Capital Allocation in Shoe Dog

If there was one book that I could point to that drove me towards a career in business, it was Shoe Dog. While the title might seem a bit drab, the story of Phil Knight and how he created Nike struck a chord with me. I loved that it was an underdog story, and I was surprised at how introverted and shy 24 year-old Knight was and, despite those qualities, was able to break through and create an iconic brand. I read it near the end of senior year, and just reread it again.

Whereas the first readthrough left me with an optimistic, vaguely mystical feeling of excitement because I was about to start my job, the second readthrough has provided more concrete lessons (though mystical feelings remain, albeit more textured).

I think these lessons are worth putting onto paper. If Shoe Dog’s broad message is “the importance of grit”, the underlying, subtle messages synthesize into a crash course for start-up financing, cash flow, and decision-making. During the second readthrough - even the broad message becomes more refined.

Shoot your shot

At 24, when Phil Knight made his way Onitsuka Tiger’s factory in Kobe for the first time, he only had an idea of his business plan, but nothing was set in stone. In other words, he wasn’t incorporated, he didn’t have a solid strategy when he arrived at the factory, and he didn’t know what to expect or who to talk to. When the leaders of Onitsuka Tiger showed up and asked him what his US company was called, Knight was a bit taken aback, fumbled a bit, but cleared his throat and answered: “Blue Ribbon Sports”. It was a name he made up on the spot, but that was enough to convince Onitsuka that he was the real deal. He wasn’t, yet. But with that made up name, he decided to go for it. If he didn’t, there wouldn’t be Nike.

“Thinking is good, but too much thinking is paralyzing” some people like to say. Sometimes you have to take a chance and see where that chance takes you. For Knight, that started him down a path of creating the most valuable shoe brand in the world - a journey that he wishes he could “do all over again”. It’s easier said than done though, right? How big of a chance are you going to risk? What are the pitfalls? As someone who has a job in the real estate industry, stories like Knight’s make me think hard about survivorship bias - for the number of success stories in real estate, there are many more undocumented failures. In real estate, most of the time these failures are due to overleverage of debt (borrowing too much and not being able to pay it off). Typically, covenants attached to the debt for certain real estate business plans include personal guarantees and collateralization of personal assets. One wrong deal, and you could lose your family’s life savings. There was a point in time during Nike’s history where Phil took a job as an accountant for a few years because he was afraid of overleverage if the entire thing didn’t work out.

But at the same time, what’s a life worth living without risk? Stability gives you space to breathe, but eats away at you internally if you play it too safe. Taking on risk can change your trajectory, and manifests not just careers, but friendships, relationships, hobbies, and promises. It’s a tradeoff worth thinking about.

Capital timing, quality, and bootstrapping

The importance of cash flow and timing is one of the more technical meta-themes in Shoe Dog. While Knight was working towards building up Blue Ribbon and then Nike, underlying the operations was a struggle of cash flow timing. Even though Nike doubling it’s revenue year over year, the interest payments owed to the bank were often delivered at the last second because all the excess cash Nike made went into buying more inventory. Hence cash on the balance sheet was always near $0, which made cash flow timing extremely vital to Nike’s survival - if they missed only by a few days, their banks could decide to stop doing business with them which would cascade into a series of terrible events: they wouldn’t be able to pay their suppliers, other lenders, factory workers, and the numerous shipping business that relied on Nike product would go out of business as well.

And that’s exactly what happened. Due to a late shipment from their supplier, one day Nike found themselves without enough to pay their primary bank, and everything went to **. The factory workers in the northeast almost attacked the factory manager because the checks all bounced. Nike did eventually survive, thanks to a generous loan from their Japanese manufacturer bank, but it came very close to folding. Surprisingly, even after this debacle, Nike operated cash-light for a few more years, basically growing even larger with a near $0 cash balance, living on the float (although now the float was provided by the Japanese bank, which was more stable).

Timing, excess cash, type of funding are all features of capital that you have to be aware of. If Knight had started his company with a bank that was more risk-on, maybe he wouldn’t have gone through such a painful process, but he might have had less capital to borrow. If he had excess cash reserves, he would have been able to pay his workers on time - but he wouldn’t have reinvested as much. Tradeoffs are everywhere you look - but the type of capital you choose can make or break your start-up.

How did Knight eventually solve this chronic timing issue? He finally decided to issue equity (with majority controlling stake to his team) to create a buffer of cash and less nagging from the lenders. With an IPO, Nike’s equity grew significantly as it became a function of the market demand, which gave him much more flexibility to operate around timing issues and borrow more with less strings attached.

My takeaway here was to bootstrap for as long and sustainably as you can, and then consider other sources of capital when operations hit a bottleneck.

Intangibles

While the technical lessons from Shoe Dog are fun to uncover and vital to understand, I think the broader message of grit and passion for the business is more important. The inspiration you draw from and the grit you need to push through bottlenecks ultimately drives success. During tough moments, Knight would think about all the people/moments that helped him start Nike: his mom buying the first pair of shoes, his coach/cofounder Bowerman spending countless hours designing shoes, running with his coworkers in silence while brooding over business problems. Those moments would inspire him to dig deep and persevere.

Knight at 24, right before walking into Onitsuka Tiger’s factory:

“So that morning in 1962 I told myself: Let everyone else call your idea crazy . . . just keep going. Don’t stop. Don’t even think about stopping until you get there, and don’t give much thought to where “there” is. Whatever comes, just don’t stop.”

Maybe that’s what it all boils down to.