Why “Evergreen Companies” Beat Venture Capital at Its Own Game with Dave Whorton

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0:01:26 Hello, everybody. I’m Guy Kawasaki. This is the Remarkable People podcast. We go all over the world finding remarkable people to inform and inspire you.
0:01:54 And we found a remarkable person in Sun Valley, Idaho. His name is Dave Wharton. And he started his career at a great company, Hewlett Packard. I love Hewlett Packard. Their calculator changed my life. After Hewlett Packard, he became a venture capitalist. And if you’re going to be a venture capitalist, why not go to work for Kleiner Perkins and John Doerr? If you got to do it, you might as well go big.
0:02:05 And I got to say that he had a very interesting kind of epiphany about the way venture capital was working and, you know, grow fast, grow big, die, go public and all that.
0:02:21 So he kind of reversed himself and he started creating what he calls evergreen companies. And he had an institute called the Tugboat Institute, as opposed to the Bentley Institute or the S-Class Institute or the G-Class Institute.
0:02:29 And these are companies that strive for profitability and purpose-driven and to endure generations.
0:02:39 And he wrote a whole book about this called Another Way, in which he shares stories, good and bad, and the principles of building evergreen companies.
0:02:42 So welcome to the show, Dave Wharton.
0:02:44 Thanks, Guy. I appreciate being here.
0:02:47 Oh, I appreciate you taking the time.
0:02:49 So let’s just dive in.
0:02:52 And let’s say we start the clock with the IPO of Netscape.
0:02:55 So what did that IPO mean?
0:02:58 What did it change in Silicon Valley?
0:03:00 Yeah, you picked a really important event.
0:03:03 Because in my mind, that is what really changed Silicon Valley.
0:03:05 So Netscape went public in 1995.
0:03:12 It had been incorporated 18 months earlier with the web browser and the web server, which you may remember well from those times.
0:03:15 It was a very early pioneer in the internet world.
0:03:18 And John Doerr was the investor in that company through Kleiner Parkins.
0:03:21 The day it went public, his price rose dramatically.
0:03:22 It closed the day at about $3 billion.
0:03:28 And I call this a shot heard around the world as far as for investors, because this has never been done before in history.
0:03:32 In such a short amount of time, so much stock value creation.
0:03:37 And suddenly it really started putting in question the entire model of taking companies public.
0:03:39 Because prior to that, you had to have eight quarters of profitability.
0:03:46 You had visibility in four quarters going forward, a strong management team, a good board of directors, a really stable foundation for the business.
0:03:52 And suddenly this one had just been cobbled together extremely quickly, but it had become really valuable.
0:03:59 And this is when John started talking about the greatest wealth creation in the world will happen with this rise of the internet, which today has been proven to be true.
0:04:01 But at the time, it was kind of the wild, wild west.
0:04:06 And so people were off to stake their claim in the internet, and they weren’t going to use the old model.
0:04:12 They get the profitability early, to grow at a sustained level, have increasing profits over time.
0:04:14 It was, let’s just get big fast.
0:04:17 Let’s stake out the claim, and we’ll become valuable like Netscape or more valuable.
0:04:20 And so the model shifted quickly.
0:04:31 All the venture capitalists started adopting this, and pretty soon it was about raising more capital, hiring more people, getting a world-class CEO in the top seat, hiring senior executives, staffing out teams quickly, and going for it.
0:04:39 And if it worked, you might be tremendously wealthy as a founder, a venture capitalist, or senior team member, or you’d just go away and go do something else.
0:04:41 And so that really became the model.
0:04:50 But what was interesting is then we had the dot-com crash, and I thought for a moment that it would probably revert back to the old model, the model I originally learned at Kleiner Perkins when I joined there in 1997.
0:04:53 So people were still practicing some of the old model.
0:04:54 It didn’t.
0:04:57 And then it started, the get big fast got stronger in 07, 08.
0:05:00 We had the Great Recession, so it slowed down again.
0:05:03 Then it roared back with growth at all costs.
0:05:06 And that was really driven by the low interest rate environment that the Fed put on us.
0:05:08 They drove interest rates basically to zero.
0:05:12 So you can no longer invest in fixed income if you’re an institutional investor.
0:05:13 So what do you need to do?
0:05:17 You need to invest further out on the risk curve to get the yield targets you’re going after.
0:05:21 And that meant venture capital and other alternative assets.
0:05:31 So a tremendous amount of capital flowed into the venture capital industry with an understanding there would be a power law dynamic, which we see very much today in these venture portfolios.
0:05:33 We’re trying to get big, fast, or grow at all costs.
0:05:37 And that is one or two companies will drive the total returns of the fund.
0:05:42 You might invest in 50 or maybe 100, but one or two are going to do it.
0:05:46 And they’re going to be the next Google or Amazon or Facebook, you name it.
0:05:50 And that will make up for all of the losses many times over.
0:05:53 So in a portfolio of 100 companies, you might lose 50 to 60 of them.
0:05:56 You might have a modest return on another 20 or 30.
0:05:58 You might have some that do 5 to 10x.
0:06:03 And you need that one that does 100 or 200 or, if you’re really lucky, 1,000x of the original investment.
0:06:06 And so that really became the model.
0:06:08 And it was a very different model.
0:06:10 It’s a very high risk, high return type of model.
0:06:18 And then what we started seeing, I think, over time was that the amount of capital that came in was just, if you look at it historically, almost unfathomable.
0:06:23 So in the first 40 years of venture capital, $25 billion was raised and deployed.
0:06:26 That included Amazon and Google in that $25 billion.
0:06:32 In recent years, the entire industry has raised $250 billion in a single year.
0:06:37 That happened X more than the entire industry in the first 40 years in a year.
0:06:39 And that happened year after year after year.
0:06:52 But it does raise the question, was there something really wrong with that original model if it led to things like Amazon and Google and Netscape and Genentech and FedEx and Microsoft and Starbucks and all these wonderful companies that are under that first $25 billion?
0:07:05 So I get your diatribe about this whole model, but do you think if you and John Doerr got together in 2025, you’d be sitting around saying, man, companies are not the same.
0:07:12 Remember back in 1995, we took Netscape public and we had visibility into profitability.
0:07:14 We knew we had a world-class team.
0:07:17 We were conservative about our revenue projections.
0:07:25 And now in 2025, if you just work for OpenAI for two weeks and you quit, you get a $5 billion valuation.
0:07:27 You raise a billion dollars.
0:07:30 What happened to the good old days, Dave?
0:07:32 So is it all relative?
0:07:34 It is all relative.
0:07:37 And I would say I don’t want to be overly critical of venture capital.
0:07:40 I think venture capital plays a really important role.
0:07:48 But I think this idea that you apply the get-big-fast model or the growth-at-all-cost model into all situations isn’t appropriate.
0:08:03 And I think a number of venture capitalists who are friends of mine would agree that we’re getting companies to do something that would be better served just perhaps bootstrapping and taking a longer time horizon to develop the company without the pressures of being public or being sold someday.
0:08:09 So I think it’s just that it was too much application of a model too broadly.
0:08:17 If I would make the case from 1995, fast forward to 2025, if anything, it’s worse today.
0:08:22 AI is making the internet look like a local television program.
0:08:24 And now we’re in the big top.
0:08:26 And now everything’s going crazy.
0:08:28 So what are the downsides of this crazy model?
0:08:38 I think the downsides are if people get pulled into the model with businesses that really can’t meet those expectations, reasonably can’t meet them, the companies will fail.
0:08:41 It’s all of that time and energy spent.
0:08:47 And it can be incredibly hard on the founding team and the executives to try to make it work for the model.
0:08:56 Whereas that business might have been a beautiful, independent, smaller, profitable, purpose-driven business if it hadn’t taken that path.
0:09:00 And I think one of the challenges that we have today as founders, we’re told that is the path.
0:09:09 That if you’re going to build something of significance, you have to raise angel capital that leads you to venture capital, that leads you eventually to an IPO if you’re really lucky.
0:09:14 If not so much, hopefully a sale into a firm in which will continue developing your business.
0:09:18 Whereas what I’d love for founders to hear is, hey, look, think about this business.
0:09:21 What could it be over time?
0:09:27 And would it make sense to instead think about being an evergreen company that you might run for the rest of your career?
0:09:32 Some may hand to your employees and your children who continue to grow and sustain this over time.
0:09:35 Or you could consider the venture capital path.
0:09:40 That’s the high risk power law path where one out of two are really going to move the needle.
0:09:47 10 out of 100 are going to be of some significance and the rest are really not going to matter and go away.
0:09:51 So just to know that, to be aware, there’s more than one way of doing it this other way.
0:09:53 Let me just push back on that.
0:10:02 So why would an investor invest in an evergreen company when that company is not going to go public, not in the short term?
0:10:05 It might not be acquired in the short term.
0:10:14 So like how many venture capitalists and professional investors are sitting around saying, oh, if only I could build a company that would last 100 years.
0:10:17 And the flip side of that is also for the employees.
0:10:21 So how do you take someone who’s getting recruiting letters?
0:10:26 You know, Mark Zuckerberg says we pay interns 10 million a year.
0:10:31 And how are you going to get top talent when you’re saying we’re building a company to be evergreen?
0:10:34 You raised two really, really good points, Guy.
0:10:40 And this is funny because when I was in my early learning journey around evergreen, these are ones I had to explore myself.
0:10:43 So I think I have a reasonable answer to these.
0:10:48 So first on the investor side, there are not investors out there that want to invest in evergreen companies.
0:10:52 So you’re really taking a bootstrapping path and perhaps friends and family.
0:10:56 You know, maybe you have an uncle, parents, friends who put some capital in.
0:11:01 But you have to really lean on the old principle that we had before Netscape, which is get to profit early.
0:11:05 Get to profitable growth early and then grow from there.
0:11:08 And that was what we did when capital was scarce.
0:11:10 So capital is scarce for evergreen companies today.
0:11:11 That’s the truth.
0:11:15 I went out and met with a lot of family offices where I’ve talked to them.
0:11:20 They like the idea conceptually, but they say, well, at the end of the day, we do need to see an exit too.
0:11:22 I think this will change over time.
0:11:26 I think there will be sources of permanent capital where this makes sense.
0:11:31 But today, if you’re a founder and you’re going on this path, you’re basically going alone with friends and family.
0:11:33 And then with the friends and family, you have to be really clear with them.
0:11:34 Look, I’m not selling this.
0:11:35 I’m not going public.
0:11:36 But guess what?
0:11:41 If I actually achieve my vision for this, I’ll generate quite a bit of cash and your dividends can be very attractive.
0:11:46 I know companies that issue dividends that are two to three times your original investment every single year.
0:11:50 So your returns can be off the charts over long periods of time.
0:11:53 So in your book, you discuss this.
0:12:05 I have never seen this particular company used as an example in any book about venture capital or entrepreneurship or innovation.
0:12:10 And the company’s name is Seize Candies.
0:12:17 I can’t tell you that all my friends are saying, God, if I could only start Seize Candies.
0:12:23 So tell us how Seize Candies has defied all of this Silicon Valley craziness.
0:12:27 Yeah, Seize goes back a long way from its origins in California.
0:12:32 And as you may know, Warren Buffett approached them to purchase them.
0:12:35 And I think at the time they were doing about 20 mid-20s in revenue.
0:12:39 And I think he felt that a fair deal would be about $20 million.
0:12:41 The family wanted $30 million.
0:12:45 And there were an impasse and Warren was ready to walk away.
0:12:52 But this is the famous moment in the history of Berkshire Hathaway where Charlie Munger said, I think you’re making a mistake.
0:12:56 I think this is a very high quality business at a fair price.
0:13:05 And I’d rather have a very high quality business at a fair price than a fair company at a high quality price or a low price.
0:13:07 And so Warren ended up taking that guidance.
0:13:09 I think they did the deal at $25 million.
0:13:10 He purchased the firm.
0:13:14 They’ve never had to put additional capital into the firm, 100% owned by Berkshire.
0:13:23 And it’s argued that it’s distributed something like $4 billion of excess cash back to Warren to reinvest in other wonderful companies.
0:13:29 And so if the Seize family themselves were able to govern the firm as Warren had, maybe they couldn’t have done it.
0:13:31 That would have been their family’s rewards.
0:13:36 $4 billion in excess cash while continuing to grow, while still doing hundreds of billions in revenue.
0:13:40 Having a great brand, great products, great workforce.
0:13:42 So it’s a really special company.
0:13:47 And it took Warren, and to your real question, he’s a form of permanent capital.
0:13:51 And they say, I’m going to own this underneath their umbrella, let them operate autonomously.
0:13:53 I do want their excess cash.
0:13:54 But outside of that, they can do what they want to do.
0:13:55 And that’s what they’ve done.
0:14:21 Okay, so the second question is not that this situation is realistic, but if I am a potential manager and I say, okay, I got this offer from OpenAI to manage something at OpenAI.
0:14:23 I got this offer from Seize Candies.
0:14:28 How are you going to get the guy or gal to go to Seize Candies instead of OpenAI?
0:14:31 So I think that’s a great challenge.
0:14:34 And I think that’d be a very difficult one to overcome.
0:14:41 Because if you’re in your early 20s or being offered a million-dollar base salary, that’s excessive compensation by any measure, but that’s what’s being paid.
0:14:46 I think you’re going to have a very difficult time competing for that individual.
0:14:48 But let’s say that you’re Seize Candies.
0:14:56 You’re going into a new region, and you are trying to recruit somebody that’s been working at Burger King under multiple private equity owners.
0:14:59 I think you would have a very easy time recruiting that person.
0:15:03 Because you say it’s owned by a patient capital investor.
0:15:05 We grow at a pace level.
0:15:08 We pay way more in base salary than Burger King did.
0:15:11 We’ll pay you much higher bonuses than you got.
0:15:16 If you’re wise, you’ll buy some of the Berkshire stock yourself of the parent company that owns us.
0:15:17 And you can have an incredible career here.
0:15:21 And that’s why people go to In-N-Out over McDonald’s.
0:15:22 Same thing.
0:15:26 They can make twice the base compensation plus bonuses on top of that.
0:15:35 So if you think about the pool of individuals you’re competing with, Seize and In-N-Out and Chick-fil-A and Panda Express are not competing with people going to OpenAI.
0:15:39 They’re going to be with people that go to these other concepts.
0:15:44 And by far all of those evergreen companies I just cited, they can win that recruiting battle any day.
0:15:50 Quality of the job, purpose of the firm, compensation, culture, all of those things.
0:15:59 Part of the problem is that I live so long in the bubble that my approach to everything is through this high-tech filter.
0:16:00 And me too.
0:16:01 Me too.
0:16:02 I had to rewire my brain.
0:16:10 People literally had to hit me with a two-by-four on some of this stuff and say, Dave, get out of the valley and see the rest of the world.
0:16:19 So what other companies would be in the evergreen hall of fame so people can say, yeah, I didn’t realize that company is so successful.
0:16:21 Enterprise Rental Card would be an example.
0:16:24 That’s a wonderful evergreen company.
0:16:26 I’ve become very close to Andy Taylor.
0:16:31 We took all of our CEOs down there for a two-day visit, deep dive on the company, and I was just blown away.
0:16:37 The culture, the growth, the mistakes they’ve made, the fixing the mistakes.
0:16:38 They made a big mistake going internationally.
0:16:42 In the UK, initially, they pulled back, figured out what they did wrong, fixed it.
0:16:45 They acquired National and Alamo.
0:16:47 People sometimes have forgotten that in modern days.
0:16:49 But when they acquired it, they did something very smart.
0:16:55 Most acquisitions out of Silicon Valley, if you acquired another company, you basically throw your executive team on top of it.
0:16:56 You change all the information systems.
0:16:58 You make it really your company.
0:17:01 And Andy Taylor had a good judgment saying, National is actually a bit different.
0:17:03 It serves a different customer than we serve.
0:17:07 It’s a business traveler who doesn’t care about customer service.
0:17:10 They just want the car ready to go, the keys in it, so they can get the heck out of there.
0:17:14 And he was smart enough when he acquired it to put just a couple of executives in the business.
0:17:15 So anyway, that’s a wonderful one.
0:17:18 Panda Express would be in that, in and out.
0:17:19 Din Tai Fung would be another.
0:17:22 Cargill would be another wonderful.
0:17:25 Edward Jones, Radio Flyer, Spikeball.
0:17:26 We talk about some of the smaller companies.
0:17:28 Spikeball would be in that category.
0:17:32 Awesome, the company that owns both Smug Mug and Flickr.
0:17:33 That’s an evergreen company.
0:17:38 So there’s a good list of just wonderful companies out there that are evergreen companies.
0:17:46 What if some big swaggering dickhead from Stanford is now saying, he just described a bunch of
0:17:48 companies that are in the living dead.
0:17:50 They’re not evergreen companies.
0:17:51 They’re living dead companies.
0:17:54 So how do you push back on that schmuck?
0:17:59 So what I would say to that schmuck is that venture capitalists, and I know that term well,
0:18:00 you do too.
0:18:05 Living dead is a company, to define it for your audience, that is unfortunately making just
0:18:08 enough money that it’ll stay in business.
0:18:12 It’s not making enough money or growing enough that it’ll ever get sold or public for anything
0:18:13 attractive.
0:18:17 And so this sits in a venture portfolio, and that portfolio starts getting older, 10, 12,
0:18:19 14 years, and you don’t know what to do with this company.
0:18:21 You just want it to go away.
0:18:26 And sometimes you’ll just ask them to shut it down, or you’ll sell it on a cheap to another
0:18:27 portfolio company.
0:18:29 You just got to get rid of it.
0:18:33 And that might be a company that’s, say, hypothetically growing at 15% a year and profitable.
0:18:38 If you grow at 15% a year and you’re profitable, and you stretch out the time horizons well beyond
0:18:43 venture capitalist time horizons, and I’ll put it at 30 years and 40 years, that company
0:18:46 can grow 60 to 100 times larger than it is today.
0:18:50 So what you saw as living dead is actually the beginning of a great, evergreen company
0:18:54 if it didn’t have you as an investor, the venture capitalist.
0:18:57 So time allows for compounding.
0:18:59 As you know, compounding is the eighth wonder of the world.
0:19:02 And it’s a thing that Warren Buffett espouses in all of his investments.
0:19:07 So unless you think Warren Buffett and the work he’s done at Berkshire Hathaway is living
0:19:09 dead, you don’t understand investing.
0:19:13 Because compounding at 50% a year for 40 or 50 years leads to massive companies.
0:19:18 It leads to enterprise rental cart, for example, being about 60, 70 million in revenue when Andy
0:19:20 Taylor took over from his dad.
0:19:24 And now it’s doing about 35 billion in revenue during his lifetime.
0:19:26 So I wouldn’t call that living dead.
0:19:27 No.
0:19:28 I wouldn’t say that about Edward Jones.
0:19:31 In 1960, it was 10 partners.
0:19:34 And today, it’s 55,000 employees doing over 10 billion in revenue.
0:19:40 I can guarantee you that enterprise is not trying to dump a bunch of Teslas that they bought
0:19:41 either, right?
0:19:42 I don’t know.
0:19:44 Is that Berks that did?
0:19:45 Madison is from Nebraska.
0:19:51 So every time you say Charlie Munger and Warren Buffett, their heart skips a beat.
0:19:52 Yeah, yeah.
0:19:57 So in some ways, the values of evergreen companies are very much akin with how Warren and Charlie
0:19:58 look at business themselves.
0:20:01 They’re not looking for things that grow in 100% a year.
0:20:03 And they do realize that they made some mistakes.
0:20:04 They should have invested in Amazon.
0:20:06 They should have invested in Google.
0:20:07 They knew that.
0:20:10 They knew it because of the personal relationship with Jeff.
0:20:13 And they also knew it because Google was getting a lot of business.
0:20:16 Our Geico was spending a lot of money on advertising on Google.
0:20:17 So they knew Google was a great company.
0:20:22 On the other hand, it hasn’t hurt their performance at all investing in a ton of evergreen light
0:20:22 companies.
0:20:24 That’s done extremely well for them.
0:20:28 I bet a lot of people are confused and they’re thinking, so maybe.
0:20:29 I love that they’re confused.
0:20:32 I was confused.
0:20:44 So can you imagine anybody or should anybody pitch an evergreen concept to Kleiner Perkins or Sequoia or Andreessen Horowitz?
0:20:48 Should they just stay out of that madness on Sand Hill Road?
0:21:07 I don’t think they’ll take the meeting because if you say that I’m not intending on going public or being sold and I’m not planning on growing at hyper growth rates, just at a pace level year after year, it doesn’t meet their expectations to achieve a return based on the power law.
0:21:15 Those companies, by definition, will not fall into those very few that will have power law dynamics because it’s happening too slowly.
0:21:21 Now, they could do that over a 30 or 40 year period, but that’s way outside the time frame in which these firms operate.
0:21:25 So, no, I wouldn’t recommend that.
0:21:30 What you really have to do as a founder of this kind of company, you got to be really thoughtful about your business model up front.
0:21:34 You got to figure out, how do I design a business model that’s not cash absorptive?
0:21:35 It’s low CapEx, high cash flow.
0:21:37 And so you’re not buying assets.
0:21:39 You’re not doing a bunch of CapEx.
0:21:43 You want to be Airbnb, not Marriott.
0:21:50 You want a business model that leverages very few physical assets because that is what ends up absorbing a lot of cash.
0:21:52 Inventory also absorbs a lot of cash.
0:21:54 So, you got to be a little careful about your business model.
0:22:00 So, you’ll see early evergreen companies are like D2C e-commerce companies with products.
0:22:02 They’ll actually just do D2C only.
0:22:07 They won’t go through distribution because they can’t build the inventories required for traditional distribution.
0:22:14 So, they’ll start D2C and then as they get scale and generate cash flow, then they’ll go into things that have distribution networks.
0:22:18 I guess the idea of being asset light is the point I’m finding.
0:22:18 Okay.
0:22:19 That’s very helpful.
0:22:22 You can become more asset intensive over time.
0:22:25 But in the beginning, as a founder, you have to be really thoughtful about how you get to early cash flow.
0:22:31 Or you maintain your current job until that business is like a side project generates.
0:22:33 Like Spikeball is a good example of that.
0:22:37 Chris Reuter kept working in his consulting firm until he was selling enough Spikeball sets.
0:22:41 His wife finally tapped him on the shoulder and said, honey, you don’t need to keep working.
0:22:42 Let’s make this.
0:22:43 Let’s just go with Spikeball.
0:22:46 And that was a wise decision by both of them.
0:23:05 Now, I’m going to ask you to back up a few minutes because I want you to define the Evergreen Performance Incentive Program, which is the name of the program to incentivize employees in an Evergreen company.
0:23:06 Yeah.
0:23:09 And you did ask this question before, which I really appreciate.
0:23:17 And frankly, to give credit to a friend of mine, Pat O’Day, who at the time was the CEO of Pete’s Coffee, he asked a similar question.
0:23:22 He said, how will firms compete for talent if they don’t have stock options?
0:23:25 And you can’t offer them because you’re not going public or being sold.
0:23:27 And so that, I thought, was maybe a fatal flaw of this idea.
0:23:32 I ended up talking to a guy named James Kim at the time at FW Cook, and I posed the question to him.
0:23:33 He was a compensation consultant.
0:23:40 He said, Dave, interestingly enough, multigenerational family business has solved this problem years ago because they don’t go public and they’re not sold.
0:23:47 And they create something which we ended up adapting, as you called correctly, the EPEP, which is the Evergreen Performance Incentive Plan.
0:23:54 And the idea is to share in an uncapped bonus program with key members of the team.
0:23:58 It could be all employees, but at least key members of the team in the outside of the business.
0:24:06 And the idea being is you measure economic profit, and that’s your profit, let’s say your EBIT, less your cost of capital.
0:24:09 And so you’re actually bringing into consideration cost of capital.
0:24:15 And then what is created above that, that economic profit, you share an uncapped amount of that forever.
0:24:18 It could be 15%, 20%, 25%.
0:24:23 And then in any one year, you just measure the amount of economic profit.
0:24:25 You take, let’s say, 20% of it.
0:24:28 You put it in a bonus bank, and you pay it out over a three-year period.
0:24:32 So you take three years of incentive compensation for the individual.
0:24:40 So they start seeing this bow wave of if you’re increasing economic profit, the bonus pool is getting bigger, the payouts are getting bigger.
0:24:48 And a really well-executed evergreen company, often the payouts on that EPIP end up being as much as the base salary itself.
0:24:51 And so this becomes a very competitive compensation.
0:24:58 And then on top of that, there are some evergreen companies that allow employees to own shares in the company with an internal marketplace.
0:25:03 So you buy in under some formula, and you sell back under some formula.
0:25:06 And usually, and wisely, it should be the same formula.
0:25:09 But let’s say you buy in at five times cash flow.
0:25:12 You buy the shares priced at five times cash flow.
0:25:16 And then 20 years later, you sell them back to the company at five times cash flow.
0:25:26 And if you’ve developed a lot of additional cash flow during that period, let’s say 10 times more cash flow, then the value of the underlying stock is 10 times more.
0:25:31 And so let’s say they bought half a million dollars of stock, and they’re selling out and getting $5 million.
0:25:39 But very predictably, because in an evergreen company, these have very high durations relative to venture capital-backed companies.
0:25:48 And so the fact they’re profitable and growing and maintaining that profitability through good and bad times is a really important part of making sure that underlying business is still there.
0:25:55 But also this promise of both payouts under the EPIP as well as in the shares you might own directly could be fairly significant.
0:26:00 So we see very often people retiring from these evergreen companies very comfortably.
0:26:06 And then there’s another model, which I was not familiar with until I got into this, and that’s the ESOP model.
0:26:16 And so you have companies that are everything from 5% owned by employees to an ESOP structure, which is governed by the Department of Labor, up to 100% owned ESOP.
0:26:23 For the 100% owned ESOP, the selling founder gets no taxes on the sale of the company to the employees.
0:26:26 It doesn’t pay any taxes at all if it’s 100%.
0:26:29 So it’s a very beneficial thing for the founder who’s selling it to the employees.
0:26:39 Then the employees accrue value within the company through this ESOP program such that when they retire, they get a piece of the company paid back to them.
0:26:43 And we have one company in our group called Torch Technologies down in Huntsville, Alabama.
0:26:47 They have over 300 people that are multimillionaires underneath their ESOP.
0:26:52 And some of the ones that have been there the longest, I think it’s up to about $10 million of value.
0:26:57 So there is a tremendous value to be shared with employees of evergreen companies.
0:27:01 It just doesn’t happen in a single moment of time through a sale or a public offering.
0:27:03 It’s done over years and years and years.
0:27:14 I think part of the core problem here is that business writers like me, as well as journalists, all we ever cover is the tech companies.
0:27:19 As I said, nobody ever writes a book the seas way or the enterprise way.
0:27:26 And if you think about it, I get asked this so often about, can you review my pitch?
0:27:28 I’m going to pitch it to venture capitalists.
0:27:30 And I asked, what do you do?
0:27:34 And the guy says, I make a special kind of wax for surf bars.
0:27:36 And I said, I hate to tell you, pal.
0:27:36 That’s not going to happen.
0:27:41 Pitcher capitalists are looking for the next Google, not a surf wax company.
0:27:44 Guys, send that guy to my book another way.
0:27:45 Okay, okay.
0:27:47 And I think he’s going to see it, which would be great.
0:27:51 Because his wax really is better.
0:27:53 So now I want to ask you a question.
0:28:02 I think people conflate the concept of whether a company is fundable and whether it’s viable.
0:28:04 Oh, for sure.
0:28:05 And in Silicon Valley.
0:28:06 That is conflated.
0:28:07 And that’s not right.
0:28:09 That is not right.
0:28:17 Because whether a company is fundable or not by the perception of venture capitalists does not mean a wonderful company cannot be built.
0:28:25 Because I’d say most evergreen companies, if not the vast majority, at least in the early stages, would never be funded by venture capitalists.
0:28:28 Because of the commitment that we’re never selling or going public.
0:28:30 And we’re going to pace our growth.
0:28:31 And we’re going to get to early profitability.
0:28:36 Those could be incredible companies built over somebody’s lifetime.
0:28:43 That wax company guy, he could build a $50, $100 million revenue company, I bet, by getting global distribution of his products.
0:28:46 He could probably generate 30% margins on that, is my guess.
0:28:51 He’ll generate $30 million of income every year, year after year.
0:28:54 And then he’s going to go into other products and other services.
0:28:59 And it could be the beginning of something that someday does a billion in revenue with hundreds of millions of profitability.
0:29:00 And he owns 100%.
0:29:03 Or maybe he owns 90% and sold 10% of the employees.
0:29:06 So I wouldn’t discourage that person at all.
0:29:13 For those of you listening and are interested in surfboard wax, the company’s name is Tree Wax.
0:29:14 There you go.
0:29:22 I swear to God, it is a far superior wax to any kind of wax that you’re getting for your surfboard.
0:29:23 But that’s kind of a niche market.
0:29:24 Yeah.
0:29:29 These niches, when you look at them on a global level, are not as niche-y as you think.
0:29:32 And that’s another really cool thing about evergreen companies.
0:29:37 It’s something that maybe in one small company would be too small.
0:29:46 But if they take that single product, they clearly understand who that single customer is they’re trying to serve, like you, with wax, and go global, they can build something quite significant.
0:29:47 Okay.
0:29:52 So I’m going to ask you a question I guarantee no one has ever asked you before, which is this.
0:30:04 Could you not apply this principle of evergreen companies, purpose-driven, trying to make a profit, sustain itself for hundreds of years?
0:30:14 Wouldn’t it be a good thing if we could apply this to government and politicians, to have evergreen governments and evergreen politicians?
0:30:16 100%.
0:30:18 And what’s holding us back?
0:30:23 Every politician maximum has a four-year time horizon, right?
0:30:27 And 435 people in Congress have two-year time frames.
0:30:34 Which really is less than two years because they have to start fundraising for the next cycle probably within months of winning the current one.
0:30:37 So, yeah, I don’t have an answer because you’re right.
0:30:39 I’ve never been asked that question.
0:30:42 A similar question I have been asked and I’ve thought about is nonprofits.
0:30:45 Could a nonprofit be very evergreen-like?
0:30:46 And absolutely.
0:30:53 Particularly if the nonprofit develops your product or service, that actually makes it self-sustaining without having to raise money every year.
0:30:58 The challenge of nonprofits is you’re always got your hand out trying to raise more money to stay in business for the following year.
0:31:08 And if your primary funder, let’s say it’s the Gates Foundation, changes their point of view on what’s important, you either adapt to that point of view or you lose your future check and then you’re out of business.
0:31:13 So, the really cool nonprofits are the ones that have actually found a way to sell a product or service.
0:31:19 So, while they’re a nonprofit and they can’t distribute profits or owners, they can sustain themselves.
0:31:27 And so, the thing I encourage nonprofits and leaders to think about is can you come up with a model of what you can get away from having to raise capital every year?
0:31:31 And an example of that is our community library here in Sun Valley, Idaho.
0:31:38 The women who founded that about 40 years ago were smart enough to create a second-hand store called The Gold Mine.
0:31:51 That gold mine underwrites a good chunk of their annual budget just by having people drop stuff off, sell it to other people, and then all the proceeds go to support this community library, which requires no state or federal or city funding.
0:31:52 It’s completely independent.
0:32:07 I know people at the highest levels of signal and Wikipedia and NPR and I keep telling them you have got to get out of this model of always having your hand out.
0:32:14 And arguably, if you’re NPR and you didn’t have your hand out right now, you could tell Donald Trump to go stick it.
0:32:15 That’s true.
0:32:16 You could do as you wish.
0:32:17 That’s very true.
0:32:20 And so, I think that’s a really good encouragement, Guy.
0:32:29 Whether they could do it or not, they should do a strategy outside retreat for a few days with some really smart minds like yours and say, let’s just brainstorm a completely different model.
0:32:31 Let’s not get carried away.
0:32:53 Have you heard about this Cloudflare idea that the content hosted on Cloudflare that they can charge AI models to scrape the content they’re hosting and then pay that revenue back to the content creator?
0:32:55 I think that is it.
0:32:56 Not heard of it.
0:32:59 I would do that in a second if I were NPR.
0:33:00 Oh, interesting.
0:33:01 Oh, interesting.
0:33:02 Yeah, there you go.
0:33:02 See?
0:33:04 You’re thinking out of the box here.
0:33:12 That’s why I’m a shitty little podcaster sitting in my kitchen here doing this podcast and I’m not Joe Logan.
0:33:17 Guy, you’ve influenced people for decades, possibly.
0:33:20 So, I’m not going to let you be too humble here.
0:33:21 Yeah.
0:33:25 I’ve been accused of many things, Dave, but never of being too humble.
0:33:47 So, is there any politician or is there any government entity that you say they really have embraced the sort of evergreen model?
0:33:49 They’re thinking for the long term.
0:33:50 They’re viable.
0:33:55 Boy, I do not have an answer off the top of my head.
0:34:03 If you think about some of these other governments, I guess it would move beyond the U.S. government, but you look at what Norway has done with their sovereign wealth fund.
0:34:05 You look at what Singapore has done.
0:34:11 I think in some ways, maybe there’s an element of that where they’re willing to be a Canadian pension fund.
0:34:14 They’re incredibly patient long-term investors.
0:34:17 They’re willing to hold assets for decades, if not 100 years.
0:34:22 And so, they would be in the category of people who I think in those times, but they’re not a government agency per se.
0:34:25 Do you have any that you can think of?
0:34:26 I bounced around in my head.
0:34:30 And most agencies lose a lot of money, if you really look at it.
0:34:31 The Postal Service loses money.
0:34:33 Amtrak loses money.
0:34:37 I don’t know of any government agency that generates.
0:34:38 We can ask.
0:34:41 The Fed kind of does it with interest rates, but that’s playing a game, I think.
0:34:54 The California DMV is an extremely well-run organization.
0:34:57 I interviewed the person who runs the California DMV.
0:35:03 Well, they do charge pretty high registration fees, so there is a chance they could actually operate within that budget.
0:35:07 Because that is a service they’re offering that people pay a price for.
0:35:08 And they have a monopoly.
0:35:10 Yeah, yeah.
0:35:14 But I do think there is an opportunity for agencies.
0:35:19 And it reminds me, there’s a company called SRC Holdings, and it has an idea called The Great Game of Business.
0:35:28 And it’s about teaching your employees how to read an income statement, a balance sheet, teaching them kind of how the game is played, how you get rewarded, and then sharing in the upside.
0:35:37 And I believe government agencies in Missouri have actually adopted that, both in the city of Springfield and others, saying, look, let’s move to that.
0:35:40 Let’s teach our employees how to think about this like a business.
0:35:45 Let’s make sure they understand what leverage you can pull that create more profitable agency.
0:35:48 And then let’s bonus them around achieving those objectives.
0:36:01 But I used to really love the concept of let’s run government like a business until the last two or three years, because now, quote unquote, Doge is running the U.S. government as a business.
0:36:13 And it’s not clear to me that by shutting the Department of Education or just ripping up NIH or taking away all the vaccine studies and like, okay, they’re running it as a business.
0:36:17 But it’s not clear to me that they’re doing best for society here.
0:36:18 Yeah, I don’t know.
0:36:25 But one thing that came out of that, which I really appreciate, is there’s a lot of really good people that work in our government.
0:36:30 Really talented, purpose-driven, they care.
0:36:39 And so the weird silver lining of some of that has been that I think it’s actually highlighted for us that we’ve got a lot of very committed civil servants that are doing a great job.
0:36:40 And we should know that.
0:36:42 We should know that.
0:36:43 And we should respect them for that.
0:36:46 And we should appreciate them serving in those jobs.
0:36:52 Yeah, but then we have a 22-year-old guy named Big Balls who is now making these decisions.
0:36:54 I do not understand that.
0:37:04 Okay, maybe you can explain this because you run in this circle with John Doerr and Mike Moritz and all these ballers.
0:37:16 So what happened to these people like Mark Andreessen and Mark Zuckerberg and Peter Thiel, they turned into something I never would have predicted.
0:37:23 The Valley used to be all optimistic and we’re going to make the world a better place and democratize everything and all that.
0:37:27 And now it appears they have the exact opposite attitude.
0:37:29 What happened to them?
0:37:30 So I don’t know, Guy.
0:37:31 I don’t.
0:37:34 I can speak more societal versus individual.
0:37:39 When I was in Silicon Valley, there is a lot of envy there, right?
0:37:45 There’s a lot of, wow, that guy down the street’s company just went public, made a killing, bought a house in Atherton, moved out of Menlo Park.
0:37:48 And I always felt that there was a lot of-
0:37:49 Back off there, buddy.
0:37:50 I had a house in Atherton.
0:37:52 Okay.
0:37:53 Okay.
0:37:58 Me and Willie Mays were the only two non-white people in Atherton for decades.
0:37:59 Oh, my gosh.
0:38:02 But so I would say that there’s a lot of envy.
0:38:07 There’s probably more greed than there should be as far as people feeling they need more than they have.
0:38:13 Because when did $100 million not enough to do anything you ever would want to do in life besides buy things?
0:38:14 You know, you could rent almost everything.
0:38:22 That was one of the refreshing things about moving to Sun Valley was I didn’t go to parties and feel like I was playing status games all day long.
0:38:26 Or people trying to figure out what your net worth was, what you’d been involved in, what you’d funded.
0:38:28 It was just more like, hey, where’d you go hiking?
0:38:30 And do you have a dog?
0:38:31 And what do you find interesting?
0:38:33 And what’s your favorite band?
0:38:38 And not that I get some of that, because I do have very good friends in Silicon Valley that I really admire and care about.
0:38:46 But I just think the natural cadence is of stress and looking over the other neighbor’s fence and being a little jealous for their success.
0:38:48 Schools themselves are very competitive.
0:38:51 And that, I think, can be really tough on kids.
0:38:56 Haven’t given them an opportunity to grow up in Silicon Valley because they’ve got to learn Mandarin when they’re three years old.
0:39:04 And they’ve got to be doing Kumon math and they’ve got to – it’s just – when kids start jumping in front of trains at a gun high school, you know something’s wrong.
0:39:05 And it’s not getting repaired.
0:39:08 So I don’t know what happened with those three individually.
0:39:10 I would hope they’re still optimists.
0:39:18 I would hope that they still think that what they’re doing with their intelligence and experience and money is really for the good of society.
0:39:19 I hope so.
0:39:21 I don’t know what the alternative would be.
0:39:22 They’ve got plenty of everything.
0:39:25 I just – I’m not in touch with those folks anymore, unfortunately.
0:39:27 Or fortunately.
0:39:37 If I ever had more money than God like they do, I would take the high road and I would dedicate my life to making the world a better place.
0:39:43 It’s not trying to reduce long-term capital gains or ensuring that crypto was successful.
0:39:44 I would have bigger goals.
0:39:45 Yeah.
0:39:47 So you probably admire McKinsey Scott, right?
0:39:49 Which she’s done because like –
0:39:50 Exactly.
0:39:50 It’s incredible.
0:39:53 But I think Lorene Powell Jobs has tried that too.
0:39:55 But McKinsey to me is the ultimate.
0:40:07 The fact she’s willing to write a check of significant size without forcing a 100-page grant request document and then say, just do your jobs well, guys, and I’ll be happy.
0:40:08 That’s the way it should be done.
0:40:10 I can tell you a great story about this.
0:40:22 So one of my favorite charities is called Digital Nest, and they help Hispanic children have a career other than picking strawberries for white people, okay?
0:40:31 And the guy told me, yeah, one day out of the blue, we got an inquiry from McKinsey Scott’s organization.
0:40:33 They knew all we were doing.
0:40:34 They liked what we’re doing.
0:40:36 So they wanted to give us a grant.
0:40:39 I said, well, did you have to fill out a 100-page document?
0:40:39 No.
0:40:44 Are they telling you that you have to meet milestones if you report to them?
0:40:44 No.
0:40:48 They just have faith, and they’re telling us to take the money and do it.
0:40:54 I was like, oh, I never heard of anything that came like that with no strings attached.
0:40:55 That is truly amazing.
0:40:56 Yeah.
0:40:59 I got to know her when Jeff and her were together.
0:41:04 In fact, we had a really fun time going golfing together where she just was razzing Jeff like crazy.
0:41:09 This is the old Jeff, the nerdy Jeff, not the current Jeff, Superman Jeff.
0:41:10 And she’s an author.
0:41:11 She’s a mother.
0:41:12 She’s very grounded.
0:41:17 But given the gift of these tremendous financial resources, I think she’s doing it right.
0:41:21 And I think when you sparked the idea from how you mentioned it, but Guy, that’s the way I’d like to do it.
0:41:23 That’s the way you’d like to do it.
0:41:26 So I wish you the best and hope you have the opportunity.
0:41:39 So now the next question is, based on all these people that you know who are very wealthy and successful, what do you believe is the coefficient of correlation between wealth and intelligence?
0:41:44 And it can go negative if you want.
0:41:50 So I think luck plays a huge role in this and timing.
0:41:52 And I do believe intelligence is important.
0:41:54 But I think as important as intelligence as character.
0:42:04 And I think we’ve heard this said many different ways, but really intelligent, low character person can do a lot of damage and probably steal your money if you’re an investor.
0:42:12 A low intelligence, high character person, you’ll have a good time with, but they will lose all your money, too, because you’re not going to figure things out.
0:42:20 So the magic balance is probably high intelligence, high character, and probably a good dose of energy and there’s some luck.
0:42:25 And those things working together, I think, can lead to a lot of wealth.
0:42:29 But there are some very wealthy people who I think don’t give luck enough credit.
0:42:36 I think there’s some other people who have not generated wealth, but they’re remarkable human beings.
0:42:37 They had all the elements of it.
0:42:39 They gave it a good run, but they had bad luck.
0:42:40 And that happens, too.
0:42:44 And you can’t prevent that in our capitalist system.
0:42:45 But my heart goes out to those folks.
0:42:50 I’ve had a few people on my network who found luck very late because they never gave up.
0:42:58 And they’ve had tremendous success later in their careers, but got knocked to the ground three or four times, but did not give up.
0:42:58 And then it happened.
0:43:00 And I think that’s really cool, too.
0:43:02 It’s an important lesson in that.
0:43:05 I’m going to try to pin you down one last time.
0:43:12 What do you believe is the coefficient of correlation between wealth and wisdom as opposed to intelligence?
0:43:23 Oh, that’s much higher because wisdom means that there’s been learning from that experience, right?
0:43:37 And there’s been an ability to look back and see the bigger picture and see how all the different things had come into play and to be able to articulate that both in your actions as well as how you influence others.
0:43:45 Wisdom is a much more powerful thing towards wealth, but I think sometimes when people find true wisdom, they realize they aren’t really pursuing wealth.
0:43:49 Wisdom makes them realize that wealth really wasn’t the end game.
0:43:56 The end game was relationships with your family, your friends, with other people you admire.
0:44:05 Because when people are on their deathbed, as we know, and I’m sure you talk to older people all the time, they’re not reflecting on how much money is in their bank account outside of enough to be comfortable.
0:44:09 When they reflect on it, what was the impact they had with other people?
0:44:10 How were people impactful to them?
0:44:14 What kind of legacy did they leave in that dimension?
0:44:16 And Naval talks about this, right?
0:44:19 He does that whole podcast, which I think is brilliant, about how to get rich.
0:44:23 And then he says, then you’re going to get rich and realize that isn’t what the game was all about in the first place.
0:44:24 That’s wisdom.
0:44:30 I’m telling you that there are a lot of people in Silicon Valley that on their deathbed, they’re going to say,
0:44:39 my greatest accomplishment was ensuring lower tax rate for long-term capital gains and ensuring that crypto was successful.
0:44:45 That’s what I want to be remembered for because they certainly seem to be obsessed with those two things.
0:44:49 I guess they determine that’s the purpose of their life.
0:44:53 And that’s, you know, that wouldn’t be where I would put value.
0:44:53 Yeah.
0:45:03 I’d put value in building a wonderful Evergreen company that you were able to pass to your children and your employees and continue impacting your communities really positively.
0:45:07 I think that would be a heck of a legacy if you’re going to build a company.
0:45:13 Starting from this moment, my goal in life is to build an Evergreen podcast that can go on forever.
0:45:18 So Madison is going to be the next guy or better.
0:45:19 Yeah.
0:45:28 My last comment or question is, I just want you to review the concept of an Evergreen company.
0:45:44 So if people have listened to this far in the podcast and have heard this term over and over, I want you to explain the Evergreen concept and also give a plug for your book because your book does an extremely good job explaining this.
0:45:45 Oh, thank you, guys.
0:45:47 That’s the plug right there.
0:45:50 Evergreen companies, as you said, are really being built to endure.
0:45:58 And we came up with a framework we call the Evergreen 7Ps to really help you understand what are the core principles of those Evergreen companies.
0:45:59 And there’s seven.
0:46:09 And it’s purpose, perseverance, people first, private, profit, paced growth, and pragmatic innovation.
0:46:17 And the idea being is you want to mature your company on all seven of those dimensions over time, as well as understand it’s a system.
0:46:23 There are tradeoffs between those P’s that you have to make a decision as the owner and CEO at different parts.
0:46:28 You may go for lower profits for a period of time to make more investments in long-term products and services.
0:46:35 Or you may do lower profits in a period of time to be more generous with your employees during a difficult economic period.
0:46:47 But knowing over long periods of time, 10, 20, 30, 40, if you’re profitable, you’re pacing your growth, you’re continuing to innovate, you’re treating your people well, you’re being purpose-driven, you’ve got low debt, so you can persevere.
0:46:47 Guess what?
0:46:52 There’s a good chance you’re going to be a significant company over your lifetime.
0:47:02 And it may be small today, but by the time you pass the reins to the next owner and next leaders, it could be a $25 billion company.
0:47:04 Incredible things can be done building an Evergreen company.
0:47:07 And the book itself, I try to explain this.
0:47:15 I try to explain my learning journey coming from Silicon Valley, like you, getting confused and having people ask really tough questions and being, oh, man, maybe there’s a fatal flaw here.
0:47:17 So I just explain how I learned.
0:47:19 So I bring you through my learning journey.
0:47:25 And then I dive into case studies of a bunch of Evergreen companies that I respect and I think others can respect.
0:47:28 The good news is I think there’s a lot of Evergreen companies out there.
0:47:30 They’re just not well-recognized.
0:47:33 I don’t think they’re well, as respected as well as they should be.
0:47:34 And they’re probably underserved.
0:47:39 So my hope is not only to get people excited about the idea of Evergreen companies, but go work for them.
0:47:40 Go be a customer of them.
0:47:42 Be a supplier to them.
0:47:45 Help them flourish because they’re really good for our society.
0:47:50 Right after we end this podcast, I’m going to drive over to See’s Candies.
0:47:55 And I’m going to go buy some See’s Candies to support an Evergreen company.
0:47:57 Where’s your local See’s Candy?
0:48:01 I live in Santa Cruz, so it’s across the street from the Capitola Mall.
0:48:02 Okay.
0:48:02 Oh, great.
0:48:04 Yeah, there’s one in Stanford Mall.
0:48:05 I’ve got to excuse you.
0:48:08 I’ve been trying to hold back a sneeze for an hour now.
0:48:11 I almost made it.
0:48:12 So anyway, yeah.
0:48:16 So one plug for the See’s Candies.
0:48:18 We’re all going to go make See’s Candies.
0:48:19 See’s Candies, your wax friend.
0:48:21 My wax friend.
0:48:23 I’ll make a plug for all Evergreen companies.
0:48:25 Please support them.
0:48:27 All right.
0:48:28 And please buy the book.
0:48:30 Yeah, please buy the book.
0:48:32 It’s called Another Way.
0:48:34 And let me sign off here.
0:48:41 I want to thank Madison Neisman, who is going to be my Evergreen podcaster, air apparent.
0:48:44 Tessa Neisman, who does our research.
0:48:49 Jeff C. is the co-producer, probably also part of the Evergreen podcast.
0:48:53 And Shannon Hernandez, this is the Remarkable People team.
0:48:57 And Dave, thank you very much.
0:48:58 Thank you, guy.
0:49:05 This is Remarkable People.