Start-up Lessons from The Home Depot Story (Book-Built from Scratch )
Home Depot is one of the most respected enterprises in the world know for its exemplary customer service, widest product range, and the best products. The founders believe it as their 3-legged stool that keeps the company ahead of the competition. The founders’ journey teaches lessons that start-ups of today can apply and use to sail through tough times. Home Depot grew from a start-up to a public company and to Fortune 500 faster than any organization ever. They have achieved $1 Billion in sales revenue in less than 7-years of inception. Their current annual revenue is over $100 Billion.
The Founding- They company has been founded by Bernie Marcus (at age of 49 years), Arthur Blank(37), former executives of Handy Dan, a leading home improvement supplies company in the 1970s and Pat Farrah of Homeco. Bernie and Arthur have been fired by Sandy Sinoloff and when Bernie informed the news to Ken Langone, his response was “You have been kicked in the ass with a golden horseshoe. This is the greatest opportunity! Now you can open up the store you talked about when you are in Houston!” Bernie had the idea of creating an immense warehouse store, with the largest assortment of products in the build materials and home improvement industry, sourced directly from the manufacturers so that they can offer the best prices to small and medium-scale professional contractors and do-it-yourself customers along with the best customer service offered through trained people selling on the shop floor.
Takeaway: “Failure or Rejection can be a blessing in disguise”- Sometimes being rejected or fired from your job or a failed startup can be a great sign to start all over again and do it the way you wanted. On April 14th, 1978 they have been fired and they opted to pursue their goals instead of a legal battle with Handy Dan.
The Funding- Ken Langone agreed to arrange $2 Million funding for the start-up Home Depot. He approached H.Ross Perot (Founder of Electronic Data Systems) For his $2 Million he would get 70% of the company, Ken Langone would get 5% and the founders 25%, it was a raw deal for the founders and luckily, that deal didn’t go through as they were the differences in the thought process and cultural conflict. That 70% would have been $58 Billion as of 1998 and 70% of $255 Billion valuation (as on 23/03/2020) would have been $ 178.5 Billion. Later they raised the $2 Million seed capital at 50% by selling preferred stock units of $25,000 to 40 investors know to Ken Langone.
Takeaway: “Find the right partners who will trust your long-term vision and values” Losing an investor or partner might turn out to be a blessing in retrospect.
The Team- Getting Pat Farrah the co-founder of Homeco, onboard was one of the key decisions that helped Home Depot build a team with complementary skills. He was a great merchandiser but not an equally good businessman. He complimented the management skills of Bernie Marcus and the financial wisdom of Arthur Blank. Initially, Home Depot wanted to acquire Homeco and start operations but later they decided not to as Homeco was losing money on each sale and when it went bankrupt they offered Pat Farrah to join the team of Home Depot.
Takeaway: “We take care of the customer and each other” Identify people with complementary skill and the desire to make it big and give them an opportunity and freedom and see the magic happen. The founding team must full faith in the vision and the start-up idea, they must go to great lengths to care for their target customer and vouch for their team.
The First Stores: They need $3 Million financings to buy goods (merchandise) for the stores, VC financing deal didn’t go through in the last minute due to the stringent conditions by the VC and cultural differences. They had approached an old friend and banker Mr. Rip Fleming of Security Pacific National Bank in LA. He literally had to put his career on the line to get Home Depot the credit limit, the bank gave its first start-up loan ever, and had not to Rip Fleming gone out of the way and put his career at stake there might not have been a Home Depot. Finally, on June 22, 1979, Home Depot opened its first store of 60,000 sqft in Atlanta after many hiccups, their advertising agency could not place the store opening advertisement in the local newspaper on the day of the launch and they had to hand out $700 one-dollar bills in the streets to attract customers to the store on the first day. They also had to stack 250 empty boxes and 2000 empty paint cans on the top racks (10 feet high) to give the store a filled look. In the initial days, they negotiated credit lines with manufacturers by selling them the vision of setting up 100 stores in the coming years.
Takeaway: “When you want something badly, the whole universe conspires in helping you achieve it” Persist and improvise when you see hurdles, not everything will be in our control but our reaction and how we can improvise in the situation will be in our hands.
Initial Days: The sales were slow and customers trickled in one at a time so they were able to attend the customers personally and know their needs. If they didn’t have an item in the store they would buy it from another store and hand-deliver it to the customers’ house or worksite in their own cars. By the end of 1979, they had expanded to 3 stores in Atlanta and had $7 million in sales and 200 associates. They sold at low prices and in flash sales to attract a large number of customers. By the end of 1979, they lost almost a million dollars of equity trying to boost sales. When they spoke to a customer who came to the store from 50 miles away by hearing about them from a cousin who lived 70 miles away. Then they knew they were up to something special.
Takeaway: “We lease our customers, a short lease if we do not look after them well they will look for other options” In the early days meet the customers personally and know their pain points and ask them things they like in your product or service and for areas of improvement. Every customer is important, never lose one.
Hiring and Training: The salesperson on the floor is the frontline for Home Depot he/she interacts directly with the customer, they must reflect your company values. Imbibe your values in them to do the right thing always even if it brings temporary losses to the company, empower them to make decisions on the job and do the right thing in the customer’s best interest. Every position in the company is very important, hire people who care for the customer because if you care about the customer today they will come back tomorrow. The Home Depot founders were directly involved in the training of employees for 3 decades and built practices that could be followed after them. Offering ESOPs early at Home Depot with a seven-year vesting period has helped reduce employee attrition and share the benefits of the success of the company with all stakeholders. Train people to do better than you, so that they can lead the company in the future.
Takeaway: “Do the right thing, don't just do things right” Train, trust and empower your employees to do the right thing and take care of the customer. Every customer is important and no customer is small. Your customers and employees are your brand ambassadors so take care of them and they will take care of the business. Hire overqualified with a view towards future growth and train them to follow your company values and do the right thing at all times.
Exemplary Customer Service: The Home Depot founders had displayed a 1–800 number by the name Ben Hill, in every store it a direct line to their office and they answered the phone, it didn’t matter if the phone rang during an important million dollar deal, they stopped and answered the call. It was like a code red if the phone rang and the customer was dissatisfied with something in the Home Depot Store. This made the store associates and managers become more customer-oriented and avoid the Ben Hill escalations.
Takeaway: “Every business is there to please the customer. Be close and available to your customers, employees, and suppliers at all times.” When the founders display the highest commitment towards customer satisfaction then every employee will follow suit and sales are bound to increase due to happy customers and word of mouth referrals. No advertising is better than happy and satisfied customers talking about your service and brand. Companies like Amazon and Zappos have mastered the art of Customer Satisfaction.
Financial Conscience: Home Depot stores did not have photocopiers and fax machines until mid-1990 they would go to a nearby Kinko’s or other stores when they needed prints. They feared incremental expenses and every penny was spent only if it is absolutely necessary and they only spent money if it had an impact on the sales or customer service.
Takeaway: “Every dollar saved will give you extra time to survive the early days of the start-up” First 3-years of the start-ups the mortality rate is very high and saving money will help you survive this time until you find your product-market fit and get to the stage of rapid hockey-stick kind of growth.
Sustainable Growth: Sam Walton the founder of Wal-Mart has advised the founders of Home Depot to leave the flash sales culture and adopt everyday low prices in the early 1980s. The sales rose and fell according to the flash-sale dates, in order to deliver value to customers every day, they made the prices more affordable and steadied their margins, they believed customers should get the same deal Monday through Sunday. When they needed more funds and they went public in 1981 and raised $7.2 Million. Home Depot grew from a start-up to a public company and to Fortune 500 faster than any organization ever. Growth requires a cautious and well-considered plan, we need to plan our product range, distribution, financing, and infrastructure. By 1986 it had $1 Billion in sales revenue. Home Depot followed the strategy of concentrating on certain locations or areas become #1 there and then move to the next locations, they didn’t spread thin, they dominated certain geography and then moved to the next. Growth at all costs might not be a great approach in the long-term we have to look for profitable growth. They have 2285 stores as of March 2020 and a revenue of over $100 Billion.
Takeaway: “Deliver value to your customers and get your basics right” When you deliver value to customers it gives them a reason to come back and make additional purchases, you need to have your footing right in order to grow rapidly and sustain that growth. Build your niche and be a dominant player in your area before moving to adjacent markets and geographies
Competition: The competition can copy your product and pricing but cannot emulate your culture and customer service. Improve your efficiency and it should give you lower prices and higher volumes, lower prices are better for the customer and the economy. Know your customer, Home Depot concentrated on the do-it-yourself customers, small and medium-scale professional contractors and built a business around their needs which made it easier to beat the competition.
Takeaway: “In the longterm, the competition will be less relevant once you find your niche, and product-market fit (secret sauce)” Customers dictate who you must be and what services they value, so listen to your customer not try to copy your competition.
Capture Customers Mind-Space: Like Home Depot is for home improvement and Amazon is for books, electronics, etc. you must capture the customers’ top-of-mind awareness for your category. The customer must search and find you for the product or service he needs. Your brand must be like a synonym to the category like Amazon is for online shopping and Uber is for cabs.
Takeaway: “Customer must identify you as a top player in your sector, build your niche” There is no better way to attain the customer mind space other than with exemplary customer service, convenience, cost-savings, and speed.
Build Reliable Long-term Partners: Having the right investors, advisors, mentors, core team and employees will make or break your start-up. If Bernie Marcus didn’t know Ken Langone and Ray Fleming who helped them get the initial round of seed funding and financing respectively, we would not have such a wonderful enterprise employing 4,00,000 people. If the suppliers or manufacturers didn’t believe in founders’ vision they would not have lent good credit terms and the business would not sustain.
Takeaway: “Build relationships that last and do your part to sustain them” Many people will help you in your startup journey, so surround yourself with the right people and build the right and helpful connections, you must also reciprocate in their time of need if you want sustainable relationships.
Legacy: A great company goes beyond making money. A great company has a mission, a vision, and a dream. They sell a singular vision over and over again to win the support of customers, suppliers, financiers, and shareholders. They deliver value to customers and returns to employees and shareholders. Home Depot gives back to the society it builds homes, playgrounds for the under-privileged local societies, they use these construction activities to involve all the store associates and use it as a team-building exercise. Home Depot has built a sustainable business that will continue the legacy of founders and their values to provide the customer with the best products, widest assortment and great customer service.
Takeaway: “Think long-term, look beyond 20 years” If you want to run the company for the next 30–40 years even if it's not acquired or you don't get an exit then think how you want to build it and what is the legacy you want to leave beyond making money.
There will be risk and reward in your start-up journey, sometimes you miss opportunities and sometimes opportunities present themselves, you have to be in the game to capture them when you come across them. As entrepreneurs, we must believe that the journey is the reward and do our best every day.
