Business Lessons From a Titan

The title Eddie C. Brown chose for his recently released autobiography, Beating the Odds, serves as an apt description of his rise in the highly competitive financial services arena, especially considering his start as a moonshine runner in the back roads of sleepy Apopka, Florida. He’s now CEO of Baltimore-based Brown Capital Management L.L.C., a BE 100s money manager with $3.2 billion in assets under management that competes against some of Wall Street’s leading investment firms.

Brown, an industry trailblazer who became the first African American money manager at leading investment firm T. Rowe Price in the 1970s and early 1980s and one of the top panelists on the renowned Wall $treet Week with Louis Rukeyser television program for about 25 years, launched his firm in 1983. Today, Brown Capital is the second oldest black asset manager in the U.S. (Ariel Investment preceded Brown Capital by six months.) Over the past three decades, the 70-year-old stock picker nonpareil has developed a series of top-performing mutual funds on the basis of his investment philosophy: GARP (growth at a reasonable price). He’s also helped diversify the financial services sector by hiring and mentoring minority portfolio managers.

Chosen as this year’s recipient of black enterprise’s prestigious A.G. Gaston Lifetime Achievement Award for his business contributions, Brown has always been motivated to give back. He and his wife of 49 years, Sylvia, have used their fortune to become a philanthropic force, donating more than $22 million over the past 15 years to an array of charities to advance the arts, improve healthcare in impoverished communities, and increase educational opportunities for black youth. Throughout his career, Brown has also served as a mentor for young investment professionals and entrepreneurs. Through excerpts from his book and an exclusive interview, he shares six lessons that can help entrepreneurs achieve business longevity.

Lesson No. 1
Launch your business with sufficient cash reserves.
I did a lot of studying of successful and unsuccessful businesses, majority- and African American—owned. What I discovered is that many businesses, especially those that are African American—owned, fail because they forget the basic equation: Revenues have to be greater than expenses. They build up a lot of overhead in terms of fancy offices and a lot of other accoutrements of success without much revenue. I said, “When I start my business, I’m not going to make that fatal mistake.” [I made sure I had] enough financial wherewithal to be able to last without any income for three to five years to give the business an opportunity to make it. I [followed] a business plan that might be described as one of creeping incrementalism–a series of small forward steps that will be undertaken only when Brown Capital Management has the underlying resources to justify them. In terms of the new business, acquire enough financial wherewithal to do it independently, preferably without loans, or through angel investors or friends and family. Acquire enough capital to have staying power because it takes time to build a business.

Lesson No. 2
Stay positive through personal and business crises.
I was just getting started. Right off the bat, we found out my wife had breast cancer. Man that was almost like a knockout punch. Rather than merely go through the motions, wasting my clients’ time

as well as mine, I put Brown Capital on hiatus and focused on my most important priority at the moment–assisting my wife with her recovery. It required a lot of internal fortitude to get myself together and have the uplifting spirit that you need as an entrepreneur to keep plugging ahead.

Lesson No. 3
Always be prepared to make the big pitch.
You haven’t lived until you’ve had 10 minutes to persuade six total strangers to give you $40 million. My audience [was] the investment committee of the California Public Employees Retirement System, or CalPERS. It’s time to sell the heck out of my brand. No sooner does my backside settle into a chair at the conference table than a black digital stopwatch with big red numbers on it starts running. Given the amount of money at stake, naturally, I’ve left nothing to chance. I know precisely what I’m going to say as well as how and when I’m going to say it. I’ve rehearsed my lines ad nauseam and have literally timed them to the second. So I let the verbiage I’ve chiseled into my brain start to flow, and make it a point to swivel my head so that I can have eye contact with each CalPERS team member. I’m excited and revved up but not nervous because thorough preparation always puts me at ease. Bottom line, a few weeks later I get the $40 million I flew to Sacramento for.

Lesson No. 4
Never change your success formula.
[At one point, Brown Capital] lost a lot of assets, a lot of clients because we got away from what had made us successful for

so many years. That’s not only doing good research and analysis on companies but also focusing our investment selections on longer term prospects, the next three to five years, as opposed to shorter term, the next few quarters or year. When our performance suffered, in 2004 in particular, but subsequently it continued for another three years, because we started to react to client pressures for performance, consultant pressures for performance in the shorter term and began to react to that in a dysfunctional way. Finally, we said, “Let’s go back to the basics that made us successful for so many years and forget about trying to respond to these pressures.” It led us to select clients more carefully, clients that not only believe and buy into our investment philosophy, this growth at a reasonable price philosophy, but also the fact that we are longer term investors.

Lesson No. 5
Treat your people right.
Some of the principles that T. Rowe Price, the man, had for T. Rowe Price Associates I adopted very early in the history of Brown Capital. That is, the most important assets of a financial services business leave and go out of the door every night. One of the very important things is to retain talent because this is a knowledge-intensive business not a capital-intensive business so you really need to retain that exceptional talent. This was T. Rowe Price’s principle. That is, you treat them very well as human beings and respect them as human beings, you give them a great work environment and you compensate them very well. You offer them a piece of the action, some ownership in the firm. If you do those four things, this exceptional talent will tend to stay with you.

Lesson N0.6
Reward top talent with a piece of the action.
We have a completely different structure than Wall Street generally. The general structure on Wall Street is you have a very small base salary. I started believing that principle of offering people a piece of the action, not giving but offering people the opportunity to purchase equity over time so we started a stock purchase plan many years ago. [Brown Capital was an] S corporation owning 76%. Other investment and marketing professionals and our chief administrator officer owned the remainder. They initially purchased [shares] and then I bonused enough extra money for them to purchase equity from me. As of year-end 2010, we basically froze the S corporation and established an L.L.C. [limited liability corporation].

When you establish an L.L.C., the member interest would be like a partnership. So I’m now a 50% owner of the new entity and then collectively the other folks own the other 50% and parcel that out based on a lot of different factors. From the beginning of 2011 forward, I’m voluntarily lowering my participation. [The employees] are incentivized like hell to make this firm grow because now they’re all putting a dollar of their own money, participation, ownership, member interest in the future of the firm. So, everybody is excited. I’m more concerned about keeping this exceptional talent that we have attracted and keeping the firm growing and focused, than I am about another few million dollars personally.