James Toreson's Microcomputer Systems Corp. spawns new high-technology companies as well as healthy profits. Now eager venture capitalists are lining up outside his door.
By today's strike-it-rich standards of entrepreneurship, the story of Microcomputer Systems Corp.'s James S. Toreson could be the story of almost anyone else who inhabits a large, corner office in Sunnyvale, Calif. The protagonist leaves a big corporation, gathers together some fellow engineers, and, with $8,000, founds his own technology business. Eight years later, MSC hits $300 million in sales and is expecting $100 million in a few more years.
Despite all those zeros, the plot thus far would hardly interest Horatio Alger.But this business adventure has a twist: MSC sustains itself in large part by giving birth to other companies, providing them with operations lessons in accounting and administrtion, and preparing them for big-money suitors. So far, MSC has been blessed with three little ones. Eventually the parent will become a private holding company of the public companies it has nurtured itself, a strategy rare in the annals of entrepreneurship. There are some public holding companies that finance private companies; there are venture capital arms of large corporations and institutions; and there are holding companies that expand their portfolios through acquisition. But there are few -- if any -- other holding companies that are private and create their holdings out of whole cloth. MSC's compounded annual growth rate of 117% placed it 35th on last year's INC. ranking of the country's fastest-growing private companies.
All the more remarkable, this growth, from the $8,000 seed, has occurred before any toddler has taken its first big step into the arms of a venture capitalist. "This is the final stage -- positioned and poised to go after something big," says Toreson, MSC's 39-year-old founder. "It's like giving birth to a kid. Then we'll get to work on the next embryo." And the youngsters will keep coming -- if MSC's potency holds up. "We'll be like United Technologies," Toreson reflects, "except that we'll generate them, not acquire them."
Toreson's initial experience with creating a business from scratch was hardly indicative of such prowess. During the venture-capital drought of 1971, a start-up he was involved with was unable to secure second-round financing and expired. It was back to the drawing board and eventually to a position as engineering manager at Splectra Physics. Three years later the dauntless engineer decided to try his hand again, and MSC was conceived. This time, though, Toreson was determined to fund the effort himself. "I didn't know anything about accounting, finance, capital, marketing, sales, or anything," recalls Toreson. "I had to learn the hard way." His first income was derived mostly from consulting. There was no business plan. What was to unfold at MSC and, in retrospect, seem an ordered and inspired progression, in fact "just sort of evolved."
What evolved was a foolproof means of entering markets. Toreson sought out original equipment manufacturers that needed component development but didn't have the research or manufacturing wherewithal to do it themselves. Contracts were struck with such fully extended companies as Hewlett-Packard, Digital Equipment, IBM, Ampex, Intel, Memorex, Sperry-Univac, and Texas Instruments. Each agreement came complete with built-in buyers -- the contractors, who committed themselves to substantial orders.
MSC gladly filled these, while retaining ownership of the technology it developed. As chance -- and Toreson's engineering background -- would have it, MSC began by focusing on disk-drive controller architecture, a field that adds information storage to, in this case, personal computers, by utilizing small, rigid magnetic disks, electronically controlled by a single board. MSC has since become the country's largest independent supplier of disk-drive controllers -- a status that was substantially "funded" by its contractors.
This process of finding and filling market niches provided the capital stream for MSC's growth. But its president and chief executive officer anticipated that MSC couldn't become a $200 million company simply by patching chinks in the marketplace. "If you participate in niche markets," Toreson reasoned, "you could grow companies to $10 million in a whole variety of areas without a hell of a lot of money. But you can't become a $100 million or $200 million company. It's tough walking into a market that has a giant sitting there. In addition to all the other things a successful business requires to operate in such large markets, it requires money. You can't do it on your own."
But sooner or later MSC had to go for larger markets on its own. The problem was that the "magic act," as Toreson refers to such customer-financed progress, kept MSC tied to large original-equipment manufacturers. Because it was undercapitalized and had no budgets for advertising and sales, MSC had to leave the end-user to the big guns. But serious profits lay with the end-user in the exponentially expanding micro- and minicomputer arenas. MSC had not only to find but then to cement pathways to the end-users.
To do this, the company would have to open itself to formal funding or fall behind well-heeled competition that also is sniffing out marketing opportunities. The trouble is that niche-seeking would scare off formal investment because of the quick maneuvering it involved. "You have to be able to adapt very fast to work the niches," says Toreson. "And therein lies the problem with venture capital: Investors don't understand that. Venture capitalists don't know how to zig and zag fast enough. And if you do it, they think you're out of control. They're excess baggage in the marketplaces we're now in. I'm sure I would have been thrown out of this company long ago if we had venture capital money."
