EVERGREEN PRINCIPLES

THAT EMPOWER
INNOVATION
Cornell University’s Family Innovations Summit:
Disruption, From the Inside Out
May 14, 2019
 AGENDA

What Defines Evergreen Businesses

Pragmatic Innovation
How Tugboat is Helping Today

TUGBOAT MANAGEMENT CONFIDENTIAL INFORMATION 2

 We believe in the vital importance
of humans coming together to create and grow
enduring, private businesses that
make a dent in the universe

TUGBOAT MANAGEMENT CONFIDENTIAL INFORMATION 3

 OUR FRAMEWORK THAT DEFINES EVERGREEN

PURPOSE
PERSEVERANCE
PEOPLE FIRST
PRIVATE
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
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 EVERGREEN 7PS

PURPOSE
Being passionately
PERSEVERANCE driven by a
PEOPLE FIRST compelling
mission
vision and

PRIVATE For Evergreens, wealth

creation is a natural
PROFIT byproduct of achieving
one’s Purpose, not the
Purpose itself
PACED GROWTH
PRAGMATIC INNOVATION
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 EVERGREEN 7PS

PURPOSE Having the ambition

and the resilience to
PERSEVERANCE overcome obstacles
and keep pursuing
PEOPLE FIRST the mission
indefinitely into the
PRIVATE future

PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
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 EVERGREEN 7PS

PURPOSE The belief that, by

taking care of your
PERSEVERANCE employees, they will
take care of your
PEOPLE FIRST customers, suppliers,
partners,
PRIVATE communities, and
their families
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
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 EVERGREEN 7PS

PURPOSE Having a longer-term

view, greater
PERSEVERANCE confidentiality
around strategies,
PEOPLE FIRST and more operating
flexibility than public
PRIVATE or exit-oriented
businesses
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
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 EVERGREEN 7PS

PURPOSE Not mistaking profit

as the purpose of the
PERSEVERANCE business; but
recognizing it is
PEOPLE FIRST essential to survival
and independence,
PRIVATE and the most
accurate measure of
PROFIT customer value
delivered
PACED GROWTH
PRAGMATIC INNOVATION
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 EVERGREEN 7PS

PURPOSE Having the discipline

to focus on long-term
PERSEVERANCE strategy, short-term
and long-term
PEOPLE FIRST performance, and
grow steadily and
PRIVATE consistently from
year to year
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
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 EVERGREEN 7PS

PURPOSE Embracing a
continuous-
PERSEVERANCE improvement process
built around taking
PEOPLE FIRST capital-efficient,
calculated risks to
PRIVATE innovate creatively
within constraints
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
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 EVERGREEN BUSINESSES ARE IN GOOD
COMPANY
1

Variety of Business Types

Founder/Owner
Multi-generational Family
Employee-Owned
Family & Employee Owned
Partnerships
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 OTHERS WISH THEY COULD BE EVERGREEN

84%
Of Fortune 500 CEOs believe: “It would be easier to
manage my company if it were a private company”

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 UNIQUE SOURCES OF COMPETITIVE ADVANTAGES
FOR EVERGREENS
Better people – Evergreen values & culture attract better people, who are more productive,
caring, loyal and innovative; owners can invest in and reward employees more generously than
ones with financial investors onboard
Decisions – Evergreen values foster flexibility, adaptability, and decisive action at all levels
which is more important today than scale; no knee jerk culture busters (layoffs over $.01 miss)
Attracting customers and suppliers – Evergreen values are enduring, and customer, suppliers
and communities gain comfort knowing the company isn’t for sale; a key selling point
Resiliency - deeper Purpose provides meaning in tough times; little debt protects the company
in downturns and creates opportunity for market share as others fail/stumble;
Not chasing growth for growth sake—Evergreen owners have no need for a smooth up and to
the right curve idealized by VC, PE and public investors. Grow as markets, financial resources
and human talent/culture allow, and focus on long term economic profit not revenue growth;
power of compounding growth over decades
Building moats – enduring brands are built over long periods of time; 1000 details done well
and improved over decades form a system near impossible to replicate; ability to privately test
new business models in response to markets/technology change (would tank a public stock)
Innovation –today’s discussion
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 Pragmatic Innovation Lessons from
Evergreen Businesses & Thought Leaders

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 EVERGREEN 7PS

PURPOSE Embracing a
continuous-
PERSEVERANCE improvement process
built around taking
PEOPLE FIRST capital-efficient,
calculated risks to
PRIVATE innovate creatively
within constraints
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
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 CONSTRAINTS DRIVE CREATIVITY

Orville and Wilbur Wright

Samuel Langley

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 1995: Founded 2009: Founded
- $9M Equity Raised Pre-IPO - $24.7B Equity Raised Pre-IPO
1997: Public - $1.6B Convert Debt
- $50M Raised 2019: Public
- $1.2B Convert Debt in 1999 - $9-10B Raised
2004: $7B Revenues (9 years after founding) 2018: $10B Revenues (9 years after founding)
10 YR TOTAL: $0.06B Equity + $1.2B Debt 10 YR TOTAL: $36B Equity + $1.6B Debt
NOTE: $233B Rev & $10B Net Income 2018
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 KAIZEN THRU EMPOWERED EMPLOYEES

Aligned on Purpose and long term objectives

Trained to understand business principles and key tools, given
transparent scorecard and provided upside stake in the outcome
Institutional knowledge and wisdom from long tenured employees
Room for 9x5 workers and ambitious future leaders
Everyone invited to eliminate waste and to improve processes and
approaches to improve cash flow and return on capital
Failure ok, lack of integrity not

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 LOW-COST EXPERIMENTS

“Dig a lot of holes”

- Jim Goodnight, Founder/CEO, SAS Institute
“We use the analogy of planting seeds. A
seed for us is a new product. We bring a
lot of new products to market as fast as
possible and at as low a cost as possible
not betting the farm on any one product
idea”
- Robert Pasin, Chief Wagon Officer, Radio Flyer

“Shoot bullets before cannon balls.”

- Jim Collins, Author Good to Great

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 PROTECT THE “NEW” FROM THE “BEAST”

“…think of how a movie starts out. It’s a baby…we all start

out ugly. Every one of Pixar’s stories starts out that way. A
new thing is hard to define; it’s not attractive, and it
requires protection. Every new idea in any field needs
protection. Pixar is set up to protect our director’s ugly
baby.”
- Ed Catmull, former CEO, Pixar

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 EVERGREEN LEARNING JOURNEYS

5
Team exercise in learning something new
and/or identifying blind spots
Adjust Plan

Go out and talk to people to learn from

them – companies and thought leaders
you admire in and outside industry Study Do

Do not come to any conclusions

prematurely (natural tendency)
Spend a year, then follow Deming Cycle
CANNOT leverage successfully if under
hyper-growth or under short term
expectations by board and/or owners
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Deming Cycle
“I wasn’t sure I was still the right CEO until
our learning journey revealed that we had
simply saturated that first S-curve”
- Melanie Dulbecco, Torani Syrup
23
 COMPETE ON LONGER TIME HORIZONS

6
PUBLIC COMPANY

PE-BACKED COMPANY

(PRIVATE) EVERGREEN COMPANY

Bezos PublicCo Exception: “In order for innovative ideas to bear fruit, need to be willing
to wait for 5-7 years, and most companies don’t take that time horizon”

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 CASE STUDY: POWER OF COMPOUNDING

$20
Raise Capital. Grow rapidly. In 5 years,
EBIT hits $15M & sell for $150M.
Founder $50M pre-tax*
(and the dream is over) $15M
50% CAGR
EBIT ($M)

$10

$5M
15% CAGR
$3M

$0
0 1 2 3 4 5

* Assume PE firm sells the company for 10x in year 5 and founder share 33% = $50M pre-tax one-time capital gain

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 EVERGREEN COMPOUNDING MACHINE

EBIT hits $200M and growing

(dream lives on, tremendous
$200 resources & 100% private)

$175

$150

$125
15% Growth
Millions

$100

$75
Sold for a “win”
$50 (and the dream is over)

$25

$0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

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 EVERGREEN OPPORTUNITY: PURSUE INDUSTRY
CREATING “EMPOWERING INNOVATIONS”
7

“Across the financial industry, investors say they want to

back disruptive innovations – yet in the past 15 years, the
industry has evolved such that we are funding fewer
disruptive (empowering) innovations”
- Clayton Christensen

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 THREE TYPES OF INNOVATION
1 2 3
Performance Improving
Innovations
Replace old products with new and
better models.
All successful incumbent firms are tuned
to product them repeatedly and
consistently. There is a zero-sum aspect
to these innovations: they replace
yesterday’s products with today’s
products and create few jobs.
In dollars, they account for the highest
number of innovations.
Source: Christensen Institute Conversations; ”Are Investors Bad for Business?” HBR June 2014
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Efficiency Innovations
Helps companies make and sell mature,
established products or services to the
same customers at lower prices
Includes low-end disruptions that
involve the creation of a new business
model
These innovations almost always
reduce the net number of industry jobs,
because they streamline processes and
raise productivity.
Return Period: 12-18 months
Market Creating Innovations
Transform complicated and expensive
products available only to the highly skilled
or rich into simpler, cheaper products
available to many.
Two critical ingredients: enabling
technology that drives down costs & new
business model to serve non-customers
These innovations create jobs because they
require more and more people who can
supply, build, distribute, sell and service
these products.
Return Period: 5 to 10 Years
28
 THE HEALTHY ECONOMIC ENGINE
Performance Enhancing
Innovations
Neutral on Job Growth and on Capital
Creation

Marketing Creating
Innovations
Create Jobs, Consume Capital

Return Period: Efficiency Innovations

5-10 Years Eliminate Jobs, Free Capital

Return Period:
12-18 months

Source: Christensen Institute

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 MARKET CREATING INNOVATION PROCESS

Core Up
Foothold Maintain
Develop- Market
Market Success
ment March

1-3 years 1-3 years 3+ years Ongoing

Small team Small team Grow team Refine through

sustaining and
Focus on removing Pursue underserved Allow product and efficiency innovations
technical risks early, or greenfield market, team’s capabilities to
plus product design & usually small by mature As ROIC goes down,
business model to definition invest in new
serve non-customers Move to compete in empowering
Product performance mainstream markets innovations and/or
Exercise in creativity lags mainstream distribute to owners
& perseverance market Paced Growth with
high reinvestment
Low burn rate Profitability > Rapid level
Growth

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 EMPOWERING INNOVATION PROCESS
What mainstream VC investors do not support….

Core Up
Foothold Maintain
Develop- Market
Market Success
ment March

1-3 years 1-3 years 3+ years Ongoing

Small team Small team Grow team Refine through

sustaining and
Focus on removing Pursue underserved Allow product and efficiency innovations
technical risks early, or greenfield market, team’s capabilities to
plus product design & usually small by mature As ROIC goes down,
business model to definition invest in new
serve non-customers Move to compete in empowering
Product performance mainstream markets innovations and/or
Exercise in creativity lags mainstream distribute to owners
& perseverance market Paced Growth with
high reinvestment
Low burn rate Profitability > Rapid level
Growth

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 SUMMARY OF LESSONS

1 Constraints Drive Creativity

2 Kaizen thru Empowered Employees

3 Low Cost Experiments

4 Protect the “New” from the “Beast”

5 Evergreen Learning Journeys

6 Compete on Longer Time Horizons

7 Pursue Industry Creating “Empowering Innovations”

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 AGENDA

What Defines Evergreen

Business Myths
How Tugboat is Helping Today

TUGBOAT MANAGEMENT CONFIDENTIAL INFORMATION 33

 TUGBOAT INSTITUTE

A membership group of Evergreen CEOs and presidents

130+ CEOs from 35 states, 25+ industries and 4 countries.
30% Multi-Generational. Growth 30%+ per year
Connection, inspiration, new ideas, and best practices
on business-family-self via major gatherings, forums,
seminars, 1:1 meetings, publications & other programs
Designed to foster deep, trusted relationships

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THANK YOU
DAVE WHORTON
DWHORTON@THETUGBOATGROUP.COM
650-400-7150

www.thetugboatgroup.com
www.tugboatinstitute.com
 We believe in the vital importance
of humans coming together to create and grow
enduring, private businesses that
make a dent in the universe

TUGBOAT MANAGEMENT CONFIDENTIAL INFORMATION 36