Building on Bedrock

by Derek Lidow

  Perfection doesn’t exist, and entrepreneurs who insist on it will make people uncomfortable because such bosses never offer praise. Certainly, some entrepreneurs who withhold praise have built successful businesses. But people feel most comfortable working for, buying from, and being with flawed people like themselves.

  How to Split Up

  A high percentage of founding partners cannot agree on what to do next when their company starts to grow. When that happens, the performance of the company in question is always negatively impacted and often collapses. These transitions are perilous. Few entrepreneurs and nascent companies survive the loss of individuals with critical skill sets, let alone with the momentum they need to stay ahead of the competition. But Stephanie did.

  How Stephanie DiMarco managed the fraught task of easing her partner out is rife with lessons for entrepreneurs about how to lead a successful startup. On forming Advent, Stephanie added a valuable resource that many entrepreneurs neglect to put in place—an experienced board of directors to help her overcome naiveté. As is almost always the case, with success came trouble: her partnership with Steve foundered and the company was in danger of stalling. Steve was and is a great engineer, but his love of engineering was greater than any desire to see Advent become a big, valuable company. He preferred to make things perfect rather than make them work economically, and he felt uncomfortable supervising anyone who felt otherwise. This mindset resulted in missed schedules among the company’s engineers. As soon as Stephanie identified the problem she secured managerial coaching for Steve. When that produced no change, she wisely sought the advice of her board, ultimately working out an agreement to buy Steve out with the stipulation that he spend up to one year training his successor. Stephanie, with the help of the Board, had found a graceful way to ease Steve out, a breakup that most entrepreneurs with partners find impossible to face. Relying on other people’s skills doesn’t mean letting those people hold you back—but this is true if and only if you understand how to deal with these tricky and stressful people issues. Like Sam Walton, Stephanie did not possess the skills critical to dealing with this situation, but she was smart enough to access those skills through her tight circle of advisors, mentors, and board members.

  When it comes to entrepreneurship, skills matter; style and personality, not so much. In order to prosper, Sam and Stephanie got lots of help when and where they needed it. But without some minimum level of competence, of themselves and within their founding team, they would never have succeeded. We need to understand the answer to the question, “How good?” As we’ll find out in our next chapter, the answer isn’t so simple.

  * * *

  [14] Profit margin is the percentage difference between what an item is sold for and how much it cost.

  [15] By the time Wal-Mart went public Sam had closed some of his Ben Franklin stores to concentrate his time and resources on opening new Wal-Marts.

  [16] The Price Club was actually founded by a Mr. Sol Price.

  CHAPTER 7:

  How Good

  Walt Disney barely made it as an animator and as a head of an animation studio. Barely. But when he finally put all the pieces in place, he redefined and reinvented several different forms of entertainment. That makes Walt Disney an excellent role model for understanding exactly how good you have to be to make it as an entrepreneur. Though he died years ago, you should get to know and appreciate his story. Because his impacts on art and entertainment are still strongly felt, he has been the subject of excellent biographies and a great deal of research.

  As a child growing up in a family with limited means and little joy or affection, Walt found drawing a welcome distraction. He got started with a sketchbook and colored pencils that an uncle gave him when he was five. Friends, neighbors, and teachers praised him for his drawing skills and encouraged his pursuit, though his father thought it frivolous. Aspiring to be a newspaper cartoonist, Walt drew for his school newspaper and at every opportunity he could find. While in high school, he even took adult night classes at Chicago’s Art Institute in order to learn professional drawing and cartooning skills.

  Home was such a joyless and dispiriting place that Walt left home at sixteen to join the army. While the army rejected him for being too young, the Red Cross didn’t look too closely at the age of the scrawny kid who applied to drive ambulances. He wound up in France right after the end of World War I and experienced a world very different from the Midwest where he was raised. He drew whenever he had the chance, passing up ample opportunities to meet the friendly and appreciative locals with his fellow Red Cross volunteers. He preferred drawing by himself and earning some extra money by sending cartoons back home to a local newspaper. At age eighteen, he came back from France as a strong, strapping young man brimming with confidence that he would soon be a famous newspaper cartoonist.

  Not wanting to return to his parents’ home in Chicago, Walt went to live with an older brother in Kansas City. His brother helped him land a job drawing for a local advertising agency. But there wasn’t enough work to keep him busy and the job soon fizzled. Rather than look for another one, eighteen-year-old Walt teamed up with another draftsman laid off from the same agency, Ubbe “Ub” Iwerks, to start an agency based on the selling power of humor. In spite of being an introvert, Walt had no qualms about walking into downtown business establishments and telling anybody who would listen that he could get them more customers with humorously illustrated ads and flyers. In the first month Ub and Walt made some good money, but business tailed off quickly when the ads didn’t bring in the promised throngs of new customers. To survive, they made their agency into a part-time business, and Walt took a job around the corner at an agency that created ads for movie theaters to run during intermission. Walt quickly got immersed with his new job, and the agency he started soon died.

  With stars like Charlie Chaplin and Harold Lloyd, movies were already a huge, fast growing business in the early 1920s, attracting scores of entrepreneurs, completely analogous to the entrepreneurial attraction of today’s Internet. Bigger cities each had advertising agencies that specialized in designing eye-catching ads to show specifically to movie audiences. Animation was one of the ways to make an eye-catching ad, and the agency Walt went to work for had a small group that did that. Walt was enthralled, and his interest quickly got him transferred to work with the animation group. He borrowed a camera from the agency owner and in the garage in back of his brother’s house he set up a crude animation rig. He worked until past midnight virtually every night animating his own humorous versions of classic fairy tales. He took out the only book on animation he could find at the public library. He followed its every instruction, and then he’d experiment with his own ways of getting the effects he wanted. His animations were crude, but nobody at the agency or in all of Kansas City could do any better. Several successful animation studios already existed at that time, and millions loved cartoon characters like Felix the Cat. But all the famous studios and their animators were located in New York City, and Walt felt no pull to move there.

  Not long after Walt started experimenting, he began to feel constrained and started to dream about being his own boss and making his own funny animated cartoons. He showed his work to the theater owners in town, but it took about a year before one of them agreed to show his series of short humorous cartoons during intermissions. The cartoons were satires of life in Kansas City. Although the local theater owner paid only a small sum of money, Walt felt this indicated that he could prosper from his talents. So after work was over at the ad agency, and before he went to his brother’s garage to produce his weekly Kansas City cartoon satire, Walt began asking everyone he knew to loan him the money to start his own animation studio. Although his older brother and a successful uncle declined to invest, they introduced him to a prominent member of the local political elite who thought that it would be great to have a movie studio in Kansas City. He gave Walt a loan for the equivalent in today’s money of around $50,000, and he u
rged his business and political buddies to invest, as well. Walt used this largesse to incorporate Laugh-O-Gram Studios (even though at twenty he was technically too young to incorporate a business in Missouri) and quickly hired eight people, including his former partner Ub Iwerks, and a salesperson, to start production on a series of five-minute animated fairy tales.

  As soon as the first of the animated fairy tales was finished, Walt dispatched his salesman to New York to try and sell it to a distributor. Over the next several weeks, the salesman lived and entertained lavishly in New York, which, when combined with the all the Kansas City salaries and production expenses, depleted the money Walt had in the bank. Walt had no choice but to call his salesman back to Kansas City and start begging for more money. But on the day he departed New York, the salesman picked up a written commitment from a small regional movie distributor to buy six animated fairy tales for $11,100 (the equivalent of around $150,000 today), with $100 up front and the rest paid on delivery of the six fairy tales the following year! Although this was an absurdly bad deal because Laugh-O-Gram would take on all of the risk for a year’s worth of work, Walt felt it vindicated his efforts and sent a clear sign that he should carry on and borrow more money wherever he could find it. Dozens of people loaned him small sums of money to help him fulfill his dream.

  Moving several times in the dead of night to avoid bill collectors and to keep his equipment from being repossessed, Walt eventually made four of the six animated fairy tales. Unfortunately, within months the regional distributor went bankrupt, leaving Walt with no customer whatsoever for several of the animations he had already finished but not yet delivered. To get the money he desperately needed, Walt made a few other animated shorts for local businesses, using the opportunities to try out new techniques. But after a year of effort Walt was all alone and homeless (his brother had moved to Portland), his clothes were threadbare, and he was skeletal. Every night he slept on a different friend’s floor. With debts that amounted to the equivalent of about half a million dollars today, he recognized that he had no choice but to declare bankruptcy. He sold his camera and packed his few remaining possessions in a battered cardboard suitcase and boarded a train for Los Angeles, dreaming of making it as a movie director.

  At that time of the bankruptcy Walt Disney was the best animator and animated filmmaker in Kansas City, but the region had nowhere near enough customers to sustain a local studio. He failed to establish his reputation with any of the national distributors in New York that would have enabled him to break into the business. Walt knew he had to sell in New York and he tried, first with an expensive salesman and then on his own, but he was not yet skilled or savvy enough. He was a naïve businessperson, and he lacked the basic skills to manage money. Although Walt had initially hired a business manager, he used him basically as a bookkeeper until he could no longer afford to pay him. And although Walt was thoughtful about how he planned his animated shorts, he was not thoughtful at all about how he planned to spend his money—he thought money was just the means to his ends.

  Walt learned a lot about animation from his failure. By the end of the experience, his animation production skills were as good as almost anyone’s in New York. In fact, while experimenting with new techniques in his frenetic attempt to save the studio, Walt Disney developed a novel one for combining real and animated footage. He even made a short called Alice’s Wonderland starring a four-year-old actress who played with cartoon cats. But by the time of Walt’s bankruptcy, none of the New York distributors had offered to distribute the novel short.

  When Walt launched his first studio, he was a pure, high-risk entrepreneur. He conducted the equivalent of a half-a-million-dollar experiment with other people’s money, only to discover that he wasn’t good enough to make his entrepreneurial dream come true. With crude skills and no coach, he chose to compete as a walk-on in the major leagues of animation. He raised his half-million dollars from naïve investors who enabled him to practice and improve his animation skills. Today, entrepreneurs undertake similarly expensive experiments with the money of friends, family, or strangers.

  How good do you have to be at what you do to succeed as an entrepreneur? The answer depends on what entrepreneurial league you want or need to play in. In Walt Disney’s case, he was good enough at the age of twenty to sell his animations locally but not nationally, so he went bankrupt.

  Owning a small store in a small town may not require as much mastery of as many skills as founding an animation studio or founding a company that provides cybersecurity software to the world’s top banks (one of today’s most sophisticated businesses). And while the independent retail owner and the cybersecurity founder are both entrepreneurs, they appear to have little else in common. But in fact, the success of both of them results from decisions they make about how good they want to be relative to their fellow entrepreneurs. All entrepreneurs ultimately decide what league they’ll try playing in—unfortunately, most choose unconsciously and choose the wrong one.

  Succeeding as a small shop owner requires knowledge of where you can buy the goods you think you plan to sell at a low enough price that you can make enough money to pay your rent and salaries. You need to know basic math so you can calculate change or add up the total cost of a list of items. It would also be beneficial to understand what your customers want to buy and the price they’re willing to pay.

  If the shop owner proves competent at buying goods that customers want, at a cost lower than customers are willing to pay, and the owner is frugal and able to save the profits, then the shop owner may choose to use the savings to rent a larger space and sell a wider range of goods. To compete with other shops selling the same goods, the shop owner would then need employees to help and would need the skills to find, hire, and train honest people who knew enough basic arithmetic to make correct change or to count the goods as they were delivered from the wholesaler. To make a profit running a medium-sized shop, the former small shop owner would need more sophisticated merchandising skills, at least as strong as those of shop owners selling similar goods. The shop owner would also need some basic bookkeeping and inventory management skills to keep track of money, what goods to replenish, and what items were selling well.

  When it came to skills, Sam Walton knew his limitations. While working for J. C. Penney after college, Sam had been trained to be a skilled department store salesman, but he understood that didn’t prepare him to run a small-town store, let alone compete with established storeowners. As a young man just out of the army, knowing he lacked those skills, he chose to buy a Ben Franklin franchise store. He didn’t want to risk his future on having to instantly acquire the skills required to source, inventory, and merchandise thousands of items. So he gladly agreed to forgo a significant portion of his potential profits in exchange for being trained to run a well-branded store supported with sourcing and distribution through Ben Franklin.

  Walt Disney and Sam Walton took opposite paths in mastering the skills they would need to compete in the entrepreneurial leagues they joined. Walt chose to compete in the big leagues of animation, acquiring the skills to do so through trial and error and with no expert coaching. Sam chose to de facto pay a brand name coach to help him prepare to compete with the two other small-town shop owners in Newport, Arkansas. He had to work hard to implement all he learned from Ben Franklin’s supervisors, which he then augmented by copying what he saw was working at other stores. Sam succeeded to the point where his profits allowed him to buy a new store when his landlord refused to renew his lease. On the other hand, Walt’s choice created no value but lots of experience, and he lost lots of other people’s money in the process, forcing him to leave town to get another chance.

  On declaring bankruptcy, Walt felt his best opportunity lay in joining his Uncle Robert and his brother Roy in Los Angeles. Living off of Uncle Robert’s good will, Walt ignored his uncle’s expectations that he would quickly get a job, any job. Instead, Walt spent his time visiting movie studios and trying to s
ell versions of his Kansas City animation ideas to LA’s even more sophisticated theatre owners. Fortunately, a New York distributor of cartoons began to have contract difficulties with one of the animators she worked with. So she decided to reconsider an inquiry she had received from Walt about her interest in Alice’s Wonderland. She offered to pay Walt $1,500 for his novel combination of animation and live action, giving him a chance to get back into business.

  Walt, who was never afraid to ask for help, made a decision to ask his older brother Roy to be his partner in a new business, Disney Brothers Studios. As we learned from Sam’s experience, key partners can bring essential skills to an enterprise. Whether Walt realized it or not, Roy had essential skills that he lacked, including bookkeeping and money management. Roy had always been good with figures and at saving his money, as he had been a bank teller before being diagnosed with tuberculosis. Indeed, Roy was still recuperating in a tuberculosis ward when Walt snuck into his room in the middle of the night to wake him up and ask for his help. As his convalescence was coming to an end, Roy had been contemplating what to do next. He was delighted to help his beloved little brother with his business venture.

  Roy’s involvement and maturity made it possible to borrow $500 from Uncle Robert to rent space and set up the business, money they paid back with interest when they received the $1,500 for Alice’s Wonderland. The distributor, who wanted Walt’s cartoon idea to work as much as Walt did, was disappointed with it. She said its poor workmanship and dull story made it unusable. Nonetheless, she gave him permission to produce a second episode for another $1,500. Walt, who was always open to artistic criticism, produced a more appealing and better-executed second episode that satisfied the distributor and gave her the confidence to offer Walt a contract to produce a new episode every month for the next year.