Cromemco's Never Taken A Dime From Anyone

In five years, the company's revenues soared over 8,000%. Yet it has never sold equity and rarely borrows money.

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California's Silicon Valley is a featureless sward of high-priced turf spreading outward from the steps of Stanford University in Palo Alto much as Route 128 does from the Massachusetts Institute of Technology in Boston. It is to West Coast technology as Beverly Hills is to movies: the home of stars. Hewlett-Packard, Apple Computer, Intel, National Semiconductor, and scores of other high-tech luminaries are housed there.

Most of the neighborhood consists of public companies with large capitalizations, impressive amounts of long-term debt on their balance sheets, and infusions of venture capital at various stages of their rise to preeminence. One cheeky newcomer, however, shares none of these taken-for-granted marks of making it.

Among the country's largest privately owned manufacturers of microcomputers (and, it claims, the world's biggest manufacturer of S-100-based microcomputers: Invented in 1975, the S-100 bus is a sophisticated component that shunts data from one part of a computer to another), Cromemco and its 450 or so employees moved into a brand-new 200,000-square-foot plant in Mountain View in 1980. (What the mountains are is academic now: The view is steadily vanishing into megalopolitan smog.) The company rents these quarters not because it can't afford to own them, but because buying real estate and paying off long-term notes runs counter to the financial strategy that had brought it this far, according to Cromemco's owners, "without even being close to getting into trouble." Renting also gives the company flexibility; it has moved five times in five years. Barely six years old, Cromemco is expanding at a compound rate of 216% per year -- a giddy pace that demands that cash be plowed into growth, not tied up in grounds. Liquidity -- the ability to move in and out of cash quickly -- has been Cromemco's financial cornerstone since its founding as a partnership in 1975.

In and of themselves, Cromemco's revenue figures are nothing short of astonishing: $50,000 in 1975, $600,000 in 1976, $4 million in 1977, $11 million in 1978, $20 million in 1979, $30 million in 1980, and an expected $50 million in 1981. But they are all the more impressive in light of the fact that the gains have been accomplished without a nickel of outside investment. Cromemco remains owned wholly by its two co-founders, who have engineered its spectacular ascent to the top of the microcomputer market solely through internal profits. Aside from what shares of stock Cromemco contributes to a profit-sharing plan, ownership is undiluted.And though it has some short-term bank financing of its receivables, the company, incorporated in 1976, has no long-term debt.

At the outset the owners, both steeped in the traditions of closely held family businesses, were determined to bring Cromemco along conservatively. Their heroes were William Hewlett and David Packard, who remained active in their business through their retirement; their fear was to end up like Gene Amdahl, whom they consider a "macroexample" of show ownership can be wrested away through financial exigencies. What could have been accomplished -- or mishandled -- had they gone for broke in the just-dawning microcomputer industry of the mid-'70s is anyone's guess. And guess some of it must remain, since one of the privileges of private ownership is that you don't have to wear a P&L heart on your corporate sleeve. Cromemco's financial strategists are willing to talk -- but only to the point where someone else's financial strategists might be listening.

One of the keys to Cromemco's remarkable ability to disdain venture capital infusion and to remain free of long-term loan obligation can be found in when and how the company began. Cromemco started almost as humbly as a mom-and-pop corner store, and was swept along in a rising technology tide. It was a self-launch that seems to have happened, and to have succeeded, by preordination.

The corporation's two, and only, shareholders, president Harry T. Garland and vice-president Roger D. Melen, both 34, received their doctorates from Stanford in 1972. Garland's degree was in biophysics with an electrical engineering minor; Melen's was in electrical engineering. In those years the pair wrote several articles for Popular Electronics, offering in the text to supply the components of the described kits (one a capacitance meter, another a TV camera). Almost grudgingly, they were in business.

At the same time, both were invited to join the Stanford faculty. With this steady income, plus the free magazine "advertising," they were able to put together enough capital -- the grand sum of $5,000 -- to enable them to buy the parts to manufacture a small computer. Adapting the S-100 bus to modular "add-on" circuit cards of their own devising, they kept on selling computers. The units were not what could be called aggressively marketed: Recalls one observer at the time, "It was almost word-of-mouth." Their research lab was a room in Melen's apartment; the production facility, Garland's garage. "I like the way we did it," Melen reflects. "No rent, no salaries. We packed the stuff ourselves, we soldered it ourselves. We didn't sap the operation when it was too small to support us." On December 31, 1976, Cromemco was incorporated.The name was an old-grad gesture in honor of their Stanford dorm, Crother Memorial Hall.

It turned out to be a classic case of being in the right place at the right time with the right product. From the start, Cromemco went for the high end of the microcomputer field, emphasizing quality and reliability over price. (A full top-of-the-line base unit sells for about $8,000, and a complete six-user system for over $18,000.) Only once has the company had to lower a price to meet competition. But if the capital aspect of the business was played close to the vest, it was innovative in other areas. The company holds a number of patents (it plows back some 8% of revenues into research and development), and pioneered marketing arrangements with independently owned retail computer dealers whom Cromemco trained at its factory -- an arrangement to which it still holds today.

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