Building Evergreen Companies with Dave Whorton – EP.267

Inzo Technologies – https://inzotechnologies.com/

(00:00:44) – Sponsor – ⁠Inzo Technologies⁠

(00:03:02) – The Tugboat Institute and Evergreen Companies

(00:03:50) – Dave’s Journey in Technology and Venture Capital

(00:08:46) – The Value of Long-Term Family Businesses

(00:29:15) – Governance and Family Harmony in Business

(00:33:13) – Lessons from Multi-Generational CEOs

(00:33:52) – Estate Planning for Founders

(00:35:29) – Curiosity About G3 and G4 Leaders

(00:37:36) – Industry Selection in Evergreen Companies

(00:40:09) – Challenges of Transitioning to a Family Business

(00:43:08) – Alternative Paths to Business Growth

(00:49:36) – Innovative Practices in Evergreen Companies

(00:59:13) – Northgate Markets: A Success Story

(01:02:59) – Concluding Thoughts on Evergreen Companies

Alex Bridgeman: Dave, thank you for coming on the podcast. Think Like an Owner is all about how ambitious CEOs grow great companies, and you’ve met a lot of CEOs both through your time in venture and then also your time building the Tugboat Institute, which is a big focus of your book, Another Way, that talks about both the Tugboat Institute and many of the CEOs in it and kind of why they chose to be a part of it and chose the lifestyle and business decisions that they did, which I am excited to dive into. But can you talk about what led up to Tugboat? It’s a really unique background for someone doing something like evergreen CEO summits and conferences and content. 

Dave Whorton: Pretty orthogonal, right? 

Alex Bridgeman: Yeah, it’s a very different background. So, I want to hear a little bit more from you about that. 

Dave Whorton: Yeah. Well, Alex, thanks for having me on with you. So, my background is really in technology. And my first exposure to technology was in high school at Hewlett Packard. I spent four summers working in manufacturing facilities in Santa Rosa, California. I had three divisions up there, showed up at six in the morning, stuffing circuit boards, assembling chasses, doing micro assemblies, worked with engineers, got to spend a little time with the general manager to the divisions, and just had a natural passion for math and science, and I really tapped into it with HP. And what struck me about HP at that time, which is kind of coming full circle with what I do today, is just the value system at HP. And I call it the HP way. David Packer and Bill Hewitt founded the company under that value system, and it’s a very people-first type of value system. I’d say before they went public, they were a stronger, better company than after they went public. They weakened over time, and then, of course, with the merger with Compaq, it weakened significantly. But that was my first exposure, and I really had very positive feelings about corporate America from that experience. Then I went onto Cal Berkeley, studied mechanical engineering, worked at a startup one summer, worked at Nordstrom one summer, got some different experiences, and then came out, worked at Bain & Company in the San Francisco office, which was, very few Bain offices at that time, a very entrepreneurial office, and loved the people I worked with. Great culture there too, but I did see through some of their clients weaker cultures and ones that were not very fair to their employees, companies that were struggling and I don’t think acting out of generosity or thoughtfulness to the employee base. And then I left that, started a company making industrial CO2 lasers, partnered with an older gentleman, a physicist who had a brilliant idea around this, ended up traveling into Europe and Japan on a regular basis selling these lasers. We’re going to try to disrupt and change the world around high-powered 5,000-watt CO2 lasers. My company ended up being sold. I went to Stanford Business School, and in my first month there, and this is talked about in the book, I was really brought into the venture capital world by John Doerr at Kleiner Perkins. He recruited me to be a summer intern with him. I chose not to do that. I worked at Netscape instead and had a pretty interesting experience there. Then John, in my second year of business school, said, we really need to talk about you coming in here. I’m being inundated with business plans and ideas and entrepreneurs. You have a pretty unique background. I’d spent also a year in venture capital with InterWest Partners before Stanford Business School, so I had a taste of what that looked like, and ultimately decided to join that firm and spent three years working with John and the partners there. Very interesting time. I mean, Amazon, I think, went public a month before I arrived at Kleiner. Kleiner was the only venture capital investor in Amazon. That started the beginning of a relationship with Jeff Bezos that would go over years. Later in my tenure there, I was kind of taking the lead on behalf of John of doing the financing with Google, with Larry and Sergey. So, I spent time with them and helping structure that investment and some early participation with them post that investment. And saw a lot of other things, helped write the business plan for AutoTrader, helped lead the investment in Blue Nile. My classmates actually started Align Technologies, the one that replaces braces. And so, it was just a very exciting time and learned in that period about how you build companies fast. And John Doerr is a huge pioneer of this. That led me to starting my own get big fast company called Good Technology. We can go into more detail there if you like, but ultimately we sold that to Motorola. And then that led me to TPG, one of the top private equity firms. They asked me to come and take a look at their very new venture capital fund and portfolio and ended up, almost as an experiment for them and for me, joining that firm and helping turn around that fund very successfully, which I was able to do in a short amount of time based on an investment in a company called Success Factors, which ended up being just a really successful fast growth early SaaS company, much earlier, probably shortly after salesforce.com was one of the big leaders at that time. And then I started my own venture firm called Tugboat Ventures. And the idea being is that I kind of wanted to do it my way in a more traditional way, kind of a pre-get big fast way, working with really ambitious entrepreneurs, but willing to kind of do it in a more bootstrapy, capital lightweight, control your destiny, set your timing, take a little bit longer time horizon, and really ended up working with some entrepreneurs I truly loved working with, but found that it was still venture capital. No matter how I described it or thought about it, more patient, kinder, more understanding, whatever, at the end of the day, we had to sell these companies or take them public, and a lot of pressure around that. And I think that’s what your question was, is how did this lead to Tugboat Institute? And that happened in 2012, 2013. You raise a fund about every two or three years, it was time to start thinking about raising a third fund. And I used the opportunity based on the conversation I had with one of my lead investors that was kind of concerned about my current strategy for the fund in an environment where there was a lot of checks being written very fast and I was going slow, to go out and really see if there was entrepreneurs out there that were more aligned with, I’d say, were more like David Packard and Bill Hewitt. They were building it to build something that was a real contribution to society. They wanted to treat their people really well. And so, I started posing the question, who do you know that’s ambitious to build a meaningful company? Not a lifestyle company, but a meaningful company, make a dent in the universe, but has no interest in raising venture capital or private equity, and has no interest in ever going public or being sold. And a lot of my friends, when I first posed this question, were very puzzled, like, what? It doesn’t fit. You can’t be ambitious to build a meaningful company today and not take venture capital or not find a growth private equity investor. It just doesn’t work that way. But a few people started making introductions, and I started meeting folks, and I started seeing there was this kind of whole class of companies that weren’t really named. Some were family businesses, some were founder led bootstrap, some were employee owned even. And I started realizing that, outside of this very exciting environment that I worked in, where there’s a lot of capital, things moving very fast, very manic, big wins, big losses, there was something much more steady happening out there. And that was what I ended up calling Evergreen Companies and then forming the Tugboat Institute in 2013 as a vehicle to support them. So, I didn’t raise that third fund. I continued supporting my first two funds. But as I started shifting my energy from looking for new deals to invest in, I started spending time looking for new entrepreneurs and leaders who might benefit from being part of a community of sharing best practice around how to build something that doesn’t go public and doesn’t get sold, but might someday be a $35 billion company in revenues, 50, 80, 100 billion, not that they have to be there, but of a scale that you see in public companies but done on the private side. 

Alex Bridgeman: And over time, of course, you’ve found, and that’s probably the power of such a big country and the internet, for any group of people or any set of interests, you can generally find enough people who care about that thing. And there are, and through the podcast too, we’ve met similar companies that sound similar to that where they’re family-owned but for multiple generations, no intention of selling, and think about growth in a very different way. And one thing I find so interesting about those companies is how much more long-term, like myths and legends and stories about the company are. There’s usually a grandparents or parents or great-great-grandparents who started the company. They started out of the garage or they started in the Great Depression or some, there was some awful war… Yeah, there’s some terrible time that was going on in the midst of them starting this business and those stories of struggling and we were this close to going under or had this product go wrong or something like that, those stories get passed down through the families and to the kids who take over the business and on and on in a way that’s really unique to family businesses. And I think it’s, from what I can see, very rare in public companies or even many other private companies, that kind of storytelling and that keeping the ideas fresh in your mind that it can all collapse if not run well and you’re not prudent or savvy or whatnot, that it can get worse. Keeping those stories live is really, it’s a unique aspect of a lot of the companies that you work with. 

Dave Whorton: Yeah, and those stories get formed, as you said, often in very difficult periods, periods that we’ve never seen in our lives, you or I, maybe we will be seeing this year, maybe in four or five years. But I like to joke there’s a company in St. Louis called the Stupp Brothers, and it was founded during the Civil War. And I think it was during the late 1880s, there was a fairly significant depression, if not recession, recession, if not depression at that time. And they lost the business to the bank. They had borrowed too much money. This was a company that made steel bridges. And they made a commitment as a family never to borrow money again. If they did, it would be on a temporary basis, very low amounts of it. That’s just part, it’s wired into the DNA of how they think and how they care for the business because they’ve seen how bad it can really get, and they don’t ever want to put themselves in that position again. Those stories, I’ve spoken to John Stupp Jr, it’s as if he participated in the story. It’s that clear. And so, you’re right. It’s a very powerful thing to be able to share these lessons over generations. Whereas if you think of the average public CEO, I think they’re now less than four years in that seat. Most of our evergreen CEOs, it’s very common for them to be in the seat for 20 to 25 years. So just from a continuity of learning, a compounding of knowledge, it’s a real advantage. 

Alex Bridgeman: Yeah, you get to benefit from the experience of your earlier predecessors in a really unique way. A lot of the other CEOs we’ve had on the podcast, there’s peers or investors that advise them, but it’s totally different when it’s the person who was the CEO before, maybe it’s your parent or grandparent who was that person who is now telling you, and has been telling you your whole life since you were a kid about all the stories about the business. And you’re right, those lessons are so much more ingrained over time because you have, by the time you become- the kid takes over as the CEO of the company, they may have been hearing these stories for 40 years. 

Dave Whorton: Yeah, that’s true. And just as a kind of a nuance of that, or maybe taking over as chairman of the board or head of the family council, just having these ingrained values, these ingrained stories, this kind of very even-keeledness that comes from that, versus you said you might have a new investor come into a firm on another round of financing, and they’ve got their own objectives for the company, they’ve got their own ideas what it should do. So, there’s something quite powerful about those stories, those values, passing them along. Like some of those powerful ones around things related to perseverance, like keeping low debt, others around how you treat people. And it’s just grandpa, like you said, always treated people well, mom always treated people well, I will always treat people well. That’s just what we do. That’s who we are. That’s pretty awesome. And then knowing that the owners of the business support that fully. So, there’s no gap between how the operating lead is running it and kind of the values of the board and the owners, which is also really important because there’s alignment there around the purpose, around the values, and these can get quite out of line for both public and private companies that have institutional investors. 

Alex Bridgeman: Yeah, there’s a lot of wisdom there too. And low debt is a very common maybe expression of that idea. You run a company, you run a family company for long enough, there’s going to be cycles that that company is in where having a lot of debt was a terrible idea, or being bad to people was also a terrible idea. And you’re capturing lessons from a much longer time period where over 100 years, there’s so many things that could go wrong or pose a challenge to your business that you can now learn from, versus kind of having a maybe 20 or 30 year or even less recent history of lessons learned. 

Dave Whorton: Yeah, so one thing that sparks in my mind as you say this is a conversation I had with a gentleman named Spencer Burke. He was a lecturer at Olin Business School and used to work at Edward Jones as a partner, is now at St. Louis Trust. And he said, Dave, I want to challenge your thinking about innovation. He said, you come from Silicon Valley. I think in general, you guys view yourselves as the great innovators of the world. What about a company that’s been around for a hundred years? How about 200 years? How about 300 years? Depressions, world wars, changes, geopolitical changes of massive scale. And these companies survive through that and adapted and innovated. And I was like… I had many of these in the book, not this particular one, but many where it’s just, it’s like, I felt like my eyes were just opened. It’s like, ah, I never thought of it that way. I’ve been so centric on what we’re doing in technology today with emerging technology out of Silicon Valley. I didn’t really think about it. It’s more than just that. It’s more than just going out and raising a bunch of money and bringing technology to market and maybe one out of a hundred times building a great company. It’s like how about these companies that have found a way to continue innovating decade after decade, century after century? Those arguably are the great innovators. 

Alex Bridgeman: What are some of the things that many of these families do to most effectively pass on those lessons and stories? Obviously, raising kids and telling them stories all the time over dinner or maybe bedtime for some of the nicer ones, that’s clearly a great way of communicating stories and myths and legends over time. But are there some more structured ways you’ve seen families do that for future generations, especially as the family becomes much larger and there’s more and more grandkids? And doing that kind of one-to-one becomes a lot more challenging when, if you have one grandparent who’s running the company today and they have all these stories in their head, communicating those consistently to ten grandkids, it’s going to be pretty difficult. What are the more structured ways you’ve seen families do it most effectively to pass on those stories? 

Dave Whorton: Yeah, the family businesses, and it’s interesting, it applies also to employee-owned businesses that go through multiple generations too, they have to become very deliberate about their communications and how they phase those communications over time. So, some of the best examples I’ve seen are ones that say, by 13, we want to expose them to this set of ideas. They’re at that level of maturity to understand it. At 18, another set of ideas. At 25, another set of ideas. And so, there’s almost a deliberate training that happens in stages. And that can be structured around annual family gatherings. They’ll tell you a couple of times a year they might do this. But for example, at 13, they might say, we’re going to start teaching you what it means to be a shareholder. How many people get taught that at 13? It’s not about being a shareholder of that family business, it’s just being a shareholder. What does it mean to own a piece of a company? And what’s that entitle you to? And what are the economic benefits of that? The idea that money is being made for you while you’re sleeping at night, right? And then at 18, it might be, let’s talk about our family business specifically. Let’s talk about its history, how it got formed, what are the core values, how to… And so it’s more of a philosophical level. And then maybe at 21, it’s like, let’s get into the books. We’re going to teach you how to read an income statement and a balance sheet. And this will be of our company. And we’ll show you why we’ve made the decisions that we made. We’re going to have you start meeting with some of the senior managers, CEO, leadership team, and start getting exposed to how they think about things, because ultimately, you’re someday going to be a steward of this whether you take a job in the company or not. They’ll have work rules around if you do want to come into the company, what are the set of expectations around that? Many of these businesses say we need you to go off and work somewhere else for three to five years, we want you to get an advanced degree on top of it, maybe, maybe not. But go out and experience the world before you come in to our company. Because, well, we do a lot of things well, we’re not perfect, but we don’t want you to understand that there is no perfect company, so your standards are too high even for us. And then if they come into the company and they’re working in the company, how do they get promoted? How do they get compensated? How does that look? And so, the ones that have done this well, generation after generation, they’ve been extremely deliberate in this. Because as you said, if you’re the children of the founder, you were exposed to this firsthand. You got to see what dad and/or mom were doing on a regular basis. You saw them have difficult periods, how they behaved during those periods. You probably picked up a lot at the dinner table. You probably had summer jobs working there during high school, maybe college. You had a lot of exposure to it, so you didn’t really have to be trained. But that third generation, the fourth generation, you have to be a lot more deliberate. It’s something very subtle here, but very important, is that often that second generation was raised in a family, it was actually pre-wealth. They did not have wealth yet. And so, they saw what it was like to drive an older car and go to the beach for vacation and go camping, versus the third generation and things have gone really well, might be like, huh, to take an extreme, we flew private down to the Bahamas. Well, that isn’t the experience the founding generation had or the second generation had. So there has to be some conditioning about what does it mean, wealth in our family, a whole conversation outside of understanding the business, the responsibilities there is just what is our responsibility as somebody who’s been given the privilege of starting with wealth and what should we do with that wealth to continue being productive in society. So, I think, I’m giving you a very long answer, but it’s a lot of education and it’s a lot about being deliberate about this. The other thing I’d say is when there’s a misalignment around perhaps let’s say how a grandchild is behaving, it’s not ignored, it’s addressed. If you’re in the business, you’re not coming to work on time, you’re leaving early on Friday afternoons, you’re doing that because you think you can do that, or you can be fired also. And let’s be very clear. If you’re fired, you probably will not return to the company. And so, there’s also an attentiveness to making sure that people are honoring those commitments they’ve made as part of that family. 

Alex Bridgeman: So, we had the CEO of First Supply, Katie, on recently. And First Supply is a fifth generation wholesale distributor in Wisconsin. Fascinating business. It’s massive, too, like 700 employees and really big business. I have an affinity for distribution businesses. I find them just really interesting and they just built a massive brand new facility that looks very cool. But one thing she talked about was in their family board on the company, they also have independent non-family directors who can come in and kind of provide some of that governance to help provide like a more unbiased, but someone who’s a bit more direct in their feedback to help kind of steady the board a little bit. Have you seen that be successful in other companies, and then maybe what other things are successful? 

Dave Whorton: I think that’s actually a best practice. That’s one of the best practices. There’s a myth out there based on some research done a long time ago on a very small number of manufacturing companies that privately owned companies have poor governance and that the governance for public companies and even private equity-owned companies is actually stronger. I saw that and I just wanted to throw up because I know that’s not true. And this particular dimension is for sure, good evergreen companies, great evergreen companies have independent board members, and they’re empowered. They’re expected to participate and understand the business. They’re not expected to nod when the senior partner at the private equity firm says, hey, Jack, that’s kind of the way we do it, right? Yeah, Bob, you’re right. That’s the way we do it. No, that’s not. We’re not looking for some validation of what the private equity lead partner wants to do. What we’re looking for is real contributions. Taken to the extreme, we have a number of members in a mature multi-generational family, business-owned evergreens in which there are more independent directors on the board than family members. So the independents actually dominate the board. That is an incredible vote of confidence in your ability to govern that business. And it also is an accountability measure for the CEO, whether they’re a family member or not, which is you don’t get to just have- report three or four family members that you can kind of emotionally compromise. You’ve got independent board members. These are people of stature. They’ve got incredible experience. A public company would be lucky to have them on the board. Maybe this person wouldn’t serve on the board of a public company. And they’re helping the CEO and the team think about strategy. They’re helping the CEO and team think about the team composition. Are people in the right seats on the bus, to borrow from Jim Collins, and they’re watching for execution and opportunities for improved execution. And then overall, particularly in a family business, they’re making sure that they’re honoring the values of the original founder, that the company is actually continuing to operate consistent with that, because those should be in a loop. Those should not be something that’s being changed year to year, as you might adjust a strategy or make changes in your team. So no, that’s a wonderful thing, and I give First Supply a lot of credit for doing that, and I encourage everybody to take that very seriously. There is no reason why a private company cannot have better governance than a private equity-owned, venture-backed or public company. Because in all three of those scenarios, there are other objectives happening at the board level that may be different than doing what’s just best for the company. And that might be that it’s time to exit your fund. And so, it’s time to sell the company. That sets up a set of behaviors that may not be in the best interest of the company for the long term. Taking the case of a company owned by a private equity firm, they may cut all future R&D, they may reduce the quality of the product, they may increase pricing, they may reduce package sizing, they might reduce training, they might cut down local philanthropy. All of those things arguably weaken the company in the longer term but will generate more cash in the near term. And they’re trying to get high cash to get a high multiple to get a high valued exit. So, I’d say, how could that governance be better than a family business governance if they do it well? It can’t be. And so, I kind of laugh about this report that gets cited from time to time about how much, how superior public governance is as well as private equity governance to a well-run private evergreen company. And if you think about public companies just for a moment, they have all kinds of issues. If that public company is going to miss the quarter, a lot of things start happening to try to get the company back on track for that. And that can be pretty significant as far as the shifts, including abrupt layoffs. I would not argue that’s good governance. 

Alex Bridgeman: And these independent board members, they can fire the family member CEO too, right? 

Dave Whorton: Yeah, I mean, if you had a majority, technically they could. Now, who owns the voting shares of the company? And often you see the voting shares are held in a trust or the voting shares are held in a branch of the family. There’re different ways this can be treated. If they do something that the person who controls or the trustees control the voting shares think is not a good decision, then of course, they can fire the board members and then replace them. And then they can bring back that CEO. But typically, that would be a very unusual circumstance. And it’d also be a pretty dramatic event. I think if I was an independent board member on a family business board, I’m not, but if I was, and I was very concerned about the CEO, I would do the groundwork of making sure I understood other people’s perspectives on this and trying to build some consensus in a fairly transparent way with the board around my concerns. And if ultimately, we’re still in the majority, but the family members felt very, very strong about not making a change, maybe I’m not the right person for the board. It’s better for me to move on. But I would make sure they understood my position on that. So yes, the board ultimately, their final decision, the most important decision they make is the hiring and firing of the CEO. So they could. 

Alex Bridgeman: Yeah, definitely a big important decision. 

Dave Whorton: And this is the subtle thing, Alex, and it’s kind of fun, is that I’ve had some founders ask me this too, like, hey, if I put a board of directors together, what if they fire me? And many founders are so busy building the companies, and they don’t really understand governance and how it works, I’ll ask the question, who owns the shares of the company, particularly the voting shares, if they’re separate from the economic shares, no, no, the same shares. I own 100% of them. I’m like, okay, so they fire you. What do you do? And they say, I don’t know. Well, you fire them, and you reconstitute the board because it’s your company. And the board members know that. More likely, they’d just resign the board if they felt that at some point the CEO was not the right person for the job. They’d voice the concern multiple times, and the [inaudible].

Alex Bridgeman: One thing I’m curious about too, beyond the governance, independent board members, which I think it’s a pretty smart idea, what are some other governance tools that you see families employ to help future generations who, as you said, maybe grew up in wealth or grew up maybe even just when the business was doing well and don’t have that firsthand business not doing well experience? What are some other tools that some of these companies and families will employ to make sure the governance is still in check? 

Dave Whorton: Yeah, I may shape this a little bit differently than governance. And I think what I’d say, Alex, is that family harmony is really important in family businesses. Maintaining harmony generation after generation is critical because what I’ve learned is that when these family businesses fail, high quality, it’s typically not because of an issue around execution or strategy, it’s because the family broke apart. And there’s a lawsuit and there is a desire to sell shares and force a sale to maximize wealth. So, it’s very important to maintain family harmony. And so, the things I think about are really around that as a central design point. For example, the outside board members, which we talked about before, is a way to create family harmony. It’s a way for people to know that there are independent people keeping an eye on the business, as I might be a family member who’s a passive shareholder. I just want to know that it’s not just my uncle who’s making all the decisions with no supervision. Because my stock, I want it to be worth something, and there’s value in that. That’s also why you train the kids, so that they can become good stewards someday, whether they’re operators in the company or they’re in steward positions as owners. They do family get-togethers a couple of times a year just to kind of keep a connection there. Often, they’ll have family councils as the family gets larger so that the family can speak with one voice. If there’s 40 or 50 family members, the CEO doesn’t need to hear from 40 or 50 family members. The board members don’t need to either. But the family council can kind of bring things to a head and say, look, as a family, we’d like to see the company put more emphasis on this or that. Or we’re a little more uncomfortable with what we’ve done on this dimension. So, it’s more directional guidance on what the owners would like to see as a group, without getting in the weeds of trying to manage it as a board member. What else? Buy-sell agreements, some shareholder agreement so that if somebody is no longer interested in being a family member owner of the business, they can sell their shares in an orderly process that is predetermined, some formula, some kind of preset valuation metric so that it’s like, look, you’re no longer happy. We understand that. So, we’re going to go ahead and buy you out. And it might take a few years to do it, so we don’t put too much cash pressure on the company. But we’re not going to force you to be a shareholder. So that kind of releases some pressure. So, if somebody’s really unhappy, you don’t just start fighting and fighting everybody. They just say, look, I’m pulling the parachute and I’m out. And that’s okay. I mean, they can go take those resources and maybe build something themselves. They could be the founder of their own company if they were so uninterested in the family business. So, there’s a series of things that are done that are kind of around this idea of good hygiene that really can help increase the probability that each of those generational transitions happen more successfully. 

Alex Bridgeman: How many CEOs or leaders in Tugboat are the first generation, they’re the founder of the business that they intend to create into a multi-generational family and are kind of there to learn from others? But I’m also trying to think about if I was going to found a company and I wanted to be like the founder of my family, so to speak, what are some things that I might do differently that can make that more possible? And I’m more curious kind of what that distinction looks like. 

Dave Whorton: Yeah, so in our group of roughly 300 CEOs, about 40% are founders. In the family business- Yeah, it’s about 120. And in the family business vernacular, they’d be called G1. I don’t think there’s a single founder that would call themselves G1, but G2 calls them G1. G3 calls them G1. But they’re the founders. And I’d say that, what would be some of the lessons that a founder would learn from a multi-generational CEO? It’s going to be about thinking about this family harmony much earlier than you have anticipated, not waiting until it becomes a problem. Again, probably okay with your kids, but as your grandkids are born and start coming into the family, having some of these things thought out in advance. And very importantly is often estate planning, which is, right now I think a couple can transfer, is it $20, $24 million of assets gift under the current law? So, if your business was worth $20 million, you could transfer the entire business into a generational skipping trust and never pay taxes again. Never pay taxes again. Now, it’s no longer owned by you and your spouse, but it will be owned by your children and your grandchildren thereafter, and which is a very smart move. And then you don’t have to do 100%. You could do 75%, keep 25% outside of it for yourself because maybe you want to give that to your kids directly or give it to some of your employees or however you want to do it. There’d be that element. Where you get in trouble on that same dimension is let’s say that you’re so busy building the company, suddenly you wake up and it’s worth a billion dollars. How do you transfer a billion dollars to your next generation when you pass away when you only have the first 20 that is not taxed and the rest is taxed at I think 40%. You’ve got to come up with a $400 million tax bill for the company to continue operating as a privately held family business. You better have had a massive insurance policy to pay that bill off or some other mechanism. But if you haven’t done anything and you’re now late in life, probably you are going to have to sell the company, which is really unfortunate. There’s things the founders can do early that cost very little to put themselves in a position where they’ll never have to worry about this, and their future generations will never have to worry about this. That would be an example of something. I think we often see a lot of curiosity with the founders about how is a G3 or G4 leader, how were you raised? How are you so smart? Why are you- how are you so committed to the company’s purpose? What did your parents, what did your grandparents do to kind of get you in this position where you’re now running this company, and let’s say it’s doing 300 million in revenue, and you just seem like a remarkable leader? And those are the stories that get told, like we talked about earlier. It’s like, oh, I was raised into it. I started working at 14 at the desk or at 12. We have one guy, I just love this guy, he started working in the company when he was eight years old, did his first sales call when he was nine. He’s CEO now in his early thirties of a large company. And so, you can say he’s kind of been in the business already for 25 years. Most people don’t get started in business and a lot of people until after they graduate. So, to be the equivalent of him, they’d have to be in their early fifties. He’s got the experience of somebody, but he’s at early thirties. And for some reason, this thread pops in my head was an Enterprise Rental Car. You think about that. Jack Taylor founded it and brought it up to, I think, 50, 60 million in revenue, had his son, Andy, come into it well before it was handed off, of course. And then Andy took it over, I think, around that 60 million mark and grew it to about 24 billion over his leadership, and then handed it to Chrissy, who now is running it and she’s been scaling it very successfully since about a month before COVID when she became CEO. Talk about battlefield tested. But I have employees at Enterprise I’ve talked to that just fondly remember Chrissy washing cars when she was a teenager, chasing down ones that were parked in the wrong spot, working at the desk at the St., I forget the name of the airport, Lambert Airport in St. Louis, just behind the desk at Enterprise. She’s the family that owned the business. That one, it’s pretty amazing for the kids to work at that level, but also just think about the employee response to seeing that, how much this person cares about the business and no job’s below them. And so, I think that’s a pretty cool thing. 

Alex Bridgeman: Have you noticed any commonalities or themes in the industries of Tugboat companies, like rental car or first supplier with distributor or Thrasher foundation repair on concrete? Some of these are industries that really aren’t going to go anywhere versus your background in tech where things change every couple of months. A lot of these companies are in industries that maybe they would- maybe they’ll adapt to new technology and some of their process will improve, but the core product will be pretty much the same for hundreds of years. Is that a theme that is consistent, or are there other companies that they continue to evolve and find new ways to grow in totally different ways? I’m curious if there’s anything to take away from the industry selection of the families in Tugboat. 

Dave Whorton: Yeah, it’s interesting. It’d be interesting, because if you could go back and talk to the founders of these companies, they’d probably say nothing about industry selection. They would say, I saw an opportunity. And it’s an opportunity to serve some customers, to have a team, pull together a team, and it just kind of became what it became, whether it be in foundation repair, whether it be in rental cars, all those founding stories are just fascinating. How did the founder get the insight to start this company? But maybe taking this a little bit of a different direction, when I first started doing my learning journey, I was thinking that there was probably a fairly narrow list of industries in which I’d find these evergreen companies. And where we sit today, of the 300 some odd members we have, it’s over 25 different industries. It’s all over the place, including software, including warehousing, including dealerships, John Deere dealerships, CPG products, business services. It’s all over the spectrum. And so, I’ve come to the belief that there’s evergreen companies in every industry. There may be some that are more naturally aligned to it because of the structure of the industry. Like John Deere, they want people to be- the dealerships to be family owned. Now, Deere’s a public company, but the partners in which they work with that help distribute all of those amazing products, those are regional family businesses. And so, of course, we’ve got a few of those in our group and they are really exceptional distribution companies. But yeah, we find them everywhere which is cool. 

Alex Bridgeman: That is neat. Is there a way for- have you seen many CEOs who may be the G1s in their family and they have outside investors, but they want to become a multi-generational family business? Have you seen many make that leap? What are some of the things they do? 

Dave Whorton: That’s a tough leap, to be honest. It’s a heartbreaking conversation for me to have with somebody that says, look, I’ve fallen deeply in love with my business. I love my team. We’re growing, we’re profitable. But I raised a lot of venture capital. How do I do this? I don’t have an answer. I don’t have a way of unwinding that. Because there isn’t just a ready class of capital out there to buy companies and then keep them private forever as a good partner to the entrepreneur. Now I’ve seen a few smaller companies do this. There was a woman that did this where she took venture capital from a pretty well-known East Coast venture capital firm, but she’s very profitable and growing. So she said she wanted to have a buyout clause in their shareholder agreement. I’ve never seen that before, but she got them to agree to do it. And then she pulled the trigger, I don’t know, five, six later and bought them out and was back to owning 100% of it. I saw another company that’s in the ed tech space that had kind of a quasi non-profit investor, for profit, but the investor behind it really, that particular fund, really interested in seeing successful ed tech companies. He was able to convince them to give them a reasonable, not too high, but a reasonable valuation to buy them out. So, they bought them out. There was also a company, a pretty well-known company in the Midwest who took on a private equity firm. This company was actually quite a bit larger. I think it was 400 or 500 million in revenue, brought on hundreds of millions of dollars, and realized about 90 days after they did the deal, they made a mistake. And they actually didn’t want to go public. And so, they had a really tough negotiation with the private equity firm. The good news was they were able to get the private equity firm out pretty quick at a okay markup from, so from a high RR basis, that looked really good, from a total returns basis, it wasn’t, but if they waited two or three years, it would have been impossible, given the rate at which they were growing, and they had to borrow a lot of money to buy this group out. It was very painful for them. They actually made a decision, they’d rather break the company under debt than continue having a private equity partner, given what they’d seen so far. That was pretty interesting. You’d rather risk breaking the company than forge a long-term partnership where you guys are going to be not aligned around what the ultimate objectives of the company were. But unfortunately, it doesn’t. That’s the caution I give founders, which is, as soon as you take that first dollar of venture capital, you’re pretty much on a path. And that’s a fairly irreversible path, both legally, but also morally. I mean, those venture capitals backed you in your agreement that you’re going to take the company public or sell it. You are going to give them a return through an exit. And so, it is a very important thing to think about. And I think that’s one of the things we’re failing founders with is we don’t talk about the alternative. There’s a knee-jerk reaction, which is, well, the way you grow companies today is you raise some angel money, and then you raise some venture money, and you raise some more venture money and growth money, and then you go public or get sold or you fail. Versus saying, look, there is another path. I mean, this is the essence of the entire book, Another Way, which is you can do it another way where 15, 20 years later, you still own all of your business. You’ve built something of scale, it’s done against a purpose you deeply believe in, which is not about generating wealth for yourself, but something much more, much more deep than that. Now, the byproduct might be you do generate quite a bit of wealth, but it’s a byproduct of achieving your purpose, serving customers well, having happy employees. So that’s one of the things I’m hoping with the book, people think, oh, I didn’t know if you could do that today. Yes, you absolutely can do that today. Now, I would not suggest trying to bootstrap an LLM company in the AI space when the world’s throwing billions and billions and tens of billions of dollars at it. But be more clever. Be an application on an LLM that you bootstrap through customer funding and however else you can do it. Maybe you’re doing it as a consulting project on the side. And then get that to early profitability and start growing that thing and be very focused on who your customer is and have a very narrowly defined product that serves a very narrowly defined customer base, serve them very well with that product, get to profitability, and start scaling from that. And you know what, if you can do that, 20 years from now, you might be a very big company and never took a dollar of outside capital, just to give an example of how you might play in something even like AI, where people say, it’s impossible. No, it’s not impossible. But don’t try to compete on the basis of capital. That’s not what you’re going to compete on. 

Alex Bridgeman: Why wouldn’t you create kind of like a Tugboat Partners or Tugboat Capital and be the long-term capital provider who can take out some of these PE investors who someone decides, I want this to be a family business, I have these other investors, Tugboat comes in, buys them out, and then there’s an agreement that you have at the company to say you can buy out my shares over a 20, 30 year period, whatever we decide that’s going to be? Have you run that- I’m sure you’ve run that thought experiment before. 

Dave Whorton: Yeah, and people raised it with me. Yeah, people have raised it with me too. So there’s two dynamics to it which are challenging. One is it’s very hard to buy an existing LP or a venture capitalist private equity firm at a reasonable valuation. The expectations are so high. I mean, if you’re going to keep something private forever and grow it at a more paced level, you don’t want to be buying it for 12 times ARR, average recurring revenues. That’s very expensive, or 30 times earnings. I mean, these are insane valuations, but this is what investors want. This is why they push these companies to grow so aggressively. But maybe if it was a company that was overlooked in the portfolio, maybe they wouldn’t care as much. They had some other wins. Like that’s kind of slow growth. It’s profitable. The term some people say is living dead. That might be an opportunity around that. But the bigger challenge is, where is the source of permanent capital to empower somebody to do this? It’s very, very hard to find. Very hard to find. 

Alex Bridgeman: Have other member families raised their hands and said, if I could invest in other families and companies that were like me, I would do it? Like, I’m sure someone’s raised their hand like that. 

Dave Whorton: There’s been some conversations. But nothing that has actually come fully to fruition. But yes, I think there is an opportunity in the world to be a permanent investor. This is what Warren Buffett is effectively, not with his public stocks. I mean, he’ll hold this public stocks for a long time, but if he loses confidence in that sector or the leadership team or sees really a declining business model, he’ll get out. And he’ll sell it and he does it. On the private side, he will hold these companies forever. And he talks about that. He said, even if the company is not performing to a level in which we would invest today or buy today, as long as it’s still generating economic profit, not profit, but economic profit, we’re going to keep it. That’s just part of our deal with these families. And of course, he’s not looking at the past family. He’s looking at the future families. He wants them to know that, look, I’m just not going to trade your company. If I buy it and I own it, I am going to nurture that wherever. And so, he is a wonderful example of this done well, and the source of his permanent capital is a float from his insurance companies is where he gets it. So, do I need to start an insurance company, Alex? 

Alex Bridgeman: I’m not advocating for that. But that seems like it would be such a neat community dynamic where families within Tugboat are invested in this group that helps buy out and essentially bring new companies into Tugboat… Yeah, into the fold. Like, there’s other CEOs out there and families who have that philosophy but don’t have a bootstrap company, they have outside investors, I’m sure they’d love to be a part of a Tugboat kind of community and run their companies in that way. It seems like it’d be kind of a cool full circle like vehicle that you could create. 

Dave Whorton: And evergreens grow in circles too. So there you go. 

Alex Bridgeman: Oh, there you go. Yes, perfect. Perfect. But yeah, it strikes me there’s vehicles like Berkshire, and like long-term holding companies have become a little bit more mainstream in at least some of the like middle market private equity world, there’s a couple long-term investors who back a lot of those and many are pretty explicit that their investors should not expect to get capital back. But ultimately, people want their money back in some way, which creates some challenges. 

Dave Whorton: There needs to be a financial return. 

Alex Bridgeman: Yeah, there’s a return at some point. 

Dave Whorton: It is an interesting space. And I do canvas it, and I keep my ears and eyes open. And ultimately, if it can be of service to the members I serve, then we’ll find a way to do it. 

Alex Bridgeman: What other… To the point of serving members, what other types of things are you excited to try out with with Tugboat or Admin 2? We were talking off mic about different benchmarking and data points you might track over time. But what are some other things that you’re excited to try? 

Dave Whorton: Yeah, so if I can step back and talk about what my vision is for Tugboat Institute, it’s really twofold. First is to be an unparalleled resource for the members we serve. I mean, they’re the ones that pay our checks, keep us in business. They’re the source of all these ideas. I curate ideas, I do not create ideas. So, I’m constantly canvassing the group for like, what are you doing that’s really interesting? And we do that dynamically. So right now, there’s companies within the community that are doing some very interesting stuff with AI. And we’re surfacing that to share with other members so they can see like the potential of these things and get people excited because I want these people, any member of Tugboat Institute I want to be as competitive as anybody who’s sitting in a venture capital portfolio of a top venture firm. I mean, they should have access to information and ideas like they would. So there’s that very important dimension to me of kind of building that community, having high levels of trust, authenticity, high levels of sharing within the community, helping each one become a more mature, more successful evergreen company. There’s a second piece of this, and this only can be done with the permission of the members, is that I want to share those ideas with the rest of the broader evergreen community, domestically, overseas, every nook and cranny of the world. And I’d love for somebody to be like, oh, I’ve kind of got this idea of an evergreen company that captures my imagination. There’s no venture capital where we are. Nobody backs companies like I do, but I can build an evergreen company. This playbook I can execute. And so, we share that. And so, that’s a really important dimension that I’m looking at over the next 10 years. The book is a first step in that, publishing something that really captures the essence of these ideas, which Another Way does. We have a weekly newsletter now. We have a subscription-based newsletter, which is the EJ Plus, which gives people access to… We have, I think, 200 plus videos now from CEOs speaking about best practices, 300 articles, like it was 50 to 100 a year. So, it continues to increase regularly. We’ve got other content that we’re going to be putting into there to, again, help the broader community. We’ve done an assessment tool; it’s called the Evergreen Growth Navigator. We just put that on our website about a month ago in anticipation of the book coming out. So, some of you can go and take about an hour, put in a bunch of data about the company, about their people first practices, how they think about perseverance, purpose, how they grow, how they innovate. And then we play back to them kind of from what they shared with us, how well we think they’re doing against the Evergreen 7Ps. And then we just give them a lot of best practices. I think 30 or 40 best practices that I and my team have identified that the really good evergreens do consistently. And we give them five specific opportunities around what we think for their specific company would be the highest opportunities for further maturation as an evergreen company. And we’re doing this, again, this information is because of the community we serve. I don’t think it exists out there today, but the goal is to help there be as many successful evergreens as possible and do that in a very generous way, not with sharp elbows, not thinking competitive dynamics, but like this is good for society. Because I think generally where we are today is we’re not seeing the best of capitalism. And I think evergreens represent the best of capitalism. I mean, if you’re going to treat your people well, if you’re going to treat your customers well, if you’re going to be good, collaborative, innovative partner with your partners and suppliers, if you’re going to be an important backbone of your local communities, I mean, this is good stuff. But there’s a lot of energy around the public markets. There’s a lot of energy around PE. PE right now, this is amazing, I did an informal poll of the members about, in their respective industries, do they see high activity by private equity? 85% of our members said yes. We see high activity in our industry sectors, including people who said five years ago, there wasn’t a single PE firm, but there was so much money that the PE firms have raised over the last 10 years. There’s so much capacity for acquisition. I think on average, they’ve raised half a trillion dollars a year for about 10 years. They put about a trillion dollars of debt against that two to one ratio. So, they have about $1.5 trillion of purchasing power every year, and they haven’t been using it every year. So, it’s getting bigger. And so, they’re going everywhere. And as you probably see, they’re doing a lot of roll-ups in sectors that they never would have played in before. And they’re just playing an arbitrage game. They’re buying mom and pop things for $5, 10, 15, 20 million, and then rolling those up. And then at scale, being able to get a much higher multiple. So, they might buy it for a 2X multiple and then they’re going to turn around and sell this in the public markets for 15 to 20X. Just that arbitrage right there alone is incredible. That’s not necessarily good for society. Whereas if you’ve got firms that are in those communities, they’ve been there for a long time, they have good, very high service levels, fair pricing, it’s kind of the stuff you see at evergreen companies, we want those evergreen companies to be competitive. And now we’re starting to see some evergreen companies become the acquirers. They’re the ones doing the roll-ups and basically kind of taking elements of the private equity playbook, but doing it in an evergreen context and not doing it with outside capital, maybe a little bit of debt to pull it off. But it’s pretty magical to see what they’re doing. 

Alex Bridgeman: Well, that’s pretty interesting too because a lot of the, as we were talking about at the start of the conversation, there’s a lot of kind of timeless lessons, and low debt being one of them, but a lot of the lessons learned are from families through lots of market cycles and past decades and maybe a hundred years of… the end result of that is a pretty steady kind of set of rules to follow that generally you wouldn’t think roll ups or M&A is a big part of. But I think my question is, is there eventually a time where some of the older rules, there’s ways to- there’s still ways to keep the philosophy of how the company grew up while taking some of these other growth ideas or growth methods that maybe are becoming more common, M&A being the most obvious one? How do you decide to do something new like that or a new growth strategy like that against a backdrop of a family that maybe hasn’t ever done that? 

Dave Whorton: Yeah, it’s a process of experimentation. And what they won’t do is create a 30-page slide deck and go walk up and down Silicon, Sun Valley – Sun Valley, I’m sorry – Sand Hill Road. They won’t walk up and down Sand Hill Road. They won’t be going to the private equity firms and saying, look, I want to raise money for me to go do this. They’ll do it internally. They’ll run a series of experiments. They’ll do it in a low-cost way to try to figure out whether they can do it or not. And then as they start building success in those experiments, we’ll start investing further in it. And it’s just one of the kind of classic innovation models that used to be very common in Silicon Valley, but still very common in evergreen companies is this idea, Jim Collins calls it bullets before cannonballs. Robert Pasin at Radio Flyer calls it planting a lot of seeds. Jim Goodnight at the SAS Institute calls it digging a lot of holes. But it’s a methodology by which you gain early feedback on these new ideas, early learnings, and then move forward based on that. You continue to improve. I won’t say the name of the company, but I know one I have a lot of respect for and has probably done 15 acquisitions now, gotten very good at the acquisitions, have gotten larger over time, they completely screwed up the first acquisition. Completely screwed it up. Because the CEO read as much as he could about how to successfully acquire companies and generally was convinced that they should take a very hands-off approach and be perhaps Berkshire-ish, which is we’ll just buy them, we’ll give them some guidelines and have them run the company. What they realized is that the way they ran their company in that particular sector was extremely efficient and very, very, very well run. And the other firms just didn’t mirror that. And so, in the second acquisition, they said, oh, different playbook. Let’s try it differently. Let’s have them basically adopt the way we do things. And we’ll start preparing even before the actual acquisition is closed, that integration process. We’ll bring some of our top people over to do training and leadership. The second acquisition worked well, then they refined it again. And now they’re just fantastic. They have very high predictability on what they can do when they acquire these companies. And so, it’s a learning process, but it’s not being done under an artificial timeline because in the context of having institutional investment, things have to happen fast. They want to see high growth rates and see like okay, look, if you’re going to go in that vector, you will real execution against that quickly and we will give you more capital to throw at it. And sometimes it’s not capital, which is the determinant of learning. It’s time, and it’s creativity, and you’ve got to see how things play. That’s what I love about evergreens is there’s this kind of a sense of urgency, but not too urgent to kind of learn and get better, knowing if I’m going to be in business 30 or 40 years from now, and I get good at this over the next five, six, seven years, I can capitalize on that for another four or five decades. Firms that are going to be exiting in four or five years, don’t even- they can’t think of this time. They have to make that all happen faster. And I think that actually causes more breakage and might have higher failure rates. But the learning process in evergreen companies is pretty cool.

Alex Bridgeman: What’s an interesting thing you learned about an evergreen company in the last year? Maybe an interesting idea you hadn’t heard before or some tactic or strategy someone did or just something unique you saw? 

Dave Whorton: It’s funny, I learn stuff all the time because every time we bring in a new member, we get exposed to their history. I get exposed to how they think about business, some of the mistakes they made, some of the really good decisions they made in the process. The one that came to mind when you asked this question was a company we spent some time with this fall and it’s called Northgate Markets. It’s based out of Los Angeles, founded by the Gonzalez family. The Gonzalez family was originally out of Mexico. They had a shoe factory and it burned down. And if I recall correctly, they did not have insurance, so they could not rebuild it. So, the father grabbed the oldest son, I think the family had nine or ten kids, and they immigrated to the United States and they started doing janitorial work, restaurant work. And then the son convinced the dad, we got to get back into business, we got to own something. So, they bought a quarter liquor store, sold off the inventory, and turned that into a little Hispanic market, a little mini grocery market, a convenience store. Then they continued to refine that. Now, Northgate Gonzales Market is really the Whole Foods of the Hispanic market in Los Angeles. Extremely high-quality product, a very well-run company. A lot of the products they sell in the grocery store are ones that they actually make in their commissary, they bake right on location. And what’s so cool is that, and the thing I learned from that that really struck me is, that’s going very well, but they’re not sitting idle. They’ve introduced banking services, healthcare clinics, they’ve changed their whole strategy around how they go into shopping centers. They want to make sure that the other stores are consistent in value and serving a similar customer to them. So, they’ll actually buy the entire shopping strip before they go in there in many cases. And then Oscar, who’s the current CEO, who’s the youngest son of the second generation, he’s currently running the firm, has worked for quite some time, looking how could they even further their purpose of really exposing people to the authentic kind of Mexican foods that he created a concept called the Mercado. And that Mercado has been led really by G3 and the family. The development of the concept, they’ve got their first location, it’s doing fantastic. And that concept may be one that they could take national. They can take the grocery idea too. But they just keep innovating. This started from a corner liquor store to what they have today. I probably shouldn’t say, but they’re over a billion in revenue, well over a billion. I feel like they’re just getting started. And humble as can be, good people, take deep care of their customer base. Interestingly enough, in the new Mercado concept, I think one third of the customers are of Asian background, one third are kind of traditional white background, and a third are Hispanic. And so, it’s actually serving a much broader audience than you’d expect. And those are rough numbers, I don’t remember exactly, but he’s really captured and they have captured the imagination of a lot of people around the foods and tastes that they’re bringing forward. So, there’s just a zillion lessons in what they’ve done. And that’s what the coolest thing about my job, Alex, is, I get to go meet with these people. I’m going up to Seattle in a couple of weeks to spend the day with one of our companies that’s been a member for a while, just to understand, I’m just curious about their business. And in particular, having to deal with some of the tariff issues that are pretty significant right now and get underneath, how are they responding to that, see if there’s some lessons to be learned there I could share with the rest of the members. So, I guess what I’d say is I feel like my learning curve continues to be pretty steep and it’s been that way for 12 years. And I’d say this with all humility, I don’t feel I was learning much on the old venture capital learning curve. It was kind of becoming a very sales-oriented job, trying to get into the hot deals, negotiating your way in. Of course, be helpful. I have an operating background, so I can be a little bit more helpful in some dimensions. But besides getting exposed to new technologies, I kind of felt it was, I would never would have said it at the time. I just said, oh, I’m on a super steep learning curve. Only now that I’m on this learning curve, I realized, wow, that really flattened out because these evergreen companies are really doing very interesting stuff around people, around products, around geographies, around, as I said, organic growth, M&A. It’s cool stuff. 

Alex Bridgeman: Yeah, it is exciting. And it’s fun to hear all about it. And Dave, thank you for sharing your time on the podcast. This has been a ton of fun. I’m glad we finally got to chat more about it. 

Dave Whorton: Yeah, thanks for your patience, Alex. It’s been a pleasure spending time with you. And your book didn’t fall down. Look, it’s still sitting there. 

Alex Bridgeman: It’s holding its own. Yes. That’s an evergreen book stand. 

Dave Whorton: There you go. Fantastic.