Built to Last (And Last...And Last)

Bo Burlingham

September 21, 2015

Jessica Herrin remembers exactly where in the Stanford University library she was sitting when she checked her email that day in the spring of 1998--and nearly fell off her chair. She was a 24-year-old MBA student at the time, and the message was from Dave Whorton, one of the judges in a business-plan competi­tion she and a classmate had entered with a proposal for an online wedding-gift registry. "Are you serious about this?" asked Whorton, an associate partner at the blue-chip venture capital firm Kleiner Perkins Caufield & Byers. "If you are, pull your entry from the competition and come talk to me."

"If you were a Silicon Valley wannabe entrepreneur back then, getting an email from Kleiner Perkins was like getting an email from God," she recalled many years later. She and her classmate took Whorton up on his offer and launched their business, Della & James, with Kleiner Perkins's backing. Two years later, Della & James merged with the Wedding Channel. Herrin stayed with the company until she moved to Texas with her husband in 2001.

Herrin says that she found her Wedding Channel experience tremendously educational, but parts of it made her uncomfortable. "I remember sitting around a board table with everybody talking about going public, and thinking it seemed crazy to me. We didn't even have a clear path to profitability and predictability yet, but people were completely focused on return. The way their business model worked, they needed to sell, and they measured success by the valuation they'd get when they left. I believed you would actually create the best return if you were focused on transforming an industry, serving customers, and creating a really special brand that would last, versus trying to flip it."

Today, more than ever, venture capital dominates Silicon Valley's priorities.

Herrin's insight represents a choice that entrepreneurs have long faced: between passion and profit, between building a company to last and building it to sell. Some companies--from 3-D carmaker Local Motors in Phoenix to $3 billion software giant SAS Institute in Cary, North Carolina--have tried to show that the dichotomy is false. Now such companies have powerful, wealthy backers in Silicon Valley and elsewhere; they argue that the path of permanence not only can be more satisfying, but can make you more money, too.

Herrin's next business, she decided, would have to be more than a good commercial opportunity. "I thought, 'What am I passionate about?' If I was going to do something again, I wanted to be soulfully connected to it. I wanted a mission-driven company that I would feel like doing until the day I die." She realized there would be no room in such a business for investors who required an exit. Their focus would inevitably clash with hers. "When you have venture capital, the guiding principle can too easily become 'How do we increase the stock price?' versus 'How do we change the world?' I'd done that once. I didn't want to do it again."

All of which Whorton found rather confusing when she came back to him in 2005 looking for startup capital. Herrin could hardly contain her enthusiasm for the new business she was working on, Luxe Jewels. It would design jewelry and sell it through trunk shows and home parties, and the sales force would consist entirely of women attracted by the opportunity to be in business for themselves. "What's your exit strategy?" Whorton asked.

"My exit strategy is to be rolled out of my office on a gurney," she said.

"OK. So it's a lifestyle business," said Whorton, who was in the process of setting up his own venture capital firm, Tugboat Ventures.

"It absolutely is not a lifestyle business," she replied, offended by the suggestion. "It's going to be a big, international business, and it's going to impact positively the lives of thousands of women entrepreneurs."

In the end, Whorton put in some of his own money, as did another venture capitalist. The understanding was that they would earn a return through profit distributions, not from selling their shares. Over the next five years, they watched as the revenue of the company, renamed Stella & Dot, soared, reaching $104 million in 2010 and landing it at No. 67 on the Inc. 500 list of America's fastest-growing private companies. Within two more years, annual sales had doubled again. The company's success was so dramatic that, in 2011, Sequoia Capital agreed to invest $37 million for 10 percent of the equity, likewise earning its return through profit distributions and thus allowing Herrin to keep running Stella & Dot as long as she likes--a radical departure for a bastion of venture capital.

Herrin is, in fact, just one of a growing number of tech entrepreneurs, or former tech entrepreneurs, who have eschewed traditional forms of private equity, including venture capital, because they don't want to be forced to sell their companies in the future. Tom Bilyeu is another. He realized in 2009 that he needed to make a change. His software company, Awareness Technologies, was going gangbusters, reaching No. 42 on the Deloitte Technology Fast 500 list of fastest-growing technology companies in North America. "We were making money, winning awards, standing in this beautiful conference room overlooking the Pacific Ocean, and I turned to my business partners and said, 'I'm completely miserable.'"

Even if you don't start by raising a bunch of money, it's easy to be led astray.

Like Herrin, he longed to work in a business he believed in, and his partners felt the same way. Their mutual passion was health and fitness. Within a year of Bilyeu's epiphany, they sold Awareness Technologies and launched a new company, Quest Nutrition. Its first product was a protein bar developed by the wife of one of the partners. Sales took off. In 2014, Quest was recognized as the second-fastest-growing company on the Inc. 5000, with 2013 revenue of $82.6 million, almost 200 employees, and no outside equity. The owners were enjoying themselves way too much to consider accepting any investment that would require an exit. They were, however, willing to take on a minority partner, and this spring they sold such a stake to private equity firm VMG Partners in a deal reported to value the company at about $900 million.

Or consider Jason Fried, the founder of the project management software company Basecamp (and an Inc. columnist). "I don't like investors," he said at Inc.'s annual GrowCo conference in 2014. "When you take money, you're typically setting the stage to get out. It's about multiples and math at that point. It's not about product. It's not about customers. It's just about growth. And that, to me, is a perverted sense of what business is about. Business to me is about making something great, treating your employees great, treating your customers great, adding something good to the world that wasn't there before."

Enter the Evergreens

Few people have spent more time pondering these issues than Dave Whorton. He hadn't known quite what to expect when he'd invested in Herrin's company, and the success of Stella & Dot had come as a revelation. A 42-year-old Stanford business school graduate, he had spent his entire working life in Silicon Valley, including stints at Bain Capital and TPG Capital, in addition to Kleiner Perkins, Hewlett-Packard, Netscape, and Drugstore.com, of which he was a co-founder. Until his experience with Stella & Dot, he had generally assumed that a startup needed venture capital backing to grow quickly to an appreciable size--appreciable, that is, by Silicon Valley standards--and venture-financed companies are built to sell, not to last. That's how their backers get the liquidity they need to pay off their own investors.

Herrin had shown Whorton that at least one type of startup could get big fast without venture backing--and thus without having to sell or go public--and he couldn't help wondering if there were others. In the late summer of 2012, he went to see her and asked if she knew any other entrepreneurs who shared her ideas about building companies to last. She said she knew about 10 people who would do it if they could raise the startup capital they'd need. Most of them had had venture-backed companies before and were contemplating what to do next.

Whorton began meeting with them and getting references to other people he should interview. In the next eight months, he talked to 30 to 40 entrepreneurs who either owned or intended to start businesses with the express goal of remaining private, independent, and unsold for a long, long time. By then, he had brought in a partner, Chris Alden, a co-founder of Red Herring magazine, and they had come up with a name for such ventures: evergreen companies.

The more of these evergreen entrepreneurs Whorton talked to, the more he noticed certain themes. "They wanted to talk about culture," he says. "They wanted to talk about people and purpose and 'Why am I building this business?' In the private equity world, it is rare that entrepreneurs speak first about the culture and the people. There are exceptions for sure, but usually they talk about money, because money is the goal."

He found his reaction to the conversations equally interesting. "I started really enjoying them. The people seemed very authentic, even courageous. They have to be self-motivated, because they're not getting much positive feedback in the community. They're not getting a pat on the back for having a high valuation, or for getting a top VC to back them. They're not publicizing their revenue or their profitability, and that's OK with them. Those things are not what it's about. Instead, it's about 'What experience am I having in building this company?'"

And there was another theme. "In a lot of these conversations," he continues, "I heard a tremendous loneliness, like, 'Is anybody else out there talking like I'm talking? Because I don't hear about them.' I knew absolutely that others were thinking the same things, and so I proposed a meeting in Sun Valley, Idaho, where I have a second home. I asked 20 or 30 people if they'd be interested in getting together to discuss what it's like to build one of these businesses. I thought maybe five or six people would take me up on it. We ended up with about 50."

The meeting, later dubbed the Tugboat Summit, was scheduled for October 2013. As it drew closer, it took on additional significance for Whorton. "I wanted market validation that there was really something here, and I hadn't just made it up in my mind," he says. "If that gathering had not gone well, I'm not sure where we'd be today."

But it did go well. "I saw firsthand that, oh my gosh, bringing these entre­preneurs together is a very powerful thing. They need each other. They need the support. They want to share. It was incredible. I mean, just watching the trust, the authenticity, the excitement about the ideas we were sharing. So we had to do a second one. I said, 'We'll do it in six months. I want to build on this energy.'"

He also wanted to see if the first summit was a fluke. "I thought maybe it had magic just because it was first," he says. "The second one might fall flat. I didn't know." Whatever doubts he had were quickly erased as that second summit got under way, at the Carmel Valley Ranch in Carmel, California, in June 2014. "It was fantastic, just fantastic--because of the people," Whorton says. "We put together some interesting content, to spark conversation, but let's be clear: It was the people who made it happen--their connecting, their shared purpose, their common values."

The success of the two summits convinced Whorton and Alden that it was time to take the next step. In September 2014, they threw a party at Tugboat headquarters in Palo Alto to celebrate the launch of the Tugboat Institute, a membership organization for evergreen CEOs. There they issued a manifesto of sorts that included what they saw as the seven defining characteristics of evergreen companies, or the "7 P's": purpose, perseverance, people first, private, profit, paced growth, and pragmatic innovation. They also announced that the institute would start a digital publication, The Evergreen Journal, and that Tugboat Ventures would establish Tugboat Evergreen, a network of investors interested in providing "patient, long-term, and noncontrolling capital for profitable and growing evergreen businesses."

Not that Whorton and Alden were renouncing their pasts. "We want to be abundantly clear," they wrote in their manifesto, "that we view the evergreen path as an alternative to, not a replacement of, the venture and private equity path--and just one of a variety of different approaches to entrepreneurship." Nevertheless, their announcement was proof positive that the idea of building to last had taken hold in the unlikeliest of locations: Silicon Valley.

Avoid seller's remorse For many entrepreneurs, the long-term benefits of hanging on will outweigh even a generous buyout.  VIEW FULL VERSION 

The VC Backlash

Once, of course, Silicon Valley had been home to numerous companies with values similar to those espoused by the evergreen movement. Their epitome and role model had been Hewlett-Packard, or at least the version of HP that existed when Bill Hewlett and Dave Packard were still alive. Back then, the Valley was still in the process of earning its global reputation as the place where technological innovation happens, and it was also becoming the center of the venture capital world. The two subcultures have grown symbiotically ever since. Along the way, however, the balance between them has shifted. Today, more than ever, the venture capital side plays the dominant role in defining the Valley's mores.

To some extent, the evergreen movement represents a backlash against the change, as Alden can attest. He has been in the thick of the action since 1992, when--as a young man just weeks out of college--he met a magazine maven named Tony Perkins and, with a third partner, launched Red Herring, which soon established itself as an authoritative chronicler of the tech boom in the Valley. After Red Herring succumbed to the bursting of the dot-com bubble, Alden started a technology company that merged with another company three years later. He stayed with the combined company, and became its CEO, until it merged with yet another company in 2010.

To build a company to last 100 years, you must be obsessive about values, reputation, and promoting from within.

By then, he was having doubts about the evolving business climate of the Valley. "Entrepreneurs were getting addicted to money," he says. "Their first thought was 'I need to bring money in,' as opposed to 'How do I build a product that generates revenue?' Once they do bring the money in, they have to get a return for their investors. So they go for growth first, profit second, which means they ultimately have to sell. That need can distort the strategy and get in the way of building sound companies. You're really hoping someone else will buy the company and figure out how to make money off of it. It's a big change from the companies that we covered in the early and mid-'90s. They didn't have an exit orientation the way companies do now."

Alden was well aware of alternative approaches to building a business. His parents had started and, after 40 years, still owned a successful chain of boutique hotels. His younger brother was its CEO. "That was always my concept of what a company was," he said. "You ran it, made a profit, grew it, and held on to it. My question was, could you combine that mode of building a business with the dynamism of Silicon Valley? I thought, 'Maybe there's something that I can do to help change this dynamic. We have this entrepreneurial ecosystem that is very exit-focused. Couldn't there also be one that is long-term-focused?'" He was working on starting such a business when he ran into Whorton, whose firm had invested in one of his previous companies, and they decided to join forces for the launch of the Tugboat Institute. Alden has since gone on to start what he hopes will be his own evergreen business, Palace Games. It develops "unique games and immersive experiences," he says, such as the Great Houdini Escape Room at San Francisco's Palace of Fine Arts.

Forever Is a Long Time

From one standpoint, it's surprising that more technology companies haven't chosen to remain private, independent, and unsold while growing into giants. "There actually should be a higher prevalence of them, because tech companies can be profitable more quickly than other businesses and produce cash flow and wealth for the owners without having to sell," says Bill Flagg, another converted tech entrepreneur. He had been president and co-owner of RegOnline, an event management company, which was sold to a competitor in 2007. "A tech company can start with less upfront capital, no receivables, no inventory, and huge gross margins if you do it right," he says. "At Reg­Online, we were running 40 to 50 percent net profit margins, and I don't think that's unusual. But you probably won't do it right if you start by raising a big bunch of money. I mean, why do tech entrepreneurs want the money? It's not for funding inventory and receivables, as in other businesses. It's for hiring people you can't afford to pay out of revenues. You think they will allow you to grow faster. Then you keep hiring ahead of revenue and have a company that is constantly losing money. They call it the 'burn rate.' So you need to keep raising more rounds of money, and the more you raise, the less likely you are to reach profitability. If you want some wealth and your investors want a return on their investment, you have to sell it."

But even if you don't start by raising a big bunch of money, it's easy to be led astray. Flagg described the syndrome in a post on his blog:

1. Start a company, find customers, hire employees, start making real money.
2. Someone approaches about buying the company.
3. Fall in love with the idea of having millions in the bank. Start thinking about traveling the world, buying private islands, and never working again.
4. Become paranoid that if I don't sell soon, I may screw up the company, miss my chance at No. 3, and end up sleeping on my sister's couch instead.

That is, in fact, more or less how he and RegOnline founder Attila Safari came to sell their company, much to their later regret. Flagg estimates that 80 percent of his entrepreneurial friends have fallen into the same trap. It's "what drives them to ultimately sell great companies to not-so-great companies who then run them into the ground (which is bad for customers, employees, and society as a whole)," he writes. "In fact, I'm surprised by how many of my friends (a good 30 percent-plus) have bought back the companies they've sold after they've been run down."

The irony is that entrepreneurs can often make more money by continuing to run a business than they can by selling it. Flagg gives the example of a company with $1 million in pretax profit, or $600,000 in after-tax profit. If it is sold for 10 times pretax profit--a high multiple--and the proceeds, after paying capital gains tax, are invested at an 8 percent annual return, the former owner will earn $384,000 per year after taxes, instead of the $600,000 she was taking home before the sale (see "The Case for Not Selling," page 40).

And Flagg walks his talk. Since the sale of RegOnline, he has become a partner in four customer-funded-- otherwise known as bootstrapped--software companies in Colorado, where he lives. They have no outside equity investors other than him. He's a minority shareholder in three of the businesses, and so it's not his decision whether or not they ultimately get sold, but for now at least, all the owners are content with the arrangement. "If you grow a company organically based on what your revenues can afford," he writes, "you end up coming into a much more profitable situation, which is what my partners are in. Between the four companies, we've got $20 million in revenue and are making $6 million in profit. So there's plenty of wealth to be shared."

The obvious question is, why haven't more tech entrepreneurs followed Flagg's example? He asked himself that question after presenting his ideas to about 200 entrepreneurs at an SxSW conference. It "hit me that we are in a world full of VCs, private equity, investment bankers, attorneys who love to promote 'flipping' companies because that's how they make money," he writes. "And there's not many voices out there promoting the idea of holding onto and growing companies for life. I was amazed by the energy that erupted from this room of entrepreneurs to hear a different, maybe more fulfilling option. So I've come to the conclusion that Richard Branson and Warren Buffett have it right... if a company is profitable and growing, the best holding period is forever!"

Then again, forever is a long time. Entrepreneurs who are serious about building to last will someday face a much tougher challenge than deciding not to accept investments that require an eventual sale of the business--the challenge of building a company that can keep its mojo and stay private and independent after the founder is gone. Few companies are capable of pulling it off, and they are virtually all either family- or employee-owned. Some entrepreneurs have made that their explicit goal--but they aren't in Silicon Valley.

Only a few companies can keep their mojo and stay private and independent after the founder is gone. They aren't in Silicon Valley.

One of them is Rich Panico, the founder and CEO of Integrated Project Management, based in Burr Ridge, Illinois. Now in his early 60s, he exudes an intensity and a sense of purpose that he traces back to his childhood. The son of Italian immigrants, he grew up on the South Side of Chicago in a cold-water flat that shared a hall bathroom with three other apartments. His parents wanted a better life for their son and sent him to a series of Catholic schools, where he excelled. After graduating from college with a degree in aviation-technology maintenance and management, he landed a job with Johnson & Johnson and wound up staying for the next 15 years.

There he developed a fascination with professional project management, a relatively new specialty that had not yet been sufficiently codified to call it a discipline. "I felt the profession and the science of project management were critical for this country if we were going to implement, change, and evolve in a world that was becoming more and more competitive," Panico says. He was thriving at Johnson & Johnson, which had rewarded him with promotion after promotion. He figured he would either become CEO one day or get fired. What set his heart racing, however, was not the opportunity to lead a giant corporation. It was the chance to revolutionize his chosen field by starting a company of his own.

Panico says his father had taught him that "anything you do, you should do to last," and that was his mindset when he launched IPM in 1988. The first person he hired was JoAnn Jackson--who was the CFO until recently, when she became vision realization officer--because he wanted to have a potential successor in place from day one. (Now the succession line goes four deep.) His stated objective was, and remains, to build a company that could last more than 100 years. Ask employees today--even the newest recruits--about IPM's overarching goal, and they will tell you that it's to have "a 100-year company." Several admit that they joined IPM because of that goal.

Panico and his team have shaped IPM's culture accordingly, developing business practices and processes that are now deeply ingrained and second nature to the company's 140 full-time employees and about 95 project management consultants. What anchors the system, Panico says, are "timeless values" that guide everyone who works there and give recruits a clear idea of what they're signing up for. By values, he means things such as "honest and ethical conduct," "uncompromising integrity," maximizing employee job security, consistently delivering the highest quality in the industry, and continuously improving. These are not just abstract ideals, either. IPM's commitment to the latter, for example, is embedded in the company's annual planning process, in which everyone is involved and which begins with a survey asking 15 questions, such as, What can be improved? Are we true to our values? What obstacles should we be aware of?

Obsessive is a word that frequently comes up when Panico talks about his approach to management. He believes that, to build a company capable of lasting 100 years or more, you must be obsessive about values, about reputation, about promoting from within, about creating an organizational structure that can evolve over time, about defining and documenting business practices, and on and on. Those obsessions have earned IPM a slew of awards over the years. The Great Place to Work Institute recognizes it every year as one of the best small-to-midsize workplaces in the country. Other groups have honored it for its ethics, customer engagement, and excellence of character. Then there's the Malcolm Baldrige National Quality Award, which IPM is currently working toward. Panico says he began the Baldrige process because "I wanted a report card based on close scrutiny."

It will take IPM another 73 years to reach its goal, and--if it does-- Panico won't be around to celebrate the achievement. In fact, making it to 100 will depend on people other than him. All Panico can do is give those who come after him a decent chance to succeed. That means, among other things, bequeathing them a culture, a management system, and an organizational structure that are set up for the long haul and not reliant on any one individual, least of all Panico.

Therein lies the challenge for all entrepreneurs aiming to build private and independent companies that are as evergreen as sequoias. If Flagg, Whorton, and others are right about the superior strength and profits of evergreens, we should eventually see a forest of them.

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