Supported by Greenhaven Road Capital, finding value off the beaten path.
Yvon Chouinard is the founder of Patagonia. He was a guest on the How I Built This podcast and wrote the book Let My People Go Surfing: The Education of a Reluctant Businessman. Before we get into some notes, let me take a moment to point out my stupidity.
What if I had contrasted Nasty Gal to Patagonia? They’re both clothing companies built around a brand. Rather than rehash Nasty Gal, let’s start from scratch. Mohnish Pabrai said that when he was starting his investing partnership he just did what Warren Buffett and Charlie Munger did. Pabrai didn’t need to know the why, just the what.
Chouinard has given us that too.
1/ Start with you.
Chouinard started making hardware, not the apparel that Patagonia is known for today. How did he get started? He scratched his own itch.
“Every time we went climbing we came back with ideas to improve the climbing gear…so I became a blacksmith so I could make some of the climbing hardware that I thought would be better than what’s available.”
People who do the thing figure out better ways to do the thing. A better way also means a different way. Chouinard’s pitons were reusable compared to the (cheaper) European ones which were not. It was the same for clothing.
Chouinard’s inspiration was a colored rugby shirt he saw on a trip. Men’s gear was all one color, Chouinard’s wasn’t. His next item was a pair of stand up shorts. Why were they called that? Because the first pair stood up on their own (the fabric was so rigid).
The stuff was good because it had to be. When Chouinard made pitons he used the pitons. It was the ultimate instance skin in the game (SITG). Chouinard writes, “Quality control was always foremost in our minds, because if a tool failed, you could kill someone, and since we were our own best customers, it was a good chance it would be us!”
When Chouinard and his team moved into clothing they were also the ones that used that.
“We knew what we wanted. I heard someone say that if you wait for the customer to tell you what to do you’re too late. We were our own customer. I think that was the secret to coming out with products.”
2/ Make something for the ideal customer. Chouinard writes:
“All our customers are not equal in our eyes. There are indeed some we favor more than others. These are our core customers, those for whom we actually design our clothes. To understand this more clearly, we can look at our customers as if they existed in a series of concentric circles. In the center, or core circle, are our intended customers. These people are the dirt baggers.”
That’s who you make stuff for, the dirt baggers.
Failed startups never found the “dirt baggers.” Those founders confused “sure” for “hell yeah” and “it looks good” for “OMG, shut up and take my money.”
Chouinard made these mistakes too. He writes that they tried a foul weather line for sailing, but it didn’t sell. There wasn’t enough of a market and he wasn’t a sailor. He didn’t know what to do because they weren’t the ones using it.
3/ You’ll never be ready. “I didn’t know anything about clothing. I learn everything by taking a step forward and see how that feels. If it feels good I take another step, if it feels bad I take a step back.” “I learn by just doing.”
Rather than plan out ideas and see what might or might not work, Patagonia puts their gear in the field. “We test until something fails,” Chouinard writes, “strengthen that part, then see what fails next.”
“By the first weeks of 1996, revenues were growing 30 to 40 percent a month, a frenzied rate that undermined attempts at planning and required such a dizzying pace that employees later found gaps in their memory when they tried to recall this formative time. No one had any idea how to deal with that kind of growth, so they all made it up as they went along.”
You’ll never be ready, but don’t mistake that for an excuse to go fast.
4/ Grow slow. At one time Patagonia was growing 50% a year. That was fine until one year they built out too much inventory, a recession hit, and Patagonia had layoffs. “That was really tough,” Chouinard said.
“We couldn’t get any loans from anybody, my accountant introduced me to some mafia guys who wanted to loan me some money at 18% interest.”
Now, “I wait for the customer to tell us how much to make.” It means that Patagonia grows slower, but grows safer.
This conservative approach is a way to apply Margin of Safety (MOS) thinking to business. Looked at one way, too much inventory appears to be a MOS but it is at the expense of cash. Whether it’s street fights, island invasions, or investing a MOS is crucial because there are possible futures you can’t plan for.
It’s easier to keep a MOS with a low overhead.
5/ Keep a low overhead. “I’d live on fifty cents to a dollar a day.” “Before leaving for the Rockies one summer my friend and I bought a couple of cases of dented cat food cans from a damaged can food outlet in San Francisco we supplemented cat food with oatmeal, potatoes, ground squirrel, blue grouse, and porcupines.”
In tech speak, a low overhead lengthens your runway.
Jay Leno told Judd Apatow he kept a low overhead. “I was also a Mercedes-Benz mechanic at the time. I didn’t have any expenses. I didn’t have any lifestyle to maintain. I liked doing it. I would drive hundreds and hundreds of miles to work for free for four or five minutes. I didn’t know if I would ever really make a living at it.”
Jerry Seinfeld said much the same thing. “I was a minimalist from the beginning, I think that’s why I’ve done well as a comedian…If you always want less, in words as well as things, you’ll do well as a writer.”
6/ Deep understanding. Chouinard was a climber, fisherman, and skier. He’s not a particpant – he’s an instructor. He’s written technical books on all these subjects. He understood – through experience and through study – what the gear and his business needed to do.
As a climber, Chouinard knew what the gear needed to be:
“we used to make a small rock-climbing pack that had a thin foam pad in the back for comfort. The pad was removable so you could take it out and sit on it on cold bivouacs (BIV WACKS). My climbing partner broke his arm in a fall in the Tetons, and I was able to make a perfect splint with the sheet of foam and a few accessory straps.
He understood how the gear should be made:
“You have to choose such relationships carefully. The first thing we look for in a supplier or contractor is the quality of its work. If the standards aren’t high already, we don’t delude ourselves into thinking they’ll be raised for us, no matter how attractive the price.”
He learned how the business should be run:
“Once I decided I was a businessman I decided to really study up on it. I studied every book I could on Japanese management styles and Scandinavian business. I thought there had to be a different way of doing business. I still wanted to only work for part of the year.”
As Napoleon Bonaparte wrote;
“If I appear to be always ready to reply to everything it is because before undertaking anything I have mediated for a long time. I have foreseen what might happen. It is not a spirit which suddenly reveals to me what I have to say or do in a circumstance unexpected by others. It is a reflection, a meditation.”
7/ Decentralized command. “I call in maybe three times in the five months. People know that if the warehouse burns down, don’t call me. What can I do, you know what to do.” “I don’t care when you work as long as the job gets done.”
Pabrai said that Buffett learned early that his most important thing (MIT) was hiring the right manager for the business.
There was more in my notes, but that seems like enough of a nibble to get someone interested. Chouinard inspires me.
Thanks for reading.
Update: An early version of this post misspelled Chouinard as “Chouindard.” I also forgot to note that Chouinard calls in “three times in the five months.” Thank you to those who noted my mistakes.