Earlier this week, I shared how Pat Farrah became a Home Depot cofounder. Farrah was an entrepreneur who started Homeco, a concept similar to what Home Depot would become.

The language of business (i.e., accounting) is critical for entrepreneurs, but Farrah didn’t speak it. Equally as important, Farrah didn’t know what his costs were. His bank accounts had money in them, so he thought he was doing well. He and his top lieutenants even bought Porsches and Cadillacs. While Homeco was going through due diligence to be acquired, Farrah shared that he had no idea what his margins were or how much money he was making. When his suitors asked him, he guessed that his margins were 23% and he was solidly profitable. After the suitors cleaned up his books and audited them, they learned that the true margin was half Farrah’s estimate. And Homeco wasn’t just unprofitable, it was bleeding so much money that it was already insolvent by the conclusion of the audit. The acquisition was canceled. Homeco failed. Farrah was forced to file for personal and business bankruptcy.

The most successful entrepreneurs running profitable companies have the wisdom to get a handle on costs. Their focus on generating a profit usually leads them to learn basic accounting concepts (or hire someone knowledgeable about them). Their understanding of their costs leads to better decision-making and a company that generates cash (i.e., profits) instead of consuming cash.

Understanding costs served me well as a bootstrapped entrepreneur. I remember watching a competitor sell a popular automotive part for less than our cost. Customers loved the item, and it drove a significant amount of revenue to this competitor. Our team wanted me to compete on price so we could capture some of that revenue, but I declined. It didn’t make sense to lose a material amount of money on each transaction. Selling below cost is unsustainable. We didn’t have outside investors, so every dollar mattered. I reasoned, Why play a game we know we can’t win? Over time, I started to see other decisions this competitor made, and I suspected its leaders didn’t have a good grasp of its costs. A year or so later, it went out of business. I suspect that not tracking its costs caught up with it.

I’m enjoying reading Built from Scratch: How a Couple of Regular Guys Grew The Home Depot from Nothing to $30 Billion, a book about Home Depot’s founding. It was published in 1999, and initially I was worried because it missed the last 25 years of the company’s history, but I realized I was looking at it the wrong way. Because the book covers a shorter period, it goes into more detail about things I care about most—mainly the actions taken in the early days and the wisdom gained from them. If the book covered 25 more years, it would have to be twice as long or less detailed.

I’m a fan of founders thinking about the market for their products or solutions. It’s hard to build a big business in a small market—there just aren’t enough people willing to pay for what you’re selling. Given the importance of markets, I’m always curious about how founders who achieved outsize success thought about their market in the early days and how that shaped their strategy.

This book detailed how the Home Depot founders thought about their market and how their thought process and strategy evolved. Again, this book was published in 1999, so the data reflect that period. Here’s what they realized:

• In 1996, the do-it-yourself industry was thought to be $135 billion in annual sales. Home Depot had sales of $20 billion that year, so 15% of the market. That left 85% of the market for it to go after—$135 billion is a big market, and 15% leaves a lot of room for growth.
• The founders realized their market wasn’t the do-it-yourself market; it was the home improvement market. The home improvement market included consumers (do-it-yourselfers) and businesses doing home improvements (i.e., contractors). This expanded market included anything needed to maintain and improve homes and was more fragmented, which equaled more opportunity.
• The home improvement market in 1996 was $365 billion, not $135 billion, meaning Home Depot had only 5% of the market.
• Selling to smaller contractors was a huge opportunity. The company retooled its stores and operations to cater to smaller contractors in addition to consumers.

Home Depot redefined “the pond in which we fish,” as they put it in the book. The realization that its market was much bigger than consumers doing weekend projects led to an adjustment of their growth strategy.

Over 25 years have passed since this strategy was implemented. I was curious how it played out, so I checked Home Depot’s SEC filings and found its 2023 10K (annual report). The company reported annual revenue for 2023 of $152 billion.

Markets matter a lot. Founders should understand their market and formulate their growth plan accordingly. Home Depot found a large and growing market that helped propel the company to levels of success the founders never dreamed of.

I’m reading Built from Scratch: How a Couple of Regular Guys Grew the Home Depot from Nothing to $30 Billion. It’s about the founding of Home Depot and its growth until 1999, the year the book was published.

One thing that stood out to me was how Bernie Marcus and Arthur Blank identified another cofounder, Pat Farrah. Farrah was a merchandising and marketing genius who started a home improvement superstore called Homeco in California in 1978. Farrah’s store was packed with customers because of his innovative approaches to marketing and merchandising. Marcus and Blank heard about Homeco and went to visit. They were blown away by what Farrah had created and how he’d built the business. It was exactly what Marcus had envisioned for the yet-to-be-named start-up, but Farrah had beaten them to the launch.

Farrah’s skills helped get Homeco’s stores full of customers and sales growing straight out of the gate. But his weaknesses ended up sinking his company. Farrah didn’t understand accounting, processes, or controls. Homeco was doing brisk business. Stores were packed and money was coming in. But Farrah didn’t know whether Homeco was making money. Vendors were sending products but weren’t being paid. It turned out that Homeco was losing money rapidly. Farrah had no idea until Blank brought some things to his attention. Homeco closed a few months after Blank warned Farrah about the issues, and Farrah filed for personal and business bankruptcy.

Farrah had failed as an entrepreneur, but Blank and Marcus looked past that. They recognized that his talents in merchandising were unlike anything they’d seen in anyone else. They wanted those skills at Home Depot, so just two days after Homeco folded, they mounted a full-court press to convince Farrah to help them launch Home Depot. They reasoned that Homeco had failed because Farrah had skills gaps that made the business vulnerable. They also noticed that where Farrah’s skills were weak, Marcus’s and Blank’s were strong. And vice versa. Marcus and Blank figured the three of them could be a complementary unit with exceptional skills in all the key areas needed for Home Depot to survive. Failure or not, Farrah had to be part of the team. Farrah eventually agreed to join as a cofounder, and the first Home Depot store opened in June 1979.

I like the approach Blank and Marcus took to identifying a cofounder: find an entrepreneur who has failed but has skills that complement those of the founding team, filling the gaps. The failed entrepreneur likely has learned a lot from his (or her) failure, has free time, and wants another shot to prove he (or she) can succeed as an entrepreneur.

A failed founder joining the right cofounders at another company can be a win-win for everyone. It worked out pretty well for the Home Depot founders.

Today I had a chat with the founder of an early-stage company. He’s done discovery and built an MVP. People are using his mobile app, but he’s noticed something odd. Users are telling him one thing, but in the app they’re doing something different. The founder has been leaning into what users have said they want, but the features built to satisfy them haven’t resonated with them. He’s frustrated.

Building a company that sold products to consumers taught me something: for many reasons, consumers don’t always say what they mean. Sometimes they act without thinking about or understanding what’s driving them. They don’t have clarity on their motives, so it’s not realistic to expect them to clearly articulate them to me.

When I found myself in situations where consumer actions and words didn’t align, I followed a simple rule: actions trump words. What people do is likely an accurate reflection of what they’re thinking or feeling, so lean into their actions. It’s easy to say something but not mean it—the energy and time required are minimal. It takes more energy to act. People usually act when they’re driven by a belief or feeling that warrants exerting energy.

I suggested that this founder consider diving deeper into what users are doing by asking clarifying questions about what’s driving their actions—I suspect something is. This may get the founder one step closer to product–market fit.

I read a quote today that I like:

"Every morning in Africa, a gazelle wakes up, it knows it must outrun the fastest lion or it will be killed. Every morning in Africa, a lion wakes up. It knows it must run faster than the slowest gazelle, or it will starve. It doesn’t matter whether you’re the lion or a gazelle—when the sun comes up, you’d better be running."

~ Christopher McDougall

I like this quote because it does a good job of illustrating how complacency can negatively affect anyone, regardless of their advantage or lack thereof.

Today I finished reading Kick Up Some Dust: Lessons on Thinking Big, Giving Back, and Doing It Yourself by Bernie Marcus, cofounder and longtime CEO of Home Depot. The book is about Marcus’s life. It describes his upbringing, career in corporate America, transition to entrepreneur, and transition to philanthropist. Marcus is almost 95 and has accomplished (and failed at) many things over the years. I was eager to hear about his experiences and the lessons he learned from them.

Marcus shares what he calls “core lessons in business and life.” He makes it clear that lessons are easy to grasp but hard to put into action. Here are the lessons:

• Confidence – You won’t get anywhere if you don’t believe that you can “do it yourself.” You must be confident that you have the skills and abilities to accomplish any task or solve any problem. If you don’t have the skills, you can learn most of them without going to school.
• Teamwork – On the other hand, you don’t have to do hard things by yourself. Some people will help if you give them the opportunity.
• Full-time – You must be committed and determined to make whatever you’re pursuing work. Marcus says “[t]here is no such thing as part-time passion.”
• Risk taking – If you find a problem or need that isn’t being met, you must take big risks to meet the need or solve the problem. Consider taking the biggest risks when you’re young; there’s less downside.
• Failure – “Failure is the price you pay on your way to success.” Marcus describes his ninety-plus-year journey through life as "stumbling" fueled by optimism.
• Storytelling – Marcus considers this the most important lesson. You must be able to articulate what you’re doing and why it adds value in a compelling story that’s easy to understand.

I’m glad I found this book. I learned a lot about Marcus that I wasn’t aware of. He’s a driven person who’s had a significant impact as both an entrepreneur and a philanthropist.

After reading the book by Home Depot cofounder Ken Langone, I decided to go deeper on the other cofounders. Bernie Marcus was the CEO for many years, and I discovered that within the last few years, he wrote Kick Up Some Dust: Lessons on Thinking Big, Giving Back, and Doing It Yourself. Bernie is almost 95 years old, so I was curious about the wisdom he’d accumulated after almost a century. I ordered his book.

I’m not finished with the book yet, but so far as I can tell, Bernie has a strong personality and entrepreneurial fire inside him.

Bernie shared his thoughts on failure, and they got me thinking:

"I think how you respond to failure comes down to whether your fear is stronger than your passion. People driven by passion see setbacks as unpleasant, but inevitable challenges. What they know that quitters do not is that failure can be eaten in small pieces."

I never enjoyed failing when I was younger, but my mindset shifted when I started being entrepreneurial. I was passionate about what I was doing and driven to see it succeed. This meant I was trying a bunch of things and a lot of it didn’t work. But I noticed a pattern. Going through the things that didn’t work led me to the things that did work. Instead of looking at things via a success-or-failure construct, I began looking at them as either a success or a lesson that got me closer to success. Failures became expected. Many were still painful, but I focused on what I could learn from each failure instead of the pain.

Failure is part of life. As they say in baseball, nobody bats a thousand. Even the best players strike out at the plate. But a single strikeout doesn’t stop them from winning the World Series as long as they don’t give up and keep playing the game to the best of their ability.

One thing I hear founders discussing is raising the next round of growth capital from venture capital investors. That’s their goal. They orient everything the team does around it. They spend time figuring out what metrics investors need to see to be comfortable investing. Then they work backward to hit those metrics.

I know a founder who set a goal of raising a few million for his seed round, even though he had sufficient capital in the bank. He heard that seed-stage investors want to see a few hundred thousand dollars in revenue before considering writing a check. He wasn’t close to that, so he found a way to get there fast. His software product was sold on a subscription basis (monthly or yearly), meaning the revenue was recurring every month or year. He decided to run a promotion to give new customers lifetime access to the product in exchange for a one-time payment at a heavily discounted price. The result was a surge in new customers and one-time revenue.

The founder hit the metric that seed investors wanted and got meetings with dozens of firms. The problem was that the quality of the revenue was low. First, the revenue wasn’t recurring, but the costs of running the platform were. Next, the customers weren’t people who were enthusiastic about the product because it solved a problem for them. Rather, they were bargain hunters who were loyal to getting something for a steal. They were never satisfied, and they needed a lot of handholding from the service team to onboard and use the product. They just weren’t an ideal customer profile for his product. After many conversations, the VC firms decided against investing in this company—I assume for these reasons.

The lesson from this is to start with the right goal. The goal of any company should be to satisfy and bring value to customers by solving a problem that’s sufficiently painful for them. A company that succeeds in doing this produces positive metrics (revenue, retention, engagement, etc.) that investors like to see.

All companies need capital to stay alive, but continuously raising capital from investors shouldn’t be the end goal. Instead, it should be the byproduct of having created something that satisfies customer demand for a solution to a painful problem and that has the potential to scale tremendously. By focusing on the customer and creating something they want, you up your chances of getting capital from investors (if you even need it).

This week, an entrepreneur told me about a real estate project he’s finishing. He shared that he ran into several delays and other hurdles that he didn’t anticipate. Because of them, he had to adjust how he funded the project to give himself enough runway to complete it. The project looks great and is projected to do well financially.

During our chat, I asked him about the projected completion timeline versus what played out. He planned for the project to take a little over a year, and it ended up taking twice as long. The only reason he was able to complete the project instead of being forced to abandon it was that he personally had the cash to see it to completion.

In the end, it should all work out for this entrepreneur. His situation reminded me of a lesson I learned the hard way as an early-stage founder. When I’m doing something difficult, unforeseen events will cause things to take twice as long as I thought they would. Building in enough runway to support things taking twice as long should be part of my plan.

Yesterday I shared a key concept I took away from reading Home Depot cofounder Ken Langone’s book I Love Capitalism!: An American Story. Today I read a section where Langone shared the details of how he orchestrated Home Depot’s successful IPO in 1981. It was a tough environment in which to raise money from public-market investors. The economy was in a recession, inflation was through the roof, and interest rates were surging. But Home Depot was just a start-up and needed cash.

One week before the IPO date, bankers said they could fill only $3 million of the target $6 million the company needed to raise. Langone got to work and figured out a way to craft a creative deal and sell it to the existing investors (who ended up not being able to sell shares in the IPO). Everyone agreed to the new terms, and the company raised the $6 million it badly needed.

Langone’s reflection on this difficult situation stuck with me:

If there’s anything I would take a bow for throughout this whole process, it would be this: never giving up, and thinking creatively, instead of reactively, when the chips are down . . . . You get to enjoy lemonade instead of the lemons God gives you . . . .

Langone was in a tough spot. Home Depot cofounders, employees, and existing investors were all counting on him to remove the IPO roadblocks before the deadline. He was in a high-pressure situation, and he kept pushing. He focused on figuring out how to accomplish the goal given the hand they’d been dealt. His solution was unorthodox but ended up working. Absent Langone’s persistence and resourcefulness, Home Depot might not have gone public in 1981 or, worse, survived.