How I Made My First Million Dollars Part 2 | Ask Mr. Wonderful Shark Tank's Kevin O'Leary

Hey, Mr. Wonderful here, and welcome to another episode of Ask Mr. Wonderful. Now, this week, as always, has been brought to you by questions from the audience, which I think is the best way to do this. There are two that I found absolutely fascinating, kind of interrelated, which I think kicks us off into another, but I hope to be very interesting session.

Listen to this one. This comes from Johnny Devica. "I'm a 15-year-old student who aspires to be an engineer someday. I've seen you appear on various TV shows, along with one of my personal favorites, Shark Tank."

One of mine too, Johnny! I love Shark Tank! "You have been an inspiration for me for a long time, and it would be very helpful if you would answer my question. I would like to know what was the biggest factor that helped you achieve success. Any response would be greatly appreciated."

Well, thank you, Johnny! But before we proceed, I want to read one from Melissa, kind of along the same genre but a little more specific because she's been viewing some of the episodes recently. Melissa writes, "I watched your episode on how you made your first million, and I also watched last week's show about the five common attributes of successful people. I still feel ripped off!"

Okay, okay, so you started a software company in your basement and sold it for 4.2 billion. I get that! But you never explained what made your company different from the tens of thousands of other software companies that started at the same time. What did you do differently? What made it so valuable?

"I have started my own business now, and I'm trying to learn everything I can to avoid failure. If you really are Mr. Wonderful, you will give it up! Don't disappoint me!"

Okay, Melissa and Johnny. Melissa, that's a little tough love there! I don't think you should feel ripped off. It started you on your journey to question, and I think that's fantastic. But you raise a very valid point. What differentiated the Learning Company from the thousands of other companies who were trying to do the same thing?

I wanted to talk about a concept in life, business, and entrepreneurship called pivoting. In other words, you set a path for yourself. You have to. I don't care what you're doing in life. You have a plan. You have an educational plan. Maybe you've got a business plan, you've got a life plan, you've got a marriage plan—you've got whatever. It's a plan! You see yourself three to five years out, and you're thinking about, "Who am I? What am I going to be? How am I going to get there?" Everybody should do that. There's nothing wrong with that!

But sometimes, you start down the road, and you find out it's not exactly what you had planned, and you have to do something called pivot. Let me tell you a story. The reason I think this story is important is that it points out, in life, the concept of experience.

As you go down the road, you have all these experiences. They go into your collective database, your memory, and sometimes it's really, really important to pull from that experience when it comes time to pivot and make a move. And I'll give you this example.

You know, I finished undergrad college. My dad says to me, "Environmental studies, psychology, you're gonna starve to death!" Some of you've heard this story before. He said, "Why don't you, while you have time and you've got decent marks, go and get a business degree?" Which I did! So I went to do my MBA post-grad. That's a two-year program in those days, and you get a few months off in the summer.

So I'm walking down the halls, and there's all these recruiters, and I'm a marketing guy. I love the idea of apprenticeship, of learning something. I mean, you're only going to be working for 60 or 90 days, but what can you learn from that? What can you get? You're not even working! Call it an internship or call it an apprenticeship. I love this because it lets you immerse yourself into an environment where you can just be a sponge and suck up as much as you can, then get back, finish college, and move on with your life towards your big goals.

I'm walking down the hall, and I see this company called Nabisco Brands with a brand called Miss Mew cat food. They basically were looking for somebody to expand the product line over a 90-day period. In other words, in the pet food business, you need as many facings on the shelf as you can get.

It's no different than any other business. The more facings you have, the more real estate you have on the shelf. It's the same online. The more different flavors you've got, the more presence you have when you're pitching your product to somebody who's going to buy it online. But in those days, it was all retail, and so they were just saying, "Look, kid, we're looking for somebody that has marketing grit and can take our line from 21 flavors to maybe 24 over a 90-day period."

I said, "Sounds good! I'm in! Let's go!" Now, what did I know about pet food? Nothing! But listen, it's a marketing problem, and I think I can learn quickly. I think you can too.

So, the first day on the job, I meet this Dutch guy, who was my boss, basically. He was a product manager, a portfolio manager, or brand manager, and he says to me, "Listen, kid, I'm going to take you on a little journey today. We're going to go to the rendering plant where we make this cat food."

We're driving in the car on the way there, and he says to me, "Look, I want you to understand something about pet food—it's basically made from two engines of protein." I said, "What does that mean?" He said, "I'll tell you. Sea of Japan tuna—the underbelly is one engine of protein. We buy millions of tons of that rendered tuna or that underbelly dark tuna that people don't want to eat, and then we add bacon bits to it, or maybe we add peas, or maybe some carrots, or maybe some wheat, or whatever it is, and we create a new flavor. But the basic engine is, and the protein is the underbelly of the tuna."

And I said, "I got it, boss! You make different flavors from tuna to expand the product line." He said, "Your job is to dream up some flavors that cats are going to like. You know, your whole testing facility, where we have all kinds of cats, so you can dream up your concoctions, work with the lab, and see if the cats like your stuff."

And I said to him, "Do the cats buy the cat food, or does the pet owner buy the cat food?" He said, "Now you're thinking! We have to make it so the cats will eat it, so they'll buy it a second time. But basically, you've got to make sure that when they open the tin, it smells good and looks good for the person who's buying it for the cat. You need both things to work—the cat has to like it, and the buyer has to buy it. So, you gotta come up with a flavor that looks great on the label. When you open it up, it's got to smell good and look good, and then when Fluffy looks at it and says, 'Oh, I really like this,' and Fluffy eats it—the Fluffy being the cat!"

Now, side story: the reason I say Fluffy is we received a letter from a woman in upstate New York who had a cat that was 23 years old. Now those of you who have cats for pets understand that's old for a cat! She was wondering if Fluffy could be featured on the Miss Mew label as one of those, you know, cats with, with this saying, "This cat ate this food and it's 23 years old." Pretty good endorsement, except that the cat hadn't been eating cat food; it had actually been eating dog food, a brand called Dr. Ballard's dog food, also made by us in Nabisco Brands.

So my boss said to me, "One of the things you're going to be doing right out of the gate is going to check out this Fluffy story." I get there; I meet the owner. I meet Fluffy. Fluffy is 23 years old but also has no hair, has no teeth, is very, very, very old, and is leaking out of every orifice a cat has. I don't mean that in a bad way; I mean it's just fact! And I said to the owner, "Um, Fluffy is old." She said, "Yeah, isn't it wonderful?" I said, "Well, I really can't work with this image because this cat is—and I'm trying to be delicate about this—I'm trying to say to her, I think the cat wants to move on to cat heaven. It's really looking rough."

What I learned about that is it does matter what you feed your cat. It does matter that they go at the right balance. But anyways, I was learning my way through the whole cat world at this point. So, back to the rendering plant—sorry for that diversion, but I just remembered that story and absolutely loved it.

So here we are now, and he's saying to me, "For the protein from the tuna, it's a whole set of seafood-based flavors—you can work with that, or you go to the beef side, where we mix chicken faces, beef lips, renderings from, you know, slaughterhouses. This isn't pretty stuff!"

And if I recall what they did is they put it in papaya juice, and it would kind of break it down into a pulp, and they compress it, and that became the other engine. So you had two engines: you had the seafood engine, you had the chicken face beef engine, and then you added your flavors—your bacon bits or peas or carrots or, you know, whatever you could dream up.

So that really hit me! I thought to myself, I'd always thought you made all these different things to make these 24 flavors or whatever it was. But really, it's only two different pastes, and then you get the inexpensive flavorings, and you dream up a new SKU, a new product facing.

I bring this story up because it ended up being probably the most important thing ever in my whole life—to pivot at the Learning Company, to take it from just being an ordinary software company, of which there were tens of thousands of them, to the one that was worth 4.2 billion dollars a few years after it was started.

And here's how that manifested. Here's the story. We were making software, and I'll give you an example. You see this? This is Rita Rabbit! This cost at that time $129, full of CD-ROM discs because that's how things were sold in those days, and would cost us about $8.50 to make.

Now, we would sell it to retailers for 50% off, so if it's $130, you're talking about $65, and it made us $9 to make it, so the margins are very, very good. And that was really expensive because back in those days, the first PCs coming out of Boca Raton were about $3,000. So you could get away with selling software for prices like that, but that was all about to change, because Michael Dell, in his, you know, dorm room, dreamt up a new vision for computers that would make them ubiquitous in every home in America.

He wanted to drop the price at that time below a thousand, so knock two-thirds off the price—and that's what he did! He was one of those great entrepreneurs—obviously still around today—has grown a huge empire. But he built it around the idea of making computers inexpensive for every family because, after all, this product is designed to advance reading scores.

When you're going through grade school, you need reading and math scores. We also had a math version to advance the child's ability to pass the test to go on into high school and then on to college.

Reading and math are two engines! Remember engines: Sea of Japan tuna—beef renderings! Reading and math—bing! One of those moments, it hit me like a ton of bricks! I thought to myself, we're competing like everybody else, writing from scratch software in reading and math that's costing us millions and millions of dollars every time we come up with a new product.

Why don't we just standardize on two separate engines that we only develop, and then we add the flavors? Like maybe we take Big Bird; we get a character we license it, just like Rita Rabbit? We owned the rabbit—this is Rita Rabbit over here! That's a character that sits in the engine! Why don't we license a whole bunch of characters, and we'll just maintain two development teams?

We'll have two engines, reading and math—Sea of Japan tuna, beef rendering—you get it now, right? And I went to see my partners and I said, "Look, I had this experience back, you know, 10 years earlier at a rendering plant where they made pet food, and it was a multi-billion dollar business with just two flavors, basically the two pastes. Why don't we do the same thing and cut our development costs dramatically? I think we could save 12%, maybe 15%, right to the bottom line!"

That's exactly what we did! And boy, did it work! So what happened was we started acquiring all of our—now I'm giving, you know, Melissa, you know, and Johnny, basically, how this company became different from all the others it was competing with! It was from that pivot moment, that change that I'd learned so many years earlier, just randomly in a pet food rendering plant.

And what I'm suggesting to you is, in life, keep these experiences because you never know when you're going to take it out like an arrow out of your quiver and just use it as a tool. That's the key! You want to have those arrows ready to put into your crossbow or your bow and arrow when you need them, as I did that day.

Because as soon as we figured that out, we said, "Why don't we go acquire all of our competitors? We can effectively almost overpay for them and then drastically cut everybody out of the business," because the business was growing so fast, they would just get new jobs right away.

So we weren't worried about that! We made a very good point of giving them tremendous counseling and finding people, so we would buy a company, keep the 10 developers, and give them the two math and reading engines and come out with products at a fraction of what they were spending originally to develop it.

That means our cost of capital went way down as our stock price went up, and we continued to use it as a currency to buy more and more and more and more companies. In fact, we went on a spree to consolidate the entire industry! There were so many companies doing the same thing that it made sense that somebody would take the rendering strategy, the two engines, and put it all together.

And if you go back online, you'll see all the controversy. I remember the Wall Street Journal did an article; one of our competitors called Broderbund said, "We know the difference between cat food and children's software." Well, no, actually they didn't! That was the whole point! And we bought them in a hostile acquisition, actually, and so they weren't able to stay independent because we had grown so big and controlled so much distribution that we were able to take them, also do the same thing—just keep their products and their developers and continue to expand.

And that is actually how the Learning Company ended up being worth 4.2 billion dollars because we figured out a pivot that we learned from another industry.

Now, there were some things that happened along the way that I think are really important too—that are great lessons learned. There was a big conference in those days, each year, called Comdex, and all of the world's industry around computers and software met in Las Vegas for the Comdex conference, and every company had a booth. We had a booth too.

And I'll never forget this! It was around the time when the first Dell computers were about to break a thousand dollar price point—$999—and I'm sitting in the booth with a woman named Kathleen Baum, who is one of our marketing people. Along comes a buyer from a network—this is like 1995—a buyer from a network called QVC. Still exists! I go on QVC all the time; it's a fantastic marketing tool. It reaches millions of people on live television that buy consumer goods and services—a great way to test products!

And he said to me, "Listen, you're selling this software here for $129, and the first $999 PC is coming out. Would you consider bundling maybe a few products together? Like maybe your key draw product with your form designer, and maybe some of your educational software together into one offer?"

Let me stick in my head in the middle here for $29.95! I said, "What? Are you crazy?" Together, this is like $400 worth of software! He said, "No, you're crazy! You don't get it! The world's about to change! If the price of a PC is dropping to $9.99 and maybe lower, you've got to get hip! And the way to test it is you've got to check it out on our network! You can price it, bundle it together, and see how it goes. And if it doesn't work, you stop doing it! You're not going to destroy your retail multiple tier distribution because we're selling direct to consumer."

"Build a special version, all bundled together of your products, and let's test it out at one price point!" I looked at Kathleen; she looked at me. I said, "What do we got to lose? Let's check it out!"

Now, the reason I bring this story up is Kathleen Baum recently found that tape and sent it to me. Now you can see it. Here's the two of us marketing software on QVC.

“Hi, welcome back to the computer shop! I'm Bob Powers, and I have two people that I met at Comdex that's right while a long too long ago. We've been trying to get Softkey onto QVC for a long time! This is Kevin O'Leary, president of Softkey! Nice to meet you! Down here is Kathleen Paul! Hi, Kathleen!"

"Hi, nice to meet you! Kathleen's the wizard; she has all of this under control! What we're going to show you is actually five of the finest programs you're going to see in a package! And what is so nice about this is that you get them as an exclusive package! One thing that we can do here at QVC—if you're not a QVC viewer, you'll have no access to this Softkey five-pack—it's only $39.62! It's an $11 for 99 cents! It includes Body Works 4.0, Key Design Center, 3D Time Almanac, 1995, the Silver Platter Cookbook, and the MPC Internet Wizard—all in one package for under 40!"

"This is all CD-ROM!"

As we weren't just successful, it was a sellout! We blew out the numbers like we couldn't even have dreamt in just minutes! And back in those days, you were on a rotating table or something; it was absolutely incredible! But that's not really what made it magic! During that airing, somebody in Arkansas was watching it, and that somebody was a buyer at Walmart!

Shortly after that aired, I got a phone call from Bentonville headquarters of Walmart, and it was basically like this: "Mr. O'Leary, we want you to come down and talk to us about the software business. We're huge in the music business, but we haven't done much in software yet, and we now are going to be selling a computer shortly for under $800."

Now, Walmart, when they get into a sector, they get aggressive! "We would like to have a whole suite of educational software and reference software so that our parents who are buying these for the family have plenty of offerings. Can you make it down and see me next week?"

And I thought, "Hmm, let me think about that. The largest retailer on earth wants to see me about putting my software in their stores? No, I'm going to push them off!" That's not what happened—I got down there real fast!

And in those days—and it's probably still true today—they videotaped the meeting between the buyer and the seller, so you couldn't do anything that would breach any rules, and they tell you they're going to do that. I think it's fair! And my buyer—and that's the great thing about Walmart—they're really smart.

They don't leave buyers in place for years and years; they move them through different product categories! And my buyer had been, I think it was in fish tackle and rubber boots for fishing, fishing supplies, which are huge at Walmart.

I sit down with them. We—I think we have a 40-minute meeting teed up, and I walk them through the whole world of software, and all the different products and all the price points, and you know at that time, I was saying, "On special, this would sell for $9.99, and I could probably give him a great deal at $89 bucks suggested retail price if he bought a lot."

And I'll never forget that moment! He looked at me and said, "No, no, no! If we're selling computers for $8.99 and even $7.99 with speakers and a monitor, we're thinking Reader Rabbit is $29.95!" I said, "I can't sell it to you for $29.95!" He said, "No, you're going to sell to me for $14 bucks!"

I said, "Sir, with all due respect, the whole industry doesn't work on margins like that! There's nobody in the world selling a software package to you for $14.95 that you're going to sell at $29.95!"

He said, "I think I can sell 12 million packages!" Now, that was a moment in time where I had to make a decision because he had told me beforehand if we didn't leave with a deal, there were plenty of other software companies waiting outside.

And maybe he was bluffing; maybe he wasn't—they were going to take up on this opportunity. Did I want to take a purchase order potentially worth 12 million dollars? Change the entire industry margins by class collapsing?

Did I really want to take the entire industry and collapse its gross margins by 75% in one Walmart sale? It would have caused chaos to take software that was on deal at, you know, normally sold at $129 and sometimes at $99, and all of a sudden put it out at 29? You’d have to be crazy to do that!

What do you think I did? I shook his hand. I said, "You're on!" Now, I knew when I called my partners back at headquarters that it was going to be a shitstorm because the risk was horrific!

Imagine all the inventory we already had in the channel all around the world! We were selling in 34 countries! All of a sudden, we drop our prices that dramatically! But think of the volume if that 12 million was real!

We went to see some of our biggest investors the following week, and I said, "Look! I said yes to this! I think it's the right thing to do! All of us at, you know, the team is on board! We want to make this happen! We need massive manufacturing facilities to pull this off! We're going to need every CD-ROM stamper on earth to fill these orders!"

It was one of those pivots, one of those moments, one of those crazy times of either going to make our company very, very valuable or we're going to crash and burn! Those are the moments you have to experience in your life as an entrepreneur because they define who you are, who the company is, and what the value is for your shareholders!

You have to take risks! But isn't the premise, doesn't it make sense? If the price of computers is collapsing, wouldn't you want to have lower price, commodity-based software? And we thought $29 was a low price! Well, we did that deal.

The reason that Michael Jackson's album "Bad" was delayed two weeks is that the Learning Company sucked up all the capacity worldwide just to stamp out CD-ROMs for its orders at the new price point! That's a true story. I'm very proud of it! I have a copy of that album from that original press! Loved it, by the way!

But we basically tied up every single stamp we could get to fulfill all those orders, and everybody else—the price point in software did not stop at $29.95! By the time that year was over, we were selling software at $12.99 to $19.95, and selling millions and millions and millions of copies!

That essentially is the story of what made the Learning Company so valuable and how it was sold for that price. It had so much market share because it dropped prices and turned software into the commodity it was.

And because it had the expertise of developing around engines from the cat food days, we were able to drive a model that made sense. We could put controls on our R&D costs, continue to launch products quickly by just licensing characters, which we did, and launched thousands of SKUs over a two or three-year period!

It was a remarkable pivot! And it wasn't just me—it was a team! The thing about successful companies is the team—everybody understanding the path, the engine pivot that came from the cat food business! But to implement and execute it took a team of people!

And we had tremendous talent doing it! We just looked at our competitors in the dust! They never caught up! We basically acquired most of them! And the industry, of course, changed again when everything went online!

But my point in this week's episode was the concept of the pivot, the risks, the pivot, and seeing the direction you need to go even though it's risky—in the case of dropping the price of software and working with every retailer around the world to sell it at a commodity price that every family could afford!

That was a defining moment for the Learning Company, and we had tremendous talent to pull it off! But I'm glad, Melissa, you asked that question because you're right, I never explained that! But that is essentially how it worked! And I think when I look at great entrepreneurs today, maybe you even, Johnny, what will make you successful is experience that you'll take and have those tools in your memory to use when you have to make your pivot!

Great entrepreneurs do that all the time! Don't let a crisis ever be wasted! You learn something from it, and then you move forward because you might not use it that day, but you're going to use it one day, and it's going to be tremendously valuable for you!

That is the story of the Learning Company, and it all started with Fluffy! That's why I love the Fluffy the Cat story! It ends up Fluffy helped make us worth over four billion dollars! Thank you, Fluffy! Wherever you are in cat heaven, I appreciate you! Unless you're still alive, but I don't think that's the case!

Everybody, I really enjoyed it! Thank you for the questions, and I will see you next week!

Now, speaking about pivoting, imagine you're involved in the wedding industry. There hasn't been a wedding in months! Nobody's renting halls, nobody's buying flowers, nobody's renting carpets, nobody's having big dinner parties—that's all shut down! These are entrepreneurs that want to survive! I've invested in many of them, so they have to pivot!

Now, you know me! I like to get involved with my entrepreneurs! I like to help! I like to bring in my social media platforms to see if we can reduce customer acquisition costs together, and I like innovation—I like ideas! So Sarah Mongolis, the CEO of Honey Fund, said to me, "Why don't we do a virtual wedding to promote the business? Why don't we actually marry people online?"

Now, that's a crazy chicken idea! And guess what? There are all kinds of people that still want to get married! They want to get on with their lives! They want to start a family! They can't wait for COVID to set us free! They've got to work within the confines of what this pandemic has done to large and small businesses alike, and that's all about innovation and pivoting!

So check this out! Yup! I got ordained, and I married this wonderful couple! That's innovation! That's business! And that, my friends, is a pivot!

Okay, everybody, take your places! We gathered here today, surrounded by the beauty of creation and nurtured by the sights and sounds of nature, to celebrate the wedding of Ian and Erica! Before we begin the vows, Erica would like to share something with you.

"Ian, I guess I didn't really know what I was getting into when I signed up to date a police officer, but what I've learned is although it's incredibly hard to watch you go through what you go through, I will always be here for you through thick and thin! I'm gonna love you, babe!"

"Do you, Ian Matthew Cochran, take Erica Kathleen Brower to be your wife?"

"I do!"

"Do you, Erica Kathleen Brower, take Ian Matthew Cochran to be your husband?"

"I do!"

"And by the power vested in me, I now pronounce you husband and wife! Congratulations, guys!"