✪ Business - Toilet Paper Entrepreneur - Mike Michalowicz

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Good morning. Welcome to Smart Companies Radio. I'm Kelly Scanlon, publisher of Thinking Bigger Business Media. And our guest today, someone we're very excited about because he's going to be in Kansas City just a few days from now on Monday. His name is Mike Michalowicz and he started his first business at the ripe old age of 24. With no experience, no contacts, no savings, yet he bootstrapped that startup into a multi billion dollar business and then he did it two more times with two other businesses. He's currently the CEO of the Providence Group, a consulting firm that ignites explosive growth in companies that have plateaued. And one of the things that I think is one of the neatest things about Mike is that he was a recurring entrepreneur expert for, for CNBC's the Big Idea with Donny Deutsch. He's also the small business columnist for the Wall Street Journal. He's a frequent television guest, a keynote speaker on entrepreneurship, and the author of the cult classic the Toilet Paper Entrepreneur. His newest book, which he's coming to Kansas City to talk to us about, is the Pumpkin Plan. And it's already been called the Next E. Myth for all of you Michael Gerber fans out there. So welcome to the show today. Mike.

Thank you, Kelly. Thank you so much.

Well, okay, 24 years old, you started this business, you grew it into a multimillion dollar business. So you're sitting there, you're 24 years old. Did you think in your head, I'm 24? I think at that time you had one child and you're married. Did you actually sit there and think, oh, I'm going to quit my job, start a business and in one year, two years, however long it's going to be a multimillion dollar business? What were you thinking at the age of 24 with a child and a starting out like that?

Yeah, yeah, it's, you know, I encourage, I don't encourage anyone to do it the way I did it. What I did was I was, I was working at like a computer store. I literally couldn't get a business out of college. I got married and had child very young and I went out for drinks one night just bemoaning that working at this place as with another guy, I was telling him I'm smarter. You know, I do all the work and the boss is a jerk and he makes all the money off my sweat. And I said, I'm gonna, I'm going to quit. I'm going to Start my own company, competing company. And I literally had enough beer in me to have some liquid courage. And I left a drunken slurring message saying, I quit and I'll start my own company. And the next morning, I begged for my job back. Yeah, I think I made a mistake. And the boss said, no, no, kid, go, go. And I was done. And I was terrified. And it's funny, I've ultimately come to find that fear is a wonderful, wonderful motivator. You can't sustain on fear. But at least as a kick out of the door, it got me going. It got me going for a long time.

Oh, yeah. But then you did it two more times. So you've had a total of three businesses, both of them multimillion dollar businesses. Is it because you found a pattern this might actually lead us into the toilet paper?

Yeah. You're totally sounding pumpkin theory.

So did you find that there was a formula there?

Yeah. What is it? Yeah, I want to know. Yeah, that's actually what I talk about in the pumpkin plan. And so I'll give you kind of an insight into. At least. What I found worked for me was I found that the ordinary entrepreneur is similar to the ordinary pumpkin farmer, or maybe it's vice versa. The ordinary pumpkin farmer is similar to the ordinary entrepreneur and most entrepreneurs. And this is how I got started, too. We go after what I call the quantity game. Get more customers, pursue more opportunities. More, more, more. The funny thing is, while it's necessary in the very early stages because you don't have any customers to get any new customers, a good thing very quickly, you have to find your pattern. You have to find your piece that works and then start replicating it. And so what colossal pumpkin farmers do is they are highly selective on the seeds, the things that work to grow colossal pumpkin. And I found that colossal entrepreneurs, people that become the dominant player in their niche, or the people that have these colossal companies like Apple and Google and all these things, all of them have found their seed and they really exploited that. They were highly selective. Instead of playing a quantity game, they played off of one kind of seedling. A perfect example, because we all know Apple. Apple played into the uniqueness of Steve Jobs. And one of his uniquenesses was that he had a button phobia. He was afraid of buttons for his whole life. I say to any entrepreneur, whatever you were made fun of in high school, that's probably something that makes you really unique. Exploit it.

So, buttons. Okay, I have to stop you there. Buttons. Buttons, as in button buttons on your shirt. Or buttons, as in the buttons you press on a phone or a device. What kind of buttons are you talking about?

Yeah. So Steve Jobs was afraid of buttons on a shirt. You'll never see a photo. Yep. You'll never see a photo of him wearing a shirt with buttons or pants.

Yes. Why? He always wore the black pullover.

Yep. Turtleneck. Yeah. He had a phobia. He had a legit phobia. Now, how this played in, amazingly, was that his fear or uncomfort in comfort or uncomfort, I guess, with buttons resulted in that when his designers were presenting stuff like a mouse or the iPhone, he would always say, got to have less buttons. If you look at an Apple mouse, it will have one big button where most mice today have like 15 buttons on it. IPhone, one button. It was all because of that phobia, that uniqueness. So we got to exploit our uniqueness and we have to stay true to it. And of course, a couple other elements. There must be customer demand for it. You must be able to scale it. But if you overlap those three things, uniqueness, customer demand, and scalability, you can get a business that will just take off colossally.

So I'm sure that as these farmers are destroying the rest of their crop in order to nurture these larger pumpkins, that that has to be somewhat painful because I can just. I mean, I imagine that in order to follow your advice or to go with the theory that you're talking about, that you're going to be firing customers and you're going to be slashing away things that you may have birthed at one point, but you're going to have to give up in order to put all the energy and all the nutrients, so to speak, into the thing that's going to really pay off. Become colossal.

Exactly.

Is there much of that?

It's so fascinating. Ordinary pumpkin farmers are in a quantity game. The more pumpkins I can grow to sell for a dollar or two or ten is a good thing. Colossal farmers. This is an interesting fact. A seed from the blue ribbon winning pumpkin can sell for up to $1,500. A seed, which by the way means an ounce of pumpkin seeds is worth about 100 times an ounce of gold in today's valuation of gold. But what's interesting is the ordinary farmers in the quantity game, the more pumpkins that are growing on the vine, the better. Anything that's small and weak is actually helped along to grow, to give it some. Some potential. They work on it to help it, to move it along. Colossal farmers just as you indicated, Kelly, are the exact opposite. They identify what pumpkin has the most potential and then they kill off everything else because they know another pumpkin on the vine is taking the nutrients. Another pumpkin is taking away the weeds, taking away the sunlight. And weeds are taking away the sunlight from the colossal pumpkin. Now, these are things parallel to entrepreneurs. It's ordinary entrepreneurs. When they see other little pumpkins growing it, they go after it. These weeds of distraction too often are labeled as opportunities. And what I found is that the ordinary entrepreneur says yes to new opportunities 10 times more than they say no. Conversely, the most successful entrepreneurs say no 10 times more than they say yes. Focus on the colossal pumpkin all the time.

Okay, so I have to ask you this. You also hear the opposite advice. Don't put all your eggs in one basket. And it almost sounds like you're saying put all your eggs on or put all of your money into one pumpkin. So how do you justify doing that? You're throwing that advice out the window. It sounds like, how do you justify that?

Yeah, I totally believe in putting all the eggs in one basket. Because what it is, is that a colossal pumpkin. Listen, every season you're not going to have a blue ribbon winter. Sometimes a colossal pumpkin grows and then it collapses under its own weight. It can grow too fast. Businesses can too. Sometimes the external environment, hail, storms, the weather doesn't play in favor. It's a bad season. Happens for businesses, too. The interesting thing is I found, I studied farmers for about a year, pumpkin farmers. I found there's only, only one guarantee in the pumpkin farming industry. And what it is, is that an ordinary pumpkin farmer will never, ever grow a colossal pumpkin like you and I can drive down a country road past a pumpkin farm, and you'll never see a miraculous giant pumpkin just growing out of the ground. No, by doing the ordinary growing strategy, they have guaranteed never to have colossal success. Ordinary entrepreneurs, by doing the let me serve every client I can, let me spread myself, let me be a generalist, guarantee they'll never have colossal success. But here's the more fascinating part. The colossal pumpkin farmer, if the bad storm comes, if it falls under its own weight, if they don't win, they don't go in and say, you know what? This process doesn't work. Instead, they say the process works. It wasn't my season. And they go right back to the fundamental process of collecting the pumpkin, treating a certain way, cutting off the weak stuff, because they know the process works. The outside elements, that's outside their control didn't. Well, I found the same Thing for colossally successful entrepreneurs. If they have a failure, they don't say, oh my God, this will never work. I must become a generalist. They just say this one wasn't my season. And they immediately go after the exact same process with a new iteration. And I can prove this to you in the real world. If you look at any successful company of any magnitude, I can guarantee you they've never grown by being generalists. They've put all their eggs in one basket.

Give us some examples that we'd recognize.

Apple, right. So let's start with Apple. Apple IIe. They made their big bet on the Apple II. Apple computers made the big bet on the Apple IIe. Now there was other computers leading up to that, but what they did is they picked that computer, but they also picked a vertical which was the educational market. That's how they got started. They got schools and then they expanded out. So one computer, their flagship computer, the Apple IIe, to one target customer schools. And they grew it explosively. Another classic example is Procter and Gamble. And I like to say them because they have like 10,000 different products today and people tell they are such generalists, obviously. No, Procter and Gamble started with two products, soap and candles. And they decided that that was way too many products to offer and they dropped candles and only did soap. And then they picked a vertical, which was the military and they only sold soap, which was Ivory Soap that they founded. Ivory Soap. To only one group, the military spread, that dominated and then they expanded out to more general consumers and more products. Walmart. Walmart decided to service convenience only to people that were less affluent in very small town America. They dominated that niche and then they expanded into every city in the entire world.

Yeah, and you could go on. These are great examples. One of the other things I would like for you to talk about is again, flying in the face of traditional wisdom. You hear all the time about, oh, make sure if you don't do anything else that you ask your clients for referrals and you say, no, wrong strategy there. Talk to us about that.

Yeah, so here's the problem with that. The ordinary farmer looks at the surface level. Opportunity. How well is the foliage? How good are the leaves? The colossal pumpkin farmer looks under the ground. The root system. Well, the parallel I found in business is that ordinary entrepreneurs who struggle in the day to day are looking for surface opportunities. The easiest one is client referrals. Here's the lesson that we've all been told. Go to the client and say, how is my product or service when the client says it's good, say thanks. By the way, do you have any friends or contacts? I could also use this product or service. Many cases they'll say yes just to get you out of the room because it's very uncomfortable. But if you think about it for a second, what you're saying is you just collected money from this client and you're saying, I'm sorry, your money's not good enough. I need your friends, I need your contacts. It's over. Asking uncomfortable. You're potentially diluting that client, meaning you're not going to be as available for them if they refer you elsewhere. And maybe you want a competitor now you can give them competitive secrets. It's a lose lose for the client. Here's the better strategy. To me, this was the turning point. I've applied this in my businesses and this is why they took off. And I found every successful company uses a strategy just like this. They go for the root system. And the root system is what I call complementary vendors. Other vendors who service the exact same client as you but offer different services. What you do is you go to your client and you say, hey, thank you for letting me be of service to you. What other vendors do you depend upon? They'll probably say, well, why do you want to know? You say, if I meet those vendors, we can collectively learn about each other and serve you better. It's a no brainer referral. Now you meet that vendor, of course they'll meet with you. You have a mutual client after all. And then you say, hey, what can I do to help service this client better? You build that relationship with that vendor. Well, guess what? They have probably other clients just like that mutual client you had. They become a huge referral source for you to identical clients. By the way, if you do this vendor referral networking or this complimentary vendor referral networking with your best client, they likely service other clients like them. It's the best way to clone your best clients.

Yeah, that's absolutely true. And just as an example, this is a very, very simple example of what I think you're talking about is if you are going in to rent a tuxedo for an event, and because they're in the event business, they're selling or renting formal wear to people who have to go to some kind of a black tie, whether it's a wedding or a dinner or whatever, there's likely to be a photographer that's needed. So that would be one of the vendor referrals you're talking about is that correct. Or people who provide flowers, for example.

Always necessarily the most obvious one. It can be these weird links. So when I was. I was. My first company was in computer networks. Very boring subject. I was the guy, if your computer broke, I'd come out and break it even more. Basically, computer guy. And when I found out with my niche in computers, I was first a generalist, I was struggling. I then identified the hedge fund industry as where I had special ability. My business started taking off and I did this vendor referral. Networking. Well, I found out the cleaning service had special access to brokerage houses and hedge funds. They need special security.

So.

So I became friendly with a cleaning company and we were able to network together. They were able to introduce me to brand new clients because they were in all these different hedge funds. So it didn't have to be a technology company, it was a cleaning company and it got referrals and opportunities.

It's amazing when you really start thinking about the vendor network that your clients probably have. You're right. It could go on and on and on. I do want to get in. We're going to hear. I'm going to say this again at the end of the interview, but we're going to hear more about the pumpkin plan from Mike when he's here in Kansas City on Monday, just a few days from now. So if you don't have your tickets, make sure you go out to I thinkbigger.com this afternoon and get those. Still just go to I thinkbigger.com, click on Events and you can still sign up and register because as you can see, he has a lot more to say. And we just have a short time for the interview, but I want to take just a couple minutes before we close this out here and talk about the toilet paper entrepreneur, because you are very well branded as a toilet paper entrepreneur. And what is that about? Why did you write the first book? And what is a toilet paper entrepreneur?

Yeah, so I wrote the first book a little bit out of frustration. I was watching all these entrepreneurs who were not going to start a business because they couldn't get a venture capitalist to come in. They couldn't get all the money. I said, that's not really the reality of entrepreneurship. Someone that funds you wants to see a degree of success. They need to understand you. They got to know that you are bankable, that you have success. So in many cases, the very early startup phases, you may have to start it on your own dime before you go out and seek funding. I hated to see these People just sitting and waiting. The other problem I had was that as I read through all these great magazines like Fast Company, I love Fortune Inc. These magazines, I always saw what I call the media darlings. Mark Zuckerberg is on the COVID of every magazine and people jaded in the wrong way. They thought if I start a business instantly I'll be a millionaire or a billionaire. Other reality. I wrote the Toilet Paper Entrepreneur to explain that sometimes we're stuck in those three sheet moments. Everyone's been there, everyone survives, and we often are shorthanded. But the beautiful thing about being shorthanded is necessity is the mother of invention. When we don't have the, we don't have the resources, we don't have the.

Experience, we don't have the money, it's.

Actually your biggest asset because now you become inventive and you can bust through a category, you can break into an industry a brand new way and stand out. That's what the book is about.

Yeah. And innovation. All the innovation that comes out of that struggle and the making do with the resources that you have at your disposal. Sometimes. Well, I mean just think back around 2000 when we had the first dot com bus. All of these companies were throwing just tons of money at. Well, I use companies loosely that had no idea really what they were doing and then it all just exploded. But yet they had great break rooms and they had great game rooms, but they just didn't have a really viable business. So sometimes not having that money is a good thing. What would you say with all the perspectives that you have now after three companies, multimillion dollars, what would you say are some of the mistakes that you see entrepreneurs making? Obviously you said that sometimes they think they're going to get rich quick rather than get rich. Right. Which is a phrase you like to use. But what are some of the other mistakes that you see entrepreneurs making these days?

I see a lot of entrepreneurs pursuing the trends. What are hot? Social media is hot. I'm going to become a social media consultant or start offering social services within my company. Here's the problem with that, Kelly. If what you do is not congruent with what excites you, your passion, you will not excel at it. Imagine anyone going into social media versus a person that just thrives and loves social media, lives on social media. I don't care how much of an opportunity is there. If someone loves it and you don't, they are going to study harder, they're going to research harder, they're going to push harder, they're Naturally going to have the energy. The biggest thing I see entrepreneurs as a mistake doing is going after the money, but not after the passion. You have to go after what you love because that naturally gives you the energy and the desire to excel in the category.

Great point there. And there are a lot of people who I'm a firm believer that you have to have passion to do what you want to do. But there are a lot of people who said passion doesn't have anything to do with it. Get somebody, if you can got the idea and you've got the resources to get it going. You can have somebody else step in and who likes doing it.

You can do passion placement they call it. Right. You can stick someone in that cares for it. But most of us aren't in that situation.

No, not at all. So what advice would you give? What action steps for any entrepreneurs who are listening today that they want to grow their business but they're stuck. I hate using the economy as an excuse, but I know there are some people who have who've not fared very well during the downturn. So they want to grow their business, but they're stuck. Or maybe it's not even a cash flow problem. They're just overwhelmed. What would you tell them?

This sounds crazy. I go into company after company saying this. You've got to actually fire stuff. You've got to fire clients. And it's like, are you kidding me? I can barely make it day to day. I got to fire clients. Yes. And this is how you do it. Sort your clients by revenue first. That's the money they are spending with you for the last 12 months. Then sort it by what I call the cringe factor. How much do you like or not like this customer? And then the final category is your hourly return on the client. How much money are you making based upon the time you spend with them? Often the clients that you like least, they are the whiners. They are the squeaky wheels that generate the least revenue. Also cost you the most time. The bottom of your list of clients sometimes nets companies like negative dollars or five bucks an hour. Those clients you have to fire. What happens when you get rid of the worst client you have? You lose very little revenue. You sometimes gain profitability because you don't need as many resources now and you absolutely gain time with this extra time. You focus on cloning your best clients. You make more money that way and you have to clear out the space, time, availability, the resources in order to pursue the best clients. Businesses that are stuck in the struggle just the next person knocks them the door, the next business comes in, I'll take you. They don't qualify them. They take on crappy clients. And the problem is they stuck in the struggle for eternity.

Yes, they're going to sit there playing with all their little tiny pumpkins while their competitors out there growing the colossal ones. So great advice, Mike. And for folks who may not be able to attend on Monday, and this is actually a national show, so we know that a lot of our listeners won't be in Kansas, where can they get a copy of the Pumpkin Plan and the Toilet Paper Entrepreneur?

Yeah, so you can get a free chapter from each1@mikemcalowitz.com Give your best attempt at spelling it on Google and you'll find me. And then Amazon, Barnes and Nobles and your local bookstore carry both books.

Mike, it's been wonderful talking with you today. I'm very eager to meet you on Monday. I know we have a great event coming up to feature you and just really looking forward to that. Thank you so much.

Thank you. Blog talk radio, where millions of hosts and listeners gather. Sam.