Whatever else catapulted them to the peak, it wasn't conformity to the norms of business
When you look at the leaders on this year's INC. 500 -- the 25 companies that by virtue of their growth sit at the top of the list -- you can't help but be impressed, first by their phenomenal accomplishments, and second by their remarkable diversity.
Sales among the Top 25 companies expanded an average 6,028% from 1978 to 1982. The average Top 25 company reported revenues last year of $14.7 million, up from $229,000 in 1978, and now employs 156 people, instead of the 9 it had in 1978. All together, these companies have created 3,672 new jobs in six years.
But differences abound. Revenues among the group range from $82 million to $3.3 million from sales of products as diverse as gravity inversion boots and telephone modems, and of services as disparate as computer software design and downtown auto parking. Their initial capitalization ranged from a lot to none at all. Some were planned, and others seem just to have happened. Some are still 100% entrepreneurial, a few have assumed some of the trappings of mature businesses.
For all their differences, however, these companies do share a common characteristic -- the force that powers their growth. It is neither obvious nor measurable, and finding it requires looking not only at the businesses but also at the people who started and run them. The common characteristic, expressed differently in almost every case, is an unmitigated commitment to creating something where before nothing existed.
These 25 companies that top the INC. 500 are young. Eight were founded in 1978, and only 4 predate 1976. While the oldest, Gravity Guidance Inc. (No. 2), of Pasadena, Calif., goes back as far as 1971, it began operating as a full-time business only in 1979. Company founders, likewise, are young, 23 men and two women who, when they started their companies, ranged from age 19 to 45, with an average age of 33.
More than half of the founders were entrepreneurial virgins, most often refugees from larger companies, who left before achieving senior executive status. Most of the entrepreneurial veterans, on the other hand, are not on their second or third venture, but more like their umpteenth. Bruce Burdick -- a one-time private eye -- lost $100,000 in the worm-ranch business before starting Burdick's Computer Stores Inc. (No. 14), of Overland Park, Kans. Miles Barber's Commercial & Industrial Administration Co. (No. 10), of Santa Clara, Calif., is only one of five businesses Barber founded in California. Rex Maughan, founder, chairman, and president of Forever Living Products Inc. (No. 6), of Phoenix, has, over 15 years, put together dozens of nonoperating partnerships (e.g,. Bear River Land & Cattle Co.) and dabbled in office building and land deals. Robert Sillerman, co-founder -- with -- Bruce Morrow of Sillerman-Morrow Broadcasting Group Inc. (No. 13), of Middletown, N.Y., claims to have a hundred or more start-ups under his belt.
Every one of these companies began not just because an opportunity existed, but because a founder recognized the opportunity. The reason Bruce Burdick (who was living in Sioux City, Iowa) started his chain of retail computer stores in Kansas City has little to do with geography and everything to do with the difference between luck and Burdick's keen eye. At39, he was operating a greenhouse and raising worms with his stepfather in Sioux City. In 1978, on his way home from a wormranchers convention in Dallas, an article on computers caught his attention, and within a few months he had moved his wife and four children to Kansas City, where a Computerland franchise was available. Last year, Burdick's Computer Stores's six Kansas City retail outlets generated sales just shy of $10 million. Two new stores opened this fall. "My mother says I was lucky," Burdick remarks, "that I was in the right place at the right time. I tell her, 'No, I was in Sioux City, which was the wrong place. I had to move. There were millions of people in Kansas City who could have taken advantage of that opportunity, but I recognized it and they didn't. It's not just luck."
The difference between looking at an opportunity and seeing it comes up in the story of almost every company's founding, or, in the case of Fifth Season Travel Inc. (#3), of Indianapolis, its turnaround. In 1977, Patti McVay, an accounting instructor at a local business college, was asked at a cocktail party to look at the books of a vacation travel agency started earlier by four Indianapolis lawyers. Not only did they not have any books, McVay says, they had no business. Something, however, caught her attention. "I looked around. The agency was in a building with lots of big corporations, and it wasn't arranging any of their travel. I was curious, so I went in and asked about it, and I began reading." Soon McVay agreed to take over 51% of the equity in the failing company, and last year Fifth Season generated revenues of $10.9 million arranging travel for its expanding roster of corporate clients.
McVay and Burdick both had keen eyes, and the guts to take the next step -- to take a risk. Risk-taking for an entrepreneur has two elements. One is the degree of risk: What are the chances for success? The second is the amount at risk: What is the cost of failure? Companies among the Top 25 have balanced these two elements through the full range of proportions.
Consider Brian and Sharon Stutt, a young, New York couple surviving in Houston on food stamps and Sharon's waitressing tips. Brian, having worked for a time in his family's appliance business, noticed that Houston wholesalers charged higher prices than retailers got back home. So he and Sharon stuffed neighborhood mailboxes with fliers promising cut-rate prices on major appliances if the customer would pay up front. Two neighbors responded and the Stutts made their first sales using a borrowed truck to deliver the goods. Word spread, and the Stutts soon had a growing white-goods business operating out of their home. Last year their company, Warehouse Appliance Inc. (#5), generated sales of $8.9 million, and the Stutts took out their first bank loan to help them open a second showroom.
The degree of risk for the Stutts in starting a discount appliance retail business was, and continues to be, high. Several major competitors have failed, as Houston's oil-based economy has cooled. But the Stutts have compensated for the high degree of risk by putting as little as possible at risk. Failure at any point in the growth of Warehouse Appliance, while undesirable, would not have been expensive.
On the other hand, the failure of Polycoat Systems Inc. (#18), of Hudson Falls, N.Y., would have cost George Carruthers a bundle. He and family members put up $600,000 in capital to launch the company, and while that is a lot of money to risk, there was relatively little chance that the venture wouldn't survive. Polycoat manufactures and distributes the same kind of insulation materials that the family's construction business had been installing for many years. Carruthers undertook to outsell the competition by outmarketing them -- promising problem-solving and technical assistance while others sold only product. It was a good idea. Last year's revenues were $7.4 million, up from $4.5 million in 1981. But Carruthers was hardly betting the family fortune on an untried product in an unfamiliar market.
Others among the 25 have found different balances, somewhere between the Stutts' high-risk-but-nothing-to-lose start-up and Carruthers' low-risk-but-a-lot-at-stake venture. Prakash T. Melwani, for example, owner of a not-very-promising Indian gift boutique in Manhattan's World Trade Center, decided to try mailorder sales. In 1978 he approached such magazines as Glamour and Mademoiselle about placing color ads for silk blouses. "Glamour," he recalls, "pooh-poohed the thing. Cosmopolitan said it was very, very risky, but if I was going to do it I'd need a toll-free number, Mastercard, Visa, etc. -- a $14,000 investment." He raised most of the money from family and friends, and within 12 weeks the investment paid off: 3,000 orders at $22 each. Last year, Royal Silk Ltd. (#21), of Clifton, N.J., peddled more than $7 million worth of silk clothing through its catalog.
Melwani's example illustrates something else about these 25 super-growth companies: Few of them appeal to the sort of venture capitalists that are famous for financing high-technology start-ups. For most of the founders, that is just fine; they don't want that kind of capital anyway, or so they say.
"Venture capitalists have a different outlook from the entrepreneur's," says Dennis Hayes, whose Hayes Microcomputer Products Inc. (#4), of Norcross, Ga., scored $12.3 million in sales last year. "It's a trade-off. It might have been easier at the start to use venture capitalists," Hayes says, but he worried that they might make him concentrate more on short-term profitability than on long-range growth.
Among the 25, only Digital Research Inc. (#9), of Pacific Grove, Calif., has married itself to venture capitalists, although Nady Systems Inc. (#23), of Oakland, Calif., would have if it could. John Nady wanted capital to develop his cordless microphone. "I was going to Hambrecht & Quist and to the banks at the same time that high-techs like Apple [Computer] were looking for money. No one saw the potential in my industry," he says. They spurned his advances. Instead, he found a partner with $20,000. Later, he bought the partner out; he now owns 100% of $3.3 million (1982 sales) Nady Systems.
Typically, then, the founders of the Top 25 started their businesses with whatever capital they had in their pockets, augmented sometimes by family money. In financing the subsequent growth of their businesses these entrepreneurs have been surprisingly conservative and cautious. The Stutts used prepaid orders to start Warehouse Appliance and, as the company grew, were careful not to buy anything they couldn't pay for out of retained earnings. Rex Maughan at Forever Living Products, a grower and direct-sales distributor of aloe vera products, claims to adhere to the same pay-cash rule. With bank loans, he says, "you spend half your time trying to convince people why they should make investments instead of [spending the time] working on your company."
Sometimes self-financing isn't possible. Sillerman-Morrow Broadcasting Group could never have paid for the acquisition of six radio stations and partial ownership of an Atlanta TV station out of retained earnings. But the company has not engaged in any fancy financing schemes. "We've been a borrower at the bank since day one," says Robert Sillerman. Borrowing at the bank is about as exotic as any of the Top 25 have gotten in their financing.
Without access to the public equity or debt markets, their financing options are limited. Only four companies have even sought Small Business Administration loan guarantees. While Bruce Burdick says Burdick's Computers probably couldn't have gotten started without the SBA-guaranteed loan, Sharon and Brian Stutt of Warehouse Appliance gave up in frustration at the complexity of the process. Nady Systems used an SBA-guaranteed loan to bridge a cash-flow problem.
Santos T. Abrilz Jr. financed the start up of Apoca Industries Inc. (#11), of Deer Park, N.Y., with the help of an SBA direct loan, but after the eight-month application process, 'the proceeds of the loan were almost spent before we got it," he says. Apoca, which manufactures electronic communication equipment for the Defense Department, is the only member of the Top 25 that deals exclusively, or even primarily, with the government market. As a Puerto Rican, Abrilz qualifies for the SBA's 8(a) minority business set-aside program, and he has also used the targeted jobs tax credit to help offset the cost of hiring primarily minority-group workers.
Only a few other companies report using the jobs tax credit, other federal tax incentives, or economic development aids. Industrial development bonds financed equipment for Markdata Inc. (#12), of Pittston, Pa., and a warehouse for Polycoat Systems. Companies that attempted to use other federal programs reported them too cumbersome. Accelerated depreciation and tax credits for increased research and development activity, both passed as part of the Economic Recovery Tax Act of 1981, were cited as helpful by no more than a half-dozen companies. Some chief executive officers, like Dennis Hayes, believe set-asides are the only way to ensure that big companies don't get all of the government's procurement business. Most, however, are skeptical. Patrick Durbin, president of Metier Management Systems (#7), of Houston, worries that "some companies become dependent on set-asides." Others flatly disapprove of any government help. "I don't think we need to get the government involved," says Kent Weber, founder of Modulite Corp. (#25), of Canoga Park, Calif.
The experiences of these leaders among the INC. 500 confirm what statistical researchers, such as David Birch at Massachusetts Institute of Technology, have begun to learn from their work: that the overwhelming majority of entrepreneurial start-ups in this country, despite all that is written about government assistance and venture capitalists, are still financed by Aunt Agatha.
Santos Abrilz started Apoca with six partners, but "they didn't last long," he says. "I bought them out and got rid of them... The salesman didn't sell, the finance manager couldn't finance, the marketing man couldn't market. Now it's my company, and I do it myself."
Like Apoca, almost half the companies among the Top 25 were started by two or more partners. About half the partnerships couldn't withstand the strains of growth. "My partner lacked vision," says one CEO. "He got in over his head," complains another.
The four co-founders of Metier Management Systems, however, still work together. Theirs was not, in contrast to most, an accidental partnership, but the product of careful planning. Richard Evans and Robin Lodge were colleagues in a British computer company, and both resigned when the company was acquired. "We spent lots of time," Lodge says, "looking at what we might do together and, once that was set, looking for the other two people who would fit in." The partnership survives and the company thrives, Lodge says, for three reasons. "Each of us understood the relationship that would exist among us. Each of the four could identify a fairly unique role to play and was thus content to operate there without trying to get into the underwear of the other three. And, although we were largely equal partners we were happy to be led by Mr. Evans." The possibility of dissension wasn't ignored. "When one gets married," says Lodge, "it is very sensible to decide how one is going to get divorced, should it occur."
The predisposition of Metier's founders to organizational planning also explains why theirs is one of the few companies among the Top 25 to have brought outside professional managers into the company sooner rather than later. A little more than half of Metier's business, which involves designing and installing turnkey computer systems for project management, takes place overseas. "It became clear to us," Lodge says, "that local people were necessary in various parts of the world."
Gravity Guidance is another exception to the rule that says most companies among the Top 25 prefer to develop their own managers. CEO Bryce Martin didn't start the company, which produces the patented gravity inversion boots people use to hang themselves upside down for several minutes a day. Martin's father, a physician, invented the boots and formed the company nearly 15 years ago, but sales were limited to a small medical community. Martin took over in 1979, determined financial vice-president, a sales and marketing vice-president, and an experienced head of operations and manufacturing. "It's been a major goal of mine in the past year," Martin says, "to get us out of the entrepreneurial mode... Entrepreneur? I don't like that word, because it means 'singular,' and that's dangerous. I have good people around me right now."
Most of the Top 25 say they don't use consultants, except in specific areas in which expertise is essential -- medical advice, for example, in the case of Forever Living Products, the producer of aloe vera products -- but not for general management. "Why do I need [them]," asks CEO Maughan, "when I'm already successful?"
Nor have most of the 25 yet learned the value of a good board of directors. Maughan's consists of himself and his lawyer. "I like to make decisions fast," he explains.
For all their entrepreneurial bluster, however, many of the founders of these first-among-the-fastest companies take an enormous interest in developing home-grown managers who can share the CEO's burden, maybe run the company eventually. Perhaps as important as anything else these companies do is the learning opportunity they provide for their employees. It is a good deal more than just a job.
Patti McVay, at Fifth Season Travel, the former accounting instructor, admits she knew nothing about managing when she took over her company. Today she reads everything she can on the subject -- "at least three hours a night, even while I'm drilling my 13-year-old on spelling words." She looks at how her corporate clients run their businesses. What she learns she teaches to her middle managers. She has promoted people who are good at training others. "That's what middle managers are," she says, "teachers."
With 10 retail locations and a growing outside sales force, Burdick's Computer Stores needs managers, but Bruce Burdick hasn't hired any. They have come from inside. "I guess," Burdick says, "they become managers before we give them the title. We don't have a promotion program here, and all our job descriptions read the same: Do what is necessary. If someone wants a job, he takes it.. . . My job is open, too. I was not a good manager five years ago. Since then I've learned a whole bunch."
Santos Abrilz is proud that at least half of Apoca's 130-plus employees are Hispanic and a majority of them, at all levels, women. Since he bought out his six partners, all the vice-president slots at Apoca are open and will be filled, from time to time, probably by people already in the company.
The right place, the right time, the right product or service, and the right delivery are all prerequisites of growth. But is there a key to success for a small privately held company?
It is not a question of choosing the right industry. Such companies as Hayes, Digital Research, Burdick's, Metier, and Northern Data Systems (#20), of Westwood, Mass., are being pushed along by the explosion of the computer industry. But who would have picked appliance retailing (Warehouse Appliance), general contracting (Sigal Construction [#1], of Washington, D.C., and Sonaz Construction [#24], of North Hollywood, Calif.), waterbeds (Advantage Distributing [#16], of Haverill, Mass.), or parking lots (Kassouf Parking Co. [#22], of Cleveland) as markets that would sustain growth?
It is not just having a unique product. Patents keep competitors from treading too closely on the heels of Gravity Guidance. But Polycoat Systems has grown 4,011% selling an insulating product that is available from many other sources.
It is not just capital. DEY Laboratories Inc. (#15), of Concord, Calif., which grew in five years to $5.5 million, was launched on the back of $100,000 from the founding partners and another $100,000 from the bank. But Royal Silk Ltd. grew to $7.2 million in five years on less than $15,000.
Asked to list their company's competitive advantage, CEOs tick off flexibility (Sonaz Construction), price (Warehouse Appliance), marketing (Sillerman-Morrow Broadcasting, Forever Living), and service (Fifth Season Travel). And they will talk about that advantage and some others. But then ask them again, what really powers the company's growth. Lots of businesses compete on price. Lots give good service. What makes theirs so different? They don't know exactly. They have trouble giving it a name.
"I live and eat business," admits James Kassouf of Kassouf Parking, "and when I'm out socially, I like to think and talk business."
"I try to incorporate my personal life with my business life," says Carruthers of Polycoat Systems, "so I guess my personal goals include having the company grow larger and staying in charge of it."
"I haven't had much time for personal goals," says Patti McVay of Fifth Season Travel, "but they're right in line with company goals... It's kind of fun to think you're needed."
"Fun," answers Dennis Hayes of Hayes Microcomputer Products. "My personal goals are to have a good time, to have fun. For example, it's fun seeing the company grow. It's fun seeing my products shipped all around the country and knowing that people are happy with them. At a trade show in San Francisco, a woman with a Hayes modem under her arm came up to me and asked for some advice. I asked her what kind of computer she had. She said she hadn't bought one yet. She just knew she wanted a Hayes modem to go with it when she did."
What they have in common, then, and what sets them apart, these 25, and indeed most of the CFOs whose companies make up the INC. 500 list this year, is, to use Hayes's word, fun -- fun doing something that most of us don't do very well -- creating real economic growth from the flimsy stuff of ideas.
"I went to my 25th reunion," recalls Burdick, "and most of the people there acted like their lives were over. I felt I was the only one who still had a dream... Every day I feel like I'm just beginning."