Business Breakdowns: “The Founder” Ray Kroc and the Story of McDonalds |  E1872

26:28So you don't have to have one thing that makes it better. What McDonald showed was they had a series of maybe 30 innovations, hard fought. Some of them were simple. Some of them were complex, but they had the audacity to not stop innovating and creating efficiency. Yeah. Nick Offerman plays Richard, who's sort of the brains behind the operation. And I think he's presented as being completely relentless. Like it was never good enough. Even when he figured out a problem he was just immediately on to the next problem he was just constantly looking at this entire operation holistically and thinking about how can i make it like the first scene we see of them he's talking to his brother about i think if we increase the temperature on the fries by 25 degrees and put them in there for a slightly less amount of time they'd come out a little crispier and everybody else is like oh you're crazy they're already delicious but that's just the way his brain works he was constantly like how do we shave an extra one percent off the time it takes to make this or how do we make it taste one percent better and and if you come in with that attitude every single day yeah eventually you get mcdonald's you know yeah and and to not make it all about the mcdonald brothers rake crock during the same thing um was listening in his hotel as he's driving from town to trying town trying to sell his five spindle milkshake maker he's listening to self-help records and the self-help author and he's got like a portable record player with him that he's ostensibly sets up every night in his hotel room to listen to the same records over and over again and it's talking about resiliency and what business is about and so when i meet young founders and i introduce them to a business book to be inspiring or like we're doing right here or when i'm doing this week in startups i was thinking how important it is to tell stories and to look for inspiration.

28:14And Ray Kroc was a relentless entrepreneur who was relentlessly trying to make himself better and find a big win. He just needed one win because the two or three things he had tried to do previously didn't work. And he's constantly getting mocked for those things. But here he is, the person who created McDonald's, the modern day McDonald's, not the original drive-in. It's important for you to remember the self-help that he was listening to self-help would be the equivalent of today listen to podcasts well i mean that that's still like a a trope in the in the in the in this kind of movie in the the sort of the the go-getter plucky upstart they a lot of the time they're listening to motivational stuff in the car uh at the beginning of the movie and i think they they play they tweak it in a really interesting way here where we do we open with him listening to this motivational record about resiliency And then at the end, we see him and he's preparing to give a speech of his own and he's ripping it off.

29:11He's he's plagiarizing the record he listened to in the opening scene as his own speech talking about the importance of resiliency. So I think it's shading it in a way. It's like, well, is it just resiliency? Because the McDonald brothers were resilient as well. Is it just resiliency or is it the willingness to do whatever it takes? Oh, yes. We're going to get to win. Yes. I think there is an element of that too that resiliency is the nice way of putting it. The not as nice way of putting it is and you won't stop, you won't let anything stop you. Not ideology, morality, nothing. You're going to win.

29:47Winning is all that matters. Win at all costs. Right. And I think it reminded me of, it's a two-sided coin. It's a two-sided coin. You remember the scene from, I think it was American Beauty. I will sell this house today. Right. I will sell this house today. I mean, this is a trope. A lot of these movies about ambitious people or people are down on their luck, but they're go-getters. They're driven. They're ambitious. They're going to win. They need this. They're desperate. A lot of that, you know, those are the people who are listening to sometimes podcasts, sometimes how to win friends and influence people, you know, those kinds of stuff.

30:23All right. Tony Robbins. Tony Robbins comes up in a lot of movies. So at this point, Kroc has lost his mind, right? he's totally blown away and one of the brothers comes out and says oh how are you enjoying your hamburger just some people sitting on a bench croc says this is the best one i've ever had in my life this is oh well we aim to please and how would you like a tour right so yeah he takes him to dinner they they they give him the whole kind of story uh and immediately he's like let's let's get into business this there need to be mcdonald's all over the place what are you guys doing with one burger stand and they're they're hesitant at first because they apparently they've had bad experiences other people have come to them with similar deals that it didn't go well they weren't able to keep quality consistent they are so focused on their sand burdu location they wanted other people to come in and start these other franchises but then those other franchises aren't as good and don't keep up the standard it's their name it's their business makes them feel bad so they've had this bad experience and as mac tells ray uh he'd prefer to have one great restaurant than 50 mediocre ones.

31:28It's not just about the money for them. It's about the brand. It's about the pride. It's about making great burgers for people. They don't want to make a subpar product. So they say no. But that obviously does not, everything we've talked about with Ray already, that doesn't sit well. So he's immediately scheming, how am I going to get these guys to say yes? And he, while driving around doing his sales trips, he comes up with the sort of pitch in a very, it's a kind of mad men inspired sequence where he gives them like a Draper kind of pitch where it's like, don't, don't do this for me. Don't do it for yourselves.

32:07Do it for your country. America needs McDonald's. He's talking about, you know, he was driving around and he sees every community. There's a cross cause that's where people gather for the church and in his, and there's a flag cause that's where people gather for the government or for the court. And then he's like, he, to him, the golden arches of McDonald's, which was not his invention, which was Richard McDonald's idea. But he thinks that golden arches need to be just as prominent and it's just as important and central to American life. And it's this very patriotic, do it for your, your country kind of pitch.

32:41And this is where like complimentary skill sets of founders, you know, comes into play. The people who start a company are not the ones who always get it to the promised land. And, you know, you'll sometimes have complimentary people on the team. You know, Steve Jobs and his partner was the act is a perfect example was was like, you know, building the circuit boards was the nerd was the technical person. But Steve was the visionary clearly. And you know, people sometimes remember was the act and sometimes they remember the third co founder who got bought out of Apple, but most of the time, they just say Steve Jobs, I say Apple, you say Steve Jobs, right?

33:16And you know, you had Dick mcdonald who was just insane at operations you know doing all those little innovations and mac was like a you know kind of like a storytelling ceo type jovial you know shaking hands kissing baby type guy if you think of it in restaurant terms like dick was running the kitchen and mac was front of house you know greeting customers managing the staff that kind of stuff but neither of them were the scaling ceo and when we are talking about technology startups here in, you know, Silicon Valley, we talk about like, a zero to one founder, a product visionary, somebody who can get a product into the world.

33:52But then you need people who know how to scale a business if you want it to become a venture scale or a truly significant business in the world. McDonald's and the McDonald's brothers didn't want to do that. They wanted to have one really great business. But that was not the ambition of the scalable, you know, CEO in Ray Kroc. He saw a vision of how to make this grow across the country. And that really becomes the central tension, I guess, of the second act, you would say, is the friction between the brothers and Ray Kroc's ambition. Listen, public markets can be volatile. Don't I know it? And if you're looking for a unique asset class to diversify with, let me tell you about blue chip art.

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36:04So yeah, Ray gets the brothers to agree to make him sort of director of franchise operations or something similar. So he's going to go around the country starting new McDonald's franchises. The brothers will take a small cut. He'll take a somewhat larger, but still fairly small cut. And he'll manage all of these other McDonald's restaurants and keep their quality up so that it befits the brand. So he opens the first McDonald's in Des Plaines, Illinois. I believe it's still there as well. This is where we get into him. A lot of him like hustling. So first working the people at the country club, working his connections there and then finding new ways to find new people to kind of recruit.

36:46It's almost a little bit of like an MLM scheme for him at this point. Like the more franchisees he signs up, the more McDonald's he opens, the more 2 % takes he's getting of everybody's business. So it's kind of like he's the upstream and they're the downstream a little bit. And that is the criticism of the franchise business model. And it's also the great part about it is the franchisees have to do all the work, but they may get this incredible formula. Now, this is something that's hotly debated. If you dive into Subway, and we should do a deep dive into Subway, because I'm sure they'll make a movie about Subway at some point.

37:22Those franchisees are really ground down and grinding it out is the name of Croc's book. so there is something to this. You have to be a grinder. And in terms of this film, you know, it really shows that food service and restaurants is a grinded out business. It is not a business for rich people who are, you know, retiring and don't want to work. And there's this very important moment as he's trying to find people to open up these franchises. He starts at the country club with people who have the money and it's no big deal. They sign it and then they go back to playing golf and drinking you know uh martinis but the problem is those people have no standards they don't care about the restaurant they just want to flip their money kind of uh and that infuriates crock and of course that infuriates the mcdonald's brothers who care about quality above all else and so there's this great pivot where he goes from country clubs to synagogues uh veterans associations who else does he hit up oh So the first person, tell everybody about the first person that he recruits as a franchisee when he decides rich people are not going to get this done.

38:27I need blue collar, hard work and salt of the earth people. The Jewish Bible salesman, this guy, is that who we're talking about? Yeah. So he's there's a lot of there's a lot. I guess you see it in older movies where people are just in the same office and they overhear somebody's conversation. They're like, that's the guy I need to be in business. I feel like this doesn't happen in today's world as much. uh there are random collisions this would fall into the category of collisions or sliding doors he or no he goes to his own office and there's this very pushy bible salesman trying to sell to his own secretary uh who's not interested and this guy is just relentless not giving up and then he stops him in the hallway and he's like hey you know who who are you tell me about yourself the guy his name's green bomb or something something obviously jewish uh so it's like you're a you're a jewish guy selling uh bibles the guy's like look i gotta you know i gotta make my nut i gotta i gotta earn a living and that's how he's like oh this that's the kind of light bulb moment for ray is like i need people who they need this this is going to become their life they're going to be obsessed with this the way i'm obsessed with this not these country club guys who don't really care they've already made their money i need hungry people you know in our industry we want people to have skin in the game and this is why in our industry you know people selling or founder selling their secondary shares and not having a mortgage payment or kids in private school or, you know, 12 months of runway, six months of runway, 18 months of runway.

39:52The venture capital community and the architecture of the entire system is a bit of a pressure cooker. It's very rare that somebody gets five years of funding and some huge salary that competes with the salary they had at Apple or something. And that pressure makes the diamond. Skin in the game is what we're looking for with founders and with venture capitalists. They have to put a certain percentage of their money into their venture funds. And the movie also, it sort of does this with Ray and his wife, who's played by Laura Dern, Ethel, Ethel Cohn, where even she, they don't see eye to eye because she's at the point where they're in their 50s.

40:27She's like, we own our home. You've had your years of being a salesman on the road. Isn't it time for you to slow down and start thinking about retiring or spending more time with me, going to dinners, enjoying your life more? Can you go to Spain? She wants to go to Spain. He wants to go to Spain, yeah. And he just, he can't function that way. That's just not who he is. And we sense that that's never going to be who he is. It doesn't matter how much money he makes, how comfortable he gets. He's never going to want to just rest on his laurels and stop building. He's just that kind of a person. He wants to win.

40:58He's competitive, and that's the only sort of life that he can envision for himself. And so later, over the course of the film, he meets a franchisee named Raleigh Smith and his wife, Joan, who's much more of his kind of mindset. She's a go-getter. She's hungry. She's ambitious. She loves money and wants to make more money. And so, you know, you can see that's the attraction of him to her is that, you know, again, it is about skin in the game, but it's also just about having that kind of motor, just having that personal ambition versus, you know, just a different kind of person who's not as caught up in the rat race, you know?

41:35I was going to bring this up. spouses are so critical in the formation of startups. Now you'd think like, well, they don't go to the startup every day. But if you think about it, like an Olympic athlete, or if you think of it like a Navy SEAL, or somebody who's doing some extreme pursuit, well, their spouse might have to sacrifice, oh, they're on a tour of duty, you know, in Afghanistan, or they're going to the Olympics, and they've got to do three workouts a day, and they're going to be, you know, doing some competitions all over the world. The spouses bear the brunt of that often in startup land.

42:08They have to take care of the family. If there's a family, they have to manage the domestic stuff. And this becomes a bit of tension often because one person is pursuing their life dream and they're getting all this glory. And the other person is doing all the chores and having to cheer them on. And then the person who's cheering them on will become resentful. and then the person who is going out and working on this they might have their spouse then become critical of what they're doing and then that is the death of the marriage it's the death of the partnership it just becomes irreconcilable often and that's why often when i talk to people who have families and kids and they're starting a company and they want my advice i say well have you talked about this with your partner slash spouse whatever your you know a common term is make sure you have that aligned because some people work to live and some people live to work.

43:02And this is like the tension you see when I tweet on Twitter or X on Twitter, whatever I'm doing on Twitter, posting on X. And I say like hard work pays off. And then people are like, ah, but what if it doesn't? It's like, well, that's kind of implied, but okay. And it's just fundamentally some people, when the whistle blows at five o 'clock, that's when their life begins. Other people, when the whistle blows in the morning, they get to work. That's when their life begins. Yeah. So different strokes for different folks. Yeah. And I think that that is part of the sort of it's both the McDonald brothers versus Ray Kroc.

43:29It's Ray versus his wife. We see we see that kind of play out several times over the course of the movie. There's kind of just very different ways of measuring success. And what does it mean to be a success? And what does it mean to like have a successful company or marriage or whatever else? I think that that's really interesting. So at this point in the movie, Ray is kind of he started having the same kind of success and market pull that the McDonald brothers had. Now, Ray is starting to experience where rather than going out and recruiting, people are coming to him. McDonald's is becoming a breakout sensation.

44:01He takes this trip to Minneapolis where they're opening a new franchise and he gets this kind of hero's welcome. And he realizes like, oh, this is really I'm on to something. This is really taking off. And that's the point where the tensions really start to build between him and the McDonald's brothers, because he starts to feel more ownership. Like I built this into this huge thing. Sure. You guys had the idea of how to make the burgers, but now we're, we're, we're all contributing. It doesn't just feel like it's, it's your company that I'm helping with. It's also my company. Now, I think part of what they're applying is that this was always kind of who Ray Kroc was, and he's just becoming unleashed.

44:38The more powerful he gets, the more rich he gets, the more status he gets. the more he's sort of free to become that person. And he doesn't have to be the salesman anymore who's constantly pitching and glad handing everybody. So as he kind of comes into his own more, we get a lot of back and forth where he wants to make changes and the McDonald brothers are not into it. Like the main one being that the contract he's getting, I think it's 1.9 % of the revenue from these franchise restaurants. He was so eager to sign the deal, he didn't really worry about the math at the time. Now that it's really taking off and succeeding, he's recognizing that that's not that much money.

45:20I've got all this overhead that I'm managing and I'm only getting 2 % of all of these actual locations. I'm not getting rich the way I should be getting rich. And this is a path that founders go along. You have complete doubt and uncertainty and fear, and then you start winning. And then your confidence builds. And then that confidence can become arrogance. It can become narcissism. It can become, you know, momentum. It can go either way. And often it goes multiple ways. And so it's important for founders to not feel so low in the beginning when you're figuring out product market fit and you're figuring out the business because that is the part of the process is the suffering is the, you know, not making enough money is being under appreciated.

46:06And then what happens is you hit it. And when you hit it, then all of a sudden, everybody wants to be your friend. Everybody's giving you applause, thanking you, hugging you, you're the greatest person ever. And this is where, you know, having a strong foundation as an individual, a strong sense of morality, a strong sense of ethics, a strong sense of who you are as a person. And this is where you're parenting and everything comes into this. And what will happen is people who are not grounded, man, you can see them go off the rails, all different kind of directions. And tragically, people who don't get product market fit, you know, know, they can get depression and worse.

46:40And so I thought that the movie did such a good job of capturing his journey from just being considered a loser by everybody, knowing he was actually a winner, knowing he saw these opportunities that other people couldn't see. He knew, Lon, that he had it. He knew he had it. But the world doubted him. And then he starts turning a corner. And every week, every month, every franchise that joins, he realizes he's awesome at this. And everybody who doubted him is wrong. He gets the divorce from his wife. He gets the new wife who is aesthetically played as younger and more beautiful. And more importantly, who wants to be his partner in crime and his partner who pumps him up and says, you can do it and you're awesome and wants to be involved and celebrating the victories.

47:28Who needs real ice cream? We need profits. It's yeah. Nick, producer Nick coming in with a really great drop. Maybe you could take us to that moment where the new wife is like getting involved in the business and rolling up her sleeves and is thinking like crock and how that moment plays into his relationship where crock finally confronts the McDonald brothers. This is one of those movie, the law of efficiency of characters, what Roger Ebert would call it. Like you can't just constantly introduce new characters. So you got to consolidate when you can. So this did not all come from the real Joan Smith.

48:01She was a McDonald's franchisee. They did eventually get married. But the movie, for convenience sake, also gives her the powdered milkshake idea. And apparently this was not. That's apocryphal. But anyway, yeah, in the movie, she comes to him with this discovery that one of the major expenses of running a McDonald's franchise at that point was these big walk in freezers where you'd store the ice cream. And that's what it's a thing that it annoys Ray and his franchise. It annoys the other franchise owners. It's it's soaking up a lot of what should be their profits. So Linda Cardellini, who plays Joan Smith, she discovers in one of those trade industry magazines, powdered milkshakes, which you could sort of simulate the milkshake experience.

48:47But it doesn't require a freezer. It's not real ice cream. You just mix the powder into water. And it did one of those food science discoveries in the 50s and 60s. They were so into. It's kind of a NASA kind of moment, right? They were taking freeze dried stuff. Yeah. You know, and the food chemistry, food labs and all that, all those discoveries in terms of like chemical artificial flavoring and all that. All that was big, big business at this time. And they were constantly coming out with these new kinds of products. And, you know, today stuff like powdered milkshakes and powdered potatoes or whatever, there's a lot of we've we are already stereotype that is like, oh, that's institutional food.

49:27That's cafeteria food. That's prison food. But in the 50s and 60s, they were obsessed with technology. They thought that stuff was amazing. This is the future that everybody's going to eat powdered milkshakes one day. Yeah. So Ray and Joan, very excited about this idea. But Richard McDonald is like milkshakes have ice cream in them. It's a part of the deal. No. And just refuses to negotiate or discuss or talks about it. So that kind of becomes the last straw. And this is a key because we haven't talked about deal making and negotiation. But in order to get the deal for McDonald's, he had to agree that the McDonald's brothers would approve every change to what happens in that restaurant.

50:08So if he wanted to change the ice cream and milkshakes to a powdered one, He needed to get explicit written approval from the McDonald's brothers, which they would never give. And they were slow and they were resistant to change. Right. So he's trying to sort of figure out this power struggle. And it's another one of those kismet. He's just having this conversation and then somebody's like, hey, I have the answer. But he meets Harry Sonnenborn, played by the office vet, B.J. Novak, who would later go on to become McDonald's first CEO. he's just at the bank as a fellow customer overhears this problem and uh meets with crock and figures out the solution this very elegant somewhat devious solution which is rather than focusing on the franchise itself and taking a little piece of the profits of the franchise mcdonald's should be buying the plots of land that the restaurants go on and then they lease those plots of land to the franchise owners, which gives the McDonald's company all the control over the location rather than the franchise owner.

51:16And they're just taking a little chunk of change every month of the profit. So let me reflect this back so the audience doesn't miss it. McDonald's had franchisees. The McDonald's brothers own the McDonald's experience and Ray's in the middle. He can't make enough money off of the 1.9 % he negotiated. Is there a problem? A big one. you don't seem to realize what business you're in and so this clever person says well you know you're really in the real estate business why is he in the real estate business um it turns out when mcdonald's opens a restaurant the entire world goes next to them because so they're so successful that they in fact are distribution if and starbucks has a similar phenomenon if you put a starbucks they research where they're going to put them really well when you place a starbucks the block on either side of that Starbucks now goes up massively in value.

52:06Why? Foot traffic, obviously. So they were leasing the land under the McDonald's, building these iconic buildings with the arches, as you can see in Lance's background there, key part of the story. But they were leasing it from landowners. Who benefits from that? The landowners. Now, if you wanted to get around the McDonald's brothers deal, well, if you own the land, if Ray Kroc had a separate company that owned the land, and he leased it to the new franchisee. So the franchisee signs a franchisee documents, finds a construction person, builds it, and then opens their restaurant. Does it matter if they get the land from Ray Kroc or they get it from some random landowner?

52:46Well, Ray Kroc realizes that's the business. I'm assuming, they didn't mention this in the story. We could ask our Google notebook LM, which has a bunch of McDonald's information, if they would also buy the plots of land around them. It would seem like you should buy as many plots around a McDonald's as possible before you install it. But that was the key there because now they're the landlord in a 10 or 20 year lease. If it's successful, then what's the price going to be? They own the land outright and then they get to charge the franchisee whatever they want. And the thing that they don't mention, Lon, they know the franchisee's economics.

53:20So they can match the rent for that land, the lease, to what they think is the maximum breaking point that doesn't make the franchisee go find another the location right which i'm sure is what they did it's an exclusive deal you can't open a mcdonald's unless you're leasing the land from the mcdonald's corporation so they have to they don't have a choice in one other way it's clever too from ray's perspective it gets him around the mcdonald brothers like at this point now he's the center of power they might be able to say well contractually we control what you do with the burgers but now he owns the land the franchisees are working through him.

53:57It gives him control over the entire company. And it really gives him free reign at this point to just start ignoring the brothers altogether, which he does in a big display by sending all the franchisees the powdered milkshakes and just doing it anyway, even though the brothers said no. And the brothers come to him and the brothers say, hey, we're not going to allow it. And when they don't allow it, they say, hey, we have a contract. Ray Kroc just says, well, you know what they say about contracts? They're meant to be broken. And that's when he goes to the dark side. In my mind, you realize he has the money, he has the power.

54:34He's now somehow wrestled control from them. And he feels emboldened to in any situation in his life, to use the law, or to use might, and power money to just create the world he wants. And this happens in business as well. We just had a situation where Apple is being accused of hiring all these people who built patents for the Apple for for smartwatches and health care, like oxygen reading on your watch, and they stole employees and, you know, they're apparently being sanctioned now. But, you know, a company like Apple might get reckless as they have money, distribution, and power. And they will roll over people around them.

55:15And so this is when Ray, I think, kind of crescents into the, I don't want to say dark side, but just being cutthroat. If you don't agree with me, sue me. If you are not going to support me as a wife, I'm getting divorced. I'll give you everything, but you're not getting to share a McDonald's. And he just went hardcore. This is the hardcore moment. Yeah, I mean, I think it's interesting. I think the movie is doing something really interesting here. Did Ray go to the dark side? Did the money and the power and the status get to him and get in his head and change him? Or was this always who he was in the back of his mind?

55:52And he just it had to wait to come out. Like in the beginning of the movie, he doesn't think that's accurate. I think that's accurate. He doesn't have the power. He can't. his goal the entire time is to get FU money so that he can unleash his inner capitalist tycoon bastard. I think, I think that's a, I think that's a fair read, but I don't know if that's, I don't think that, I think you could read the movie the other way that he wasn't, he wasn't always so cutthroat. He did learn that that's how you have to be, or that's the way he wanted to be over time. My take on it is as you get more confident and you get more power, you will take more risk or you'll be more hardcore.

56:33So that would track more with me. He didn't have the power when he was selling milkshakes to roll over anybody. In fact, he was, instead of being on a heater and accumulating power and having momentum as a founder, he was kind of the other way, right? He was on his heels. And when you're on your heels and you're not confident, the idea that you would fire off a lawsuit or you tell somebody, well, F you, sue me if you don't like it, you might not do. Yeah, we meet him and he's in full salesman mode. I think it's really like the very first scene we see of him. And it's not only just a sales, but it's that kind of Willie Loman, like down on his luck, Shelly Levine, like, I got to make this sale.

57:08It's that desperation. Hey, you look like a smart guy. I don't have to tell you the business, you know, like he's got that. And so I think that's kind of what we're watching too, is this, the, how it sort of unleashes him to, to be able to put that persona aside permanently. I don't have to be the salesman anymore. And that's kind of the scene when he's getting drinks and he gets back from Minneapolis and he's talking to his wife and he's like, they love McDonald's. They were all over me. We gotta have a drink. That's what he's really celebrating is I get to put away being servile forever. I'm nobody's, you know, step stool anymore.

57:43I get to be in charge now. And I, you know, I think, and it goes, it goes from there. Like it gets, it only builds from there. And there's a lot of technical things that occur, you know, around company formation. When he makes this real estate company, he calls it the Franchise Realty Corporation. Yeah. But then eventually he's like, you know what? I'm going to call it the McDonald's Corporation. If you don't like it, you can sue me. It confuses people. It's confusing to people. Yeah. And he's like, oh, that's the whole point. I'm going to confuse people. I don't care. And this actually happened to go back to Zuckerberg as well.

58:08Another incredible entrepreneur with, you know, many would argue, you know, less than top shelf morals or ethics. he screwed all his original business partners restarted facebook sold the assets from an llc into a c corporation and that's what the social network was about was about this same thing a person who didn't have power was building you know software for the winklevi all of a sudden getting some power getting somebody like sean parker in his corner getting peter teal in his parker getting success and then be like you know what might is right i have the chips i have the power now i'm to just do whatever I want.

58:43And if you are my previous partner and friend, you can sue me. And so the arc of, and we should do the social network at some point, the arc of Zuckerberg going from a coder with a certain ability to copy other people's products and do it better than them, all of a sudden he just becomes a person who doesn't care and will screw anybody, including his best friends. And this is a central theme of business. Is it necessary to screw everybody around you to be successful? The answer is it's not. There's many more stories of people being menches and having a moral compass and being ethical and making sure everybody's taken care of than Zuckerberg and Ray Kroc.

59:22How much of it do you think came from Kroc feeling like he was being screwed because the percentage was so small and obviously he was doing so much of a brunt of the expansion work, basically 100 % of the expansion work. Presentment. Exactly. And the McDonald brothers wouldn't budge even a little bit. They wouldn't even give him 2 % or 3 % or 4 % or whatever he was asking for. And another follow-up to that is, do you think McDonald's would exist in its current iteration if the brothers had just been like, you know what? Why don't you take 5 %? We know you're doing all this work and we're going to cut you in on 2 % of the net profits from everything at the end.

59:53Okay. These are great questions. I'll take them in reverse. If the brothers had played ball with him and gave him more leeway, I think actually it would have grown faster because he wouldn't have been wasting so much time arguing with them. It is possible that he could have destroyed the product, but I think it's unlikely. At some point, that power struggle was going to come to a head, right? Because no matter how much compromise each side made, their fundamental view of the business was just so different. The McDonald brothers really, they cared about the food quality. They cared about family.

1:00:23Consistency. They really bought into that sales pitch of like, no, this is about bringing people together and community and making something great. How does he eventually get what he wants out of them? i mean i think at some point ray crock was going to screw them and get rid of them i i had to say but how does he get what he wants from them so eventually uh they're like we're going to sue you you're violating our contract and he's like go ahead sue me he points out what has become obvious which is by making this land real estate deal by forming this huge corporation he now dwarfs them in terms of power and status he yes he is the owner of this massive company mcdonald's They own a burger stand in San Bernardino.

1:01:06So I think once they realize that they've already lost before the argument has even started, because he has this tremendous lead on them, there's basically no choice. They can't sue him. He'd tie them up in court forever. They've got to make a deal. So he makes this deal that is a pretty terrible deal for them. He gives them$2.7 million to split between the two of them. That's worked out mathematically. So each brother walks away with a million after taxes. Right. So they get to keep their San Bernardino location. That's theirs. And then they ask him for, they want 1 % of all McDonald profits in perpetuity forever.

1:01:46And he says, well, I'd like to give that to you, but the board, we're going to have to do it as a handshake deal. And I'll fight for you. And then he screws him. My point is, eventually, he just negotiated with them. And so I think that there was a negotiation to be had here. We're playing Monday morning quarterback. I think if the brothers had just extracted a small amount of money each time you wanted a concession, so that if you wanted to go to 2.5%, okay, well, they want this payout or they want this percentage of the real estate company, et cetera. But they didn't want to play ball. They didn't want powdered milkshakes, even if it made them$10 billion.

1:02:22But eventually, they wanted a payout. So I think the strategic error, I'm talking about strategy here. I agree with you. Their motivation was this purity. At a point, they said, we don't want to deal with this chaos. We want our money. And I think they should have got better lawyers. And I think they should have been negotiating a slow exit until the company went public. And this is an important lesson for everybody watching. If you are in a situation enough like the McDonald's brothers are in, keep your equity in the business. Make sure you have the equity in the business. Because what that means is no matter how big it gets, if Lon owns 10 % of the business, and let's say I'm Ray Kroc and I own 20%.

1:03:00Okay, for every dollar, those shares go up and you own$10 worth of shares and I own 20, you go to 11, I go to 22, you're still getting the benefit, but you're not doing any of the work. And this is really why equity and stock ownership as opposed to licensing deals and royalties is the gold standard in business because the share price goes up, everybody wins. Now, of course, people can do funny things like dilute the shares and issue more shares. But in general, those things are frowned upon. The McDonald's brothers did not have great representation, it was clear, and they should have. And they should have never, obviously, walked away without owning equity in the business.

1:03:38And so Ray Kroc was dogged, But, man, they could have held on to percentage ownerships. And by the way, the Facebook partners did. The Facebook partners did. Eduardo and then the other people, all those early people did wind up keeping shares in the company. Not the Winklevosses. The Winklevosses, I think he specifically did not want them to own shares. Eduardo, Saverin, and those other guys. Yeah, yeah. So, again, all of those things become negotiations. So, here's the two lessons. Number one, if you're the king or queen and you've won power, you can really negotiate hard and you're going to wind up on top in all likelihood.

1:04:13But if you're the person who's getting screwed, you really want to fight doggedly to make sure you own equity in it because that person has proven to you that they're a lunatic. And if that person has proven that they're a lunatic and they'll fight to the end, well, you want to have equity in them. Eduardo Sarevan wound up with over 50 million Facebook shares. So he did quite well for himself. I just think there's a lesson here about like fiscally compensating people based on their value to the company. Like he was so valuable and you see, which I think it goes back to Lon's point earlier about this being like a really measured take on this.

1:04:45It didn't make him look like a total terrible guy, but it also didn't paint him like a hero. That scene where he's like behind on his mortgage payments and you're like, how is this guy expanding this business so rapidly doing such an amazing job and he's missing his mortgage payments and you know, he's not gambling the money away. He's just like being underpaid. you're like that's crazy it was crazy definitely there is definitely a personal emotional dimension to this rivalry that i think both sides probably kept them from seeing things entirely clearly like yeah uh ray crock kind of a hot-headed guy even by his own admission he talks about this in the autobiography i believe that he could he was very emotionally this he cared about this a lot he could fly off the handle he hangs up on them and the guy's like what did you just hang up on us The McDonald's brothers immediately get turned off from dealing with him because they're not like that.

1:05:34They're these very gregarious, Midwestern, even keeled, calm guys. And this guy screaming at them on the phone, they don't like it. So I think they're hesitant to make changes both because of their ideology, but also because who the hell is this guy to call and bark orders at us? And I think it's the flip side to Ray by the end of the movie has become vindictive where it's not just about I want to get the most money. I got to take care of myself. It's like, oh, I'll leave you your San Bernardino restaurant, but then I'm going to open my own McDonald's right across the street and put you out of business.

1:06:09He wants to bury them. It is personal. Just because now I hate you and we've been combative for so long that now I want to get my sort of revenge and stick the knife in. So I think, yeah, it's a business negotiation, but it does inevitably take on this personality clash as well, where they start to hate each other. The film ends. The McDonald's brothers get their money. Well, I think there's a fascinating scene at the very end where Dick McDonald and Ray Kroc end up, after the legal proceedings, they end up in the restroom together. Yeah. It's a total movie trope, by the way. It's a very screenwriter-y.

1:06:46I'm sure this never happened. but you know take a leak and do the debrief yeah you gotta get them together for one big final you know whatever uh recap of what happened like it's like what just happened why did we see what we saw an audience right we want closure we want them to have a final moment coming to terms with each other or whatever uh so uh you know dick mcdonald's basically asking him like hey if you were willing to just steal from us and screw us over why did you want to make a deal with this in first place like we we showed you everything we showed you what we did you saw the restaurant you could have just gone home and made your own mcdonald's and called it something else and you didn't have to be in business with us at all why not just do that and uh he says it's it's the name mcdonald's that that was part of it part of the package and the brand and the when he showed up that day to get his burger and was blown away that was part of the experience was that it was called mcdonald's this very welcoming friendly all-american name he points out his own name crock very slavic immigrant sounding i will tell you crocs is a great line everyone needed crocs and then in the epilogue to the epilogue so that's like kind of a mini epilogue but there's another one at the end where they actually show ray croc speaking and he's talking about how beautiful the mcdonald's name is how iconic it is and he says you know i never like gimmicky names like burger castle or whatever.

1:08:13He's obviously talking about Burger King or Burger Stop or whatever. Astro Burgers we have here in LA. Yeah. And he's kind of mocking Burger King and other people who copied it. But it is such a key point of, I think, Ray Kroc's brilliance. Ray Kroc was an observer of humans and opportunities. He was a hustler. He was a grinder, thus the term, grinding it out. And he took pride in that. And grinding it out is what startups are about at their best. It is what innovation is about at its best. It is a grind. And it is about resilience and confidence and momentum and just never stopping your innovation.

1:08:49And as an entrepreneur myself, people who have worked for me, and you both have worked for me, I might come in after a break and be like, hey, we're doing this new thing. It's founding university. Hey, we're doing this new thing. It's called This Week in Startups. Hey, we're going to try this. And you have to be constantly trying to come up with something new that clicks. And then you have the thing that clicked and you got to keep tweaking it. So here we are in year 13 of, you know, this week in startups. I'm like, I want to do more of these like business breakdowns with lawn because they're fun for us to do.

1:09:15And the audience loves them. So here we are. Resiliency is the big takeaway for me, grinding it out, having great lawyers. And just that understanding of branding from such an earl. Like today we take that for granted. Everybody is, we're all personal brands. Everybody thinks in that, in those terms, but in 1954, to be like, you know what? Those golden arches in every town, you'll be on the road and you'll drive and you'll know what that is. And it's going to be consistent everywhere I go. McDonald's is McDonald's. No, he was way ahead of the curve thinking about how important that would become for Americans.

1:09:50Which, by the way, at the start of our careers, we saw this information superhighway as this incredible opportunity because you could transmit information and go anywhere, get any information for free or close to free. And really the highways, the American highways built in the 30s, 40s, 50s, 60s were essentially like the platform shift of its time. Route 66, he says early on, Ray Kroc, I have this vision of Route 66 and you can go across the entire country, which was built off the innovation of the factory, which created cars by Henry Ford and the McDonald's factory. and when they're making that tennis scene, it's based on Ford and him making the - Yeah, the assembly line.

1:10:32The assembly line. So we should sit here for a moment, I think, and reflect on platform changes, right? We're sitting here with AI as a platform change. We witnessed cloud, we witnessed mobile, we witnessed broadband and the internet itself, PC revolution, cloud revolution, all this kind of great stuff. You know, and it just, when there is a new innovation that occurs, like factories and the assembly line, many people can profit from it or when there's something like you know uh infrastructure that's built many people can profit from it mcdonald's wasn't the only people who profited off of route 66 and you know the highway system hotels yeah howard johnson's would have been the same area tons of brands and then going big is my final lesson here you know people do not have a gambler's mindset and if you look at uh the mcdonald brothers they had a protectionist mindset, Lon.

1:11:24They wanted to protect what they had because what they had was really special. They weren't willing to risk what they had to have what McDonald's has become. And that was their choice. It's obviously a critical mistake if you want to make a ton of money, but they did make them a killing for people who made a hamburger joint, but they only wound up capturing, if you take it as 10 million in today's dollars or you know close to 500 million if you had put it into the s &p um or would have been a billion dollars between the two of them they only got a fraction of the actual yeah i mean mcdonald's last year made 6.1 billion in net income that would have been 61 million if they got their one percent yes and that would have been every year and that's for one year you know one year that happens every year so lots of big lessons big company i think there's one other really interesting we were talking about lessons we were talking about these sort of sea changes and shifts in not just you know individual companies but the way kind of business is done and approached and i think this movie is also about another kind of pivotal shift or sea change moment uh the mcdonald brothers are like when you in elementary school when they teach you adam smith and capitalism you know you do those like you make something at home and then you bring it in and you do a little like mini economy in class like i'll sell you you know, here's what bartering is.

1:12:47And here's, I'll sell you one of these for two of those. And that's how we have an economy. And I think that's where the McDonald brothers stopped. They were like, we want to make the best product for the best value. And we're going to be better than all of our competitors. It'll be faster. The cheeseburger is going to be juicier. And we're going to make everything as perfect as we could. And then that's where they stop. And I think Ray Kroc represents a modern take on capitalism, which is not just about looking at one product and looking at how much of that product do we sell to how many customers, but all of these elaborate financial systems and products and institutions and ways of investing, ways of thinking about scaling companies and growth.

1:13:29Scale is the key word, Lon. It's changed so much. And I think now it's all about how much are you making this quarter versus last quarter or this quarter versus the same quarter last year? Yes, yes, as it should be. What's your 10-year projection? How are we going to keep innovating and how are we going to keep - And your total addressable market and what percentage of it are you? Exactly. And so the Kroc brothers were never thinking, well, how many milkshakes and hamburgers are eaten every year and how many of those can we capture? They're just thinking, well, there's a person in front of me, how delighted are they with the burger?

1:14:02And so that was the first half of capitalism and here we are in the second half of capitalism is how much can I capture? producer Nick any moments or lessons from this that you take away it really was profound to me when he went to Phoenix for the first time which was the first Golden Arches establishment and I just thought it was amazing how you know that's still a feeling that we all have if you're on the highway in the United States if you're on a long road trip and you see the Golden Arches you're like oh I could get I could get some food there look Mickey D's I just you know Jason you You talk about real world virality a lot.

1:14:34And back in the 50s, that basically didn't really exist, right? Like, what was that? And he just saw it. And I also, I said this before, but my other main takeaway was just like, if somebody is doing such a lion's share of the work, you have to get them in on ownership and compensate them properly and keep them around. Because that would have been much more lucrative for the McDonald's brothers in the end. And what they did wound up just, and who knows if that's actual really the reality, but we're just talking about the movie. Multiple sides to the story. both of their sides and the actual reality are the three that we're left to deal with right yeah i think those are great thoughts as well all right we do we like to give a little awards here so nick lightning round here these are the awards for the film producer nick came up with what's your first award you want to give the number one award uh well you guys have to give them but you could just choose any character you want the wood hire award for a character you would hire immediately so you're telling me there's a chance a wood hire award hmm well i mean can we say ray crock You could say Ray Kroc, yeah.

1:15:31I mean, when you got somebody with that much to prove and who's that resilient and dogged and hardworking, that's the person you pick. I mean, after that, it's got to be the guy who explained to him, basically a conciliary, who explained to him how real estate works. Those would be my two. Harry Sonnenborn. Harry Sonnenborn, first CEO of McDonald's. Yeah, Harry Sonnenborn. I mean, I think we got to take Ray Kroc out of it. So I go with Harry. Who do you go with, Lon? I mean, I feel like Dick McDonald is a good answer there. Dick McDonald being the sort of the innovator, none of it exists without him coming up with the ways to make the burger better.

1:16:06He's got to be there at the ground floor. You don't have a product. Got it. So you got the product market fit guy. I got the financial engineering guy. We both would have taken Ray Kroc first, I assume. The Woodfire Award for a character, you would fire immediately. Who would you fire immediately? God, I don't want to say the first wife. she doesn't even work there she's i know but she's such a downer and she's like doesn't believe in him and yeah that she was uh man i didn't give laura durn a lot to work with by the way in this movie no yeah that's such a thankless role the like the the wife who just wants her husband to stay home i always think of they didn't even really give her like a like a mad scene either they didn't let her go i always think of uh i love donnie brasco but ann hache in Donnie Brasco has the most thankless role of her job is literally stand in the kitchen and yell at Johnny Depp for not being home enough.

1:17:03And like, there's like four scenes, they keep cutting to it, and it's the same every time. And this is one of those thankless Anne Heish and Donnie Brasco type roles where she's just there to be, you know, why aren't you home, Moral? We should go to space. You're 100 % right. Not giving Laura Dern a really juicy character is just a huge mistake. Yeah, she's Laura Dern. She's a queen. Queen. Can I jump in here? I have an answer for this one. Who do you hate? I would immediately fire Joan Smith's nerd husband who just lets Ray Kroc completely ogle his wife in front of him at the dinner scene. I mean, Ray Kroc should have been smacked there.

1:17:43And that guy is just, what a loser. I would fire him in two seconds. That's an instant toss. He's just ogling her. And he's like, that's my wife, dude. And he's like, yeah, I don't care. i mean maybe you grab him by the belt actor patrick wilson i know yeah i know it's patrick wilson yeah yeah that's what i was just treating aquaman's brother that way uh let's see who who would i fire that's the oh oh all of the hoodlum teenagers get them out of there none of these hoodlum teenagers can hang around okay next one scarface push it to the limit award for the best money-making montage oh there's a few good ones there are some good ones in here so in the film there's the montage when they're on the tennis court and they're going four montages right now in the film that are all there's a tennis court one right that would be considered a montage yes yes i love that because that's the product market fit tennis court montage operational excellence yeah yeah yeah i like that one there's another good one where it's where they're opening up all of the mcdonald's and you just get those lower thirds of like each new location as it goes up.

1:18:47And they do a really good job of, I'm assuming it was probably one plot and they would just build out a few different looks to get, to make it look like it was different McDonald's locations. I'm sure they didn't build like five whole old school McDonald's, but they shoot it. They're very clever. It definitely does not look like the same location over and over again. I love the one where he's pitching. He's at like the temple. He's at the synagogue. He's at the mosque. He's at the church. And he's like, Mazel Tov. Yeah, the VFA. make me part of your tribe yes yeah the vfw yeah yeah yeah i love that one that's pretty great actually yeah i these are good ones yeah yeah because he's he's even peppering in yiddish phrases yes exactly that's what he's right about it he thinks he's he's thankful to be at their mishpacha or whatever yeah yes yeah all right that's good the next one the travis award for biggest force of nature we are going to dominate every city that we go into i mean this one's you You got to, right?

1:19:41Crock. There's no comparison. Yeah, there's no answer. It's Crock, yeah. I mean, that's an interesting thing that you call it the Travis Award because if you look, in the case of Uber, most people felt that he went too Ray Crock, perhaps, right? And pushed it too hard is always been the criticism that he was going too hard, too fast, bending, breaking, whatever your interpretation of it, you know, of breaking the rules around who gets to, you know, give people a ride from point A to point B. And then you bring in somebody like, you know, Dara. And so, you know, someone like Dara wants it to grow, wants it to be profitable, but does care about maybe not knocking as many things over.

1:20:21And so that's like the balance between the two. But yeah, it's very crumb. Got to be. 100%. Got it. All right. Any ideas for the next one? Jason, you mentioned social network. Ron? Man. Are you on board for that? Do you have any other ideas? Oh, for our next episode? Yes. I mean, I think social network makes a ton of sense. Moneyball? Moneyball would be the other one I would say is an interesting movie that still has a lot of like fans and is part of the sort of discourse people talk about a lot. I think that would be. It's fun, too, because it's not directly business, right? It's baseball thinking about but thinking about it analytically like you would operating a business.

1:20:55How come there's no business bio of Oprah? Why is there no movie about Oprah's career? Oh, I mean, probably when she she gets a little old. I think she's still too in the public eye. Like you need to wait a few more years for her to be less present. And then you do the Oprah move. Uh, you know, I want to earn private parts is a pretty good business movie. Uh, it might not have enough to it, but it is a, that's an interesting one. There was, uh, it's on prime video. Now, uh, there is a, a really good movie called the burial that came out this year with Jamie Fox and Tommy Lee Jones based on a real lawsuit from the nineties where a A small mortuary owner took on like one of these huge funeral service conglomerates in court.

1:21:41And Jamie Foxx plays this kind of ambulance chasing TV defense lawyer who ends up representing the small business. Tommy Lee Jones is the owner of the small business. Really well done, like kind of a throwback courtroom drama, but really well done. And it does touch on a lot of the kinds of, you know, like David versus Goliath kind of stories like it might be. it's an interesting one to check out as well i think boiler room comes to mind money ball comes to mind the big short would be iconic did i see margin call on here that's a good one too yeah i mean that's that's an indie about the financial crisis like that i almost feel like the big short is a bad one because it it kind of does that to itself in the movie right they have those cutaways where they're like explaining everything yeah i almost feel like margin call is the more interesting take that fewer people have seen.

1:22:30Margin Call is like 48 hours behind the scenes at Lehman Brothers, like the day that their analysts figured out that the entire market was about to collapse. I think it's actually Goldman because Goldman was the one who sold and survived. Lehman was the one that went under. You're right, it's Goldman. Yeah, it's amazing. Jeremy Irons, greatest movie speech movie ever. Jeremy Irons, Zachary Quinto. Incredible, yeah. The goal of this is to get business lessons out of it. And this one had so many business lessons. Yeah. I mean, we could go like totally off the wall. Moneyball has a lot of good ones.

1:22:59That's why I think Moneyball's got a lot of business lessons. Yeah. What does Jeremy Irons say? It's, you can either be - Willing buyers. There's three ways to get ahead in this business. You can be first, you can be the smartest, or you can cheat. We don't cheat. And I'd like to think we have a lot of smart people in this room, but it's a hell of a lot easier to be first. That's like the big thing when he decides to sell. It's amazing. All right. This has been amazing. Great job, Lon. Our Twitter handle, our X handle is TWI Startups. and let us know which business breakdown you want next.