How Phil Knight Beat the FBI and US Customs to Take Nike Public
The Bank of California had had enough, and now the FBI was getting involved.
Phil Knight’s “grow or die” business strategy had finally caught up with him. What he would call “living on the float,” looked like fraud to his bank.
Float is money that is essentially counted twice, because of the time it takes to process checks and transfer cash to banks. Every month Knight would order as much inventory as he possibly could, maxing his $1 million credit lines with both the bank and the Japanese trading company, Nissho. He knew there was way more demand for his shoes than equity he had to spend on inventory.
At the end of every month, he’d play chicken with his bank, moving around every penny in his accounts to meet his debt payments, always under the gun.
Knight finally missed the float. Now he had no bank (for the second time in five years), and they were referring his account to the FBI for fraud.
With his accounts frozen, he not only couldn’t pay the $1 million he owed Nissho, but he had to ask for another $1million to pay off his other creditors. Just four years earlier, Nissho, a Japanese trading company, had invested in Knight when no one else would extend him more credit.
When they heard about Nike’s predicament, Nissho did a full audit of their books, which they concluded by telling Knight that there were worse things than ambition.
Finally, someone who truly understood debt financing! The exponential, “hockey stick” growth seen with today’s startups was rare in the 1970s, and banks were much more conservative with small businesses, especially a sneaker company like Nike.
But Nissho recognized Nike’s potential and agreed to pay off their debt to the Bank of California. There would be no FBI investigation, and Knight was back in business.
Cash flow is an existential problem for small businesses, and Phil Knight exacerbated that problem best he could. For 16 years, his dream nearly died at the end of every month. By facing down oblivion twelve times a year, Knight was no longer afraid of his business dying. He could survive anything that came his way — everything was figure-out-able.
With every punishing month, Nike built up a resilience that allowed Knight to be fearless in taking incredible risks and overcoming obstacles that would have caused others to throw in the towel.
Today’s best endurance athletes learn to ignore what researchers call the brain’s central governor, whose job is to scare them into stopping with pain signals, even though their bodies have much more to give. Our brain jumps the gun in an act of self-preservation, making fatigue more of a subjective state than physiological fact.
Through lawsuits with his original shoe supplier, building secret factories and even entire companies on the sly, shoe failures and recalls, Knight had learned to lie to his central governor.
So when a $25 million fine from US Customs came across Knight’s desk in 1979, putting his plans to take Nike public in jeopardy, he didn’t wallow in self-pity or throw in the towel. He ignored his central governor and used every lever of power at his disposal to get to the finish line.
In the spring of 1980, Nike settled with the US government for $9 million and then went public on December 2nd.
A business that was founded in 1964 with a $50 loan from Knight’s father grew to $300,000 by 1969, was worth $8 million when it went public in 1980 and is worth over $30 billion today.
For Phil Knight, survival was his only answer to the constant threat of oblivion for Nike. For us, just the thought of being finished in any endeavor can scare us into paralysis. Why take the risk of seeing a project crash and burn when we can walk away instead? Our brain tells us it’s too much to handle, the odds are against us, we’re at our wit’s end.
But is this really true, or is that our central governor preventing us from testing our limits? The best athletes in the world learn to ignore the lies the brain sends to the body and push ahead. The next time the ego tries to protect us from pain, we might do well to appreciate the thought, but go on anyway, knowing our bodies we are capable of so much more.
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