Dave Whorton was a prominent venture capitalist in Silicon Valley when he realized that pushing startups to grow as fast as possible toward an initial public offering (IPO), without regard for profitability, rarely worked out well — except for VCs. He later discovered privately held companies that had been prospering for decades.
Dave Whorton Established the Tugboat Institute for Firms That Want to Be Great, Not Big
Whorton's first job, at age 16 in 1983, was at Hewlett-Packard factories in Santa Rosa, Calif., where he interned for four summers across three divisions. John Young had succeeded Bill Hewlett as CEO, while David Packard was still chairman. Whorton worked alongside employees, many of whom had been with the company for two decades, soldering resistors to circuit boards or assembling network analyzer chassis.
"They would tell stories about Bill and Dave, like the time they got wind that a manager had decided employees were taking too much of the supplies from cabinets, such as PC boards and transistors he declared were only for engineers, so he locked them up," Whorton wrote in his new book “Another Way: Building Companies That Last…And Last…And Last” (co-authored with Bo Burlingham). "Either Bill or Dave took a bolt cutter and chopped off the locks, declaring that they should never treat people that way and if workers, whether they were a secretary or a janitor, were curious about these things they were encouraged to take them… I loved that idea — that no matter your role, you had the opportunity to grow and contribute. It's part of what became known as the HP Way."
In 1994, legendary VC John Doerr of Kleiner Perkins Caufield & Byers (KPCB) led its $5 million investment in Netscape Communications, creator of one of the first commercial browsers, which earned a return of $400 million. He also headed the investment in Amazon, and KPCB had backed AOL, Compaq, Intuit, Sun Microsystems, and other foundations of the new digital age.
Whorton was a first-year MBA student at Stanford's Graduate School of Business when he was surprised to be asked to meet with Doerr in the fall of 1995. It turned out Doerr's mentor, Tom Perkins, had worked for HP and wanted to know what Whorton had learned there. Doerr later asked him to join the investment team as a non-partner, but Whorton declined, preferring to start his own company. Doerr promised to fund it if Whorton would work at Netscape that summer and then spend two years as his assistant after graduation.
"Becoming his assistant felt as if I had jumped on a treadmill going 100 miles per hour," he wrote. "In my first week I traveled with him on a road show leading up to @Home's IPO. We then headed to Seattle to visit with Jeff Bezos at Amazon… Doerr handed me all the business plans that were coming to him. He wasn't going to read them anymore — I was, even though I wasn't familiar with some of the technologies in the plans. Then there were the countless meetings. The sheer volume of work was overwhelming."
At the end of year two, Doerr asked for one more year, and the other partners were eager to have him stay. Heading into 1999, a dot-com boom was underway and Whorton played an important role in KPCB's backing of Google.
But Whorton grew disillusioned as the VC business model shifted dramatically in those 36 months — from $2 million to $3 million for a Series A investment to as much as $50 million, with fund sizes jumping from $150 million in the early 1990s to $1 billion. This tempted VCs to exit fast with no regard for building meaningful or lasting value for other investors or the public, he said.
A Learning Journey to Evergreen Principles
In April 2000, Whorton was devoting all his time to his new company, Good Technology, which was trying to launch a personal digital assistant better than PalmPilot that could accept plug-in accessories. The first was an MP3 player that got positive reviews but was expensive and sold poorly. A year later, Apple released the first iPod, offering customers a huge selection of music at a moderate price. In 2002, the BlackBerry from RIM combined a cell phone, email, and internet access in one device.
Despite the bursting of the dot-com bubble, Whorton raised another $60 million. But personal and family health crises, including his parents' medical problems and his wife's pregnancy, made it difficult to remain CEO. He recruited his replacement and convinced Michael Dell to build a new product.
In January 2003, VCs were still recovering from the dot-com crash and the Sept. 11 terrorist attacks, so Whorton struggled to find investors for promising startups like LinkedIn, which Microsoft acquired for $26.2 billion in 2016. He decided to open his own fund, Tugboat Ventures, raising $50 million at its 2006 launch. The name reflected his view of tugboats as powerful guides for much larger ships. His plan was to identify risks for software startups and raise more money as each was eliminated, while keeping a focus on profitability — similar to what Silicon Valley had done in the 25 years before Netscape.
It worked well enough, but with low interest rates pushing hundreds of billions of dollars to VCs, capital was overly abundant and the industry-wide "growth at all costs" mentality could fund even the worst ideas, he recalled. He also grew frustrated with Silicon Valley's emerging Hollywood culture, where everyone wanted to be seen at the right social events and court media attention.
Whorton had been spending more time in Sun Valley, Idaho, where he found successful people who felt more authentic and where he could hike and decompress. There he began hearing about private companies that thrived without having to think about their stock price, like family-owned See's Candy. Warren Buffett's Berkshire Hathaway bought it for $25 million in 1972, when it had $30 million in sales and a pretax profit of $4 million across 167 stores. More recently, it has posted $500 million in revenue and $100 million in pretax profit, Whorton reports. Berkshire has invested another $7 million in See's, which has returned $2 billion in cash that the company has deployed elsewhere.
As he talked with the leaders of some of these private firms, he began to think of them as "evergreen" — companies with no set date when shares had to be sold. A former Netscape colleague, Roberta Katz, now a vice president at Stanford, told him she was also discouraged by the erosion of values in Silicon Valley. "We've lost track of the importance of human beings coming together to build meaningful companies to change the world," she told him.
Whorton found a collaborator in Chris Alden, former editor of the tech magazine Red Herring, and the two eventually formed the Tugboat Institute to offer business services to evergreen companies. In 2011, Whorton moved his family to Ketchum, Idaho, just outside Sun Valley, drawn by the quality of its schools and outdoor opportunities. The move deepened his thinking about building businesses for reasons beyond getting rich.
Together, they developed the Evergreen 7Ps, the defining principles guiding the companies they wanted to support:
- Purpose — having a compelling reason for existing.
- Perseverance — having the resilience and ambition to overcome big obstacles to keep heading for the purpose.
- People First — engaging a workforce to excel individually and as a team, motivated by the purpose and a culture that takes care of them with total compensation, so they will take care of their customers, vendors, partners, communities, and their families.
- Private — taking the longer-term view of success and their operating strategies than public companies.
- Profit — recognizing the importance of being profitable, but not mistaking for the purpose of the business.
- Paced Growth — having the discipline to focus on long-term results, balancing those with short-term ones that are a good measure of customer value delivered.
- Pragmatic Innovation — embracing continuous improvement and calculated risks to innovate creatively within constraints.
Appendix B of “Another Way” has the Evergreen Leader's Reading List, the 30 fundamental business books Whorton recommends to all the Tugboat Institute's members.
But how do you attract talented team members to evergreen companies when there are no stock options? "The problem was solved long ago in the form of long-term compensation with several models available," he wrote. "We called our favored version the Evergreen Performance Incentive Program, which incorporated a cost-of-capital component and multiyear payout, which could also include an offer for employees to become direct owners of the business with restrictions. Warren Buffett has one that makes sure his managers keep an eye not only on return on invested capital and profitability, but the allocation of capital for the long-term health of their companies."
Tugboat Institute Conferences
They brought together leaders of evergreen companies — and those looking to make that transition — for the first Tugboat Institute conference in Sun Valley in October 2013. Enthusiasm was high enough that a second conference was held in June 2014, a few months before the Institute was formally launched. Many attendees had no idea other firms shared similar values and operating principles.
Meanwhile, Whorton and Alden visited SAS Institute, then a $3.2 billion privately owned software company in Cary, N.C., with 13,000 employees worldwide. Founder and CEO Jim Goodnight was often mentioned as the "spiritual heir to Hewlett and Packard." They were impressed with every aspect of its approach to ensuring worker happiness, even as the rest of the industry was laying off thousands. SAS also stressed bootstrapping innovation, arguing it forced more creativity and collaboration.
Alden left in January 2015 to start a gaming company, leaving Whorton without his help moving the Institute forward. But Whorton had been interviewed by Bo Burlingham of Inc. magazine the month before — Burlingham would become co-author of "Another Way." Burlingham had mentioned a book by Jack Stack, CEO of Springfield, Mo.-based SRC Holdings: "The Great Game of Business."
"I could see from the first page that SRC was the first manufacturer I had ever encountered that put People First, with revenues which were more than $500 million a year," Whorton wrote. Stack told him the company had $100 million in a reserve fund so that in the next recession it could "take advantage of the opportunities it would create for us." Whorton found that every worker he talked to was not only a master of his or her job, but understood how it fit into the bigger picture of the company and the industries they served.
SRC helped him get through the third conference, where 35 new attendees became members, bringing the total to 80. Then another article about the Institute appeared in Inc., and he expected to receive many queries — but not a single one came in. It turned out the Institute's website had not been saving membership applications. "It felt like after two great years we were cursed," he wrote, but he used the article in its PR efforts and some of those who had tried to join contacted him directly.
Whorton also received valuable advice on persisting through setbacks from Gen. Stanley McChrystal, who had turned around U.S. efforts in Iraq and Afghanistan and written “Team of Teams: New Rules of Engagement for a Complex World.”
One new member was Val Hollingsworth, chairman and former CEO of Hollingsworth & Vose, a Massachusetts manufacturer of "nonwoven materials and engineered paper products" established in 1881, with roots dating to 1728 that included Revere Copper Works, bought from the family of Paul Revere. Its customers included Tesla and SpaceX.
"I was especially impressed with their ability to finance all growth out of retained earnings and bank loans," wrote Whorton. "The world I grew up in — of VC and startups — conspires to shield us from the thriving and diverse world of private companies. The structure of business education and the culture that celebrates rapid, personal growth generation above a business's contributions to the community and society are co-contributors to this."
Even major companies like Enterprise Holdings (vehicle rental), Wegmans Food Markets, and Edward Jones (financial services) are not widely recognized for the role that being private plays in their success.
In his final chapter, Whorton outlines the Evergreens' Nine Rules of Innovation:
- Get risks upfront and out early: identify the four major types of risks of an innovation venture — tech, team, financing, and especially market. Use your limited resources to eliminate the white-hot risks as early as possible.
- Drive creativity through constraint. Remember the Wright Brothers, who had fewer resources than their major competitors but realized through their own experiments that those companies had faulty data about lift.
- Try lots of low-cost experiments. Jim Collins and Morten Hansen in “Great by Choice” call this "firing bullets before cannonballs."
- Take learning journeys. Long-term success benefits from exploring outside the business, seeking informed criticism, identifying blind spots, and learning from people and companies the leaders admire.
- Look to suppliers for ideas. Together you can identify, design, and produce innovative, high-margin products and services.
- Protect new ideas from the metrics and requirements of the established business or you will have no real innovation.
- Take advantage of your longer investment horizon than competitors. Amazon, despite being a public company, has shown over and over what it can achieve without worrying about short-term results.
- Pursue market-creating innovations, such as performance enhancements (adding a touchpad to a laptop), efficiency improvements (just-in-time manufacturing), and market-creating products (PCs).
- Organize for continuous improvement. A team aligned on purpose, values, and long-term goals is the most powerful advantage you can have, so train everyone to understand financials and business principles so they know they have a stake in the outcome.
By the end of 2024, the Tugboat Institute had nearly 275 members and is growing about 15 percent annually. If your company or startup vision is evergreen, consider joining the movement.