As I’ve been reading Cable Cowboy: John Malone and the Rise of the Modern Cable-TV Business, I’ve gotten a clearer picture of John Malone. Malone is brilliant and shrewd. I’d consider him more of a financial engineer than anything else. He excelled at deal making, strategy, and capital allocation—but not at building a cable service customers loved or a company that was sustainable long-term.

Between 1973 and 1989, he completed 482 deals, or one every two weeks or so. From the company’s low in 1974, not long after Malone joined, through mid 1989, the stock rose 55,000 percent, a spectacular return.

Malone’s constant deal making created remarkable shareholder value. But it came at a cost. Customers hated TCI. Malone’s goal was to charge as much as possible for his service but spend as little providing it as he could get away with. This strategy maximized cash flow but resulted in notoriously poor customer service, massive rate hikes, unreliable service technicians, and inconsistent cable service. TCI’s poor reputation with customers and its business practices (including others not mentioned here) led to Malone being forced to appear before Congress to defend himself and TCI’s business practices. He and various state and federal politicians became enemies. TCI’s shareholders were happy, but Malone and the company were under constant attack.

Malone was in a service-oriented business selling to consumers, but he didn’t approach it that way. He focused on engineering financial outcomes, not making customers happy. He got the financial returns he wanted, but he and TCI were vilified by customers, politicians, and competitors. It all took a toll on Malone over the years. As I read this part of the book, I couldn’t help but wonder if all the hate he encountered was worth it. Couldn’t he have gotten a similar outcome if he built something people loved, not hated?

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Last week I learned about John Malone while reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. This inspired me to buy and begin reading Cable Cowboy: John Malone and the Rise of the Modern Cable-TV Business.

Tele-Communications Inc. (TCI) was a cable company founded by rancher and cottonseed salesman Bob Magness. TCI laid wires to allow cable to reach homes and charged monthly fees for access to its infrastructure and programming.

Magness used debt to expand TCI and got in over his head. In 1972, he recruited Malone to get the company’s finances in order and take it to the next level.

Malone focused on increasing the long-term value of TCI, not short-term profits. He ignored reported profits and concentrated on the company’s cash flows, not net income. He reinvested cash flow in ways that would generate a high return and increase TCI’s market capitalization (i.e., valuation). Here are two key things I noticed Malone did:

• Depreciation – Cable systems were depreciable assets. Once a system was acquired, TCI depreciated this cost over time, which minimized (and often eliminated) TCI’s tax bill. The lower the tax bill, the more cash TCI had to buy more cable systems. The more cable systems TCI purchased, the more cash flow Malone had to reinvest and the more depreciation lowered TCI’s tax bill. The bigger the system became, the more subscribers Malone had to use as leverage in negotiations.  
• Programming – Cable system operators thought programming was a commodity they had to pay for. Malone realized programming companies were valuable because they had two revenue streams: advertising and payments from cable systems (like TCI) based on subscribers. New channels increased fees to cable systems as popularity increased. Malone realized that owning part of new programming (i.e., new cable channels) would allow TCI to profit twice by owning “both the pipe and the water flowing through it.” He could offer new channels broad distribution early and negotiate lower programming rates for TCI, a win-win. Malone started seeding new cable networks. He provided capital and access to subscribers in his system in exchange for 20% of new programming channels.

Malone ended up building a powerful flywheel that increased TCI’s long-term value. The more cable systems he bought, the more cash flow and subscribers he had. The more subscribers and cash he had, the more leverage he had with new cable channels. The more these new channels succeeded, the more revenue they had and the more valuable they became. The more valuable new programmers became, the more valuable TCI became.

Using this approach, Malone ended up owning stakes in BET, the Discovery Channel, the Family Channel, and others.

I haven’t finished the book yet, but I can already see why Malone is considered one of the best capital allocators.

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I’ve recently read books about two founders who founded massive publicly traded companies, but in different ways: Pierre Omidyar, founder of eBay, and Willis Johnson, founder of Copart. Both companies offer online auctions. As of this writing, eBay has a market capitalization of roughly $27 billion, while the Copart valuation is roughly $53 billion.

Omidyar worked in Silicon Valley and was financially comfortable after a previous employer was acquired. He thought the world was unnecessarily unfair economically. He envisioned an efficient market that empowered people financially so they could control their own lives. His mission was to create an online auction with a strong community. His vision- and mission-first approach led to his nailing product–market fit straight out of the gate. The company went from zero to $41.7 million in revenue and was publicly traded on the stock market in three short years.

Johnson didn’t want to work for anyone but needed to support his family. He knew the salvage industry and started a salvage yard because he knew he could make money. As more problems presented themselves and money-making opportunities arose, he took them on too. After twenty years of opportunistically solving various problems, the rapid success of his online auction market in 2003 caused him to question his “job.” He shifted his mission from solving various salvage problems for profit to “streamline and simplify the auction process.” Johnson’s twenty-year transition from mercenary to missionary led to unprecedented growth at Copart. It’s now a global online auction market.

I, too, began as a mercenary when I started my company. I wanted more control over my life and needed to replace the salary from the job I’d had. I went from problem to problem with a focus on profitability. Years later, after I had financial breathing room, I started to focus on the painful problems. I became something of a missionary. This led to $10 million in annual revenue, but that could have been $300 million if I’d gone full missionary. I should have been laser-focused on our customers’ most painful problem.  

As I thought about my founder friends and myself, I realized that Johnson’s journey is most common among my peers. Most of them picked a market and focused on making money to support themselves. They often attempted to solve various problems. But my friends who had outsize success didn’t stick with that approach. When their companies began to grow rapidly, it was because they were laser-focused on a single problem and mission. Their outsize success was the result of converting to being missionary founders, often after they had financial breathing room.

Entrepreneurs wanting financial independence and control of their lives can accomplish these goals as mercenaries, but if they aspire to have a bigger impact or build something significant, crystallizing a vision and mission is likely the key.

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I’ve been thinking about sharing my daily posts in an audio format in addition to the written format. My self-imposed deadline was to get it done by Friday, April 26. I met that deadline and launched via Spotify. Apple Podcasts and Spotify are the two largest distribution platforms for podcasts, so I want to be on both.

Today, I finished setting up everything with Apple. My posts can now be heard on Apple Podcasts. I need to tidy things up a bit, but I’m live!

Feel free to check out my blog on Apple Podcasts.

This is my two-hundred-thirteenth weekly reflection. Here are my takeaways from this week:

• Audio blog – I launched an audio version of my blog this week. I still need to fine-tune things and expand to other platforms, such as Apple Podcast, but the first box is checked. I’m excited about what I’ll gain from this experience. It feels like the next evolution of my learning in public. You can check out the audio blog’s Spotify page here.
• Entrepreneurial groups – I spent time learning about groups like EO, YPO, Vistage, and Tiger 21 that are attractive to entrepreneurs. While doing so, I also learned about their business models. I was shocked at how much revenue these organizations generate. If revenue is a proxy for value, they’re bringing tremendous value to founders.
• Distilling – I’m still not where I want to be in distilling and documenting what I’m learning from the books I’m reading. I want to focus on this more next week.

Week two hundred thirteen was another week of learning. Looking forward to next week!

Today, I finished reading Junk to Gold: From Salvage to the World’s Largest Online Auto Auction, an autobiography of Copart founder Willis Johnson. Johnson founded Copart in 1982. It started as a salvage yard. He purchased wrecked cars and sold the parts and scrap metal for a profit.

Johnson picked the salvage market because it was supported by two larger industries. Car manufacturers had to produce cars or they’d go out of business. Insurance companies had to write car insurance policies or they’d go out of business. “They’re always gonna make cars, and they’re always gonna insure them. We’re the guy in between.” The salvage business was important because it sat between the two and helped dispose of wrecked or inoperable cars, which are inevitable.

Johnson started with a salvage yard but was always scanning the landscape, paying attention to what was happening around him and searching for the next thing. He started a pick-your-own-parts yard and other businesses as opportunities cropped up. Over the years, he realized that providing a place to auction salvaged cars helped insurance companies recoup more money—and insurance companies were great repeat customers.

He continued to iterate on the auction model. In 2003, Copart rolled out an online auction platform. The platform was a tremendous success. Johnson realized he was on to something big and began to ask himself, What is our job? which I translate to What’s our mission? Up to this point, he’d been chasing anything that could make money. But now, the online platform’s success changed his thinking. He’d found product–market fit but wasn’t sure what to do with the in-person auctions and other businesses. Where should he spend his time? What was the biggest opportunity? He realized that his mission was to “streamline and simplify the auction process.” With a clear mission, his decisions were easy. He ended in-person auctions. All auctions would be online going forward.

Having a clear mission and product–market fit took Copart on an unprecedented run. The company is now a global online auction market and has a market capitalization (i.e., valuation) of over $52 billion as of this writing.

I enjoyed learning about Johnson’s journey. The distance he traveled was impressive. He doesn’t have a college degree and isn’t technical, but he nevertheless built a massive company centered on technology. Johnson’s business was founded in 1982 and started trading on the NASDAQ stock exchange in 1994. It took nine more years for him to crystallize his mission and focus on a single solution with massive potential in 2003.

Johnson hustled in the salvage industry for twenty years before he found product–market fit. When that happened, he switched from hustling to being laser focused.

Johnson’s journey is unconventional, even by entrepreneurial standards, but his success is outsize and undeniable. His story reminds us that there are many paths to success as an entrepreneur, including unsexy paths like the salvage industry. In the end, it boils down to finding a painful problem, solving that problem well, and providing the solution to a large pool of people or businesses.

Today, I began reading Junk to Gold: From Salvage to the World’s Largest Online Auto Auction. It’s by, and about, Willis Johnson, the founder of the online wholesale and salvage vehicle auction Copart. He tells readers about his life from childhood on and shares a series of stories from each point in his life and the lessons he learned.

Copart is a publicly traded company with a market capitalization (i.e., valuation) of roughly $52 billion as of this writing. The company’s core offering appears to be an online auction.

Given what the company is today, I expected Johnson to have had a big vision. I haven’t finished the book, but it’s clear that he didn’t. Instead, he built his company in what I’d consider a reactive manner.

He was constantly scanning his surroundings for opportunities and reading the newspaper (yes, the newspaper) to look for new ideas. When he saw an opportunity that seemed like a good deal, he pulled the trigger quickly. He was always shaking the trees, seeing what fell out, and snatching up the best option. Some of his biggest decisions were opportunistic plays that presented themselves. Often, he wasn’t even considering them the day before he committed.

When he saw a competitor doing something he liked, he promptly cloned it. For example, Johnson knew nothing about IPOs or the stock market. But when a competitor completed its IPO, Johnson decided to copy the move. Keep in mind that he didn’t even know what “IPO” stood for at the time. Roughly two years later, his company was publicly traded.

From what I can tell, junkyards (this is how Copart started) and auction businesses are highly unpredictable. You never know what’s going to roll through your doors. You have to react to whatever happens and try to turn a profit with whatever shows up. Johnson not only thrived in this environment but figured out how to build a massive business one reactive decision at a time.

I’m someone who likes to start with the end in mind and then figure out the best path to that goal. Johnson’s operating style isn’t something I’d be able to adopt, but I’m fascinated by how successful he was. I’m curious to finish the rest of Johnson’s unusual story.

Reviewing my notes on The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, I spotted a few patterns. Most of the CEOs displayed the following traits:

• Daily operations – These CEOs hired strong lieutenants who managed day-to-day operations. This time-management hack allowed them to focus on whatever the most pressing issue was at any given time and strategic things like capital allocation. Finding the right number two took years in some cases, but when it happened, it freed these CEOs from the weeds of the business and gave them more control of their time.  
• Frugal – There’s an old saying: “If you watch the pennies, the dollars will take care of themselves.” All these CEOs took this to heart and watched their costs. They were happy to spend, but only when the return was clear. They avoided unnecessary layers of people and the associated costs. Most avoided expensive class A offices, opting for modest, unassuming offices instead. Tom Murphy of Capital Cities Broadcasting used frugality as a defense to his company’s inconsistent ad revenue. He recognized that he couldn’t control revenue but he could control his costs.
• Independent thinking – These CEOs didn’t believe in mimicking others. They didn’t follow their peers or conventional thinking. Instead, they spent time doing their own thinking to arrive at rational and pragmatic decisions. These decisions were often the opposite of what peers were doing and led to returns that exceeded those of their peers.
• Free cash flow – Free cash flow is a recurring focus among these CEOs. They didn’t pay attention to reported profits (i.e., net income); rather, they wanted to know how much cash the business generated that they could allocate. The distinction between free cash flow and net income is an important one. Many entrepreneurs don’t understand that difference, and it shows in their decision-making.

These CEOs ran large public companies, but these are traits that founders of almost any stage company can embrace and benefit from.

Today I finished reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. William N. Thorndike, Jr. profiled these CEOs:

• Tom Murphy, Capital Cities Broadcasting
• Henry Singleton, Teledyne
• Bill Anders, General Dynamics
• John Malone, TCI
• Katharine Graham, The Washington Post
• Bill Stiritz, Ralston Purina
• Dick Smith, General Cinema
• Warren Buffett, Berkshire Hathaway

The book describes how CEOs generated capital and executed creative approaches to capital allocation, and it reports their returns over a long period. I was familiar with Buffett but less so with the others. I took many notes on Murphy, Singleton, Malone, and Graham.

It was interesting to learn about Singleton’s strategy. It was the same as Buffett’s playbook, and Singleton was older than Buffett and deployed his strategies before Buffett did. Buffett has praised Singleton as one of the best businessmen ever, and I’d imagine many strategies that make Berkshire Hathaway successful were borrowed from Singleton’s playbook.

John Malone is the CEO I’m most unfamiliar with and most excited to learn more about. Malone recognized the predictability and high growth rate of the cable industry early. He used various strategies to build one of the largest cable distribution companies. He also helped seed various cable programming entrepreneurs, such as Bob Johnson of BET, and partnered with other cable entrepreneurs, including Ted Turner.

This book chronicles CEOs of publicly traded companies, so most examples don’t apply to early-stage entrepreneurs. But it does a good job of explaining capital allocation, including why it’s the most important job of a CEO, and quantifying the results of superior capital allocation by talented CEOs.

Capital allocation is a mindset and a skill all entrepreneurs should be aware of. For entrepreneurs seeking to grow their companies, capital allocation is a critical skill to master.

I started reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success this weekend. The book, written by William N. Thorndike, Jr., and published in 2012, details eight CEOs' methods and why they led to outsize returns for their shareholders over a long period.

The central concept of this book is that capital allocation is the CEO’s most important job. Capital allocation is “the process of deciding how to deploy the firm’s resources to earn the best possible return for shareholders.” It’s investing to get the highest return, so CEOs are both capital allocators and investors.

CEOs need capital before they can deploy it. They can acquire capital in three ways:

• Generating cash from company operations
• Issuing debt (i.e., bank loans or bonds)
• Selling equity (i.e., selling part of the company to VC, PE, or public investors)

When CEOs have capital, they can deploy it in several ways:

• Investing in the company’s existing operations
• Acquiring other businesses
• Issuing dividends
• Paying down debt
• Repurchasing equity (i.e., buying back part of the company)
• Launching new businesses (as the sole owner or in partnership with others)

These options make up a CEO's capital allocation toolkit. Figuring out what tools to use, if any, and when, is the skill of capital allocation. The book emphasizes that no courses are taught on capital allocation (as of 2012), so it’s a skill many CEOs lack. Now, though, Columbia Business School apparently covers this topic in its Security Analysis course.

Core to gauging the effectiveness of a CEO’s capital allocation in the long run “is the increase in per share value, not overall growth or size.” Long-term per share value essentially measures long-term value creation.

When I ran my company, I was focused on two things: running the company efficiently and generating cash. Getting the operations right consumed much of my time, and I didn’t think in terms of being a capital allocator.

So far, the stories of how these CEOs thought about and executed capital allocation strategies to generate high returns have been thought provoking. I’m looking forward to finishing this book.