This is adapted from Built from Scratch (by Bernie Marcus and Arthur Blank, founders of The Home Depot with Bob Andelman).
On April 14, 1978, Bernie Marcus (CEO) and Arthur Blank (CFO) who had done a good job of running Handy Dan hardware store chain very successfully up till that point, thought they were attending a corporate planning meeting, but were instead fired by their boss, Sanford C. “Sandy’ Sigoloff (who liked to refer to himself as Ming the Merciless). Bernie Marcus up to that point had thought he couldn’t be fired, to put it in his own words, “I still believed that if you did something well, if you made a lot of money, that people, even if they didn’t like you, would tolerate you. How wrong I was.” As a side note, this is another reason why middle class folks (MCFs) need to switch focus away from ‘jobs, jobs, jobs’ to ‘own, own, own’ – if you depend only on a job, you have very little to no control over your life and financial well being.
Anyway, Bernie Marcus had determined earlier on, that hardware store store chains, such as, to put it in his own words, “… Handy Dan and this whole industry is vulnerable. Too many small chains, no national companies, and prices are too high.” Ken Langone, an investment banker friend of Bernie later asked him how much it would take to start the kind of store he had in mind when he said (to Ken Langone) earlier on “There is a store I have created in my imagination that is going to make Handy Dan obsolete.” Bernie threw out a number “Twenty-five million”.
Later on, they went out seeking investors to at least start the venture off with $2 million – at one point, they almost struck a deal with Ross Perot, who would have put up the $2 million and owned 70% of the company. That $2 million, not counting dividends over the years, would be worth over $28 billion at the end of 2010 (in 1999, at the writing of the book [referenced above], it was worth more than $57 billion). Why did the deal fall through with Ross Perot,? He insisted that his employees (in this case Bernie Marcus) should not drive Cadillacs – Bernie Marcus argued that it was cheaper for the new company to take over the lease on his used (4 year) Cadillac than going out and getting a new Chevrolet. Another example of the limitations of a job and how employers dictate the choices of employees.
Subsequently, Ken Langone assembled a group of about 40 investors (who had earlier made a lot of money from Handy Dan at Ken’s urging) to put the $2 million (in units of $25,000 of preferred stock) for a 50% stake – which at the end of 2010 (not including dividends over the years) is worth over $20 billion.
- $25,000 was a lot of money around 1978/79 when this deal was being put together. Do you think many MCFs had access to that kind of money? Probably not.
- Even if the odd MCF had access to $25,000, was it likely that she would have heard about this opportunity? Very unlikely.
- Even if she did hear bout the opportunity and participated, how many other MCFs would she have been able to invite along for the ride? Very few, if not zero.
- If there had been a platform (like the MCWB Club) at the time, was it more likely that the opportunity would have been open to more MCFs to participate? Even if they only had $10 to put down? Probably.
- Why? Because for every deal that is happening anywhere in this world, there is at least one MCF involved as a junior level lawyer, accountant or other adviser – through these leads, the MCWB Club may have gotten to know about it and found a way to get many MCFs in. MCFs who may have put in $10 in 1979 would today have an income producing asset worth $100,000 with annual dividends (before tax) of $2,700. Starting with $10! If and when these MCFs die, they would still be able to pass this asset on to their heirs. Do you have a job that can match that?
- We know that many of these start-up stories go down in flames – which is why you should limit your total exposure to such seemingly risky ventures to no more than between 1% – 55 of your total available resources. However, these fellows had a very good track record in their industry and were worth betting on. Even if you put down $10 each in 20 such deals ($200 total) and only one succeeds on this scale, you would have done very well.
- These type of deals are currently out of the reach of MCFs – the MCWB Club will bring it within reach.