Jones, the founder of Tudor Group, told in an interview that he used to rail against Warren Buffett, believing Buffett was simply in the right place at the right time to catch a bull market. But now he calls Buffett a “genius” for one reason: “He understood the power of compound interest. Warren Buffett and Charlie Munger understood the power of compounding for companies that were growing all the time. They invested for the long term,” he said. Jones said that the power of compounding works for entrepreneurial companies, too, particularly those that grow from their own profits and build their companies for the long term—what can be called Evergreen Companies.
He says that many ambitious founders believe that if you want your company to grow big, you need to take outside capital. But with the power of compounding, bootstrapped companies have the potential to grow much bigger over the long term than many of their counterparts that are backed by outside funding.
Sharing his experience, he says that “the vast majority of VC-backed companies fail. It’s a high-risk, high-return game with very few winners. But let’s say you are one of the successful few. You sell a big chunk of your company to outside investors to get big fast, and you work hard to grow rapidly. In 10 years or so, the private equity firm comes to you and says, “Hey, you did a good job. Time to sell this baby.” They find a buyer and sell the company for $250 million. You crushed it. Assuming the investors didn’t have a multiple liquidation preference, you just made $50 million for yourself and your family, and you never have to work again. But it’s over. The dream has ended. That company is gone.”
He explains the Evergreen way: “It is relatively slow because the company grows on its own fuel. Imagine your bootstrapped company isn’t growing fast enough to make the Inc. 5000 list, but it’s growing 15 percent a year on average. By venture capital standards, that’s a death sentence. (If a VC-backed firm were growing at that rate, investors would say, “What a catastrophe! How are we going to get our money back?” They would literally stop attending board meetings.) But if you can keep growing at about 15 percent a year, that growth begins to snowball. If you grow the company by 15 percent for 30 years, it will be about 66 times larger than when it started. (At 20 percent a year, it would be more than 237 times larger!) In other words, a $10 million revenue company would reach $662 million in 30 years at 15 percent annual growth (and nearly $2.4 billion at 20 percent!). It’s still private, still growing, and still yours.”
He says that “this pace of growth allows you and your team to build strong foundations. You can hire and onboard value-aligned people with great potential and develop them. You can learn to be a good leader and gain mastery while under less growth pressure than when you take outside capital. You can develop strong systems and processes for future scaling and frame your mindset for long-term thriving. When you have that kind of paced, profitable growth, it unlocks unbelievable value. You can reinvest in your business. You can distribute some of the excess cash to yourself.”
“But, admittedly, growing 15 percent a year for 30 years is not an easy task. You and your team have to stay laser-focused on what matters, watch every dollar of spending, leverage a capital-efficient, more cash-generative business model, and deliver high-value products or services to early customers to earn a profit that can be reinvested in growth. In the early days, with a small base, growth might look more like 20, 30, or even 40 percent a year, and later it might settle into the mid- to high teens. You also have time to learn what’s really working—and what isn’t, giving you the opportunity to drop customers and products that undermine your profits,” he adds.
We can conclude that the strength of your company culture and your people compound over time, too. And cultivating long-term relationships with your key suppliers pays increasing dividends for your business. The same goes for your innovations, intellectual property, and operational know-how and efficiency. Crucially, the strength of your company reputation and brand compounds as well. If you do the right thing over long periods of time, you’ll build a wonderful, lasting brand. And that is a powerful competitive advantage.
