Look at Failed Companies for Cofounders

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.