Today I finished reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. William N. Thorndike, Jr. profiled these CEOs:

• Tom Murphy, Capital Cities Broadcasting
• Henry Singleton, Teledyne
• Bill Anders, General Dynamics
• John Malone, TCI
• Katharine Graham, The Washington Post
• Bill Stiritz, Ralston Purina
• Dick Smith, General Cinema
• Warren Buffett, Berkshire Hathaway

The book describes how CEOs generated capital and executed creative approaches to capital allocation, and it reports their returns over a long period. I was familiar with Buffett but less so with the others. I took many notes on Murphy, Singleton, Malone, and Graham.

It was interesting to learn about Singleton’s strategy. It was the same as Buffett’s playbook, and Singleton was older than Buffett and deployed his strategies before Buffett did. Buffett has praised Singleton as one of the best businessmen ever, and I’d imagine many strategies that make Berkshire Hathaway successful were borrowed from Singleton’s playbook.

John Malone is the CEO I’m most unfamiliar with and most excited to learn more about. Malone recognized the predictability and high growth rate of the cable industry early. He used various strategies to build one of the largest cable distribution companies. He also helped seed various cable programming entrepreneurs, such as Bob Johnson of BET, and partnered with other cable entrepreneurs, including Ted Turner.

This book chronicles CEOs of publicly traded companies, so most examples don’t apply to early-stage entrepreneurs. But it does a good job of explaining capital allocation, including why it’s the most important job of a CEO, and quantifying the results of superior capital allocation by talented CEOs.

Capital allocation is a mindset and a skill all entrepreneurs should be aware of. For entrepreneurs seeking to grow their companies, capital allocation is a critical skill to master.

I started reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success this weekend. The book, written by William N. Thorndike, Jr., and published in 2012, details eight CEOs' methods and why they led to outsize returns for their shareholders over a long period.

The central concept of this book is that capital allocation is the CEO’s most important job. Capital allocation is “the process of deciding how to deploy the firm’s resources to earn the best possible return for shareholders.” It’s investing to get the highest return, so CEOs are both capital allocators and investors.

CEOs need capital before they can deploy it. They can acquire capital in three ways:

• Generating cash from company operations
• Issuing debt (i.e., bank loans or bonds)
• Selling equity (i.e., selling part of the company to VC, PE, or public investors)

When CEOs have capital, they can deploy it in several ways:

• Investing in the company’s existing operations
• Acquiring other businesses
• Issuing dividends
• Paying down debt
• Repurchasing equity (i.e., buying back part of the company)
• Launching new businesses (as the sole owner or in partnership with others)

These options make up a CEO's capital allocation toolkit. Figuring out what tools to use, if any, and when, is the skill of capital allocation. The book emphasizes that no courses are taught on capital allocation (as of 2012), so it’s a skill many CEOs lack. Now, though, Columbia Business School apparently covers this topic in its Security Analysis course.

Core to gauging the effectiveness of a CEO’s capital allocation in the long run “is the increase in per share value, not overall growth or size.” Long-term per share value essentially measures long-term value creation.

When I ran my company, I was focused on two things: running the company efficiently and generating cash. Getting the operations right consumed much of my time, and I didn’t think in terms of being a capital allocator.

So far, the stories of how these CEOs thought about and executed capital allocation strategies to generate high returns have been thought provoking. I’m looking forward to finishing this book.

I finished reading The Perfect Store: Inside eBay, a detailed recount of eBay’s early days (through 2001). Pierre Omidyar worked in Silicon Valley in the early 1990s. He saw technology creating wealth rapidly. But that wealth didn’t accrue to the average person—market inefficiencies concentrated it with the well-connected. This bothered Omidyar. He believed the internet has the power to connect everyone on Earth, which would not only accelerate wealth creation but also distribute it more equitably.

Omidyar had a vision: an efficient market that empowers the average person financially, allowing them to take control of their lives. On Labor Day weekend in 1995, his vision for what the world could look like compelled him to act. His mission was clear: create a community-driven online auction.

Jeff Bezos famously said, “Be stubborn on vision and flexible on details.”

Omidyar was stubborn on vision and flexible along the way. He made numerous decisions others would not have but that supported his vision:

• eBay was a cash register. It was profitable the first month. It raised $5 million in venture capital funding (which it never touched). Despite the abundant capital, Omidyar insisted on everyone being frugal and spending money like it was their own. He called this being “ebaysian.” This was during a time when unprofitable venture-backed companies spent $250,000 on launch parties. Omidyar didn’t spend lavishly because he wasn’t building eBay to flip or be acquired (though he came close to selling a few times). Omidyar wanted an ebaysian team to ensure that everyone focused on the goal: building a company that would last so his vision could become reality.
• Omidyar was technical and recognized that his business gaps could hinder his mission. He brought on Jeff Skoll in 1996 as cofounder a year after he’d launched. They were polar opposites, but Omidyar respected what Skoll’s skills contributed to the mission. Omidyar assumed that his year’s worth of work was worth 15% of the total company value. He split the remaining equity evenly with Skoll, which surprised Skoll. Omidyar was generous in issuing title and equity, something many founders would not have done.
• In 1997, two years after launching, eBay grew so quickly that Omidyar realized he himself couldn’t (or didn’t want to) level up fast enough to take the company to the next level. That fall, the decision was made to hire a CEO. Meg Whitman was the most ebaysian and qualified candidate. She started as CEO in February 1998. Omidyar moved aside and let Whitman take charge. He cared about the company reaching its full potential, not his title.

Omidyar’s focus on vision and flexibility in details led him to make decisions most hard-charging CEOs wouldn’t have made. eBay is almost thirty years old and has been a public company for over two decades. It has over 130 million active users globally in 190 markets. Users create 2 billion auctions/listings, which resulted in a transaction volume of $18.6 billion in Q4 of 2023. I’d say his vision is now a reality, and his approach worked well.

I’m wrapping up reading The Perfect Store: Inside eBay, which describes eBay’s early days (through 2001) in great detail. eBay’s growth was astonishing. In September 1999, four years after Pierre Omidyar created an online auction in his spare time, the company had 1,500 employees (half of whom had been hired in the last six months) and hosted $5 billion in annual auctions.

International growth was a significant growth strategy, and lessons can be learned from eBay’s experiences:

Germany

• In March 1999, six friends studied eBay and decided to launch a German version. They called it Alando.
• Alando acquired 50,000 users and 250,000 listings in two months, which indicates that Germans were adopting the internet rapidly.
• eBay took notice. In June 1999, eBay bought Alando for $42 million in stock.

United Kingdom (UK)

• UK consumers paid their phone company to surf the web by the minute, an expensive proposition.
• eBay decided to hire UK talent and build a site from scratch. It launched eBay UK in July 1999.
• Within a year, eBay UK surpassed its main competition, QXL.

Japan

• Japan was the second-biggest internet market in the world and growing.
• In 1999, Yahoo offered to partner with eBay on a Japanese auction site. Softbank, a Japanese telecommunications company, was a major Yahoo investor and understood Japan. eBay declined to partner, perceiving the terms as unfavorable.  
• In the fall of 1999, Yahoo Japan launched its auction site.
• In February 2000, eBay launched its auction site.
• In 2001, eBay Japan had 4,000 listings and was ranked fourth in the country, while Yahoo Japan had 2 million listings and ranked first.

By the first quarter of 2000, eBay UK and Germany realized $87 million in combined auction volume, double the volume of European rivals. eBay deemed its upstart European sites successes. Japan, however, was a disappointment and a missed opportunity.

When a company expands outside its core geography, it often evaluates building versus buying. Cultural and other factors must be considered. One that’s important is the growth rate in the target geography: how fast is the number of people experiencing the problem growing?

The UK market grew slowly, so eBay could afford to build a solution from scratch. But in the rapid-internet-adoption markets of Germany and Japan, building from scratch meant ceding market share to competitors who had closely watched eBay’s success in the U.S. and understood their home markets better.

eBay learned from its Japan experience and, in 2001, bought the majority of Internet Auction Ltd, South Korea’s largest online auction. This gave eBay a dominant position in Asia’s second-largest internet economy—but even that couldn’t make up for eBay’s decision in Japan. Without that country, the second-largest internet market in the world, eBay couldn’t have a dominant position in Asia when the book was written. That title went to Yahoo, and so did the revenue and profits associated with it.

eBay CEO Meg Whitman openly regretted not partnering with Yahoo. Opting to build rather than buy meant that competitors satisfied consumers’ needs while eBay was building and figuring out cultural norms. Convincing them to switch after their needs were already being met proved difficult and cost eBay revenue and profits.

I’m reading The Perfect Store: Inside eBay by Adam Cohen. The book, which was published in 2002, recounts eBay’s early days through 2001. eBay’s story is a remarkable example of the power of product–market fit.

Frustrated that markets favored the elite and weren’t efficient, Pierre Omidyar created an online auction in his spare time. Over a long Labor Day weekend in 1995, he wrote the code for AuctionWeb and launched the site as a free service. To keep costs down, the site was hosted as part of a website dedicated to Omidyar’s freelance consulting company, Echo Bay Technology Group—eBay for short—for $30 a month.

By the end of 1995, traffic was increasing quickly. In February 1996, his hosting provider forced him to upgrade to a business account for $250 per month. His fun hobby was becoming expensive, so he started charging sellers a percentage of each sale (i.e., a take rate). Envelopes of dollars and coins began showing up at his house, and by the end of that month, customers had sent him more than $250. He was profitable his first month!

In March, Omidyar took in $1,000; in April, $2,500; in May, $5,000, and in June, $10,000. His hobby was bringing in more than his day job, so he quit. So many envelopes were coming in that Omidyar hired someone to open them and make deposits. Think about that: his first hire was someone to help him count the money.

In 1996, the first full year of existence, AuctionWeb recorded $350,000 in revenue. In 1997, the name was officially changed to eBay, and revenue reached $5.3 million. In 1998, revenue soared to $41.7 million, and the company held an IPO that September. In just three years, the company went from a side project to a publicly traded company with tens of millions in annual revenue and millions in annual profit.

eBay was cash-flow positive immediately and never needed capital to grow, but Omidyar lacked experience in scaling rapidly and struggled to recruit talented people despite the company’s remarkable growth and financial success. In June 1997, the company raised $5 million from Benchmark Capital. But eBay never touched Benchmark’s money; it just sat in the bank account. Benchmark acted as a behind-the-scenes partner, filling the eBay founder’s gaps with its own relationships and wisdom accumulated from a portfolio of investments and years of experience.

Omidyar stumbled onto a painful problem and solved it in a way that was tremendously valuable to consumers and businesses. Customers rewarded him by happily paying for the value they received. eBay made many mistakes along the way, but the problem was so painful, and the market grew so quickly, that the company was wildly successful. eBay’s first few years are an example of the best thing that could happen when you find product–market fit: customers rip the solution out of your hands!

eBay is almost thirty years old and has been a public company for two-and-a-half decades. As of this writing, its market capitalization (i.e., valuation) is roughly $26 billion.

An early-stage founder recently told me that he got a legal bill that exceeded $100,000 for work on two legal matters. Both matters were standard, but it was the first time the founder had navigated them. He needed experienced lawyers to help him. He enlisted a top-tier firm with deep early-stage experience without realizing the cost would be that high.

While bootstrapping my company, I quickly learned that I couldn’t afford well-known service providers. I also couldn’t afford to get work done by inexperienced service providers. The downside to mistakes in things like legal work is high (as I found out the hard way). I had to try to get the highest-quality providers I could while staying within my bootstrapped budget.

It occurred to me that top-tier service providers are a collection of people. The knowledge and experience the top-tier firms are known for reside within the people doing the work. If I could find someone who used to work for a top-tier provider, I could likely get high-caliber expertise for significantly less.

In a specific legal situation, I pinpointed a firm known for handling the type of matter I had. I then looked for lawyers who had worked at that firm and now had their own practices (or were part of a virtual practice). I figured that if they’d left recently—within the last few years—and started their practice, they were hungry, entrepreneurial-minded practitioners. A partnership could be a win-win for both of us. The strategy worked. I found a great lawyer who’d left that firm a year earlier. He started a solo practice and was looking for new clients. He got a new client and I got a rate I could digest because his overhead was significantly lower than that of his previous big law firm. With a little bit of digging and hustling, I found a diamond in the rough. He was less known, but I got the caliber of work I needed in a timely manner without breaking the bank. And I supported another founder. It was a win-win.

I now think of hiring service providers for early-stage companies or small projects as being just like hiring team members. Start with a budget and try to find the best provider with the desired experience (or capabilities) within the budget. This often means identifying people with relevant expertise who don’t have the packaging of elite firms. It’s more work, but it’s worth it when resources are limited. It’s also a great way to build relationships with great service providers early on.

Today I caught up with an early-stage founder. During our chat, she shared updates on her business, which is doing well. And she casually mentioned that she’d gotten only an hour of sleep the night before. She was in the zone working, and the next thing she knew it was 6 a.m. She said that today was a struggle because of her lack of sleep.

I’ve done my fair share of all-nighters. But over the years I learned that functioning on a few hours of sleep isn’t ideal for me. After minimal sleep my energy level is low and I’m in a mental fog. It’s a bad practice health-wise. Over the last five or so years, I’ve learned more about the importance of sleep and the role it plays in mental and physical recovery. I now try to make sleep a priority so I can recover mentally and physically. If I need to work on something that’s pressing, I try to go to sleep early and wake up early so I can do the work when I’m fresher.

Hard work is a key ingredient in success. There are no shortcuts. But hard work doesn’t have to mean you regularly deprive your body of sleep.

I finished reading The Davis Dynasty: Fifty Years of Successful Investing on Wall Street this week. The book chronicles three generations of the Davis family and how an initial $50,000 investment in stocks by the patriarch has turned into more than $2 billion for the family and an investment firm that manages over $25 billion in total assets.

This book caught my eye because I enjoy learning about “investor entrepreneurs” —investors by profession who don’t want to work for someone else, so they choose to become entrepreneurs by starting companies that invest capital

In the 1940s, the Davis family patriarch had a unique insight about insurance companies. He realized that (1) the companies had hidden investment portfolios that would compound for long periods until claims were paid out, but they were disguised as unprofitable companies because of accounting rules, and (2) the market for life insurance was exploding because of World War II. He quit his job in 1947 and became a full-time investor specializing in the stocks of insurance companies. His timing proved ideal: his portfolio ballooned from $50,000 to roughly $10 million by 1959.

One key takeaway from this book is the patriarch’s insistence on writing and distributing a weekly bulletin about the insurance industry. In the early 1990s, his grandson began helping him write this newsletter. He asked why they should bother when the lack of feedback suggested that no one was reading it. The patriarch’s response? “It’s not for the readers. It’s for us. We write it for ourselves. Putting ideas on paper forces you to think things through.”

The patriarch used the weekly bulletin as a tool for reflection and learning. Distributing it to others added accountability to the process.

When I read this, I thought about a few successful founder friends with a similar habit—which I remembered because it’s rare. They’ve built companies worth hundreds of millions of dollars or more. Each sends a weekly email update to their investors and/or team. They’ve kept up with this habit for years, since their earliest days. I asked one of them why he keeps doing it. He does it for himself, he said, not the recipients. It forces him to reflect on the past seven days and plan for the next seven.

I’m a proponent of founders sending update emails. It’s a habit with superpower potential. Everyone can do it, and because few people do, it gives those who take the time for it an edge.

Last week I shared my takeaways from 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. One thing I learned is that Home Depot’s founders rethought their market, which changed their growth strategy.

They initially went after the do-it-yourself market, which was consumer focused. Then they realized they were serving the home-improvement market. This change in how they thought about and defined their market was important because home improvement included contractors too. Home improvement was a much bigger and more fragmented market than do-it-yourself. This decision played a role in Home Depot’s annual revenue increasing from $20 billion in 1996 to $135 billion in 2023.

Today it was announced that Home Depot is acquiring SRS Distribution Inc., a “distributor of building products . . . serving the professional roofing contractor’s business.” The deal is for about $18.25 billion. The stated logic behind the deal is that it will help Home Depot grow its business with contractors.

The Home Depot’s founders haven’t run the company for over twenty years. But their insight about what their market is and what customers they serve is still driving the growth strategy today, even if it’s growth through acquisition rather than organic growth.

Markets matter a lot more than some entrepreneurs realize. I’d say it’s one of the most important factors that impact business success and growth potential. Building a big business in a small market is hard because there aren’t enough people willing to buy your product or solution. Home Depot’s realization about its market roughly thirty years ago has allowed it to build a massive business, and it still provides growth opportunities, as shown by today’s announcement.

Today I caught up with a friend who told me about his job. He talks to his employer’s biggest customers to understand their problems. He puts together events where the company’s biggest customers share the problems they’re encountering and expecting to encounter and how these problems are painful. He then makes these customers aware of solutions offered by his company that can solve their problems and connects them to the appropriate person who can close the deal (sometimes he can).

The interesting part of his job is hearing from various large customers in a single setting where he’s able to see across entire industries. He can identify trends and problems his customers are having early. As I listened, I thought, His job is to do customer discovery.

This got me thinking. Not all companies offer this kind of role. But if you’re an aspiring entrepreneur working at a company that does, it’s a great opportunity. Doing this job is a terrific way to identify problems and quantify how painful they are before you make the full-time leap. It helps you thoroughly understand problems, which should help you build a better solution, and lets you build deep relationships with potential future customers. All while still collecting a salary (and hopefully saving too).