Dave Whorton is an experienced tech investor and funded founder who spent the first 20 years of his career at the highest levels of Silicon Valley venture capital and tech-boom startups. He started his career at Hewlett Packard and experienced the famous “HP Way” culture firsthand before he attended the Stanford Graduate School of Business. He joined the preeminent tech venture capital firm Kleiner Perkins and worked directly with John Doerr for several years before launching Good Technology and raising $63 million venture funding in the early 2000s. He brought in a CEO to run the company before it was sold to Motorola.
Dave joined the large tech private equity firm TPG and directed many investments there before creating his own small venture capital firm and making several investments in 2006. A few years later, Dave started to become disenchanted with the “Get Big Fast” of the venture capital approach. He talked to several founders who were growing businesses without any outside funding and were building better businesses with better cultures and better outcomes with no intent to ever sell their companies.
In 2013, Dave started the Tugboat Institute, a membership organization that brings together Evergreen® CEOs across industry sectors to share best practices and unique insights, and to develop trusted bonds for their respective Evergreen paths. Evergreen leaders are seasoned entrepreneurs, CEOs, and presidents with the vision, creativity, resourcefulness, patience, and grit to build and scale a business that will stay private indefinitely.
Best quote from Dave:
“These ‘evergreen CEOs’ are not trying to be cool kids. Their internal compasses are so strong that they’re not looking for external validation. They don’t need a venture capital firm to tell them they’re good. And the valuation of a funding round is irrelevant to them because they’re so focused on both their customers, who they’re trying to serve, and the employee experience.
If you do those two things well, you’re going to build a wonderful company. Profits will follow and you have the patience to allow yourself to grow over time at 10%, 15%, 20% a year, year after year for 30 years. So you’re going to be building something really meaningful and you won’t be subservient to anybody else. You’ll only be subservient to your belief and what’s important to delivering those values into your community.
It feels really good to be profitable and growing under your own fuel with no outside investors. It is a very liberating feel. You have nobody you are accountable to except for your employees and your customers. In most venture-backed companies you’re accountable to one thing and that’s the board of directors—your investors. And if they’re happy, you continue to keep your job. If they’re unhappy, you’re gone.
Edited transcript of Practical Founders Podcast interview with Dave Whorton, CEO of Tugboat Institute
Greg Head: And we’re live with Dave Wharton, the founder and CEO of The Tugboat Group, the Tugboat Institute, and a longtime software founder, funder, and now really focusing on helping the best entrepreneurs in the world create long-term, successful companies staying off the big funding drug. So Dave, it’s an honor to have you on the Practical Founders Podcast. Welcome.
Dave Whorton: Thank you, Greg. It’s an honor to be here.
Greg: I’ve been following you and you’ve been commenting a little bit on the LinkedIn posts. We’re kind of leading parallel paths but in the software and tech industry. But you’ve done it at a whole ‘nother level. In Silicon Valley, worked for one of the premiere venture capital firms in Silicon Valley during the dotcom era. A graduate of the Stanford Business School, was the CEO in the early 2000s of a massively funded software company, and now you’ve got a new thing, the Tugboat Institute, and you’re helping a different breed.
Greg: Dave, why don’t we just start with what is the Tugboat Institute these days? It’s kind of a movement. What’s the Tugboat Institute? And we’ll dig in about evergreen businesses.
Dave: Terrific. Yeah, thank you, Greg. So the Tugboat Institute is a membership-based organization. We have about 240 evergreen CEOs that are members of the group. And our goal is to bring these people we have tremendous respect for together a few times a year, several times virtually, to share ideas and best practices about how to build wonderful evergreen companies. We span 25 different industries from sizes $5 million in revenues up to $25 billion in revenues. As far as geographies, 40 of the 50 states, Mexico, Canada, and England. Before COVID, we had Estonia, Singapore, China, and Spain, but we have to kind of rebuild some of those ties overseas. But our focus is really North America.
Dave: And the idea is that to build a company that’s going to last another 100 years, at least another 100 years, requires thinking differently than if you were to be thinking about something that was going to need an exit in three, five, seven, ten years. And our goal is to really make sure that the CEO of this organization are exposed to every possible idea that would increase their probability of success of building that kind of 100-year company.
Greg: Well, a 100-year company. We don’t hear that in tech very often, Dave. So you’re not just an enthusiast or a therapist for these more sustainably, you know, long-term thinking, awesome companies. You came right out of the middle of one of the hottest times in Silicon Valley tech and did it yourself.
Greg: I laugh; I tell people I’m like a medical doctor that spent 30 years inside the health industrial complex and overprescribe drugs and now I’ve discovered holistic medicine and I keep people off the drugs by saying, “Eat better and exercise and take care of your health.” You’ve kind of got a little similar thing, but you had to go through your own experience. You didn’t start like that. Dave, why don’t you take us through a little bit of your background, how you got to this, the concept, and the movement of evergreen companies?
Dave: Yeah, well, thank you. I started working at Hewlett-Packard when I was 16 years old. The great Hewlett-Packard, Dave Packard and Bill Hewlett’s firm. And it was a way I was going to put myself through college. So, at 16 I applied thinking I’d get a janitorial job or some kind of remedial job. And they said, “Well, by the way, we have a thing called the Seed program. It’s for students interested in engineering programs, and I think given your grades and stuff, you might want to check it out.” So I did, and I applied and I was accepted.
Dave: I spent the next four summers doing manufacturing work at three divisions of Hewlett-Packard in Santa Rosa, California. And it was a wonderful experience. One, it paid well. Two, I was mentored by an engineer and I got to know the general manager of the firm. And the reason why this story is so important is that HP, still at the manufacturing and employee level, was the very special HP that we thought about in the ’50s, ’60s, ’70s, and ’80s.
Greg: Very special Silicon Valley culture.
Dave: Yeah. The HP way was extremely important to them. And the HP way is really people first. It’s a very people-first centric view of the world, a very empowering view of the world. So, that was kind of planted as a seed to me, like, “Oh, that’s just how companies work, right? They all treat people well and you have these really interesting work environments.”
Dave: So then, moving through my career, I ended up coming out of Cal Berkeley. I was a mechanical engineer and started working at Bain & Company. And that gave me my first exposure to what bad manufacturing companies look like. And they were horrible in the way they treated people, and their financial performance. And if a manufacturing company at that time was hiring Bain, they were probably in pretty big trouble because Bain didn’t have a real core practice around manufacturing.
Dave: So I started seeing a different set of experiences. I ended up leaving Bain. A lot of my colleagues went to business school. I didn’t feel ready for business school yet. It didn’t feel like the next chapter. And I had a friend’s father who had been making industrial CO2 lasers. So I ended up going up to Santa Rosa, back where I had gone to high school and joined that team as general manager. And for the next three years, brought a technology that was not fully functional into the market and got that to a bootstrapped, profitable company.
Dave: I guess that’s not completely fair. There were a million dollars raised from a distribution partner in Europe, but he kind of acted like friends and family. And that company, my partner, decided to sell and had a nice outcome there. And then that led me to going to Silicon…
Greg: So that was an actual business. This wasn’t, you know, some PowerPoints and some demos and some super adrenaline funding, yeah.
Dave: Yeah. I’d been working on the laser for a number of years. The reason why this piqued my interest is one of the summers I worked on installing CO2 lasers at HP on the manufacturing lines. So I was pretty familiar with the technology and kind of the state of the art. This guy’s technology blew my mind. Truly disruptive technology. And the folks at Honda Motors had gotten word of this laser, and that actually was a validation point for me. And General Motors both came to Santa Rosa saying, “Look, if you can get this laser working, we’ll buy hundreds of these lasers. This is just incredible technology.”
Dave: So I was kind of part of putting that team together, getting the lasers working. We actually convinced Honda to start making the lasers for us. They’d never done that in their history, so I spent a lot of time with the President of Honda. I’m in my mid-20s, so this is a pretty exciting time to be flying to Europe, selling lasers, going to Japan, and negotiating with Honda to make these lasers. And then again, it’s a longer story, but my partner, with all respect to him, decided to sell the company and he had a nice outcome there. And so I went to Stanford Business School. And it was in ’95, and a very important thing happened in ’95. You probably remember, Netscape went public.
Greg: Yes, I was in Silicon Valley then.
Dave: That was a big deal. And that was the first time a company with no profitability went public. It only been funded by, I think Kleiner. It had been 18 months after funding by Kleiner, $4 or $5 million dollars, and the company went out and had an unbelievable valuation. And Kleiner’s interest in that ended up being worth about $500 million dollars, which is probably at the time one of the greatest venture returns ever in history.
Greg: So that was the time of the opening of the Internet. And Netscape was the first visual browser. Marc Andreessen and Jim Barksdale came out and we had kind of reality-type technology companies running on PCs. Generally pretty practical, some profitable and so forth. But all of a sudden the internet was introduced and it was a massive explosion in Silicon Valley. Everybody could see it and everybody changed their thinking right away. It was pretty amazing. Mid-90s.
Dave: It was amazing. And so, I’d just started Stanford Business School and I got a call from John Doerr. And John Doerr was the lead partner at Kleiner Perkins that led the investment in Netscape. In all honesty, I thought it was a prank being played on me by one of my GSB classmates. And so I got the call, spoke to John’s assistant, scheduled the time to come and meet with John. So I called back Kleiner Perkins main line and asked for John’s assistant and just said, “I just want to confirm. I’m coming. Dave Wharton, to meet with John Doerr next week.” And she said, “Yes, Dave, we did confirm that, I think about 10 minutes ago, right?” And I said, “Yeah, okay.” So at that point, I knew it was the real deal.
Dave: So I met with John, and it was supposed to be a very brief conversation, I think 30 minutes. And we spent about an hour and a half together. And he was just fascinated with my observations about HP and having helped build this laser company. And so, he was pretty intrigued with the Bain background, and he has a lot of respect for engineers, too. So I think it kind of fit his profile.
Greg: He was one of the kings of venture capital of the ’90s.
Dave: I would argue he was becoming the king for about a four year period. So, John invited me to come work for him the following summer, but I was really intrigued by this idea of being an entrepreneur again. I liked the laser experience; I kind of felt like it was cut short by my partner selling it. So I told John, “I actually came to Stanford Business School to learn how to be a better entrepreneur and get a little room and space to think about some ideas about where I might start a company.” And so, John had me meet the other partners and then eventually he said, “Sure. Why don’t you do what you need to do?” And my goal was either to work at Netscape or Cisco. John pushed me towards Netscape, so I did that. I ended up joining Netscape and worked there that summer.
Dave: I was very fortunate because I was in a team where I got to work on the internationalization of the browser in Eastern Europe with a woman named Roberta Katz, who became a valuable mentor, even today. And then secondly, they asked me to spend some time working on the commerce server. So everybody was focused on the pub server, the publishing server. That’s where all the action was. But they had also designed a commerce service. They didn’t work particularly well. So I got a chance to kind of look at this thing. And I didn’t do anything, effectively, over the summer with it, but it gave me an insight into e-commerce. And I suddenly realized, “Oh my God, this is going to be huge.”
Greg: This is the future.
Dave: This is really going to be big.
Greg: You and Jeff Bezos, that year. Yeah.
Dave: And so I realized, “You know what? I need to figure out if there’s an e-commerce opportunity that I could start coming out of business school.” So I started putting together a matrix of all the different sectors and different criteria which I thought would actually make it prone to e-commerce, successful in e-commerce. And I had a supply chain background, so I do kind of bring that part into it. I understood a lot about shipping, and logistics; I brought that part into it. And I just kind of force-ranked it.
Dave: It was my second year of business school and John Doerr came to present again. He and I lost track of each other because he had changed assistants and the new assistant didn’t know who I was. So John called me out in the crowd and said, “Dave, we need to talk.” And so, John and I talked afterwards. He was like, “What are you doing?” I said, “Well, I’m going to start an e-commerce company. He goes, “Well, we need to talk.”
Dave: So, I went back up to Kleiner, and I kind of pitched him on my idea to start an online drugstore. And I thought this idea of replenishing things you’d buy in the drugstore on a monthly basis, weekly basis, whatever cycle you wanted, getting your over-the-counter drugs, getting gear… A huge industry, who likes to go to the drugstore is kind of how I looked at it.
Greg: Non-perishable stuff, you could ship it in a box, the whole thing. Yeah.
Dave: It’s not fashionable, so the inventory always had value, that kind of thing. So John thought that was pretty interesting. He asked why I came up with the idea, so I pulled out my chart and showed it to him. And he just grabbed it and said, “I need a copy of this.” And I said, “Sure, you can have a copy of it.” And then that led to John saying, “Look, basically you need come work at Kleiner Perkins. Put this drugstore idea on the side.”
Greg: A venture firm. You were a VC, yeah.
Dave: Yeah. “Come to Kleiner Perkins, be a VC. You’re going to be my right-hand guy. I’m going to basically bolt you to my hip, and for the next two years, you’re going to do, basically, everything I need you to do to make this firm more successful.”
Greg: Look at new deals, dive into existing deals, the whole thing.
Dave: Exactly. Help other partners, work on strategy, whatever it may be. And that didn’t quite get me. And John’s an incredible negotiator. I mean, he’s one of the most talented I’ve ever been exposed to in my life. He said, “Look, I think you want to do this drugstore thing, so we’ll do that. We’ll do that too. I will let you incubate drugstore.com in Kleiner Perkins. You can work one day a week on it. You’re going to have to find somebody who’s going to be kind of the lead founder, and it can’t be you. You came up with the idea; that’s fair.”
Dave: So I found a guy named Jed Smith and brought him in and he became kind of the founder of the firm, later replaced by Peter Neupert from Microsoft a year and a half later. But John let us get that off the ground, plus I worked on the broad-based e-commerce strategy for it. And I was right in the center of it. And the goal… And Vinod Khosla really laid this goal out. He said, “We should have every partner in this firm do at least one e-commerce investment, but we should just make it a basket of e-commerce firms and we should just go for it.” And that’s what the firm did. They went for it. And I was part of that going forward experience.
Greg: There was a lot of go for it in the ramp up. The Internet was early in ’95 and only the pioneers were getting going. But ’98, ’99, of course, 2000, was a little bit like we just experienced. The over the top, you can’t spend enough, you can’t raise enough, everything’s infinite. And you were part of that run up.
Dave: Yeah. We called it “Get Big Fast.” And now they call it “Growth at All Costs.” I actually think “Get Big Fast” was the better way of describing it, which is there will be leaders and the market leaders in these respective segments will be worth tremendously more than number two or number three if they don’t even take the entire market. So our goal should be to fuel these things, put in the most talented leadership teams as fast as possible, get technology into the marketplace as fast as possible and try to win these markets.
Greg: Winner take all.
Dave: Winner take all, an extremely exciting environment. And you think you’re going to bootstrap a drugstore company when we’re raising hundreds of millions of dollars in a drugstore company? Good luck. We’re going to be so big and have so much scale and such important partnerships, you won’t catch us. And there was an argument, and John was, I think, very much right about this. He said, “You know, the Internet is going to change the world. It’s going to be the largest wealth generating thing that’s happened in 100 years. We’ll take advantage of that.” And that’s proven out. Now, in early dotcom crash time, people, I think, were critical of him for that, but now you look back and say, “Gosh, he was right on the money.”
Dave: So was part of that for three years. It was supposed to be two; John asked me to stay for a third year. That was 1999. That was a really interesting opportunity for me too because that led to me basically taking the lead on negotiating the investment with Google. So, Larry and Sergey were very interested in having an investment both by Mike Moritz because of his investment in Yahoo! and John Doerr, because John Doerr. And John was extremely busy at the time, and so Ram Shriram and Andrew Bechtolsheim couldn’t get a hold of him. They were two of the key lead investors, along with Jeff Bezos. So Ram reached out to me and said, “Dave, you’ve got to do something here. John is not getting the message. He’s missing this incredible opportunity.”
Dave: And so I started talking to John about it. And John, of course, was interested because he said, “Search is a big deal.” We did have Excite in the portfolio, so there’s a little bit of can we do one when we have one? So that had to be kind of negotiated with the Excite team and with Vinod. And there are some details around that. I think it was done in a very fair way.
Greg: Well, Dave, I’ve heard the story, maybe you can verify it here. They didn’t really need a ton of money. They wanted the best advice in the world for creating a massive technology company. So, it wasn’t about the money, actually. It was about getting this great help and setting themselves up to build a massive business.
Dave: That’s exactly right. And you know, the $25 million, I think, was backed into because they wanted to make sure that both John and Mike were incentivized to be on the board of directors. Each would have 12.5%, and that’s pretty low for both Mike and John. I mean, it wasn’t driven by needing $25 million, it was just that’s what it was going to take to create the structure to get these two great investors to come into it. You could just see it where it was. And so we got, worst case, it’s 5x, best case, maybe this is huge. We’ll see. That’s kind of how we got into it.
Greg: So even Google wasn’t necessarily obvious. I mean, obviously, they were very smart. This was a big market and so forth.
Dave: Absolutely. Other VCs had passed on it. I think a few others might have had an early look at it. And I don’t know this, I’ve heard this second hand. But no, we did not know how big it was going to be. Even when we went public at $20 billion dollars, which was years later, it was unclear what would be the upside from here. I mean, that’s a high valuation.
Greg: Dave, I was part of this since the early ’90s, late ’80s, and just to imagine, “Oh my gosh, this software company’s worth $50 million,” when we sold it in ’93, and then, “A software company is worth hundreds of millions,” when I helped start a company and it went public. Like, a billion dollars, when Microsoft offered Intuit, Scott Cook a billion dollars for Intuit, we all went, “Oh my gosh. A billion dollars.” We never heard of that. And then Netscape came along and then Google came along. You know, $20 billion dollars. We climbed this wall of, “Gosh, how big could this get?” And of course, the market exploded. Now there are billions of people buying software and using software, and it wasn’t so in the early days.
Dave: It’s not a U.S. market, it’s a global market when you talk about the Internet. And that just changed all the math.
Greg: Yeah, it’s probably 20 times larger now than what it was 20 years ago. Something like that.
Dave: And we know that none of us were that smart about it, because in the dotcom crash Amazon dropped down to about $4 a share. So if all of us had the vision and foresight of seeing how big these companies would be, we should have all bought tons of Amazon stock at four bucks a share.
Dave: Yeah, Apple, Google, all of them. And you could have bought them over a five or six-year period and done really, really well. So, I think while people, when they look back think they had this really figured out, I think very few people really understood the scale of this, and maybe even felt foolish talking about the scale of it.
Dave: So anyway, I was at Kleiner for three years and then I was really itching to get back into the entrepreneurial domain. John thought it was a great idea. He said, “Look, whether you end up becoming a long-term entrepreneur or you go back into venture capital, it’s a great experience to really understand what it takes to be on the other side of Get Big Fast.” So we went after another “Get Big Fast” category and it was to partner with Handspring to put a wireless communicator in the back of their Handspring visor, and that would be a way to do messaging, email messaging, update contacts and whatnot. As we got into it, we realized…
Greg: Mobile messaging for a handheld. And before iPhones and smartphones and the rest, this was the experiment. BlackBerry too, it was before BlackBerry, the device that was the email calendar device, right?
Dave: Yeah, BlackBerry at that point was just a pager. And they actually did kind of a hack where you could put some software on your local computer to redirect messages. And the IT departments hated this because it was going on a non-secure network out into a paging device. And so, we actually built very high-quality software to do that in a secure way between devices and kind of the server sitting in your IT environment. And we raised quite a bit of money, ended up selling it to Motorola.
Greg: What’s quite a bit? So, you were a VC and you’re helping these “Get Big Fast” companies and investing hundreds of millions of dollars or helping Kleiner do that. Then you became an entrepreneur and you took the big funding drugs. This is what you do. This is how you do it. And how much did you raise as the founder and CEO of Good Technology?
Dave: So, I raised from Benchmark and Kleiner. John thought it’d be fun to partner with Bruce Dunlevie, who was also very deeply involved with Handspring on the project. And so, they each came in with, I think, $3 million dollars; they bought a majority of the company. And then I raised $60 million dollars that fall. We did a pivot. The longer story was we had a music player, very, very small. Looks like the Nano, if you remember the Nano, it was about that size. That, originally, we plugged into the back of the Handspring visor.
Greg: So this is hardware, Dave? Some hardware? Holy cow.
Dave: Yeah. There’s a long story about how we did that too.
Greg: I’m sorry to hear that. Yeah, right.
Dave: Yeah. And so then, I’d always had in the back of my mind that I was much more interested in the messaging space. So I kind of quietly skunkworksed a team. Rick Osterloh led the team. Rick is actually the head of the Google Phone team now, so he’s really had a very successful career. And Rick helped me kind of figure out what the opportunity was there as far as the market opportunity and then kind of roughly what we thought the product needed to be. I went out with a bunch of slides, 19, I think, and raised $60 million dollars saying, “Yeah, we did this music player. We can do hardware, we can do software. We’ve proven it. We’ve done it in six months. Now we’re going to apply it to this area.” And people, they bought into it.
Dave: And then we raised another $100 million dollars. So, I can’t remember the total raise because I ended up leaving the firm in 2003, but I think it was about $170 or $180 million. And then we sold it for $550 million to Motorola just shortly before the iPhone was released. And arguably, if we had actually survived long enough for that, that could have been a huge accelerator in the business. But you know, the board’s judgment at the time was it was a fair offer given what we knew and they took it.
Greg: And how was your experience as the CEO of a big funded Silicon Valley, you know, right in the center of it, in the heyday and then the post dotcom low day, I guess we would say, the low days, that was a little adventurous. Was that just brutal, or exciting, or?
Dave: Brutal. Exciting. Terrifying. Exhilarating.
Greg: I’ve been there.
Dave: The ups and the downs were unbelievable. I mean, when I got the…
Greg: Super ups. Super downs. People have no idea.
Dave: Yeah, and super downs, too. I mean, you are riding the bow of the boat when you’re “Get Big Fast”. Highly-funded, high expectations. And John said to me at one point, “I would hope this firm’s worth $20 billion dollars.” I mean, $20 billion dollars in 2000? There’s nothing like that out there. So the expectations were extremely high on the contributions I was supposed to be making.
Greg: And was it $20 billion or bust?
Dave: John’s imagination was that if we really do this well… And he was right again. It’s a huge market opportunity.
Greg: Really big.
Dave: Yeah. So, I was CEO for the first year and then I brought in a guy named Danny Shader to run the company because the complexity of the business had gone through the roof. There was a software component on the handheld. There was a hardware component with the handheld. There was software that had to sit on the exchange server. There was software that had to sit in the network of the carriers because this ran over the carrier data networks.
Greg: Right, routing emails and messages. Yeah.
Dave: Yeah. So hardware is very hard. Software on handhelds, like this is core software, like how you operate it. This is pre-Android existing. That’s very hard.
Greg: In the early days of handhelds, before we said smartphones have 100 times more power than your PC. This was very raw and early and pioneering.
Dave: And that’s kind of what led to the acquisition by Motorola, which is, “We’ll put you back in the hardware business. With your software, our hardware, we’ll do some pretty exciting stuff.” Which, frankly didn’t happen until Motorola eventually ended up in Google with my core team. And that team has just done a fantastic job, I believe, with the Google Phone.
Greg: What is somebody who’s done both sides of the table, you’re a VC and then you were a CEO, founder, what do you do after that? Do you go back to the funding side and stop the brutal adventure of being in the boat, rowing the boat?
Dave: Yeah, it kind of took it out of me, to be honest with you. And I didn’t have the energy to do it again. In fact, I talked with John Doerr and he said, “Dave, let’s do another startup.” At that point, I had a four year old and a two year old who I’d hardly seen for most of their lives because I was always working and always traveling. And I couldn’t do it. I couldn’t do it to my wife, I couldn’t do it to my kids. And so, I was intrigued by going back into venture capital, but it was late 2003 or mid 2003, and frankly, none of the firms were hiring. And a lot of the firms I was talking to, you’d be very surprised to hear this, they were talking about shutting down.
Greg: It was the apocalypse after the tech bust of 2000, 2001, and then the economic recession after 9/11 happened.
Greg: And it all kind of came tumbling down.
Dave: I think some people were pretty candid with me. They’re like, “Look, we made a lot of money before the dotcom crash. We’re probably not going to make that kind of money for another 10 or 20 years.” Maybe it’s time to take my chips off the table and go enjoy a new chapter in life. You know, go teach at Stanford or Harvard. Maybe go do other things. I was talking to these VCs, I’m like, “So you guys really aren’t leaning into this slowdown?” Because I saw it as being an opportunity. I’m like, “Wow, this could be… I mean, I just survived a really difficult situation. I bet there’s some entrepreneurs out there that could really use some support, emotional and financial support.”
Dave: So the only group I could find that was really interested in being aggressive at that time was TPG, the private equity firm. So, I could then see the inside of one of the top three global private equity firms. So it was a really unique opportunity to continue doing venture capital but also be exposed to this. And so, Tim’s like, “Why not?”
Dave: And so I dove in, and I had some really good luck very early. And the luck was I reconnected with Dave Strohm over Greylock and he introduced me to a guy named Lars Dalgaard. Remember Lars at SuccessFactors, one of the early, very successful SaaS companies. And Lars had about a million in revenue, largely selling it off a disk. It was a company that Dave had constituted out of three failed companies in 2000 to go after the HR space using a SaaS model versus either, literally a disk drive base model, or an Ethernet-based model of software. And very early in that kind of design as a SaaS company, very, very visionary by Dave Strohm, and Lars bought into it immediately. But they couldn’t get funded. They talked to 32 venture capital firms and nobody would give them any money.
Dave: I looked at it; I had a lot of faith in Dave. I knew the HR space really well. John Doerr had pounded in my head the importance about OKRs. And he wrote that book recently, right? Well, John was talking about that going back to the days when he was with Andy Grove at Intel. So I understood the importance of OKRs. I thought, “Wow, that’d be a great thing to have in a SaaS platform.” Available to employees globally, cascading objectives down, doing performance reviews. I got it.
Dave: And so, I was very happy to lead an investment in the firm. The struggle was, the partners at TPG really didn’t understand SaaS and they really didn’t have a mindset to take the level of risk required to back a firm like that. So, while I saw like, “Wow, green light on CEO. Green light on market. Green light on business model.” They saw, “Red light, red light, red light.” So it was a very difficult process to convince them.
Greg: A lot of red light until maybe 2010 or 2011 with venture capitalists in SaaS. Why are you spending all this money and you’re only getting this little tiny rental?
Dave: TPG was not unique because 32 other venture firms had passed on it, so we were just the 33rd. But I couldn’t say no to this opportunity. So, while the partnership passed on it, I said, “What do I have to do to prove to you guys that we should do this?” And they gave me kind of some hurdles to hit. I spent the next month hitting those hurdles and then we led the investment.
Dave: And that firm, as you know, it later went public and was acquired by SAG for $3.4 billion dollars. And we invested at a $11 million, pre-money valuation, putting $4 million in. So, we had a good chunk of a very successful firm, and I sat on the board of that company for six, seven years. I kind of saw the maturation of that company, its models, how they do distribution. At the same time, some kind of overall adoption of SaaS more broadly.
Greg: So Dave, you spent the first 20 years of your career right in the middle, the epicenter of the Silicon Valley tech boom and “Get Big Fast.” But you were playing the “Get Big Fast” game the whole way.
Dave: I was.
Greg: You know, it worked at SuccessFactors, it worked at Good Technology, it worked with the investment in Google, it worked at Kleiner Perkins and was working all over the place. Auto Trader, you helped that start and get the other things going. And you knew people who were doing it sideways, Jeff Bezos and the rest here. But now you’re not talking about the great big funding anymore. You’re talking about the alternative path. How did you get to the other side? What was it that… Because it seemed to be working so far, I guess.
Dave: It’s really interesting, Greg. I was having some frustrations with the Valley. I felt like people were coming into the Valley just to make money. When I first got involved… Back to HP, back to being at Netscape, it felt like people were doing it because they loved the technology and they wanted to bring the technology forward. There’s a tremendous amount of pride in that. And the great technology, as we know, is like magic, right? People just… it awes people. And I remember sitting on a plane and seeing people in first class holding my G100 device from Good Technology. I’m like, “Oh my God, that is the coolest thing. Half the people in first class have a G100 in their hand.” You know, that’s really satisfying, but it started to feel like it shifted and it became a lot about the money. And I think the MBAs started pouring in, and I was an MBA…
Greg: Yes, the MBAs did not show up in tech until ’99 and 2000 when the money was shown and then it became first choice.
Dave: Yeah it was too technical, they couldn’t handle it. In fact, you wouldn’t even be respected enough. So, by that kind of 2005 timeframe, 2006, it just started feeling different to me. And there was also kind of an intensity around investments and people had pretty sharp elbows and firms had gotten bigger and they wanted to own all of the deals, they didn’t want to share the deals. And so, the TPG experience ended up being three years and I came to the conclusion that I had a much higher risk comfort than they did.
Dave: The second investment I tried to lead was LinkedIn. I was good friends with Reid Hoffman. We just talked at a very high and soft level about it, but we were kind of hoping to invest $2 million for 20% of the company. And Mayfield was going to come in, Alan Morgan for $2 million also. And Alan and I were hanging out a lot with Reid, and this is even, I think, before he started spending time with Sequoia. Neither Alan and I could convince our respective partners to let us invest in LinkedIn.
Dave: And as you know, that was sold for what, $20 billion plus? And so it was a big miss. And I just felt like there’s probably a better model for them. We decided what it was was to build a growth venture firm led by, at the time, Bill McGlashan. Had my full support and I kind of backed out to start my own firm. I thought, “Look, I’m going to go early stage, pre-product, pre-revenue, small fund.” Now, single GP, I think I was the first one ever to come out as a single GP. And just see if I could kind of bring us back to the way venture was practiced pre “Get Big Fast.”
Greg: So, GP is general partner. You were leading your own firm and you say, “I understand technology, I understand early stage, I understand founders and markets. I’m going to place some earlier bets.”
Dave: Right. That’s exactly right. And I raised that first fund very quickly and started deploying it and then ran into kind of the very troubling time of ’08 and 09. And it was brutal for funding and we kind of ran out of cash on a bunch of the projects. And a couple I put more energy into I hoped would survive. It wasn’t a great experience.
Dave: I raised a second fund in ’08. As things were starting to slow down, we started deploying that one. And it was kind of time to raise my third fund, 2012. And because of some of the dynamics in the industry, some of the competitors… I mean, seed funders were coming in and I was really doing pre-seed, I guess they’d call it today. And they’re doing uncapped notes. Like, uncapped notes, there’s no way to get any kind of reward. If you give them money, let’s say $1 million dollars, a group of people, or $2 million dollars, it ends up converting at $20 million post. You know, you own less than 10% of it.
Greg: That is like throwing money to invest without even a price on what you’re valuing. So the crazy money came in.
Dave: There was no price. The price was not set. I was too disciplined. I was trained at Kleiner. You set a price, you get rewarded for your investment. And so it’s very difficult to compete with free money. And people would say, “Dave, we really like you. We would take your money as long as you match their terms.” I’m like, “I’m sorry. I’m going to try to maintain some price discipline. I’m not going be able to do that.” So, that was just losing over and over and over again because I wouldn’t compete on those terms. And I did find some good investments and some great entrepreneurs to work with. Really, it’s been a pleasure for me.
Dave: But what happened was in 2012, a couple of my limited partners were investors and kind of pushed back and said, “Look, Dave, I’m not sure your strategy works. You have a highly concentrated portfolio, trying to maintain pricing discipline.” One guy suggested, “Just start writing checks to everybody. You’ve got a great network. Just give everybody a check. Don’t go on boards of directors, don’t take time to build relationships,” which is what a lot of the seed funds were doing.
Greg: Yeah, a lot of seed models do that.
Dave: Exactly. So out of a $50 million fund, I made nine investments. Most seed would be a $50 million fund, it would be $100 investments. So you can see my kind of focus and concentration which I was committed to because I wanted to have deep relationships with guys like Lars Dalgaard. I really enjoyed those experiences.
Dave: So, going back in 2006, I talked to a woman who approached me who went back to Kleiner Perkins. And her company was Dell and James, and we did the “Get Big Fast” thing with that, and the company ended up being sold afterwards. For a brief moment of time, Martha Stewart invested, went on the board of directors. It was in the wedding registry space. And it got sold a couple of times and Jessica stuck with it, Jessica Herrin. So she came to me in 2006. I’m starting a new firm, and she said… Kind of a punch in the face. She said, “You know, Dave, I liked you and your partners at Kleiner Perkins. I hate your model.
Greg: The “Get Big Fast,” venture funded, go big or go home model.
Dave: “Basically you’re going to transact me. At the end of the day, I’m going to be transacted and if it isn’t a huge success, I don’t matter. So anything less than a huge success, I really am just a footnote in history.”
Dave: So she said, “I’m going to build a company and I’m going to do this independently. I’ve raised a little bit of money from friends and family and I plan on running it for the rest of my life.” And I said, “You know what? After all you’ve been through, good for you. You should build a lifestyle company.” And man, she about ripped my face off when I said that. She goes, “I didn’t say anything about a lifestyle company, Dave. I said, I’m going to build a meaningful, impactful company that changes the lives of millions of women and delivers great products.”
Greg: A billion dollar business, not just a little business. A scaled up business.
Dave: Could be a billion dollar business some day. It kind of threw me back because I said, “Gosh, maybe you’ve kind of missed the memo, Jessica, but to build a consumer brand today requires a quarter of a billion dollars. That’s the math at Kleiner Perkins, that if we are actually going into a new venture, we are prepared to raise and deploy $250 million dollars to build a consumer brand, an internet consumer brand.” And she said “You don’t have to do that, Dave. You don’t have to.”
Dave: The thing we didn’t talk about is the timeframe in which I’m going to do this. I’m not talking five or six years, which is what you guys would expect at Kleiner to get to $100 million or more. I’m talking it might take me 20 years. It might take 30 years. But if I’m investing the rest of my life and I let compounding of growth work in effect for me… These are my words, not hers. I will build a very meaningful company that will have a lot of impact. It will have lots of happy, hopefully, employees and impact the lives of millions of people. Nobody talks that way in Silicon Valley.
Greg: Right. And everybody says lifestyle. If you’re not taking the big funding drugs, then you’re not one of the cool kids and it probably won’t work. And we’ll fund somebody who’s going to kill you. You’re not a player.
Dave: That’s exactly right. You lack ambition, you lack courage, you don’t want to win. All those things kind of get associated with it. So anyway, she planted that seed in my head, and I put a little bit of money in and tracked it for a while. And she did very, very well for a period of time. And she kind of proved through her actions that she could do it. And so, what I ended up doing in 2012… So I’m like sitting there going, “Hmm,” getting some pushback on my model of investment. I’m not really enjoying a lot of the conversations I’m having with peer investors and with entrepreneurs. There’s just this greed slash sharp elbows, aggressiveness about it.
Greg: It’s all about the money, yeah.
Dave: Yeah, you want to get your teeth in that next big winner. And there were a lot of parties happening at night that I didn’t want to go to where all the action was. You’ve got to be in somebody’s hot tub to get a deal done. You know, you hear these kind of stories. I’m like, “Oh my God, I’ve got kids and a wife. I’m not going to play that game.”
Dave: I went back and sat down with Jessica and I said, “Look, I want to talk more about what you’ve been doing because you’ve really proven this in a way I never would have imagined. I mean, I wanted you to be successful; I didn’t think you would be, and you’re being very successful. Who else do you know that’s doing this? That’s going to build a meaningful company, is not interested in raising venture capital and private equity, and ideally, might run this for the rest of their lives and build something that really makes a difference?”
Dave: And she said, “If you’d asked me that in 2006, I would have said nobody. But I know a few people now. They’ve kind of self-identified to me, given what I’m doing. I’ll make a couple of introductions.” Then I just kind of went to my network. GSB, Berkeley, Kleiner, everybody I could think of, TPG, Bain, and I said, “Who do you know who is ambitious to build a meaningful company? One that makes a dent in the universe but has no interest or expressed no interest in raising outside capital?”
Dave: And that’s about the best I could do as far as criteria at that point. And at that, people started making introductions. And a very powerful introduction was by Clayton Christensen. You probably remember Clayton from Harvard Business School. So, Michael Horn is kind of his right hand guy, and I’d been talking to Michael and Clay a little bit about kind of what was going on in the markets. Clay was very disappointed with venture capital at this point. He said, “You guys are no longer funding market creating innovations, you’re doing efficiency innovations. You’re not doing the hard work of building technologies into small markets in which you then mature the technology, then go mainstream. You’re forcing these guys to go mainstream too early and you’re breaking the companies. So true fundamental technology innovation is not happening at the rate it should be happening.” And I think we see evidence of that today, right?”
Dave: So long story short, Clay kind of talked about this guy named Jim Goodnight of the SAS Institute. You may know Jim down in North Carolina. Michael ended up making the introduction and sent an email to Jim on my behalf. And then Jim replied, “Talk to Jenn Mann.” And the next thing I know, my phone rings; it’s Jenn Mann. Like, “Hi, Jenn.” And she was the Head of HR for the SAS Institute. And she said, “Jim and I would love to host you out at the SAS Institute to talk about how we’ve built this company over the last 35, 36 years.”
Greg: And what did you say to them? Did you say, “I think I’m a reformed VC. I’m looking at this alternative path and exploring.”
Dave: No, I didn’t know what I was at this point. I didn’t know what I was, I was just curious. I just was super curious because I wanted to get back to what I thought Silicon Valley was about when I first got involved in it. So I sat down with Jim, and it was a really valuable conversation because Jim basically said, “Look, I started this company…” He bootstrapped it, right? He was a professor, I think at UNC or one of the schools there. And he was just trying to solve a fundamental problem and then it kind of grew and grew. He never raised outside capital. He owned 60% of it, 65% of it, and his partner owned 35% of it. And they built it to $3 billion in revenues, highly profitable, 600 acre campus, golf course, elementary school, two gyms, artwork all over the place.
Greg: This is the SAS Institute, S-A-S, not the SaaS that we know. But yeah, one of the largest private software companies.
Dave: Closest thing I’d ever seen to HP, the feel of it. The culture, the warmth, the people first, the purpose, all those things. And suddenly I’m like, “Whoa, this guy over, almost coming up on 40 years, has kind of captured that culture and he attributes it to the fact he doesn’t have outside investors.” He said, “If I had outside investors, I would have been forced to go public a way long time ago and we never would have survived this.”
Dave: In fact, there was a competitor in the ’70s that came out, was venture-backed, grew really fast. He was told, “You’re going to lose the market because this guy is well-funded, hiring a lot of people.” And Jim kind of drew a curve for me which was like a rocket going up and peaking and dropping straight down. He goes, “That’s what happened to that firm. And I just kept plugging away. Tortoise and hare, man. The hare’s gone, flamed out, and I’m just powering along. Became the market leader, generating all this cash, self-funded.”
Greg: And if you grow 15% a year… You’ve talked about compounding. I’ve seen your awesome videos which I’ll put the links to in the show notes here. But you know, 15% growth in top line in profits for 30 years creates a massive impact. You’re huge.
Dave: You’re huge. And if you’re that for a venture capital-backed firm, you’re fired. I mean, 15% a year? Oh my God, you’re so walked out the door. I don’t care if you own a majority of the company or not, they’ll find a way to get you out. So yeah, that was kind of the beginning of this transformation.
Dave: So, I went out and just start talking to more and more people, very interesting people. And I talked to Cargill, the largest family-owned business in the United States. And they talked about their purpose. It’s to feed the world’s population, and nothing is more important. “No family members dividend is more important than serving our purpose, so if we have to terminate all dividends, we will do that to make sure this firm is delivering on its promise.” Who talks that way? I mean, what venture capitals say, “We’re going to defer going public or being sold for 10 more years because the purpose is too important.” No.
Greg: Our quarterly numbers for a public company are more important than the larger purpose. Absolutely.
Dave: So over the course… To kind of hit the punchline of this. In the fall of 2013, I was so intrigued by this idea, I invited 40 of these evergreen leaders and some thought leaders to come to Sun Valley, Idaho where I had a second home. And I said, “Let’s just spend a couple of days. I’ll pay for everything. I just want you to come. So please, just come. We’ll do like a TED-style kind of morning experience, we’ll go enjoy the outdoors of Sun Valley in the afternoons. You can golfing, biking, hiking, whatever you want to do, shoot skeet. And then we’ll just celebrate at night the fact you guys are building these really cool companies that nobody cares about, nobody really is talking about or cares about.”
Dave: And we did the first day and I couldn’t sleep that night I was so excited. One, this is real. These people exist. And two, they are incredibly generous with each other on their insights. That’s what really blew me away. I am so used to being in environments like… When we brought the CEOs at Kleiner Perkins together in Aspen every year, everybody was on their best game, everything’s going great in their companies, everything’s up and to the right, until they filed for bankruptcy the next week, kind of thing, right?
Dave: These people were just very authentic. They were talking about their revenues, their profits, the things they’re struggling with, what they think they’re doing well. And the candor just blew me away. And because of the candor and the trust, they were talking about things at a much deeper level. That was helping each other than just pretending everything’s great and acting like… Because if you do that, if you bring a group of CEOs together and you just all pretend everything’s great, you never get to any kind of interesting conversations, right?
Dave: Because they are who they are, because of the humility they have… There’s not a chest pounder in this group. You know, Silicon Valley is common for this kind of Superman, put a Superman belt buckle on. You know, I’m going to lift this entire organization forward. That’s part of the ethos of Silicon Valley. Evergreen CEO’s don’t have that feel. In fact, most of them self-identify as introverts. Which means that they can be very effective public speakers, very effective sales people, but the way they gain energy and recover is spending time by themselves, being reflective versus being in a social group surrounded by folks.
Greg: Trying to be one of the cool kids.
Dave: You don’t have to be a cool kid. Your internal compass is so strong, you’re not looking for external validation. You know what you’re doing is right. And so you don’t need somebody, you don’t need a venture capital firm to tell you you’re good. And the valuation of that round, the indication of your degree, it’s irrelevant to you because you’re so focused on both your customers, who you’re trying to serve, and the employee experience. You know, if you do those two things well, you’re going to build a wonderful company. Profits will follow and you have the patience to allow yourself to grow over time at rates… Like you said, 10%, 15%, 20% a year, year after year for 30 years, you’re going to be building something really meaningful and you won’t be subservient to anybody else. You’ll be subservient to your belief and what’s important to, as the founder of that company, in delivering those values into your community.
Greg: And were these people… They weren’t the Stanford MBAs. Was this the B-team who was trying harder and doing it their way? Did you have an epiphany, “Oh, my God, these guys are just as smart about business as the smartest guys in Silicon Valley.”
Greg: Oh my goodness.
Dave: Because the Silicon Valley playbook is easy. Raise a bunch of money, hire a bunch of people, fire a bunch of people later. When you’re willing to hire them, hire them again, you know, and just throw resources at it. There’s a lack of true creativity.
Dave: I mean, think about the creativity of a software developer who’s going to be like one of your practical founders, maybe someday an evergreen company. They really have to think very clearly about where they’re going to dedicate their limited resources to get that first product to market, for example. You can’t be sloppy. You don’t get the luxury of hiring 25 engineers and having them work on two different projects and throw pieces around and hope one of them works out. I mean, the discipline around invention is so much higher.
Dave: Just for example, the discipline around how you gain distribution is so much higher, you can’t be sloppy. So, you might think you have the answer and then you think about it again and then you come up with a better answer. You think about it again and you come up.. You keep refining these ideas before you even pull the trigger, where, in the venture world, you pull the trigger as fast as you can because speed is all that matters, and we’ll just make up for it with speed.
Dave: And so, there’s a tradeoff there in that. So no, these were very sophisticated thinkers, in my mind, on how they approached their businesses. And I’ve got to tell you something, most founders don’t know this in Silicon Valley, but it feels really good to be profitable and growing under your own fuel with no outside investors. It is a very liberating feel. You have nobody you are accountable to except for your employees and your customers. In most venture-backed companies, your accountability is to one thing, and that’s the board of directors. And if they’re happy, you continue to keep your job. If they’re unhappy, you’re gone. And on the board of directors, there’s typically one or two investors that are the most influential. So at the end of the day, you’ve got to keep them happy.
Dave: So, if you’re thinking about a customer versus keeping your lead director happy, you will make sure your lead director is happy over that customer because that’s what keeps you in the seat. And it’s really sad to say that but it’s the truth. At the end of the day, if the CEOs are looking up to the boards for validation they’re doing the right thing. They’re not looking to their employees or their customers for that validation. Evergreen leaders, and I believe practical founders, are not looking up, they’re looking across. They’re looking at those customers, those employees. If they’re doing it really well, they’re going to build a wonderful company.
Dave: And I’ve got to tell you, VC’s are not all-knowing either. We make some bad judgment calls on what we encourage teams to do. Maybe if we’d talk to our customers and our employees more effectively, we would have not made those decisions, but it was a high-stakes board meeting, something wasn’t going well. A lot of ideas were being bantered around and one board member said something that they’d seen happen in a different company and it worked really well, It’s like, “Okay, that’s it. Let’s go do that.” And then the CEO walks back to his or her executive team and says, “Look, the board wants us to do X.” And the team is like, “That makes no sense.” And it’s like, “I don’t care, we’re going to go do it. Because they’re just smart people and…”
Dave: I think we’ve all been there. If you’ve been a venture-backed CEO, you know what that experience feels like. And it’s weird because it kind of turns your stomach, right? You know it’s not quite right. But you’re told by so many people that these venture capitalists are so wise, are so experienced, you really defer your judgment to their judgment.
Dave: In the context of a practical founder and evergreen founder, no, you’re not going to defer your judgment to somebody that’s a partial attendee at board meetings on occasion. It’s going to be your judgment based on what you believe you understand from your employees and your customers.
Greg: So Dave, you were investing other people’s money, venture capital investor. Raising funds and investing, maybe you did some angel investing along the way, for a lot of your career between running these businesses. Now you have the epiphany of seeing all these great long-term businesses just steadily growing and doing amazing things with their culture, their employees, their customers, and in their markets, too. So they were not less competitive than the other ones. You have a lot of advantages when you don’t have the stupid adrenaline, you know, decision-making, got to be public in five years or bust. These guys were not taking outside investment. You created a community of these guys, but did you stop investing or did you invest in a different way, in a more practical way? How do you play the investment game through this with these bootstrapped founders.
Dave: Yeah, I haven’t made a venture capital-type investment now for over 11 years. It’s been 11 years since. So, I basically kind of burned the boats on that one. I did have the two funds and I have a fiduciary responsibility to kind of see those to closure, which I did in the first one, not the second. But yeah, I did talk to some of the founders at the beginning and someone said, “Dave, you know, you come from venture, you have private equity. Is there a way to fund evergreen companies that doesn’t put them on the path of being taken public or sold?”
Greg: Let’s talk about that. Is there a practical funding approach that doesn’t commit you to the big funding, got to do what the board says, the ups and downs, we just see it now, you need to lay off 20% of your employees, you can’t spend enough that you can’t lay off enough. How did you approach that?
Dave: Well, it was interesting because I got kind of tooled by some of these CEOs. And they said, “Look, the first place you should be getting your cash flow is from your customers.” And maybe you need to think about your pricing, you think about your business model. I mean, design of business model at the beginning of your thing as a founder is really important if you want to be an evergreen company. You want to design one that actually is cash generative. And you often can pick between different business models, and sometimes you’ve got to pick a business model nobody else uses.
Dave: Like, for example, a great example is SmugMug. You know the guys at SmugMug, the MacAskills? Don MacAskill, he did something really, really innovative that most people don’t know. He started his company on $20. That’s the invested capital in SmugMug and Flickr at this point in time. It’s now called Awesome. And what he did, and everybody told him it’s a mistake, is he charged a subscription fee for access to your high-quality photos in their service. People said, “You’re nuts. Photo sharing is free. Nobody’s going to pay for it.” He said, “Well, I can’t build a business that I want to build over the long haul on free because that means I have to raise venture capital.” He had a bad venture capital experience prior. So he said, “We’ll just see. And if people won’t pay for it, I don’t have a business.” Well, guess what? They paid for it. They were happy to pay him some nominal amount per month, customer-funded.
Dave: So, one thing I was taught is you need to be way more thoughtful about business models and how you customer-fund these businesses. Second is, as you get to profitability and grow, modest levels of debt, very modest levels of debt can be a further accelerator. One times EBIT, two times EBIT. Again, in venture world, we don’t talk much about debt unless we’re borrowing it simultaneously with equity financing where the bank is saying, “Look, I know the equity guys are going to cover the loan.” It’s not going to be covered by cash flow, it would be covered by the goodwill of another round of financing. So, that was kind of another one.
Dave: And then third, on the equity piece, there really wasn’t an answer. So I went out and talked to about 70 family offices about the idea of these companies that were never going to go public, never be sold. “What do you think? Would you be willing to be very long-term partners in this?” And at the time, things may have changed, but I ended up being very disappointed. Because what I heard was effectively, “No. Our family office is run a little bit like a private equity firm. The professionals on the team are paid carry and management fees so their incentives are…”
Greg: They get a return, right? That’s correct.
Dave: Exactly. And they need to compete against benchmarks in VC and private equity. And there were some that said, “Yeah, we’d do it on a case-by-case basis,” but there really wasn’t much energy there. I didn’t want to waste more time on it. And the other thing too is, it wasn’t like the people in my community were asking for it. Because of our criteria, you had to be profitable. I set criteria for being part of Tugboat Institute, which is $5 million in revenue, two years of profitability, been in the CEO role for ideally five years. So you’re established in the role, you’re established in your market.
Greg: Evergreen principles that you created.
Dave: And the Seven P’s. We’ll talk about those in just a second. And so, there really wasn’t a lot of supply or demand. So I kind of said, “Forget it. Let’s just go build this great community. Let’s find how to really share information effectively.” I view my job as not being the content expert. I view my job as being a curator. And so, I’m looking for, among all these members and conversations, when I hear a brilliant idea I think everybody else would benefit from, we get them up on stage or we write an article about them or we do a seminar with them. Something to really bring those things forward.
Dave: But if I could, could I digress to the Seven P’s, because I think this is what was kind of my next evolution of this. As I was out having these conversations before that first gathering in Sun Valley, I was calling these evergreen companies. There wasn’t a term for them. And some of them were multi-generational family businesses, but there are a lot of those. There are plenty of founder-owned businesses, but these weren’t lifestyle businesses. For sure they weren’t lifestyle. And there were employee-owned companies, 100% employee-owned companies that had these same characteristics that I kind of admired like SRC Holdings, Torch Technologies and others.
Dave: And so, I just said, “We should call you evergreens. You’re growing at a paced level year after year. You do fine through four seasons. You’re majestic over long periods of time. You live hundreds of years.” And people were like, “Hey, yeah, that’s a good term. I like it.” So they kind of bought into the term. And then my colleague who was helping me get this off the ground, Chris Alden, he was the founder of the Red Herring magazine, if you remember Red Herring from the good old days…
Greg: Oh, my goodness, of course.
Dave: Chris said, “Look, you’re going to have to put a stronger framework in place on this than just calling it evergreen because others are going to grab on to it and they’re going to kind of steal it from you.” So he said, “One, let’s get this thing trademarked. But two, what would that framework be?”
Dave: So we started playing around some ideas, and then I came up with this idea of the Seven P’s, which is purpose, perseverance, people first, private, profit, paced growth and pragmatic innovation. And these are seven principles that we’ve used that define what it means to be an evergreen company. And they work as a system. They don’t work independently, but they work together. And so, I put it out there and used a term that I learned at Bain & Company years ago. I said, “Look, here’s a straw man. I think this is what I’ve heard you guys basically express what it means to be your type of company.” And I also try to bring in my entire history and career and my experience and what I’ve learned from reading Jim Collins to Tom Peters to all these wonderful authors, Clayton Christensen…
Greg: Bo Burlingham, with his “Small Giants.”
Dave: Yeah, Bo Burlingham, absolutely. I said, “So here it is. So guys, just tear it apart.” And people are like, “Hey, I like that.” And then we started having people calling us saying, “Hey look, I read about your Seven P’s. We run the company this way. Can we be part of Tugboat Institute?”
Greg: The Beacon went out.
Dave: So here it is 11 years later. We’ve changed the wording slightly to kind of be better and more descriptive, but it’s still the Seven P’s that I presented early 2014.
Greg: People can find that, I’ll have links to it at tugboatinstitute.com. We’re private, not the goal of being IPO. We’re profit, which is the opposite of overfunded companies. We’re paced. Pace is so powerful. It’s just the speed factor to grow at the right rate and not the unnatural rate. Like, people first. Are those the opposite of what you see in great big funding VC and PE growth games?
Dave: Yeah, I don’t want to be too critical of VC because I think there’s a really important role for VC in the world. I think particularly where you need a lot of capital to get something off the ground. You’ve got to build a factory or you’ve got to build a new drug or something. So, those have the characteristics in which you might need a lot of money to get to first product into the marketplace because there isn’t a TMC that’s out in the world that’s going to build your chips for you or your drug for you at Pfizer or something. So yeah, I’d be very clear. There is a very important role for VC. I just don’t think every company needs to be VC-backed, and I sure don’t think that should be our de facto growth model for the entire economy.
Greg: That’s my Practical Founders motto. It’s practical. It’s not bootstrap or die or VC fund or die. There are plenty of ways to do this and it’s just the big VC funded is overhyped and overprescribed. And it doesn’t work most of the time.
Dave: Yeah. And in certain circumstances, it’s probably the only path. But boy, if you can bootstrap your company and have the flexibility and optionality to stay independent forever as an evergreen, or sell it, as you said, is a fine outcome. You have 10 years in, you’re doing $10, $20 million in revenue. Take the money and you’ve now created a level of freedom for yourself and your family you could have never imagined when you were young.
Dave: What I would say back to your question is that I think that there’s very, very good intention around most founders that are venture capital-backed. They want to have a deep purpose. They want to treat their people well. I mean, there are exceptions. You know, there are some people who aren’t very nice people. But I think in general, profit, no, pace grows, no, pragmatic innovation, no, perseverance, yeah, they want to think that they can persevere. But the problem is, purpose and people first get thrown out the door the day you have a bad board meeting or miss a call.
Dave: Look what’s happening in Silicon Valley now even at the big tech firms. Great cultures, nobody’s accountable, free food, massages, laundry, all this stuff… That’s over, right? And I think it’s jarring to have a culture like that which is overly generous to suddenly say, “Now we’re going to lay off a whole bunch of your colleagues overnight, cut all of these special programs. And get back to work because we need to have a profit discipline now. We didn’t have to have a profit discipline for 10 years, 20 years, but now we have to have a profit discipline.”
Greg: How do you spell profit? We don’t know what EBIT is.
Dave: Why does it even matter? People say profit is bad. And that’s another thing. There’s a difference between building a firm to generate wealth for the founders or a couple of venture capitalists. And I’d argue that is not contributing to society at the level it could be. Profits are critically important because that’s how you sustain your independence. That’s how you reward, through profit sharing, your employees. That’s how you reward your owners for keeping their invested capital. That’s how you invest in the growth of the business.
Greg: And it’s proof of customer value.
Dave: Absolutely. It is proof of customer value. Will a customer pay you more than your total cost of delivery? If they will, you’re probably on to something. And then if that profit is higher than your cost of capital, then you’re onto something. I mean, you keep doing that. So profit’s a wonderful thing. How in the world have we gotten confused that profits aren’t important or in fact should be treated as a negative?
Dave: Now, in the world of “Get Big Fast,” that was understandable. But in today’s world, we’ve got to get back to really respecting profitable companies. And again, people say profit means big dollars in the pocket of the owners. In most evergreen companies, I see very little money flowing into the pockets of the evergreen owners. I see the opposite. I see extremely generous compensation. I see a lot of reinvestment in the business.
Greg: Profit sharing.
Dave: I see tremendous philanthropic contributions that they don’t talk about publicly. I mean, some of these companies are incredibly philanthropic. Because they believe like, look, we’re here…
Greg: To change their communities.
Dave: Fundamentally change their communities. And then one of those gets bought by private equity, and one of the first things they cut beside the staff and the payroll and raise prices is they cut the local philanthropy. And it’s just like… It’s gone. It might have been $20 million, $30 million, $40 million of annual local philanthropy, just overnight, it’s gone. Because that’s another way to pay off the debt of that private equity that the private equity firm put on the company. You know, line item, boom, get rid of that stuff.
Dave: So yes, I think that there are wonderful intentions by many founders, but the rude awakening comes the day that you’re not performing up and to the right. And purpose… You’ll find very quickly you thought your purpose was something noble. Your purpose is to make sure your investors make money. If you’ve taken out something, at the end of the day… And it doesn’t become apparent until it diverges. Because if you’re building value against your noble purpose and the investors think they’re going to generate more value in the company, you’re fine. At the moment that your noble purpose, by sustaining it, like not laying off your employees and trying to maintain your headcount, works against what the investors believe is in the best interest of protecting the company and their investment, your purpose is gone. And I think that’s the rude awakening that just breaks the hearts of many founders because they didn’t really understand that’s how it’s played.
Greg: I saw practical founders without big funding creating unbelievable companies growing on their own terms. And then I see the VC companies miss a quarter and everything crumbles. Fourth and fifth management team shuffled through and whatever they had as their big cause has been decimated in there. And I see more of the practical founders and fewer of the VC success stories. In the last three or four years, as VC funding took off, IPO tech valuations took off, funding valuations took off, it became “it’s just what you do.” You get funding, you have an idea, you get funding, you grow big, you raise more big funding, you go public, and it almost never happens and almost never happened in the old days. It was the exception, not the rule. Why do you think that big funding in software tech became the default case? Not “create a scalable business with little or no outside funding?”
Dave: I don’t know. I mean, you look at Veeva software, right? I think it’s public and would raise $4 million from Emergence and that’s the only capital it ever raised. You look at Microsoft way back when, they didn’t need outside funding. You look at Google, they effectively didn’t need outside funding. I mean, capital was free. I mean, the funds were raising tremendous amounts of money. It was technically free because the interest rates were zero. And then the discount rates, when people ran their models, the Wall Street wizards, they said, “Wow, these cash flows may worth so much money some day.”
Dave: So, it just kind of went back to this growth at all costs thing, which was a shift from “Get Big Fast.” “Get Big Fast” was to become the market leader and then have monopoly-type profits. “Get Big Fast” just became like, “That’s what everybody does.” And the way you get big fast, you just raise as much money as you can at the highest valuation you can even if you have really bad preferences, which is another conversation where you can really hurt the common shareholders. But it’s just groupthink and it’s hard to fight that groupthink.
Greg: Especially when it’s about getting rich which will cause people to click on it, will cause people to bet everything, to lose everything. How about get rich slow? Like, are you ‘Get Big Slow?” GBS, is that what you are? Instead of getting it faster, you’re “Get Big Slow?” Is that what you’re professing with evergreen companies? It isn’t about staying a $5 million business forever, it’s about changing the world and doing it more sustainably for your customers and your employees over the long term.
Dave: It really comes down to how much do you need and what do you want to be your legacy and your contribution. And I think what people find very quickly is that if they sell their company… And I’ve seen this by a number of people. They sell the company and suddenly they have $100, $100 more million dollars. One, they pay a big tax bill, and then they turn around and they start investing in the public markets, the private markets, and they’re getting a lower return than they were getting on the money they had in their own firm. And suddenly, they don’t have a team anymore, they don’t have a purpose, they don’t have a customer base they’re serving. I’ve seen people get really depressed, really depressed. They’re rich beyond measure, and they’re horribly unhappy.
Dave: And I look at the evergreen CEOs that are kind of late in their career and they’re transitioning out of CEO and they’ve been running the firm for 20, 25 years. They scale it from $20 million to $400 million, from $2 million in profits to $80 million of profits. They’re writing $20 million dollar checks into the community. They’re writing big bonus checks to the team. They go to the grocery store and wives of employees come up and smile and their husbands and pat them on the back and say, “Thanks for just having such a great company.”
Dave: And they’ve got more money than they can spend, they’ve got control over the firm, they’ve got a wonderful customer base, they’ve got a wonderful employee base, they feel like they’re important parts of the community. I mean, that to me feels like success, not building something up and selling it and then hiring Morgan Stanley to invest your money for you and then getting confused by all these deals that they’re putting you into, these funds. I mean, their salesmanship around how they’ll manage your wealth is phenomenal. And they probably underperform the S&P 500. If you just put your money… As Warren Buffett encourages, just put it in an ETF or the 500. And if you want to take more risk, borrow money and put it into the ETF, don’t let other people borrow it on your behalf.
Dave: So, I think people have kind of lost track of what success really… What really true success can feel like for an entrepreneur and a founder. And I would argue what really feels like success is to build an independent private company over the long haul with happy customers, happy employees contributing to society, contributing to your communities, doing what I call the evergreen path. And again, I just see these people and there’s just a level of contentment and satisfaction and their contributions that have built this kind of company. And I don’t see the same thing in Silicon Valley for the people who’ve gotten rich. Now they’re chasing deals and they’re putting pressure on the new set of entrepreneurs. I mean, it just never ends.
Greg: Well, it’s a common thing. On this Practical Founder Podcast, one of the questions I ask with the successful founders who’ve grown something and had an exit and they’re successful… And if it doesn’t have an exit, and I’d be open to that possibility, run it forever. Successful ones with an exit, the question is, how did it feel when the money hit your bank account? “Oh, it was great.” And how did it feel the next day when you didn’t have an office to go to and your team and your customers and the cause and everything? And they said, “It was the worst day of my life.” And then how long did it take for you to go back and get back to building something important for the world again? And usually the answer is “about six months,” something like that. I can’t play golf. I’m not going to fish.
Greg: Like, we build things that have an impact on the world. And that’s the reason I’m here for the practical founders. I’m helping the crazy people who are solving today’s problems with tomorrow’s solutions, right? I don’t think the government’s going to do it or big companies are going to solve it. I think crazy entrepreneurs solve a lot of the world’s problems. And they have to do it at scale in the long term to be able to solve it, not just have that small impact.
Dave: And Greg, if I could say this too, it’s because I know that you do encourage practical founders that they can sell their companies or they can play long ball and may be more evergreen. The one thing I’d say is I don’t think we should judge anybody’s decisions. It’s their decision whether they raise venture capital, they decide to sell getting to $10 million in revenue or they decide to go the evergreen path. That’s all okay, because at the end of the day, you created something from nothing. And part of that and that part of what our society stands for is that gives you permission to make these kind of decisions.
Dave: I just hope more people are exposed to your ideas and my ideas because I think these are really valid alternatives to, again, this kind of sense that the de facto growth model is you have to go raise angel money to venture capital, to more venture capital, to a public sale or sale or public offering. It’s just… No, no. There are some wonderful alternatives to that. And really it comes down to what do you want out of your life and your legacy? And and if you want something more than just a big bank account, I would argue play long ball. Give it a shot.
Greg: And in the software business, it used to take tens of millions of dollars to build a product with 30 engineers for Windows servers and all that stuff. And then it took another $10 million to go-to-market. And then you would have to do all that kind of stuff. But you can build software for under a million dollars, half a million dollars and start selling it and get to revenues fast. And you could grow fast without spending tons on advertising on Facebook. And you can grow fast. And you have the optionality to sell it when you hit $3 million or $5 million ARR or double down and fund a little bit in a practical way on your terms like Sergey and Larry did at Google or to keep on going. Software is a very high margin, very valuable, very leveraged business compared to a manufacturing business of lasers. It’s a beautiful business. SaaS is a business model.
Dave: Absolutely, absolutely. It’s a beautiful model. It’s one that does allow you to go on an evergreen path if you choose to or exit at high value sooner than that. And you’re absolutely right. You make a very important point. We could not have this conversation in 1999. You could not do this in 1999 because you had to buy servers. You had to put them in your own office and you’re racking them and you had a database administrator. You had to make sure your network was working and you’re writing all of the software at every level of the stack. And now you can go out and you can leverage these existing platforms beautifully to actually get focused on what really matters, which is are you delivering value to your customer. And again, hopefully to your employees? And so, I’m with you. And I think that’s a little bit of the shift we’ve missed. These, what you call practical founders, have a tremendous opportunity in front of them to maintain very high optionality in what they want to do in a way that a software founder could not have done in the ’90s. It would have been possible.
Greg: Well, Dave, it’s been a fascinating conversation. I’m sure we’ll have you back on the podcast. We’ll dig into VC and PE or some other interesting topic. I have been consuming your videos on tugboatinstitute.com. Really great stuff. You are a master class. It’s like TED Talks to describe what it’s like to get private equity investment, what it’s like to get VC. What’s the VC math these days? What is it like to be an evergreen? How can people find out more about what is an evergreen company to Tugboat Institute, talk to you or get involved in some way?
Dave: I encourage people to go to our website, tugboatinstitute.com. And what Greg is talking about is you can go to a tab on it called The Evergreen Journal, and I did a presentation called The Rise of Private Equity. I did one called The Moment of Divergence. The Moment of Divergence is about VC. The Rise of Private Equity is about private equity. Please watch those. Many of the other videos and articles are written by members of our community. These are evergreen CEOs sharing their wisdom very generously with you, the broader community. So they’re happy to share and do it.
Dave: If somebody feels that they’re an evergreen CEO and they would be interested in talking about membership, they can send me an email. I’m at email@example.com and I’d be happy to talk to them about it. I’ve got a team that helps with membership. We’re always looking for people that are inspired by these ideas who feel like they’re building companies aligned with these Seven P’s, and we’d like to grow the community.
Greg: It’s an awesome community. I can imagine just the brainpower and the generosity that shows up in that room must be just an unbelievable experience.
Dave: Yeah, well thanks, Greg. And another thing too is they’re from all different industries. It’s so interesting to see a software guy talking to somebody that runs the largest John Deere dealership. And you realize, wow, there’s something to be learned from the dealership and the dealership from the software company because all this stuff is touching software at some point. So it’s really neat to see these interactions.
Greg: Well Dave, what a great conversation. Thanks for sharing your wisdom here and thanks for what you do for evergreen companies and practical founders out there. Thanks for being on the podcast today.
Dave: And you too, Greg. I mean, I feel like I’ve found a good friend kind of espousing similar ideas. And I really appreciate what you’re doing to really help these practical founders see that there are other ways to do this. And so thank you for inspiring folks.
Greg: Thanks, Dave.
Dave: All right. Take care.
In this episode, Dave explains:
- How is early experience working for Hewlett Packard showed him the power of the people-first “HP Way” culture that empowered all employees to collaborate and create meaningful impact
- What he learned about the VC model working with top-tied Silicon Valley venture investors Kleiner Perkins and TPG
- How he was inspired by the more sustainable and people-first approach of creating large companies without any outside investors
- What it means to be an “Evergreen Company” who are building large and meaningful companies without any outside funding that are build to last for 100 years
- The power of independent, profitable and disciplined companies that grow to large companies with major impact over 10, 20, or 30 years
Tugboat Institute Company Facts
- Founded: 2013
- Description and Mission: Tugboat Institute® is a membership organization that brings together Evergreen® CEOs across industry sectors to share best practices and unique insights, and to develop trusted bonds for their respective Evergreen paths. Evergreen leaders are seasoned entrepreneurs, CEOs and presidents with the vision, creativity, resourcefulness, patience and grit to build and scale a business that will stay private indefinitely. We exist to support these leaders and their companies.
- Number of Employees: 10
- HQ: Sun Valley, Idaho
- Dave Whorton on LinkedIn
- Tugboat Institute on LinkedIn
- Tugboat Institute website
- Kleiner Perkins on Wikipedia
- John Doerr on Wikipedia
- Dave Whorton video – The Moment of (VC investing) Divergence
- Dave Whorton video – Introduction to Evergreen Companies
- Dave Whorton video – The Rise of Private Equity
The Practical Founders Podcast
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