Why and How to Build Businesses Designed to Last Forever

Evergreen

With its Evergreen company certification, the Tugboat Institute is creating a new community of companies that see staying mindfully private forever as the best kind of success.

There’s a dominant paradigm in business today, especially in Silicon Valley: Do whatever it takes to grow big, as fast as you can, then sell the company and move on to the next thing. After years as a successful venture capitalist and entrepreneur, Dave Whorton had seen plenty of companies follow this method. Some — including companies he founded himself, like Drugstore.com — succeeded, with profitable exits as they went public or sold to bigger firms. Others faltered along the way.

But when a friend came to him looking for funding for a company she wanted to run for the rest of her life, it got Whorton thinking. Was there a formula to prosperity and success besides the one everybody in his industry seemed to be preaching? Was anyone else thinking differently? What happened to the idea of building a company for the long haul, which he’d witnessed as a high school intern at Hewlett-Packard?

To try to answer those questions, Whorton started looking for and interviewing business owners like his friend, whose ambitions were to make a difference in the world but who had also made a conscious decision to not raise private equity or venture capital. He wasn’t sure whether he would find 20 of them. Now, three years later, he has interviewed more than 300 founders and CEOs who fit that new mold. And he founded a business, the Tugboat Institute, to facilitate a community around the idea. He calls it the “Evergreen Movement,” and he would like you to consider joining — even if you don’t own your own business. We spoke with Whorton about what it means to be an Evergreen company, and why the world needs this mindset.

This idea of an Evergreen company, and putting a name to it and creating a community around it: why is that game changing?

Dave Whorton: Because we’ve too narrowly defined what business success looks like. Everybody should understand there is an alternative approach to building a company. Silicon Valley is all about growth; don’t worry about profits. In Evergreen, it’s about getting to profitability, then growing from your profitability. It can be good for employees, customers, suppliers, the community, owners. But you have to take a much longer planning horizon, and you’ve got to not expect it to be a silver bullet. It’s a long, persistent process of change and innovation and growth.

 

The 7 Characteristics of Evergreen Companies

Whorton and members of the Tugboat Institute have landed on these seven guiding principles that define an Evergreen company.

1. PURPOSE: Being passionately driven by a compelling vision and mission.

2. PERSEVERANCE: Having the ambition and resilience to overcome obstacles and keep pursuing the mission indefinitely into the future.

3. 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.

4. 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.

5. 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.

6. 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.

7. PRAGMATIC INNOVATION: Embracing a continuous improvement process built around taking capital-efficient, calculated risks to innovate creatively within constraints.

That idea is pushing against a culture that has become prevalent in a certain community; Silicon Valley and maybe business schools. But on the other hand, it also feels like what was normal 50 years ago.

DW: Yes. I’ve had people say to me, “Dave, this is old-school. This feels like the old Midwestern values.” It’s old-school intersecting with the energy and ambition of Silicon Valley; that cultural feeling like “we’re going to make a difference in the world. Over time we’re going to become an impactful, scaled business, and through that business we’re going to do tremendous good.” I’m not saying Silicon Valley is essentially bad. I love the spirit of it. Hewlett-Packard 30, 40 years ago had that spirit. It was old-school and it was innovative. It had that energy and that can-do attitude.

What did you find through all your interviews? What distinguishes these companies?
DW: We ended up coming up with a list — the Seven Ps (see left) — to describe what I found. A couple of things stood out immediately. One, by definition of the people I was interviewing, these were all private companies. But they saw strategic value in being private. The experiments they could run, the practices they could try, they wouldn’t be able to do if they were on the traditional path of raising venture capital equity or going public. There’s a playbook that’s expected there that wouldn’t give them that flexibility. Also they know that being private for the long-haul means that they don’t have to do quarterly reporting, that they don’t have to disclose information to short-term-oriented investors.

Second, most had been profitable almost from day one. They usually had extremely thin teams in the early days, but felt that was the way to stay nimble and to get to profitability and figure out what the customers really wanted.

Next I noticed just how purpose-driven these entrepreneurs were. I don’t think a single one of them said, “The reason I’m doing this is to make money.” Of course, if they build a valuable company that delivers great services or products, and do it profitably, that’ll happen, but they’re always very quick to say, “But that’s not why I’m doing this. That’s just a byproduct.”

Then that often led to a meaningful conversation around their teams; they deeply believe in the people. Taken to the extreme, some of the companies had open books with all of their employees. That was often coupled with generous profit-sharing plans; “If you keep helping me build a profitable company, I’m happy to share some profits in both cash and other benefits.”

Another thing I heard is that if you’re going to build a company to last a hundred years, you’re going to need tremendous perseverance, because there are going to be ups and downs in your industry and in the macro environment. I heard many stories of what people had to do to get through tough times. It was often in the context of “people first.” They went to the team and said, “Look, it’s 2009. Revenues have slowed down and we’re going to go unprofitable. How do we do this, guys? How do we solve this problem?” It was this sense that they’re all in it together, which I thought was terrific.

And then the other of the Seven Ps — paced growth, pragmatic innovation — those were ones that I heard not from all, but from some. Particularly in companies that had been around for 30 or 40 years, innovation was just wired into their culture at all levels. With growth comes change, and with change comes the need for different approaches and ideas and products.

 

Whorton’s tips for following the Evergreen Path

> Incorporate as an LLC

It makes more sense tax-wise if you’re ultimately going to be distributing cash to yourself as an owner. In a C Corp structure, you’ve got to pay corporate taxes and taxes on your dividends. In an LLC structure, you’re taxed just one time as the individual owner. Also, if you ever change your mind someday, it’s much easier to move from an LLC to a C Corp than the other way around.

> Accept modest capital, wisely

Often a business does need a little bit of capital in the beginning, though it might be a lot less than Silicon Valley would suggest. Spend that wisely and source it from people who have bought into the idea that you might be an Evergreen company, even if you’re not sure yet. It’s also ok to use a little bit of debt financing.

> Be very honest with any investors you do bring in

Be clear from the start that you don’t ever intend to sell the company or go public. You want the angel investor who says, “If you want to run this privately for the rest of your life and send me dividends, I’d be delighted to see that.”

> Commit to being fair to your employees

Pay market-competitive salaries and overtime; provide good benefits. Set up a profit-sharing program to ensure that employees gain some of the upside of helping build a successful company — and then don’t cap it or ever take it away.

What does it mean to officially become an Evergreen company? Is there a certification? Is it like being a B Corp?

DW: We just announced our Certified Evergreen program in the summer of 2016. We’re going to use the Seven Ps as a set of evaluation criteria to help people understand how Evergreen they are.

They’ll submit data and information and surveys to us. We’ll validate that information and then we’ll let them know how they did. The idea is that it’s a high quality standard: There’s real data. There’s real surveying. There’s real validation.

That allows them to then go out and say, if they pass, “We’re a Certified Evergreen company” and hopefully take pride in that recognition. We’ll be accepting applications at the end of 2016 and start certifying for 2017.

What kind of specific metrics are you using to tell whether somebody really is being good to its people or purpose-driven?

DW: All this stuff I like to do in a collaborative way. So we have a working group of members of the Tugboat Institute who are doing that with us right now. We’re looking at each of the Seven Ps and asking, “What is the qualitative and quantitative information we need to validate how somebody is on that P?”

As you might imagine, looking at certain things is going to be easier. Knowing if somebody is private and has not taken outside investment that requires an exit, that’s pretty clear. But how do you measure perseverance? As far as we know, there isn’t really data to do that. That’s going to have to be stories. What has that leader and that team done to demonstrate that, in very difficult situations, they’ve fought their way through and strengthened the company? That’s a work in progress.

And then it’s going to evolve. We’ll get smarter and smarter about it. This is something that will be good at the beginning and will continue to get better over time. You can’t just say you’re certified and it’s forever. No, no, no. You’re going to have to submit annual data. Then every couple of years, you’re probably going to have to go through a pretty rigorous recertification process.

A key piece: The Tugboat Institute membership is for the CEOs and presidents of these companies, but Certified Evergreen could start from any employee. I can see a 24-year-old Millennial saying, “I really want to help my company certify as Evergreen,” and leading the charge.

Does the world need another certification? How do you see yourself in relation to B Corp certification, for example?

DW: All of this stuff is good. People have asked me the same question about YPO [Young Presidents’ Organization]. They say, “Dave, you’ve been a member of YPO for ten years. Do you see this as an alternative to YPO?” No. It’s a complement to YPO. I say the same thing with B Corp. I don’t see us in competition with anybody because I think the more important thing is that we’re all moving forward with this different way of thinking about business.

With B Corp in particular, there’s a lot in common and there’s some differences too. For example, you can be a public company and be a B Corp. You can be a venture capital-backed company and a private equity-backed company and you can be a B Corp. Those would be knockout criteria for us. We’ve got a narrower community. We’re putting additional emphasis on the importance of being able to stay private indefinitely. Forever.

These are good values for building businesses. I would love to see Evergreens thrive all over the world, in contrast to everybody thinking the only way to do this is to grow really fast and raise outside money and sell it or break.

What’s giving you hope?

DW: The people in this community. These are truly remarkable human beings. They have the courage to do something they know in their gut is right. They’re acting in a way that’s very contrarian to what everybody in the world says they should be doing, and you just have to appreciate people like that.

At the beginning, I didn’t know if there were a half a dozen people who built businesses under these values. Now I know there are hundreds if not thousands, and maybe tens of thousands. They just have to be awoken. That gives me tremendous optimism, because that means there’s a chance there can be a huge number of employees having really meaningful experiences, engaged in their work, and learning how businesses work. They’re going to leave those businesses someday and go create their own businesses and live those values, and that’s going to get spread further.

Most Evergreen CEOs, while they’re investing tremendous amounts of energy in educating their employees around financial literacy and how to be great businesspeople, are more than happy to see those people leave and start their own companies. They view it as part of their role in society, to create the next generation of really talented entrepreneurs. I’ve never seen that before. In the Valley, it happens for sure, but it’s not deliberate. They’re doing this deliberately. Those are all reasons to be optimistic.

Learn more about the movement: www.tugboatinstitute.com

This article appeared in Issue 10 | Nov/Dec 2016

In Issue 10, we’re looking at the game changers – the people, ideas, and companies that have the ability to shift the entire paradigm of their industry or change the game for good. In an exclusive partnership with Gamechangers 500, we profiled the top 25 for-benefit companies in the world. We also have interviews with Next Jump Co-CEOs Meghan Messenger and Charlie Kim, who spoke to us about building a $2 billion company based on culture; Tom Chi – the co-founder of Google X – who spoke to us about rapid prototyping; the CEO of Next Energy Technology who detailed the company’s breakthrough energy technologies; and Jed Emerson, the Godfather of Impact Investing, who reflected on the future of conscious business. Plus: how to shift your workplace culture starting with you, a look at the new job skills needed in the current economy, and what it takes to have people-first leadership.

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