Why Chasing an Exit Could Be Killing Your Business w/ Dave Whorton 

23:45I think it was about a million dollars. And then Kleiner put in, I think, eight and a half million dollars, something like that. I mean, have that split off. And that was enough to get into the public offering. So some of our biggest successes in technology really didn't need that much capital. And then you contrast. This is going to blow your mind, Ed. So in the first 40 years of the venture capital industry through 1999, $25 billion of capital was deployed. That includes Google, Amazon, Electronic Arts, Starbucks, FedEx, you name it, all those companies. Uber raised$25 billion. One company. I mean, how out of whack are we?

24:24That's out of whack. In any one year, we were getting up to levels of$150,$175 billion of venture capital being deployed. A year. A year. When it was 25, over 40 years, they built these incredible companies that have these very strong foundations. They built from strong foundations. And that's one of my biggest concerns. When you raise all this money and you're moving this fast, how strong is the true foundation of that company? Now, if you can sell it and get out, it doesn't matter. But if you want to build something lasting. Well, it matters to the acquiring company. And I always wondered this too.

24:58How can I tell when I'm looking at a company how it's really doing with all of this artificial cash? It's almost like the economy in general. It's very difficult to know the underlying metrics of a business that's taken on a a perverted amount of capital prematurely. It's just hard to evaluate the company. Hard to know how they're really doing. Well, and it's hard to know what the culture is like. It's hard to know how well they innovate. It's hard to know how close they are to their customers. It's hard to sense, like, are they really a people first organization? Are they just flooding their teams with cash?

25:26And as soon as the stock price goes down, they're out the door. Well, that's my question for you. So I coach, I have an entrepreneurial coaching group I have with Andy for sale. It's called the RTA Syndicate. And so these are real entrepreneurs in our group. And one of the questions we get asked a lot is this notion of, should I take on debt or should I give equity away? And so that's one question of which most of the time our answer is neither, but particularly no on the debt side. At least for me, my tolerance, what I don't like to see on a balance sheet, the pressure it puts on the company.

25:55But one real question I do get, I'm now an entrepreneur and I'm going to go with your philosophy, which is the actual textbook philosophy, which is I'm not building this thing to sell it, at least not anytime soon. It's not why I'm doing it. How do I acquire and hold on to talent? What are your recommendations for that? Because I may be in a marketplace competing with companies that are getting artificially propped up with cash. How do I get good people? Because in order to grow my company, if we're a people first company, it's also right people, right seats, right bus, all that stuff. Do you recommend

26:34equity, a founder giving away equity, but then if they're not ever really going to exit, is that very effective? What are your thoughts about acquiring talent? I know it's a hard question, but that's why I have the show and we do interviews a little bit differently here. I try to push the theory to its extreme. It's a great question. And interestingly enough, when I was first on my learning journey around this, a guy named Pat O'Day, who was the CEO of Pete's Coffee, familiar with Pat. He posed this question to me as we're hiking on Mount Diablo in the East Bay. And he said, look, I'm concerned because I really like the idea conceptually of evergreen companies, but I think you're going to have a talent problem because you're not going to be offering stock options because stock options effectively are worthless if you're never going to sell the company or take it public.

27:15So can you pay him enough cash? Will he be able to buy a house? Those were the questions he had asked. And I thought it was a really good question. So I went and spoke to a compensation consultant that works with a lot of very successful 100-year-plus family businesses. And they said, you know, we kind of think about that a little bit differently. You want to be competitive on base salary, but you need to have some kind of multi-year paying out profit sharing plan. And better if it's economic profit, not profits. The difference between economic profits and profits, economic profit, you take out the cost of capital.

27:49So you basically penalize the profitability of the firm by the cost of capital and say, everything above that, we will give you a very generous share of as a team, a very generous share. And the way you allocate, it can be done different ways, but that's how you kind of earn what goes into, it's called the bonus bank. Then on top of that, you can do equity. I've seen some great firms carve out a little bit of the equity. Even when, for example, the family owns the majority of it, they might say, look, I want my employees to own a piece of this thing. And so I'm going to do something probably on a fixed formula to avoid market variation by the public companies and say, look, you can buy in at this price and you sell back when you leave at the same ratio, whatever it may be, like six times cash flow, eight times cash flow, two times book value.

28:33It'll be something like that. And so you come in and you go out, it's on the same ratio. And then you enjoy the appreciation of value between the time in which you joined and you left. So there are ways to kind of bring in equity type things for you. But stepping way back, I think what's really important is make sure that people are aligned with your purpose. So you need to be able to clearly articulate from the earliest days, what is the purpose? Why does this company need to exist? And then get behind that and then try to figure out what are those four or five core values in which you want to be measured against and you want your team measured against.

29:05And as you're interviewing people early in the process, say, look, I want you to understand what I'm trying to build here. I'm not building something to flip. I'm not building something to generate wealth just for myself. I'm building something that's going to be lasting. I want you to spend your career with me. I want you to help me invent this company. You're going to grow. I'm going to grow. We're going to use the guy. We're going to add more people to this. Yeah, we're going to be working pretty hard in the beginning because we don't have a lot of resources, you know, and we're going to be trying to generate our own profits.

29:31And so we might, in a venture capital model, we would have hired five senior executives in six months. Well, we're going to do that over three years. So I got to pick which person will bring the most value with the cash flow I have today to move the business forward to the next level, the next person. So that if you hear this theme, creativity, creativity, thinking out of the box, approaching things, you have to do this in this model. Even business models to digress them, you got to think differently. There are business models which are highly cash absorptive. there's business models in the exact same industries that are not nvidia is an example of it how many factories did nvidia build zero zero zero now great the tsmc did it for him it's fantastic that a good partner in that but so an evergreen uh founder has to be much much more creative about this and scrapping this role but that's part of the joy that's part of the journey this is your hero's journey how heroic is it being a good salesman and raising a bunch of money from angels and then being a really good salesman and raising a bunch more money from venture capitalists and then having that thing fail later because you never really had it right.

30:36Right. Yeah. That isn't the hero's journey. That's just a good salesman raising a bunch of capital, making a run at it, trying to get wealthy. The true heroes, you know, you know, these people, Ed, the other ones are like, you know what? I'm going to dedicate the rest of my life to this. And it may go slow or it may go fast. It may be small, mid or large, but this is what I'm going to do. and I hope it's large, you know, but if it's not, I'm going to have a one hell of a journey doing this and I'm gonna do with people. I really enjoy. Yeah. I have to tell you, and the latter is what I want to talk about next.

31:06Um, those are the people, at least in my own way that I admire most. So once you've done pretty well, you're in these circles as well. You know, you have friends that are entrepreneurs that have had big exits and you have other ones that have had like these long enduring family businesses that have value and strength and endurance and have made a difference a long time and they're proud of the brand, proud of what they've created. And just my default emotion is I have more admiration if I were picking for the person who's done the long haul and built something sustainable. It's almost like someone who had a really good family to me for three or four years.

31:43And then, you know, that kind of broke apart as opposed to someone who's had a long-term beautiful family with children and grandchildren and a legacy to me, it's, it's what entrepreneurship is.

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32:35Use Indeed's sponsored jobs to hire top talent fast. And even better, you only pay for results. There's no need to wait. Speed up your hiring with a$75 sponsored job credit at Indeed.com slash podcast. Terms and conditions apply. you know, one little piece of this model that I'd like you to discuss, and it's not so much in my prep for the book, but I want to ask you about it is that you do have to have separators if you're going to, you know, be in this model. And for me, I think one of the things that's moving to the forefront and all businesses, even ones who raise money is the experience that either the customer experience is interacting with you, but also your business partners and employees.

33:18In other words, the experience. There's so many things now that are becoming sort of neutral with AI and other information so accessible. One of the separators of coming to work for me, we're going to go long and slow in the right way, is the experience. Whether that be the recognition, maybe it's travel, maybe it's how we treat you, maybe it's the extension of including your family or your spouse is somehow involved in our culture. But what about that notion of these evergreen companies having a, not just culture, but a culture of an experience of being, I think back to Google when they were innovating and having their fun rooms, they were the first that I remember, wow, those guys wear t-shirts on Thursdays and they have a great time and they go play, you know, ping pong in between meetings.

34:03And it became an experience to work there. And I think oftentimes that can be a separator. If you're going to build an evergreen company is just the process of working there or interacting as a client. 100%. One of the things interesting is you point to Google and I'd say people can fall in a trap where like, I have to do all the things that Google did. The ping pong tables, the free food, the free dry clean, all that. You don't. Because at the end of the day, what people really want is want meaningful work. They want to work with people they enjoy. They want to have a boss that respects them, that sees that they want to be able to contribute more, respects where they are, treats them fairly.

34:40That is critically important, more important than the ping pong tables for sure. Now you can have that fun stuff too, and that can be an add-on, but at the end of the day, it's the kind of the commitment the company is making to the individuals, particularly ones that are coming in at the beginning of their careers. The thing that blows me away about Evergreen Companies is the commitment they make to training people and developing people. It is at a completely different level than I've seen in Silicon Valley, at least for Silicon Valley venture-backed growth companies. They don't have time for it.

35:09They're moving too fast. If you get the job, you don't know what you're doing. You're out, right? They're not doing development. We have a company called McCarthy. It's one of the very large general contractors based out of Dallas and St. Louis. The CEO spends 30 % of his work here on training employees of the firm. The CEO does, wow. So there's nothing more important than developing the next generation of leadership. in this firm starting at first-line management. Because if you've ever read Tom Peter's work, he says it's made or broken by the first-line managers because they are the ones that actually manage all your employees, you know, because that's the vast majority of employees are working under the first-line managers.

35:53They are very attentive at McCarthy to that first-line manager training so they can actually do a great job of bringing people in, onboarding them, developing them, not being possessive of them, you know, seeing that there's better things for each of these employees with the organization. So the commitment to training. And what happened was at Stanford Business School, Ed Lazier talked about this. He's an economist. And he said, the problem we've fallen into is that we no longer invest in training. And the reason why we don't invest in training is because the relationship between employee and employer is broken.

36:20So the worst thing you can do as an employer is invest a lot in training for two or three years, have them leave to get higher pay at a competitor. And that's what was happening. Evergreen's asked for a different relationship. They're like, we're going to invest in you like we used to invest in people. but we want you to be with us. We want you to commit your careers to us. And it's not signed in a legal document. It's not signed in blood, but it's, it's just kind of, it's a, it's an understanding that we're going to invest in you at levels. Other people won't, but be with us. And we have responsibility to make sure we create those opportunities for you.

36:51We have to pay you well, but please don't go look for, you know, green or grass elsewhere because it's pretty green here and it will help you understand that. So I think that's a pretty powerful thing is that people can actually make careers. So we ask the question as people join membership and tugboat Institute, you know, how's, how holds, uh, how long has your longest tenure employee been with you? Well, they're 45 years, 50 years. What's your average tenure? 15 years. Their average 10 years longer than the life of most Silicon Valley startups. I mean, I mean, isn't that incredible? And the knowledge and the relationships and externally and internally, it's powerful.

37:28And that stuff compounds to, you know, people, relationships, trust, doing things together. What about, you know, my space, no pun intended, not my space, the company, but space I'm in my space, the, uh, the idea of personal growth. You write about this in the book of different topics, but personal growth and how that's sort of connected to longevity. Because what I have watched happen over time is that the results of a company begin to exceed the personal identity level of the founders or the frontline leaders, meaning a company can actually begin to outgrow the growth capacity of the founder.

38:13And then it stunts the growth of the company. The innovation slows down, that pragmatic innovation that you talked about earlier. and everything just sort of begins to become repetitive and slower. And it's really founded on the fact that that individual who's leading the company or individuals are not investing in themselves to grow themselves, their identity, their ideas, their ability to communicate, their ability to problem solve in a more modern time. Is there a correlation between these long-term evergreen companies and the growth strategy, the internal growth metrics of the person leading it or the group of people leading the company.

38:50Yeah, it's a really good point. It's a subtle point. This is where pace growth comes in. If you're growing a company at 15 to 20 % a year, let's say it's very headcount intense, of which most companies are. You have 100 employees going to 115, 115 to 131. That's kind of where you're growing year after year. Silicon Valley, it's 100 to 200, 200 to 400, 400, 800. That's kind of a winning strategy. That is an extremely demanding leadership talent to be able to manage scale at that rate. And that's why you often have to bring in experienced CEOs, experienced managers, and the founders kind of get pushed aside.

39:23In the context of an Evergreen company where you're taking a multi-decade time frame, you actually give yourself breathing room to learn and adapt and go on learning journeys yourself. Now you will still reach a point, and this is very hard for Evergreen founders, where you're going to look around the table and realize the people that got you where you are, aren't going to get you further. And you have to start upgrading your talent and you have to bring in people who have actually seen more and have more experience. Some of the people are going to go there right with you. But if you as the founder cannot upgrade the team at critical junctures, then you will no longer be able to leave that firm effectively.

40:00And that's where mentors come in. And that's where people can kind of say, look, I see what you're doing. I think what you're starting to see is you're starting to lose some efficiency. And the reason why is because your team is now in a position where nobody's ever done this before and it's starting to really slow you down and you haven't done it before. So when we look at that head of product, I think that might be your first opportunity. Let's see if we can find a really experienced head of product from a company in a similar industry and bring them in. And the first time a founder does that brings one of those in and it's successful, they get it forever.

40:30They're like, oh my God, that was an unbelievable unlock. look, now I get it. And they start thinking about who can they bring in in other areas of leadership. It doesn't mean you have to fire the person that was there before. You just say, look, you've got a new boss. They're going to help develop you to the next level as they help take us to the next level. But that is a very important part of the evolution of an evergreen company. But it's happening at growth rates that are 15, 20, 25%. Again, it gives you some breathing room. That's the rub, by the way, is the guy that founded it with his two buddies, or they've been there since the beginning and they sacrificed through the, you know, intermittent paycheck stage or whatever.

41:09And now that guy, the CFO that started your company may not be the CFO or the woman who should be the CFO going forward. And it's this, it's this idea of disloyalty. I'm going to have to let this person go, but to your point, maybe not, maybe they're rewarded for their loyalty because, uh, and they fit your culture and your mission and your values. And so there's a spot for them. It's just not that spot anymore. and that's it's it's one it's one of the things that you know at least in my mind it's just an honest conversation which is look i think we're getting to the point now where we're holding back the ability of this company to achieve its purpose because of where you are i'm not asking you to leave but where could we put you which would get you back on a growth curve doing something you might really enjoy i've seen people pivot from product to hr and crush it in that or maybe they go from, you know, sales leadership into business development because now their team.

42:02So there's, there's a level of respect in an evergreen company, which I really admire. I mean, I like to say that I feel there's a higher level of consciousness about their relationship with their, the human peers. You know, it's just not manic. It's not about getting rich quick. It's about building something meaningful and doing it together. And that's incredibly rewarding. I mean, how cool would it be to sit on your front porch in a rocking chair with a bunch of the people that work with you and just reminisce about the incredible company you built that's still going strong? You guys are well beyond it.

42:33It's going strong. You've transitioned leadership. You've transitioned ownership. You've transitioned control. And you're like, I think we've left it in a really good place. I think the psychological rewards of that and the relationships that were formed in doing that exceeded anything else. I don't think you could earn enough money through a public company or a large sale to have what that would feel like later in life. And again, you probably have this. I have friends, many friends I really admire, but are starting to really question how they spent their lives. Some of these people were writing, as they say, writing checks their entire life.

43:08I wrote checks for a while, but not my entire life. But they look back and they go, you know, it's interesting. There's been so much capital out there for the last two decades. If I hadn't written that check, somebody else would have written the check. So what did I really do? How did I contribute the advancement of society, make a meaningful difference? If I was just the guy that got there first and wrote the check faster, but if I hadn't existed, the sand would have just filled the hole immediately. It didn't matter. And a friend shared that with me and it just, it was very profound. Yeah, I totally agree with you.

43:41I'm just thinking so many different thoughts right now. This episode is brought to you by Marshalls, where you never have to compromise. between quality and price. The buyers of Marshalls hustle hard, working to bring you great deals on brand name and designer pieces because Marshalls believes everyone deserves access to the good stuff. Visit a Marshalls store near you or shop online at marshalls.com.

44:07Let's step back for a second. I want to ask you, it's book related, kinda. Just like a more like a macro look at the world right now, right? So there's all this talk about what AI is going to do to the world and is there going to need to be a guaranteed minimum income at some point and what's it going to do to the job market. Part of me kind of connects your work to this in the sense that there may be fewer jobs, which may need, in my opinion, to cause people to go into business for themselves and create an expression of themselves as an entrepreneur. Maybe more people are going to move into being responsible for their own incomes.

44:45if i may be right about that long term let's assume someone listening to this right now maybe they aren't an entrepreneur yet but they're thinking i have the itch that michael gerber called a name at the entrepreneurial seizure so to speak would there be any overall advice for you you know trend wise something passion wise that you say hey if you're going to do this long-term business thing and it's going to endure and there's going to be all these ups and downs way more downs than you think, here'd be some of my advice of industries or places, or don't look at all. If you don't have that entrepreneurial thing about you, what would you say to them?

45:21Well, to your last point, I, I think you have to really want it. You're going to be an entrepreneur. I mean, if you're, you want to be a serious entrepreneur that builds something of significance, you got to really want it. You can't have, there's no half measures, right? You're all in. There probably are industries you want to be careful of. I mean, if we want to pick on ones that are more obvious looking backwards, you probably did not want to be in a DVD video store when Netflix announced that they were going to start streaming. I mean, that was the beginning of the end, right? And I'm sure there are equivalents of that today.

45:55Some people say that that'll apply to graphic designers and others like that. Yeah. One thing I do believe is I think if you're the best in any area, you'll have a meaningful life and compensation won't be an issue. I don't care where it is. Anywhere. you know you've probably heard of jiro there's a very famous movie called jiro dreams of sushi i have not i have not heard of it no beautiful film i think it's still available but maybe i'll watch on netflix he is the best sushi man in the world in japan in fact at the fish market in tokyo they actually hold the best fish for him because he's proven he can take that fish and turn into something so magical that is beyond the taste experience of anybody he's extremely, I think he's 90 something now, um, been happy his entire life.

46:43Compensation has never been an issue. You can charge whatever he wants for a sushi. I think that exists everywhere. And Joseph Campbell talked this about this too. And a lot of his writings, which is, you know, if you follow your bliss, everything's gonna be okay. So even in a world of AI, where all this stuff can be destroyed, if your deep, deep passion is graphic design, go for it. You're going to still find a way to, you know, do something incredible, um, in that domain. If you're going to be okay in some of those fields, I don't think you want to be okay. You know? And so I think one thing it does is that I feel really, uh, fortunate or unfortunate, I think it's going to cause people to be very thoughtful about what they really want to do.

47:19And I think to really excel in that, I think that, um, that's going to become very important. I also am not quite sure to your premise that there will be less jobs. You know, Paul Romer, the economist that talks about this a lot, his Nobel prize winner about as ideas are introduced, there is discontinuity for sure. But typically things happen in an unexpected way. They end up absorbing all of the talent that's needed too. So this idea of AI assist to me feels more natural than AI replace. And I think, you know, yes, you may have less radiologists, but those radiologists with AI assist are going to be really good.

47:56And so that might have been okay or mediocre radiologists, go find something else to take advantage of AI system to go do great things with. Yeah, by the way, I know I don't know. And I've interviewed enough people on the show that are expert. I really don't know. It's certainly, I do feel like I just, I feel like more and more people, entrepreneurship has just become very sexy through social media and Instagram and Shark Tank. And I think a more real world explanation of this is a grind. It's hard every single day. It never leaves your mind. You probably do take it home with you more than you realize.

48:30And it's the ultimate for me. I'm not a singer. I'm not a particularly good painter. Entrepreneurship for me has been the greatest form of expression of my lifetime. It's how I express myself. And for a lot of you, it may be this part of you that's itching and yearning to express yourself a little bit more deeply. And you don't have a desire to exit that form of expression. You'd like to build upon it and see what it can turn into and it can become. So I love the work you're doing. I want to ask you one last question. By the way, this is like flown by. I promised you a certain timeline and we've blown through it because I've enjoyed it so much.

49:03But I think of friends of mine like Sarah Blakely, who built Spanx with no debt, and she did end up eventually exiting that company. And, you know, I know one of the three guys that founded Casamigos Tequila. Three years later, they had this exit and it's a billion dollars. And then everyone goes, oh, I need to start a tequila company or a vodka company. And, you know, that's what everybody thinks. Oh, sure. Every alcohol company starts in three years. It helped having George Clooney as your spokesman, right? That didn't hurt. So I'm just wondering your advice to somebody listening who's, you know, they're sitting there going, I want to build an evergreen company.

49:34This was a really fruitful discussion. I'm going to certainly grab the book. There's no doubt about that. And we'll give them a way to get the book here at the very end as well. But something that they didn't cover in the interview that I wish they would have covered and I left the floor open to you. one other big takeaway from the book or thought process idea would be what? What would you impart on to somebody who should be building an evergreen company that lasts and lasts and lasts? The one idea that came to mind, because you made a reference to this before, building an evergreen company does not mean going slow and doesn't mean going slow forever.

50:10And there's a gentleman named Ho Nam, who's a dear friend of mine at Altos Ventures. And he argues this very, very succinctly, which is if you go slow in the beginning and build a found, a strong foundation, you know, your culture, your product development processes, your customer service processes, your sales processes, you will actually see accelerating growth over time. And that'll be very profitable, accelerating growth. So what I don't want people to leave with this impression that this leads to small companies over a very long time. This can do two very big companies, not in a decade, but over three decades.

50:46So if you're 30 years old and you've got this deep purpose and you're like, I'm going to do this, you're right, Ed, it's going to be a tough first five or six years. That's just the nature of this. Then you're going to punch through, you're going to get to sustain profitability, you're going to start strengthening your team, you're going to start adding additional products to your partner portfolio, you're going to expand your geographies, and it's going to start growing faster. And so you may see an increasing growth rate over a period of time. And next thing you know, you're doing a billion in revenues.

51:14You're doing two billion. Not a valuation of a billion, actual revenues of a billion. And so I don't want people to leave thinking this is a small company phenomenon. You can build a small company too on the same values. That's fine. But I don't want people to feel like they can't build something of significance. And you know what? I don't want them to think either, brother, on your behalf, that you're not building a massive asset just because you don't intend to liquidate it. Right. So just remember this. You're building an asset. Building a business is an asset just because you don't plan on selling it or liquidating it anytime soon, if ever, does not mean it's not a tremendous asset.

51:48In fact, some of the wealthiest people that I know never sell their homes. They just get other ones, and it's an asset. So just because you're not going to let it go doesn't mean it's not an asset for your net worth that you can leave to your children or grandchildren or to something philanthropic in your life. And so just remember that. Just because there's no exit doesn't mean it's not an asset. You don't have to sell something for it to have value. And that's what I don't want people to miss either. Go ahead. Final thought. And that company, let's say you sold that company at year seven and you took out$20 million.

52:24That'd be an incredible outcome, right? Well, you build that at 15 % a year for another 20 years, you'll take out more than 20 million every single year. So it's still, again, don't do it for wealth generation, but don't think this is like some philanthropic thing. Now, what you're going to do with all that money is I hope you're going to give some to your community. I hope when somebody calls you up and says the hospital needs$10 million for that new wing, otherwise we're not going to be able to provide this kind of care in this community. You know, like I'll write that check. I'll write that check because that's what I do for this community.

52:57I mean, that is a wonderfully be able to do with that kind of success. I totally agree with you. What's really interesting about today's conversation is for so many people, this is actually, it's almost like a first introduction to actual entrepreneurship, not this other version that you've heard. And by the way, I have many friends, including myself, who have had liquidation events. They're great. It's just not the norm, nor should it be. And what we're talking about here are companies that create value, that change culture, that change families, that change communities, that can change lives.

53:30And this is a much more real, sustainable, wonderful, medium, big, and huge size companies at every single scale and scope. So, guys, you heard from Dave Wharton today. The book is, and I love this book, by the way, Another Way, Building Companies That Last and Last and Last. The book's loaded. So go get the book because we just scratched the surface today. Dave, this was so good. It flew by. Thank you so much. This was fun. I really appreciate it. Enjoy Sun Valley, brother. God bless you, everyone. Max out.

54:03This is the Ed Myland Show