Dave Whorton is an experienced tech investor and founder who spent 20 years of his career at the highest levels of Silicon Valley venture capital and tech startups. He worked directly at the top VC firm Kleiner Perkins and co-founded four companies, including drugstore.com and Good Technology. He is also the founder of the Tugboat Institute and the author of the brand new book, Another Way.
Dave joined host Robert Glazer on the Elevate Podcast to discuss his remarkable career, the pros and cons of the Silicon Valley growth strategy, and the Evergreen Companies that achieve lasting, sustainable growth.
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Listen to the podcast here
Dave Whorton On Another Way To Build A Lasting Business
Our quote is from Warren Buffett. “Time is the friend of the wonderful company, the enemy of the mediocre.” My guest, Dave Whorton, helps founders build businesses that are meant to be sustainable over the long-term. Dave is an experienced tech investor and founder who spent twenty years of his career at the highest levels of Silicon Valley venture capital and tech startups.
He worked directly at the top VC firm, Kleiner Perkins, and co-founded four companies, including Drugstore.com and Good Technology. Dave is the Founder of the Tugboat Institute and the author of the brand new book Another Way. Dave and I first met years ago after I attended Tugboat. I loved the community. I learned about what he was doing and believed deeply in that mission.
Like Dave, I saw massive founders chasing the high-growth, cheap capital of Silicon Valley and trying to be the next unicorn, and didn’t think it was a model for everyone. In fact, my book Elevate Your Team, in a lot of ways, was the argument against this high-growth model. Dave makes this very similar argument in his new book, too.
We’re going to get into his concept of evergreen businesses. We’re going to talk about how he refused the job offer that I don’t know if anyone else has refused and why the Tugboat model, an evergreen model, is the perfect model in the environment where we need more businesses that can weather any storm. Thank you for tuning in, as always. I hope you enjoy the conversation with Dave.
Dave Whorton, welcome to the show.
Thanks. It’s good to be here.
I always find it interesting to start at the beginning, back to childhood. You have an interesting story here. Somehow, you ended up working at Hewlett Packard at sixteen years old. What were you interested in back in those years? How did you end up with a job at HP?
Early Business Adventures: Atari, Silver, And HP By 16
When I was little, I was very interested in making money. I don’t know where that came from, but I did. I had a newspaper route, and I had a second newspaper route. I started trading Atari cassettes. I started buying silver when the Hunt brothers were trying to close the corner of the market. It looked good for a while. It doubled.
Where did you buy silver back then?
I rode my bike down to downtown Santa Rosa. There was a coin store. I was buying silver coins. I had a conversation with my dad, and he said, “We need to be careful about your college. I’m not sure I am going to be able to afford to put you through school at this time, so we might want to have you go to a junior college for a couple of years, and then transfer to a four-year college.” That wasn’t very exciting to me because I was on my way to being valedictorian. I was involved in student government and sports. I was trying to be a pretty ideal student. I started looking for work. You might think about going to the local Pizza Hut and stuff like that.
That’s what I did. Papa Gino’s.
There you go. That would’ve been an alternative, too, but I wrote a letter to Hewlett Packard. They had three divisions in Santa Rosa, California. You think about Palo Alto for HP, but they did have three up there. They wrote me back in a couple of weeks and said, “If you’re interested in engineering, we have a program for students interested in engineering. It’s summer work in the manufacturing environment. You get matched up with an engineer. You’re going to spend lunch with the general manager of the division. Let us know if that would be of interest to you.” I would’ve been happy if they’d given me a job gardening.
That letter could have said anything.
That’s exactly right. I showed up at 6:00 in the morning, and I did manufacturing work for four summers in a row. I was stuffing circuit boards, assembling chassis, and assembling gold parts under microscopes. It was a variety of jobs each summer.
You did that throughout school, it sounds like?
I did it for 2 years going into college, and then 2 years of college. It paid well. I worked overtime. Even though I learned later I wasn’t supposed to be working overtime, I sneaked some in. That helped me afford going to Berkeley.
What did you major in?
Mechanical engineering.
Turning Down Venture Capital: Choosing Netscape Over John Doerr
That was very relevant. How did you catch the attention of John Doerr of Kleiner Perkins? He’s an icon.
It’s interesting. I still don’t know how. I’ve asked around, and I’ve asked him, and he has brushed it off. Through Chuck Holloway is my guess. Chuck was a professor at Stanford Business School. He had a special advisory role at Kleiner Perkins. I’m guessing, but I could be wrong.
What was the initial connection? What happened there?
I was only at school for less than a month, and this woman reached out to me and said, “I’m John Doerr’s assistant. I’d like to schedule a meeting with you and John.”
Did you know who he was at the time?
Yeah. Netscape had gone public. It was probably eight weeks after the Netscape IPO. That was a shot heard around the world with the valuation of that company. My first reaction was, “This has got to be a joke.” I figured Laura Arriaga or one of my other girlfriends was pulling my leg. I was going to show up at Kleiner Perkins and be embarrassed. I called back. I called the main line and asked for John Doerr’s assistant. She got on the line, and I said, “I want to confirm that I am scheduled to meet with John.” She said, “Dave, we confirmed this.” I said, “Thank you.”
Did you tell her you thought you were being Punk’d?
No. I left that out of the story. I said I wanted to make sure I got the time right and all that.
Tell me about the meeting.
Learning has a compounding effect. Over a decade, a mere 10% annual increase in effort can double one’s capability compared to someone who doesn’t make that extra effort.
It was scheduled for 30 minutes. We had spent a couple of hours together. John is a very engaging interviewer, as you would expect. He went through my background. He was curious about Hewlett Packard. I’d also worked in a company making industrial CO2 lasers. I was eventually the general manager of that at a young age in my twenties.
I also worked at Bain & Company, and he wanted to talk about that. I had a brief stint at Inner West Partners as a job before starting at Stanford Business School. He was curious about that. He kept talking about Tom Perkins. He said, “You know Tom Perkins worked at Hewlett Packard and ran around the divisions. You know Tom Perkins ran a laser company.”
I did know these things. I did my research beforehand. Tom was John’s mentor. There was a little bit of a connection on, “The HP experience is a good one. The laser is pretty interesting. Bain is a pretty interesting experience. He has done a little bit of venture capital, so he has a sense for what that’s about.” He was looking for somebody to work for him that following summer. He wanted an MBA summer venture.
He offered you a job.
The Birth Of Drugstore.com: Incubating Ideas At Kleiner Perkins
Basically, and I turned him down.
You turned down an internship at Kleiner Perkins.
I did.
Are you the first in history?
I don’t know. I haven’t asked that question. I came into Stanford with the idea that I was going to be an entrepreneur. I wanted to learn how to do it well because I’d had a chance to do it with this laser startup, and it didn’t achieve the objectives I wanted to achieve. It was successfully sold, but it wasn’t something we built. It didn’t become Hewlett Packard-like, which is what I was after, so I wanted to do that again.
I was very grateful and humbled by his offer, but I said, “John, I want to spend the summer working in a high-growth tech firm. I’ve seen HP. That’s huge. I’ve seen a tech startup. That’s small. I want something in the middle with $200 million or $500 million in revenue.” He said, “What companies are you thinking about?” I said, “The two that are on my radar are Netscape and Cisco.”
He said, “I’d encourage you to go to Netscape. It’s a great firm. I’m on the board of directors. It’ll be a way for us to keep in touch. I’ll introduce you to Barksdale, Andreessen, Eric Hahn, and a few of the key leaders.” I’m like, “What an amazing opportunity.” That’s what I did. I ended up working at Netscape the following summer.
What year was that?
That would’ve been ‘96. This is right when Microsoft turned its guns.
I still remember being in a basement dorm of someone in college who showed me ESPN on the first Netscape browser. It was like, “What is this?” I remember that same moment I had with ChatGPT the first time that I started talking to it.
A lot of us had that kind of moment. There was AOL before that. You probably remember. You could do the dial-up. It was that closed garden. It was the cool thing about exploring the web, and the web wasn’t huge at that time. That was a big idea. Fortunately for me, one of the summer projects I worked on was the eCommerce server. I spent a little bit of time with the product manager in charge of the eCommerce server, but that was not the focus of Netscape at the time. They were facing a direct assault by Microsoft on their web server. That was the franchise they needed to protect.
The eCommerce thing was off to the side. It wasn’t getting a lot of attention, but I got some interesting insights by sitting there and hearing the entrepreneurs coming in complaining about the server, what it could and couldn’t do, what they were trying to do, and what their vision was. I was like, “This is a big idea, this eCommerce thing.” I got an early look at that.
You were in this Kleiner Perkins and Netscape world of Get Big Fast, which is the Silicon Valley mantra. We exited it a few years ago.
Maybe.
You were in the thick of this. You also got your hands around entrepreneurship and dove right into this. Tell us a little bit about that.
What ended up happening was that in that second year of business school, I started working on ideas around the eCommerce space. I wanted to see if I could do a startup that would be in a sector that nobody was paying attention to yet. It was still very early. Amazon was already in business. It was getting prepared to go public in early ‘97. This is in the fall of ‘96.
John came and presented at Stanford Business School with a thing called View from the Top. I was in the audience. I had tried to reach out a couple of times to him to check in and give him an update because he said, “Stay up with me. Let me know how things are going in the summer. Let’s stay in touch.” I never heard back, so I assumed he changed his mind, moved on, and hired somebody else.
After his presentation, I went up and said, “Hey, John.” He goes, “Dave, where have you been? I haven’t heard anything from you.” I said, “John, I’ve reached out several times.” He goes, “I have a new assistant. I don’t know if she knows who you are.” This new assistant was filtering me out as another MBA punk trying to get John Doerr’s attention. We started conversations again, and John said, “I do want to talk to you now about joining Kleiner post-business school and working for me as my associate for the next couple of years,” which was very different than a summer job. I’m pretty torn because I’m pretty excited about it.
He’s like, “You can’t turn this down twice.”
The Valley attracted a lot of people that wanted to make a lot of money fast.
There was an element of that, too, but I was working on the idea for Drugstore.com. I was pretty excited about that. John and I had some conversations. He had me and all the other partners. I liked the team there. Kevin Compton, Doug Mackenzie, Ted Schlein, Russ Siegelman, Vinod Khosla, Will Hearst.
This is the all-star team.
There was a real draw on that. At the same time, I was very excited about this idea of being an entrepreneur. I had a real dissonance. One of my two letters to Stanford Business School was about how I was going to be an entrepreneur coming out of Stanford. I was publicly committed to this. John did a brilliant thing because John is a brilliant man. He said, “Dave, let’s remove your reservation about this. I’ll let you incubate Drugstore.com here at Kleiner Perkins while you work for me.” I’m like, “What?” He goes, “Let’s do that.
You can’t spend a lot of time on it because I’m seeing every business plan on the Internet coming towards me. I need you to filter all of those. I need you to be in meetings with me. I need you to support the portfolio companies I’m working with, but let’s identify somebody who could be the public founder of the firm. You can be a co-founder quietly. That person will have to lead, take the ball, raise the capital, and put the team together.” I’m like, “This is good.” It was an offer I would’ve never imagined, and that’s what we did.
It’s an offer you can’t refuse.
How could you refuse it? He was basically saying, “I’m going to give you what you want.” It wasn’t me being full-time as an entrepreneur, but he did say, and this is what put me over the top, “Let’s do this for a couple of years together. Assuming that the relationship goes well, and I expect it to go well, I will back you to start your own firm. I will sit on your board of directors and we’ll build a great company around an area of interest for you.” This was the ultimate offer.
I would say so. What happened next?
I wanted to take a few days off after I graduated from Stanford Business School to travel with my friends. John said, “That’s not going to work. You need to start working.” I started working a couple of weeks before graduation.
You were getting every insert vertical dot-com business plan in the valley at the time.
Everybody wanted to work with John. John was probably getting between 50 and 75 business plans a week. Back then, you wrote a business plan and submitted it. It was printed on paper. It’s a foreign concept. I’d take home a stack of business plans every weekend because I didn’t have time during the week to read them. We were in meetings. We were working pretty long hours.
I’d flip through these things. Most of them, you could throw away. It was so far off. Some were compelling, and we’d say, “Let’s get these guys in, have a meeting, and see what we’ve got here.” The ones that were the hardest for me were the ones that were gray. Gray, for me, was they were in a sector I didn’t understand well, like networking.
It seemed like a compelling team, so I had to spend a bunch of time figuring out whether it was worth spending time with them or not. Usually, I’d have to go see Vinod, Kevin, or one of the guys who specialize in that domain. A lot of times, they were very helpful. They’d say, “This isn’t going to pass muster.” I spent a good chunk of my weekends reviewing business plans that were coming in for John and the rest of the week.
Drugstore and then Good Technology.
Good came after I left. That was the company I started as I departed. The average work week for us is that we had partners meetings on Monday. We typically had a long discussion with the partners on Monday morning, and then they would have people come in and present their business ideas in the afternoons. During the rest of the week, we’d be meeting with candidates for senior positions in John’s portfolio companies, meeting with CEOs and having strategy conversations, and spending time with entrepreneurs we thought were promising that John wanted to spend time with. There’d be business leaders and political leaders who would want to come in. All these meetings were happening, so we worked some pretty long days.
The good thing, and I love this about the firm, is that they encouraged us all to go home for dinner. The firm cleared out at about 5:00 or 5:30. These are the most powerful, influential venture capitalists in the world at the time, and they cared enough about their family to say, “It has to stop. Let’s go home. Let’s have dinner.” We’d be back online by about 8:00. Think about a little Messenger thing that would light up, and you see email traffic. I thought this was a great trade-off because it was an exciting time.
Also, you’re in the middle of interesting stuff and people.
You wouldn’t want to miss this.
This is where some of the artificial constraints on work these days are. I know everyone sounds like kids, but when people are saying, “I work 30 or 35 hours,” I’m like, “How are you going to learn? I’m not working an 80-hour week, but when you’re 20-something years old, you should be drinking from a fire hose.” This was for MBAs.
I completely agree. That’s how I looked at it. In the beginning, when the partners would bring a company for a presentation on Monday, we usually got the materials on Friday afternoon. It’d be the business plan, a written overview, investment memo, or maybe some market-related information or some team information. I would devour that on the weekends also.
I’d come into Monday meetings and hear these entrepreneurs present, how the partners reacted to it, the questions they asked, and the conversation after the entrepreneur left the room. I’d write down what I thought the issues were or the real opportunities. I was off quite a bit in the first month, and it got a little better. By about the sixth month, I was lining up pretty well with the things they would be concerned about and the risks they were worried about. Around that time is when John finally said, “You’ve been too quiet. You need to start speaking up in the meetings.”
At least I could have some interesting ideas and contributions. That was awesome to see the rest of the partners reacting to some of the ideas and some of the concerns I had. If I had a concern, I’d do some background research on it in preparation for the meetings. I’d come with a little bit more information than, “Here’s something I’d be thinking about.” It was exciting. You’re right. I was on a very steep learning curve. If I tried to work 40 or 50 hours a week, John would’ve bounced me.
My friends in medicine are training fellows. Rightfully, they’ve cut back from some of these 100-hour work weeks and policies. A lot of them are saying that after three years, they’re at half the reps that they were. That’s one problem they’re trying to solve. They’re like, “I don’t know. The program may need to be longer. These people aren’t ready at the end of the fellowship to do these surgeries.”
That’s concerning for us on the table. We want them to have the reps. I agree with you. 8,000 hours is too much. When I was in my 20s, I got by fine with 5 or 6 hours of sleep.
Nobody said it’s easy to build a company from its own fuel and to build one that you wanted to last past your lifetime.
That’s the time to do it. I expect work-life balance from people in their 30s or 40s with young kids. I don’t expect it as much from a single twenty-year-old who should be in absorb mode.
I agree. They should be voracious in what they’re trying to learn. They should be asking for more opportunities and more responsibility. That’s how you learn. I agree. It’s a compounding effect around learning, too. If you do the extra 10% every single year, that compounds dramatically. Ten years from now, the one that didn’t do the extra 10% versus the one that did, that other person is twice as capable.
At 50, you can’t do it. You can’t fly around the world. Your body won’t let you do it.
Unless you’re an investment banker. You have to.
It’s probably not letting you do it. There are some warning signs. Let’s talk about how you got to the fork in the road. You’re in and around the highest-growth VC Silicon Valley. You’re in and around private equity, founding these companies, and tons of money. You eventually got to a point where you were like, “This is not the right strategy.” We could walk through that slowly, but give us the maybe double speed version of how you got there.
The Shift In Silicon Valley: From Impact To Wealth Generation
It’s not that it’s not the right strategy. It’s not the strategy that every company should be pursuing. This narrow definition of business success is that if you’re a great entrepreneur and you’re ambitious, you have to first raise Angel money. People who have access to VC raise VC, and then raise a lot more VC. Every time you raise more VC at a higher valuation, that’s a recognition of success and validation to the point where either you fail or you sell for a high value. Occasionally, you get public. That happens a lot less often now.
I was starting to struggle with that because there are a lot of downsides to that definition, particularly if you’re trying to go fast. You’re growing at 100% a year. You’re putting tremendous pressure on yourself and your team. It is all the things that you and I talked about. People don’t internalize that 100% a year means that you double your staff every year, typically, in any kind of technology company. It is roughly double, from 100 to 200, 200 to 400, or 400 to 800. That is a lot of disruption to the culture, training, development, coordination, communications, and all of those things, but you do it because you’re going after that big brass ring.
Where I had the switch was when I started feeling a different Silicon Valley post the Great Recession. The dot-com crash happened, and I thought, for sure, we were going to go back to the original Kleiner playbook. Kleiner funds, when I joined, were about $150 million. The fund that they raised when I was leaving to start Good Technology was $1 billion. Still, that’s five times larger, but the same number of partners and the same pace of two deals per partner per year.
You have to start writing bigger checks. The bigger checks don’t necessarily mean you’re leading to better companies. The model before was smaller checks worked well, building capital efficient, strong foundation companies. What got to me was not that. What got to me was that the Valley attracted a lot of people who wanted to make a lot of money fast. It was no longer getting the same people who were passionate about technology and passionate about making a contribution.
Wealth generation, up until the time of Netscape, was not something that happened in the Valley. It was very rare. A great exit for a VC was that you sold the company for $100 million. I remember at IVP, and I was there for a brief time working with Geoff Yang. They used to put the company name on a conference room if it exited for $100 million. Can you imagine that now, $100 million as an exit value given the fund size?
Everyone would be underwater.
It would be an embarrassment. It was a shift. In talking to people I admired, like Roberta Katz, Burt McMurtry, Dave Strom, and others, they were like, “Something’s changed.” There’s such an orientation around wealth generation with the language we use and the way we talk. Entrepreneurs are coming in, and they’re prepped because they want to raise capital. They’re like, “I’m going to make this thing worth $1 billion.”
Lots of hockey stick charts. Someone sent me a deal last night who’s not in the investment world. His friends sent it to me. They’re raising $2 million on 90, and they’re going to have 100 million customers next year. I didn’t notice any revenue. I was like, “This is a bad deal, to be clear.”
That’s when the shift happened for me. I like to point back to the Hewlett Packard experience. That was a wonderful company in its early days. With the HP way and the set of values it had, it was an incredible company, probably the most admired in the world at its time. Where were the Daves and Bills in 2010? Where are they? Where are the ones that want to build a company that has great people-first policies, does a great job with its technical contribution, serves its customers well, grows fast, but not too fast, and isn’t in a rush to get wealthy? I was struggling to identify them.
I went on this learning journey and posed a question to people in my network, which is, “Who do you know that’s ambitious to grow a meaningful company or a significant company that has a real impact in the world but, for some reason, is not raising venture capital, has no interest in private equity, doesn’t want to go public, and doesn’t want to get sold?” As you can imagine, in Silicon Valley, a lot of people are like, “What are you talking about? You can’t build something.”
Some of these go hand in hand. When you raise a lot of money, you have to be sold or go public. You need to get a return for your investors.
In a short amount of time, too. As I did this, a lot of people had blank stares. Occasionally, there were people who were like, “I had a guy in high school I knew that’s doing this,” or, “I knew a guy in college.” It was always not the person sitting next to him. I started having those conversations. You know some of these people because you spent some time with us. There are guys like Mac Harmon.
I started realizing these guys have great values, and they’re-purpose purpose-driven. They want to build a meaningful company, but, for whatever reason, maybe prior to experience, their networks, or internal judgment, they don’t want the pressures of outside investment. They don’t want to have to build something they love and then sell it probably at the peak of their love affair, which is what happens so often when it’s working. That led to this idea of evergreen companies and these people who want to build meaningful, impactful companies, hopefully, that last well beyond their lifetimes as a private company.
A couple of comments. I love Dave Heinemeier Hansen. I don’t know if you’ve ever had the Basecamp guys come to Tugboat. Have you ever seen the speech he gave at a startup business school making fun of venture companies for making fun of lifestyle businesses?
No, but that sounds like a good one.
It was a phenomenal speech where he was like, “You’re making it sound like everyone wants to run a 7-Eleven when they want a business.” The whole thing, he was like, “You have product and profit. What is the key missing ingredient to get? Price. You need to charge for something. That’s a good thing to do.” He highlighted in this thing, too, that the selection bias of this exported culture of Silicon Valley is real. You hear about the Bezos’s and the LeBron James’, but they’re the 1 out of 1,000 or 1 out of 10,00. LeBron didn’t stay in school, and look what happened. There are 99 other kids who didn’t stay in school, and look what happened. People forget these odds.
It’s because nobody talks about that. Nobody wants to focus on the failures. You’re right. In an average venture capital fund that’s got 50 investments, you would be lucky if 1 is LeBron.
Ironically, you get one LeBron and you trade on that for twenty years with pretty subpar drafting after that.
Frankly, you don’t care about the other 49 in that fund and the next fund. You’re right. People talk about it. If you, as a venture capitalist, have one of those, and you have the good judgment that after it goes public, you distribute the shares and don’t sell your shares, and it’s truly one of the great companies like Google, Amazon, Salesforce, or you name it, you’ll be wealthy beyond measure on one investment An investment could even be done by your partner. You didn’t even do the investment. Your partner did it. You had the judgment not to sell it.
Discovering Evergreen Companies: The Tugboat Institute Gathering
This brings us to your new book, Another Way, which documents this counter-strategy to the Silicon Valley model. As you talk about in the book, the movement started with this gathering in Sun Valley that I’ve been to called the Tugboat Institute. Walk through the first meeting, what you were expecting from it, and what you heard. Why Tugboat?
When I was doing this learning journey, trying to discover the next generation of Dave Packer and Bill Hewlett, the people I met started asking me questions back, which was great. One of the questions they asked frequently was, “Are you talking to other people who are talking the way I am talking? I don’t know anybody like that, or very few.”
I started making one-on-one connections, and then I realized, “This is happening enough that I’m going to be doing a lot of one-on-one conversations or connections. What they probably want to do is talk to each other.” I proposed an idea. I said, “If I held a gathering in Sun Valley, Idaho, would you come? I’ll pay for everything. Get yourself there. I’ll take everything after that. I’d like to talk for a couple of days on what it is like to build a company with this alternative approach this other way.”
I invited 50 people, and 42 showed up. In the mornings, we did TED-style talks, and the afternoons were for outdoor experiences. The evenings were spent celebrating, playing poker, and having fun together. At that first gathering, I saw a level of humility, candor, and honesty that I hadn’t seen in CEO environments at Kleiner, TPG, or even in some of the NBA stuff, so that was pretty special. I thought it was cool that the ideas they were sharing with each other. They were pretty powerful ideas.
That night, the night of the first full day, I couldn’t sleep. I’m like, “This is it. I know what I can do. As the next chapter, it’s not doing more venture capital and trying to be the next nicest venture capitalist getting into the next hot deal. Why don’t I go serve these incredibly underserved evergreen CEOs and leaders and do that?”
The next day, I proposed the idea to the group. I said, “I’ve been thinking about this. I couldn’t sleep. I love the experience we’re having here, but I need to know from you. I’m prepared to burn the boats and go forward in supporting you guys. Do you want the support?” It led to a standing ovation. People were like, “Do this.” I said, “Great. Should we do this in a couple of years?”
They probably felt left out in a lot of EO or YPO places where they were like, “Am I crazy?”
There is that. They’re like, “Am I crazy? I need to be behind other people who are crazy, too.” Nobody said it’s easy to build a company from its own fuel and to build one that you wanted the last time past your lifetime. One thing that’s interesting about this is the dynamic. You don’t only have to build a company, but you have to set the foundation zones for something that is successful after you leave. Nobody talks this way in venture capital and private equity. The timeframes don’t even support it. In this community, you have to do it. Particularly because of estate taxes, you do have to get ahead of this. If you wait too long and you get too big, it almost becomes impossible to stay private.
There’s this values-based consistency that is missing in a lot of these companies. A lot of them are making a lot of money, but they’re making a lot of money because they’re passionate and dedicated about what they do. It’s not the means.
It’s the byproduct. Andy Taylor, who owns and ran Enterprise, grew it from $60 million to $25 billion in revenues over his career. He says, “It’s pretty simple. If you have happy customers and happy employees, the profits will follow and the business will sustain itself.” The corollary to that is, “If you maintain focus and get big, you’ll generate a lot of wealth, and you can do a lot of good things with that wealth, but you don’t build the business with that purpose in mind. The purpose was the contribution you wanted to make in supporting people, having rental cars, and the availability of rental cars with awesome service.”
I’ll play devil’s advocate to hear your answer on a couple of things. I’ve seen the model. The devil’s advocate is not on the model itself, but on how the environment impacts this. There is a lot of positive and negative talk about private equity. You’ve been more negative on the topic. I always say it’s like getting married. You can criticize the institution of marriage, but it probably makes a lot more difference who you marry.
That is part of it.
Your partner is a bigger part of it than if you got married. A lot of these folks are pursuing ESOPs. They’re selling the company to their employees and have a longevity strategy. I love all of that. There are two things that make that increasingly hard. One is the speed of change. I’m not sure how many multigenerational companies are going to exist in a world where the business cycle is scary fast and creative destruction.
If you had an olive grove for years and no one had that olive grove, then you could run the family business. Now, how fast can you do the Internet of things on the olives and grow it in a different environment? That’s the one thing, too. I have a lot of friends who are reaching out to private equity and stuff because their kids don’t want to run the businesses. They don’t have any successors.
Back to that ESOP thing, I have some friends in agencies who want to do ESOP, and they’re like, “People aren’t around long enough in these industries.” I get it’s not right for everyone, but what do you think about some of these trends for people who want a Tugboat business? The market’s going to get harder for a Tugboat business.
That’s fair to raise that. I don’t have a definitive answer for you, except that some of these companies that are in the group that are 100, 150, 200, and 300 years old have been through the Great Depression, civil wars, World War I, World War II, and communism. There’s always something going on. What it comes down to is how they adapt.
One of the seven Ps is Pragmatic innovation. The ones that do this well, it’s wired in the DNA. They’re talking to their customers. They’re leveraging their entire employee base, everything from continuous improvement like Kaizen measures to real invention. They’re underestimated for their ability to innovate. The world’s changing, but they’re changing pretty fast, too.
The one thing that’s pretty amazing is that they are also much more resilient because they don’t carry debt or very modest debt. They’ve got long-term commitments to their employees and long-term commitments to their partners. They’re even-keeled. They don’t have knee-jerk reactions to things. I would argue that they have a competitive advantage because of that. The more things change, the more you’ll have low debt.
Making money never gets old, right?
Yeah. If you have a strong balance sheet, that’s a good thing, too. Give me one second to remember the name of this gentleman from Harvard.
Arthur Brooks?
It’s Josh Baron. Josh Baron articulately talks about the fact that family businesses and, more broadly, evergreen companies will have a higher competitive advantage going forward in a high rate of change environment than other companies. The reason is that ownership is closely aligned with the executive team and the CEO. Decisions can be made extremely rapidly when required and extremely slowly, if that’s necessary, too, versus a public company that’s got a distributed ownership base and has to achieve every quarter or a private equity firm that expects results every month.
Private equity firms work on monthly cycles, not quarterly cycles. The venture capitalists have long time horizons, but if you adopt the model of Get Big Fast, you’re only standing around as long as you can raise capital. If you can’t raise the next round, you’re out of business. The time horizon is your cash balance. That could be 6 months, 12 months, or 18 months, but it’s not 7 or 10 years.
If you have happy customers and happy employees, the profits will follow and the business will sustain itself.
I have two separate questions. Let’s jump back.
Do you want me to hit the kid one real?
I had two other ones, but go ahead. Hit the kid one, and then give me the seven Ps. I realize we didn’t cover that.
Let’s do that, too. On the kid side, I do hear this from time to time. Somebody says, “I built a great company. I don’t think my kids are interested.” Frankly, culturally in the United States, we want to give our kids all the freedom in the world so they don’t even have to come back to the family business or the evergreen business.
Maybe when there aren’t other jobs, they’ll be more interested in the business.
That could be the case. There are other ways you can still own the company without having your kids run the company. You can hire a professional CEO or a professional president. The kids can be board members. There’s a way to be a steward and an owner while not having the family itself run it. You see this often in third, fourth, or fifth generation evergreen companies where family members may have run it for one, two, or three generations, but it’s large and complex. It’s tough to run a business of that scale, so they hire the best professional manager they can. It’s aligned with their value. That’s a way of addressing that.
I have a friend whose family business is $300 million, and no one’s qualified to run the business in the family.
Congratulations. That’s awesome.
Hopefully, once qualified, they will be on the board of directors to make sure that they sustain their values. You had two other questions. Do you want to do the seven Ps?
Yeah.
Seven P’s Of Evergreen Companies: Building For Longevity
The seven Ps are Purpose, Perseverance, People first, Private, Profit, Paced growth, and Pragmatic innovation. You have to think of those as a system because some of those Ps interact with each other. You look at them individually for optimization and maturity, and then also at how they work together as a system. Our belief is that if you do that well, you dramatically increase the probability of being around 100 years from now. Nothing’s ever guaranteed, but you’d dramatically increase the probability of being an enduring 100-year-plus company.
The nature of making a profit is not lost. I like the quote, “Oxygen isn’t the point of life, but without it, there isn’t life.”
Well said.
The other question ties to that profit. I’m curious about your thoughts on this. We have produced an entire generation of business school proteges who were armed with tools all to grow the top line with endless funds. As businesses changed, or suddenly, the money dried up, and it’s all about profit, they assumed that you could flip the switch, and all these people would know how to do that. My theory is that I don’t think a lot of them have the skills and the know-how after ten years of being brought up in a different operating system. I’m curious about your thoughts on that. I don’t think it’s as easy as people think it is to flip the profits with.
It’s incredibly hard if you’ve not had a profit discipline because the discipline you had was raising capital.
Also, acquiring customers.
You don’t have to have a threshold of return on a customer acquisition as long as the next round of investors don’t dig too deep into your financials to realize that you’re upside down or that your long-term customer value is less than your acquisition cost. There are investors out there, because there is so much money out there, who aren’t even looking at these things.
The discipline that was built was to be a very effective salesman to people who provide capital. If you were good at that as a CEO, you could be quite successful for quite some time. Eventually, it does catch up to you. The discipline of understanding profitability and making sure every employee in the company cares about every dollar spent, because the dollar spent wisely or not spent is a dollar of profits, these organizations have never had that. They had massages, dry cleaning, free food, and all that. You’re taking it all away.
If you didn’t want to get the free food, you could get one at your desk. I remember Google bragging about this on a tour. I was like, “What kind of entitlement are you creating that it’s even too much work to go get my yogurt from the thing, so you’ll put a mini fridge at my desk?”
Is it good for your health to never get out of your chair? They should put it in a central location a mile away to force all of them to get up and walk around a little bit.
I see it a lot in marketing teams. They didn’t know how to operate in scarcity. Some of the greatest marketing stories that I’ve heard, like from Honest Tea and Stonyfield Yogurt, were scarcity stories. It’s like, “We had $20,000 left and we had to figure out these Honest Tea video cams in every city and who was going to pay for their tea.” Stonyfield was told it would be $2 million to buy into the Chicago market. They went to the MTA and figured out how to give everyone a Stonyfield yogurt on the train one morning on the L, and got the market share in two weeks.
That’s creativity.
When you have unlimited resources, you don’t have to be creative.
You get a standard playbook. I heard this pitch from a woman who runs a growth private equity firm around consumer products. She was like, “You have to do this.” She was giving this advice to an entrepreneur. I was listening in because this entrepreneur is aspiring to be an evergreen entrepreneur. She outlined a $20 million spend.
For a strong company with a strong balance sheet, going through a difficult time means your competition will weaken faster than you will.
It works because they want to write a $20 million check. It matches the check. The marketing campaign and the check size match each other nicely, but that doesn’t mean the underlying company is developing any discipline about profits and any discipline about discovering and what works. You have to focus if you have a profit discipline.
Money hides product market fit.
You can hide all kinds of stuff with money.
I always think of the example of food delivery. During COVID and all this stuff, I thought these things were great. They were charging 10%. I was using them all the time. They were bleeding cash. Afterwards, to make money and be profitable, they had to charge a 40% override. At that time, I’m telling my kids, “You are not ordering that at a 40% markup. It’s not happening.” It’s not even that the core service itself has value. If you can’t figure out a price that the customer values and that you can make money at, you don’t have a business.
You’re right. You hid that signal for years because you subsidized what you lost. You were being honest with yourself. Your top line was growing like crazy. You’re raising more capital because the top line was growing. People weren’t focused on this profit discipline, assuming cash and capital would be free forever. It’s not.
Do you think people think this is an aberration, and we’re going to go back to the ERP thing? This ERP was the aberration. I don’t think a lot of people are ready for the new reality.
It’s hard to imagine that interest rates are going to go back to zero. Look at our debt as a country. Was it $35 trillion? Anybody who has to service that debt, being the federal government, they’d like the rates to be lower. They’re not going zero.
Trying to induce a recession to make rates lower turned out to be not a great plan.
You’re right. The worry is that there are some smart people out there, and it’s hard to predict the future, if not impossible, who say, “There will be a point in time 4 or 5 years ago where we could have a Great Depression.” Unless something dramatically changes, like Medicaid goes bankrupt, Medicare goes bankrupt, or Social Security goes bankrupt, our interest payments become twice the size of our defense budget. We got this massive deglobalization happening. Interest rates could be 8%, 10%, 12%, or 15%, like in the late ‘70s. We’ve never seen that before. I was a little kid in the ‘70s. I had no awareness. I was outside looking for some silver to buy.
Most of our markets are not set up for anything remotely related to that.
The entire ecosystem built around the capital markets has never experienced that before. There are a lot of smart people who’ve never seen this before. It’s hard because you go back. I’m trying to gather information about what it looked like during the last Great Depression, and there aren’t a lot of good books out there about that or sources of information. There are some interesting stories about how companies survived the Great Depression. I’m guessing that there are some classic lessons in that, maybe nothing that’s surprising, but it’s good to see those reinforced.
Usually, there’s a pretty good track record of companies that endure the next wave or perform during the downturn of the last wave. It’s been a pretty consistent trend. If you can make it work during that time, then you can probably make it work during good times.
That’s exactly right. Wise investors have been investing for a very long time, like Warren Buffett. They know that. They see that. They see that the companies take advantage of those downturns to expand further. For a strong company with a strong balance sheet, going through a difficult time means your competition will weaken faster than you will.
There’s a chance if some of that competition was over-leveraged by the private equity firms that owned it that you may be able to buy that company for pennies on the dollar and dramatically increase your footprint if, culturally, you can accept the culture of that company that has been under that leadership of private equity. It’ll be a very different culture, but there could be some massively positive opportunities. That was one of the surprising things Jack Stack told me. You know Jack with The Great Game of Business. He said, “We see downturns as opportunities. Venture capitalists like you, Dave, try to get out before those things happen. We look forward to those things happening.”
What’s amazing to me is that if you look at fund vintage, even private equity ventures, the best performance by far is during down markets. The funds raised at the top of the markets and deployed below average performance.
You’re right. The ones that are deploying in down markets, the entrepreneur is starting in down markets. You’re right. There’s a certain discipline and courage about starting a company when everybody thinks the world’s coming to an end.
The venture guys turned off the spigot over the last few years. Prices are down 80%. It’s tripping to invest at the top and not invest in these times when all the data would say you get the best returns.
They’re not dumb. There could be some dynamics around capital calls, too. They call it capital periodically. The limited partners, many of whom are way overexposed in private equity and venture capital, given that the public markets have gone down. There’s been very little money coming back both from venture capital and private equity. There are all these rules of thumb, which are that whatever amount you’ve given me is the amount I’m going to dedicate to your next fund. What if you haven’t given anything for three years?
I have a couple of those coming back for the next fund. I’m like, “No distributions. You’re planning on recycling it.
It’s like, “You got my check. It’s in your last fund.”
The folks who are able to raise a successful fund have good performance from at least the folks two funds ago. They’re getting checks from that fund and feel confident in it.
That’s exactly right. There is a dynamic in these markets where entrepreneurs are trying to reduce risk. They will go back and try to raise money from the top venture capital firms because that is validation when they’re on the right track. It’s also a risk-reducing thing for them. LPs are not dumb. They know that Sequoia is still going to have plenty of itching deal flow, as well as Excel, Greylock, and Andreessen. They’ll be fine. In fact, they may even get much more on a percentage basis of total capital raised during these times.
It’s going to be hard for the people who are either emerging managers who don’t yet have a track record, or they had a first fund that’s slowly developing. That happens. It’s going to take some brave LPs to see people clearly for what they think their potential is. That’s hard work. It’s much easier to put money in something that’s guaranteed.
You mentioned Warren Buffett. I know Buffett and the late Charlie Munger were big influences on your Evergreen approach. Talk about why they made an impact. Did you ever get to meet either of them or talk about it, or are you emulating long-distance mentors?
If you are going to be a great evergreen company when innovation happens, you have to get in the game. You got to experiment. You got to try things.
They’re in the long-distance mentor category. I’ve never had a chance to meet either one of them. I’ve hoped, and I’ve gone to annual meetings. You see them across the room.
You made the pilgrimage.
I’ve done the pilgrimage. I’ve done that half a dozen times. I’ve enjoyed it. It was a guy named Ho Nam who turned me onto them when I was at Kleiner Perkins. In the height of all the dot-com excitement, these long hours, Amazon, Google, and all this excitement, he’s like, “There’s an investor out of Omaha that’s got good values and this incredible track record. There’s probably something to be learned from him.” I was like, “What are you talking about?”
He piqued my interest, and I bought some B shares. It was nothing exciting compared to the stuff I was holding in the tech domain. Through that, I started reading the annual reports. The way they were written and the level of clarity of his thinking, I was drawn into it. I was not formally trained as an investor. I was thrown into the deep part of the pool with Kleiner Perkins. We were moving so fast from the day I started. I didn’t have time to reflect, read investing books, and all this stuff. I started picking up from them.
It was the See’s Candies story that blew me away. That’s when they shifted their model. Warren was trying to find cheap companies at a cheap price and, hopefully, buy them, get out of them, and earn 2 or 3 times as much money on that. I call these cigar butts. When the See’s opportunity came and was presented to them when the See family was selling it, they wanted $30 million for the company. That was about its revenue level.
Warren wanted to pay $20 million because he wanted a deal, and the See’s family wasn’t going to take it. It was Charlie who said, “Warren, this is a good business. Wouldn’t we rather get a good business at a fair price than a fair business at a good price?” That shifted Warren’s thinking. He ended up paying $25 million for it and was able to acquire the entire thing.
I don’t know the exact numbers, but See’s has generated over $200 billion of excess cash that’s been returned to Warren for him to deploy in other investments. In itself, See’s has grown in a very paced growth way from its own profitability that required no additional capital from Warren. It does hundreds of millions in revenue. Maybe it’s $500 million in revenue. See’s, in itself, is a very evergreen company within the umbrella of the holding company.
What I loved was the fact that Warren was dynamic enough to shift the way he thinks. He shifted towards quality at a fair price. I love that. Many of his lessons are classic. He gives his CEOs a lot of rope to run firms as they wish. When he buys a company from a family, he generally protects the family brand name and guarantees them that he will not sell it. If it’s doing horribly, he will. If the company’s doing okay, barely earning a return on investment, he’ll still hold that company because that’s his commitment to the family. He wants to maintain that commitment. He is an incredible human being with good values.
In a services business, I used to always say 30% felt like the wheels were coming off. Is there a rate that you feel is the self-sustaining line versus non non-self-sustaining line?
It depends on the industry. It depends on how much cash you generate. You can do a formula that’s called the self-funded growth rate. There’s a good Harvard Business School press article about this. Based on your cash cycle, you can figure out what rate you can grow without requiring any outside capital. No debt, no equity. It’s good to know that.
Also, in doing the math, you see where the levers are. They’ll let you generate more cash because if you generate more cash, you can reinvest for higher growth rates. That’s formulaic. I love this about evergreen companies. Wegmans is a great example. Wegmans started opening two stores per year decades ago. They still open two stores per year, at least the last time I talked with Colleen about it.
The 7-mile march or the 20-mile march.
That’s their pace. When I talked to the guys back at IBO years ago, they had found, and maybe this is similar to you, that if they grew at 8%, it generated enough opportunity for high-quality people and ambitious people.
That’s what happens when you don’t grow.
Not so fast that it diluted the culture or led to poor onboarding. They said, “We could do ten. We can do eight. It’s not 20 or 25 to bring on and attract and develop the quality of the people we want to work with.” I hear this from different people. There are these bounded rates. Some are based on employee counts. Some are based on the number of locations. Some are based on economic profit. They have different measures of pacing, but the key thing is that they pace. They pace consciously not to run out of cash, not to outstrip their culture, and not to overwhelm their management team’s capabilities.
This is a nuanced one. I heard this from one company. I liked it. He said, “We can’t pace because that’s not how our industry works. We get very large contracts. What we do is we stair-step grow. When we have a big stair step, we hold for a year or two. We make sure that it’s working, the culture’s settling, the systems have been repaired, and training is being done appropriately. It’s like a stair-step. That’s the way we do it. If we don’t take the pause between the steps, that’s when we break.” That was super cool, too.
AI & The Future Of Evergreen Businesses: Adapting To Change
This is relevant. I’m curious about your take. I am not a maximalist, nor am I a minimalist, but AI is changing businesses faster than anything I’ve seen in my career. It seems about speed. The latest trend is that you get a ton of funding, build a company with AI, and scale as fast as possible. That’s the maximalist view. There’s also the minimalist view where people are like, “I’ve never tried ChatGPT before.” I’m like, “I don’t know how you get through the day. It’s improved my productivity by 50%. People I know who are using it are inherently more productive.” What does an AI evergreen company look like?
It’s interesting because AI is so new. It’s a couple of years old. I don’t believe we’ll see an evergreen company that’s an LLM because of the capital requirements, the data centers, and everything. It’s too much. That’s the playground of Google and Amazon. I guarantee you that those firms would love to have evergreen companies that are leveraging the LLM in the markets that they compete in and doing it very well.
One of the things I’m doing is I’m pulling all of our CEOs every six months. We do a general economic survey, including what’s the latest in AI. There’s been tremendous progress in this move on AI. In general, most people are sampling. There are very few people who don’t know ChatGPT. They may be using it to write better emails and have better marketing communications. They aren’t putting it into the core systems.
We have others on the spectrum that are replacing their call centers. It’s all going to AI. It’s faster and more accurate. We have people doing configuration through AI. They were doing phone calls back and forth, customization, and configuration. That’s completely done by AI agents now. It’s awesome. Back to pragmatic innovation, if you are going to be a great evergreen company when these things happen, you have to get in the game. You’ve got to experiment. You’ve got to try things.
This is where you get the kid excited or the grandkid excited.
We’re relevant. Is that a good thing or a bad thing? I’m excited about what these companies are going to do related to AI. Depending on the industry, there’ll be some low-hanging fruit for everybody around individual executive productivity. There are going to be some cool things done with the full automation using agents, maybe agent assist. Your team is getting much smarter because the agent is supporting them. There’s going to be good stuff coming up.
It’s going to be a lot more disruption than a lot of people are ready for.
You don’t want to be the guy in 2002 who doesn’t have an eCommerce site.
Remember, the CEOs in ‘99 were bragging, “I don’t know how to use email. That’s for my EA.” None of them had jobs in the 2000s. That was a disqualifying statement.
That’s exactly right. You will never be hired again.
Investing Lessons Learned: Google, Amazon & Warren Buffett
Last question for you. This is multi-variant. It could be singular, repeated, professional, or personal. What’s a mistake you’ve made that you’ve learned the most from?
It’s probably personal. I don’t think I’ve shared this one before, so I appreciate you asking. It had to do with investing. I was very fortunate to be a recipient of early-stage stock in both Google and Amazon. That was when they went public. For Amazon, it was ‘97. For Google, it was 2003. I held on to chunks of that for some time, but I also sold it down because I had very few financial resources.
There were parts of my family I wanted to support outside of my core family. I thought these valuations were insane. Google’s worth $20 billion. Who could imagine? Is it 100X that now? I missed an opportunity to do better. On the other hand, I did fine. My kids are like, “Dad, you sold way too early.” I said, “That’s a lesson for you.”
Too early is still better than too late in some cases.
That’s true, or not being in the game at all.
I know a lot of people who want to sell their business. If you’re trying to sell your business around markets, too late is usually zero, and too early might be a little bit off the peak.
That ties back to Warren Buffett and the lesson I had. I heard him loud and clear. He said, “When you are lucky enough to own a piece of a great company led by a talented CEO, you don’t ever sell it.” If I’d heard of Warren Buffett in 1995, I might have done better.
Where can people learn about you, Tugboat, and the new book?
Probably the best way is our website, TugboatInstitute.com. You can find links there on where to purchase the book. You can find some additional products we offer for entrepreneurs and leaders about being a great evergreen company. We have a thing called the EJ+. We have a thing called the Evergreen Growth Navigator. That would probably be the best place. I’m also on LinkedIn. I enjoy getting more involved on LinkedIn.
Thanks for joining and sharing your story with us. I recommend people check out Another Way, learn about the tugboat methodology. It can help any business. Thanks for coming to join us.
Thanks. I appreciate the time.
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That was my conversation with Dave Whorton. Maybe my favorite takeaway was that he was probably almost the only person to ever turn down a job offer from John Doerr twice, and then maybe he got a third one. I’m hoping that when the dust settles from some of the rockiness we’re in, we’ll see more sustainable businesses that adopt these evergreen principles going forward and get the growth that their people want, but we see the people growing with the business. Thank you again for tuning in to the show. If you enjoyed this episode, think about leaving us a review or subscribing so that you get the newest episodes downloaded directly to your feed. Until next time, keep elevating.
