When sales still didn't develop according to plan, Krause did something businesses in Ohio might be used to, but not those in Silicon Valley. Everybody in the company took a pay cut. "We developed our 15-10-5 plan," Krause recalls. "Executive committee members took a 15% cut; exempt employees, 10%; nonexempt, 5%. We felt that the people most responsible for the fortunes of the company should take the largest pay cut."
While all this was going on, IBM Corp. introduced its 16-bit personal computer and, with that one announcement, created the market 3Com had been waiting for. By the summer of 1982, 3Com's sales were back on track, and that fall its growth began in earnest. The planning, the patience, and the survival plan had all paid off. Now 3Com is on a growth track that, Krause projects, will take it to $100 million in sales by 1987, with a return on stockholder's equity substantially higher than it could have earned if it had consumed capital pursuing other, shorter-term markets, or if it had gone back to the capital markets instead of conserving the cash that it had.
The philosophy -- almost the corporate culture -- that led to this payoff now seems to permeate 3Com, and is reflected in what its executives say when they assess the slow-growth period of the past. "Bill," Charney says, "has an expression, which is, 'Do a few of the right things well.' Doing a few of the right things well is a very good way to run a business, because doing too many things will kill you. You don't have enough resources. Too many small companies die because they attempt 14 variations on six different themes. That's what3Com's business plan was -- a plan of too many of the wrong things done poorly. That's not to say that we were stupid; it's just to say that we had to grow up, learn to focus on what our business was about, and then concentrate on the two or three things that really needed to be done over the next 12 months."
"My view," says Krause, "was that long-term profitable growth was more important than short-term market share. My theory is that you start out with a set of principles or beliefs, and from those you begin to develop business strategies that are consistent.-My purpose in building a business is to create something that will live beyond me. I want people to say they want to join 3Com because it's the best managed company in Silicon Valley, so I needed to stick with some fundamental principles: Make a profit, serve the customer, achieve product leadership, and build a quality organization. They became both conditions of and constraints to our growth. We couldn't take on too broad a market, for example, because how, then, could we be perceived as product leaders? Trying to do too many things might require us to grow faster than our principles would allow us to grow."
"Bill," adds Charney, "would say, 'We don't buy into the philosophy that we'll make profits tomorrow and suck cash today. It's just as easy to make a profit today, and we're not going to fall prey to that intoxicating thought, to put profit off into the future."
So far, the fiscal conservatism of people like Krause is only beginning to be reflected elsewhere in Silicon Valley. Top-line growth, points out venture capitalist Myers, is what creates "value" in a company's stock. "Maybe what's changed, though, is how you go about it." There is more pressure today, he acknowledges, to be smarter about not putting too much money into a company too early. And some companies themselves are chary of venture financing precisely because of the superfast growth rates typically demanded by venture investors (see "Why Smart Companies are Saying No to Venture Capital," INC., August, page 65).
To Charney's way of thinking, however, the lesson couldn't be clearer, both from his own company's experience and the experience of others. "Here's 3Com. It went public in the worst time in years, and its stock went up; it's acknowledged as being a very well-managed company; and it's growing at 300% a year, or whatever. And so you say, 'Well, didn't you miss? You could have grown at 500% a year.' Yeah, yeah . . . but I'm not embarrassed to go to my investors and say that we grew from $4.7 million to $16.7 million this year . . . and we had 15% operating profit in doing so. And I'm still here, and the turnover is low. Maybe there's some lost opportunity, but I find it hard to believe that it's worth the risk."
Other companies' trajectories, he notes, bear out this conclusion. "Fortune [Systems Inc.] made a bet on one computer system with one technology, high flying. They said, 'We're going to staff up to 250 people; we're gonna raise $26 million. I don't care if we are sucking $6 million a month in negative cash flow.' 3Com took a completely opposite point of view. We said, 'We're going to raise $1 million. Then, when we kind of think it's all gone, we'll raise another $2 million. Meanwhile, we'll come out with this little tiny product and see if we can sell it. And if somebody buys it, that'll be great.'
I would say that the probability [of success with Fortune's approach] isn't worth the risk. We have Osborne and Victor and Fortune and Eagle. So we have three or four resounding didn't-make-its. Atari is another. Pizza Time Theatre is another." But what about the ones that succeeded -- Apple Computer, say, or a more recent hot number like Convergent Technologies Inc.? Charney is unshakable. "And then we have Convergent, one which appears to have made it and also took that risk. I don't want to take the Convergent risk as an entrepreneur, that all-or-nothing risk. I just don't think it's worth it.
"The reason I don't is that a more conservative, lower-flying, more controlled growth, more wait-and-see approach has a higher probability of success. I believe it will get you there in the end."
