How Millionaires Think About Business | ft. Randall Kaplan

Kevin: "How good is this flavor?"

I said, "It's fantastic! I worked with the cats; I know they love it."

He said, "No, you're gonna eat some right now. Prove it!" He made me eat the whole tin in front of the entire sales group.

I want to talk about your parents separately, and we'll start with your dad. Alcoholism ultimately caused your parents' divorce, and he died when you were seven years old. Can you tell us what that was like and how his alcoholism and his death at a young age for you influenced your childhood and your future?

Yeah, it was. It's an unfortunate situation. My mother is a descendant of a Lebanese family, and my father was Irish. He was a, you know, gregarious salesman, and they met in my grandfather's company called Kitty's Talks.

It was unfortunate that he was, you know, a difficult man to live with. Obviously, alcoholism has its issues. I think he loved his kids; I believe that. But they ultimately separated. While he was alive, I think he was very lonely at that point, and he died at a very young age at 37 years old.

So that was very traumatic. Obviously, my mother was trying to, you know, retain custody, and she, in fact, had to go to Europe with us to leave the country. We traveled around Europe for almost a year, going through the legal process of separation, which was an extraordinary experience for me.

I mean, I went to all those countries at a young age, and ultimately she remarried a man who basically fathered me for the rest of my life. He's still alive. They ultimately settled in Geneva, Switzerland.

During the journey, my dad was my stepfather George. He became a member of the International Labor Organization, the ILO, and he was an expert in infrastructure. So the ILO would go do projects in multiple countries, and he'd get two-year stints in each one.

I've lived in Cyprus, Cambodia, Tunisia, Ethiopia, Japan, Germany, Switzerland, France—you name it, I've been there. I went through all those different educational experiences in different schools. I met some extraordinary people.

I met Paul Pot, I met Haile Selassie, I met Sihanouk; I met them all because they were part of the international community. The expats would often mingle with the government quite often, so it was a really incredible experience for me. I didn't realize it was happening at the time. I thought everybody lived that way.

When you're a child, you assume that everybody's growing up the same way. Looking back, it really formed how I think about investing, how I think about other people, how I think about other cultures, and indeed the way I invest and travel today.

Let's talk about your mom, Georgette. She was a small business owner; she came from a family of merchants. What kind of values did she teach you, and how do they affect your future?

She believed in personal financial independence. She really, really believed that because she felt helpless during the divorce period, and that really changed her view of the way she was going to manage her life, her own money, her own destiny, and her own investing.

She became a great teacher to me about how important it is to take care of yourself and make sure that you're safe so that you can then take care of others around you. She became sort of the matriarch of her sisters and indeed the whole family.

She was a very pragmatic, disciplined woman about money. She was very liberal in her thinking, which is completely different than I am, and yet she was a great matriarch. So politically, we didn't agree on anything, but around business and family values, she was very strong in that respect.

She always believed in charity, and she had a great idea of karma. She'd always say, "Look, two things: if you talk about money and you brag about money, one day you won't have any money. And also, you have to give back. If you're successful, karma will get you if you don't give back."

I've lived by those mantras, as she taught them to me when I was a teenager. She also taught you about the value of saving. Let's talk about that in food and exercising.

At a young age, she really believed that you need balance in your life—that you really have to figure out how to live well and take care of yourself. She believed in taking 20 percent of her income and investing it; you know, the idea of putting something aside and only spending within your means.

As the executor, I dispersed the money to extended family members, and it's still around. I mean, my goodness! What a lesson that was for me. After her passing, she taught me something in death: the lesson there is the value of compounding.

I think it's important for our younger and even older listeners and viewers to note you don't have to be wealthy to save. If you save and your money compounds over the long term, that is the key. Compounding is the key to financial freedom.

Yeah, I totally agree with that. I mean, it's geometric growth of wealth; that's what's going on there.

What were you like as a kid? Were you popular? Were you a leader? And what did you do for fun?

I had a different childhood because I was in a different country every 24 months, and so I'd have to remake friends. Some of these people that I met in those years are some of my closest friends today from multiple countries, but we would roll into town and didn't know anybody.

You know, find a place to live in places like Addis Ababa, Ethiopia. In Addis Ababa, we were in an expat community: lots of different people from different countries living there, servicing the United Nations or the military or whatever.

For example, there were no bicycles; we rode horses. We rode horses in the open plains of Ethiopia. You know, I just thought that was normal, and it was incredible.

I remember the first time I ever put a barbecue out when we arrived there. I remember it specifically. It was December of 1969. I remember that because the White Beatles album had come out, and I received that for Christmas that year.

I went outside and lit up the fire, and I put a couple of hamburgers out. In about five minutes, the sky blackened with giant vultures circling—massive birds, prehistoric-looking, you know, shuttering the sun for me.

Those are the kind of images I remember from extraordinary outcomes of living in countries like that. You do not barbecue in Addis Ababa because there are really, really big vultures hanging around, and when they smell that meat, they come and get it.

That was the nature of living as an expat in all these countries.

Is it necessary to get a formal education? There's enough to go through the school of hard knocks.

Well, I'm getting a lot of trouble talking about this because, you know, when I finish with you here today, I'm going to Harvard to teach my class. I'm a guest lecturer there to graduating cohorts, and I tell them I don't remember anything from my education.

I don't remember any of the lessons in finance or anything from my MBA—none of it! It went in one ear and out the other. But I still know that cohort of people, and they have assisted me in my businesses all around the world because they're the leaders of banks or they're running industries or they're running companies.

The secret to education is not the education; it's the people you meet on the journey. Obviously, professors don't like to hear that, but it's the truth, and that's why you do it. That's why you try and go to college, if you can, to meet those people, so all of these paths and doors open for you that wouldn't had you not had that opportunity.

Between your first and second years of your MBA program, you worked at Nabisco, and after you graduated, they hired you as a brand manager in their cat food brand. Can you share with us how this experience and what you learned there about beef paste and tuna paste contributed to your later success at The Learning Company and in your career?

Yeah, as part of your MBA, in the summer you have to take an internship—that's part of your education. So I chose Nabisco Brands, because I was interested in marketing.

The day I arrived, the brand manager there, who was Dutch, a really interesting guy, said to me, "I'm going to take you to the rendering plant where we make cat food." The brand was called Miss Mew, and my job for those 90 days was to design a new flavor and get it on the shelf.

So the whole idea of cat food is the more facings, the more market share you get. The more flavors you have on the shelf that are maintained by the grocers. When I got to the rendering plant, there were basically two production lines: one was taking the faces of cattle and chickens and renderings, and certain fat off organs. I mean, it was just brutal.

Then, the sea of the Sea of Japan underbelly tuna that is not sold in premium markets is what makes all of the fish flavors of most cat foods.

What he explained to me was, "Look, human beings like to open a can of cat food and have it very stiff so they can turn the can over and drop it into the food plate, and it keeps its round shape. But cats like liquid; they want a soup. We've tried to sell soup for the cats, but the people won't buy it. They think they're getting ripped off."

So you have to find a balance of making it moist enough so the cat will eat it versus the person that wants to just have a puck there.

We had a plant that had over 500 cats in upstate New York that we would sample all these things. What he was trying to tell me was you only need two engines: you need the chicken-beef mixture, and you need the tuna fish. Everything else, you just dream up.

That's what I did. I remember, you know, at the end of the session, just before I went back for the second year of MBA, I had to go to the head sales meeting with hundreds of sales reps, and I learned by fire how that worked.

I said, "Guys, in order for me to get a good mark on this, you got to get this sold into every grocery store in North America."

The head of sales got up and, you know, in the summer back in the room said, "Kevin, how good is this flavor?" I said, "It's fantastic! I work with the cats; I know they love it."

He said, "No, you're going to eat some right now. Prove it!" He made me eat the whole tin in front of the entire sales group.

Later, I found out that was what they did to every intern every year. I didn't realize at the time— not the eating in front of the sales force—but what the head Dutch guy taught me about the two engines because that changed my entire life.

It's so amazing the lessons you learn that you store in your memory, and they bring them back later to apply them in a different way that becomes very powerful.

You started SoftKey in a Toronto basement, a garage—a basement. That's where a lot of companies get going—with two partners. The company was a publisher and distributor of personal computer software for Windows and Macintosh computers, which, like it is now, was a very crowded field with many competitors doing very similar things.

What on earth did you know about computers at that time, and what was the "aha" moment where you said to yourself, "There's a need in the market, and I want to fill it"?

In those days, when you had to—when you were doing film and you needed the title of, let's say, a hockey player or something—you had to actually create the font and burn it into the film.

I had met a man named John Freeman; he had taken a Hewlett-Packard single pen plotter—a device that drove a pen in an X and Y angle—and he wrote some software to actually write fonts, to write letters. I met him in the basement of what was called the Osborne Computer Club.

I bought an Osborne computer, which was a CPM computer—the first part of the computer ever—and he showed me the software. I said, "John, that's incredible! That's going to change the world for a lot of people because you're allowing to do charts and bars and graphs with letters and everything else. Why don't we form a partnership? Why don't we go 50/50? I'll be the marketing guy; you'll be the programmer, and I'll go sell this software to every single plotter manufacturer all around the world—in Japan, in the U.S., in Germany, you name it."

That's exactly what we did. I went to a woman named Mary Zoller, who at the time was the brand manager for Hewlett-Packard plotters in San Diego, and I met with her and said, "Mary, why don't you just give me 10 cents a copy and put this in every single plotter?"

She said, "Kevin, very interesting idea, but I'm the top of the pecking order. I can do that anytime I want. Why don't you sell it to somebody else that was one of my competitors first?" She pointed me in the direction of a couple of Japanese manufacturers. I went to see them next, and they said yes.

From no sales at all, we started getting checks for millions of dollars because we were selling it at 10, 20, 30 cents a copy for millions of plotters. That was the beginning of SoftKey Software Products, and that eventually became The Learning Company.

It started in my basement, and I was traveling all around the world. It was just the two of us in the beginning, and then, of course, it was thousands of employees later on. But it was the idea of OEM bundling; it was the idea of marrying the software with the firmware with the plotter that was the success of SoftKey Software.

Then, of course, we became the largest educational software company in the world, the largest reference company in the world. We did Compton's Encyclopedia before Wikipedia; we did all that stuff, and I never forgot the lesson.

I told my board of directors, and I told them the story of the cat food. My thesis was this: let’s buy everybody in because in educational software, there are basically two directions that you're trying to go—math and reading scores. You're trying to advance math and reading scores in children between four and eight years old because that's how they get through high school; that's how they get to college—it's all math and reading scores; still is today.

I said, "Guys, let’s buy every brand, and let’s just do two engines—one for math, one for reading—and we'll fire everybody else. We don't need all that overhead. We'll just have two. Then we'll add characters like Big Bird, and we'll add characters like Barbie, and we'll add characters like Reader Rabbit on top of—just like you added the bacon bits to the beef patty in the cat food thing because the kids don't buy the software; the parents do."

I mean, our cost of capital went down because our profits went up, our stock price went up, our access to both debt and equity at much higher prices reduced our cost of capital, and we started buying everybody.

We acquired the entire industry and became the largest educational software company in the world until Mattel bought us because we were actually encroaching on the toy companies too.

I owe it all to two people: one was the woman who fired me from a Goose Ice Cream Parlor, and the other was that Dutch product manager who taught me about engines. That's what it boils down to.

You took The Learning Company name when you bought it for 606 million dollars. When that deal closed, you moved the company to Cambridge, Massachusetts, home of Akamai Technologies, and then six years after that, took six years of Mattel value for 4.2 billion dollars.

I mean, that's a monster deal— a massive home run—but it was soon called one of the most disastrous acquisitions of its time. What happened there? Can you take us through it—from starting a company to growing it, to all of its challenges and all the successes, to the massive sale, and then what happened after the sale? Can you tell us how you bounced back from that? That could not have been fun.

No, in fact, what happened was this: the thesis of the merger or the acquisition, if you want to call it—Mattel is going to buy us, and then we would take their big brands like Barbie, for example, and put it into the math and the reading engines, and the same with American Girl.

We had demand for those products by the millions of units. When I got there, I immediately moved to L.A. to start working with the product managers to get these projects out because we'd already pre-sold them to Walmart, Target, and some of the big distributors all around the world.

My assumption was we always could get out a product; we could do it in four months because we already had the engine. We just needed the graphics design of the doll or whatever it was going to be.

I explained that to the management at Mattel, and I said, "Look, here's the path; here's the order size; here's what's going to happen; here's the trajectory; here's the target sales." Two years later, we still hadn't released "Barbie Teaches Math," or "Barbie Helps You Read," or "Teach Us Typing," or anything.

The culture was so different. It was so not entrepreneurial. A toy company that's been around for a hundred years does not move quickly. They had a whole procedure in terms of how to integrate it and checks and balances on the brand and everything else.

It was extremely frustrating for me because we were trying to harness the entrepreneurial spirit in a very large corporation, which was impossible.

It was a pretty big lesson, and you know, in retrospect, that was a huge mistake because, you know, we should have recognized that it wasn't going to work.

Worse, there was huge conflict between myself and the board of Mattel because I was, for a while, the largest shareholder. Personally, I owned more stock than most of the board members did, and I just said, "Guys, this isn't working, and as a shareholder, I'm unhappy. We've got to fix this, and I know how to fix it, so get out of the way and let me do it. Otherwise, we're going to lose a lot of value here."

That's not what they did. They fought tooth and nail, and that was an important lesson for me: culture matters in a business. If you're going to sell your company, don't stick around afterward—start a new one.

You never do it twice. I mean, I'll never do what that would happen there again because I know to avoid that. That's the whole idea of experience that you wouldn't have seen coming. But yes, it was challenging, no question about it.

Later, in later years—in fact, just a few weeks ago, I had lunch with Alec Gore, who is a very famous private equity one of the big SPAC operators. That's where he and I met years and years ago because he bought some of the assets.

What I eventually tried to do was buy back The Learning Company from Mattel, and they wouldn't sell it to me; they sold it to Alec instead. But we've become great friends since then.

You've said that business is war and that you want to kill your competitors, and you want them to fear you, that you want to make their lives miserable, and you want to steal market share. You want everybody in your team to think you're going to win.

Is business really war?

It is, and if you think it isn't, you'll be one of the people that loses. It's competition for the best ideas, the brightest people, the most market share, the most markets, the most innovative products—it's always war.

When you get out there, if you don't understand that you are marching to the orders of your shareholders, your employees, and your customers, and you have to win, you won't win.

Now, I have nothing wrong with mission-driven businesses. If you want to give a dollar away every time you sell a product or plant a tree, I get it. In fact, that is a good strategy because a lot of people care about that, or eliminate plastic waste—which I'm a big believer in from my environmental days.

The whole idea is that you have to set some parameters that you have to achieve, and you've got to get the whole team following in that direction. If anybody is not agreeing on that direction, get rid of them; they're destroying your culture.

Everybody has to agree, and what I would do with my management is always say, "Look, here's the plan for the next quarter. Does anybody have an issue with it? Is there anything you don't like about this plan? Is there something you want to change in this plan? Speak your mind now or forever be at peace because we're going to achieve this plan."

I don't care how hard we have to work to get there, how many hours we have to work, or where you have to go to make it happen—we're going to achieve this plan because we're going to turn around and tell the street, "This is what we're going to do," and shareholders are going to listen, and we're going to do it.

I think that is business—that really matters. Now, you may not agree with me. I don't know any other way to do it. You need to motivate people; they have to believe in your leadership, and they have to want to follow you, and if they don't, you've got to help them find someone else to follow.

That's your job. I would always give great severance packages to people that didn't want to get on board. I just got rid of them, and everybody that worked with me understood the challenges we had and faced it, and we worked together to make it work. We all did well together; that was the whole idea.

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