Your Creditor Sets Your Growth Rate

The Core Insight

Phil Knight sold 8,000 dollars of running shoes in his first year and projected 16,000 dollars for his second. His banker called that trend troubling.

The banker's rule was that growth off your balance sheet is dangerous. Blue Ribbon bought shoes on a letter of credit, sold them, repaid the bank, then ordered twice as many. Every dollar of growth was inventory bought before revenue arrived, so the company held assets and no cash.

Shoe Dog is a memoir with one arithmetic problem underneath it. Knight grew near 100 percent a year for eighteen years, and he was never more than one bank meeting from the end.

Most founders read a refusal from a lender as a verdict on the business. Knight read it as a verdict on the lender. A bank earns on cash balances and prices fast growth as risk. A trading company earns on volume at thin margins and prices the same growth as revenue. He kept the numbers and changed the reader.

The Framework

The business was an importing arrangement on one page of terms. Onitsuka sold Knight the Tiger at 3.33 dollars a pair, and he advertised it at 6.95 dollars. The first order was 300 pairs for about 1,000 dollars, shipped in cellophane because boxes cost too much.

The rights were the fragile part. Mr. Onitsuka granted the thirteen western states verbally, in 1964, for one year. The 1966 upgrade gave exclusive United States rights for three years. Knight marked it by ordering 5,000 shoes for 20,000 dollars he did not have. The 1970 renewal ran four or five paragraphs, and no lawyer read it.

Six sources of money carried the company through those eighteen years.

• Knight started on 1,500 dollars from savings and a car sale, and his father covered the rest.
• First National funded the letters of credit and capped every request at his equity.
• Bank of California took the account in 1971, with limits below every request.
• Nissho Iwai financed the inventory and took second position behind the bank.
• First State Bank of Oregon added a 1,000,000 dollar line near its legal limit.
• The public offering of December 1980 ended the cycle.

Knight settled control before each round of money arrived. Bowerman proposed a fifty-fifty partnership in 1964, and Bowerman's own lawyer revised it to fifty-one and forty-nine to give Knight operating control.

Key Ideas

Growth Off the Balance Sheet Is the Constraint

The sales ladder reads like a success story and worked as a debt schedule. Sales were 44,000 dollars in 1966, 84,000 in 1967, 150,000 in 1968, and under 300,000 in 1969. By 1965 he owed First National 11,000 dollars against negative cash flow, and his liabilities to equity ran ninety to ten.

The wall arrived in 1970. Sales approached 600,000 dollars, and Knight asked Bob Wallace for a credit line of 1.2 million dollars. Wallace maxed the line instead and attached sales quotas, while the spring shipment needed 20,000 dollars the company did not have.

The equity route failed the same year. Knight offered 30 percent of Blue Ribbon at two dollars a share through a holding company named Sports-Tek, to raise 300,000 dollars. Buyers took 300 shares at one dollar, and the buyers were Bob Woodell and his mother. Woodell's parents then lent 8,000 dollars with no interest and no paperwork, worth 1.6 million dollars at the 1980 offering.

Sales closed 1971 at 1.3 million dollars and 1973 at 4.8 million, after a 57,000 dollar loss on 3.2 million dollars of sales.

Pick the Creditor Whose Economics Reward Volume

The answer came from an article about the Japanese trading houses, which are importer, exporter and private bank at once. A banker told Knight that Nissho Iwai, the sixth largest, was a 100 billion dollar company. Nissho did large volumes on low net margins, so it wanted growth companies.

Chuck Robinson, whose mining company partnered with all eight of the big houses, gave Knight the rule. State the terms on the first day. So Knight opened with the line he refused to move: no equity in the company, ever.

Nissho priced the rule rather than fighting it. The house took four percent off the top as a markup on product, plus market interest rates. It also took second position behind the bank, and that subordination made the bank comfortable. By 1975 the bank line was 1,000,000 dollars and the Nissho line another million.

Nissho was paid before the bank and everyone else, because Nissho was the closest thing to equity the company had. That doctrine nearly ended it in 1975. Blue Ribbon owed Nissho 1,000,000 dollars and was 75,000 dollars short. Knight paid in full anyway, and drained four store accounts and the Exeter payroll. Bank of California froze the accounts and reported the company to the FBI as possible fraud.

Nissho audited the company, found a secret factory it funded without knowing, and found its own representative hiding invoices. Ito judged that worse things exist than ambition, paid the whole bank debt on the spot, and ended the FBI matter.

A Sole Supplier Owns the Company

Onitsuka was the only supplier, which made every other advantage temporary. Shipments ran late and mis-assorted, and a contact inside the export department confirmed the search for a replacement.

During a 1971 visit to Oregon, Knight opened Kitami's briefcase and took the folder inside. It held eighteen American distributors and appointments with half of them. The offer came next: Onitsuka buys fifty-one percent of Blue Ribbon, or Onitsuka appoints better distributors.

Knight kept ordering and kept smiling for another year, which is the move worth copying. He used those months to build his own supply and his own brand. His contract barred other track-and-field shoes, so his first product was a football shoe, 3,000 pairs of leather soccer shoes made in Guadalajara.

Kitami terminated the relationship and billed 16,637.13 dollars. Knight told thirty employees that two million dollars of sales the year before owed nothing to Onitsuka. The trial opened in Portland on April 14, 1974, after he refused 800,000 dollars to settle.

Knight graded his own testimony a D minus, and his lawyer told him to disclose the spy memo and the stolen folder anyway. The judge decided the case on truthfulness. Blue Ribbon kept the Boston and Cortez trademarks and settled a week later for 400,000 dollars.

A currency forced the rest. The yen sat pegged at 360 to the dollar until Nixon floated it, Japanese labor costs rose, and planning in Japan stopped working. Production moved to Nippon Rubber, then Guadalajara, then a closed factory in Exeter that cost 250,000 dollars to open. Taiwan came next. Korea built a few giant factories and Taiwan a hundred small ones. A buyer with high demand and low volume dominates a small one. Knight signed the Korean plant that copied his Bruin, and the dependence on Japan ended in 1977.

Answer the Regulator in Its Own Currency

An envelope from United States Customs arrived in late 1977 with a bill for 25 million dollars. The American Selling Price law set duties on nylon shoes at 20 percent of manufacturing cost. A similar shoe made in the United States changed the base to 20 percent of that competitor's selling price. Domestic makers built token shoes, declared them similar, and priced them high, which raised Nike's duties by 40 percent, retroactively.

The counterattack in 1980 had three parts. Nike launched a cheap nylon shoe from its own factory in Saco, Maine, priced barely above cost. Customs then had to price against a Nike shoe. A television commercial put a small Oregon company against the government. On February 29, 1980, Nike sued its competitors and the rubber companies for 25 million dollars.

Customs came down from 20 million dollars to 15 million, and Nike paid 9 million. Robinson closed it on the cost of delay, because the fight blocked the public offering.

Control Was Priced Before the Money Arrived

Knight refused to go public three times, because it costs control and spoils the culture. Three forces overrode him. Holders of the 1971 debentures, 200,000 shares at one dollar, wanted liquidity. First State Bank sat at its legal limit. Robinson read the financials and called the company 90 percent debt, structured like a Japanese trading company.

Robinson supplied the mechanism. The public bought class B shares with one vote each. Founders, the inner circle and the debenture holders took class A shares, which named three quarters of the board.

The offering filed 20 million class A shares and 30 million class B, in a range of 18 to 22 dollars. About 2 million class B shares went to the public. Insiders held 56 percent of the roughly 17 million class A shares, and Knight about 46 percent.

The bankers recommended 20 dollars, then 21, then 21.50. Knight held at 22 and cited Apple, public that same week at 22. The stock priced on December 2, 1980. Bowerman held 9 million dollars on paper, Woodell, Johnson, Hayes and Strasser about 6 million each, and Knight 178 million.

The Team Ran on Autonomy and Mockery

No school taught the shoe business, so Knight hired accountants and lawyers. Both groups mastered a difficult subject and passed a big test, and the margin for error was too thin to gamble. The hires were also personal. Employee number four was paralyzed and lent Knight lunch money at the interview.

Management met twice a year at Sunriver, in a meeting the team named the Buttface. No idea was too sacred to mock and no person too important to ridicule. A thin skin was the only thing not tolerated.

The doctrine came from Patton. Tell people what to do, and let them surprise you with the results. Knight answered almost none of the hundreds of letters his first employee sent. One executive mutinied and defected to Kitami. Rotation was policy, and two executives swapped houses and coasts.

Practical Applications

Shorten the cash cycle from the customer side before you ask anyone for money. Knight sold discounts of up to 7 percent for large nonrefundable orders placed six months ahead, which bought lead time and collateral.

Sort your financiers by what their own economics reward, before you pitch any of them. Ask what the counterparty books when your next order doubles.

State your one non-negotiable before terms open, then let the other side price it. Knight opened with no equity ever, and Nissho answered with four percent off the top plus market interest. A rule stated first gets priced. A rule raised late gets negotiated.

Find the second supplier while the first one is still happy. Read your supply contract for the clause that names what you are barred from making, because that clause is the way out.

Settle the control structure in the same conversation as the money. Knight fixed both of his splits before the cash arrived, sixteen years apart.

Who This Is For

Founders who sell physical goods get the most from this book, because inventory makes the cash cycle visible. The mechanics carry to any business that pays for supply before the customer pays for output.

Skip it as a management manual. The hiring was idiosyncratic, the delegation extreme, and the team ran on personal loyalty that does not port into a company of strangers.

Read it as a retrospective memoir by the winner, written decades later and polished by a professional writer. The scenes carry dialogue nobody recorded, the figures are the author's own, and the numbers do not always agree. Knight calls the 25 million dollar customs demand near his whole year of sales. Sales for 1977 appear elsewhere in the book as nearly 70 million dollars.

The survivorship problem here is worse than in most business books. The behavior the book recommends is the behavior that killed most companies that tried it. Paying a creditor in full while your own payroll bounces reads as conviction because Nike survived. The same decision ends most companies that make it, and those companies do not write memoirs.

The Decision

Run the count this week. Take the days between paying your supplier and collecting from your customer, and multiply by the revenue you plan to add this year. That is the hole that opens next quarter, and it grows with every good month.

Then name whoever fills it, and check what that person is paid on. That answer sets the growth rate you are allowed.

Knight went eighteen years without a cash balance and stayed alive on a creditor whose economics pointed the same way as his growth. Run the count, then go find yours.