September 19, 2014 (Updated September 2, 2015)
An Emerging Model for Purpose-Driven Entrepreneurs
We live in the Entrepreneurial Age. Innovative companies with great teams, led by mission-driven entrepreneurs, have bettered our world and will continue to do so in the foreseeable future. The most transformative businesses built over the last few decades have combined fundamental business principles – sound management and strong financial discipline – with the dynamic and innovative “Silicon Valley” mindset. Many of these companies took venture capital or private equity and their investors were rewarded, when successful, with liquidity upon a sale or IPO.
The once-coveted IPO, which trumped a company sale for entrepreneurs who wanted to see their dreams realized, isn’t what it used to be. Going public in today’s market requires substantial scale and entails significant cost, and can fundamentally alter a company’s character by subjecting it to short-term pressures, the scrutiny of competitors, volatility of traders, whims of flippers, disruption from activists, and a misperception by employees that company performance is measured by daily stock movement. As a result, those entrepreneurs with long-term outlooks, who have no desire to sell or go public, have increasingly avoided private equity capital altogether. In doing so, they’ve opted to build independent and enduring private companies with strategic flexibility but sacrificed the ecosystem of support provided for companies with private equity funding.
Starting with a transformative conversation in 2005 that Dave had with Jessica Herrin, CEO and founder of Stella & Dot, we have seen an increasing number of experienced entrepreneurs pursue this alternative path. Combining sound business principles and extraordinary vision and purpose, and without an expectation of an “exit,” these companies were being built to grow profitably and privately for a lifetime, or longer. We coined the term “Evergreen” to give this path a name.
Evergreen entrepreneurs have the passion and talent of great Silicon Valley entrepreneurs. In fact, many Evergreen founders have been successful, venture-backed CEOs in the past. Today, they are wary of any path that compels them to a pre-determined exit or a growth-at-all-costs approach. They avoid anything that could put the viability and longevity of their business at risk and undermine its purpose. They measure success by how well they deliver on their mission – not by a sale price, IPO buzz, or an investor’s valuation.
While some entrepreneurs dream of quick riches, Evergreen entrepreneurs aspire for long-term impact. What’s cool to them is building a company that thrives for a century, not making a billion dollars. They look for inspiration to people like Dr. Jim Goodnight, the founder & CEO of SAS Institute, the world’s largest private software company. Founded nearly 40 years ago, and with zero outside capital, it has grown profitably every year and now dominates the high-end analytics market. The SAS Institute generates over $3 billion in annual revenue and employs over 14,000 people around the world. The company often ranks first or second in Fortune’s Best Companies to Work For, and Dr. Goodnight ranks high in the Forbes 500. Not bad.
Evergreen entrepreneurs often feel under resourced and overlooked for taking a path that doesn’t require, or allow for, raising venture capital or private equity. This has been more than an observation. Over the past two years, we have met with over a hundred entrepreneurs who have expressed such sentiments. They feel like renegades by eschewing private equity in order to control their destiny and to preserve the primacy of their mission. We gathered dozens of such CEOs at two distinct summits over the past 12 months and the energy and enthusiasm among them was palpable. Get 50 “lone eagles” in a room together and they realize they’re not alone after all -- and that they’ve found their people. People they can learn from, share insights on best practices with, presume trust, and provide mutual support.
Through these meetings and summits, we have observed seven defining characteristics of Evergreen entrepreneurs and the companies they build. The first three touch on Evergreen character; the others on Evergreen strategy.
PURPOSE: Being passionately driven by a compelling vision and mission.
PERSEVERANCE: Having the ambition and resilience to overcome obstacles and keep pursuing the mission indefinitely into the future.
PEOPLE FIRST: Engaging a workforce of talented associates who excel as a team and are motivated by the mission and the culture, as well as the total compensation, in the belief that by taking care of them, they will then take care of the customers, suppliers, partners, communities and their families.
PROFIT: Not mistaking profit as the purpose of a business; but recognizing it is essential to survival and independence, and the most accurate measure of customer value delivered.
PRIVATE: Taking advantage of the ability of closely-held private companies to have longer investment horizons, greater confidentiality around strategies, and more operating flexibility than public or exit-oriented businesses.
PACED GROWTH: Having the discipline to focus on long-term strategy, balance short-term and long-term performance, and grow steadily and consistently from year to year.
PRAGMATIC INNOVATION: Embracing a continuous-improvement process built around taking capital-efficient, calculated risks to innovate creatively within constraints.
These “Evergreen 7Ps” define what Tugboat has come to call the Evergreen path and while it has some characteristics in common with the current venture model, it has some fundamental differences in key objectives, relative priorities, financing and human capital strategies, investment decisions, customer relationships, and execution. These differences arise from the Evergreen entrepreneur’s determination to build a notable private company that will last decades, if not generations.
Listening to Evergreen entrepreneurs today often reminds us of the tech entrepreneurs of 20 years ago. It was the tech entrepreneur that was the lone eagle just a couple of decades ago. While they may grace the front of countless magazines and web sites today, business media largely ignored tech startups, dismissing them as inchoate and inconsequential, before Red Herring started covering them and bringing them together at conferences. The vibrant network of investors and service providers that supported these startups (the entrepreneurial ecosystem) was nowhere near what it is today.
We’ve dedicated our careers to supporting great entrepreneurs and we believe that supporting evergreen leaders is our calling. To that end, we have created Tugboat Institute: a membership organization that convenes great Evergreen CEOs to support each other and to collectively learn, develop, and share Evergreen best practices. We are growing as an invitation-only peer network for high-caliber leaders with unimpeachable integrity, inextinguishable energy, and a shared vision for their approach to company building. We hope the Institute will serve as a standard bearer and springboard for the broader Evergreen movement — a path we believe that thousands of companies are already following in one form or another across the globe.
To further that end, Tugboat Institute is publishing the Evergreen Journal to chronicle the companies, people, and ideas of the Evergreen community. As Red Herring and many other publications played a valuable role in the emergence and success of the venture path, we hope that the Evergreen Journal will have a similar impact for the Evergreen ecosystem.
In order to build a broader support network for Evergreen CEOs, Tugboat Institute has begun partnering with Evergreen exemplars, such as SAS Institute, as well as with a number of industry leading service providers, such as Cooley, who has committed to supporting Evergreen companies — and with services tailored to the Evergreen model as needed.
Many Evergreen companies bootstrap or self-fund and never require institutional capital. Those that do, for the most part, are creative with their financing or just learn how to succeed without outside equity capital. To help a select number of the highest potential Evergreen companies with primary and/or secondary investment, we are building Tugboat Evergreen, an Evergreen investment practice that will focus initially on providing patient, long-term, and non-controlling capital for profitable and growing Evergreen businesses. We are employing a structural orientation towards ongoing profit sharing distributions and dividends to align management and investors. The backbone of our patient capital value proposition is a network of value-aligned, long-term oriented investors that we are bringing together. These investors are eager to support companies in this mold and many are successful entrepreneurs (or their descendants) that generated their wealth by building great, enduring private businesses of their own.
Evergreen is a powerful idea — one that we have observed and labeled, but certainly not one that we have created — and as it gains broader awareness, we are confident that the entrepreneurial ecosystem will emerge to better support the Evergreen path, just as it has for startups over the past decades. The movement will also strengthen as the clear benefits of the Evergreen approach gain more awareness: a company that is purpose-driven, independent, and long-term oriented is tremendously appealing for many prospective customers, partners, and employees. As the Evergreen advantage becomes more commonly understood, we believe these companies will go from under the radar, to being well recognized for the highly attractive employers, vendors, and partners that they are.
We want to be abundantly clear 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. The Tugboat Group’s mission is to re-introduce the vital importance of humans coming together to create and grow lasting, innovative businesses that make a dent in the universe. It does this through Tugboat Ventures (a classically structured venture fund), Tugboat Institute, and Tugboat Evergreen, so that we can support entrepreneurs on both the venture and Evergreen path.
More choice for entrepreneurs is a good thing, and both paths will continue to grow, thrive, and midwife fantastic and transformative businesses. We don’t plan on spending any time proselytizing Evergreen dogma to those on the venture path because we see both as great options, with different advantages and drawbacks. Great entrepreneurs know what path is right for them, so we view our role as supporting them in whatever approach they have chosen. In doing so, we will do our part to broaden our society’s definition of entrepreneurial success.
To keep the entrepreneurial ecosystem on the cutting edge, financial and professional services must adapt to support a wide array of entrepreneurs and a range of models. We must innovate to serve the innovators and to help usher in the next phase of the Entrepreneurial Age.