This document discusses principles for empowering innovation in evergreen businesses. It defines evergreen businesses as private, enduring companies focused on purpose over profits. The document outlines seven principles for evergreen businesses: purpose, perseverance, people first, private structure, profit, paced growth, and pragmatic innovation. It provides examples of how constraints can drive creativity and discusses practices like low-cost experiments, protecting new ideas, long-term learning, and focusing on innovations that create new markets and jobs. The document is presented by Tugboat Institute, a membership group for CEOs of evergreen businesses.

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

2. TUGBOAT MANAGEMENT CONFIDENTIAL INFORMATION 2
AGENDA
What Defines Evergreen Businesses
Pragmatic Innovation
How Tugboat is Helping Today

3. TUGBOAT MANAGEMENT CONFIDENTIAL INFORMATION 3
We believe in the vital importance
of humans coming together to create and grow
enduring, private businesses that
make a dent in the universe

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OUR FRAMEWORK THAT DEFINES EVERGREEN
PURPOSE
PERSEVERANCE
PEOPLE FIRST
PRIVATE
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION

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PURPOSE
PERSEVERANCE
PEOPLE FIRST
PRIVATE
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
Being passionately
driven by a
compelling vision and
mission
For Evergreens, wealth
creation is a natural
byproduct of achieving
one’s Purpose, not the
Purpose itself
EVERGREEN 7PS

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PURPOSE
PERSEVERANCE
PEOPLE FIRST
PRIVATE
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
Having the ambition
and the resilience to
overcome obstacles
and keep pursuing
the mission
indefinitely into the
future
EVERGREEN 7PS

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

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

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PURPOSE
PERSEVERANCE
PEOPLE FIRST
PRIVATE
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
Not mistaking profit
as the purpose of the
business; but
recognizing it is
essential to survival
and independence,
and the most
accurate measure of
customer value
delivered
EVERGREEN 7PS

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

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PURPOSE
PERSEVERANCE
PEOPLE FIRST
PRIVATE
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
Embracing a
continuous-
improvement process
built around taking
capital-efficient,
calculated risks to
innovate creatively
within constraints
EVERGREEN 7PS

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

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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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PURPOSE
PERSEVERANCE
PEOPLE FIRST
PRIVATE
PROFIT
PACED GROWTH
PRAGMATIC INNOVATION
Embracing a
continuous-
improvement process
built around taking
capital-efficient,
calculated risks to
innovate creatively
within constraints
EVERGREEN 7PS

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1
CONSTRAINTS DRIVE CREATIVITY
Samuel Langley
Orville and Wilbur Wright

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

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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
2

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LOW-COST EXPERIMENTS
3
“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
“Dig a lot of holes”
- Jim Goodnight, Founder/CEO, SAS Institute
“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
4

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EVERGREEN LEARNING JOURNEYS
Team exercise in learning something new
and/or identifying blind spots
Go out and talk to people to learn from
them – companies and thought leaders
you admire in and outside industry
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
5
Do
Plan
Study
Adjust
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

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COMPETE ON LONGER TIME HORIZONS
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”
6

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$0
$10
$20
0 1 2 3 4 5
CASE STUDY: POWER OF COMPOUNDING
* Assume PE firm sells the company for 10x in year 5 and founder share 33% = $50M pre-tax one-time capital gain
15% CAGR
50% CAGR
Raise Capital. Grow rapidly. In 5 years,
EBIT hits $15M & sell for $150M.
Founder $50M pre-tax*
(and the dream is over)
$3M
$5M
$15M
EBIT($M)

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$0
$25
$50
$75
$100
$125
$150
$175
$200
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
EVERGREEN COMPOUNDING MACHINE
EBIT hits $200M and growing
(dream lives on, tremendous
resources & 100% private)
15% Growth
Sold for a “win”
(and the dream is over)
Millions

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EVERGREEN OPPORTUNITY: PURSUE INDUSTRY
CREATING “EMPOWERING INNOVATIONS”
“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
7

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31 2
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.
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.
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.
THREE TYPES OF INNOVATION
Return Period: 5 to 10 YearsReturn Period: 12-18 months
Source: Christensen Institute Conversations; ”Are Investors Bad for Business?” HBR June 2014

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Efficiency Innovations
Eliminate Jobs, Free Capital
Performance Enhancing
Innovations
Neutral on Job Growth and on Capital
Creation
Marketing Creating
Innovations
Create Jobs, Consume Capital
THE HEALTHY ECONOMIC ENGINE
Return Period:
5-10 Years
Return Period:
12-18 months
Source: Christensen Institute

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MARKET CREATING INNOVATION PROCESS
Core
Develop-
ment
Foothold
Market
Up
Market
March
Maintain
Success
1-3 years
Small team
Focus on removing
technical risks early,
plus product design &
business model to
serve non-customers
Exercise in creativity
& perseverance
Low burn rate
1-3 years
Small team
Pursue underserved
or greenfield market,
usually small by
definition
Product performance
lags mainstream
market
Profitability > Rapid
Growth
3+ years
Grow team
Allow product and
team’s capabilities to
mature
Move to compete in
mainstream markets
Paced Growth with
high reinvestment
level
Ongoing
Refine through
sustaining and
efficiency innovations
As ROIC goes down,
invest in new
empowering
innovations and/or
distribute to owners

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EMPOWERING INNOVATION PROCESS
Core
Develop-
ment
Foothold
Market
Up
Market
March
Maintain
Success
1-3 years
Small team
Focus on removing
technical risks early,
plus product design &
business model to
serve non-customers
Exercise in creativity
& perseverance
Low burn rate
1-3 years
Small team
Pursue underserved
or greenfield market,
usually small by
definition
Product performance
lags mainstream
market
Profitability > Rapid
Growth
3+ years
Grow team
Allow product and
team’s capabilities to
mature
Move to compete in
mainstream markets
Paced Growth with
high reinvestment
level
Ongoing
Refine through
sustaining and
efficiency innovations
As ROIC goes down,
invest in new
empowering
innovations and/or
distribute to owners
What mainstream VC investors do not support….

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SUMMARY OF LESSONS
Constraints Drive Creativity
Kaizen thru Empowered Employees
Low Cost Experiments
Protect the “New” from the “Beast”
Evergreen Learning Journeys
Compete on Longer Time Horizons
Pursue Industry Creating “Empowering Innovations”
1
2
3
4
5
6
7

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AGENDA
What Defines Evergreen
Business Myths
How Tugboat is Helping Today

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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

35. DAVE WHORTON
DWHORTON@THETUGBOATGROUP.COM
650-400-7150
www.thetugboatgroup.com
www.tugboatinstitute.com
THANK YOU

36. TUGBOAT MANAGEMENT CONFIDENTIAL INFORMATION 36
We believe in the vital importance
of humans coming together to create and grow
enduring, private businesses that
make a dent in the universe