I recently went to see the movie The Founder, which is about the formation of Ray Kroc’s version of McDonalds. It’s a very compelling movie and while I have no idea if it is a skewed view of history, it held some great lessons and cautionary tales for entrepreneurs.
According to the Rotten Tomatoes website:
THE FOUNDER features the true story of how Ray Kroc (played by Michael Keaton), a struggling salesman from Illinois, met Mac and Dick McDonald, who were running a burger operation in 1950s Southern California. Kroc was impressed by the brothers’ speedy system of making the food and saw franchise potential. Writer Robert Siegel details how Kroc maneuvered himself into a position to be able to pull the company from the brothers and create a billion-dollar empire.
Today McDonalds Corp. serves 68 million customers a day from 37,000 stores in 120 countries. If that’s not the ultimate in scaling, I’m not sure what is. It is believed to be the world’s 2nd largest employer and has a brand recognizable by nearly everyone on earth. Say what you will about it’s contributions to health (not), but when entrepreneurs dream about world domination, they can’t even imagine the scale that McDonalds has achieved.
As someone who interacts with the entrepreneurial community nearly every day, and whose job it is to invest in companies that can reach large scale, I found it a fascinating watch. A few big themes really stood out to me:
1) There are big vision entrepreneurs and small business entrepreneurs; not everybody is meant to lead a large business (and the corollary: charisma matters).
In The Founder, the actual original founders of McDonald’s, after whom the company is named, started their store when their first small southern California restaurant failed. They dreamed up the assembly line, low capital intensive model that became the hallmark of all that was to follow, but were unable to expand it meaningfully outside of the original San Bernardino site despite early efforts at franchising. The McDonalds brothers seem the epitome of small time business owners who are highly successful in their local milieu but unable to–and not even wedded to–the idea of growth provided the local store remains successful. It was a great idea, well executed on a small scale and poorly executed on a large scale, at least by them. In the McDonalds’ one attempt to grow beyond the San Bernardino market, they meet with failure due to inability to ensure quality standards and consistency from market to market. And then they stop trying. They dream up the idea of the golden arches but never really capitalize upon it as a meaningful trademark. 15 years pass.
Enter Ray Kroc, a Midwestern salesman who moves from entrepreneurial idea to idea, always looking for the big hit. He finds McDonalds and immediately recognizes the potential, though he has seen that potential in many other businesses and has been wrong before. Nevertheless, being the born start-up guy that he is, he goes all in on what turns out to be a great idea this time. The big difference between he and the McDonald brothers is threefold: visions of grandeur and the ability to execute upon them, the willingness to never say die, and the charisma to attract investors and franchisees based entirely on selling his vision. Kroc has the je ne sais quoi that investors look for in entrepreneurs, and as a result he quickly finds investor backing and rapidly scales the business in a way the McDonalds brothers could not.
2) Culture matters and so does alignment of goals. When forming a partnership, take the time to articulate (and document) what matters to all parties.
There are numerous times in the movie story when culture clash results in terrible outcomes that may have been avoided if the two parties – Kroc and the McDonalds brothers – took adequate time to truly understand what drove the other party. The original contract between them gave Kroc a pretty poor financial deal, though neither party realized it at the time. It also gave the McDonald’s brothers a specific level of control that didn’t suit the business as it grew.
The trouble started when it became apparent how widely the goals of the two parties diverged. As the new McDonalds grew and Kroc became more financially powerful (and also better informed of the true dynamics of the business), the McDonalds became more and more frustrated at changes Kroc demanded and especially those he makes without permission. Given the contract between them, the McDonalds’ frustration was understandable; on the other hand, most of these changes were entirely logical based on learnings about the business as it scaled.
Kroc was operating from a position of “do whatever it takes to succeed” while the McDonalds brothers operated from a position of “the original vision is perfect – don’t ever change.” It was a toxic culture clash and in the end, the need to serve investors and Kroc’s personal drive won out. Is that wrong? It really depends on which side from which you are looking. Kroc is portrayed as arrogant and ruthless, and he undoubtedly was; but on the other hand, if you take investor money to scale a business, you have to deliver.
3) Open communication and compromise are essential to growth, as is flexibility.
As business grow, they learn. And when they learn what will make the business more profitable, more customer friendly, more effective, they need to adjust accordingly without losing touch with the mission and vision. This is always harder than it seems. Sometimes the original vision just doesn’t scale (for instance, it turned out that real milk shakes were too expensive to produce, resulting in Kroc’s move to powdered milk shake products – definitely a food compromise that gave the McDonalds’ appropriate pause). Sometimes the original vision can scale but compromises are almost always required (to make the restaurants more appealing in different locales, Kroc authorized the sale of “localized” food products appropriate to the different U.S. regions despite the McDonald’s demand that every restaurant have exactly the same menu for all time).
This complicated dynamic appears in nearly every business. The problem for McDonalds was when the culture clash stood in the way of effective communication between the partners. Kroc’s approach was to ask forgiveness, not permission, despite a contract that required the opposite. The McDonalds’ approach was to deny change was necessary regardless of business circumstance. It was essentially a recipe for disaster from a partnership standpoint. One could easily fault Kroc for being a bully, but at the same time one could easily fault the McDonalds for an unwillingness to be flexible in the face of new knowledge. Had they been able to communicate more effectively and engage in compromise, the bad end to that partnership may have been somewhat avoidable.
4) Sometimes you have to change business models and not everybody likes that.
It turns out that the real money-maker in the McDonalds business wasn’t the food, it was the real estate. Kroc realizes this later when a new advisor shows him why that financial model is a winner when the original one can never fully scale. It is a massive shift from the original plan and is accompanied by many other dramatic changes which enable the company to grow to the behemoth it later becomes. The McDonalds brothers, hell-bent on their original vision, could never have come to such a realization.
The manner in which Kroc makes the switch, however, was pretty questionable. He started a separate company, unrelated to the McDonalds brothers and in which they had no interest. He uses the McDonalds name and trademark to create a valuable real estate licensing business, eventually becoming even the landlord of over $18 billion in real estate and the CEO of a massive global business. This allowed Kroc to assert extreme leverage over franchisees and ultimately led to the demise of the McDonalds’ interest in the business, as he essentially forced them out of their lease. It was appalling behavior to be sure but absolutely the right business model change. Had that change never been made, the company would not likely have survived.
So, who was right if you’re going at it Godfather style (“it’s not personal, it’s business!”)? Bad behavior aside, if the goal is growth, Kroc made the right choice. On the other hand, perhaps there was a more effective way to bring everyone along financially and culturally – it’s very difficult to know.
5) When companies soar, not everybody wins (and also, nice guys don’t always win).
I’ve seen it so many times, unfortunately – the people who are there at the start don’t always make it to the great exit. They foul out before the endgame and find themselves with virtually nothing for their trouble. Sometimes this happens because it takes too much time and money to get to the exit, even when it is ultimately positive. Sometimes this happens because of greed and self-interest on the part of other founders, executives or investors. At the sale of every great company there is always someone who feels they lost out big or were treated unfairly.
In The Founder, it is the original founders, the McDonald brothers, who end up with a relatively large sum of $2.7 million but who are cheated out of a long term royalty of tens of millions of dollars and the right to use their own name on their one remaining restaurant by Kroc. Had the brothers been more assertive with their copyright and controls from the beginning, they may have fared better, but they chose not to act early when they could have made a difference.
Was it fear? Complacency with the current income? Who knows? But it results in an unfortunate ending for the McDonalds and dramatically highlights that brute force sometimes wins over good intentions. I have seen this myself in deals in which I have participated and it’s always the bad smell in the room even when everyone else is rolling around naked in their money. Once again, this outcome points out the importance of vetting one’s partners and ensuring alignment and re-alignment of incentives all around, particularly as the business grows beyond the personal capabilities of any one founder or team member. When partners begin to think of themselves as individuals first and everyone else second, someone is bound to lose even while others win
I bet none of the entrepreneurs reading this know a single person who has never been to McDonalds. Whether you admire Ray Kroc or respect the company’s contribution to the obesity epidemic, one has to admire the chutzpah and the commitment to making the business grow and succeed at scale. It’s the stuff entrepreneurs and their investors dream of late at night in the drive-through lane. But ask not for whom the French Frier tolls, founders. It may toll for thee!