3 Lessons for Entrepreneurs From Nike "Shoe Dog" Phil Knight

By Andy Gould Markets Fool.com

Shoe Dog is the recently published memoir by Phil Knight, founder and former longtime CEO of Nike, Inc. (NYSE: NKE). The book begins in 1962 with Knight pursuing a "crazy idea" he came up with during his student days at Stanford -- importing Japanese running shoes and selling them in America:

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Being a runner, I knew something about running shoes. Being a business buff, I knew that Japanese cameras had made deep cuts into the camera market, which had once been dominated by Germans. Thus, I argued [...] that Japanese running shoes might do the same thing. The idea interested me, then inspired me, then captivated me. It seemed so obvious, so simple, so potentially huge.

Nike founder Phil Knight tells the story of Nike's early days in his candid memoir, Shoe Dog. Image source: Simon & Schuster.

Knight went on to found the company Blue Ribbon Sports, starting out by selling shoes out of the trunk of his car at track meets in his home state of Oregon. From there he proceeded to grow Blue Ribbon from $8,000 in sales in its first year into the company known around the world as Nike, which today sports a market cap of $90 billion. Along the way, he became one of the wealthiest people on Earth, with a net worth of around $28 billion, according to Forbes.

Although the book ends in 1980 with Nike's IPO, it's a fascinating warts-and-all account of the company's early years, back when Nike was anything but a shoe juggernaut. In fact, what's most remarkable about the book is just how close to going under the company was for almost the entirety of its first two decades. While Knight doesn't spell out specific advice for people trying to follow in his footsteps as an entrepreneur, here are three takeaways from Nike's formative years.

Image source: Nike.

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1. Grow or die

"Life is growth," I said. "Business is growth. You grow or you die."

Knight revisits this theme multiple times in the book. When all else was in question, Knight focused on growing the company -- at all costs. For a long period, Nike was doubling its sales every single year, and, much to the chagrin of the company's bank, that meant placing orders for even more shoes the following year to attempt the same rate of growth. As a result of Knight's full-speed-ahead approach, the company's relationship with its bank was always strained. And while this relentless pursuit of growth caused a lot of friction, it seemed to give Knight and Nike their own North Star:

I was also partly to blame, of course. I refused to even consider ordering less inventory. Grow or die, that's what I believed, no matter the situation. Why cut your order from $3 million to $2 million if you believed in your bones that the demand out there was for $5 million?

2. Lots of debt plus very little cash is a tough way to go

The unfortunate flip side to Nike's obsession with growth is that before its IPO, the company nearly always appeared broke because it was investing every spare dollar back into the business. With a cash pile that was never enough to cover its bills, the company grew dependent on ever more creative -- and desperate -- ways of paying for its large inventory orders:

... we weren't broke, we just had no money. Lots of assets, no cash.

I was forever pushing my conservative bankers to the brink, forcing them into a game of chicken. I'd order a number of shoes that seemed to them to be absurd, a number we'd need to stretch to pay for, and I'd always just barely pay for them, in the nick of time, and then just barely pay our other monthly bills, at the last minute, always doing just enough, and no more, to prevent the bankers from booting us. And then, at the end of the month, I'd empty our accounts to pay Nissho and start from zero again.

For years on end, Nike played this circular game, the business equivalent of living paycheck to paycheck. But somehow, the company managed to just barely avert disaster many times over. While it wouldn't have been nearly as thrilling a ride, a little more equity could've given Nike a lot more breathing room. Even as late as 1977, Nike had severe cash flow problems with a balance sheet that was 90% debt. Fortunately for Knight and company, Nike would finally go public just a few years later.

3. Culture is everything

As with many successful upstart companies, Nike's secret sauce, it seems, was its culture. Knight portrays the early employees of Nike as a ragtag bunch of outcasts. Many of them were former runners from Oregon, like Knight himself, who just didn't seem to fit in anywhere else. Together, they set out to upend the establishment players such as Adidas and PUMA: a herculean task, given Nike's tiny size at the time. But what appears to have made it work was that those crucial first hires went all in on Knight's vision for what Nike -- and by extension, each of them -- could become:

... when it came to Blue Ribbon, each of us was willing to do whatever was necessary to win, and if "whatever was necessary" fell outside our area of expertise [...] No [expletive] problem.

Fear of failure, I thought, will never be our downfall as a company. Not that any of us thought we wouldn't fail; in fact we had every expectation that we would. But when we did fail, we had faith we'd do it fast, learn from it, and be better for it.

Taking a chance on people [...] you could argue that's what it's all been about.

Nike would have probably become a public company sooner if Knight wasn't so hell-bent on preserving Nike's unique swashbuckling atmosphere. In fact, the company began discussing the possibility in 1976, but every time it was brought up, there was wide agreement that having to answer to thousands of other investors who didn't understand the company -- who didn't eat, breathe, and sleep Nike the way they did -- would change the culture for the worse.

Nike found the answer it was looking for when it discovered it could issue two separate classes of stock. The public received Class B shares, carrying one vote per share, while Knight and the rest of the inner circle would get Class A shares, ensuring they would be the ones to elect nine of the company's 12 board directors. In the end, Knight and his gang were able to cash in on Nike's amazing run, while bolstering the company's cash position and largely maintaining control over how the company was run.

Business lessons aside, it's a great read

The book isn't all business and no pleasure. Knight, along with Nike's earliest hires, provides plenty of entertaining reading and laugh-out-loud moments. There's the time Knight tries -- and fails miserably -- to introduce a jacket-and-tie dress code to make the company more "respectable" to the outside world. Or the ill-fated experiment where the company promotes an accountant with zero fashion sense to head up its new apparel division. Or a scene that reads like a Marx Brothers movie, as two creditors, whose checks from Nike had bounced, are storming into Nike's relatively small office at the same time. If the men accidentally met and compared notes it would be disastrous, so Knight and company have to concoct an elaborate scheme to keep the men apart at all times, including providing personal escorts to the restroom.

A rascally tale of scrappiness and survival, ultimately, Shoe Dog is the story of Knight's undying love for the company he created -- and about his drive to make sure it succeeded beyond his wildest dreams.

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Andy Gouldhas no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has adisclosure policy.