Michael Dell vs. Wall Street: Dorm Room to Billion-Dollar Battles

0:00Being an entrepreneur is a 24-7 job. And when you're hiring, you need a partner that works as hard as you do. That hiring partner is LinkedIn Jobs. When you clock out, LinkedIn clocks in. LinkedIn makes it easy to post your job for free, share with your network, get qualified candidates that you can manage all in one place. For one thing, you can post a job. LinkedIn's new feature can help you write job descriptions and then quickly get your job in front of the right people. You get qualified candidates. At the end of the day, the most important thing to your business is the quality of the candidates.

0:30And with LinkedIn, of course, you can feel confident that you're getting the best. Based on LinkedIn data, 72 % of small and medium businesses say using LinkedIn helps them find high-quality candidates. Find out why more than 2.5 million small businesses use LinkedIn for hiring today. Find your next great hire on LinkedIn. Post your job for free at linkedin.com slash altature. That's linkedin.com slash altature to post your job for free. Terms and conditions apply. This isn't your average business podcast, and he's not your average host. This is the James Altucher Show.

1:11Today on the James Altucher Show. You're literally the college student entrepreneur's dream come true. Build shit in your dorm room and make a billion dollars doing it. I've been doing that since I was a little kid. You can't understand things unless you take them apart. Giving up the opportunity for a high-quality education was like the most disastrous decision any person could make. That I decided that this wasn't just a fun little thing I was doing on the side to earn a couple of extra bucks. It was actually pulling me in in a much bigger way. It was what I was passionate about, what I was excited about.

1:53I saw this great opportunity. We got a glimpse of the future and we're not going to go back to the way it was. Everything in the physical world is becoming intelligent.

2:15Michael Dell, author of Play Nice But Win, a CEO's journey from founder to leader. and also you may have heard of a small little company he named after himself because he's got a huge ego. It's called Dell Computer. Michael, how are you doing? I'm doing great, James. Great to be with you. Michael, this book is like not only a book about entrepreneurship, but I feel like it's a how-to on deal-making. You went through so much with all sorts of hedge fund, activist battles with Dell through the years, but I really want to start with the beginning and then go to the end also because I'm curious about some things.

2:49I'm always fascinated by your iconic story of how you started. You're literally the college student entrepreneur's dream come true. Build shit in your dorm room and make a billion dollars doing it. So how did it all start? I was a freshman at the University of Texas. It was kind of the dawn of the microprocessor age. IBM had introduced the first PC in 1981. 1981, it was kind of 1983 when I went off to college. And the markups on the PC relative to the cost of the components were really high. So like an IBM PC, if I remember correctly from back then, was something like$2 ,000 or$3 ,000. Yeah, it was about$3 ,000.

3:39And when I took it apart, it looked to me like it was$500 worth of parts. So why did you take it apart? That's unusual thing number one. I've been doing that since I was a little kid. You can't understand things unless you take them apart. And so I would always take things apart. So I took it apart and I was interested in math and science and physics and electronics and all that stuff as a kid. Also interested in business and economics and figuring out how to make some money. So this$500 worth of parts that were selling for$3 ,000 kind of seemed like a criminal enterprise. So I started upgrading more basic versions of the PC, started doing that in my dorm room.

4:27That's actually how the company started by making kits to upgrade the original IBM PC to add hard drives and memory onto the PC. And your initial customers were just like parents of your friends or who, how did it amass to be enough customers that you thought to yourself, whoa, I could make some money doing this? Interestingly, it was not the students. You know, the students were not interested in having computers at that time, at least not the students that I was hanging around. So it was, you know, doctor's offices, lawyer's offices, small businesses. How'd they hear about you? Well, I started running little tiny ads like, in the classified section of the local paper.

5:19And the other thing that was interesting was, I was in Austin, which is a state capital, and turns out about two or three blocks away from my dorm room was the state government office where they would issue all the requests for bids for the state. And so I would ride my bike over there and literally get the pieces of paper for all the things the state wanted bids on. And I would just start bidding on these things. And I won a bunch of them. Like what was an example, give an example bid that you won. It would be like, you know, 10 upgrade cards for IBM PCs or, you know, three computers with monitors and that sort of thing.

6:07So I was selling to the state. I was selling to small businesses. and it got up to about$80 ,000 a month when I was in my dorm room. And I thought, hey, you know, if I got an office, maybe I could 10X it. I'm always just curious about that first moment when you thought to yourself, 80 ,000 a month. You might've thought to yourself, when I was doing a paper route, I was making$15 a week and now I'm making 80 ,000 a month and whatever the profits were. Good point, that's revenue, not profit. Right. But still you had money. Were you thinking to yourself, this is going to be my job after college? Or were you thinking this is going to be a big business?

6:49Also, did people, did other students know you were making this kind of money? And I know I'm kind of focusing on this. It's almost like I feel funny asking these questions, but they're honestly the things I'm really curious about? It was pretty incremental and step-by-step. I wasn't out kind of advertising how well I was doing to my friends or roommate or roommates. Yeah, I mean, some of them might have had a little bit of a sense because I hired some of them to help out from time to time. But it just seemed like a great opportunity, too big to pass up. And where I went to school, University of Texas in Austin, you could take a semester off and go back to college.

7:38So I convinced my parents that would be okay. And they were unhappy about it. Your mom was crying. Oh, they were super unhappy. In a world that they came from, giving up the opportunity for a high quality education was like the most disastrous decision any person could make. What do they want you to be? A doctor. You know, like my father's a doctor, my older brother's a doctor, we got a bunch of cousins that are doctors. So I was supposed to be a doctor. You tried for a little bit to heed their warnings or concerns or fears, but it just kept pulling you back in, so to speak. In 1983, I was kind of doing this while I was going to school, and my parents heard about it, and they became progressively more and more concerned about it.

8:33At one point, we had kind of an intervention to talk about in the book, and they made me commit to stopping this and focusing on my studies, which I did for about 10 days. And it was kind of in those 10 days that I decided that, you know, this wasn't just a fun little thing I was doing on the side to earn a couple of extra bucks. It was actually pulling me in in a much bigger way. It was what I was passionate about, what I was excited about. I saw this great opportunity. So it's interesting. It's almost like the struggle with your parents was a way to inform you of what you were truly passionate about.

9:15For sure. I would say if my parents had not intervened, I might have just kept it as kind of a little hobby thing and kept going to school. I mean, I don't know, but it's very possible. Well, if a young person is listening to this and they're getting pressures from either parents or professors or friends, how do you maybe think about those pressures to find what's right for you as opposed to just, I mean, you did cave in a little bit, right? You went cold turkey, as you put it in the book, on computers for 10 whole days. But still, there must be some way to navigate all the disparate elements that try to persuade us that their way is the right way.

9:57And they do it with the best of intentions. But you found your way through that maze. How do other people do it? How would you suggest other people do it? I think everybody's got to find their own way, maybe a little differently. I do get occasionally angry letters from parents, you know, because I'm a bad example because I dropped out of college. But look, I think I think you have to risk adjust the decision. I was in a situation where I saw tons of upside and the downside was I just go back to college. If you got nothing, you got nothing to lose. Where are you in that process and how big of a risk really is it?

10:45I think college was a lot different then than now in the sense that it was cheaper then. I mean, the cost of college and tuition has gone up. It was very cheap. It was like$400 or$500 a semester or something like that. It was insanely great value. Right now, kids who want to be entrepreneurs after college, they sometimes get into one or$200 ,000 amount of debt. And I'm not asking you to make a huge stance here, but is college maybe not the same choice now that it was? And this is not a podcast about college or anything. I'm just curious, you know, is the decision making about going to college and getting into that kind of debt must be different now?

11:30Well, certainly, even adjusted for inflation or anything else, it's quite a bit more money. So you would be right about that. I mean, I certainly can't give generic advice about should people go to college or not go to college, right? I think you can, but you're reluctant to, but that's okay. Yeah, I'm probably reluctant to. So as you were building the business, there were other well-known entrepreneurs building their businesses. And Malcolm Gladwell famously all sort of categorized you, Bill Gates, Steve Jobs, as being born around the same time. He was making the argument to some extent that the computer industry, a lot of the entrepreneurs would have been entrepreneurs probably no matter what, had the brains, the instincts, the guts.

12:21But with the computer age, everybody was sort of at the right place at the right time in those early 80s when there was a huge markups and computers were, the young kids were getting into it, 18-year-olds, 19-year-olds, 20-year-olds. You all started businesses, Microsoft, Apple, other companies, and you all dropped out of college and had similar experiences. When did you first start interacting with the Bill Gates and Steve Jobs of the world? When did you buy the Windows DOS, MS-DOS for the Dell computers? So Bill and Steve were about 10 years older. I went and saw Steve in 1980 when I was in high school.

13:04He came to Houston and gave a talk at the Apple user group And, you know, and then met him in 1985, the year after I'd started the business, got to know him sort of during his exile period a bit more when he was doing Next and the Next operating system and trying to get us to license the Next operating system. And Bill, yeah, it was early because you couldn't – when we started building our own PCs, which was the year after we started, or I started, 1985, we licensed – it wasn't Windows. It was DOS, right? And so we worked with Microsoft, worked with Bill from the start. Take a quick break. If you like this episode, I'd really, really appreciate it.

14:11It would mean so much to me. Please share it with your friends and subscribe to the podcast. Email me at altitra at gmail.com and tell me why you subscribed. Thanks.

14:34Being an entrepreneur is a 24-7 job. And when you're hiring, you need a partner that works as hard as you do. That hiring partner is LinkedIn Jobs. When you clock out, LinkedIn clocks in. LinkedIn makes it easy to post your job for free, Share with your network. Get qualified candidates that you can manage all in one place. For one thing, you can post a job. LinkedIn's new feature can help you write job descriptions and then quickly get your job in front of the right people. You get qualified candidates. At the end of the day, the most important thing to your business is the quality of the candidates.

15:05And with LinkedIn, of course, you can feel confident that you're getting the best. Based on LinkedIn data, 72 % of small and medium businesses say using LinkedIn helps them find high-quality candidates. Find out why more than 2.5 million small businesses use LinkedIn for hiring today. Find your next great hire on LinkedIn. Post your job for free at linkedin.com slash Altature. That's linkedin.com slash Altature to post your job for free. Terms and conditions apply. You know, so you were looking for an operating system. A lot of the IBM PCs and their family were obviously going with MS-DOS. Were there really any other choices at that time, or was MS-DOS kind of what you did?

15:47If you wanted to make an IBM compatible, it was MS-DOS. There was CPM, which was another operating system. If you wanted to build a more powerful workstation or server, you would use Unix, which you licensed from AT &T at the time. But, yeah, for an IBM-compatible PC, it was certainly MS-DOS. And then when did you decide to start getting into other computer appliances like storage and larger, more enterprise-ready computers? At what point did you decide, okay, consumer is not enough. We need to go big or go out? So interestingly, really from the first days of the company, most of our revenue was not from consumers.

16:49It was from other businesses. And even in the first year, I mean, we were selling to local businesses and then national businesses. And so it really was like an 80-20, like 80 % business to business and 20 % business to consumer. And then as we got into the late 80s, we tried to get into the server business, but we were too early, didn't quite have the right product market fit to hit it. But, you know, we came back after it, you know, in the mid 90s. But business customers kind of from the beginning were the main driver. And then we started expanding internationally, you know, with the UK and then across Europe and then over to Asia and Latin America.

17:52Yeah. And then you decided to go public, which is a very, you know, a good, the book is a fascinating story of Wall Street also. And kind of the characters you meet on Wall Street are very different than your customers and they're very different than shareholders. These are some of these people are out for blood when they aim at you. And it's a very riveting story how later on when you were in public, various activist hedge funds, including Carl Icahn, either didn't like you or just felt there was some opportunity for themselves to make money. And it sounded like that was very personally difficult for you.

18:33They didn't want you to be CEO. They had lost faith. They ostensibly had lost faith in the company and were fighting you for it. How did that come about? I mean, you describe in the book, but I'm asking the story. So, you know, the company through 2010, 2012 was really evolving itself in new ways. We were investing heavily in software and services and cloud and data center, you know, all kinds of new capabilities. And it was expensive, right? We were acquiring companies. We were building R &D. And as we did that, it depressed our earnings. And we were thinking about the business a bit longer term, but the shareholders weren't.

19:28And the business was still largely thought of as a PC business, even though we had a pretty meaningful server and data center and other kind of software and services businesses. So the result of that was that the stock kind of went down. And at some point, it got to a price where it was like, wow, we should just do a massive share buyback. We should buy back all the shares and go private and really accelerate this transition that we're on and go faster. If the shareholders don't really like what we're doing, let's give them a significant premium on the price. And so they get paid some of what they would potentially get if we were successful, but they don't take on any of the risk.

20:30And so we started that process. and after it was started, Icon, he didn't own any shares before that process. He sort of read through the documents and said, oh, wow, there's a really odd voting standard here, and if I do this and that, the other thing, I can get in there. And really what he was angling for was to be bought out at an even higher price. And so there was a pretty epic battle that went on for seven or eight months, and media covered it extensively. There were tons and tons of stories almost every day about the battle. And ultimately, we got through that and got to the other side.

21:29But yeah, I mean, there were definitely some dark moments. And Icon is this guy who would pretty much say anything. I mean, like untruthful stuff, definitely manipulative. and basically it's the green mail tactic that he's been known for. I once read that he would schedule his negotiations in the evenings and he would sleep all day knowing that the people he was gonna be negotiating with were working all day. So they would be tired and a little bit drained and not as mentally acute while he would be just waking up and fresh and ready to negotiate. So that was he had a toolbox of strategies like that.

22:19Yeah. And the book opens with with a with a fairly dramatic story about, you know, me going to see him at his at his at his apartment in New York City. And, you know, I ultimately figured out that he basically didn't know anything about our company, didn't know whether we made, you know, French fries or nuclear reactors, didn't really care. And it was just a big poker game to him. You know, but it is interesting. Like, I look at companies like Dell, and you were there every step of the way through from the beginning of the PC era, of course, till now. And I always wonder, why did it take new people to develop a search engine like a Google or a Yahoo or an Amazon?

23:10Or why didn't any of those first initial computer companies innovate in that direction when the Internet first got mainstream? Like, why did it require new blood to start these companies? like no there's no major internet brand uh that was started internally at a large computer company yeah it's a great question you know i think i think there's probably something about you know uh uh single purpose and and focus there's certainly plenty of projects and skunk works and everybody knew about the internet there were interesting things going on but for the real breakout successes i mean i think it's 100 focus with a kind of passionate leader entrepreneur you don't tend to see those things coming inside large organizations but like define focus because even dell from the beginning like you said was you were doing consumer you were doing enterprise You're doing servers.

24:18You know, now you do storage and other, you do everything in the hardware space, basically. You know, and Amazon's a good example of, they're sort of focused, but it's not just books. Then it became clothes. Then it became AWS and cloud services and all these other things. Like people scale in different ways. And so define what does focus mean? Because I feel like it could be wrongly used as well by entrepreneurs. Yeah. Yeah, I mean, I think when a business is starting, it's really got to hone in on something that's going to stick and hit and be super successful. And so that requires a kind of myomanical, just intense passion to understand it and to nail that one thing.

25:15And, you know, that's a pretty powerful force. Now, of course, most of those companies fail, right? Yes. Right. It's sort of a selection bias. We only know the ones that succeeded, not the thousands that failed. Yeah. And, of course, there were plenty of search engines, you know, before Google, etc. Yeah. What was the first search engine that you used? Would have been like AltaVista, you know, AltaVista. I guess then Yahoo. I mean, I remember, of course, we had the internet back in the 80s. What we didn't have was the World Wide Web. And then we had the Mosaic browser. Originally, you couldn't even run it on Windows.

26:05You had to have a Unix machine. And so I'd set that up. And, you know, we were enthralled with the World Wide Web because it was a fantastic way for us to, you know, display our products and connect with the customer. Because, you know, we were in the business of, like, sending out all these catalogs and getting people to call us on the phone. And now it was like, wow, you could put all this on this website. And then people would click and buy. It was like a dream. So we jumped all over that. And obviously, it was a massive accelerator to growth from kind of the mid-90s forward.

27:05During this later time when you were, you know, dealing with all this Wall Street stuff, you've also were going through your own, deciding what you wanted to do and who should be CEO of Dell and what kind of person you'd want to CEO. What do you think makes a good leader of a$100 billion company that's never run such a company before? How can you tell? First of all, when you look across the spectrum of leaders, I don't think there's one answer to that question. There are many, many ways to successfully lead. I think you want some combination of empathy and curiosity and being able to see around corners and being resourceful and being able to engage and inspire teams.

27:55There are certainly ways to prepare, but then, when somebody gets in that seat, how do they actually respond emotionally to all the pressures and stresses and everything else. It's a unique job given the scale of a business like ours. How do you inspire employees? Passion, what gets them excited, what gets them motivated. Why is what we're doing super important to the world and how can they make a difference in that? How can they succeed? We're doing things that are unbelievably important for our customers. We have the tools that we need. It's in our control. We're having fun. It's interesting.

28:42It's exciting. It's an adventure. You know, all of that. And to what extent should an employee sometimes think like an entrepreneur? Like when often they have a set of things they need to do given to them by their boss, who is given those things by his boss or her boss and so on all the way up to the CEO. To what extent should an employee be thinking, oh, I have a better way and I should try this and kind of break out on their own? And is that a typical path to success is kind of employees, employees who are entrepreneurial? Well, this is kind of a big problem. problem, you know, as organizations get big, they will have a kind of less risk appetite and try to suppress these kind of people you're talking about.

29:35And so I think it's really important for organizations to, you know, allow space for that and to nurture that and actually reward it. And so you want to embrace risk and make sure there's a place for it. You obviously don't want it everywhere. But when you're trying to do new things and innovating, coming up with new solutions, you're going to need people to take plenty of risk and to have very entrepreneurial approaches. You know, I wonder if this like, you know, obviously the founders of all these big companies, they remain entrepreneurial all throughout. And, you know, you've been very entrepreneurial throughout the whole career of Dell.

30:27And I remember the story in your book where you're negotiating with Steve Jobs about licensing his operating system for the Dell computer. And it was very aggressive terms that he was proposing. and do you think that is key for success both in an entrepreneurial creative sense but also in a financial sense? Like he was just very, the deal he was trying to negotiate with you to license the Mac operating system, if I was in his place, I would think, ah, I just, I like Michael. I want to do a deal with him. What deal's good for you? Let's just do a deal. But he was just very hardcore about trying to squeeze the maximum amount of dollars in that deal and the deal sounded like it would end poorly for you.

31:16Yeah. So that, that wasn't a deal that, that, that, that made any sense. Um, and you know, I, I think, I think there's an element of, of shrewd negotiating and, and understanding, you know, economics at a, at a fine molecular detail. That's obviously important, uh, you know, in in in run in running a business at the same time i think i think uh you know you do want to look for you know win-win situations and how do you how do you split the difference and how do you create some you know any any partnership that's going to work over any reasonable period of time has got to be somewhat mutually beneficial right and so it seems like he wasn't either he wasn't aware how you would benefit in the long run or not from this deal?