Is it time for do-gooder to cash out?

April 9, 2010

TOMS Shoes founder Blake Mycoskie created his Santa Monica, California-based company as a vehicle for giving away shoes to needy children, but should the Texas entrepreneur be looking ahead to selling the company and using the money to pursue other philanthropic goals?

TOMS, an abbreviation of “Tomorrow’s Shoes,” is based on a simple concept: for each pair of shoes sold, a pair is donated. Mycoskie, 33, conceived his “One-for-One” business model on a trip to Argentina, when as a volunteer on a shoe drive, he witnessed how a simple pair of shoes could change a child’s life (read original story here).

“Many of the kids’ feet I saw were really badly cut up and infected and just really gross, for lack of a better word,” said Mycoskie, who also noticed how much trouble the non-profit organization he was helping had in getting the right size shoes for the kids, as they were completely reliant on donations. “It dawned on me that instead of looking at this as a charity thing, which is what they were doing, why not look at it from a business perspective and create a business where you sell a pair of shoes and give a pair.”

In the first year Mycoskie sold 10,000 pairs of his South American-inspired canvas espadrilles, which retail for $45. Conversely that meant he was able to give away the same amount to kids in Argentina. Mycoskie refused to give specific revenue figures, but said it’s easy to extrapolate his overall minimum revenues since his 2006 launch – based on 400,000 giveaways at an average cost of $45 – as roughly $18 million.

THE PITCH

To date, TOMS has been entirely bootstrapped by Mycoskie, who would prefer to keep it that way. He said the orders are still essentially processed as they come in, allowing him to carry little in the way of inventory.

“We get the orders from Nordstrom’s and then we make it and then we ship it to them and then we get paid 30-60 days later,” said Mycoskie, who has benefitted from a long-term relationship with his small Texas bank, which has never balked at extending him the necessary credit. This has allowed him to resist bringing in outside investors that might try to impose a more financially-based corporate focus. “A few times I almost took the investment, but ultimately decided not to because I figured it would potentially hurt the culture.”

Mycoskie said he plans to double sales this year, moving another 400,000 pairs of shoes. This will require him to significantly expand his current staff of 70. It will also mean ramping up production in his factories in Argentina, China and Ethiopia.

That kind of growth will make it difficult for Mycoskie to maintain the smaller feel he has now and the personal attention he devotes to every aspect of the business.

TAKING IT TO THE EXPERTS

John Warrillow, a serial entrepreneur and author of the recently released book “Built To Sell”, said TOMS is an “amazing story” and Mycoskie has done a great job in building up the company and brand, but feels he is nearing a crossroads.

“Does he stay as founder and operator, or sell and take the proceeds and fund whatever initiatives he wants to with the cash he makes from selling the company?” asked Warrillow, who added Mycoskie needs to decide how he wants to achieve his philanthropic desires. Does he stay on as CEO and continue to achieve them from within TOMS? Or does he sell most of his equity in the company and pursue his goals independently a la Microsoft founder Bill Gates? “I think there’s precedence to doing both, but it feels like to me that’s the first thing he needs to do.”

Whatever path he chooses, Warrillow said Mycoskie will need to decrease his operational role and focus more on just being the main pitchman. “He’s got to probably fire himself as the guy who sells to Nordstrom’s and hire some really senior sales talent.”

Warrillow was also somewhat nervous about Mycoskie’s reliance on his long-time relationship with his bank and the fickle nature of the retail market.

“The one thing I worry a little bit about is being so dependent on the positive disposition of the bank in Texas, in the sense that when banks around the world de-leverage their businesses, they’ll pull your credit,” said Warrillow, noting the buying habits of fashion consumers are erratic. “A ‘sexy,’ fashionable business by definition is not sexy forever. It’s sexy for a short period of time. Which is why in his shoes I would be asking myself is it time to cash out?”

Daniel Lubetzky, the founder and CEO of both KindSnacks and PeaceWorks, said TOMS is a “glowing” example of a corporation whose financial and social objectives reinforce one another.

“Mycoskie’s unique one-for-one model not only serves to benefit society, it also inherently drives marketing efforts,” said Lubetzky, who has spent the last 15 years developing innovative “not-only-for-profit” businesses. “This type of model allows a company/brand to generate enormous amounts of loyalty from consumers while also giving the consumer the power to not only identify with a problem, but to be an active part of the change/solution.”

Lubetzky agreed with Warrillow that Mycoskie will likely have to make the call on whether or not he wants to sacrifice some control in order to significantly grow the business so he can give away more shoes.

“As a leader, you must always weigh the pros and cons of taking on that type of investment,” said Lubetzky, who added that taking on outside investors is a quandary all successful entrepreneurs struggle with at some point. “At this juncture, Mycoskie will likely need to decide between rapid, exponential growth that can come from additional funding and absolute control over the direction and growth of his venture.”

Lawrence Gelburd, a serial entrepreneur who lectures at Wharton’s Small Business Development Center, was also high on TOMS, but said Mycoskie would likely need to adjust his sales model to be able to double his revenues in 2010.

“It’s possible, but would be very challenging,” said Gelburd on Mycoskie’s goal of selling/giving away 400,000 pairs of shoes this year. “If you’re going to do that don’t make it a time-based goal. Say we’re going to sell a million shoes and then you set a target hopefully within a year, but knowing that internally if you don’t hit that goal within a year that it’s not success or failure, but it’s setting the bar and trying to get there.”

Gelburd doubted Mycoskie could attain such an increase without bringing in outside funding or hiring a bunch of people, both of which would significantly impact the corporate culture Mycoskie has worked so hard to achieve.

“For him, I think it would be more important to maintain that right culture than to meet that particular sales goal,” said Gelburd, who added Mycoskie is doing the right thing by trying to delegate some of his responsibilities. “His value to the corporation at this point is much higher being that top-level person, as opposed to being an operations person. That kind of succession and change of job function is a great way to go for this company, but I think his goal of trying to double that is really going to challenge that.”

Do you agree with our experts? Can Mycoskie continue to grow TOMS as a for-profit business, without taking any outside money that could potentially harm his corporate culture and social agenda? Post your comments below:

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Taking outside capital to expand may be a necessity to grow; however, it does not have to mean hurting the inside culture if the source comes from private individuals sharing TOMS core values. Even if the business would just break even, the pool of such potential investors can very likely be large and readily available. Other sources of capital such banks, traditional joint ventures, public offering, and the like, would quickly destroy the vibe of this commendable company.

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[...] Instead of celebrating charities, individuals and good intentions, journalists need to think critically about what they’re covering–including TOMS. Does the model work? How does it compare to the available alternatives? Where's the company data that, until now, TOMS hasn't released? [...]