Podcast Transcript

Sean: [00:00:07] Well, G’day everyone, and welcome to the ScaleUps Podcast, where we unpack the secrets and strategies of scaling a business with the Founders who've done it, the industry experts and advisors who can help on the journey, and we follow a group of first-time Founders on their journey as they strive to scale.  We've got a very clear goal on this podcast, we’re here to really help first-time Founders who haven't run larger organisation, figure out how to scale successfully so they can fulfill the potential of that business, can make important decisions with more confidence, and maximise the value that they can actually create in the world through that business. I'm your host, Sean Steele. I'm joined today by Richard Katzman, from the Kaz Group, which was Kaz.com up until probably 2010. I'm guessing Richard, is that right?

Richard: [00:00:48] Pretty much. Yes.

Sean: [00:00:49] Yeah. So, just a bit of background on the Kaz group for people who may not know the brand was founded in 1926 when Max Katzman, who was your grandfather, invented the electric vaporiser and it became the world's leading global manufacturer of healthcare and home environment appliances like humidifies and digital thermometers and heaters. And you were selling those under licensed brands as well to the big box and online retail across six continents. And from our earlier conversations Richard, you took over the reins of this business from your father in 1978, and then over the next 32 years, led the company through a growth stage from 4 million rev to 500 million revenue before it was sold to Helen of Troy in 2010 who own a whole bunch of other sort of leading beauty and health and home and houseware brands. And you mentioned to me that some of the key things that were happening in the business were the expansion of product lines that sort of led to this. The expansion of product lines, the development of international distribution and the brand extension licensing that you did with brands like Vix and Honeywell and Braun. So, I've been really looking forward to this conversation. Can't wait to get stuck in today and to hear about your experiences and learnings, as you've been scaling. Maybe as a way of setting a bit of context for our audience Richard, could you just give us a bit of a walked through of a typical customer, because you had an end customer who were the people who are actually buying their products at the end, but who were you guys selling to? Who were your kinds of key clients and what sort of problems did they have and how did you go about solving those?

Richard: [00:02:28] Sure. So, our customers where the, for the most part, the big box retailers and the pharmacy chains and eventually the home centres like Home Depot and Lowe's in the US, and so we basically became their category captains for those categories. I think Walmart or target might have pioneered that concept where they really relied on their leading manufacturer to not only advise them on which of our products to carry, but in some accounts we were responsible for knowing all the market shares and even recommending some of our competitors.

Sean: [00:03:12] Oh right.

Richard: [00:03:13] Would be on the shelf, and kind of managing the category for them. As it got more sophisticated, and I'm sure some of your listeners are also doing this as to connect right in with their data centre Walmart in particular was very strong on that, where they expected you to manage their inventory in your categories as well. So, you need to know like what the daily sales were, what each distribution centre was doing and make sure you had enough inventory in this whole supply chain for them, and then also to innovate and to make sure that you were the price leader and a feature leader and, just, you know, they wanted the captain. Yeah.

Sean: [00:04:10] They wanted the captain. And so, when you think about your, the competitive landscape, it's not like you are the only people in this business and the only people with this in the playing field. How did you differentiate yourselves from your competitors?

Richard: [00:04:24] Well, especially when I started in the business, you know, we were pretty small company and we were competing against Fortune 500 Companies. So, Sunbeam was a competitor. It's another global brand. And then there was one company that was a division of Champion Sparkplugs because, you know, the developers, paint sprayers sort of ended up being also a humidifier and Gerber baby food had a vaporiser humidifier division as well. So, we differentiated, I think, because this was, you know there was a very small part of, of their companies and it was 100% of our business. So, we obviously cared a lot more about it and put heart and soul into it as a family business. And I think that mattered, especially when my dad was running the company, Pharmacies.

There were a lot of independent pharmacies and they bought from wholesalers and it might've been, I don't know, 50-60 wholesalers. A lot of those were family businesses, and thousands of independent pharmacies. By the time we sold the company, there were very, very few independent pharmacies and there was really Walmart and Target pharmacy were the biggest. And then CVS, you know, there were two or three Walgreens and you know, CVS in the US were the leading pharmacy chains and you're dealing with maybe a dozen people in the whole country that bought for every single store. So, you know, it was very, very different and being, you know, if we'd stayed the kind of business that we were, when I joined, we wouldn't have been able to compete in that kind of corporate environment because, you know, the whole world sort of shifted away from smaller independent businesses towards the mega corporations.

Sean: [00:06:37] Wow. Well, do you have had some incredible experiences, and so, you know to extract the greatest meat in a short space of time on this podcast, I'd really like to jump straight into some of those key moments. And that we had a bit of a chat offline about a few of these, and one that I thought might be quite instructive for our audience, many whom I know ended up in front of a customer, have to sell a dream and then have to run like hell to deliver. You mentioned something about an experience that you had like that with Target. Maybe you can shed a bit of light on what that looked like and how it fuelled your growth?

Richard: [00:07:17] Sure. So, I think in terms of not know if I qualify as an pure entrepreneur since I didn't start the business, but I like to think of it as like intrapreneurship, which is, you know, when you grow from 5 to 500 and we were doubling every 3, 4, 5 years. It really felt like it was maybe six or seven different companies, seven plus doublings over that time. And one of the ways we grew the business was finding neighbouring product categories that we weren't in and then try to develop a product line and solve, try to improve on the category and leverage the relationships and the business that we had in the brand. And we were doing very well with vaporisers and humidifiers, and one of the products that's similar on the shelf were electric heating pads and you know, Sunbeam, I think had about 90% of the market at that point. And again, it wasn't a huge piece of their business and they hadn't been innovating or doing anything with the category. Not that it's intrinsically a very interesting category to begin with, but you know, no matter what the product is, there's always something innovative you can do. And so, we had the idea to develop the first electronic controls instead of mechanical controls on it and, you know, made it a little bit safer. And then did some, you know, paid a little bit more attention to the look and feel and the design of both the packaging and the cloth cover and the design of the switch and just to make it a sleeker, more modern product that, and now that'd be more appealing, and, you know, hopefully grow the category a little bit and that all those things were kind of the sweet spot for Target stores who really put a lot of effort into the design of their stores. And it was very clean and open and modern looking. And they really cared that the products on the shelf also looked like the rest of their store, that it would be very appealing and the buyer hadn't been very happy with the Sunbeam product. And so we had it designed, you know, we were in the middle of our design phase, which didn't quite match up with their planogram timing. And so, we had to present before we were really ready with finished product or even finished prototypes. So, we had mock-ups of our new swatch and we had front panels of the packaging and we had cloth swatches of the cloth covers not even full covers. And we had partnered with a company that would make the actual heating pad unit for us. And when it came down to decision time, they liked everything we were doing, but they had to make a decision based on what I could show them. And they said, I wish you had a real product that I could decide on instead of just all this nonsense.

And I said, and so the only thing I could say was, you know, I said, you know, in a perfect world, we would have all those things, but this is what we have. And if you buy it from us, I guarantee we will deliver on time and make you happy and they bought it. So.

Sean: [00:10:56] Wow.

Richard: [00:10:57] And then, I don’t know five or six years later, we were the category leader in that category. So, you know, from zero to leadership. But at that moment, if we hadn't gotten that account, I don't know that it really would have succeeded.

Sean: [00:11:16] Yeah. And you can imagine the number of times that we want to be professional in that businesses. And we want to often, you know, sometimes we actually just have to do the best we can to build a minimum viable product right? And then actually get it out there and get real feedback and get real testing done, which is, you know, is there a customer who's willing to pay you right now for this? If there is, it probably tells you you're on the money, but then you just got to run like hell and I imagine that's a challenging conversation to get back to the team with, hey guys, guess what? I know we don't have this product yet, but we do now, we've got money, so you need to get it done.

Richard: [00:11:51] I've been involved with software as well. And you know, software, you know, you can fix it on the fly and if it crashes you restart it.  With electrical products that get hot and it can burn people and, you know, put vaporisers humidifiers in baby's rooms. And you have a lot of electrical compliance and it gets real very quickly. So, you know, MVP means a whole another level of stress and pressure, I think.

Sean: [00:12:24] Yeah, absolutely. Can you tell me a bit about brand extensions? It sounds like the licensing, the approach to really building out some of the product lines through brand partnerships or licensed partnerships was quite a game changer in terms of the trajectory of the business. Can you tell me a bit about why you did that, and how did it impact the sort of the transformation of the business?

Richard: [00:12:52] So, in categories like vaporisers and humidifiers, where you know, when I started, there were very, very generic looking products. There, there, they weren't even in full colour boxes, they weren't really treated like consumer products. They were treated like sort of like home health devices, like you'd find a bedpan or something like that. So, you know, one of the things that, that we did was started to treat it like a consumer product. And so, we had the customers were our retailers, but our consumers where the people actually using the product and the ones that had to make a buying decision in the store, and we thought, you know, we had it, we had a nice brand, pharmacists knew who Kaz was on the whole, the retailers did and a lot of, a lot of moms that their doctor had said, you know, your kid has the croup or cold or flu, you know, she'd get a vaporiser and run it in the room, and they would tell him to get a Kaz or they would go to, so they knew who, you know, we sort of had brand recognition, but not really. It wasn't a real brand. And to build a true consumer brand is, you know, very, very expensive and time-consuming processing. Then you have to, whether it's advertising or PR or any of those things, it's a serious effort and our categories really wouldn't support that kind of investment, making a mega brand. And then one day, and sometimes I think you know, it's better to be lucky than good. You know, we got a call from a Procter and Gamble who said they wanted to come and meet with us about Vicks. And, you know, we had done some private label for like, so some of the retailers wanted their name on the box instead of ours. And, you know, there wasn't a ton of margin and it just, I said, well, if they're going to do private label, that makes no sense. I don't know, we won't, we don't want to do private label. We want to do licensing. And they had the idea that, they had done their research and they knew that vaporisers and Vicks would go very well because Vicks had their Vaporub product that's I think, they had a statistic that it's in 95% of the households in the US had one little, at least one little jar of Vicks Vaporub in their home

Sean: [00:15:25] And we all grew up with that product globally. Didn't we?

Richard: [00:15:28] And it's everywhere. And their biggest product though, was the NyQuil - the cough and cold syrup, and they wanted to sell more NyQuil. And the way you do that is to get more facings on the shelf. And they said, well, we have a small cough medicine, but a box on the shelf. And you are a big humidifier, a vaporiser. If that was a billboard, if that said Vicks on it, then that would be good for selling more NyQuil. He said, so he said, well, you know, you make a…we will license you the Vick brands, so you can make a Vicks vaporiser. You will make it the same way you're making everything now. And you will be doing the manufacturing and the selling and the distribution and the service, we won't touch it. We'll have approval over your packaging and the product, but it's your business and you just pay us a royalty for that. And we didn't know if that was a good idea or a bad idea because nobody had done brands and or licensing and in products like this. So, I said, well, you know, we'll give it a try.

And we carefully picked a model and a price point that wouldn't cannibalise our existing sales, because that was our, we'd want to lose what we had if it didn't work out. And, you know, because we'd be paying this royalty and we've been making even less than we were making before. And so, from the first meeting until the first shipment was only 11 months and that included negotiating the first license agreement that Procter and Gamble had done, and designing a fresh design for this and designing the package and getting it all done. And we thought if we did a hundred thousand units, that would have been a successful project. And it was, you know, be careful what you wish for, because if we could have made 2 million, we would have sold every single piece. Whereas before, I'd make a sales call on a big retailer and it would be, you know, you'd negotiate over a nickel or a dime in your price and fighting against your competitors, want to keep this business. And then as soon as we showed that product to the retailers, they didn't ask even how much it was. they said, sure, yeah, that's obvious we'll take that. And so, it was instantly the number one product in the category. And from there, we just kept adding Vicks. You know, new models of different Vicks products each year. And they instantly were the leaders in their category and it was so successful that then they came to us and said, you know, we want to do Vicks thermometers. And we didn't know if that was a good idea, but we hadn't been making thermometers. So, we tried it and within a couple of years we were the leading branded digital thermometer manufacturer in the…

Sean: [00:18:20] And when you mentioned that you were already in the category, you are like, well, I'll take a bet on this, but I don't want to lose my existing business. If it doesn't work, I need to be able to roll back to what I have. Did you keep both products in the category? Did you sort of position the other product at a different price point with the next kind of elevated brand and keep your brand in there for a period of time or sort of in perpetuity. What did you do with the existing one?

Richard: [00:18:40] Yeah. So, we were really nervous in the beginning. So, we said, we know we'll Kaz, the Kaz brand will be the entry price point and the best, but then the good, better, best strategy will make the better the Vicks product. Um, and so we tried it and it was, you know, just blew everything else away. And then over the years, you know, we had Kaz and Vicks and that ratio just went from zero this way to zero that way. And by the time we sold the business, I don't believe we were selling anything under the Kaz brand anymore.

Sean: [00:19:15] Wow.

Richard: [00:19:16] So, if you type in Kaz.com, now it goes straight to, uh,

Sean: [00:19:20] Helen of Troy

Richard: [00:19:22] To their Vicks page.

Sean: [00:19:25] Yeah. Yeah, that's it. Wow. And so, you know, in a transformation from a 5 million dollar business to a 500 million business, obviously you know the business is growing, from a people perspective. And so, you know, some of the big dial changes are often individuals, you know, you had certain talent or capability that you had to bring in at different stages. Who were the, when you sort of think back, what would the kind of key hires that you remember? Like it might be maybe the first one that really just jumps out, you know, what kind of key hire that really changed things because they brought a capability that perhaps you didn't have in the business and was necessary to be able to shift the business to the next level.

Richard: [00:20:02] Sure. So, there were several, I think the first real one was my dad was running the business. He was very much liked do it yourself. He liked to do the production, everything from production planning and inventory to sales, product design, you know, worked with the banks on revolving credit lines, all those things, and didn't really have any, what you'd call, you know, a hired gun professional managers in the company. And then, I came in and my first job was to build our first computer system, and I did that. I started to learn the business and I realised, you know, I started getting involved with all the different departments. So, one of the first hires we've made was a professional sales manager, VP of sales that could really be there, work with our sales reps and work with the retailers on a much more hands-on basis because it was becoming a year-round business. My dad would make one sales call at the beginning of the year and then never see them again till the following year and that wouldn't fly anymore. And that sort of started to set the stage for building a professional team and probably the most transformational hire was, it was a gentleman that we hired. He had been working at in some big pharma companies, and he came in as our VP of Marketing. And that was a big deal because he was used to a pretty high level compensation package that included, stock, you know, and he was working for public companies and that's pretty standard in public companies that you'd get options or stock package that would vest over time. And we were private company, family health, no outside shareholders. And we developed a phantom stock program. So, we could make that hire and that became a pretty powerful part of the compensation package. Because you know, when you hire top people, they want some equity in the business, and he just brought a whole new level of professionalism to the marketing and became a marketing driven company where, marketing drove product development and customer relationships and kind of knit the whole thing together. And I give him a tremendous amount of credit for… he came in right about when we were doing, right after we did the Vicks deal, which was, and that actually was not just good for our sales and our bottom line, the Vicks deal put us on the map where people like this guy Bob would really want to work in the company cause he had worked in a P&G and then he had worked at, I think it was maybe Pfizer or one of the another big company. And he understood the brand a lot more than even I did at that point. And he knew what he could do with it if he came into the business.

Sean: [00:23:22] Got his hands on it.

Richard: [00:23:22] So the stock, you know, the stock thing was important, but also, you know, having that licence I think was a recruiting aid at that time too.

Sean: [00:23:32] Yeah, absolutely. And what about funding for growth? You know, one of the things that's, of course, the most challenging for many businesses depending on the kind of working capital and cashflow profile is how do they fund a growth that, you know, you had a business that was on average growing at I think sort of 15 to 20% per year, year on year. So, you know, you have to be able to fund the growth and some businesses do a great job in optimising the cashflow so they can fund it themselves. Other people need to take on capital. Tell me a bit about, how you thought about capital and how you funded your growth story?

Richard: [00:24:04] Sure. So, for working capital over the years, we really just worked with a bank line, a revolving credit line. It was a seasonal business. So, during the summer, when we were building inventory and shipping to the retailers, that would be kind of the high watermark of when we would pull down close to the max on that line. And then, cash started coming in the fall. And when it gets reversing your … and that worked for many years and then for capital needs, we were a prime manufacturer for, most of the time I was there. So, we had a factory in upstate New York. We expanded the buildings, a couple of times we built some additions and we eventually put a whole plastic moulding operation in there. And so, for that, we had some public private packages that they'd give us some tax incentives and some other things. So, it wasn't really a cash injection. So, we needed to come up with the cash ourselves on those things. So, we worked with some of the equipment, we're on leases. There's a lot of things you can do to, to sort of spread out the payments on capital expense. So, we didn't really take in any outside money until we did a big acquisition. This was in late 2002. We acquired the Honeywell consumer products division. So that was their humidifier line, they were the biggest in air cleaners and then heaters and fans also. So, they had four product categories. Then they had sales and offices in Europe and in Asia. So, it was a collection of different divisions offices, a couple of factories that came with at a distribution centre and we needed to bring in some outside capital for that. So we partnered with a private equity firm, centre partners and that became a good relationship. And it was slightly unusual in that the most private equity deals they want to take a control interest in the business. And, they only took a 20% interest in…

Sean: [00:26:40] Did they come in with a sort of defined mandate about how long they would stick around and when they wanted to get out?

Richard: [00:26:46] Pretty much. Yeah. I mean, it was pretty typical of you know, they've had a five-to-seven-year time horizon. Unfortunately, in the middle of that time horizon, like kind of the world economy collapsed and we had to hunker down a little bit, but they didn't get out until we sold the business in 2011. So, it was nine years, they did pretty well. I mean, they had like two and a half X, I guess, but it was spread over a longer period of time. So, their IRR wasn't the home run, but the money on money was good.

Sean: [00:27:24] Yeah, absolutely. So, during that period, were there any, I'm interested in quite often entrepreneurs find it might be particular books that have really influenced kind of key decisions they made or frameworks or methodologies or tools that they actually found quite instructive or helpful in thinking about how to build their organisation. What influenced you from that perspective as you grew the business?

Richard: [00:27:51] Great question. There were a couple of things come to mind. One was I guess, we at one point about backup a little, I'd say the most influential, you know thought injections I've had in the business weren't necessarily from books, but it was from my participation in Young President's Organisation - YPO, which is a large global organisation of company presidents and CEOs. And they have events and seminars and small groups that you meet with just a group of peers and listening and the stories I'd hear there or speakers that we bring in became very influential. So, I go to one event and I'd hear somebody talking about what they were. Oh, it was, I remember it was a, they had an event at the Toyota in Kentucky where they were talking about how they manage their quality process. And I hadn't really studied that area of the business as much. And it was really eye-opening. I remember, you know, they had, one of their VPs at the Toyota plant had worked in a General Motors plant before, and then he helped them design this new plant that they were, they recruited him. They're building this brand-new plant in Kentucky and he's going through all the drawings. He's going to tell them how to do it. And he realises that and he says, oh, you know, this looks great, but you're missing a really important area in this plant. I only see this tiny little area for rework and you need big area for rework, you know, the cars come off the line and then you inspect them and you find where the things that need to be fixed on it. The lights that don't go on and the doors that don't close right. And you got to fix that. And they said, oh no, no, we don't do it that way. You know, we do it on the line and if the thing doesn't fit, they stop the whole line and they fix it there. And then when it comes off, it works and he was saying that can never work. And then of course, you know, they built the plant and he's like now he's a convert and he was bragging about how well they do it. And so, from there, you know, we brought in a quality-consultants and I think it really made a difference in not just, how we made product, but also how we spent a lot of time on processes, how to have better meetings. And it was a mindset that I think I was able to bring in. Another speaker that I heard that that had a, it wasn't so much, it was sort of a confirmation of something. So, it was Tony Hsieh who tragically passed away last year. He was the founder of Zappos, the big shoe retailer, and their company was very customer service focused. So even though they're an online retailer, they have an 800 number on every page and they actually want you to call them unlike just about every other online retailer. And his thinking was, you know, we have you on the phone for 11 minutes or whatever, and if we do a good job there, we'll have you forever. And so, they only hired people that really were customer service oriented. So, they had two different hiring processes. They'd hire they'd interview for all the typical skillset and experience and you know, all that. And if you were qualified, you went into the next round of screening and they'd ask you weird questions, like, you know, on a scale from one to 10, how lucky you, and one is like, you know, 10 is like, I don’t know good thing just happen. And one is a, you know, I don't know, no matter what nothing…

Sean: [00:32:02] … like the world’s against me.

Richard: [00:32:04] Yeah. And there's some people answer that and then a couple of questions later, they give them a section of a newspaper and they say, just all we want you to do is count the number of pictures in this newspaper, and they think it’s like they're testing my attention to detail or something.

So, they start counting the pictures. And then on the third page or something, it's a fake newspaper and one of the headlines, and one of the stories is you can stop counting now there's 31 pictures and you can write down 31 handed in you're done. And some of the people do that. And other ones go through the whole thing to the very end and count all the pictures and write it. And then he said, you know, we found that there's a correlation, like the people who said they were lucky, also read that headline and stopped counting. And so, my moral from that is, or my lesson was similar to the Vicks thing. You know, you take the meeting, you never know what's going to happen. And you can come up with a three-year plan or a five-year plan, but especially in a fast-growing business, those plans, typically things happen, and new opportunities come up and that are usually things you couldn't foresee, or often are things you couldn't foresee. You can't foresee when Honeywell's going to want to sell a division. And you know, that tripled the size of our business at that point. You can't foresee when you know, someone's going to call you and want to offer a licence, or you see some new product or technology that that's around. So, yes, you can plan. But my experience has been the kind of plans that you make with three-year plans, five-year plans tend to be very incremental thinking and by the time you get there, the world is has moved on and, like if you could be Nokia is coming up with like, here's my new brick phone, or you know, thing like we own the whole cellular phone market. Like, you know, we're going to do it different colours and we're going to do cool shapes and they didn't even see iPhone coming and didn't think it was going to be anything.

Sean: [00:34:18] Yeah, I think that the day is set and forget plan, sort of long gone, aren't they?

Richard: [00:34:24] Exactly. And even in Apple's history, you know, like Steve Jobs, he was just on a tour of Xerox and he saw the Xerox machine that was the first one with a graphic user interface, and that became ultimately the, you know, the Mac interface, which ultimately became windows. I don't think he in the morning when he woke up, he wasn't thinking I'm going to reinvent the graphic user interface.

Sean: [00:34:49] And I think it's such a great illustrative example of the need to be able to balance the dichotomy at the same time of having 100% certainty that you're going to succeed as a team and with your business and that you'll make it to somewhere that's positive, no matter what. And yet at exactly the same time, retain the vulnerability and the humility to be wrong, to be open, to find ideas, to change tack, to adapt and change and be flexible.

And that sort of infinite flexibility without being random about the openness to being flexible and not becoming well, I've succeeded so far, so I clearly am the smartest person in the room and therefore I know exactly where we should be going. That's, you know, it's a sort of a dichotomy that every entrepreneur or intrapreneur has to balance at the same time, I think.

In the context of your of your period, you would have had some really challenging times. I'm interested in what you would consider, one of your biggest mistakes or failures, whatever sort of language you might use for yourself as a leader or with the business, you know, what would one of the biggest mistakes and what it sort of almost cost you and what did you learn that?

Richard: [00:36:08] Yeah. I guess two things. I have, like probably the biggest thing with that, that happened, that, that risk, the company, we were moving along with the integration of the Honeywell business and you know, trying to figure out which parts of it were working in which weren’t. And we knew when we bought the business that, there were parts that needed to be closed and, you know, that wasn't a secret, you know, they marketed it as a troubled company and, for what it eventually sold for, it was a fixer-upper for sure. So, we're in that process and we hired, you know, fresh management team in Europe, because we didn't have an office in Europe and all of a sudden we had a pretty large office there and in Italy, they had hired a new General Manager to run that business and he started putting up big numbers on air conditioner sales, and it's a specialised market. These are the sort of the split units that, not window units and…

Sean: [00:37:23] When you said putting up, do you mean sort of forecasting big numbers or delivering big numbers?

Richard: [00:37:27] He was selling a lot of units and he had a plan and he was saying, this is low-hanging fruit. You know, we are going to weaken to … the Honeywell brand is strong and the air conditioner market's big here and we can do a great job. And so, we invested in a lot of inventory and spent a lot of time in China working with the manufacturers there to develop the right products and it turned out that he was just full of it. And, you know, we ended up not selling units, owning a lot of units, and these are very, you know, there were a lot more expensive than most of the products that we made. You know, you could fit, you know, a container of digital thermometers might be a hundred thousand, thermometers there are a lot, and air conditioners are large. They take up a lot of room and they have a lot of inventory. And so, we got way over leveraged there, and it kind of like sucked down all the numbers in the company for a year or so.

And you're not allowed to run out of cash. That's like the worst thing you can do.

Sean: [00:38:45] Not a good scenario.

Richard: [00:38:46] And we had a lot of cash tied up there, so that was…and so the lesson is, you know, just don't take people's word for it. And I would say like, my dad would say this too. He said his biggest disappointments in business were always people, people that he trusted or that he gave too much trust to without really doing the diligence and holding people, you know, making sure that they were doing what they said they were doing. I would say the corollary to that is, probably the biggest joys I've had in the business are from the people I worked with. So, you know, there might've been a reason he didn't hire great people, because he was afraid of giving people authority. I'd much rather on the other side and you know, you can have a great team, which is what we ended up having.

Sean: [00:39:40] It's almost a sort of, it's not an either or, it's an “and” you know, it's not chicken or fish, it’s chicken and fish. You need to be able to trust people and empower them. And you also need to have appropriate governance and checks and balances so that, you know, you don't miss stuff.

And that doesn't mean that you're not trusting. It just means that you can trust them and empower them. And you can also have visibility and transparency and checks and balances to make sure that things don't fall through the cracks.

Richard: [00:40:05] And it's not so much like a mistake. I don't think that, you know, in terms of like, like sad parts of the business also where people things where, you know you mentioned before, the balance of running a tight ship, but also being open to new ideas. And so, if you have the right chemistry with your senior team, you can come in and… when you go to some YPO seminar and you say, oh, we're going to do this today. And they weren't expecting that. And they like, they hate when you go to these conventions or whatever, because they know you're going to come back with some…

Sean: [00:40:50] Lots of ideas.

Richard: [00:40:51] Some nonsense. And so, to have trust the other way, where they trust you as the steward of the business or the captain or whatever, then you can bring in new ideas that they're going to listen to them and consider them and help you execute. And then also if they think it's a terrible idea that they have the relationship to push back and keep you from making a big mistake, and back to like the… so, that made it even harder. One of the tough parts about growing a business over a long run and I was saying before, you know, it's like having several different businesses, several different careers, almost in the same business.  Is that the team that you build at 50 million to 100 million is no longer the team that can run a 300 million dollar global business. And, we had to make changes there that were very painful for certainly for them. And for me personally, because I had friends that really made my career and helped the company that no longer were the right people for the roles that they were in in that business.  And if it's any consolation to them, ultimately, that was me too because when we got to like 500 million, I was not the right person to run that business. I’m much more, whether it's intrapreneurial, entrepreneurial, or just wanting to swing for the fences every now and then, and then you get outside investors and you get a big company and you get lots of levels of management and you have different cultures and different areas that came from different places, and that was not my strength to knit all that together. Whether it's your bookkeeper or, you know, somebody who's a great bookkeeper or controller at the small company is not… can't be a CFO. And so, you end up, you know you start hiring above long-time people which is awkward and not a great thing to do, but again if you have the relationship and the trust, they will support that.

Sean: [00:43:32] I think there's an opportunity to say to people that, you know, your, at some stage, if the business goes really well, the company is too likely to grow around you. And that doesn't mean that you can't continue to grow individually and thrive in the company, but it just may not mean that you naturally take on the next level up or the next level up or the next level up, because actually we need the people who've been to the stage that we're trying to get to before, to help lead us through that stage. And if you haven't done that, that's not a failure on your part. It's just an experience set. And that's why different people have different gigs. When you think about some of those most challenging periods, who did you tend to lean on? Who was your sort of go to? Was it colleagues in your YPO, forum or in small groups? Or was it your partner, your family, like who did you tend to lean on when times got tough?

Richard: [00:44:28] That's a good question too.

Sean: [00:44:29] And I asked that specifically because you know, quite often it's a pretty lonely job when you're at the top, you know, you don't always have a big group of people that you can actually confide in about what's going on because there's only some things that you can talk to about to the rest of your business.

And quite often, that just means you wear a lot of this sort of personal burden of everybody else's stuff and your worries for everyone.

Richard: [00:44:50] Well, that is actually the origin story of YPO which was a young guy. It was in a family business and his dad died suddenly. And all of a sudden, he's probably in his late twenties, early thirties, and he's running a substantial business and he didn't have any peers that he could share these issues, problems, triumphs, whatever, so he created a YPO to be a better president through education and idea exchange. And one of the core elements of YPO are these forums where you have, 10 or 12, peers that you meet monthly with total confidentiality and you can share these issues and, you know, as much as we like to think we were the only ones who've ever experienced such a horrible thing happening in our business, you know, chances are someone in there in that room also has had something similar and can tell you how they got through it or what they did. And that extends not just to the business part, but also to family and relationships, your kids, you share the good times and the bad times, and it's, there are people who, that's the only part of YPO that they participate in and it's been good. And YPO is businesses of a certain size, but there's YEO for smaller businesses, probably, the best advice I could give to people who are on the path, the scale-up path, is to find one of these peer group organisations, because, you know, it’s people with similar experiences that will…it's good to hear that and to see how they handled it. And then, we did quite a few acquisitions and the licencing and it was meeting people at some of these events and, I remember him saying like they're telling stories about what they're doing with their businesses and at first I'm like, I was pretty young and inexperienced then, because I'd only been in a family business and they think, wow, that's very impressive. And then I get to know them a little better and I’d think, I'm as smart as these people, I can do that too! That inspired me to want to do, grow the business and try different things. And we did kind of bet the farm on the Honeywell acquisition and it was a big move but I knew that we could make it work. But I think it was seeing how people had built very large companies in a variety of different ways and that they weren't superheros, they were peers. And that said I did meet a couple of superheroes that were just so smart and accomplished and that was inspiring. And, but you realise, you know, that's a very small percentage and most of the people that are building very nice organisations and businesses and coming up with great ideas are just like you, you can do that.

Sean: [00:48:24] Yup. And they still have family issues and they still have personal issues. I have a segment that I ask all guests this question, Richard, and the segment is called ‘Above All Else’. So, I want you to imagine, sort of take yourself out into the future. I mean, you've already had an incredible career to date, but imagine, you know, you sort of in your later yearning years, you've got a lot of wisdom, you know, tied up in that brain and you've achieved all the things that you wanted. You started all the businesses that you wanted and you feel like you've given what you hoped, and the CEO of a global community, the world's largest global community of Founders that are probably still sub 10 million, first time Founders, haven't built a large organisation before, and they're hungry and curious and open to insight, and she offers you a once in a lifetime opportunity to share your wisdom. And she asks you for your three ‘Above all else's’. So, she asked you to finish this sentence, “the three things, above all else, the three things that you must get right as a Founder, if you want to scale is…?” What would be your three things? The three things that you must get right as a founder, if you want to scale?

Richard: [00:49:33] I think one is that you really believe in your mission. So, I think I was been thinking back, when I was growing up in the company and leading the company. I felt like it was the most important company in the world. I mean, that sounds so ridiculously naive now, but I really believed that. I felt like we were making healthcare products and doing good things and we had good building careers for people. And it was, you know, I felt like we were much bigger. It was like the little dog that, you know, like barks at the big, you know, just when it goes down the street barking at the big dogs, thinking that he is a big dog too. So, I think that, that belief in what you're doing is important is essential.

And then you know, we've been talking about it. The people that you surround yourself with are make or break. And one thing that I do believe in is that you try to hire people that are two levels above the job that you're hiring them for.  That they can, if you're going to hire a Vice President, they should be able to be President someday. Or if you're hiring a bookkeeper, they can make it to controller. Or if you're hiring somebody, an hourly worker on the line that they might even be able to make it to a supervisor or manager. You find people who, and not everybody wants to do that, but screening for the talent and the personality and the fit. And then the third thing is like, you know, don't run out of cash. That seems like it seems so obvious. I mean, like I've been doing a lot of angel investing and you know, all these businesses are you're running, they all are losing so much money and, you know, we made money every year growing up and It's like, so old fashioned, you know, you're saying, how do you get outside capital and say, well, you know, you know, we were profitable.

Sean: [00:51:48] Like, show me a cashflow statement. Why would I need one of those? Why not, just know that it's negative.

Richard: [00:51:52] Yeah. So, I don't know. I mean, I'm an investor in one business and he's so focused on growing the top line, and he has a negative contribution margin on the business. And, so like it's costing him more money to get the sales then they're generating profit. That's before all the other expenses in the business. And I'm just saying that doesn't make any sense to me and, you know, and he has people telling them it makes a lot of sense. And so, it might be just me, but if you can keep raising out, you know, round after round of capital. Great, good for you. You're going to keep getting diluted and, I've seen businesses that they have a hot new technology or a software or market or something happens. And, you know, they're getting a big, get a big upper round and they get greedy and they take a huge valuation for it. And then when they get to their next round, they haven't, you know, it has to be a down round or flat. And in that makes it, that gets people grumpy or your former investors. So, it's not just being glib about the cash thing, but it’s I think having a plan for knowing where the ultimately where the value proposition of your businesses. And it doesn't have to be, you know, if it's a fast-growing start-up, it's not going to be profitable right away, but there needs to be some sort of rational plan as to why, I mean, if you want to exit the business and you're going to have to convince somebody that it is worth to that, and ultimately businesses ultimately, ultimately will be valued on their profitability.

Sean: [00:53:49] That's the point. Yeah, it's some of the businesses that are still on big revenue valuations, and still don’t make any money, but at some point, this thing's going to turn profitable. I promise you and I, and some of them have a big market cap. But it is a very...

Richard: [00:54:04] You can issue a token that, that doesn't do anything

Sean: [00:54:06] That's right.

Richard: [00:54:07] And it's already, so, you know. Probably, the fourth thing would be don't listen to me on these things, because…

Sean: [00:54:13] No, but I think it's incredibly instructive for, you know, I meet many businesses that still are in a space where they absolutely are profitable and they should be doing cashflow planning, but they're not doing cashflow planning, and I just haven't had that management discipline before that and never been exposed to it before, but it's incredibly important, especially if they can start growing quickly or growing faster that go to know they can actually be able to afford that because as you said; you turn off the, the, the cash tap and you get problems. Well, they're incredibly…

Richard: [00:54:43] And that can include of course, you know, raising additional rounds or going public or whatever. So, I'm going to want to…

Sean: [00:54:49] It's about the forward visibility. So, you can plan for that. Right. And knowing when you're going to run out and knowing when you need to have those raises.

Richard: [00:54:55] right. So as sort of down on three-year plans and five-year plans as I was saying before, I didn't, that doesn't apply to the cash.

Sean: [00:55:08] Haven't planned for cash, got it.

Richard: [00:55:09] Always want it to be able to make payroll.

Sean: [00:55:11] Yeah, absolutely. Well, look, those have been incredible instructive Richard and I value your time and what you shared with us today. I'd really like to acknowledge you. I mean, this is a business that you had some incredible generational history when you took the helm. So, I'm sure that also came with its own pressure and its own sort of constraints and challenges in the early days. And then for you to be able to transformed that company from, you know, from 4 or 5 mil to 500, through some really clear, big strategic moves. Some that you didn't really plan out. And some that you recognised an opportunity and you went after it, that's as important as being able to identify the opportunities in the first place. And being able to hustle and align a team and get stuff done and get it delivered at the right quality. And so, I think, you know, you'll, I’ll just like to acknowledge the way that you've led this company to continue to lead a business over that period of change. And that size of change over 32 years meant that you had to reinvent yourself to your point.

You had five or six or seven careers over that time, which meant you had to kept leveling up on your own. And so, I really acknowledge you for the journey and thank you very much for sharing that with our audience. How can people get in touch with you if they wanted to follow what you're doing, where do they find you?

Richard: [00:56:25] I'm on LinkedIn

Sean: [00:56:27] Okay. Check you out on LinkedIn.

Richard: [00:56:28] Message me on LinkedIn. I'm happy to hear from people.

Sean: [00:56:31] No problems at all.

Richard: [00:56:32] And it was a fun ride.

Sean: [00:56:36] Absolutely. Well, thank you so much, Richard. To folks, I hope you enjoyed the show today. A huge thanks to Richard Katzman. And a couple of things before you go. If you got value from today's podcast, please leave us a review on Apple iTunes. It gives our team a big thrill, and of course it helps other people find the podcast like yourself. Feel free to jump to the website, www.scaleupspodcast.com. If you pop your email in there, you will be first to know when new episodes drop or free tools and resources that are under development get released. If you've got questions about your own business and elements of how to scale up your own business. And you'd like a myself or guests like Richard to address those questions, please jump on the website, use the Speakpipe widget on the right-hand side of the page, you can leave a question straight from your phone via audio about scaling. If you are more of a social animal, feel free to follow us on the socials on whatever your favourite platform is @scalupspodcast, and there are full episodes available by video on YouTube. But before I go, please remember; the only thing, you know, it's a challenging approach scaling a business, scaling is hard, but the only thing that guarantees that you're not going to scale, is actually giving up. So, you have to stay unshakable in your faith, but, remain flexible in your approach as you've heard today from Richard. You've been listening to the ScaleUps Podcast.

I'm Sean Steele, look forward to speaking with you again next week. Thanks very much. And thank you, Richard.

Richard: [00:58:02] Thank you.

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