Founders: #291 The Autobiography of David Packard — Founder of HP

David Senra David Senra 2/20/23 - Episode Page - 55m - PDF Transcript

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And one more thing before we jump into today's episode,

do me a favor.

Whatever podcast player you're listening to this on,

do me a favor and search for Invest Like the Best

and follow that show.

Invest Like the Best is one of my favorite podcasts.

My friend Patrick is a world-class interviewer.

I was just listening to his podcast yesterday with Dan Rose.

It's episode 316.

It's called How Stunning Founders Operate.

Dan worked directly with both Jeff Bezos and Mark Zuckerberg

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He shares a lot of lessons,

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it is David Senver Passion and Pain Episode 292.

David Packard rejected the idea

that a company exists merely to maximize profits.

I think many people assume wrongly

that a company exists simply to make money, Packard said.

While this is an important result of a company's existence,

we have to go deeper to find the real reason for our being.

Do our products offer something unique?

Are people's lives improved because of what we do?

If the answer to any of these questions is no,

then Packard would deem HP a failure.

Most entrepreneurs pursue the question,

how can I succeed?

From day one, Packard pursued a different question.

What can we contribute?

As a result, HP attained extraordinary success.

This success, in turn, enabled them to invest more

in making a contribution,

which produced even greater success,

which led to increased contribution,

which created even greater success.

This virtuous cycle eventually enabled Packard and Hewlett

to personally contribute at levels far beyond

what they would have dared to imagine as young men.

In 1995, Packard attended a dinner at Stanford University.

The Dean of Engineering mentioned to Packard

that he and Hewlett had donated on a present value basis

as much to Stanford as Jane and Leland Stanford

had given to fund the university.

Upon his death, Packard bequeathed nearly all

of his $5.6 billion estate to charity.

But if you were to think of David Packard

and the HP way as being all about benevolence and charity,

you would be terribly mistaken.

Packard and Hewlett demanded performance,

and if you could not deliver, HP held no place for you.

Customer satisfaction, second to none,

is the only acceptable goal, admonished David Packard.

If you cannot lead your organization to achieve that goal,

we'll find somebody who can.

That is an excerpt from the book

that I'm gonna talk to you about today,

which is David Packard's autobiography.

It is called The HP Way,

How Bill Hewlett and I Built Our Company.

And so nearly all the words from here on in

are going to come directly from a very wise,

82-year-old founder.

What's amazing to me is how many times you and I've seen this,

David Packard publishes this book in 1995

and he passes away in 1996.

There's at least 20 episodes in the Founders' Archive

where you'll find the exact same thing.

This desire to document what they learned over,

in David's case, over 50 years, half a century,

as an unbelievably successful entrepreneur,

to document what he learned during that time

and pass it down to future generations of entrepreneurs.

And so I'm gonna put this book down.

I wanna revisit that section from the introduction though,

because really if you read between the lines

of what he's saying over those several pages is,

it's gonna be very similar to the lesson

that you and I just went over in episode 282.

The third time I read Jeff Bezos' Shareholder Letters,

something Jeff repeats over and over and over again

in those letters is that you need to obsess over customers.

That's the exact same message that David Packard

is writing in that introduction.

So I'll come back to that in one second.

In the meantime, I have another book in my hand.

It is called The Intel Trinity,

how Robert Noyce, Gordon Moore, and Andy Grove

built the world's most important company

and is written by Michael Malone.

I read this book like four or five years ago.

I'm going to eventually reread it in the next few weeks

and make another episode about it.

And the reason I wanna start here is because I think

a lot of people can look at HP and its current state

and not realize how important David Packard

and Bill Hewlett were to the history of Silicon Valley.

And so the author of the book that I hold in my hand,

Michael Malone, you can consider him

like a historian of Silicon Valley.

He's written, I think at least 10 books

on Silicon Valley history.

This paragraph that he has towards the end of this book

is an excellent overview on why you and I should spend time

learning from David Packard.

He says, in the Valley, the ultimate career standard

was set by David Packard.

Start a company in a garage,

grow it into a leading innovator in its field,

take it public, and then take it into the Fortune 500,

then take it into the Fortune 50,

then become the spokesman for your industry,

then go to Washington,

and then become a historic global figure.

Only Packard had accomplished all of this.

He set the bar and the Valley had honored his achievement

by making him the unofficial mayor of Silicon Valley.

And then I want to pick up the biography of Steve Jobs

written by Walter Isaacson and just read you this paragraph.

Steve called me late on the afternoon of New Year's Eve, 2009.

He was at home in Palo Alto with his sister.

His wife and his three children had taken a quick trip

to go skiing, but he was not healthy enough to join them.

He was in a reflective mood.

And we talked for more than an hour.

He began by recalling

that he had wanted to build a frequency counter.

Remember this for later in David's autobiography.

He began by recalling that he had wanted

to build a frequency counter when he was 12.

And he was able to look up Bill Hewlett,

the founder of HP in the phone book,

and call him and get parts.

Bill also gave a young Steve Jobs a summer job

working on the assembly line, assembling frequency counters.

Back to this.

Jobs said that the past 12 years of his life,

since his return to Apple had been the most productive

in terms of creating new products.

But his more important goal, he said,

was to do what Bill Hewlett and David Packard had done,

which was to create a company that was so imbued

with innovative creativity

that the company would outlive them.

And so if you think about the context around that paragraph

in that biography, Steve has less than two years to live.

He is so sick, he cannot travel with his family on vacation.

And one of the things on his mind is how much Bill Hewlett

and David Packard influenced his building of Apple.

I think that speaks to why you and I

should learn from David Packard.

So let's go back to the introduction,

which in my opinion is just really several pages of,

hey, you need to obsess over your customers.

And I think David demonstrates the importance of that

by some of the phrases that he uses.

These are spread over multiple pages,

but the theme is consistent.

Do our products offer something unique?

Our people's lives improve because of what we do.

What can we contribute?

And finally, customer satisfaction,

second to none, is the only acceptable goal.

And then the autobiography starts,

and the first thing he does,

the first page in the first chapter,

he highlights an institution and a person

that changed the course of his life.

As we get older, we have the opportunity to look back

over many years and see how certain events,

seemingly unimportant at the time,

had a profound effect in shaping our business

and our professional careers.

The first event that he's referencing

is the fact that he was admitted

into Stanford University.

The second was who he met at Stanford.

The second event was becoming acquainted

with Professor Fred Terman at Stanford.

It was Fred who sparked my interest in electronics

and who later encouraged and helped Bill and me

go into business for ourselves.

His interest and faith in our abilities,

even at a young age,

and in the midst of the Great Depression,

gave us confidence and helped set a course for us.

And then he tells us a little bit about his childhood,

the fact that his love of reading and experimenting

was something that was present from a very early age.

You'll see that he has,

HP has founded on the fact

that they want to produce electronics.

He was interested in electrical equipment

since he was a little kid.

He says, even as a young child,

I spent hours curled up

with the family world book Encyclopedia.

I got a thrill from looking at pictures of railroads,

bridges, motors, generators,

and other mechanical and electrical equipment.

I tried to simulate some of these devices

with small scale models in our backyard.

So this idea where he's sitting down,

he's reading the entire Encyclopedia as a child

and teaching himself about the world around him.

We just saw this last week,

a young Bill Gates did this exact same thing.

His mom in that book says,

I think when he was like seven or eight years old,

he read the entire collection of Encyclopedias

that the family owned.

One of the things that you'll find if you read this book,

spread throughout the pages,

is there's these random hints

that has polite and well thought out

as he appears to the reader.

There'll be these flashes where you understand,

oh, underneath all that is a person

that possesses this steely level of determination.

You don't live the life and build the career

that Michael Malone described that David Packard did

without turning yourself into a formidable individual.

And this is the first hint of the extreme levels

of determination that David Packard possessed

while he was alive.

When I was 11 years old, my father bought me a horse.

I would saddle him up in the morning

and when I got on him, he would buck and rear up.

Then my father would hit him on the behind with a broom

and the horse would go out of the driveway at full gallop.

The horse would spot a patch of alfalfa,

race up to it at full speed

and then plant his legs to stop and eat.

I would go flying overhead and hit the ground.

Remember, he's 11 years old when this is happening.

He knew, the horse knew, all the tricks

to get rid of its rider,

such as running next to a barbed wire fence

to scrape him off.

And this is the most important sentence in this section

and describes a very important lesson

that his father is teaching him.

My father wouldn't let me quit, however.

So I finally learned how to handle the horse.

And so I think that's David's preferred method of teaching.

He's gonna tell you these little stories,

those little anecdotes,

and from there you'll infer the lessons

that he's trying to impart to you.

And so then he moves the timeline forward.

He talks about what he learned

from competing in high school sports

and we're gonna see again another inclination

that he's a very determined individual.

I enjoyed athletics and learned some lessons

that were helpful in managing Hewlett Packard.

And so then he tells us a lesson

that he learned from his coach, Mr. Porter.

Mr. Porter said that many times,

two teams playing for a championship

each have equally good players.

In this case, teamwork becomes very important.

Given equally good players and good teamwork,

the team with the strongest will to win will prevail.

I have remembered that advice

and it has been a guiding principle

in developing and managing HP.

Get the best people,

stress the importance of teamwork,

and get them fired up to win the game.

And so we see another example of one of my favorite quotes,

this idea that Jeff Bezos says that

we don't choose our passions, they choose us.

And so David Packard said,

I had decided as far back as grade school

that I wanted to be an engineer.

And because of my interest in radio and electrical devices,

I had narrowed that to electrical engineering.

That's actually a really important sentence

because this interest leads him to going to Stanford,

which then leads in turn to the founding of HP.

Because when he's at Stanford,

he is still pursuing this grade school interest

in radio and electrical devices.

It says Stanford had an amateur radio station.

The radio station was near the laboratory

of a new young professor named Fred Terman.

Fred invited me into his office

and suggested that I take his graduate course

in radio engineering during my senior year.

That was the beginning of a series of events

that resulted in the establishment

of the Hewlett Packard Company.

And so Stanford is also where David

is going to meet his co-founder, Bill Hewlett.

He gives us a brief overview of Bill Hewlett

and something that pops out that I can't really explain,

I'll tell you that in one minute.

It says, as a youngster, Bill gave early evidence

of what became a prominent trait, an insatiable curiosity.

He wanted to know how things worked

and why they did what they did.

And he often conducted homemade experiments to find out.

Some involved explosives, and like me,

he was lucky to survive.

And so what David's referencing there is,

earlier in the book, he mentioned that he liked to experiment

with explosives as well when he was young

and that one of these experiments

actually exploded in his hand.

And then he says the fact that he,

ever since that experiment, he had lived his entire life

with a distorted left thumb.

And so when I said, this is something

that I can't really explain, what I'm referencing there

is how many times this comes up in the early lives

of these company founders,

the fact that they like building bombs.

This was front of mind because a few weeks ago,

I think on episode 278, I just reread Peter Teal's book,

Zero to One, and there's a line in that book

that talks about this.

He says, of the six people who started PayPal,

four had built bombs in high school.

And now we see with David Packard and Bill Hewlett,

they did the same thing, but even younger than high school.

So then David goes back to this idea

where that HP will likely not exist

if him and Bill did not meet Professor Fred Turman.

A lot of the people that he's going to actually meet

in Turman's class are going to form,

he says it's the nucleus of the management team at HP.

And he says, largely because of Turman's classes,

the four of us, Bill, him and these two other guys

became fast friends.

It is not a coincidence that a few years later,

this group would become the management team of HP.

Many of them working for over 30 years in the company.

Fred Turman's keen interest in radio engineering

induced him to become acquainted

with almost all the pioneers in that industry,

many of whom were located in the Palo Alto area.

Now, why is that important?

Fred becomes friends with all these early company founders.

Then he takes his students on tours.

He says Turman's course included visits

to some of these firms.

And Turman makes the point,

since this is the beginning of the industry,

a lot of these company founders,

it's not like you could be an expert in the field,

they're creating the field, right?

So it's like, what if you actually studied the field

intently, then what could you actually do

if you founded your own firm?

I remember Turman saying something like,

well, as you can see, most of these successful radio firms

were built by people without much education,

adding that business opportunities would likely be greater

for someone with sound theoretical background in the field.

That got us thinking.

And so even before they're graduating,

this small group of guys is like, okay,

why don't we start our own company?

And so they have tentative plans

to start an unnamed company.

They don't know what products they're gonna make,

they just know that they wanna build electrical components,

but the Great Depression is gonna give this diversion.

Says, our plans were set aside

when I received a job offer from General Electric.

The country was then in the throes of the Great Depression

and jobs were scarce.

Turman encouraged me to take the GE job,

pointing out that I would learn a great deal

that would prove useful in our own endeavor.

And so he drives across the country,

he goes to the East Coast.

There's two stories that he's gonna tell.

He's gonna be a GE for a few years,

but there's two main stories that he tells

about his time working for General Electric.

That he's gonna use later at HP.

The first one is that you should follow

your own intense interest.

And at the beginning of industries or markets,

you can't possibly predict how large they're gonna be.

So it says on my first day,

I met with a Mr. Boring,

who as you'll see is aptly named.

He knew of my interest in electronics,

his intense interest in electronics.

But he told me there's no future for electronics

at General Electric and recommended

that I concentrate my work and interest

on heavy components for public utility plants.

And why was this conversation so important

that David is telling us we're laying it 40 years

after it happened?

I have often thought of the irony of Mr. Boring's advice

because our electronics firm, HP,

has become larger than the entire General Electric company

was at the time that he gave me this advice.

And then the second important story about his time at HP

is really this is how David is able to succeed

where other people's failed and he's gonna use this idea

over and over again when he's building HP.

The background here is he is responsible

for quality control, they're producing,

General Electric is producing these things called

mercury vapor rectifier tubes.

And the quality of the tubes are not good,

a lot of them are failing, a lot of them are blowing up.

And so this is how he figured out how to fix that.

I learned everything I could about possible causes of failure

and I decided to spend most of my time on the factory floor

to make sure every step was done properly.

And so what he's gonna realize is the engineering department

where he's working right, they're not communicating

properly with the people that are actually making it,

the factory people.

It soon became apparent that the instructions

the engineering department gave the factory people

were not adequate to ensure that every step

would be done properly.

I found the factory people eager to do the job right.

We worked together to conduct tests

and identify every possible cause of failure.

And as a result, every tube in the batch

passed its final test without a single failure.

That was a very important lesson for me.

That personal communication was often necessary

to back up written instructions.

That is his punchline, let's repeat that.

That personal communication was often necessary

to back up written instructions.

That was the genesis of what became management

by walking around at the Hewlett Packard Company.

And so after a few years, he's still talking to Bill,

he's still talking to Fred, they still have these ideas

like, hey, we should start our own company.

So he's on like a break from General Electric.

He drives all the way back across the country,

back to Palo Alto and he has what they consider

the first official meeting of what's gonna turn into HP.

We had our first official business meeting.

The minutes of the meeting are headed

tentative organization plans and a tentative work program

for a proposed business venture.

Must be a riveting document to read.

The product ideas we discussed included

high frequency receivers and medical equipment.

And it was noted that we should make every attempt

to keep up on the newly announced technology of television.

And so the reason that is important is because

he's telling you, hey, we started a company

before we knew what product we wanted to make.

And so they decided to start the company in Bill's garage.

This garage is gonna become really famous.

This goes on for like, there's like about a year,

year and a half, while he's on like a break from GE

until he actually formally resigned.

So before I wanna get to the founding of their company

in the garage, which becomes like Silicon Valley lore,

I just wanna read this one paragraph that I thought

was fascinating and it really talks about like this,

the feeling that you have when you're taking your jump

from employment to I'm gonna run my own business.

I'm gonna take this giant risk.

And so even though this is just one paragraph

and a few sentences, it's like, I paused here

and I just stared at it after I underlined

and made notes on it.

It's just like, what is David's life if he never did this?

What if he just stayed at GE?

What if he just played it safe?

And so he writes, I didn't formally resign from GE

until nearly a year later.

Lucille, which is his wife, always remembered the moment

she dropped my letter of resignation in the mailbox.

Mailing that letter cut our financial ties,

but we were hopeful and excited

about what the future had in store.

And so this is his schedule

at the very beginning of the company.

He's also going to school and working.

And so it says, Bill found a two-story house in Palo Alto.

There was also a one car garage and that became our workshop.

In 1989, so 50 years later, the state of California

designated that garage as a California historical landmark

and the birthplace of Silicon Valley.

My schedule then was to go to classes at Stanford

in the mornings, work with Bill

and also find time to study in the afternoon

and then go to Lytton laboratories in the evening.

And so this is his first mention of Charlie Lytton,

who's actually, he's working for,

but it's also going to become a competitor in the future

and really a friend.

He learned a lot from Charlie Lytton.

They wind up exchanging information

and Lytton actually becomes really important in his life.

But there's something that jumped out to me

that you realize when you read all these founder biographies,

especially the American founders around World War II,

they didn't really believe that they had limits

on what they could do or what they could learn to do.

And they would do so many things themselves.

And so when I got to this section,

I actually thought of this book,

this biography of Edwin Land that I read for the first time

probably like four years ago, I think it was episode 40.

It's called Insisting on the Impossible.

I just reread it probably, I don't know,

maybe like a year ago.

But this is what David is learning from Charlie.

Says, Charlie was able to do everything better

than anyone else.

When he wanted to build a new plant,

he didn't hire a contractor to do the excavating.

Instead, he bought a caterpillar, like a bulldozer,

and excavated the site himself.

I helped him and then I became fairly proficient

with a bulldozer.

When Bill Hewlett and I acquired a ranch in 1954,

so it was at 15 years later,

I bought a bulldozer and then helped build

more than 20 miles of roads.

And so I have no idea why,

but when I got to that paragraph,

I thought about this paragraph that I've never forgot

since I read it four or five years ago

whenever episode 40 came out.

And I'm gonna read it to you.

And what's fascinating, now, this is crazy

how all these things fit together, right?

So David Packard and Bill Hewlett are building their company

at the exact same time in history

that Edwin Land is building Polaroid.

And back on page 437 of this giant biography,

almost 500-page biography of Edwin Land that I read,

there's this young guy named Ken Olson

who's going to wind up being an entrepreneur.

He was gonna wind up founding

DEC Digital Equipment Corporation.

Now, here's the crazy part.

He is describing, actually,

I'll tell you the crazy part after this.

Let me read this paragraph

from Insisting in the Impossible.

It's Ken Olson who's a generation younger

than Packard and Edwin Land is.

And he's describing just how different they were.

Says, lands represented a generation of scientists

that Olson encountered as a young researcher

in the late 1940s.

These older generation scientists blew their own glass.

They did their own machining.

They made their own parts.

They knew everything and they were independent.

They created radar and the atomic bomb

and all these wonderful electronics.

These self-reliant old-timers came up

against the fearful challenges of World War II

and said, you know, this war is not going too well.

What problem should we solve for them?

And so what Ken is picking up there

as a young researcher, right,

looking at these older generations,

this generation older than him,

he's like, this is extreme levels of self-reliance

which is exactly what David Packard

is describing what he learned from Charles Litton

in the book.

Now, here is how this always blows my mind

how this all connects.

This is why I think about founders

just as one giant conversation you and I are having

on the history of entrepreneurship

that just spread over,

has to be separated in episodes

but it's just one conversation, right?

Ken Olson is quoted in the Edwin Land book

that I'm holding in my hand.

Later in David Packard's autobiography,

he talks about meeting with a young Ken Olson

and trying to buy his company

Digital Equipment Corporation.

So let's go back to this book.

There's several pages that goes on.

They're trying to figure out, okay,

we know we want to develop electronics.

What do we want to build?

They're not too sure.

They're going to do a bunch of different things.

They're going to do contract work just to pay the bills.

Oh, interesting to note,

HP was profitable from the very first year

and it was profitable every year for 50 years after that.

That's crazy, but the reason it's called HP

is because that was a result of a coin flip.

They couldn't decide is it going to be Packard Hewlett

or Hewlett Packard.

We flipped a coin to see whose name

would come first in the company.

Needless to say, bill one.

And so eventually they think they have an idea for a product.

It is called an audio oscillator.

And we see very, very humble beginnings

to what is going to become a very valuable company.

So it says the audio oscillator represented

the first practical low cost method

of generating high quality audio frequencies.

We built one model and then we took it

to a radio engineers conference.

The response was positive.

So we decided to take pictures of it

and produced a two page sales brochure

that we sent to a list of about 25 potential customers

provided by Fred Turman.

There's Fred again.

We designated this first product, the model 200A.

This made me laugh.

We designated this first product, the model 200A,

because we thought that the name would make it look like

we had been around for a while.

We were afraid that if people knew

we never actually developed, designed,

and built a finished product, they'd be scared off.

We weren't expecting much from our first mailing,

but amazingly enough, in the first couple of weeks,

several orders came back and some were accompanied by checks.

And so they don't have a bunch of money at this time.

So this is where Charlie Linton does them another favor.

He was a tremendous help in getting us started

in production.

He gave us access to his shop so we could do things

we weren't able to accomplish in the garage on our own.

And this is what I meant.

That technically they're competitors,

but they're sharing information and they're friends.

Charlie Linton and his equipment made an important difference

during a period when time and money were very tight.

He never saw us as competitors, but always as compatriots.

And he also thought it was very important for them

to get together and share ideas.

He also did something else that was very important.

He loved to expound and philosophize on new ideas.

And whenever he wanted to learn more about something,

he'd organize a seminar at his shop

and he would invite me and a few other people.

These seminars occurred several times.

We also talked about business philosophy.

So in addition to mailing and trying to do outbound sales

for their audio oscillator,

they actually take it to all these conferences.

So they take it to another technical conference

and this is where they're gonna get their first big sale.

They actually sell a batch to Walt Disney.

And more importantly, David tells us

why he's able to get the sale.

There was people who expressed considerable interest

in our audio oscillator.

One of them was Bud Hawkins.

He was the chief sound engineer from Walt Disney Studios.

Hawkins was developing the sound equipment for Disney,

the Disney movie Fantasia.

He was planning to buy audio oscillators

from another company for $400 each.

Our model would cost less than $100.

Hawkins decided to buy our oscillator

instead of general radios.

And so David summarizes the advantage

that his young company had and why he received Disney's money

as opposed to general radios.

We enabled Disney to buy a good product

at a price considerably less than our competitors.

And so one of the things I loved

as David takes us to the history of the company

is they grow, they need more space

and every time they need more space,

it's like we can't possibly need more space than this.

And so this is the first of many examples.

I says by 1939, our business had grown

to the point where we needed additional space.

We set up an office in the front section of our new building

while the back room held a few machine tools

and assembly benches.

It seemed as if we had all the space

that we would ever need.

In those early days, Bill and I had to be versatile.

We had to tackle almost everything ourselves

from inventing and building products,

to pricing, packaging and shipping them,

from dealing with customers and sales reps,

to keeping the books, from writing the ads,

to sweeping up at the end of the day.

And so essentially what he's describing there

is this is a form of education.

Many of the things I learned in this process

were invaluable and not available in business schools.

Cash flow was a frequent problem during those early days

and he's gonna give us advice

that you need to shop around for your financing options.

So he goes into the largest bank in California,

the largest bank in California at the time,

is Bank of America.

We tried to establish some credit with the Bank of America.

They sent a man out to look us over.

He was not impressed, so that's a no from Bank of America.

So then David walks over to his little local bank,

which is called Palo Alto National.

And I introduced myself to its president,

this guy named Judd Crary.

I described our initial success and then I explained

how we now needed a loan to expand our business.

He listened carefully, asked some questions,

and then wrote out a note for me to sign.

That little leap of faith on Crary's part

was the beginning of a long and happy relationship between us.

When we finally grew to the point

where our financing requirements

went beyond the bank's legal limits,

we went to Palo Alto Nationals Associate Bank, Wells Fargo.

The Wells, this is so important, he's gonna repeat,

this is one of the greatest lines I've ever heard,

but he's gonna repeat this piece of advice

that he gets from the gentleman at Wells Fargo

a few times throughout the book.

The Wells Fargo bank sent a retired engineer to visit us.

I spent a full afternoon with him

and I remembered ever since some advice that he gave me.

He said that more businesses die

from indigestion than starvation.

I have observed the truth of that advice many times since then.

More businesses die from indigestion than starvation.

So at this point in the company history,

America gets pulled into World War II.

Bill Hewlett gets called into service in the Army.

So now David's gotta run the company while Bill's gone.

And it says Bill and I decided

that we were going to reinvest our profits.

This is something he repeats over and over again,

grow from profits, grow from profits.

He is very, because he grew up in the depression,

which he goes into more detail, very wary of debt

and growing way faster than you should.

Bill and I decided we were going to reinvest our profits

and not resort to long-term borrowing.

I felt very strongly about this issue.

We found we were clearly able to finance 100% growth

per year by reinvesting our profits.

And then we see an example of good guy David,

the note I left myself when I read the sentence

that he's about to describe here,

that you need to, it's very important to work with people

that you like, admire and trust.

I kept my salary at a lower level than it should have been

because I did not think it was fair for my salary

to be higher than Bill's army salary.

So as you can imagine, the demand for the war,

their business is gonna grow

because they're selling a lot of these,

like their devices and electronic equipment

to the US government, but even then,

even when they were selling them to companies,

they kept their, he talks about keeping the importance

of like keeping control of your costs.

Obviously a main theme for history or entrepreneurship,

but he's like, just because we're selling to the government

doesn't mean like we can artificially inflate

like what these things cost.

He says we had controlled our cost

to the extent that the government could not get better products

from anyone else at a lower price.

And then they also did something very smart here.

They're building products for the Naval Research Laboratory

to US government and they just asked them,

like what else do you need us to make?

What else do you guys wanna buy?

We were interested in selling them our standard products,

but also interested in finding out

what other instruments they might need.

When I got to that section,

I thought of Jeff Bezos in the early days of Amazon,

he sent 1,000 emails to some of,

to 1,000 early customers in Amazon.

I was like, well, okay, you bought a book for me,

like what else would you buy?

One guy replied back, he's like,

what do you learn about that, those emails

or the email interactions, was the fact that the answers

that people, the answers to Jeff's question

were whatever they happened to want

at that particular moment.

And that's where he realized,

he's like, oh, like one guy's like,

hey, I really wish that you would sell,

that I'd be able to order windshield wipers from Amazon

because I need to replace the windshield wipers on my car.

And Jeff's like, oh, like I can sell,

we can sell anything this way.

And so as a result of asking this question

to the Naval Research Laboratory,

they wound up being able to build

a bunch of different products for the Navy.

And more importantly, the knowledge

on how to develop these instruments

that they previously did not know how to manufacture.

And so he's describing all these different things

that they're building in the war.

And he's like, listen, they may seem,

it almost seems like counter to the advice

he's about to give us,

which is like the importance of maintaining a narrow focus

and then optimizing for the longterm.

But he's like, these products may look different

but they're all complimentary.

So he says, those these instruments differ

from one another, all were designed

to measure and test electronic equipment.

That is their main focus in the early days of HP,

measuring and testing electronic equipment.

They reflected our strategy to concentrate

on building a group of complimentary products

rather than becoming involved

in a lot of unrelated things.

I believe this decision to focus our efforts

was extremely important.

I felt that we should take on no more

than we could reasonably handle,

building a solid base by doing what we did best,

designing and manufacturing high quality instruments.

And I think that's one of the main themes

of the story that he's telling us

is the fact that they were very methodical.

They were not trying to rush their growth.

They're very, it says we had built a good foundation

on which to grow.

So do you remember early in the book

where David is talking to,

I think he's the Dean of Engineering at Stanford?

It's like, hey, it's pretty incredible

that you guys actually donated more to Stanford

than the actual founders of Stanford.

And part of that is because Packard felt he,

oh, not only did him and Bill attend there,

but they got so much value

from their close relationship with Stanford University

and all of the talent that came out of that school.

And so this program that David and Bill

are about to start with Fred Terman,

you can actually think about like, what's happening here?

It's like, they're figuring out how to create an edge

in hiring talent.

And so they start this thing with the university

called the Honors Cooperative Program.

And this is what it is.

It allowed qualified HP engineers

to pursue advanced degrees at Stanford.

This program made it possible for us

to hire top level young graduates from around the country

with the promise that if they came to work for us

and we thought it appropriate,

they could attend graduate school

while on full HP salary.

The company would pay all of their tuition

more than 400 HP engineers

have obtained masters or doctor degrees through this program.

It has enabled us to hire the top engineering graduates

from universities all across the country

for a number of years.

This was an important factor

in the ultimate success of our company.

And so in addition to building a company with Bill,

David and Bill also purchased ranches

and they actually in like their spare time

would actually act as full on cattle ranchers.

And so this is another example of what I mentioned earlier,

the fact that a lot of the way

that he's conveying these lessons to the reader to you and I

is the fact that he tells like these little stories

of experiences that may not be directly related to business

but they're actually lessons he drew

from those, these life experiences

and applied them to his business.

I've enjoyed many pleasures

as a result of my experience as a rancher.

I've learned a thing or two.

Every season we would round up the cattle from the range

and drive them to the corral.

Along the way, we'd come to a gate.

The trick was to get them through the gate

and not stampede them.

I found after much trial and error

that applying steady, gentle pressure from the rear

worked best.

That is the most important sentence in the section

that applying steady, gentle pressure

from the rear worked best.

Eventually, one would decide to pass through the gate,

the rest would follow.

Press them too hard and they'll panic,

scattering in all directions, slack off entirely

and they just head back to their old grazing spots.

This insight was useful through my management career.

And so this is where he goes more

into his company building philosophy.

One theme that he repeats over and over again,

the one I mentioned earlier,

it's his belief in the growth,

growing your company from profit

and he's gonna tie this into his experience

during the Great Depression.

And so he goes into the fact,

all companies, they have access to people,

materials, facilities, money and time.

These are the resources available to us

for conducting our business.

By applying our skills, we turn these resources

into useful products and services.

And if we do a good job,

customers will pay us more for our products

than the sum of our costs and producing and distributing them.

This difference, our profit represents the value

that we add to the resources that we utilize.

It is impossible to operate a business for long

unless it generates a profit.

The profit we generate from our operations

is the ultimate source of funds we need to prosper and grow.

It is the foundation of future opportunity

and employment security.

And then he states why he optimizes

for growing for profit as opposed to like growing from debt.

60 years ago, our country was in the depths

of the Great Depression.

Thousands of businesses had shut their doors.

Bill and I were raised during that depression.

We had observed its devastating effects on people,

including many families and friends who were close to us.

And a matter of fact, when I got to the section

and maybe realized, or maybe remember that

in one of the biographies I read on Warren Buffett,

talks about the fact that he keeps newspapers

from the Great Depression on his office wall

to serve as a reminder about how bad things can get.

So back to David, my father had been appointed

as a bankruptcy referee for the state.

I often held my father in looking up the records

for those companies that had gone bankrupt.

I noted that the banks simply foreclosed on firms

that had mortgaged their assets

and these firms were left with nothing.

Those firms that did not borrow money had a difficult time,

but they ended up with their assets intact

and they survived during the depression years that followed.

So that is something like a main theme of this book.

That experience he's having with his father,

this idea is like, okay, well, who are the companies

that actually went under during the depression?

Like why did they fail and who are the ones that survived?

I noted that the banks simply foreclosed on the businesses

that mortgaged their assets

and those businesses were left with nothing.

The businesses that did not borrow money,

they had a difficult time,

but they ended up with their assets intact

and they survived.

From this experience, I decided our company

should not incur any long-term debt.

For this reason, Bill and I determined

we were operating the company on a pay-as-you-go basis,

financing our growth primarily out of earnings

rather than borrowing money.

And we have for more than half a century.

And so eventually HP is gonna go public,

but what he says, he did not like that Wall Street

had this like fixation on quarterly earnings.

And he points out that those are really easy to manipulate,

that like you could cut back on like R&D

and suddenly you have more profits

and Wall Street's like, oh, that's fantastic.

This company may be doing well.

He's like, no, this is a description of short-term thinking.

You have to avoid that

because you're a technology company

and technology companies need to constantly create

great new products.

It is always possible to improve profits for a time

by reducing the level of your investment

in new product design and engineering.

But in the long run,

we will pay a severe price for overlooking

any of these areas.

Good new products are the lifeblood of technical companies.

And so then he has an entire chapter

on his commitment to innovation, right?

And so go back to the beginning of this podcast

where it's like one of the first things he says is like,

are our products offering something unique?

And if the answer to that question is no,

and if people's lives are not being improved

by our unique products,

then he would consider HP a failure

even if it made a lot of money.

And so there's just a single sentence here

in the chapter on commitment to innovation

that spawned an entire,

like I just filled up the page with notes.

And it says, Bill and I knew

we didn't want to be a Me Too company,

merely copying products already on the market.

And so that biography of Edwin Land

that I was reading from earlier,

insisting on the impossible,

there's a line in that that says the exact same thing.

Edwin Land clearly did not wish to waste his powers

on Me Too products.

They use the exact same language.

And then that line also made me think

of something I learned

when I was reading Johnny Ives biography.

This is episode 178.

You've got to listen to that podcast,

listen to it.

If you haven't listened to episode 178,

Johnny Ives, the genius behind Apple's greatest products,

listen to it after this episode.

I think you'll really like it.

But there's a story that they tell

that Johnny's telling in that book

where at the time,

I think this is like late 90s, maybe early 2000s,

there was this computer product called a netbook.

And so at the time,

netbooks accounted for 20% of the laptop market

and Apple never seriously considered making one.

And so this is Steve Jobs explaining

in the Johnny Ives biography

why he doesn't want to make a netbook.

Netbooks aren't better than anything.

They're just cheap laptops.

Johnny tells the story.

Steve directs the energy

instead of using Apple's resources, time and resources

to make a netbook.

They actually start doing development

and experimentation on a product

that eventually turns into the iPad.

And then the last thing that popped to mind

is in Jeff Bezos to share our letters.

He talks about, this is a couple of like,

probably like 15 years into Amazon.

We talked about like,

we have a lot of experience.

There's a lot of company history

where people inside of Amazon have seen

what starts out as like a small business,

you know, maybe a $10 million a year business

grow into a billion or 10 billion a year business.

And he had a line in there

that stuck in my mind.

He's like, listen, we don't demand

that these new businesses that are born inside of Amazon

are big on the day that they are born,

but we do demand that they're differentiated.

And that's just Jeff's way of saying,

I'm not wasting my powers making me two products.

And we see that exact same thinking,

you know, 40, 50, 60 years ago with Bill and David.

Bill and I knew we did not want to be a Me Too company

merely copying products already on the market.

Let's go back to this idea

that David repeats over and over again.

Hey, your company should have a very solid foundation

that you can build upon for, you know,

half a century in David's case.

And so he does this fantastic description

of like why that's so important

because he talks about HP survive long enough.

You know, they started in the 1930s.

There is no such thing as what we think

about computers at that point.

He's like, and yet we've successfully transitioned

into the computer age.

It's not that he designed this.

He was actually, he says he's pulled into the computer age.

But look what he says here.

He's like, in 1994, HP sales and computer products

were $20 billion, 30 years earlier.

Okay.

So 1994, they're making 20 billion from computer products.

In 1964, 30 years before our sales total

were just 125 million and they were entirely in instruments.

Not a penny was from computer sales.

And I think that's another example

of something you and I see in these books

over and over again.

And you have to do the best

with the opportunities in front of you.

And if you do the best

with the opportunities in front of you,

it will unlock, in some cases,

giant opportunities in the future

that you cannot possibly predict.

When David was operating, he's already, think of it,

he's 30, almost 30 years into his business in 1964.

He's got a successful company, he's doing $125 million a year

in 1964 dollars, that's insane, right?

Making entire, only instruments.

He was able to succeed to hold on to the best of his ability

with the opportunities in front of him.

So 30 years later, the company is doing,

and that's 20 billion in computer products.

That's only 80% of their total revenue.

That's incredible.

They're doing 20 billion a year and 30 years earlier,

not a penny was from computer sales.

And then we get to what might be my favorite story

in this book, it is titled A Maverick's Persistence.

Or another way to think about this,

this is the type of teammates that you want to hire.

Sometimes management's turn down of a new idea

doesn't always effectively kill it.

One of our bright energetic engineers, Chuck House,

was advised to abandon a display monitor

that he was developing.

Okay, so he's told by his bosses, including David,

hey, don't do that, this is what he does instead.

Instead, he embarked on a vacation to California,

stopping along the way to show potential customers

a prototype model of the monitor.

Their reaction spurred him to continue with the project,

even though he found that I had requested it

to be discontinued.

And so what happens?

Not only is he not going to stop,

he's going to speed it up.

He persuaded his R&D manager to rush the monitor

into production, and as it turned out,

HP sold more than 17,000 display monitors,

representing sales of $35 million for the company.

Several years later, I presented Chuck with a medal

for extraordinary contempt and defiance

beyond the normal call of engineering duty.

So how does the company distinguish

between insubordination and entrepreneurship?

To this young engineer's mind,

the difference lay in the intent.

I was not trying to be defiant, he said.

I really just wanted a success for HP.

He started the book saying,

hey, we're going to obsess over customers.

We're going to create new differentiated products.

They're going to make the custom lives

of our customers better, customer satisfaction.

Second to none is the goal.

He repeats it again.

The fundamental basis for success in the operation of HP

is the job that we do in satisfying the needs

of our customers.

We encourage every person in our organization

to think continually about how their activities

relate to the central purpose of serving our customers.

And then he's got another great story

about the lesson he learned.

So this is how the Japanese division of HP

is going to teach David Packard and the rest of the company

the importance of working with people

with excessively high standards.

So they have this joint venture going on in Japan.

It's like middle of the pack in performance.

It's not the best, not the worst.

They're thinking, okay, I guess this is just what this thing is.

And then this is going on for a few years.

And then it says a bright young Japanese manager

named Kenzo Sasako cornered Bill and me one day.

He said, why don't you let me run this?

You send an American manager to us to oversee our work.

We think we can do better.

And so Bill and David are like, okay,

you're going to run the operation.

The following year, this division grew at a faster rate

than ever before, but that is not the most important part.

This is the most important part.

This is how they find a 400X improvement.

We had been making printed circuit boards.

Our best failure rates were about four and a thousand.

We thought that was pretty good, a little less than 0.5%.

And that was the rate we found

a lot of other companies were achieving.

So remember, this is a story about how David

and the rest of the company are going to realize

the importance of working with people

with excessively high standards.

So okay, we have a half of a percent failure rate.

We think that's good.

We stick our head up.

We look around the industry.

They're about accomplishing the same thing.

This must be as good as it can get.

Wrong.

Our Japanese unit, on the other hand,

came in with a failure rate of only 10 per million.

So they were doing four per thousand, right?

Now the Japanese are doing 10 per million.

That is 400 times better

than anything we had been able to do.

That shook a lot of people up

and it changed a lot of thinking within the company.

It clearly showed that our targets on quality

just were nowhere near what could be achieved.

The result was that the thinking and the work

that they were doing in Japan

was soon reflected all over our company.

We were able to raise quality targets

in many divisions far beyond anything

that we thought we could have done before.

And it was an issue of how much time you're willing

to put in.

They just analyzed how the hell did you guys do this?

The people in our operation in Japan

spend considerable time making sure

that every adjustment was done just as accurately as possible.

That same adjustments were done at HP and Palo Alto

just as quickly as possible.

So one had the goal of being as accurate as possible.

The other had the goal of being as quick as possible.

And this is the main punchline

to what David learned from this.

Gains in quality come from meticulous attention to detail

and every step in the manufacturing process

must be done as carefully as possible,

not as quickly as possible.

This sounds simple, but it is only achieved

if everyone in the organization is dedicated to quality.

And one of the things I absolutely loved

about David Packard's perspective

is the fact he's writing this book

when he's in his 80s very close to the end of his life

and he's still relentlessly optimistic.

When I think of the phenomenal growth

of the electronics industry over the last 50 years,

I realized how fortunate Bill and I

were to be in on the ground floor.

But it reminds me of a story I like to tell on myself.

In my sophomore year at Stanford,

I took a course in American history

and had the opportunity to study the westward movement

beginning with the early pioneers

and continuing throughout the 19th century.

I remember lamenting that I had been born 100 years too late,

that all the frontiers had been conquered

and that my generation would be deprived

of the pioneering opportunities offered our forebears.

But in fact, we went on to make breathtaking advances

in the 20th century.

In the 20th century, we have experienced dizzying progress.

Everywhere look, I see the potential for growth,

for discovery, far greater than anything

we have seen in the 20th century.

Exponential growth is based on the principle

that the state of change is proportional

to the level of effort expended.

The level of effort will be far greater

in the 21st century than it has been in the 20th century.

Just as it has in the past, growth in the future

will come from new products.

By new products, I mean products

that make real contributions to technology,

not products that copy what someone else has done.

This must be our standard in the future,

just as it has been in the past.

The 21st century will be an age

in which many kinds of new products

contribute to a better life for all the people in the world.

And that is where I'll leave it for the full story.

Highly recommend picking up this wonderful little book.

If you buy the book using the link

that's in the show notes in your podcast player,

you'll be supporting the podcast at the same time.

The link's also available at founderspodcast.com.

You can also support the podcast

by signing up for the founder's premium feed.

I just recorded another AMA episode.

I'm getting excellent questions.

One of my favorite questions that I've gotten

is who would be on my seven-person personal board

of directors, which I just answered that

and along with other questions from listeners

in the latest episode.

That link, if you're interested in that,

is down below in the show notes, as with every other link,

and is also available at founderspodcast.com.

That is 291 books down 1,000 ago,

and I'll talk to you again soon.

Okay, so I'll be back on episode 227.

I read this fantastic book called

The Essays of Warren Buffett.

So all the way back on episode 88,

I read every single one of Warren's shareholder letters.

But what this book that was put together by Lawrence Cunningham

called The Essays of Warren Buffett

did that was so smart is that he took the shareholder letters

and instead of organizing them by year, which is standard,

he organized them by topic.

And so in the original podcast I did on this book,

which again is episode 227,

one hour and 28 minutes into the podcast that they're about,

I go over this letter that I'm about to read to you now.

It's under the heading titled On Selling One's Business.

And the reason I'm bringing this up

is because one of the sponsors of this episode is Tiny.

And one way that Tiny has been described

is that they're building the Berkshire of the internet.

And you can go to tiny.com and read the testimonials

and see all the founders that have sold their business to Tiny

and how their main differentiation,

just like Warren Buffett and Charlie Munger is,

there's no BS.

We're going to make this transaction as simple

and easy as possible,

where a lot of people that buy businesses

make you jump through hoops and it's just a headache.

And so if you think about what Warren is doing here

in this letter is his business is buying businesses.

And so his customer or founders or managers of businesses.

And so he is essentially writing a letter to a guy.

So he wrote this letter in 1991 to a guy who indicated

he might want to sell his family business.

And so I'm just going to pull out a few highlights here

and really think about what Warren's doing is

he is differentiating his services

from other people that also buy businesses.

He says, if you should decide to sell,

I think Berkshire Hathaway offers some advantages

that most other buyers do not.

Practically all of these buyers

will fall into one or two categories.

And so now Warren is going to describe his competition.

If you go to tiny.com, you'll see they described

their competition in some ways,

their competition, which is typically VCs

or private equity companies.

So Warren says, number one, a company located elsewhere

but operating in your business

or in a business somewhat akin to yours.

Such a buyer, no matter what promises are made,

will usually have managers who feel they know

how to run your business operations

and sooner or later will want to apply some hands-on.

And he puts the word help in quotation marks.

Obviously, Warren does not think that the managers

that are going to install in that business

are actually going to be helpful at all.

The second other option, a financial maneuverer

invariably operating with large amounts of borrowed money

who plan to resell either to the public

or to another corporation as soon as the time is favorable.

Frequently, this buyer's major contribution

will be to change accounting methods

so that earnings can be presented

in the most favorable light just prior to his bailing out.

And then listen to this persuasion technique that he uses

because he's writing to somebody

that he knows it's a family business,

which means they put a lot of their time

and life energy into.

So he says, if the sole motive of the present owner

is to cash their chips and put their business behind them

and plenty of sellers do fall into this category,

either type of the buyer that I just described to you

is satisfactory.

But if the seller's business represents

the creative work of a lifetime

and forms an integral part of their personality

and sense of being buyers of either type have serious flaws.

So he's just described his competitive landscape.

He says, listen, there's option one, there's option two,

but then there's a new option,

something that's completely different and better.

And he's describing the services

that he provides to founders, right?

So he says, Berkshire is another kind of buyer,

a rather unusual one we buy to keep.

Tiny does too, by the way.

All of the businesses we own are run autonomously

to an extraordinary degree.

When we buy a business, the sellers go on running it

just as they did before the sale.

We adapt to their methods rather than vice versa.

And in Tiny's case, it's up to the founder

if they wanna stare, if they wanna go.

Tiny's fine with either solution.

And then Warren does something fantastic.

He's like, listen, you know who the past businesses

that we bought.

In fact, I'm including in this letter

a list of every single person we've ever bought a business from.

Tiny does something very similar on their website

which you can go see.

You know some of our past purchases.

I'm enclosing a list of everyone from whom

we have ever bought a business.

And I invite you to check with them

as to our performance versus our promises.

And then Warren says, hey, I'm gonna keep it simple with you.

If you should decide to do business with Berkshire,

we would pay in cash.

Tiny says the exact same thing on their website.

Your business would not be used as collateral

for any loan by Berkshire.

There would be no brokers involved.

Warren also says, you deal with me.

And finally, you would know exactly

with whom you are dealing.

You would not have one executive negotiate the deal

only to have someone else in charge a few years later

or have the president regretfully tell you

that his board of directors required this change

or that change.

And because Warren has hacked away at the unessential,

all that is left is simplicity.

And his pitch is simple.

Do you want a great home for your business?

Then call me and I will do a cash transaction really fast.

Same thing that Tiny does.

I will not pester you.

If you have any possible interest in selling,

I would appreciate your call.

I would be extraordinarily proud to have Berkshire

along with the key members of your family own blank.

So he took out any identifying information

of who he's writing to, okay?

I believe we would do very well financially

and I believe you would have just as much fun

running your business over the next 20 years

as you have during the past 20.

Sincerely, Warren Buffett.

I think reading the entire letter is worth your time.

If you buy the book, it's on pages 230 through 233

and makes you go back and listen to episode 227,

the essays of Warren Buffett.

If you have not done so already.

And if you have a business that you're interested in selling

now or in the future, make sure you go to tiny.com.

Machine-generated transcript that may contain inaccuracies.

What I learned from reading The HP Way: How Bill Hewlett and I Built Our Company by David Packard.

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[2:01] Do our products offer something unique?

[3:00] Customer satisfaction second to none is the only acceptable goal.

[4:00] What I learned from rereading Jeff Bezos' Shareholder Letters for the 3rd time (Founders #282)

[5:00] In Silicon Valley, the ultimate career standard was set by David Packard: start a company in a garage, grow it into the leading innovator in its field, then take it public, then take it into the Fortune 500 (or better yet, the Fortune 50), then become the spokesman for the industry, then go to Washington, and then become an historic global figure. Only Packard had accomplished all of this; he had set the bar, and the Valley had honored his achievement by making him the unofficial "mayor" of Silicon Valley.

The Intel Trinity: How Robert Noyce, Gordon Moore, and Andy Grove Built the World's Most Important Company by Michael Malone 

[6:00] Steve Jobs: The Exclusive Biography by Walter Isaacson. (Founders #214)

[9:00] Gates read the encyclopedia from beginning to end when he was only seven or eight years old. — Hard Drive: Bill Gates and the Making of the Microsoft Empire by James Wallace and Jim Erickson. (Founders #290)

[10:00] My father wouldn't let me quit.

[11:00] Given equally good players and good teamwork, the team with the strongest will to win will prevail.

[13:00] Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel. (Founders #278)

[17:00] That was a very important lesson for me —that personal communication was often necessary to back up written instructions.

[21:00] Insisting On The Impossible: The Life Of Edwin Land by Victor McElheny 

[28:00] More businesses die from indigestion than starvation.

[33:00] I found, after much trial and error, that applying steady, gentle pressure from the worked best.

[38:00] Bill and I knew we didn't want to be a “me too” company merely copying products already on the market.

[38:00] Netbooks accounted for 20% of the laptop market. But Apple never seriously considered making one. “Netbooks aren’t better than anything,” Steve Jobs said at the time. “They’re just cheap laptops.” Jony proposed that the tablets in his lab could be Apple’s answer to the netbook.

—— Jony Ive: The Genius Behind Apple's Greatest Products by Leander Kahney. (Founders #178)

[46:00] Gains in quality come from meticulous attention to detail, and every step in the manufacturing process must be done as carefully as possible, not as quickly as possible.

[47:00] Exponential growth is based on the principle that the state of change is proportional to the level of effort expended.

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