The Ten Roads to Riches

by Ken Fisher

  Build a firm to sell or to endure. Both are lucrative.

  Californians recall H. Salt Fish & Chips—a British-style fish-and-chips joint that was huge in the 1960s. H. Salt was and is a guy—Haddon Salt. He and his wife moved to California from Britain and brought their fondness and recipe for deep-fried cod with them. This small, deep-fried firm was eventually built into something regionally huge. When Salt sold to Kentucky Fried Chicken in 1969, there were 93 franchises.15 Today, only 17 remain.16 What does Salt care? He took his money and retired long before that. Now he spends his spare time playing the most wickedly wonderful electric violin you’ll ever hear. Founder CEOs tend to blend creativity and passion. (The violin Salt plays comes from Chapter 9’s Grover Wickersham, who ran Zeta Music.)

  Businesses often get sold and then implode or disappear. Starbucks bought Bay Area bakery chain La Boulange for a cool $100 million in 2012, closed all 23 locations in 2015, but kept their tasty treats in Starbucks’ pastry displays.17 That doesn’t diminish the founder’s accomplishments. If the buyers blow it up, that’s their fault—not the founder’s. Sometimes, all the buyer wants is the intellectual property. Still a fine legacy! If you build a business to sell, don’t fret afterward. (Speaking of afterward, many start, build, sell, and retire only to discover—too late—it was the challenge of working that kept them happy. Just ask Minecraft creator Markus “Notch” Persson, who sold to Microsoft for $2.5 billion, only to realize going to work every morning was more fulfilling than kicking it with the glitterati in Ibiza.18)

  Built to Last

  If you’ll forever fret your business’s fate and want a lasting legacy, build it to last—the very pinnacle of success. Problem is, you may never live to see it. Herbert H. Dow was long dead by the time Dow Chemical became America’s third, second, and finally largest chemical company. But his legacy enriched generations of his family, Dow employees, and their families.

  When I was a kid, my father idolized Herbert Dow. I grew up hearing Dow quoted endlessly. To me, Dow was bigger than life. Early on, Dow made inorganic chemicals, originally bleach—efficiently making basic commodity building blocks cheaper than others, underpricing and gaining market share year-to-year. Dow’s focus was still alive when I was young. Dow was number one in inorganics and number five in US chemicals. Today, Dow is number one in America and number two in the world. If you can be satisfied in your grave, surely Herbert Dow must be. That’s legacy!

  I’ve tried to build much of what I learned from my father about Dow into my own firm, despite my firm not being in commodities or manufacturing. If I were writing a book solely on how to build an enduring firm, Dow’s philosophy and life lessons would be central to it. For example, Dow emphasized investing heavily during your industry’s down-cycle because he knew his competitors didn’t have the courage to do it. The benefit? On the next up-cycle, Dow had new, modern, low-cost, efficient capacity to take business away from the less courageous.

  Another Dow-ism was hiring young people, straight from school, and leading them to become part of Dow’s culture permanently by building lifelong career paths. The benefit? Loyalty, commitment, and corporate culture you can’t otherwise have. One of his great quotes was (and my father repeated this endlessly), “Never promote a man who hasn’t made some bad mistakes; you would be promoting someone who hasn’t done much.”

  In an era before today’s social nonsense (where “ideal” boards of directors are dictated by government agencies and law), Dow was committed to a board of former insiders. Share-owning retired Dow executives who could no longer be fired were fiercely loyal yet free from the CEO’s power. They also knew where the bodies were buried and who had buried them, so they could find out anything fast. That basic board structure was still mostly intact when I was young five decades ago. The benefit? No future CEO could pull the wool over the board’s eyes. Internal problems couldn’t be hidden. If Enron had been like that, it wouldn’t have rotted as it did. Dow knew 80 years ago that an outside board (today’s required norm for a public stock) is largely useless.

  To build to sell, think like a buyer. To build to last, think like an owner.

  If our society had the sense Dow had, we’d all be better off. Skip outside directors if you can. It’s better. Outside board members like it, but the value they add is really zero. You can hire or befriend all the advisers you may ever need—you don’t need them on your board.

  Culture or Cult-Sure

  Among the most important tasks you as a founder have in building to last is creating an enduring culture that maintains your strategic vision long after you’re gone. Fail and your successor may fold and sell to the first viable buyer or morph your firm into some bastardization.

  My firm started in the woods where few would suspect—on a mountaintop above San Francisco’s peninsula. I’ve lived my life in forests and see them as a benign and peaceful work environment. Years back, as we started growing into a larger firm with more employees, industry locals would refer to us derogatorily as “the cult on the hill.” I don’t know if I’ll get my way or not, but if I do, long after I’m dead they’ll refer to us as “the cult-sure,” because if you’re trying to build something lasting you must have a culture so “sure” that no person, event, economic cycle, or social trend can knock it off course. That’s what Dow did.

  BOOTSTRAP OR FINANCE?

  Fourth question: Capital intensive or not? Another way to think about that: Will you require equity financing from outsiders that dilutes your ownership, or will you largely be able to bootstrap—financing growth from recycled profits plus bank borrowing?

  Capital-intensive businesses tend to be in categories like industrials, manufacturing, materials, mining, pharmaceuticals, technology, and biotech. Noncapital-intensive ones tend toward providing services—financial firms, Chapter 7’s money managers, consulting, and maybe software. But even noncapital-intensive industries may want to start with big bucks. The advantage is that you start bigger, faster. Bootstrapping requires patience and can be a long game, starting small and pouring profits back into the firm to self-finance growth—requiring patience plus.

  Don’t be beholden to venture capitalists. Bootstrap all you can.

  It sounds grand to “start big,” but be warned: Venture capitalists know the startup game far better than you ever will. They fund endless deals. You’ll do one or a few in your life. They aren’t funding your firm for charity, but for ownership and more than their share of profits. They can create a game plan, so by your firm’s second or third financing round, they own much more of your firm than you ever imagined possible. Analysts value Uber at over $62 billion but peg founder Travis Kalanick’s share at just 10 percent.19 Forbes puts his net worth at $6.3 billion.20 Not chump change! But not $62 billion.

  Bootstrappers can do whatever they wish with cash flow and needn’t kowtow to outsiders’ wishes. If you can avoid venture capitalists, do it. (Should you decide to go the VC route, I needn’t waste your time telling you how. There are myriad books already available.)

  PUBLIC OR PRIVATE?

  Finally, do you want to build a publicly traded firm or a private one? When folks think of a CEO, they usually think of heads of public firms like Bill Gates or the late Steve Jobs—mega-names, mondo firms. But the vast majority of firms are private. That’s better, in my view. This is like choosing between outside funding or bootstrapping. Generally, firms go public to raise capital—selling their souls to the public. But like getting VC funding, you must wrangle with owners besides yourself—now maybe millions of them! Unless you’re Mark Zuckerberg, who negotiated a special share class leaving him with full control of Facebook as minority owner, but he’s the exception that proves the rule.

  Folks idealize the initial public offering (IPO), imagining endless riches. While a tiny percentage of IPOs have been spectacular—like Google, Microsoft, and Oracle—overwhelmingly most are losers. As detailed in my 1987 book, The Wall Street Waltz, IPO usually stands for “It’s Probably Overpr
iced.” Most IPOs disappoint afterward. And as the founder-CEO, for you, headaches have just begun. From then on as a public stock, you are beholden to strangers and public rules, forever and ever, amen. You share control with them, regulators, and courts—all sometimes fickle mistresses. Now they even vote on your pay!

  Less so if you’re private! Fred Koch founded Koch Industries in 1940. Huge and awesomely successful, Koch is possibly the world’s largest private company, with estimated annual sales of $100 billion.21 Besides having smarts and sharp business acumen, Koch loathed commies—another trait making him dear to my heart. Before founding his firm, Koch built refineries in the Soviet Union, where he fired most all the Soviet engineers, replacing them with non-commies.22 Love it!

  Despite a terribly tough industry with global competitors of massive scale and clout and annoying governments everywhere, Koch thrived. His sons David and Charles now run Koch—each worth $42 billion.23 They are successes in their own right. Surprisingly, they’re about the nicest guys you could ever meet. And they have no need to go public. Charles Koch has said Koch will go public, “literally over my dead body.”24 Hopefully, his son Chase, who stands to inherit significant ownership, feels likewise.

  I share Charles’s views. Shopping in my local supermarket, sometimes I’ll see local clients. They expect I’ll give them time—and should. I’ll chat as long as they want because we both willingly entered and remain in a business relationship—a 50/50 deal. They didn’t have to hire us, and my firm never had to accept them as clients. It was a mutual choice. We made a deal. They get my time.

  Not so with public shareholders. As CEO of a publicly traded firm, you have no control over who owns your stock. Anyone—the nastiest little snark from Rip-offsville with an online brokerage account and an urge to pester you in the frozen food section before suing (see Chapter 6 on pirates)—becomes your owner. You can’t talk to them. Their interests are often harmful to your longer-term vision and your firm’s health. They may only care about the stock next week.

  Who runs your firm? You, or John Q. Public, courts, and regulators?

  Sometimes to do the right thing for your firm’s future, you must make costly decisions that could hurt earnings and stock prices in the here and now. Today’s public is often short-term oriented. And you can’t tell anyone anything in the supermarket you don’t tell everyone, or you and your firm are in legal trouble. So in the dairy aisle you smile, shake hands, shut up, run like hell, and hide.

  If you can, it’s best to remain private and see only customers and vendors at the supermarket. That doesn’t mean I don’t like public stocks. I do—my business is built on investing in them—I just never want to run one. You shouldn’t, either.

  THE BIG BULL’S-EYE

  There’s great satisfaction in building an empire and employing others. But there are downsides—the bigger you get, the more people attack you. The truly successful develop sharkskin and an ego requiring scant maintenance.

  You’re ridiculed from the start. Since your novelty is new or different, it isn’t from the established order. Most folks can’t envision it as you do, and will think you’re a bit crazy—until after your firm is seen as a success. Then you’ll be hailed as a visionary. This is true of almost every radically successful founder. The bigger the success, the more they were ridiculed early on. Steve Jobs called them “the crazy ones” for a reason.

  On this road, you will be seen as crazy, too. When my firm started doing direct-mail marketing (which I prefer to call Junk Mail) for high-net-worth investors, industry experts said we were nuts. Ditto when we started Internet direct marketing—wouldn’t, couldn’t work! No one would respond to advertising like that and become clients! Next came radio, print ads, and TV. We launched a webzine, MarketMinder.com, that didn’t pitch our services, simply to educate and empower investors. They all worked, which is a part of how we built my firm. But most everyone “in the know” thought we were daft. When we started doing it in other countries, their pundits said, “Maybe it will work in America, but never here.” Now it works all over Western Europe. Just examples. Whatever you do, if it really works, everyone will think you’re crazy until you’re a proven success.

  Later, success attracts attackers who are increasingly vicious and often dishonest for their own self-interested reasons. This starts for you somewhere between 100 and 600 employees, depending on what you’re doing—but probably long before you have mega-wealth. And you must be tough in response, taking on your attackers and beating them into submission. I promise—guarantee—the bigger your firm, the more you succeed, the more you’ll be attacked by petty, snarky parasites. Some want money. (Why not? They can’t create their own.) Some sue for slights, real or imagined, personal or social. Others attack to steal customers.

  This isn’t the Coke versus Pepsi wars, or those cute Apple computer ads where the Mac is a young, energetic kid and the PC is bespectacled and portly. That’s normal competition. No, this is ill- intended, slanderous, and duplicitous lies aimed at siphoning a sliver of customers and keeping you from getting more. A different kind of normal! They’re small and petty, so to make it pay, they need only convince a gullible few who can’t see they’re being duped with lies. You must deal with it. Or you will lose. Real founder-CEOs don’t lose.

  Hackers, Mobsters, and Embezzlers

  My firm, like everyone else’s, has had to thwart covert attacks from every slimy angle—I’ve seen it firsthand, including small-scale competitors and rogue operators at large firms, wannabe embezzlers, securities criminals, and even the Russian mafia—all normal and all wanting to get our clients’ money. Former employees, too! And they all work with the media, trying to create stories that slam your firm’s reputation to shake some of your fruit off your tree. Then, too, every major firm today suffers dozens to hundreds of daily attempts by computer hackers trying to break through the firm’s external firewalls to snatch customer information for the purpose of account or identity theft or embezzlement. These aren’t nice guys. You, as founder-CEO, must be tougher than they are.

  You will be sued, attacked, and sued again. It comes with the territory.

  Employee and customer class-action lawsuits are standard. Any firm, once big enough (more than $30 million in payroll), will start getting these. The plaintiff’s lawyer usually is just a pirate—a shakedown artist—wanting to be paid to go away (see Chapter 6). The lawyers are the big beneficiaries, not the employees or customers. They never accept that your employees didn’t have to come work for you—but did by choice, relative to less favorable alternatives. They never accept that customers didn’t have to buy your product, but did so because they found it the best alternative. The parasites always—always—act self-righteously. A founder-CEO must harden himself or herself to simultaneously keep focused on customers, employees, and product superiority while finding some good bug spray. For this, I recommend hiring plaintiff’s lawyers for legal defense work. They know the tricks of the pirate trade better than nonpirates. I’d hire the very best pirates around, make it worth their while, and buy them endless rum. Arrr, matey!

  Keep “Just Doing It”

  Nike’s Phil Knight is a perfect example. First, no one believed he could do it. He built a huge, successful multinational firm and offered great, cutting-edge products—creating thousands of jobs globally.

  In the 1960s, Japan was to the United States what China is now—a source of cheaper goods. (Then, we griped about Japanese outsourcing like we do now about China.) Then, American running shoes were heavy and uncomfortable. Germans had light, comfortable, but expensive designs—about $30 a pair (which, with inflation, would be $242 today).25

  A garden-variety track runner with a passion for Japanese culture, Knight wrote a business school paper titled “Can Japanese Sports Shoes Do to German Sports Shoes What Japanese Cameras Did to German Cameras?” Or, could Japan produce a superior design far cheaper?26

  Knight cut a deal to import Japanese knock-offs of great German sho
es, selling them from the back of his run-down car.27 That valiant little firm (start small, dream big—and scale it up) became Nike. No one believed his cheap shoes were any good, except customers, who are all that really matters. If others in the industry could have figured this out, they would have already done it. But since they didn’t, they didn’t see why it would work for Nike.

  Early on, Nike targeted serious athletes. But few of us are serious athletes. We just have feet. Millions of weekend-warrior feet! Millions more couch surfers—all potential Nike feet. How to get them to want Nikes? Knight got a talented young Michael Jordan to agree to wear Nikes. Suddenly, everyone wanted to “be like Mike.” Celebrity marketing hadn’t really caught on yet on a big scale—taking an athlete’s personality and making it the face of a brand. From there, Nike became a branding machine. Suddenly, it was cool to sport the Swoosh.