Enter DMA Systems.
DMA is based in Goleta, Calif., a sleepy little town just outside of Santa Barbara, and a center for magnetic-head technology -- the devices that fly above disks and read and write data. The company's president and one of its founders, Dick Troutte, had previously worked at Information Magnetics Corp. a pioneer in the diskhead industry. Information Magnetics had been successful, but Troutte had grown discouraged and left the industry in 1978 -- mainly, he says, because of IBM. "Everything IBM did, we followed suit. . . . IBM would announce big products or reduce their prices and cause major layoffs in half the industry. It was a real tough time to go through, and I felt I needed a breather."
With the explosion of the microcomputer market in 1980, however, Troutte had a change of heart. He realized that he and a few other associates "had participated in every development program of disk drives known to mankind at that time . . . so we felt that we could make a [hard] disk drive that other people hadn't yet been able to make -- a removable one." Moreover, Troutte believed that, in the new environment, he would be somewhat insulated from IBM.
Troutte and his partners did the initial financing themselves, using money they had made from their equity in Information Magnetics. They incorporated in October 1980, and spent the next six months developing a business and engineering plan, whereupon they began hiring. At the same time, they went to the venture capital community for additional financing. A package was arranged by Brentwood Associates of Los Angeles and Southwest Venture Partners of Dallas. Before long, DMA found itself being courted by companies looking for an alliance.
Troutte was intrigued by the possibilities of such a relationship. "Any time a large company gives a stamp of approval to your products and your company and your management team, that always gives you a leg up in this industry. You've got somebody that has taken your products and gone through a lot of evaluation on them, and is willing to put their company's name on the product and back it -- then it is really a good sign."
This product relationship lies at the core of the alliance between DMA and Memorex. Memorex bought 4% of DMA, and the two companies entered into a manufacturing and licensing agreement. Memorex will market DMA products and pay DMA a royalty fee for disk drives manufactured under the Memorex label. Beyond that, Memorex gets to look at new technologies developed by DMA's engineers.
According to Memorex's Ray Gould, both companies will benefit, even though they are competitors. "In these relationships, both companies are reaching out for something that the other has. This was not the case in the era of the conglomerates, and so perhaps we have gone from the era of the conglomerate to the era of the strategic relationship."
Nor is DMA worried about "getting in bed with a hungry alligator," as one entrepreneur characterizes such relationships. Troutte notes that big companies have lost billions of dollars" by ignoring the advantages of independent, finely focused companies, and now they are looking for a piece of the action. According to Troutte, Memorex realizes that it can never take over DMA without losing precisely what it has tried to gain.
On that point, Manning and Gould agree. "Dick Troutte can decide over lunch to change direction, where a big institution might take ages," says Gould. He also believes that Memorex will benefit indirectly from DMA's high energy. "No one is going to be a sluggard at a start-up."
Says Manning, "I'm duly impressed and excited by those environments, but we just aren't going to be able to replicate those environments at Memorex." Instead, Memorex plans to go right on establishing alliances. As of January 1984, Memorex had four of them, and it has hopes of setting up several more by the end of the year.
But, despite the picture of harmony presented by DMA and Memorex, some observers remain skeptical that such alliances can work in the long run. They point to the checkered history of corporate venturing, going back 20 years or more, and note that, in the past, even the most promising relationships have succumbed to a variety of factors -- envy, shifting market conditions, changes in strategic direction or in top management, and so on.
Then there are those like L. J. Sevin, who argue that big and small companies are fundamentally incompatible. As evidence, he cites his own experience at Mostek Corp., a semiconductor company he co-founded in the late 1960s, which became involved in an ill-fated alliance with Sprague Electric Co.
According to Sevin, Mostek had problems with Sprague's sales force and with the presence of Sprague's people on its board. (On this point, one consultant noted that Exxon Corp.'s early corporate venturing gave rise to the phrase "Put a tiger in your tank and a turkey on your board.") To make matters worse, Sprague was bought in mid-relationship by GK Technologies Inc., which was then acquired by The Penn Central Corp. Ultimately, Mostek wound up as part of United Technologies Corp.
"When I hear the words 'window on technology,' I run for cover," Sevin says. The central problem is that "you want your technology and they want your technology." The large company enters the relationship in order to solve a problem, and "it is only human nature that they are going to want to get hold of a solution for themselves. Altruism is not part of the equation."
Sevin's current partner, Ben Rosen, agrees. "We have tended to minimize our involvement with majors in our start-ups," which include Compaq Computer Corp. and Lotus Development Corp. "The problem is that the investing company's principal interest is not the entrepreneur, but itself."
