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



In the early years of Home Depot, co-founders Bernie Marcus and Arthur Blank, along with other key figures like Pat Farrah and financier Ken Langone, faced significant challenges, including financial struggles and a risky acquisition of Bowater home centers that tested their resolve and Wall Street's faith. Despite initial setbacks, their commitment to customer service and hands-on management, as well as a pivotal decision to go public, fueled Home Depot's growth. Marcus and Blank's journey, detailed in their book "Built from Scratch," showcases the importance of equity, the dangers of arrogance bred from success, and the value of learning from mistakes to build a retail empire.

Summary Notes

Creation of Home Depot

  • Bernie Marcus and Arthur Blank were fired in the spring of 1978, beginning the journey of Home Depot.
  • They faced significant challenges, including limited capital and legal obstacles.
  • Convincing vendors to support them was a major task due to no balance sheet and lack of financing.
  • Home Depot's growth pushed industry boundaries and defied conventional wisdom.
  • The book "Built from Scratch" tells the story of Home Depot's growth and the lessons learned in business.

"The creation of the Home Depot began with two words in the spring of 78, you're fired. 20 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."

The quote explains the humble beginnings of Home Depot, starting from the dismissal of its founders, which led to the creation of a successful business.

Support for the Podcast

  • The host encourages listeners to support the podcast for ad-free content and exclusive access to member-only podcasts.
  • Supporters can become members through the podcast's website or subscribe to Founders Notes for distilled entrepreneurial wisdom.

"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."

This quote highlights the host's commitment to providing uninterrupted, valuable content to listeners and the importance of listener support for the podcast's sustainability.

Prehistory of Home Depot

  • Bernie Marcus gained retail experience prior to founding Home Depot, working for companies like Two Guys and Daylin Corporation.
  • The focus on customer needs was a key lesson learned, contrasting with competitors' career-focused approaches.
  • Equity and financial stability were concerns for Bernie Marcus before starting Home Depot.

"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."

The quote emphasizes the importance of prioritizing customers over personal career ambitions, a lesson Bernie Marcus took to heart in his subsequent ventures.

Sandy Sigoloff and Ken Langone

  • Sandy Sigoloff, CEO of Daylin Corporation, was known for his ruthless tactics and lack of empathy towards employees.
  • Ken Langone, an investment banker and future co-founder of Home Depot, recognized the value in Handy Dan, a subsidiary of Daylin.
  • Langone's aggressive investment strategy and relationship with Bernie Marcus were pivotal in the creation of Home Depot.

"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 when people leave."

The quote describes Sandy Sigoloff's intimidating persona, which contrasted with the more people-focused approach Bernie Marcus would later apply at Home Depot.

Ownership Structure of Handy Dan

  • Handy Dan was part of a common 1970s structure where companies owned 81% of a subsidiary, selling 19% to the public.
  • This structure aimed to unlock value but often led to companies taking the subsidiary private again.
  • Langone's investment in Handy Dan's public shares paid off when Daylin decided to go private, leading to a significant return on his investment.

"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."

The quote explains the ownership strategy that was prevalent at the time, which indirectly set the stage for the financial moves that would enable the establishment of Home Depot.

Understanding Corporate Structures and Minority Shareholder Rights

  • Corporate structures can create unexpected power dynamics, especially concerning minority and majority shareholders.
  • In certain cases, the majority shareholder may have to vote in line with the minority to avoid breaching fiduciary duties.
  • This dynamic can lead to situations where a minority shareholder effectively controls a company.

"We believe, theoretically at least, that if somebody were to get control of the 19% minority, remember, that's what Lingoen has done in the handy dand 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."

This quote explains the legal advice given to Ken Langone, indicating that the majority shareholder (81%) must vote in accordance with the minority (19%) to uphold fiduciary responsibilities.

The Impact of Shareholder Dynamics on Corporate Control

  • Ken Langone's control of 19% of Handy Dan's shares put him in a powerful position against Sandy Sigoloff, who controlled the remaining 81%.
  • The lawyer's advice suggested that this minority stake could control the company if the majority shareholder had to vote proportionally with the minority.

"Does this mean that the motion would carry, which means that the minority controls the company? That's the most important sentence, yes, the lawyer said."

This quote emphasizes the lawyer's confirmation that control of the minority shares could lead to control over company decisions.

Negotiation Tactics and Share Buybacks

  • Ken Langone used his leverage to negotiate with Sandy Sigoloff over the price of Handy Dan shares.
  • The negotiation process was marked by strategic offers and counteroffers, reflecting deep understanding of market dynamics and shareholder value.

"The price is $12. Shannon was shocked. Forget it. Wanting to leave chain in swimming alone with his personal barracuda, which is that mean guy, Bob Prairie."

This quote illustrates Ken Langone's negotiation tactics and his ability to push for a higher price for his shares.

The Clash of Corporate Titans

  • Sandy Sigoloff and Bernie Marcus had a contentious relationship, with differing management styles and philosophies.
  • Bernie Marcus felt undervalued by Sigoloff and was caught between his loyalty to Langone and the pressure from Sigoloff.

"Singleoff 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 Lingone."

This quote reflects Bernie Marcus's perspective on his importance to Handy Dan and his leverage due to Ken Langone's support.

Bernie Marcus's Miscalculation and Ken Langone's Insight

  • Bernie Marcus underestimated the personal dynamics at play, particularly Sigoloff's desire to take credit for Handy Dan's success.
  • Ken Langone's understanding of human nature highlighted the risks Marcus faced in selling his shares.

"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."

Ken Langone's response to Bernie Marcus getting fired demonstrates his belief that this setback could lead to a greater opportunity, foreshadowing the creation of Home Depot.

The Founding of Home Depot

  • Bernie Marcus and Arthur Blank, after being fired from Handy Dan, leveraged their experience to start a new venture.
  • The founding of Home Depot was influenced by their understanding of the industry's vulnerabilities and opportunities.

"This is the greatest opportunity for you to do your own thing. Let's go into business together."

Ken Langone's encouragement and offer to go into business with Bernie Marcus marks the beginning of Home Depot's story, showing the transformation of a career setback into a new business opportunity.

The Role of Capital and Investment in Startups

  • Securing seed capital was critical for the launch of Home Depot.
  • Negotiations with potential investors, including Ross Perot, were pivotal moments in the company's early history.

"Because he was the only person Ken Lingo knew with $2 million to spare, Ross Perot nearly became the majority owner of the Home Depot."

This quote highlights the importance of finding investors with sufficient capital to back the new venture, and how close Ross Perot came to being a significant part of Home Depot's history.

Ross Perot's Business Philosophy and Interaction with Bernie Marcus

  • Ross Perot is depicted as a paragon of American free enterprise and entrepreneurship.
  • Bernie Marcus highlights the importance of direct communication and autonomy in business dealings with Perot.
  • There's a contrast between Perot's straightforwardness and the subsequent introduction of Brian Smith as an intermediary.
  • Perot's business model is challenged by the Home Depot's low-margin, high-volume strategy.
  • The narrative reveals a conflict of cultures and values between Perot's corporate style and Marcus's entrepreneurial vision.

"Ross, I said, I am not interested in doing anything with you unless I know that I'm going to deal directly with you. I don't want to deal through intermediaries, and I will not become part of your existing organization."

The quote emphasizes Bernie Marcus's desire for a direct and unmediated business relationship with Ross Perot, highlighting the importance of clear communication lines and autonomy in business partnerships.

"Perot wasn't one who worried much about stepping on the views of his underlings. He wanted to do what was best for the business."

This quote reflects Perot's leadership style, which prioritizes business interests over individual opinions, indicating a top-down approach to decision-making within his companies.

"My people don't drive Cadillacs, he said. My guys at EDS drive Chevrolets."

This quote illustrates Ross Perot's philosophy on company culture and employee lifestyle, which clashed with Bernie Marcus's perspective, leading to a realization that their partnership would not work.

Equity and Ownership in Business Ventures

  • The narrative discusses the division of ownership in the new company, with Perot initially owning a majority stake.
  • Ken Langone, Bernie Marcus, and Arthur Blank negotiate equity stakes and the inclusion of a team to support the business.
  • The story emphasizes the significance of equity and ownership, as well as the potential long-term value of such stakes in a successful business.

"For his $2 million, Perot would own 70% of the company as yet unnamed. Ken would get 5%, and we would own 25% out of our 25%."

This quote outlines the proposed equity distribution in the early stages of the business venture, with Ross Perot having the majority stake, and Bernie Marcus, Arthur Blank, and Ken Langone sharing the remainder.

"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."

This quote from Ken Langone illustrates a counterintuitive strategy for raising capital, where the perceived value of a business venture is increased when traditional funding avenues are not available.

The Importance of Company Culture and Autonomy

  • Bernie Marcus emphasizes the need for autonomy in running the business and the ability to make decisions without interference.
  • The story of the Cadillac highlights the clash between Perot's corporate culture and the entrepreneurial spirit of Marcus and his team.
  • The narrative underscores the significance of aligning company culture with the values and vision of its leaders.

"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."

Bernie Marcus argues for practicality and cost-effectiveness in his choice of a company car, challenging Ross Perot's corporate policy and asserting the distinct identity of the new company.

"If this guy is going to be bothered by what kind of car I am driving, how much aggravation are we going to have when we have to make really big decisions?"

This quote reflects Bernie Marcus's concerns about future conflicts with Ross Perot, predicting that minor disagreements could foreshadow greater issues in their business relationship.

The Role of Investors and Negotiations in Business Startups

  • The narrative details the process of seeking investment and the challenges faced by Bernie Marcus and his team.
  • The discussions with investors highlight the importance of trust, past performance, and the potential for future success.
  • The story demonstrates the complexities of investor relations and the negotiation of terms that align with the founders' values.

"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."

Ken Langone encourages previous investors to reinvest their profits into the new venture, leveraging the successful track record of Bernie Marcus and Arthur Blank.

"Isn't it amazing how much Sandy influenced his life?"

This quote reflects on the impact that previous experiences, particularly with Sandy Sigoloff, have had on Bernie Marcus's approach to business and his determination to maintain control over his ventures.

The Significance of Financial Support and Banking Relationships

  • The story of Rip Fleming's support for Home Depot illustrates the critical role of banking relationships in securing financial backing.
  • The narrative highlights the personal risks taken by individuals like Rip to support the business ventures they believe in.
  • The importance of loyalty, personal connections, and trust in business is underscored through Rip's actions.

"He put his career on the line for you."

This quote reveals the extent of Rip Fleming's commitment to Bernie Marcus and Arthur Blank, showing his willingness to risk his own career to secure funding for their business.

"I realized that I had no choice and tore up the envelope containing Rip's letter of resignation."

The bank's CEO recognizes the value of Rip Fleming's relationships and contributions, ultimately deciding to support the Home Depot loan, demonstrating the power of personal conviction and loyalty in business decisions.

Pricing Strategy and Business Survival

  • The incident with the fireplace screens underscores the importance of pricing strategy in the success of retail businesses.
  • The narrative conveys the urgency and risk involved in significant purchasing decisions, especially during times of financial difficulty.
  • The story illustrates the critical role of understanding market demand and capitalizing on opportunities to ensure business survival.

"These fireplace screens sell up to $139 at Montgomery Ward. He said the guy needed to dump them right away. And I bought the entire shipment for an average of $33 a screen."

Pat Farah's decision to purchase fireplace screens at a significantly reduced cost highlights the aggressive pricing strategy that can create a competitive advantage for a retail business like Home Depot.

Pricing Strategy and Customer Attraction

  • Home Depot used aggressive discounting to attract customers.
  • Initially, screens were considered to be sold at $89, but the price was progressively lowered to $59.
  • The low pricing strategy was so effective that it drove significant customer traffic to the stores.
  • This event was identified as a critical moment for Home Depot's growth.

"The minute the ad appeared, however, people began flocking into the stores and we blew through the screens in about four days."

This quote highlights the success of the pricing strategy, demonstrating that the low price was a major factor in driving customer traffic and sales volume.

Expansion and Initial Public Offering (IPO)

  • Home Depot's expansion required significant capital, leading to the decision to go public.
  • The IPO was necessary to fund growth beyond the limitations of starting capital and borrowed money.
  • Going public meant loss of privacy and increased scrutiny from Wall Street.
  • The company delayed going public to retain more ownership and because the industry perceived them as failing.

"There is a limit on how much you can expand on starting capital and on borrowed money."

This quote explains the financial constraints that led to the decision to go public, emphasizing the need for additional funding to support expansion.

Strategic Secrecy

  • The company valued secrecy to avoid competition.
  • The quote from "Becoming Steve Jobs" draws a parallel between Home Depot's situation and Pixar's challenges in the animation industry.
  • The internet has enabled the creation of many efficient, yet hidden, profitable businesses.
  • Publicizing profitability can lead to increased competition and margin erosion.

"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, it's inevitable that the clones are going to happen."

This quote underlines the strategic advantage of keeping financial success private to prevent the emergence of competitors.

Transition from Private to Public

  • The transition allowed founders to liquidate some equity and become financially secure.
  • Ken Langone, one of the supporters, chose not to sell his shares.
  • The move to public ownership was a significant change in the company's history.

"In the conversion from private to public company, we had our first opportunity to take some equity out of the company."

This quote describes the financial benefits for the founders when Home Depot went public, allowing them to gain liquidity and pay off personal debts.

Learning from Retail Giants

  • Bernie Marcus emphasized the importance of understanding and focusing on core business by studying other retailers.
  • The book "The Big Store" about Sears influenced Home Depot's approach to management.
  • Executives, including attorneys, were required to work in stores to understand the business better.

"I wanted our people to read the book so that they understood how important our core business is."

This quote reflects the lesson learned from Sears' mistakes and the importance of maintaining focus on the core retail business.

Acquisition of Bowater Home Centers

  • Home Depot's acquisition of Bowater was intended to accelerate expansion but resulted in significant challenges.
  • The Bowater acquisition drained resources from existing stores and was a cultural mismatch.
  • The experience taught Home Depot valuable lessons about overestimating capabilities and the dangers of arrogance.

"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."

This quote captures the humbling experience of the Bowater acquisition, teaching Home Depot to realistically assess their capabilities and avoid overconfidence.

Conclusion and Reflection

  • The podcast concludes with an encouragement to read the full story in the book.
  • The host expresses gratitude to listeners and asks for recommendations to help spread the podcast.

"If you want the full story, buy the book."

This quote serves as a call to action for listeners interested in learning more about the Home Depot story and supports the podcast by promoting the book.

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