[00:02:51] Kyle Grieve: Just to give you a little background on the improvements in the fundamentals of the business, it went from sales of 8,000 in its first year, which was 1964 to sales of $140 million in 1977. An incredible compounded annual growth rate of 77, 000%, which is just mind boggling but let’s get to the beginning of the Nike story.

[00:03:12] Kyle Grieve: So Phil Knight was a real thinker. At the beginning of the book he outlines how he was thinking about what would make him really happy in life. Was it money, wife, kids? Maybe, he thought. But he wanted to go even deeper than that. Here’s what Phil wrote about what he needed to be happy. Play. Yes. I thought, that’s it.

[00:03:32] Kyle Grieve: That’s the word. The secret of happiness. I’d always suspected the essence of beauty, or truth, or all that we ever need to know of either lay somewhere in that moment when the ball is in midair, when both boxers sense the approach of the bell, When the runners near the finish line and the crowd rises as one, there’s a kind of exuberant clarity in that pulsing half second before winning and losing are decided.

[00:03:57] Kyle Grieve: I wanted that. So not only was Phil a thinker, but he was probably a little bit crazy too. He calls his initial idea for Nike his crazy idea. And he attributes much of this success to the formulation and narrative of allowing that crazy idea to become something. He says the best advice he could give after all these years is to never give up on your crazy idea.

[00:04:18] Kyle Grieve: So keep that piece of advice top of mind while listening to this episode, as I think you’ll realize just how ambitious Phil was throughout the years to continue going. When clearly the easiest decision would have been just to close shop and take a cushy corporate job that he was fully capable of doing.

[00:04:34] Kyle Grieve: So in 1962, Phil was 24 years old and ready to travel the world. Phil wanted to see places like Egypt, Japan, Greece, China, the world. And his friend Carter would be joining him for the trip. So they decided that the first stop on the trip was going to be a one way ticket to Honolulu. But Phil loved Honolulu so much that he decided to ditch the world tour and just stay in Hawaii.

[00:04:56] Kyle Grieve: But the problem was that they needed money and took up jobs selling encyclopedias door to door. Now, Phil hated the job, but he also had an MBA, and he was pondering if he should maybe put that to use and get a job he might like more. So he joined a boiler room in Hawaii. The way Phil describes it is like the very early days of the movie The Wolf of Wall Street.

[00:05:17] Kyle Grieve: So Phil ended up quitting after a few months and decided to go back to his original quest of his world vacation. His first stop would be Japan, a country we’ll be talking about a lot during this episode. Now, while in Japan, he eventually got a meeting with Onitsuka, which was a Japanese shoe manufacturer that at the time was churning out close to about 15,000 pairs of shoes per month.

[00:05:38] Kyle Grieve: Now, Phil’s original intent to meeting with Onitsuka was to become the distributor of their shoes in the United States at this time. But he had to lie to Onitsuka about his company because while he was talking with them, they actually asked him about the company name and he didn’t have one at the time.

[00:05:54] Kyle Grieve: This was how unorganized or, how young he was and how he kind of flew by the seat of his pants when it came to business. And you’ll be seeing this a lot throughout this episode. So when he was pressed by management there at Onitsuka, he said he worked for a company called Blue Ribbon Sports. I believe he just made up the name on the spot.

[00:06:11] Kyle Grieve: So they agreed to allow him to sell their shoes in the U.S. and they wanted about a $50 check just to send some samples to him back in the U.S. in his hometown of Portland, Oregon. So, after he made that deal, he continued on with his world vacation. One place he visited that was noteworthy was the Parthenon in Greece.

[00:06:27] Kyle Grieve: So while there, Phil marveled at the temple of Athena Nike. Legend has it that it housed the goddess Athena, thought to be the symbol of Nike, which meant victory. While there, he observed, quote, on my left was the Parthenon, which Plato had watched the teams of architects and workmen build. On my right was a temple of Athena Nike, 25 centuries ago, per my guidebook, it had housed a beautiful frieze of the goddess Athena, thought to be the bringer of Nike, or victory, unquote.

[00:06:54] Kyle Grieve: Oddly enough, even though he noted this in his book, Phil wasn’t even the one to come up with the name of Nike for the brand. Much more on this later in the episode. The following year wasn’t very interesting for him. He had to wait nearly all of 1963 for the shoes to arrive. Four months after he’d visited, he sent them a letter asking, what was going on with the shoes, what was taking so long.

[00:07:15] Kyle Grieve: And they replied, quote, shoes coming in just a little more days, unquote. Phil’s father believed that they would never show up just based on kind of the, I guess the unprofessionalism of this message. So during that time, he had to make money because obviously Onitsuka wasn’t sending him shoes to sell. So he once again had to fall back on his education and get a job, but he ended up deciding to go back to school and getting a CPA.

[00:07:37] Kyle Grieve: He spoke with a family friend who gave him advice that if he had the CPA, he could continue kind of rotating jobs and having a very stable floor of earnings while he rotated through jobs. So even though Phil had gotten his MBA at Stanford, he would get his CPA at Portland State. He secured a job after getting his CPA, but it was very evident in his book that he wasn’t very happy about it.

[00:07:58] Kyle Grieve: He said he didn’t enjoy the job very much, but there were two consolation prizes from having the job. One was that he was making pretty good money. And two, each time he would go for lunch, He would walk past the travel agency each day and was reminded of world travel, which he loved so much. Now, this part of the book was really interesting to me because it shows you that money isn’t everything, even though Phil was probably making a good living and many other people are making a really good living money doesn’t necessarily equal happiness.

[00:08:24] Kyle Grieve: And as I mentioned earlier, Phil equated happiness with play as he literally said for us. So I think traveling for him was his sense of play, which was why it was just such a good time of his life. But working as an accountant in the corporate world really sucked the play out of his life and he had the awareness to realize this.

[00:08:42] Kyle Grieve: So at the very end of 1963, his first shoes finally showed up. It seemed pretty strange that it would take well over a year for the shoes to show up, but they finally arrived. He got about, I think, a dozen pairs and Phil ended up sending two pairs of these Onitsuka shoes, which we’ll also be calling Tigers, to his running coach when he was at Oregon, Bill Bowerman.

[00:09:02] Kyle Grieve: So during a meal he had with Bill, Bill actually asked Phil if he would cut him in on the deal because he really liked the look and feel of the shoes that he’d sent him. Bowerman was always tinkering with shoes to try and eke out the maximal performance that he could get out of them. So they ended up agreeing that Bowerman would get 49% of the business and leave the controlling 51% to Phil Knight.

[00:09:21] Kyle Grieve: Now the first order from Onitsuka was 300 pairs of tigers. Bowerman contributed his portion, but Phil was short. So he had to ask his dad for another 500, which his dad did not want to give as his dad had been loaning him money throughout the years. Phil’s mom pulled out a few bucks and told Phil she’d buy a pair.

[00:09:38] Kyle Grieve: And his father ended up ponying money as he got the message from his mom. Now it’s worth talking about his sales strategy at the very beginning because it’s nothing like what you envision from a corporate juggernaut like Nike is today. So Phil attempted to get some retailers to sell tigers, but he just unfortunately didn’t have much luck going that route.

[00:09:55] Kyle Grieve: So he ended up just turning to roaming around the Pacific Northwest, going to track meets. He just chat everyone down in attendance about the shoes. And he said that with his strategy, he couldn’t write orders fast enough. So his success as a salesman was a little puzzling. After all, I mentioned earlier that Phil had actually been hired to sell encyclopedias in Hawaii and he was horrible at selling them.

[00:10:17] Kyle Grieve: But I think this speaks volumes to why passion in business is just so important. Phil said that the reason he was so good at selling sneakers was because of his belief in running. Phil mentioned that his passion for running and his belief that wearing these sneakers would make you a better runner altered his perception of selling and made him better at just selling them and selling his customers on them.

[00:10:39] Kyle Grieve: So he wrote here that belief is irresistible. So he ended up selling out his first shipment in the first half of the year and was now ready for a 3,000 order. But as you’ll come to see in this episode, his funds were very, very tight. His dad, who had been the source of funding previously, was no longer going to loan him any money.

[00:10:57] Kyle Grieve: So he wrote here that the bank of dad was shut down permanently, which I found pretty funny. However, his father did him a great favor by being the guarantor of a loan with First National Bank. So because he got this loan, Phil was feeling at the top of the world. He’s doing what he really liked with his passion project and the shoes were flying off the shelves.

[00:11:17] Kyle Grieve: He had a legitimate partner and now he had a banking partner to boot. So he decided that he wanted to start adding salesman to help blue ribbon grow. So California would be his next target but the problem of cashflow once again made paying to go to California to find salesman very hard. But Phil had an excellent solution that I think really did a good job of showing his ambition about how much he wanted to make this business work.

[00:11:40] Kyle Grieve: So every weekend, he put on his army uniform. So at this time he was in the reserves and he’d go to the airport, the military police would wave them through and he would get his flight at $0. So I think that’s very very good sign of ambition. So these are just some of those types of stories that you’ll hear from founders who just really live and love their business.

[00:11:58] Kyle Grieve: But the first of many legal wrinkles was about to hit him. Phil had been ordered to stop selling Onitsuka shoes from an East Coast competitor who’d recently been to Japan and signed a contract to be the exclusive American distributor. Phil called this distributor the Marlboro Man. Phil immediately got onto a plane straight to Japan to meet with Onitsuka and try to hash things out.

[00:12:19] Kyle Grieve: He ended up getting a meeting with Mr. Onitsuka and went into his pitch about how well sales were and how he partnered with a running legend who could help him continue selling shoes and really growing at just a fast pace. So Mr. Onitsuka bought exactly what Phil was saying and said that Phil Knight could have the Western States and that the Marble Man would take the East Coast.

[00:12:37] Kyle Grieve: They gave him this deal for one year and then would revisit it after this time. Phil was ecstatic about the news. So now this story really makes me think of some of Warren’s advice on dealing with people that he trusts. So, in Lawrence Cunningham’s book, Margin of Trust, he talks about how Warren’s built this circle of people that he surrounds himself with, and part of the reason for the success of Berkshire Hathaway is just this trust that he’s built with his subsidiaries.

[00:13:01] Kyle Grieve: So Lawrence writes, quote, Margin of Trust directs dealing with only those people you trust deeply, another rarity that warrants heavy reliance when found, unquote. But here’s the thing about trust. Warren now is obviously at a point where he operates out of strength. People want to work with him because of his long track record of excellence and success.

[00:13:21] Kyle Grieve: At this point in Phil’s career, he was doing less than five digits of revenue. So he was still a young man. He was largely unproven in the world of selling shoes. And he was doing business. Yes. And he was growing a little bit in the short period of time. But the thing is, he only had one supplier.

[00:13:36] Kyle Grieve: So he had to try to impress that supplier as much as possible and hope that that one supplier who basically his entire business model was working off of would continue doing business with him rather than doing business with somebody else. Now, while reading Phil’s story, I can’t help but think about the trust Onitsuka and how it was consistently tested over time.

[00:13:56] Kyle Grieve: And with this example, I just talk about it’s kind of seem like Onitsuka was going behind Phil’s back and attempting to make deals with other distributors when they’d already been dealing with Phil. And if that isn’t kind of a breach of trust, and I don’t really know what is. So, in Phil’s first year of business 1964, he made $8,000 of revenue.

[00:14:13] Kyle Grieve: He was projecting for $16,000 in sales for a second year. Now, he was proud of this growth, but unfortunately, he was getting resistance from his banker. The banker told that growing from your balance sheet was just not a good idea. It was really dangerous. Doing this meant that your growth would outpace your increase in equity.

[00:14:30] Kyle Grieve: And if something were to go wrong and you had no equity, the banks had nothing to chase if their loans ended up having no value and were no longer payable by the people that they were lending the money to. So from an incentive perspective, I actually can see where the banker was coming from here, but Phil had a very different perspective being the entrepreneur.

[00:14:47] Kyle Grieve: Phil writes growing sales plus profitability plus unlimited upside equals quality company. In those days, however, commercial banks were different from investment banks. Their myopic focus was cash balances. They wanted you to never outgrow your cash balance. Keep in mind that he said this before Silicon Valley was a big deal.

[00:15:05] Kyle Grieve: So he really nailed it. I think here with the comment on the bank’s myopic view of cash balances. Now, Phil was in full growth mode in his early days, and he didn’t want to put a break on it. Plus, he knew that in order to appease the folks in Onitsuka, he was required to sell more and more shoes at a faster pace.

[00:15:21] Kyle Grieve: He never mentioned them saying this explicitly, but I get the feeling it was probably, an implicit agreement that they had. And if Phil couldn’t outsell the Marlboro man, then he knew that Onitsuka could hand the keys to the Marlboro man in the U.S. and cut Phil out and Phil’s journey doing this shoe selling would be ended.

[00:15:39] Kyle Grieve: So there was a really interesting story here about Phil’s relationship with bankers and it actually kind of reminds me of John Malone’s relationship with bankers that I outlined in TIP619. And I think many people have really rocky relationships with banks, especially those whose business models don’t align with what banks are looking for.

[00:15:56] Kyle Grieve: And I think it just comes down to one thing, which is. Just a lack of alignment in incentives between the bank and the entrepreneur. Now, small business owners like Phil want to grow. They have to grow. And in Phil’s case, it was grow or die but the bank did not want to take part in the death part of that equation.

[00:16:14] Kyle Grieve: Because without any equity, if Blue Ribbon Sports died, the bank would not be able to recoup its losses. This is why many smaller businesses are forced to do equity issuances when they can’t just, raise funds internally or secure bank debts or they don’t have the relationships with banks yet.

[00:16:27] Kyle Grieve: For I’ve noticed here that since I focused a lot more on smaller businesses, I can see why many of them have to end up going with the equity issuance route, even though I would prefer to own businesses that don’t have to go that route. Phil at this time was encountering a lot of friction and he decided that he needed to do something to lean on.

[00:16:48] Kyle Grieve: In case Blue Ribbon just didn’t really work out for him. So since he’d finished his accounting exams, he emailed out his resume, ended up getting a job at Price Waterhouse as an accountant. Like previous jobs that took his attention away from Blue Ribbon Sports, he just wasn’t crazy about it. But the silver lining was that he got to look at the books of other small companies.

[00:17:07] Kyle Grieve: He was realizing the strength of equity and how many of the small businesses that he was looking at were really failing. And a big reason for this failure was due to the lack of equity, which he, I guess he didn’t really believe in until he got to see it firsthand. So Mr. Onitsuka and Phil’s partner, Bill Bowerman, both shared a common ambition here at the time.

[00:17:26] Kyle Grieve: They both felt that the everyday person could wear athletic shoes. Bowerman believed that behind every person was an athlete, but this dream Bowerman had would take many more years to come to fruition. So Bowerman was a role model, and a coach to Mr. Knight, but there are other notable people as well.

[00:17:42] Kyle Grieve: I think that are worth mentioning here, Phil named people like Winston Churchill, John F. Kennedy and Leo Tolstoy as some of his role models. Now, although Phil definitely wasn’t a warmonger, he liked these people who were kind of in these extreme conditions of war and politics. But I think he really enjoyed learning from these people specifically because he liked learning about leadership under extreme conditions.

[00:18:05] Kyle Grieve: And I think as you’ve seen already, he was kind of under these extreme conditions over and over again. So I think that’s why he looked to these people for insights. One additional lesson here that Phil writes about is that they didn’t say much. None was a blabbermouth, none micromanaged. Don’t tell people how to do things.

[00:18:23] Kyle Grieve: Tell them what to do and let them surprise you with their results. So I think this does a really good job of explaining some of Phil’s management tenets, mainly that he tended to be kind of hands off. Maybe two hands off. One of his salesmen, Jeff Johnson, was constantly sending Phil letters about the happenings of his sales adventures.

[00:18:40] Kyle Grieve: He was sending letters at a very rapid pace, like almost daily. And Phil would rarely ever respond to any of these letters, despite the fact that this employee, Jeff Johnson, was constantly annoyed by it. So, the quote above, I think, really tells me that he probably just Was taking a hands off approach, letting Johnson do whatever he wanted to do in order to get the results that he wanted.

[00:19:01] Kyle Grieve: And Johnson had gotten those results. So the tiger shoes at this time that Mr. Johnson was selling out of California and traveling around was now being sold and actually 37 States. So he was definitely encroaching on the marble man’s territory, but he felt since the marble man just wasn’t doing much with his territories, it was fine.

[00:19:21] Kyle Grieve: And he would just allow these sales to continue. So he never actually told Johnson to stop the sales scope and stop expanding to new States. So at that same time, Johnson actually created blue ribbon sports first resale store in Santa Monica. But Johnson’s overzealousness in selling was actually becoming a problem.

[00:19:37] Kyle Grieve: So through the track grapevine, Johnson found some very disturbing news. The Marlboro Man was trying to steal some of Blue Ribbon’s clients. Johnson had done such a tremendous job here building the Tiger brand in the U. S. And the Marlboro Man was actually placing a national ad in an issue of Track Field magazine to try to poach clients from Johnson and Blue Ribbon based on the work that Johnson had already done.

[00:19:59] Kyle Grieve: So Phil immediately went to California to speak with Johnson about it. And they agreed that they just had to get the Marlboro man out of the picture once and for all. So back to Japan, Phil went now while in Japan, Phil visited Onitsuka. So Phil really hoped that he would get to meet Mr. Onitsuka who obviously was the boss to really appeal to his liking of Phil and the fact that Phil reminded Mr. Onitsuka of himself when he was a younger man. But unfortunately, he was unable to meet him, so he had to meet with a different representative. So we told Onitsuka that sales in 1966 were $40,000 and that the 1967 projection of sales was about double that at $84,000. But Kitami, who was the Onitsuka rep, said that they wanted to work with a larger distributor with offices on the East Coast.

[00:20:44] Kyle Grieve: So going back to Phil kind of making things up and going as he would go along, Phil actually replied that they had an East Coast office and that they were even looking to expand into the Midwest, but they didn’t have an East Coast office and so Onitsuka was really impressed that they had this East Coast office and they decided that they would go with Blue Ribbon as their U. S. distributor for the next three years. And so to add to the roller coaster ride that Phil had set up for himself here, he placed an order for 5,000 more shoes, which would cost $20,000 that once again, he didn’t have. So Phil got his man Johnson in California to head over to the East coast to open up blue ribbons, first office over there.

[00:21:28] Kyle Grieve: So they could start accepting orders from Onitsuka but even just getting this done was tough. So just a little bit of background here on Jeff Johnson, who was, I think, one of the top salesmen for Phil at the time. He was a tried and true West coaster. He just didn’t want to leave California. So when Phil first tried getting him to move, Johnson first accepted, then he just threatened to quit.

[00:21:50] Kyle Grieve: Johnson said he wanted more money and he wanted to own equity in Blue Ribbon. But as I’ve discussed throughout this episode already, cash flows were basically always a problem. So paying more cash to Johnson was just not an option for Blue Ribbon at this time. And then in terms of issuing equity, yeah, that maybe could have been doable, but unfortunately Bowerman didn’t want to give up any of his equity.

[00:22:12] Kyle Grieve: And Phil obviously wanted to maintain his controlling interest of the business. So that basically meant that there was no way that they’re going to be giving up any equity. And that wasn’t an option. So Phil basically told him that he’d give him $50 raise, which was far, far below what Johnson was asking for, but Johnson ended up accepting it and Phil wrote here that, even though Johnson complained about Phil’s hands off management style.

[00:22:40] Kyle Grieve: It was also probably what Johnson needed. Phil felt that he really unlocked Johnson’s full skill set by giving him room to try things out. And while he probably could have gone and been a salesman at a different shoe company and make more money, he most definitely would not have had the same freedom that blue ribbon and Phil would provide them.

[00:22:58] Kyle Grieve: So Blue Ribbon was lucky to really have Phil’s running coach, Bill Bowerman here, as he was a tinkerer, as I’ve previously alluded to. So in 1967, Bill had taken apart some of Onitsuka’s shoes and combined the best characteristics of two different types. So they got Onitsuka on board and were offered to name the shoe.

[00:23:16] Kyle Grieve: Initially, they came up with the Aztec to pay homage to the Olympics that were to be held in Mexico in 1968. But unfortunately, Adidas threatened to sue them if they didn’t change the name, as they had a pair of shoes called the Azteca Gold. Now, during this time, Phil was developing a dislike of one of his biggest competitors, which was Adidas.

[00:23:35] Kyle Grieve: Here’s what Phil wrote about his competition. I was developing an unhealthy contempt for Adidas or maybe it was healthy. That one German company had dominated the shoe market for a couple of decades and they possessed all of the arrogance of unchallenged dominance. Of course, it’s possible that they weren’t arrogant at all, that, to motivate myself, I needed to see them as a monster.

[00:23:57] Kyle Grieve: In any event, I despised them. I was tired of looking up every day and seeing them far, far ahead. I couldn’t bear the thought that it was my fate to do so forever. So this creation of an enemy idea just kind of got me thinking that, a lot of really good entrepreneurs and of a lot of really high profile corporations really had this enemy and had a rivalry, Steve jobs, for instance, he always had Microsoft in his crosshairs.

[00:24:24] Kyle Grieve: Then you can look at other companies, Coca Cola versus Pepsi had huge wars of market in marketing. You can look at McDonald’s and Burger King. I mean, the list goes on and on. I’m sure you could think of many different examples, but the key here for Phil was to continue innovating on his products and try to really beat his competition.

[00:24:42] Kyle Grieve: And there was a lot of competition when you just think about the business model, anyone with a manufacturing facility could theoretically compete with blue ribbon. I mean, obviously they’d have to distribute it. So, there’s that, but at this time, Onitsuka was essentially the brand. There was no Nike brand and Onitsuka most definitely did not have the brand strength that Nike would eventually have.

[00:25:05] Kyle Grieve: Brands require time to develop. And Onitsuka, at this point, had only really been in the US for a few short years. Now, due to Knight and Bowerman’s dislike of Nike, they decided to comically name the shoe the Cortez as Cortez had beat the Aztecs as part of the colonization of South America. Now, it’s important to take a second here and think about how busy Phil was at this time.

[00:25:26] Kyle Grieve: He had a family to take care of, a full time job at Price Waterhouse and Blue Ribbon, of course. He was working six days a week at Price Waterhouse and growing Blue Ribbon at a very, very fast pace. And I think this goes to show you how much focus and energy really has to be put into making a truly great business.

[00:25:42] Kyle Grieve: I think much less than 1 percent of humans could endure this lifestyle for a very long time before breaking down and having to quit at least something. So life was tough here because all of his spare time in the mornings, late nights, weekends and vacations were spent trying to grow blue ribbon. He had no friends.

[00:25:57] Kyle Grieve: He wasn’t exercising and he had no social life. But here’s what Phil said about the time of his life. My life was out of balance. Sure. But I didn’t care. In fact, I wanted it even more out of balance, or a different kind of imbalance. I wanted to dedicate every minute of every day to Blue Ribbon. I’ve never been a multitasker, and I didn’t see any reason to start now.

[00:26:17] Kyle Grieve: I wanted to be present, always. I wanted to focus constantly on the one task that really mattered. If my life was to be all work and no play, I wanted my work to be play. I wanted to quit Price Waterhouse. Not that I hated it. It just wasn’t me. I wanted what everyone wants to be me full time. So the point that really stuck out to me here was his point there on focus.

[00:26:41] Kyle Grieve: CEOs who lose focus on their business are not the types of leaders that I think you really want to align yourself with if you’re looking for an optimal investment. Use Phil here as an example. So if Phil could have used his long workdays towards putting in more time into Blue Ribbon, could he have done a better job at it?

[00:26:57] Kyle Grieve: I think the answer is yes. But the fact is he had to diversify his focus on two jobs rather than just one, which made doing either at a very high level difficult. Now, this is why having a CEO who is doing a million side projects is just not someone I’d want to invest in. Business is hard enough as it is, even when you are focused.

[00:27:17] Kyle Grieve: So I would want my CEOs to, as Phil said, focus constantly on the one task that really matters. So if you see a CEO of a company that maybe you own, or maybe that you’re researching and they’re doing things like. Writing books, using social media excessively, you see a million different tweets from them on a daily basis.

[00:27:38] Kyle Grieve: If they’re a guest on, tons and tons of different podcasts, I think that you might see that as a red flag. And that red flag I think is kind of a signal that maybe they aren’t spending enough time on the business that they’re supposed to be running. And to me, that’s a major red flag, especially that our incentives are not aligned.

[00:27:56] Kyle Grieve: And I would happily pass on a business if I was researching it, or if that was the case of a business that I already owned, I would be pretty happy having to let it go. So back to Phil here, he took another trip to Japan to meet with Onitsuka and this time was very warmly welcomed by the rep, Kitami, who said that Onitsuka was just delighted by Blue Ribbon’s growth and performance.

[00:28:17] Kyle Grieve: Otsuka had made him feel like family during the visit, even inviting him to a party where Phil would make a very valuable friend inside of Onitsuka named Fujimoto. We’ll go over why this ally was so important. Later in the episode, business was really starting to take off. Blue Ribbon had just done 150,000 in sales in 1968, and Phil was ready to jump into the job full time.

[00:28:37] Kyle Grieve: He happily quit his accounting job. His blue ribbon partner Bowerman was an excellent person to do business with because of his position in the track community. So he was doing things like, tapping all the contacts he had in that community to find sales staff or just, staff for blue ribbon from all of the connections that he had made.

[00:28:56] Kyle Grieve: Now it’s worth noting here, just a point on incentives. The more I learn about businesses, the more I realized how much I underestimated Charlie Munger’s quote, show me the incentives and I’ll show you the outcome. Incentives are everything. And while I don’t think blue ribbon had a massively innovative incentive program, I think the melding of competitive athletes turned salespeople was actually a really intelligent strategic move.

[00:29:18] Kyle Grieve: And I’m not even sure if they did this on purpose, but you know, athletes are competitive. And if you have That same competitive drive in sales. You could see how that could probably work out really, really well, which I think probably helped attribute to a lot of Nike success. So just a little bit on the incentive program.

[00:29:35] Kyle Grieve: It was basically, you just made a commission on the tigers that you sold. So every tiger you sold, you’d get two bucks and that would be padding your pocket. So obviously you were incentivized to just continue. Selling more and more pairs of shoes. Phil said that the sales employees were burning up roads, hitting up every high school and college track meet within a thousand mile radius.

[00:29:55] Kyle Grieve: And their extraordinary efforts were boosting our numbers even more. Now, Bowerman had actually been an assistant coach on the U. S. Olympic teams in Mexico. And so he came back with a ton of interesting information about two of Blue Ribbon’s biggest rivals in Adidas and Puma. So having someone on the inside like Bowerman was a huge advantage for Bowerman.

[00:30:15] Kyle Grieve: Blue Ribbon and Phil Knight as they could see what bigger and more tenured competitors were doing and try to eventually steal their market share, which as we all know, they ended up doing very well. But these times we’re very competitive during the Olympics. And I think Bowerman came back with some stories that maybe show some of the darker sides of the rivalry and competitive nature here.

[00:30:34] Kyle Grieve: So. Adidas and Puma apparently were passing around large sums of cash in manila envelopes and in running shoe boxes. It was even rumored that one of Puma’s sales reps was thrown in jail as a result of being framed by Adidas. And then Puma had actually smuggled many different pairs of shoes into Mexico to avoid paying import tariffs.

[00:30:56] Kyle Grieve: One of their strategies was to make some of their shoes at a factory in Guadalajara to avoid those import tariffs. Now, Phil was a competitor and he realized that paying athletes was going to be key for the next leg of growth for blue ribbon. But the problem came down to one thing cash. The demand for their shoe was obviously there.

[00:31:15] Kyle Grieve: Bowerman said that plenty of athletes had been training in tigers leading up to the Olympics, but unfortunately, they weren’t competing in them yet. So another need for blue ribbon was to continue improving the quality of their shoes just so that they could hopefully be worn in competition and not just in training.

[00:31:31] Kyle Grieve: So right after the Olympics, Mr. Onitsuka and Kitami ended up visiting the Blue Ribbon HQ. Now, Phil, as a salesman, may have been a little overzealous in his description of the grand headquarters of Blue Ribbon. When they walked in there, they saw things like broken windows, wavy plywood room dividers, and vibrating walls emanating from the jukebox that was playing.

[00:31:53] Kyle Grieve: So it clearly wasn’t really this impressive beacon of professionalism and entrepreneurialism that Phil maybe had. exuded when he discussed it with Mr. Onitsuka. Once he saw Mr. Onitsuka see it and was kind of let down, I think he felt that maybe the deal that they had with them would be cut off. Luckily, Mr. Onitsuka said that the place had character, which assuaged Phil’s dark thoughts. Now, as a result of this event and the growth of the business, they eventually leveled up to a better location for their HQ in Tigard, Oregon, just south of Portland. As the 1970s rolled around, there was continued stress on Phil as the contract with Onitsuka was set to be renewed.

[00:32:34] Kyle Grieve: Phil ended up signing a three year contract with them and came away very happy about the deal. He also signed an order for 20, 000 worth of Tigers. And as per usual, he was batting way out of his league in terms of making large orders without having the cash to back up on. Now, I’d like to take a second here to talk about the importance of cash.

[00:32:52] Kyle Grieve: So cash in the bank is obviously very powerful for helping you pay your suppliers on time. Also, having a business that constantly has cash on its balance sheets is a good indicator that paying suppliers shouldn’t be much of an issue as there is always some dry powder laying around. So, when I’m just looking at a business, I’m looking for a business that hopefully has cash on its balance sheets and, that can be in a couple of different things that can be in literal cash on its balance sheets, but some businesses also have marketable securities, which.

[00:33:20] Kyle Grieve: Are obviously liquid and, I’m not going to get too much in the details. Sometimes it’s not liquid and it’s up to you to find out if it is because that can obviously be used as well for cash in a pinch. So, cash can also be used to help bail out a business in a bad spot when that can be whether that’s, if there’s something going on with suppliers, maybe they want to put in a big order, or if they’re just dealing with tough business environments, which we went through during covid, for instance, where a lot of businesses with cash on their balance sheets ended up surviving and thriving throughout that time. And businesses that didn’t have cash on their balance sheets obviously ran through a lot of difficulty. So the final thing I’d like to mention here about cash is it might be also worth looking at the cash conversion cycle of a business that you’re researching.

[00:34:01] Kyle Grieve: So cash conversion cycle is just the days it takes for a company to convert its inventory and other resources into cash flows. So a lower cash conversion cycle obviously is generally better, but. You’re better off kind of comparing data from one business with other businesses that are in the same industry.

[00:34:17] Kyle Grieve: Just to get an idea, if you’re comparing Nike, you’d probably compare it with something like an Under Armor or Adidas today. Now to put a band aid on the cash flow problem, Phil realized that perhaps he could actually tap into Silicon Valley. He figured that maybe he could sell shares of Blue Ribbon for about $2 and put up 30% of the business.

[00:34:35] Kyle Grieve: He figured that he could raise about $300,000 which would value blue ribbon here at about a million. They sent out flyers to potential investors, and unfortunately, they just got crickets. The only person who bought it was a blue ribbon employee named Waddell and his mother who combined to purchase 300 shares, not a $2, but a $1 each.

[00:34:54] Kyle Grieve: He said his parents wanted to actually loan $5,000 after this disappointing attempt at raising money and that they wouldn’t take no for an answer. So Phil went and visited Woodell’s mother and asked, why they want to do this. And Woodell’s mother said, if you can’t trust the company your son is working for, then who can you trust.

[00:35:10] Kyle Grieve: To help finance the deals, Phil ended up partnering with Nissho Iwai, a hundred billion dollar trading company. Well, Phil finalized this deal with Nissho. He got a call from a distributor on the East coast who had been approached by Onitsuka to do a deal with them, frightened that he’d lose his product. Phil frantically reached out to his spy at Onitsuka, who I previously mentioned, who was this gentleman named Fujimoto.

[00:35:32] Kyle Grieve: So, unfortunately, Fujimoto did confirm that they were looking elsewhere for business. Now, I want to take a moment here to discuss principles from one of my favorite books of 2003, which was What I learned about Investing from Darwin by Pulak Prasad. Now, in it, Pulak discusses some of the qualities he looks for in businesses and wants to be a part of.

[00:35:51] Kyle Grieve: Now one of these qualities is a fragmented supplier base, and I think Phil’s story does an excellent job of showing why having one supplier is so dangerous when you’re in this type of situation, your entire business is completely intertwined with the relationship with your supplier. In a hypothetical situation where Phil maybe had multiple suppliers losing one would just be a boon for the other suppliers who would probably have to pick up the slack.

[00:36:15] Kyle Grieve: But losing all your suppliers simultaneously, which was the situation Phil was in here with Onitsuka would have been pretty much game over for Blue Ribbon. So Kitami met with Phil and relayed the message that Onitsuka was actually unhappy with Blue Ribbon’s growth, despite the fact that they had consistently doubled sales each year.

[00:36:31] Kyle Grieve: Katami said that this was actually insufficient and that Phil should be able to actually be tripling it each year. So clearly other distributors had been whispering in Onitsuka’s ear about potential growth rates if Onitsuka had jumped ship and left Blue Ribbon. And they were obviously also planting seeds of doubt in Onitsuka’s mind regarding Phil and Blue Ribbon.

[00:36:51] Kyle Grieve: So Katami ended up secretly making these meetings with other distributors in the US, which wasn’t so secret. Phil could tell that they were doing it. And ended up coming back to Phil and saying that the only way that the relationship between Blue Ribbon and Onitsuka would work is if they sold 51 percent of Blue Ribbon to Onitsuka.

[00:37:09] Kyle Grieve: And unfortunately, if they did not accept this deal, then Onitsuka would set up distributions with somebody else. Now, selling here was just out of the question. So, Phil turned to his contacts here at Nissho. Nissho had been trying to find distributors for other shoes that Blue Ribbon was trying to sell Onitsuka.

[00:37:25] Kyle Grieve: Now, when they actually approached Onitsuka to allow a deal to go through, they’re actually thrown out in embarrassing fashion. Keep in mind that Onitsuka is a $25 million company throwing out $100 billion company in Nissho. So, this ultimatum basically meant that Phil had to either sue Onitsuka for breach of contract or, find other methods of distribution.

[00:37:48] Kyle Grieve: So, he took the latter option, although he did end up taking both, which we’ll get into a little bit here shortly. So he first turned to Mexico where he found a manufacturer. To make some football shoes, but he needed a name and a brand for the shoes. So Phil really liked some silly names here. He liked dimension six.

[00:38:06] Kyle Grieve: That was his name. And another name that was thrown around was Falcon. So I really want to portray this thought of motion, which was that where the origination of the Nike swoosh came from. So a few days before they had to file their patent, his sales rep, Johnson had a dream and the name Nike had come to him and they just ran with Nike.

[00:38:23] Kyle Grieve: And so that’s where the Nike name came from. So to fund their growth, Phil decided to try his hand at convertible debentures. It sold out and he raised about $200,000 for the business. The Mexican factory didn’t churn out the quality, unfortunately, with the shoes that they manufactured. But luckily, Nissho had plenty of manufacturing contacts and they could find other distributors.

[00:38:44] Kyle Grieve: So talking with one of Nissho’s representatives, Sumeragi, he heard this term shoe dog, which the book was named after. So Phil writes, shoe dogs were people who devoted themselves wholly to the making, selling, buying, or designing of shoes. Lifers use this phrase cheerfully to describe other lifers, men and women who had toiled so long and hard in the shoes trade, they thought and talked about it like nothing else.

[00:39:08] Kyle Grieve: It was an all-consuming mania, a recognizable psychological disorder to care so much about insoles and outsoles, linings and welts, rivets and vamps. So now that Nike had gotten some new manufacturing partners, it was time They decided that they wanted to start partnering up with athletes to help bring increased awareness to their brand.

[00:39:29] Kyle Grieve: After all, this was the strategy that Adidas and Puma were doing, and that’s a strategy that Phil and Bowerman also wanted to try and chase. Phil greatly admired long distance runner Stephen Prefontaine and wanted him to be a part of Nike, but unfortunately, funds were short and he couldn’t make that work, but he ended up getting him a job with Nike instead.

[00:39:47] Kyle Grieve: So the first contract that he wrote about in the book was with a Romanian tennis player, and that kicked off their journey into endorsements. In the spring of 1973, Phil had to meet with his recent investors of that convertible debenture and deliver some news that unfortunately he knew that they wouldn’t like.

[00:40:03] Kyle Grieve: So for the first time in Blue Ribbon’s history, they’d actually lost money. Sales were growing very well. It was now at $3.2 million, but profits were actually showing a net loss of $57,000. So Phil walked away from that meeting thinking that he’d never want to take this company public due to the negative experience he just had.

[00:40:20] Kyle Grieve: He said he’d rather just deal with the headaches from banks and Nissho. Now, Onitsuka had caught wind that Phil was planning to breach his contract and sue him in Japan. So, Phil ended up countersuing for breach of contract and trademark infringement. The lawsuit ended up taking a lot out of him and made Phil very, very moody.

[00:40:38] Kyle Grieve: Even daily sales would affect his mood as he knew that Nike could be on the brink of bankruptcy. He wrote, quote, we were leveraged to the hilt and like most people who live from paycheck to paycheck, we were walking the edge of a precipice. When a shipment of shoes was late, our pair count plummeted.

[00:40:54] Kyle Grieve: When our pair account plummeted, we weren’t able to generate enough revenue to repay Nissho and the Bank of California on time. When we couldn’t repay Nissho and the Bank of California on time, we couldn’t borrow more. When we couldn’t borrow more, we were late placing our next order. Round and round it went.

[00:41:09] Kyle Grieve: But the lawsuit eventually settled with Onitsuka ending up having to actually pay out Blue Ribbon to the tune of $400,000. Reading this book does a really good job of just showing how much blood, sweat and tears goes into making a business great, but it also shows how delicate growing businesses are. Now I love growth markets and the market clearly does too, but it’s important that growth also have the right base to work off of.

[00:41:33] Kyle Grieve: And I think it’s fair to say that Nike’s early days was an absolute rollercoaster. As an investor, there’s no way personally I would have accepted having a business loaded with debt and having such rocky relationships with a concentrated supplier. Now in 1974, Phil’s Bank were actively trying to suppress Phil from growing too fast.

[00:41:50] Kyle Grieve: But Phil went out, making more deals, opening more stores and signing more celebrity endorsements that they couldn’t afford. And to top it all off, he ended up spending a quarter million dollars on a manufacturing facility he decided not to tell his creditors about. So the following year, things got even worse financially.

[00:42:07] Kyle Grieve: The banks were just sick of Knight’s brazen behavior and ended up cutting him off from financing. Worse, his employees checks were actually all bouncing. So there’s an interesting story here where one of his employees actually had to get a loan from one of the customers that they had to pay the employees in cash at one of their plants.

[00:42:24] Kyle Grieve: To make things even worse, there was a probe by the FBI regarding possible fraud inside of Nike’s books. This would be the end of Nike, but luckily, Phil had friends in high places. Ido and Sumeragi of Nissho wanted to see the books of Nike to see what the problem was. There they found out that Phil had secretly bought a manufacturing plant that he never ended up disclosing to them.

[00:42:45] Kyle Grieve: Itto had found out that Sumeragi had been delaying invoices to Nike so they could more easily pay back their debt. Sumeragi did this because he liked Nike and he really wanted to see them succeed. To solve the bank problems, Ito ended up telling the banks that it would wipe off Nike’s debts. But then there was still the FBI problem.

[00:43:02] Kyle Grieve: So the folks that Nissho and Phil had figured out that the FBI probe probably was orchestrated by the bank and that probe would need to disappear if the bank wanted to ever do business with Nissho again, and because Nissho obviously did a lot of business with them, they had to accept that deal and they withdrew the probe and the probe was gone.

[00:43:22] Kyle Grieve: And so those two problems were solved. In the mid-1970s, Phil started to seriously think about going to public to help solve their problem with cash flow. But he would constantly worry about giving up control of his beloved company that he’d spent so much time, energy, money, and love having to build. And he never wanted to let any of that go.

[00:43:39] Kyle Grieve: The pain he felt from letting that first batch of shareholders down clearly also had a very big impact on him. And I think it’s a good point to consider for any other business owners listening that maybe are going to think about going public in the future. 1976 was the year that Phil could see that Nike’s brand was really starting to take off.

[00:43:58] Kyle Grieve: He felt that Nike had turned from just an accessory to a cultural artifact. He thought that people would wear Nikes to class, the office, or even the grocery store. At the time, it was a revolutionary idea, and to kick off this process, he ordered his factories to manufacture the Waffle Trainer in blue, and it really, really took off.

[00:44:16] Kyle Grieve: Phil writes, we couldn’t make enough. Retailers and sales reps were on their knees pleading for all the waffle trainers we could ship. The soaring pair counts were transforming our company, not to mention the industry. We were seeing numbers that redefined our long term goals. Because they gave us something we always lacked an identity.

[00:44:33] Kyle Grieve: Now, another bonus about Nike making their own shoes and doing in house manufacturing was that they could control the quality of their shoes. I mentioned earlier in the episode that Phil knew that Onitsuka didn’t have the sufficient quality for athletes to wear in the Olympic Games. But in 1976, Nike was being worn by athletes competing in Olympic trials leading up to the Olympics.

[00:44:53] Kyle Grieve: So riding this wave of enthusiasm, Phil’s wife began screen printing Nike t shirts that sold off very quickly, leading to more apparel and more sales for Nike. As Nike grew, they still needed to outsource manufacturing overseas to keep up with the demand of their product. Because their product was so popular, unfortunately knockoffs also started being a problem.

[00:45:11] Kyle Grieve: Phil received a pair of knockoff Nikes that he said had exceptional detail and workmanship. He wrote to this manufacturing plant demanding that they cease and desist or I’ll have him thrown in jail for a hundred years. And by the way, I added, would you like to work with us now as an additional bonus, this diversified their supplier base outside of Japan, getting to move into Korea.

[00:45:33] Kyle Grieve: As good as things were going, I’m sure you can guess what happened next. Something bad. And money related. Nike received a 25 million bill from the US Customs that was backdated three years. Nike’s competitors wanted to try and drown Nike by stirring up trouble with them through creating financial problems.

[00:45:48] Kyle Grieve: This is a really good point about when you are successful, you get a target on your back. Phil writes, quote, and its origin was sinister. Our American competitors, Converse and Keds, plus a few small factories. In other words, what was left of the American shoe industry were all behind it. They’d lobbied Washington in an effort to slow our momentum and their lobbying had paid off better than they dared hope.

[00:46:10] Kyle Grieve: They’d managed to convince custom officials to effectively hobble us. By enforcing this American selling price, an archaic law that dated back to the protectionist days, which preceded some say prompted the great depression. This lawsuit would take multiple years to settle, but Phil would just keep grinding away, building Nike.

[00:46:28] Kyle Grieve: In 1976, sales were $70 million the following year. They doubled to $140 million by 1980. Phil had decided to try and settle this lawsuit and just get past it. So they did something brilliant. They started an ad campaign, which presented Nike as a small Oregon based company fighting the big, bad government.

[00:46:46] Kyle Grieve: Additionally, they launched a cheaper priced shoe, which would set a new American selling price standard in importing duties. To put the cherry on top, they countersued their competitors for $25 million, alleging that competitors and assorted rubber companies, through underhanded business practices, had conspired to take them out.

[00:47:02] Kyle Grieve: The government took notice of all this bad press and just wanted to move past this whole event. So Phil and the government had to haggle on numbers and even though Phil felt the only reasonable Number to pay was $0. His lawyers explained to him that the government needed to save face, and in order to do that they needed their pound of flesh.

[00:47:19] Kyle Grieve: So Phil reluctantly signed over a check for $9 million and put that headache behind him. Now, to finish the book, Phil discusses the IPO, which I think went rather smoothly. That is, other than Phil not wanting to do it. So the reason I’ve previously alluded to relates to control. He just didn’t want to give it up.

[00:47:35] Kyle Grieve: But some of his colleagues helped him find a way to go public without giving up control. And this was just to use a dual class structure of A and B shares. Basically, Phil, other insiders and original shareholders would get A shares with two voting rights per share and the rest of the B shares would only have one voting right.

[00:47:50] Kyle Grieve: Phil wanted to get the IPO done during good times because he was sniffing a recession and wanted to maximize the cash that they could raise from the IPO. Now, I think this is a really good case study into why participating in IPOs is just generally kind of a poor idea. The incentives are just misaligned for the business going public, the underwriters and the public.

[00:48:08] Kyle Grieve: The incentives are misaligned for the business, the underwriters, and the public who are willing to invest in their shares. From the business standpoint, like this Nike example, they just want to raise top dollar. They want the most amount of cash that they can raise so that they can go and keep growing or doing whatever they need to do with that cash.

[00:48:24] Kyle Grieve: When you look at the underwriters, they also want top dollar, but they also want the shares to sell. So the number can’t be too egregiously high. Otherwise they won’t end up selling any shares. And then from the public’s perspective, they obviously would prefer to buy the chairs as cheaply as possible so that they can get a good return.

[00:48:40] Kyle Grieve: So you can see here how just the incentives are misaligned. Now I went out and looked at some data from FactSet that shows. Some of the returns after an IPO. So after one year of an IPO, 50% of IPOs return worse than 10%. After two years, that number goes up to 60%, and after three years, that number rises once again to 64%.

[00:49:01] Kyle Grieve: I’m sure there are the right IPOs that can be highly Luc have probably many, many years, decades down the road. But I think it’s really important to remember just what the base rates are, which I just kind of listed above here. I’ve always been to the opinion that. If I really like a business that is going to IPO, I’d rather just sit on the sidelines and see how things play out before taking a position.

[00:49:21] Kyle Grieve: High profile IPO that many listeners will be familiar with is Airbnb. The IPO in December of 2020 when market sentiment was very high, this allowed them to generate a high share price to raise more money for the business and collect fees for the underwriters. But how has the stock done since then? The stock’s price total change is negative 1.52 percent for a compounded annual growth rate of negative 0.43%. This despite a compounded annual growth of 41 percent and profits going from negative $4.5 billion to positive $4.9 billion. So the business has gotten much more valuable and much more powerful, but because of the pricing of the IPO, investors who partook in that IPO haven’t had any meaningful returns.

[00:50:03] Kyle Grieve: So after Nike IPO, Phil got to retain 46%of the company and was now worth 178 million. Inflation adjusted. That was about $678 million. So he ended up doing very, very well. Now that’s the end of the chronological story here of Nike leading up to its IPO. But Phil leaves us with some very interesting lessons.

[00:50:22] Kyle Grieve: Phil’s primary emotion after the IPO was regret, which I found very interesting. So he basically regretted that the narrative of Nike would never happen to him again. So he just absolutely loved the whole journey, even though it had all these very, very high highs and very low lows. In the kind of afterward section of the book, he wrote that he had two regrets.

[00:50:42] Kyle Grieve: The first one was not spending enough time with his two sons, but he also knew that this regret clashed with his second regret listed above of not living through the early days of Nike over again. So it’s hard to say which regret would have been more powerful to him. And three, Phil wrote the book to share the ups and downs so that anybody experiencing the same could be warned and maybe find inspiration or comfort in the journey that Phil shared in the book.

[00:51:05] Kyle Grieve: Now I’d like to share a few quick hit primary takeaways from this book before I let you go. So cash flow matters and the timing of when it comes in and when it goes out will be vital to retaining good relationships, not only to your suppliers, but also to the people that supply you with money. If you can’t appraise your creditors, you won’t be in business for very long.

[00:51:24] Kyle Grieve: A business with a product that is flying off the shelf is a great thing. But too much growth too fast can cause a lot of headaches. Relationships with suppliers is very, very vital in retail. Having very few suppliers increases risk if you are distributing a commodity. And lastly, company culture can really change when the founder loses a majority stake.

[00:51:45] Kyle Grieve: So make sure to best understand the dynamics of this in companies where the founder maybe is losing control of the business for the sake of growth. That’s all I have for you today. If you liked this episode or have any feedback, please feel free to share it with me on Twitter or LinkedIn. If you don’t use social media, please feel free to email me at kyle@theinvestorspodcast.com. Thank you so much for tuning in.

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