a bunch of new capital.

• 43:07Speaker 00

  And I think it was some, it was, it was a large round. It was like, I think he had like a term sheet to raise like another billion dollars or something like that. And he told me this phenomenal story where he's looking at the term sheet. All he has to do is sign it. And he has a thought that he never had in his life, one that he never thought he would have in his life. And he realized, I can't beat him.

• 43:30Speaker 00

  And so instead of signing the term sheet, he agrees to be acquired to work with and directly report into his former competitor. And he said it was the best decision he ever made. I have to believe that's very similar to what's happening in this story. They just see how formidable Rockefeller is, how great a company standard is. And they're given a chance to own part of the best oil company in the world or continue to compete with somebody they probably can't beat. And one way he was the most formidable is that he knew his numbers down to the ground. Regardless of where he was in the world, every day he'd receive a sheet that listed how much crude oil they had on hand, the number of barrels, the total number of gallons of refined that were shipped the previous day, and any other vital statistic of the business. Rockefeller's thoughts seldom strayed from the company.

• 44:14Speaker 00

  He focused on his business and would not allow himself to be distracted. He preferred not to go out and socialize. And he said, "I was meeting all the people I needed to meet in my day's work." Those that worked with Rockefeller said that he dominated because he, quote, "had the character and ability and could see farther than anyone else and knew how to put together a team of men that could not be matched anywhere in the world." Rockefeller was a man of infinite patience. He could wait, and he would tire the other man out. His approach to his work was simple and methodical. In the office, he proceeded in the same steady, methodical way that a farmer plowed a field. He'd get to work. There'd be a stack of letters, telegrams, memos

• 44:59Speaker 00

  in a pile on his desk. He'd put it on the right-hand side of his desk. He would take up the first paper, give an answer, or issue instructions. And then the matter would be off his mind, and the paper would be handed over to be filed. If the paper could not immediately be attended to, he turned it upside down on the left-hand side of his desk. When the pile at the right side was demolished, he would turn the pile at the left side up and transfer it to the right-hand side to be taken up again the following day. And so something happens to Rockefeller that happens to a lot of the great founders. The more they realize the more you win, the more you want to win. As his power grows, he is no longer aiming for order. He wants a monopoly. And to achieve this, he's going to blend that genteel methods of persuasion we talked about earlier with this just ruthless use of power that he had accumulated.

• 45:44Speaker 00

  Let me give you an example. A small company invents a new way to neutralize the offensive odor that was found in lubricant oil. The company receives a patent for their innovation. Shortly afterward, another smaller company appears on the scene with the same innovation that is clearly based on the other company's patent. The company that's infringing on the patent is this company called Tweedle. Standard Oil had secretly approached Tweedle and told them that they will cover all the legal costs when Tweedle gets sued for patent infringement, which indeed happens. They then purposely drag the case through the courts slowly to bleed the smaller company.

• 46:24Speaker 00

  Eventually, the smaller company breaks and sells its patents to Rockefeller. Rockefeller is now dispatching all of his partners out and wants them to consolidate power in their specific geographic area, just like he did with the Cleveland massacre. And the approach was the same. Rockefeller would tell his partners, concentrate first on the largest and strongest independent. With him secured, the balance can be brought in easily. Rockefeller wanted to make his targets sweat. He said, "We will either get them or starve them." When competitors demanded too high price for their works, he ended negotiations until they become very sick. That's what he said. To speed up their demise, he would cut the price of refined to below cost, knowing

• 47:08Speaker 00

  that every sale his now competitor had to drop the price to meet only hastened their demise. He would keep the prices low until he broke the competitors that didn't want to consolidate or sell. He said, "A good sweating will be good for them." Let's go back to this idea that he uses over and over again. He's going to identify where he has leverage and then he's going to use it. He's not the only one creating wars. Sometimes the wars, he's on the defensive end of a war. So there's, this is such a crazy story. There's a subsidiary. The subsidiary part is really important because you don't even, you don't have control. So the guy running the subsidiary, this is a subsidiary of the Pennsylvania Railroad. Pennsylvania Railroad is a giant business by the time.

• 47:50Speaker 00

  And so this subsidiary of this giant company is called the Empire Transportation Company. And it decides it doesn't just want to be in transportation. It wants to expand into the refining business, which then will make it a direct competitor to Rockefeller. Rockefeller does not like that. So Rockefeller goes to the president of the railroad, which is technically the guy running the subsidiary, his boss. This guy's name is Thomas Scott. And Rockefeller tells Thomas Scott, "Hey, I don't appreciate a competitor in the refining business that is associated with the company that I'm shipping a lot of my oil through." Now, at first, Scott doesn't agree to do anything about his subsidiary, which is called Empire, because Scott is worried Standard is getting big and will continue to get bigger. And if they aren't contained now, they might have complete control over all oil shipments

• 48:34Speaker 00

  across the entire railway system in the United States, which he was right to worry about because that is what indeed happens later. So initially, Scott refuses to intervene between his subsidiary and Rockefeller. So Rockefeller retaliates. He deprives the Pennsylvania Railroad of all of his oil traffic. At the time, Rockefeller accounted for 65% of all traffic on the Pennsylvania Railroad. He bleeds them slowly and makes them sweat. Are you seeing a pattern? After a short time, they tell Rockefeller they will end the war if he buys Empire, which is their subsidiary. Now, this is the crazy thing. They don't tell the guy running the subsidiary, this guy named Potts. He's the... Potts is the one that started the war to begin with.

• 49:19Speaker 00

  They don't tell him that they are offering his business to Rockefeller. Rockefeller buys the business and refuses to invite Potts into Standard Oil. To the end of his days, Rockefeller would retell the story about destroying Potts with great glee. Now Rockefeller was this unusual combination of this extremely frugal person, watching every single expense down to the penny, and this brave boldness to invest a ton of money during downturns when everyone else is scared. So at this point, there's a bust in their industry, to the point where the demand for their product was so much lower than what they were producing, they would have to shut down for months to catch up. And so obviously, other refiners are experiencing the exact same decline.

• 50:04Speaker 00

  They are running, and Rockefeller goes on another buying spree. Everyone wants out, and he wants more. And inside of this story, I found something interesting, where one guy that he wants to buy is temporary resisting, and Rockefeller issues a threat to him. He told the guy, "I have ways of making money that you know nothing about." And the description of Rockefeller this time is too good not to share. Rockefeller moved on a large scale with stunning swiftness. Infinitely patient, would do nothing, nothing, nothing, nothing, wait for the right time, and then act on a grand scale. Another trait that he had in his entire career, he would relentlessly and remorselessly eliminate middlemen and vertically integrate.

• 50:46Speaker 00

  He hated middlemen, so much that he goes direct to consumer in the 1870s. This is what he said about that. "We found that retailers sometimes added as much as 5 cents a gallon to the price of our oil. So we bought land, put up our storage tanks, cut the cost of barreling and freight, made tank wagons, and delivered the oil to the doors of the consumer, eliminating all those intermediate profits on the way. We made a fine crop of enemies too, but we made oil far lower in price than it had ever been before." Rockefeller would also use his scale. This reminds me of Microsoft, does very similar things 120 years later. So Standard Oil sold over 50 byproducts from the refining of oil.

• 51:29Speaker 00

  Standard did not create a single one of those innovations. Rockefeller would let others experiment. He'd wait until they developed a profitable market, and then he would move in. And when a profitable byproduct was proven, he would swoop in and buy out every single producer. And he would pay high prices because those products were protected by patents.

• 51:53Speaker 00

  Rockefeller was also very human. Rockefeller made the very common mistake. He made the mistake of fighting an innovation that would weaken his strength. So other companies outside of Standard Oil are the ones that invent and start building pipelines to carry oil. Rockefeller's advantage was the rebates from shipping oil by railroad. So he wants to stop the pipelines initially. And he is ruthless in trying to stop them. He buys up land in the way of the pipeline companies. He plants stories in the press that say pipelines were prone to leaks, which would destroy farmers' crops. He would buy up the customers of the pipeline companies to deprive the pipeline company of revenue. He would then try to buy the pipeline company outright. It was said that he used every weapon but violence. But here is one of the most brilliant things that he does.

• 52:39Speaker 00

  Rockefeller was willing to change his mind when the facts changed. He reverses his decision and decides to embrace the innovation. So then he starts building his own network of pipelines. But his partners at the railroads start to protest. When they protest, he tells them that any oil traffic lost because of the pipeline would be made up by subsidy. Think about what he just said. He built his entire career on getting rebates from railroads. When the facts change, he reversed the traditional rebate pattern. Instead of collecting the rebates, he is now paying them. That's incredible and also very smart. You cannot fight a technological phenomenon. Pipelines were obviously way more efficient, the most efficient way to move oil.

• 53:23Speaker 00

  And once that fact sunk into his mind, he embraced it completely. In many cases, Rockefeller would try to ignore the outside world. As he got bigger and bigger, he realized you can't do that. So Rockefeller would buy politicians and he would make sure that they stayed bought. When the media wrote critical articles about Standard Oil, Rockefeller would buy off the reporters in the media, too. I've already said this a few times, but it's worth repeating. Rockefeller believed in extreme focus. What Rockefeller demanded of himself, which was, quote, "getting right down to our business and attending closely to it and nothing else," he demanded of his partners as well. He would settle disputes between himself and his partners in a very clever way. He would put all of the risk and the blame on himself.

• 54:05Speaker 00

  So they're having this disagreement on continuing to buy oil leases. As usual, Rockefeller is being aggressive and pushing to buy more, and his partner, this guy named Pratt at the time, thought it was smarter to wait. So after going back and forth a few times, Rockefeller said, "Hey, I'm gonna use my own money." This is $3 million, a ton of money at the time. "I'm gonna use my own money. I'm gonna take $3 million from myself, and I'm gonna buy the leases. And if this expenditure turns out to be profitable, then the company can repay me. And if it goes wrong, I will take the loss personally." And after hearing that, Pratt says, "If that's the way you feel about it, we'll go in together. I can take the risk if you can." And all this leads up to, I think, one of the most important ideas to understand about Rockefeller.

• 54:47Speaker 00

  It makes a lot more sense about why he did what he did if you understand that he truly believed, he truly believed that his cause was righteous. As a much older man looking back on this, this is what he said. "The Standard Oil Company's work was of such a new and revolutionary character. It was a force for strengthening. We wanted a new idea to prevail. We wanted the old struggle to cease. We wanted these men to pull together, to join us, and to take their full share of the business. It is fair to say that the strong men, who were competitors in the oil refining business, the aggressive men, in the best financial condition and the most intelligent, indeed, the class of men who would be most likely to survive in the competitive struggle, were

• 55:29Speaker 00

  the men who were most likely to take up this idea of cooperation. Anything less than this, which tended to allow each individual to have its own way regardless of the interest of others, would tend to reproduce the old chaotic and very unsatisfactory conditions from which those most experienced and capable men were seeking to extricate themselves from. These unreasonable men were like a group of men trying to build a house large enough to shelter everyone, and a part of the men who needed the most shelter and the most protection of this home were all the time engaged in digging under the foundation and seeing if they could pull the structure down, and were willing to pull it down even though it fell on them." How grateful am I that from the word "go",

• 56:14Speaker 00

  it was an upbuilding process and not a tearing down? As a matter of fact, the Standard Oil Company has been one of the greatest, if not the greatest, of upbuilders we have ever had in this country or in any other country. The principles of centralization, savings and service have operated, as we always believed they would, for the benefit of the whole people, and those detractors have faded away. And that is a very pleasant reflection now as I look back. I knew it at the time, though I realize it more keenly now. I never doubted it. And that is where I'll leave it. If you can get a copy of the book, I highly recommend reading it. Right now, the book is currently, I think there's only one copy for sale on Amazon,

• 56:59Speaker 00

  and it's for sale for $1,000. It's a very hard book to find. And I just have one favor to ask you. I started a new podcast. That podcast is called David Senra. It is on a separate podcast feed from founders. I started this podcast so I could have conversations with some of the greatest living founders and extreme winners in business. If you've been listening to this podcast for a long time, you know that my number one person I wanted to meet was James Dyson. I just spent several hours with my absolute hero. We recorded this incredible conversation. It will be out soon. The only place to listen to it will be on my new podcast feed. So whatever you're listening to this on, please go and search David Senra and follow that new show. It would mean a lot to me if you do that. And don't worry about founders. Nothing's changing with founders.

• 57:42Speaker 00

  I'm still going to work on founders until I die.