How can someone who was trained and worked in the world of venture capital in Silicon Valley be interested in the concept of a purpose-driven,100-year-old company that doesn’t go public, or sells to someone else? Aren’t the two incompatible?
For a big part of my working life, including stints at Kleiner Perkins Caufield & Byers and TPG, I probably would have said yes, but then I reconnected with Jessica Herrin in 2005. After her company was backed by KPCB in the late ’90s and sold several times over, Herrin was committed to the idea of building a global company that would last privately for her lifetime, if not longer, and not be beholden to venture capital or private equity’s common exit-driven strategies. As she said when I asked her about her exit strategy: “My exit strategy is to be rolled out of my office on a gurney.” Herrin went on to set up what is now Stella & Dot, a hugely successful jewelry design and distribution enterprise.
It struck me at the time that Herrin’s idea of not exiting — ever — was highly contrarian. Until then, all the entrepreneurs I had backed and all my angel and VC co-inventors believed an exit was inevitable and the reward of success. We were always looking for the next hot startup to back for that dreamed-of rapid, fund-returning exit by sale or IPO. But, inspired by Herrin’s concept seven years later, I wondered if there were others out there thinking the same way as Jessica. I trawled through my network of contacts and asked them: “Whom do you know and admire who’s building a meaningful company without any interest in VC and private equity backing?” Surprisingly, it turned out that everyone I spoke to knew at least one person like this.
I started interviewing these people, and a common set of themes emerged. This is what we ultimately distilled down to the Evergreen company idea and principles. These are the “Evergreen 7Ps” — purpose, perseverance, people first, private, profit, paced growth, and pragmatic innovation. Evergreen companies are run by leaders who want to grow profitable and innovative, private businesses that put tremendous importance on their purpose and teams. Not surprisingly, these leaders viewed themselves as lone eagles, rarely having the opportunity to interact with other like-minded CEOs.
An experimental gathering of Evergreen CEOs in October 2013 in Sun Valley, Idaho, led to the founding of Tugboat Institute, a membership group for Evergreen CEOs. Tugboat Institute gave them a platform to meet one another and share inspiration, best practices on business and family, new ideas, and good-old fun.
One of the Evergreen 7Ps is profit — grow from your own profitability with limited debt so that you can protect your team and future destiny. To help galvanize the stark difference in approach from VC, I borrowed a quote from the Harvard Business School academic Clayton Christensen, who said: “Be impatient for profitability, and patient for growth,” the exact opposite of the Silicon Valley playbook. That said, a small number of our original Tugboat Institute members made it clear to me that were committed to profitable growth, but their specific situations required an infusion of outside capital. They were often in that no man’s land of doing everything right but being extremely cash constrained due to rapid growth between $15 million and $150 million in revenues, or needing to buy out a misaligned shareholder.
These members felt they had no good options, and they would often risk losing their business and their assets rather than taking VC or private-equity funding. They were dedicating their lives to their purpose, ventures and teams, not just five to 10 years of creating something then exiting. I concluded they needed an alternative to this brutal dilemma, but what would that look like?
Again, I turned to in-person conversations to learn and co-create. I met with 30 or so deep-pocketed investors whom I believed would provide patient, if not permanent, capital, or who had the capacity to do so. I painted the picture of these remarkable Evergreen CEOs and their companies, who might cautiously welcome a trusted, minority, non-control, permanent partner. For half of the investors the idea of a non-control, minority investment without any liquidity rights just didn’t sit well, but the other half got it. These were often owners of significant multigenerational family enterprises that drew parallels between their parents’ and grandparents’ values and experience. They could see my view that some of the best CEOs and entrepreneurs in the world are running these underappreciated companies.
Of course, as good investors, they asked for some guarantees, but ones based on long-term alignment protection rather than exit or control protection. With their input and that of other experts, we came up with a novel, structural approach that creates a win-win-win: for the company, for the investors and for Tugboat. While there are several important features, a key one is aligning management incentives to invest in high ROIC (return on invested capital) projects, and when they are not available, return the excess capital to investors. We determined that fixed-dividend rules are far too limiting on excellent management teams.
Our approach requires a tremendous amount of trust by all parties involved and puts a huge premium on everyone acting with integrity, patience, and honor. Fortunately, a number of investors see the potential and are willing to back these businesses in pursuit of very attractive long-term yields and the rewards of being a small number of owners in future market-leading businesses.
Evergreen companies and investors aren’t going to replace those entrepreneurs and businesses requiring venture capital or private equity. Though I was involved with Amazon and Google almost 20 years ago when both had fewer than 50 employees, I still marvel at the power of VC and private equity to fuel exponential growth ventures that can forgo profitability for a decade or more while creating ventures worth tens of billions of dollars. Evergreen is just a different approach to building lasting, scaled businesses with different core values and a different playbook. And, from recent visits to the Midwest, I believe the Evergreen company idea is catching on not only with new ventures, but also multigenerational family businesses who have long lived Evergreen values without the name or Evergreen 7P framework.
My belief is that the Evergreen approach will grow as a recognized alternative model of business success in the years ahead. That presents an exciting prospect for me and those entrepreneurs, leaders and teams striving towards creating and sustaining 100-plus-year-old businesses. And, of course, those courageous investors that back them as well.
Dave Whorton is an entrepreneur, curator, and investor. At the age of sixteen, Dave began working at Hewlett Packard and was inspired to create companies with similar success and values. He later would start four companies including Good Technology, Drugstore.com, and Tugboat, and worked at Bain, KPCB and TPG, learning about VC and PE from the best. A small investment prior to Tugboat opened his eyes to seasoned entrepreneurs who wanted to build large, profitable, private, innovative businesses that would never sell or IPO—what he coined Evergreen companies.