For a long time, people have been asking me, can you make a podcast on failure?
There's a brand new book called Steve Jobs in exile, the untold story of next and the remaking of an American visionary.
And it was written by Jeffrey Cain.
And that is what this episode is going to be about because of the book.
Is exclusively about.
It chronicles that 12 year period of exile between when Steve Jobs gets kicked out of Apple and then he returns to Apple.
It is probably the defining point of Steve Jobs' life because you will see one of the most brilliant entrepreneurs, maybe the greatest entrepreneur to ever live, just make mistake after mistake after mistake.
And the longer he's in exile, the more the pressure builds because he's burning through his entire fortune.
And yet, because we know what happens after he returns to Apple, this is somehow one of the most inspiring stories because of Steve's refusal to quit and then his ability to transform, to build himself into the kind of leader and entrepreneur that deserves to run Apple.
And before I jump into this book, I want to read you a paragraph from another book because I want you to keep in mind these few sentences from this other book.
This book is called The Return to the Little Kingdom.
That book was primarily about the first few years of the history of Apple, but there's an updated version where the author, Michael Moritz, writes this.
Many are familiar with the reemergence of Apple.
They may not be as familiar with the fact that it has few, if any parallels.
When did a founder ever return to the company from which he had been rudely rejected to engineer a turnaround as complete and spectacular as Apple's?
While turnarounds are difficult in any circumstances, they are doubly difficult in a technology company.
It is not too much of a stretch to say that Steve founded Apple not once, but twice.
And the second time he was alone.
The book that you and I are going to talk about right now, Steve Jobs in Exile, tells in great detail the personal transformation that Steve Jobs had to go through to be able to refound Apple.
I'm going to get right into the book.
It says every waking moment of his adult life had been spent building Apple.
Long days, longer nights.
Now he had no real friends, no other life to turn to.
Steve decided to disappear for a while, to step away from his old life and to think.
Suddenly he was gone and nobody knew where the hell he was.
And they didn't know if he would come back.
So Steve Jobs is going to officially get kicked out of Apple in September 1985.
Before that, he's stripped away of all his power.
So he spends the summer in Paris trying to figure out what the hell he's going to do next.
And he talks about this in an interview.
He says, you probably had somebody punch you in the stomach and it knocks the wind out of you.
If you relax, you'll start to breathe again.
That's how I felt all summer long.
And so during the summer, he goes to Paris with his girlfriend at the time, this woman named Tina.
And so at the time he's wondering, he's like, okay, well, I have this fortune.
Maybe I'll just live a quiet life in Paris.
And so his girlfriend wrote him a letter about this time that they were together when he had a major turning point in his life.
And this is what she wrote.
We were on a bridge in Paris in the summer of 1985.
It was overcast.
We leaned against the smooth stone rail and stared at the green water rolling on below.
Your world had cleaved, and then it paused, waiting to rearrange itself around whatever you chose next.
I wanted to run away from what we had come before.
I tried to convince you to begin a new life with me in Paris, to shed our former selves and let something else course through us.
I wanted us to crawl through that black chasm of your broken world and emerge anonymous and new in simple lives where I could cook you simple dinners and we could be together every day like children playing a sweet game with no purpose save the game itself.
And the next sentence.
Perfectly describes Steve Jobs.
But Steve couldn't stay away from work for long.
He still wanted to build and create.
And so Steve gets kicked out of Apple.
He decides, hey, I'm going to build a computer for the university market.
I'm going to target academics.
And so he winds up poaching his co-founders.
I think there's like four or five co-founders of Next.
Directly from Apple.
This causes Apple to sue Steve Jobs.
And that lawsuit is about the only thing that the company has.
It says their new company had no name, no business plan, no product, only a vague vision of building computers for universities.
And there's a bunch of things going against them.
It says at this point, Steve wasn't yet regarded as an undisputed genius in the industry.
Instead, people saw him as a terrible infant
He could sell anything, but his reputation was poison.
When Steve tried to poach other great Apple engineers, they refused to follow him.
And so one of Steve's first moves was actually surprising.
And it winds up actually being a good idea later on.
He didn't know this at the time, but this is actually going to introduce him to Ross Perot.
Ross Perot is going to be one of his major backers and one of the largest investors in Next.
So Steve decides, he says that strong teams need a visionary story to believe in.
So he actually hires...
This filmmaker named John Nathan.
And Steve asked John to come and film Nex's first team retreat.
What John films there eventually winds up as this documentary on PBS that's called Entrepreneurs.
And so we'll get to Ross Perot a little later on, but in this documentary, Steve is telling his team we have 18 months to build an entire new computer along with this operating system from scratch.
And even back then, he was repeating this mantra that he would say over and over again throughout his career, that great artist ship.
And he's telling them how he thinks about recruiting.
Now, this is going to be fascinating because there's a lot of things that he says that
That he believes in.
And during this period, this period in exile, his actions and his words rarely match.
And so there's ideas that Steve professes to believe.
And at this time in his career, where we are, when he's 30 years old, trying to start next, he believes it, but he can't do it.
So he's watching George Lucas because he's going to buy Pixar from George Lucas because George Lucas is going through this divorce.
And he's watching how George Lucas builds his company.
He's like, oh, I want to do the opposite of that.
So this is what he says.
George was cash-strapped from a $35 million divorce settlement and was threatening to fire the division's entire team if no buyer emerged.
His approach to creative work seemed to be to assemble the world's best team
Complete the movie, and then quote, blow them out, which means dissolve the group and then start fresh next time.
Steve found this approach revolting.
At Next, he was determined to build the opposite.
A permanent ensemble of brilliant people who would stay for the next impossible project and the next one after that.
Steve wanted grokking from team members, which he describes as full body absorption of the company's DNA.
That's what he says at the beginning.
He turns over every single one of his co-founders and almost every single executive.
But they make the point later in the book that when he gets to Apple, he finally builds a team.
And most of those people are with him for over a decade, for the rest of his life.
And so it talks about the way that Steve thought about hiring.
Steve demanded a certain temperament.
Steve respected talented people who could fight.
You had to be willing to push back against Steve.
Your ideas would only survive if you could evangelize them and convince all the smart people around that this was the best option.
The culture was so intensely combative
That when next veterans moved on to other companies, their new colleagues would tell them to dial it back.
They had been conditioned for a kind of intellectual warfare that didn't exist elsewhere.
That is something that Steve keeps with him even when he returns to Apple.
In fact, Ed Catmull told this great story where Steve was talking about that he had fired two people from Apple's board.
And the reason Steve gave Ed surprised Ed and Steve said is because they didn't ever disagree with me.
And so at the very beginning of Next, Steve gets captured by this idea that he wants to make a computer in the shape of a cube.
It says Steve became obsessed with the idea that a computer's form could deliver emotional satisfaction alongside raw functionality.
Steve hired a European design firm and tasked it with designing a perfect cube.
They called us and said, you've got to get on the next plane to Europe and see what we've come up with.
We have something far better that's going to change the shape of computing forever.
And this story just made me laugh.
Steve flies to Europe, sits through this design presentation.
The designers are like, hey, every computer in the future is going to look exactly like this one.
They pull off the curtain and it's in the shape of a human head.
I just laugh at the idea of the computer sitting at your desk in the shape of a human head.
And then Steve's response is, I think, predictable.
He fired the designers.
And then he calls up a designer who had previously worked with him at Apple.
This is the founder of this firm called Frog Design.
His name is Hartmut.
And what Steve liked about him was that he was a renegade.
In fact, this guy's mantra was form follows emotion.
He thought that computers should feel human, intuitive, and even sensual.
That's right up Steve's alley because if you remember when he went back to Apple, he said that he wanted to make products that you could lust after.
So Steve finds his designer.
The next thing he does is he wants a logo for Next.
So he goes and hires this guy named Paul Rand.
And Paul's another renegade, another entrepreneur that's hellbent on doing things his own way.
Paul was one of the most respected figures in American design.
He firmly believed, as did Steve, that a logo should convey something essential about a company's value.
He had created iconic logos for IBM, UPS, Westinghouse, and ABC.
Paul did not suffer fools gladly.
When Ford Motor Company invited Paul to redesign its logo, he walked into a conference room with 50 executives and immediately asked, who makes the decisions here?
Then he presented only to that person while the other 49 people sat watching.
When Steve spoke to Paul for the first time, he asked if Paul could present him with a few options for Next logo.
No, Paul said, I will solve your problem and you will pay me.
Paul's price, $100,000, whether or not Next ended up using the logo.
It was a monumental sum, but Steve agreed.
And so the reason I'm bringing this up is because it's one of the most important themes in the history of Next.
Steve had too much money.
He had too much personal money.
And he got way too much money from his investors.
And so he stopped watching his costs.
He repeats this over and over again later on, where he essentially admits, we did the exact opposite of what we did when we started Apple.
And again, we have an example where what he's saying and his actions don't match up.
He's speaking to the staff.
Hey, we need to be disciplined about cost control.
But he has this champagne taste.
They say he had champagne taste that he'd gotten used to.
And so as a result of this, the company's burn rate is just climbing.
And this will be the story year after year after year.
It only gets worse.
And so I said Steve wanted every facet of Nexus Image to be perfect.
He wanted a New York ad agency, a top-tier public relations firm, a full marketing staff, a receptionist with a prestigious college degree who could remember the names, faces, and positions of every visitor who walked in the door.
When I got to the end of that paragraph, I just wrote down the note I left myself as a question.
Did Apple have any of this before they had a product or any customers?
The answer, of course, is no.
The $100,000 logo fee spawned an inside joke on Nexus staff, a new unit of financial measurement called the Millie logo.
One milli logo was $100.
A high-end computer monitor might run 20 milli logos.
A designer sofa, 70 or 80.
Steve overheard the joke and he didn't laugh.
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And so he's getting pitched by ad agencies, and it says Steve's feedback was hard to predict or to plan for and could be searing.
Partway through an ad agency pitch meeting, Steve cut off the already nervous executives with a request.
He wanted a phone book brought to him.
Once it arrived, he leafed through a few pages, then looking up, he said, this makes for more interesting reading than the shit I'm hearing from you guys.
He was mercurial.
Nexus team members often refer to this as a hero, shithead, rollercoaster.
He could lavish praise on your work one moment, then turn around and tear you apart in front of the room the next.
You never knew where you stood.
And it's interesting to note, there's this other great book I've read three times.
I've done like one or two podcasts on.
It's called Creative Selection.
It's written by this guy named Ken Kosienda.
And it's about the golden age of Apple when Steve goes back the second time.
And he actually,
The interesting part about this is Steve fixes this when he goes back to Apple because in that book, Ken Kosienda said that Steve was always easy to understand when giving product feedback.
And so this hero shithead rollercoaster
Is happening in Next and it happens one time in front of Paul Rand, the guy that's designing the logo.
Paul's like 30 years older than Steve, doesn't suffer fools, so he calls him out on it and he actually gives him great advice.
He says, Paul saw the danger in Steve's volatility.
After listening to Steve Rand about graphic design, the logo designer cut him off.
Between now and when you have a product, you are the product, my friend.
And so you better be nice to people.
And so this book does a great job of going into detail why these little things matter.
It sets the tone for the entire company, especially in a startup.
Somehow $100,000 had become the company's standard spending unit, as if Steve's logo had set the baseline for what constituted normal expenses.
Steve, ironically, criticized the team for buying new equipment instead of scrounging for deals.
We have stopped nickel and diming for stuff, and this all adds up, he said.
I don't see that startup hustle.
And so one of the recurring themes in the book is the fact that when he started Next, a lot of his motivation was to get revenge on Apple.
In fact, when he was an older and wiser man, he said, the older I get, the more I'm convinced that motives make so much difference.
And he talked about the difference of why you're doing what you're doing, why you're building the company you're building.
Why you're building the product you're building.
And you see he probably had the wrong motivations at the very beginning because he's literally running Wall Street Journal ads, taking shots at Apple.
Keep in mind, he has no product.
He has no revenue.
He doesn't know what he's doing yet.
And yet he's wasting time and energy and resources doing shit like this.
This is what the ad said.
The personal computer industry is now being handed over from the builders to the caretakers.
That is, from the individuals who created and grew a multi-billion dollar American industry to those who will maintain the industry as it is and work to achieve marginal future growth.
I can guarantee you there is life after Apple.
And again, this kind of spending reflects his priorities.
He says so much of Steve's motivation at Next was about sticking it to Apple.
At Apple, it was about building the best product.
It was about building insanely great products.
And about a year into this, Steve sits down for an interview.
And there's just a few things that he said in this interview that I thought was interesting because it gives you an insight to how he thought about himself.
Definitely not as a businessman.
Especially if the desire is not to be a businessman, but to be a creative person.
And then he's asked, well, you're the CEO of Next.
Isn't that the very definition of a businessman?
And Steve responds, my self-identity does not revolve around being a businessman.
Do I recognize that this is what I do?
I think of myself more as a person who builds neat things.
And that is very common if people are trying to build neat or great things.
They want to retain control over the process as much as possible.
And sometimes that instinct can lead to disastrous decisions, which in this case is them building their own manufacturing facility in Fremont, California.
Steve thought that building a next operated manufacturing facility that was 30 minutes away would give him tighter control over the manufacturing process.
He also had a ridiculous idea.
This is one of the craziest ideas I've ever heard.
He envisioned that this facility would enable an elaborate buying experience.
Just like Ferrari customers fly to Italy to pick out their cars straight off the assembly line, so would Next customers.
If you're going to buy a great sports car, what's the best way to do it, he would say.
You fly to Europe, go to the factory, and buy it there.
People are not going to buy their computers this way.
That's crazy.
And again, at the same time he's saying this, Next's cash reserves were rapidly dwindling.
The bank account balance was dropping every day, and it says revenue was nowhere on the horizon.
And right as his cash balance is dwindling, he gets a lucky break on November 5th, 1986.
Ross Perot happened to tune into PBS, and on came this documentary called Entrepreneurs.
The next morning, Ross leaves Steve a voicemail and says, if you ever need an investor, call me.
Steve didn't want to look desperate, so he waited a week, and then he picked up the phone.
And they quickly hammer out a deal.
Ross is going to put $20 million into Next for a 16% stake in the company.
He becomes the company's largest outside shareholder, but as one prerequisite of the deal is that Steve has to have more skin in the game, so he asks Steve to put in another $5 million of his own money.
So in comes $25 million more to the company and a secret deal where the book says that Stephen Ross has struck a second secret deal.
It would never appear in any press release or regulatory filing.
They didn't even write the terms down.
To sell the next computer, Ross was willing to mobilize his high-level government networks and his sales force from the company he was planning to start.
This is a company called Perot Systems.
It would build on his past success selling technology to the military, intelligence agencies, and the federal government.
Remember this part for later.
The word mercurial is used over and over again to describe this version of Steve Jobs.
Wait till you see some of the bizarre decisions he makes where he will torpedo deal after deal after deal when his company has no money and is producing just a handful of computers.
And so this version of Steve has no trust in his team.
He's micromanaging every single thing.
He's essentially trapped in a prism of his own perfectionism.
And this is going to cause his company to just bleed tens of millions of dollars.
So it says in early 1987, Steve's pursuit of perfection was devouring the timeline.
Thank you for watching.
Steve was caught in his own trap.
He believed that his vision was perfect and it didn't need changing, yet he couldn't stop tinkering with it.
And again, this is where his words are not matching up with his actions because he's preaching to his team.
This is what he's telling them at the time.
The most important thing you're competing with is not another company, but it is your own ability to execute.
He seems to be blissfully unaware that they are unable to execute at the moment.
So this debate is raging on and we'll see this other reoccurring theme that Steve causes the problem, then shifts the blame of that problem to somebody else and then fires that person.
So he's just churning through people.
So even as debate raged on, Nexus VP of manufacturing, Linda Wilkin, had to begin building the company's factory.
With no firm decision on the circuit board, a choice that would dictate the factory's plan, Linda did the rational thing and prepared for both possibilities.
When Next's factory schedule inevitably slipped, rather than blaming his own indecision, Steve took out his frustration on Linda and he fired her.
And the entire company gets stuck in this loop for months and years.
Each time the chip designers got close to a final layout, Steve would change his mind.
Add this, he'd say.
Now move that.
His perfectionism about the chip's appearance created months of delays.
And no one around him is telling the truth.
When Steve asked how long it would take to finish the ever-changing design, the engineers knew the honest answer.
About a year, working seven days a week.
But they also knew that that timeline would never fly, so they lied.
One more month, they'd say, each time Steve asked.
And so Steve comes up with this thing called the deep shit list.
It's a list of existential threats that he said, if we don't solve these threats, we're going out of business.
And so he would light into the two engineers.
They're called Big Dave and Little Dave in front of the entire company and say, if you guys don't figure this out, we're going out of business.
And this is the crazy thing that happens next.
So a week or two later, Big Dave and Little Dave, they have an announcement.
Guess what?
We're ready to ship the master chip design to Japan.
We solved everything.
Steve goes on the Hero Shithead roller coaster, says, oh my God, you guys are geniuses.
We're going to give you $25,000 bonuses each.
At the time, that's equivalent to half a year's salary.
So he hands them the check.
The two Daves are like, this is great.
They leave.
They go back to their office.
They pack up their belongings.
They walk out the door and they never come back.
90 days later, the final chip arrives from the manufacturer.
The team snaps it into the computer to try to test it.
Nothing.
It doesn't work.
As a result of this, the release schedule, again, they don't have a product, they have no revenue.
The release schedule for the computer has to be pushed back a full year.
And this just continues.
As time went on, the deep shit list started to look less like an existential priority list and more like Steve's personal wishlist.
He kept piling on features, adding costs, and making last minute demands.
So at the very beginning of Next, Steve has this advisory council of all these people that work in academia.
They're advising him on the kind of technology they need, but they also talk about, hey, it's really, really, really important that your computer cannot be more than $3,000 per computer.
You have to stick to that.
And so Steve does something bizarre at the next meeting with this council.
He keeps the details of the cube hidden and instead distributes this beautifully printed 18-page brochure about the next logo.
Let me read you this note when I first read this about what's going on here.
We still don't have a prototype to show you.
The finished product won't come anywhere close to the price you've stated you're willing to pay.
But hey, here's 18 pages on how our logo was designed.
This is why I refer to this time period.
This is like bizarro Steve Jobs.
It is a version of Steve Jobs that's just making the opposite decision that an intelligent entrepreneur would make.
And he's doing it at a time where his company, remember we're in the 80s.
His company's burning through a million dollars a month.
And yet, just like with the story of Ross Perot randomly seeing this documentary and saying, I'm going to put 20 million to this company, Steve winds up next to the CEO of IBM at a dinner.
And IBM wants to license operating systems for their computers.
And this is the deal that Steve sold to the CEO of IBM.
It says IBM agreed to $30 million on signing the contract and another $30 million on shipping and then royalties on every copy they ship.
A total investment of $60 million, which is three times how much Ross Perot put in, and a windfall that brought them years of runway.
Now let's fast forward a year.
The more he raises, the more he spends.
And so we're back in a bad position.
Nexus Financial Outlook was also looking seriously gray.
The company had $25 million in the bank, but needed $27.5 million to survive the year.
To make it worse, they needed to sell 16,000 machines by year end.
They'd never do that, by the way.
And at this time, the team could barely get a single computer to boot up properly.
Keep in mind, as I read this next sentence to you, they haven't shipped a single thing yet.
He decided that Steve Jobs decided that common spaces would be outfitted with $2,000 chairs and $10,000 sofas.
Every desk would bear the highest quality phone Steve could find, priced at $450 each.
Remember, we're in 1988.
And so he has at least one person trying to tell him the truth.
It's one of his co-founders, a guy named Daniel Lewin,
So he writes this memo to Steve.
He goes,
Steve woke up to this reality after spending a week with the computer on his desk.
The computer takes several minutes.
My guess is five plus minutes to boot.
My computer crashes every hour or two.
With the current state of our software, the industry will laugh us into bankruptcy.
We are running out of time.
And again, I think these two paragraphs are super important to understand that if Steve never changed, there's no way he would have had the success he had when he went back to Apple.
For months, when Daniel tried to raise these exact concerns, Steve had dismissed him, saying that you're not spending enough time with the product.
Now Steve was seeing the problem for himself.
The sales team had a name for this Steve phenomenon.
They called it Go North.
The joke went like this.
Steve hires a salesman and tells him, go north.
He goes to Sacramento.
Keep going, Steve says.
He goes to Oregon.
Go north, Steve says.
He's in Washington now.
Go north, Steve says.
Finally, the guy's calling from the Arctic Circle.
What the hell are you doing up there?
And Steve explodes.
And Steve has another problem.
His biggest investor is losing patience.
When Ross Perot goes to these board meetings, he penetrates Steve's reality distortion field.
This is what he says.
You shouldn't introduce a product before you can ship it, he said.
What is it going to take to get the sales?
How are you going to build the rest of the company?
These are very simple, straightforward answers that more than one person will come from the outside and ask, and they don't have answers to.
Ross's newfound skepticism worried the team.
He was their main benefactor, the company's largest investor and a source of outside credibility.
And so they finally have a computer that they're ready to start manufacturing.
Remember, the price is supposed to be $3,000.
They're supposed to be selling to universities.
The price comes in anywhere from $10,500.
Or if you want a larger hard drive, it's $12,500.
To put that in context, that's more at the time.
It was more than the average year of tuition.
At a private university.
And so it says, in November, the first cubes finally shipped.
By the end of the year, Next had shipped a measly 205 computers.
Even with rock bottom production targets, the factory couldn't keep up.
Steve would get phone calls like this.
You know the 12 machines we promised you today?
Well, there's only eight because four of them didn't pass the paint test.
So it talks about
His perfectionism also, he didn't take into account that all his design changes added complexity, which made running his factory nearly impossible.
And in this case, Steve had insisted that the cube have this magnesium casing.
And the problem with that is the magnesium casing was prone to microscopic air bubbles.
Which would be revealed because Steve also insisted that every cube had to be painted matte black.
And this is a problem that his engineers had foresaw before production.
And they warned Steve about it during development, and Steve brushed aside those concerns.
And so now you fast forward many months to even years later, and it's impossible for him to scale.
Remember, he said he was going to be doing you need to do 16,000 in a year.
They can't even do 12 in a day.
And then the ones that are shipped out, a ton of them are being returned because they have defective parts.
And then they're returned and Next doesn't have a system for tracking why the machines failed and why they were returned.
And so a summary of where we are in the history of Next, it says the company was set to run out of money in a matter of three months.
They had flawed, expensive hardware running unfinished software.
And yet Steve is doing stuff like this at this point.
One day, Steve appeared in Bert's office in a panic.
We're selling everything we can make, he said.
Bert laughed.
Next was making eight computers a day.
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And then we see Steve's deal-making ability.
So early on, he decided, hey, we're not going to use a floppy disk.
Instead, we're going to use an optical drive.
The optical drives barely work, by the way, but they buy them from Canon.
And so he convinces Canon to put $100 million...
Into Next.
In return for their $100 million, they get 16.67% stake in the company.
And then we get to one of the most serious underlying problems that he has is the fact that no one around him is telling him truth.
No one around him is telling him the truth.
At the time, the company doesn't even have a COO.
He's getting a lot of pressure because now Cannon also has a board seat that you need to find a CO.
He doesn't even have an HR manager.
So he hires this guy, Phil, to become HR manager to then hopefully also help him find a COO.
And so Phil meets with all the executive team for about an hour without Steve.
And so over an hour, all the company's leaders open up about next culture issues and their frustrations with Steve.
Then unannounced, Steve walks in.
He purchased himself on a chair at the end of the table and says nothing at first.
Then he breaks in.
Well, everybody at this table feels very free to tell me everything that's on their mind.
Steve said the room filled with silence.
Phil turned to Bud, who was sitting next to Steve.
Bud, what's on your mind?
Bud's eyes dropped, said nothing.
Phil moved to the next person.
Gary, what about you?
Gary looked down at the table.
One by one by one, they all froze.
Seconds ago, they had been griping about Steve.
The moment he entered the room, everyone clammed up.
When Phil conveyed the team's harsh feedback to Steve, he was very much taken aback.
And so again, we have Daniel Lewin being the one fighting back.
At the time, their operating system, next step, is not finished.
And so they had previously agreed, hey, we're not gonna ship more than 2,000 units until this operating system is finished.
And Steve decides, no, we have to sell 25,000 computers or we're going out of business.
And so Daniel's like, I'm not placing that order.
And so Steve said that if you're not ordering the inventory as the marketing chief whose department's running sales,
Then you're not going to be making those decisions anymore.
And then the marketing department now belonged to Steve.
This decision to fire the head of marketing leaks to the press, Daniel, who is still, this is the funniest part, Daniel still remained Nexus' primary spokesman.
So the man who had just been stripped of his marketing role now had the unpleasant task of explaining to reporters why it was actually a promotion.
After Daniel finished spinning his own demotion to the press, Steve stripped him of that press job too.
And Daniel was looking back on it.
He said, there were no adults in the room except for me.
We're now four to five years into the history of Next.
The company's in deep, deep trouble.
And yet they keep messing up the basics.
When Steve ran an ad in the Wall Street Journal offering anyone who wanted a life-size brochure shaped like the cube, it turned into a self-defeating blunder.
With 5,500 requests waiting, the team realized the brochure didn't fit into any standard envelope.
Millions in advertising spending and no goddamn envelopes.
After rush ordering custom envelopes, the team then discovered at the post office that special envelope sizes required special postage.
By 1990, they felt the only choice was to scrap the cube and start over with a more advanced machine.
They looked at the alternatives.
Lose $54 million over the coming year.
Retreat and retrench or sell the company.
The time has come to look at our business proposition.
Every operating assumption we had has been proved wrong.
The product wasn't ready.
The budget has collapsed and the strategy keeps shifting.
We are set up for continued failure.
Now keep that in mind because what Steve does next, you're just not going to believe.
A month later, Steve pulls yet another rabbit out of his hat announcing a new higher margin IBM deal.
They are now going to give him another $30 million.
But this deal doesn't ever happen.
Why?
So Steve and one of the salesmen are traveling to Dallas to make a presentation about the IBM deal.
At the airport, Mark says, hey, we have a problem.
The venue's huge.
There's projection screens on both sides of the room.
They needed two sets of slides.
They only have one set.
It is not clear to me why they couldn't just duplicate this.
But Mark suggests, hey, why don't we just skip the slides entirely and we could just launch straight into the demo when we get there.
Remember, they're at the airport.
And this is Steve's response.
So Mark, what you're telling me is I don't have the tools I need to get my job done today.
You know, I'm just really busy and I'm not going to go.
Steve turned around and walked out of the airport.
So Mark flies to Dallas and has to make a presentation to 800 IBM engineers alone.
The fact that Steve didn't show up, it says the IBM executives read the no-show as a lack of commitment to the relationship.
The deal was effectively dead.
With IBM, Steve had overestimated his power, and he knew it.
Years later, he confided in Pixar co-founder Ed Catmull that he had learned a lesson from the collapse of the IBM deal.
Never overplay your hand.
He's doing that at a time he knows that his company is going to burn $54 million this year.
This is crazy.
He does it again.
Remember that story I told you earlier, Ross Perot is like, hey, we're going to sell.
I'm going to set up this company.
We're going to sell next to the government.
So it says after months of negotiations, the deal that could unlock hundreds of millions of dollars in government contracts was finally ready to close.
Pat Horner, who is the CEO of Perot Systems, flies to next.
Sits in the conference room with the contract spread across the table.
Daniel Lewin goes up to Steve, hey, we're gonna sign the deal, you coming in?
Steve looked up and said, no, I don't wanna sign the deal.
I don't wanna do business with the government.
Daniel walked back to the conference room,
And had to tell them that Steve wasn't coming and that there would be no deal.
Within minutes of Pat leaving and getting back on the plane, Ross Perot calls.
He is told Steve is unavailable.
Daniel gets on the phone with Ross Perot instead.
Daniel, this is Ross.
You know, on any given day, I can call and speak to the head of the FBI or the head of the military of Panama or the White House, and they put me right through.
I'm in business with you.
Why can't I talk to Steve?
Ross was done with the magic show.
He had studied the company's fundamental, and he was completely concerned with what he saw.
He ripped through the numbers.
Next had burned $39 million while planning to lose just $3 million.
Without $56 million from IBM and Ross, the startup would have been dead a long time ago.
Steve employed 69 manufacturing staff for a company, barely shipping a product.
And devoid of all reason, Steve forecasted sales of 11,000 computers this year.
And this is where Ross Perot finally realizes his initial mistake.
You know what my mistake was?
I gave Steve too much dang money.
When you have too much money, you just don't have that hunger and you start spending money on floating staircases and $10,000 chairs, which Steve did both of.
And there's a great sentence about this a few pages later.
He was choosing purity over survival.
Let's go back to this idea that they are many, many years into the company and they still can't even handle the basics.
So in the summer of 1991, Steve invites Andy Grove to the next offside retreat.
Andy, who is the co-founder of Intel, had been a mentor to Steve before.
And it says Andy entered a meeting room with next senior leadership team gathered before him.
He skipped pleasantries and posed a seemingly easy question.
What business are you in?
Hearing no response, he began pulling each person in the room one at a time.
Andy asked profoundly simple questions, but revealing ones.
After six years in business, Next Own Leadership couldn't agree on what business they were actually in.
And not only that, they're lying to themselves.
Remember, everybody around Steve's not telling the truth.
Now they're lying to themselves.
They have this accounting trick.
And they said they've been using this accounting trick because they wanted to hide the paltry sales figures from Steve.
The team reported sales figures by determining the number of units given to distributors, not sales to final customers.
Distributors didn't have to pay right away.
They got the machines on credit.
Next then immediately counted these as sales, even though no money had changed hands and no actual customers had purchased anything.
This practice was called channel stuffing, and it made Next look successful on paper while machines piled up unsold in warehouses.
When distributors failed to sell the machines, they couldn't pay Next either.
Suddenly, Next's reported sales tumbled, and the company was owed over $10 million from distributors holding all those machines.
Next was yet again on the precipice of bankruptcy.
It had burned through the $100 million cash injection from Canon two years earlier.
Now that Steve had alienated Ross Pro and IBM, the most straightforward paths to raising more money were shuttered.
That left Canon as the last major investor standing.
So they tell Cannon, if you don't extend another loan, Next might collapse, and your entire $100 million investment might go up in smoke.
Cannon agreed to give them another $40 million.
At the exact same time, Steve kept cycling through manufacturing leaders.
He would find one VP of manufacturing, hire them.
They'd be the VP for six months or nine months or 10 months.
Then Steve would get frustrated and he'd get rid of them.
Steve always seemed to blame them for his decision to build a machine for a market that didn't exist.
As Nexus leaders study the problem, a consensus began to emerge.
They should abandon high-cost hardware in favor of selling high-margin software.
But Steve wasn't on board with this plan yet.
That's obviously where they have to go.
He clung to hardware like a lifeline.
A software pivot would mean abandoning the beautiful objects that Steve loved to make.
And the crazy thing is through all this chaos and dysfunction, they actually developed a great operating system.
It just takes Steve a while to understand what he has.
So Steve eventually acknowledged what everyone had been trying to tell him.
Corporate America discovered that they could use Next Step to build their in-house mission-critical custom apps five to ten times faster.
Than any other operating system.
These companies came to us and said you don't realize what you have.
You have potentially the biggest breakthrough in the computer industry that we've seen in the last decade.
Next was teaching Steve something he never learned at Apple, how to transform failure into fuel.
Now, here's another example of good idea, bad execution.
Steve wasn't going to give up.
He's trying to recruit.
We're going to call him PVC.
That's what they call him.
They refer to him in the company.
He's going to be next as chief operating officer.
So Steve wasn't going to give up.
He learned that the best people were worth the wait.
When you meet somebody that good, you know you're going to be settling for second best if you compromise.
I've always found it best not to compromise and just keep chipping away.
So Steve finally gets his man.
And like a year or two later, this guy PVC tries to sell next behind Steve's back.
And so something that's obvious to everybody around Steve that we have to stop selling hardware and just transform into a software company is still something that Steve will not accept.
Finally, the financial situation of Next to get so bad that he has no other choice.
And I think this next session gives you insight into Steve understood how bad this was.
Because he's trying to recruit yet another CFO, and he refuses to let the incoming CFO see Next's books.
And he says it told him that he wouldn't reveal his accounting books because he wanted to hire risk takers.
Steve insisted that everything was fine, and this guy named Marcel believed him.
Then Marcel gets hired, dives into the books, discovers a devastating truth that Next was effectively bankrupt, that Steve had been living in a financial fantasy, and then he quits.
And it gets so bad that by December 1992, Steve has to pick up the phone and call Cannon yet again.
And by this time, they'd already poured $140 million into the company.
And Steve says, if you don't deposit another check for $20 million by Monday, I'm going to shut the doors.
In exchange for the $20 million, Canon would purchase Next's hardware division.
Next would get the cash, which would give it enough runway to survive, and then hold on to its software operation.
This is so important because this final failure of Steve having to relinquish what he loved the most, which is building hardware,
This is when we, again, we're four years away from when Apple's going to buy next.
This is when Steve starts to change and to transform.
And so it says those who were closest to Steve noticed something changing.
The pattern that had defined him for years was finally breaking apart.
The wild emotional swings that colleagues had learned to brace for.
Up, down, up, down.
The crashes seemed to hurt more and the highs couldn't lift him as high.
Each betrayal left him rawer than the last.
Daniel Lewin pointed to a passage in Ernest Hemingway's novel The Sun Also Rises that captured what everyone was witnessing.
How did you go bankrupt, one character asks another.
Two ways, gradually, then suddenly.
Steve's transformation was following the same excruciating arc.
And so the news of this failure is all over the media.
And here's an example of what was being written about Steve Jobs at this time.
Sometimes it's hard to tell whether Steve Jobs is a snake oil salesman or a bona fide visionary.
Is dead, dead, dead.
Steve had been trying to recreate past glories at Apple when the rest of the world had moved on.
He took that lesson to heart.
When the world changes, you have to change with it.
And once they lean into what they're best at, this is the first time they actually have any kind of success.
And the problem was Steve was bored out of his mind.
And so it says, even if Boring could pay the bills, it couldn't hold Steve's interest.
As the company pivoted to enterprise software, Steve's attention wandered.
He began stepping away from Next.
He let us manage the company.
It was a major shift for an infamous micromanager.
That year, the company achieved its first profit of a million dollars on revenues of almost 50 million.
After nine years of losses, Next was finally stepping into the black.
And the previous year, Steve actually recruited Larry Ellison to join Nexus board and he gave them some really good advice, which they follow.
And Larry Ellison said 70% of the IT projects fail in the world.
Larry advised the next team to start a professional services group to ensure that the success rate is 100% on your projects.
So Next did exactly that, establishing an internal group to consult on company projects.
It was a valuable addition.
It gave us insights into what our competitors were doing.
The group also came up with ideas for new products.
Next survived the year 1994 by building practical solutions to mundane problems.
So it's through this invention of new products that actually gets Steve excited again.
So inside Next, they developed this thing called WebObjects.
And in 1995, this idea was a revelation.
So at the time, each and every web page was hand-coded.
Resulting in an identical experience for every visitor.
That made building the online future impossible.
Every time an online store had a price change, you'd have to touch 10,000 web pages to rebuild.
That's untenable, and that is what WebObjects would fix.
He gathered the company together in an auditorium.
We have this new technology called WebObjects, he announced.
The internet is going to be the most important technology transformation of the next 15 or 20 years.
We're gonna burn the boats.
The future of this company is WebObjects.
Steve followed Larry Ellison's playbook.
We are absolutely moving into the consultant selling mode Steve announced.
Following in the footsteps of Oracle would be the best example.
Instead of simply selling WebObjects software licenses,
Next would deploy teams of consultants to work on-site with clients for months at a time, implementing and customizing web objects for each company's specific needs.
This approach would generate much higher revenue per customer and deeper client relationships.
Steve had struck a chord.
Everybody was lining up.
We had meetings every 15 minutes with big customers.
And one of the first people to see this potential was actually Michael Dell.
And so it says Michael wanted to build a website that would allow customers to configure their PCs online.
They could choose processors, memory features, et cetera, then check out with a credit card.
A complete vision for e-commerce before e-commerce existed.
When he asked IBM to build the website, the company quoted Michael a two-year timeline.
Then he tried Next.
They said, we can get that ready for you in one week.
Within a year, Dell's web objects-powered online sales exploded, growing to $3 million a day and quickly becoming the core of the company's distribution strategy.
Dell represented the next generation of tech manufacturers.
The web was a clean slate that would place the aging behemoths and nimble challengers back at the same starting line together.
So the person that worked with Steve Jobs for the longest consecutive time was Ed Catmull, the co-founder of Pixar.
I think it was for 24 straight years.
I actually just met Ed Catmull.
I spent a few hours with him.
I actually got to go to his house.
You probably already know this, but I have another podcast besides Founders.
That podcast is just my name.
So if you just search David Center, if you're not already following that podcast, you should.
Because my conversation with Ed Catmull will be out in a few weeks.
And he told some incredible stories in the conversation we had about working with Steve Jobs.
And there's incredible stories about Ed working with Steve Jobs in this book.
So I want to read this section to you.
Throughout their partnership, Ed had developed a unique approach to working with Steve that avoided the explosive confrontations others experienced.
I never had one of these loud yelling arguments with Steve ever.
The secret is understanding how Steve's mind work.
Steve did not want to be guided in his thinking.
He wanted to know what the facts are on which to base something.
Ed once had a disagreement with Steve that stretched across three months.
He was just wrong, Ed said.
The fact that he had a powerful personality and he could think and talk faster than I could didn't make him right.
Rather than escalate, Ed would present his case and then wait.
Eventually, Steve would say, oh, you're right.
And that was the end of the discussion.
The transformation was real and lasting.
This is such an important part.
I love this section.
This is, again, one of the most important parts of the book, the whole point of you and I sitting and talking about this today.
This is Ed Catmull talking.
The people who were with Steve by the end of 95 pretty much stayed with him for the rest of his life.
By November 1995, Steve had become the kind of leader people wanted to follow long term.
And he was humbled.
Now listen to the new Steve Jobs.
There's no way the Steve that got kicked out of Apple would say what this Steve Jobs is going to say right here, which is directly related to the point that Ed Catman was making above.
So this is what Steve said.
If you don't treat talented workers right, they can go get another job in 10 minutes.
So a strange thing happens, which is the sort of the hierarchy of power inverts and the CEO is actually at the bottom.
So I sort of feel like I work for most of these people because they're the ones that are doing all the brilliant work.
Now, the timing of this is so important because as Steve is transforming, as Next is now in the black, at the exact same time, Gil Emilio is the CEO of Apple and they are bleeding money.
They can no longer create their own operating system.
And Gil realizes we have to go out and buy another operating system.
And there's two great sentences here that I think really summarizes the problem that Apple's having this time.
So it says, Apple had no hits of its own to speak of.
It produced a mess of middling products with bewildering names like CyberDog, AppleScript, HyperCard, FireWire, OpenDock, PowerPC.
The old Apple had made two things, the Apple II and the Macintosh, and they had made them well.
And here's this remarkable twist of fate that changes history.
There is a product manager at Next, this guy named Garrett Rice.
He's reading in the newspaper that Apple was prepared to spend tens of millions of dollars on this other operating system called B, which they thought was just a pale imitation of Nexus technology.
And so Garrett Rice asks the question, why don't we just frickin call Apple?
That's what he says.
If Apple was looking at B, why not just buy the real thing?
Garrett believed that Next stood on a dragon's horde of technology that everyone seemed to be overlooking.
So Garrett calls this woman Ellen, who's the CTO of Apple at the time, and pitches her on her answering machine.
He did not focus on Steve.
He instead talked about Next's technology.
And he argued that if Apple wanted to be thorough, it should at least look at Next.
Ellen, who again is the CTO of Apple, said, I hadn't even thought about that.
Imagine how different history could be if Garrett Rice didn't ask the question, why don't we just freaking call Apple?
And so once Steve hears about this, he does the smart thing.
He calls Gil directly and gives him a simple message.
BOS was the wrong choice for Apple.
Gil then in turn invites Steve to come make his case in person.
And regardless of the time and place in Steve's job's life history, one place you don't want to be at is in a presentation duel with him.
Because Steve's invited to pitch and the founder of BOS is invited to pitch.
And look at the contrast in what they did.
So it says Steve walked into Gil's conference room and he pitched Apple's leadership on an entirely new strategy built around Next.
As he began to detail Next Step's innovative features, Gil noticed something different about Steve.
He wasn't the same person as the self-absorbed entrepreneur Gil had once known.
In his place stood a very pragmatic, specific, and precise executive.
When the time came for a technical demo, he turned the floor over to Avi instead of doing it himself.
This is Avi Tavenian, most likely mispronouncing his name, but he was the head of software engineering at Next.
So it says at a time when most personal computers struggled to play a single video file smoothly, AVI showed that Next Step could handle them and more.
We had productivity apps, we had games, we had QuickTime movies, four of them on the screen, 3D models all going at the same time.
The Apple team knew they were witnessing the future.
And when Apple engineers would question or bring up concerns, it says Steve did not dismiss their concerns as he might have in the past.
He acknowledged them, suggesting that they were the kind of solvable engineering problems that accompany all technological advances.
Steve was very smooth.
After a little more than an hour, the next team left the room.
They had made a strong impression.
The founder of B walks in, and he pursued a different approach.
He hadn't brought anyone else from his team.
He wasn't carrying a laptop.
In fact, he had prepared no presentation whatsoever.
Because the two teams had been kept separate, he had no idea what Steve had just done.
His pitch was, your technical people have met with my technical people, so you know the strengths of our solution.
Steve had demonstrated his product superiority through working code.
The founder of B offered only entitled assumptions.
Three days later, Steve invited Gil to his home, and they started the negotiation to purchase next.
Steve opened, offering the company at $12 a share, which would have made the total acquisition price $500 million.
$12 isn't possible, Gil told him.
Well, what's the number you're looking at, Steve asked.
I think I have a shot at convincing the board to take $10.
I don't think I can get a penny more than that.
The negotiation turned out to be speedy.
Steve didn't care about squeezing every penny from the deal.
The negotiation was different from any Gil had experienced.
The traditional scene, a corporate boardroom and the typical players, corporate lawyers were replaced with two men haggling in a kitchen.
Later, they called it the fastest acquisition I've seen in the world.
The whole pricing discussion took five minutes.
Even as he worked to seal the deal, Gil's allies gave him stark warnings about what Steve's return might mean for his own leadership.
I remember sitting in a meeting and saying to Gil, if you buy next, Steve will end up running the company.
But Gil didn't understand how much firepower Steve had.
Either that, or he felt he could harness it.
And you can't.
Steve doesn't know how to do anything but lead.
An Apple alumnus who had known Steve since the early 80s put it more colorfully.
So this guy calls Ellen, who is the CTO of Apple, and says, Ellen, Steve is going to fuck Gil so hard his eardrums will pop.
Gil felt he could hold his own against Steve.
Next, executives thought Gil failed to grasp what Steve's 12 years in the wilderness had given him.
Steve came away not only with better skills for building technology but better strategies for getting exactly what he wanted.
This is the crux of the book.
I'm going to read it again.
Next, executives thought Gil failed to grasp what Steve's 12 years in the wilderness had given him.
Steve came away not only with better skills for building technology, but better strategies for getting exactly what he wanted.
At 43 years old, Steve had returned to the former home that had thrown him out.
Apple was his again.
And this time, he was ready.
