HONEST TRUTH About Creating A SUCCESSFUL BUSINESS & Why MOST FAIL! | Kevin O'Leary

People bs themselves. They say to themselves, "I'm going to game the system; I'm going to tell everybody that if they buy a pair of socks from me, I'll give a pair to charity; I'll get lots of free press. The buyers at Walmart will want to see me because I'm doing something good, and I'll actually stay in business even though my costs are twice as high as my competitors." You’ve got— you know what I’m talking about.

I'll tell you, I have a problem with it. Or whoever is doing that as part of their business, I have a problem with it because it's [ __ ]. There is a growing sense, I think maybe partly driven by the business interests or the consumer interests of the millennials, that it is part of a business's calling to either give something back, to do something good, to have a bigger social purpose or impact than merely to make money for the founders and the shareholders.

It's a huge debate in America. It's a huge debate in this room. It's a huge debate in every graduating cohort of engineers in America. It's a global debate going on now. I think there are some issues here, and I'll explain what they are.

The backbone of success of our country in capitalism, and the most noble thing you can do in your life, in my opinion, is to start a business and create a job. There is nothing more noble than that. But when you take on that journey, you also, after you hire your first employee and have your first customer, and your first shareholder, you have a responsibility of sustainability of the business because you're now servicing customers.

You have employees that, actually, you're responsible to maintain. Their jobs, their standard of living, their ability to have a family comes from you. Now, when you introduce a new mission— because the primary mission of a business is to take care of its customers, its employees, and its shareholders— that is the DNA of business.

When all of a sudden you introduce a new cause, and let's just make it generic: we're going to save the world, whatever that means to somebody, you cause a mutation in the DNA of the business. Now, you could say, going to the Darwinian theory, that mutations create success, that you morph into something that’s very successful.

There are analogies in business across multiple sectors, shoe companies, other companies that bring a cause into the model, and it’s very successful because it’s a connection to the customer in a way that’s unique. If you can sustain that, you have brought it into the marketing aspect of what you are to your customer, and you’ve built it into your income statement, and it allows you to remain competitive and raise capital against your competitors.

You found a way to do something that they didn’t do. That model I appreciate, understand, and believe is a wonderful idea because it’s clearly the Ben and Jerry model. They cared a lot about their community.

But when Ben and Jerry wanted to grow and become a behemoth in the ice cream business, they ran into the ultimate problem of scale— scalability of this. And they don’t own it anymore because it was bought by someone who said, "Well, there’s a cost of capital to making ice cream, the cost of protein, the cost of distribution."

My question to everybody that pursues this is, is it sustainable enough that you can create a competitive entity that goes beyond your vision? It has to be something that creates a service or good in perpetuity for all of your customers. And what I find very often is people bs themselves.

They say to themselves, "I'm going to game the system; I'm going to tell everybody that if they buy a pair of socks from me, I'll give a pair to charity; I'll get lots of free press. The buyers at Walmart will want to see me because I'm doing something good, and I'll actually stay in business even though my costs are twice as high as my competitors." And you know what?

So you've got a problem with that. You’ve got to— well, you know what? I will tell you I have a problem with this park or whoever is doing that as part of their business. I have a problem with it because it's [ __ ]. It’s not sustainable; it doesn’t work. Those companies are still calling me up saying, "I need to raise more money," but don't worry, profitability is right around the corner. No, it isn't.

The thing to understand about business and society is this: last year, and part of it comes from right here in Seattle, was the largest amount of capital given back by entrepreneurs in the history of planet Earth from the profits of their successes of their companies. After the company had paid it back to the shareholders, they turned around and gave it all back.

They didn’t break the DNA of their business to do that; they created massive successes in Amazon, in Microsoft, in Google, in Facebook, and then they took the profits and paid it forward. And that’s where they did it. They didn’t make it a part— exactly why is it? Why does it matter?

Why does it matter whether you are a Tom’s shoe company? Very successful, very successful. They make an example of a company that actually incorporated into their business model and was able to raise capital and build it in a way that kept them competitive and scaled. But what I find is, and this is why I give a big warning sign, is to take the social mission and say it's the primary mission of the business and its DNA has now been more modified and has morphed into something else and make that secondary to the shareholder, the customer, and the employee.

That is not a successful model. So, is it a question of the magnitude of the social mission, so that it’s in its place versus the real mission of the business, which is to take care of the customer, the shareholder, and the employee? Or is it something different?

And you see what I’m saying? No, I get it. But if I flip it and I say my business's mission is to do good in the community and give shoes, that is a very important mission. It's called charity, and there is a very important aspect of what every entrepreneur— I give the same perspective every year— but I don’t confuse that with the mission of my businesses.

This is the challenge, and I'm not scared to say this: business is war. There are competitors; winners and losers; it's binary. You either make money, or you lose it. You need to understand that as an entrepreneur; you have to embrace what that means to you and understand what it means to society.

Your job is to make that business successful; it's to steal market share from your competitors. It's to salt the earth they used to walk on. It's to make sure you put them out of business, and you achieve success. Then, and only then, after you have got all of those profits as being a successful business model, you give it back and you pay it forward.

That is the model; that’s how it works, and that’s never going to change. I want to bring up the house lights because I can well imagine that some of you in the audience might like to take a whack at a shark, right? So, we have mic runners.

I don't— I haven't been in the car; I've been on TV, so I haven't seen some of the earlier sessions. We’ve got about 10 minutes before we’re going to break for lunch. I would merely ask, as you ask questions, would you mind introducing yourself very briefly and just say what you do for a living or what company you're starting or working for? Very quick introduction; and please keep your question a question and keep it taut.

Go ahead.

"Hi, um, my name is Zach Kramer. I run a company called I.T. Assurance in Portland, Oregon. We do outsourced I.T. support that doesn't suck. Kevin, my question for you is, how do you make difficult decisions? You always seem very certain of yourself and very certain of the decisions you've made. Can you take us through the process you use to make the hard choices?"

I listen to my gut. It's not scientific; I’ve learned over time, and I think every entrepreneur should trust their feelings. Because I’ve learned every time I don’t listen to my gut, I lose money. Every time I say to myself, "No, you’re wrong with that," I second guess myself— I lose money. You have to listen.

Successful entrepreneurs have a spider sense. I really believe that they know what's right, they know what's wrong; they have to listen to themselves, and it doesn’t always work out. But the minute you second guess yourself, you’re screwed. You really are; you’re no longer a leader.

People that follow you into dark places have to trust you, and you have to trust yourself. We had on one of the prior iconics in Chicago, your fellow shark, Mark Cuban. One of the things that was very interesting that he said, and he said it a couple of times— I said, "Basically, I’ve made lots of mistakes in my career."

I said, "Well, what do you do with those mistakes? Are you trying to learn from them?" And I said, "Do you carry your mistakes with you?" And he said, "No, I cut them off, and I try and learn from them, but I don’t let them weigh me down."

Yeah, I agree with him, and we talk about that a lot. The analytics though— well, because it's the same as investing. I spend a lot of time investing a lot of capital in the public markets and debt markets globally. You make mistakes; it's impossible to make 100% success in every stock you buy.

The minute you start losing, you’ve got to take it behind the barn and shoot it. You have to sell it, and you have to realize, "I hope I learned from that mistake." But you don’t always— I’d rather invest in entrepreneurs that have had multiple failures before I meet them. I love the sting of failure as a motivational tool for somebody that wants to succeed versus somebody that says to me, "Well, I’ve never run a business; this is my first Turbo Baster. I'm showing it to you now."

And that’s, to me, that person isn’t ready for prime time. I love what failure does to your way of thinking; it brings fear into it and it’s great. Do we have a question down here?

They want a Turbo Baster, actually.

"Hi, Kevin, my name is Andrea, and I own and operate outpatient therapy clinics for children. My question is about making money. I’m all for making money; it’s why I’m doing it. My entire staff are all people that are in health services, and so the idea of making profit in health care, to them, is a dirty word. I’d be interested to know how you would talk to people that have that belief that they should be there just to do good, not to make money; how you would address that."

Interesting question; it is an interesting question. You find that also in education, an area that I was very involved in for a long time. These two things can be parallel. The reason is if you provide great goods and services by hiring people that are very good at what they do— and the reason you can do that is you’re growing a successful business, and you're basically reinvesting back in people.

What I say is to them, look, people that are concerned because we were very focused in my case on math and reading scores, and many, many teachers— very good ones—in phonetic reading or whatever their tools are, I would try and hire, and they’d say to me, "Well, I’m a little uncomfortable about doing this for profit because you’re making millions off Read-a-Rabbit." And I say, "Yeah, I am. The rabbit is a very rich rabbit, and the reason you should do this is you're going to help hundreds of thousands of kids around the world, and you're going to help me hire more people like you to do this good work."

And we are going to give back because we were doing a lot of that as shareholders into education after we paid our dividends out. And you’re doing it because you're going to help the next dyslexic child, because I was dyslexic, and the people that helped me— they also were; they had to make money doing it, and I’m so glad that I met them.

So, the point is you can put both a moral, social, and educational mission right beside profit. We have made a big mistake in the last 10 years vilifying capitalism. I'm one of the people that want to take that back in.

I would just say, and I don’t want to get into politics here, but the last two administrations were about redistribution of wealth and solving for health care, and we’ve done a masterful job with that. It’s now time to focus on what makes America work, which is business— to make it easier to start a business, sustain a business. We have to fix our corporate tax rates. The next president, he or she— this will be the primary mandate; it has to happen because we’re not competitive anymore.

And these things can always work together; you can do great things and make money, and the two of them can work hand in hand.

Let’s go back here to the aisle there.

"My name is Ed. I’m a co-founder of Yoga Panda, which is a startup that helps people find yoga classes in Seattle. My question is to Mr. Wonderful: chasing opportunity versus chasing passion— which one do you think is more important?"

Well, you know, every entrepreneur I meet is very passionate; that’s just part of the equation. I actually argue that what matters most is executional skills. Every entrepreneur's passionate; everybody that’s an entrepreneur is ready to take that journey and go down that road, and that’s great.

But the ones that are still doing it three years later have executional skills, so that’s what I think matters above everything else. I meet lots of teams; I fund lots of companies; I see lots of failure and lots of successes. The difference is men and women— primarily women these days— that can really execute, that set goals, tell you what they are, talk to every three months saying, "I achieved this goal," or "I didn’t," and why.

To me, that’s the building block of a business. There’s nothing worse than vision all day long; vision's easy, execution is hard.

Let’s go back there on that side.

"Hi, my name is John Strafano; I’m the CEO of Garmentory. We’re a startup in Seattle; we’re the Etsy for young luxury, so we’re a marketplace for young luxury contemporary fashion— 100 to 600 items. Our business is growing really well. When we talk to venture capitalists, I talk to a lot of venture capitalists. My question specifically for you is, how do excellent entrepreneurs break preconceived notions that you have and then give you what they think is actually the reality?"

So, for example, we’re in a 40 billion dollar market. People hear boutiques or contemporary fashion, and they think, "Ah, that’s a small market," but it’s not a small market. So how do you— what have you seen from entrepreneurs that’s been really effective if you want to successfully raise money?

Because I’ve heard pitches from your space 100 times now, and where they make a mistake every time is what we’ve all learned about building that. I love that space, by the way, because what I find so remarkable about men and women that are passionate about fashion, they throw caution to the wind on price and margin. They don’t give a damn if they see something they want; they’ll kill for it.

I think that's fantastic. You find that also in the marriage business, and you find it in the burial business— all three of which I’ve invested. And so you don’t care about price when you're dead or when you're getting married; that’s great. But what you never answer when you’re pitching is the first question you should answer before you’re even asked it: Have you figured out customer acquisition cost?

Because in fashion, acquiring the customer and making them loyal has, in most cases, 99% of the time, is actually more expensive than the lifetime value of the customer. And so I immediately go to that and say, "What are your customer acquisition costs, and what is the lifetime value," even though your business has only been around for eight months or something.

And that’s where I find the model is broken. Because unless you can find a way to acquire a customer, and the ones that have been successful— have you think of those in the bridal business, for example, that sell dresses, rent dresses, and in groomed gowns, and everything else? They have found a way to get that equation nailed down.

And anybody in here that’s pitching an online business, answer that question first. The first in your deck, after you’ve explained what the business does, let the second slide say customer acquisition costs and lifetime value. That’s how you’re going to get an investor interested that you’ve somehow solved for that; everything else is secondary.

So if my CAC LTV is 40, how do I change your mind about market size or some other thing?

You don’t have to change my mind about market size; that's not my number one question. My question is sustainability of your business model. I don’t care if your market’s 10 billion, 1 billion, 500 million. Am I going to get 10, 15 share of the market? I’m a quick study on this stuff. I can figure it out in a couple of minutes whether it’s going to work or not based on your customer acquisition cost.

What do you know that I don’t know about getting a customer? Because I’ve done it in multiple sectors now, I know what works and what doesn't. The reason companies like, you know, Bottle Breacher, which makes— they take ordinance bullets and turn them into wedding gifts, I mean how crazy is that?

But they know how to acquire customers, and they’re wildly profitable; same with cupcakes, same with wedding gifts. The question is, if you talk to Sarah who runs Honeyfund, all she talks about is customer acquisition cost. That’s it; that’s 99.9999% of her business challenge.

After that, she knows what to sell them, but work on that.

The last question goes to that one, Matt aisle.

"Hi, my name is Ahmad from the University of Washington, and we're starting a business in virtual reality education. So, my question is, you highlighted that team is the most thing you’re interested; you will be investing in what kind of characteristic or dynamic you look into the teams before you invest in a company?"

Well, that’s a great question; a good way to end it. So what I look for is teams that augment or solve for the leader’s weakness. Because if you come and tell me you’re the CEO, you’re the founder, you’re the largest shareholder, that you know and you’re perfect at everything, I know you’re full of crap.

That is so not true. Great entrepreneurs know their weaknesses and surround themselves with solutions: the logistics person, the marketing person, the accounting person, the saleswoman, the salesman. And I’ll tell you guys a little secret here: when I look at new deals, existing companies, and I’m being asked to either fund with debt or equity, the first thing I do is I don’t take the meeting with the CEO.

I ask to go and drink good wine with the man or woman running sales, and I say, "Look, you know, I’m not available on that city, so I’ll pay to fly her or him out to New York and I’d like to just have dinner with them." And often the CFO, who’s trying to broker the deal, says, "No, no, no, I’ll come with them." I said, "No, no, no, no. I like to meet with the head of sales."

It’s just kind of a ritual; that’s how I work. And good wine— I’m talking good wine— and the head of sales, and three hours, and I can tell you everything about that company. Because the head of sales knows where things are buried; they know where the problems are with the customer base; they know where the opportunities are.

And my point is the CEO— the next meeting is with the CEO and the CFO. And if they know less than I do about their company from the sales person, I know who to fire when I get control of that company, and it’s not the head of sales.

In my companies, there’s no cap on the compensation for the man or woman that runs sales, ever. They’re always the highest paid person, always. And so, talk about a team; you want to interview from the sales down. Without sales, you don’t have a company. Get to know the sales team, then meet the logistics people, then meet— you know, I’ll tell you the truth, CEOs are fungible; you can get a new one anytime.

They are the captain, and if they can’t lead the ship, you’ve got to swap them out. And I know that sounds terrible, but I help CEOs that are large shareholders get out of the way of success sometimes. I've done it multiple times now because they're not the right person. Teams, team leaders, like great quarterbacks, understand what they’re not good at.

There’s nothing worse than an arrogant CEO that thinks they’re good at everything. I just can’t wait to shoot them.

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