Forget rebel, forget misfit, forget poor boy makes good. A new study shatters old myths about the entrepreneur.
THERE ARE THE WORKAHOLICS IN BLUE JEANS AND FLANNEL SHIRTS, STILL garage tinkerers at heart. There are the corporate mavericks, hand in hand with venture capitalists, looking to go public and make a quick score. You'll also find immigrants chasing the American dream, women and minorities, swashbucklers and techies.
In fact, if you look at the men and women who run the companies of the INC. 500, you can find almost anything you want. All the heroes of entrepreneurial myth are there -- the rebels and the misfits enshrined in pop culture, the disadvantaged finally given a place in the sun. But, if you look for someone who typifies the group as a whole, you are more likely to find Henry Stickney.
Norman Rockwell could have painted the portrait. Stickney came from solid middle-class parents who owned a dairy store in suburban Cleveland. In school, Stickney was in the top third of his class, and played first base on the varsity baseball team. He worked weekends and after school at the dairy, and was the first in his family to graduate from college. He's white, Protestant, and Republican, a good family man, married and never divorced. And today he runs his fast-growing medical-specialty company on Business Center Drive in San Bernadino, Calif., with his wife and two sons pitching in.
During the past several months, INC. and USA Today have been looking at the men and women who, like Stickney, run the fastest-growing private companies in America, the INC. 500. For years they have been touted as the leaders of an entrepreneurial explosion in America but, until now, they had never been studied as a group. Our interest was less in finding out how they run their businesses than discovering who they are, where they came from, and what makes them tick.
On the pages that follow we will explore the overreaching need of these executives to control their own lives and the businesses they run. We'll look, too, at their marriage patterns and investment patterns, their politics and hobbies, what they risked to build their companies to national prominence, and what they gained. And we'll analyze the differences between company founders and nonfounders, between men and women, between West Coast executives and East.
But more striking than the differences are the similarities among these '80s entrepreneurs in background, style, and values. Forget rebel. Forget misfit. Forget poor boy makes good. As a group, these creators of the new economy come straight from the mainstream, upwardly mobile Anglo-Saxon inheritors of the traditional American dream. Eighty-five percent are married, 7 out of 10 to their first spouse. They have 1.4 children and take two weeks off each year. They play golf, vote Republican, and prefer Time to Newsweek.
Their values are Main Street as well. Asked to explain their success, most cite such bedrock virtues as hard work and persistence. They worship a Protestant God at chruch and self-reliance at the office. And to those entering business, their most frequent bit of advice is, "Do unto others as you would have them do unto you." Tom Duck Sr., of Tucson, seems to typify the attitude toward life and business: "I was raised in Sunday School, and my folks were God-fearing Protestants. I was an arden Boy Scout. And my real values haven't changed. I always believed that you should be honest and hardworking and, some way, you would be blessed."
Only their success seems unconventional. The INC. 500 executives have not simply done better than their parents -- they have done appreciably better, with a median income today around $100,000. Over the past decade, on average, they have bought houses valued at $750,000 and amassed a net worth of more than $4.7 million. And these days they're likely to drive down Main Street in a Cadillac or a Mercedes.
America's entrepreneurial revolution is thought to be profoundly democratic, bringing increasing numbers of women, minorities, and those with lower-class backgrounds into the economic mainstream. But you'd never kinow it from looking at the executives of the fast-growing companies of the INC. 500. "This really is a land of opportunity," says Paul Woodruff, CEO of Environmental Resources Management Inc., "for those of us fortunate enough to have the right parents."
The statistics seem to bear him out. Ninety-six percent of the INC. 500 CEOs are white, 96% are men, and 70% are at least third-generation Americans. They grew up in traditional middle-class households: dad, three or more kids, and a mom who stayed at home while they were growing up. Psychologists, no doubt, would find it relevant that a disproportionate number were first children.
Dads' collars were mostly white, not blue. They were salesmen (13%), businessmen (23%), or professionals (19%). But most important, they were entrepreneurially inclined: more than half the CEOs had parents who had started or run a small business at one time. And no doubt their children first learned about running a business while sitting around the kitchen table.
Henry Stickney traces his strengths as a manager back to his parents, a father "who can sell anything to anybody" and a mother "who can organize anyone to do anything." The family dairy store was hardly glamorous; even with the seven-day workweeks and everyone helping out, it eventually went under. But the father's values would become the son's model. "He wanted to do everything himself, even make his own ice cream and grind his own hamburger. He took that much pride in his work," Stickney remembers. "He had a lot of independence; I guess that's why I'm in business."
If you ask the CEOs what, if anything, they "excelled" at in high school, they'll most often say "getting in trouble." But to hear them reminisce about their exploits is to be reminded of a simpler America, when skipping school, staying out late, or smoking in the boys' room were the accepted forms of adolescent rebellion.
In fact, the INC. 500 CEOs were achievers early on. More than a quarter were honor students in high school, and nearly a third, like Stickney, ranked in the top third of the class. They were active in school government, clubs, and church activities, and a third played varsity sports.
Paper routes and yard work were the traditional ways to earn pocket cash on Main Street, but, like Tom Sawyer and his white-washing, many of the future CEOs went significantly farther than that. Before they turned 21, 15% had a business with other employees, expenses, and profits. Darby McQuade, for example, cornered the local worm market in Richwood, W. Va., hiring his buddies to dig for bait he could sell at the beginning of fishing season. And John Cheney was into photography. He walked the streets of Houston snapping photographs of houses that he later developed, framed, and sold door-to-door. His enterprise grossed him several hundred dollrs a week through high school.
Of course they went to college, studying science or engineering in the main, or business. A quarter eventually took some form of graduate degree, but only 12% hold an M.B.A.
Mostly, they got their business education on the job. Contrary to the suspicion in the corporate boardroom that the successful entrepreneur is a lucky, untutored novice, we found that the INC. 500 CEOs had an average of 10 years of professional experience before they started their own companies, learning "to make mistakes when somebody else is paying for them," as Thomas F. Richardson, now a manufacturer of school supplies, puts it. The majority worked in another start-up or small firm, and fully 45% put in a tour of duty with the Fortune 1,000.
With the experience under their belt, they struck out on their own -- the median age was 33. The prospect of making lots of money was not critical in their decision, they now say. Most often they cite the chance to be their own boss, to control their own lives, and to prove to themselves and to others that they could do it. Even today, with all their wealth and success, 44% list the pressure to succeed as a major source of stress.
From the start, the business was very much a family affair. The majority had family members involved in the start-up -- a wife, most likely, but also children, siblings, and parents. Most of the start-up capital came from their own savings, from mortgages taken on the house, from relatives and friends. And one out of five CEOs relied on his wife's paycheck to keep the family finances from floundering.
Now, a decade later, the business is booming, but the family is still involved. Wives, generally, have been promoted to vice-president, but the title does not precisely define their roles. Judson Beamsley's wife, for example, is now the vice-president for personnel but concerns herself with much more than that. "She has veto power, and has pretty much had it since the beginning," he says. "I worry about what we could do, and it's her job to worry about what we can do."
Here, too, Henry Stickney fits the mold. Although a little older than the norm, he started out in 1978 with $2,000 in savings, a wife to work the desk, a daughter to do the billing, and a son to make deliveries. Today Western Medical Specialty Corp. has 55 employees and $10 million in annual sales, with a projected growth next year of 40%. His wife now handles the company's public relations. And, like two-thirds of those surveyed, Stickney works with his kids in the business. Kenneth, the youngest son who recently received an M.B.A., is in charge of the company's new-product development. And son Doug, vice-president of sales and marketing, joined the business after graduating from UCLA.
Like many companies on the INC. 500, Henry Stickney's firm defines a new type of family business in America. It is not the small business that might have been found on Sinclair Lewis's Main Street, the mom-and-pop operation of a simpler time. Its payroll is larger, its geographic reach is wider, and its owners are focused more aggressively on growth. But what our study has revealed is how firmly these entrepreneurs are rooted in their past. They have put to good use not only the economic and educational advantages they inherited, but the Main Street values as well. True to the American dream, they have done better than their parents. And God willing, they hope to see their children do better still.
INC. vs. FORTUNE
It's the money you notice most. The Fortune 1,000 CEOs made a lot more of it then than their small-company brethren. And that's without counting the stock options, the corporate jets, and the low-cost loans.
Maybe they deserve it, if only for their loyalty to the company, or the polished educational background. But so much else is the same. Mostly, these are two very similar groups of white men in suits.Although the Fortune 1,000 executives are about 10 years older, both groups are predominantly Protestant, still married to their first spouses, and vote Republican. They both take about three weeks off each year and put in a nearly 60-hour week at the office.
Still, those 60 hours feel different. Ask a Fortune 1,000 type how his role has changed over the past five years, and he'll mention "a growing interface with government" followed by "interaction with various external constituencies." For the INC. 500 CEOs, the biggest change has been the ease with which they can pay their bills.
WHAT DO THEY CRAVE? CONTROL
You can hardly blame them for feeling proprietary. Three out of four started the business themselves, and they've been at it for an average of almost 10 years. It's their money that provided most of the seed capital, and their net worth that is still at stake -- typically, about $3 million is tied up in the company. There's a reason they call them private companies.
But the demands have changed as these private companies have grown, creating a tension for chief executive officers between wanting to build something of their own and wanting to build something that is bigger than themselves. It is one thing to work 65-hour week after 65-hour week during the start-up, trying, sometimes single-handedly, to turn an idea into a tangible operation. But the start-up is now ancient history for the executives of the INC. 500. The companies are well over the start-up hump, with average sales now in the $15-million range, and 126 names on the average payroll. Responsibilities are different now. And it's harder to keep control.
In the beginning, control was a fairly simple, albeit elusive, goal. The CEOs wanted "to call the shots, rather than having them shot at you," as Aaron N. Zohn of ZBR Publications Inc. puts it. Looking back, the founding CEOs remember the desire to make money as much less critical in their start-up decision than the desire for independence, freedom, and control.
Judson H. Beamsley, for example, just got tired of being moved around. Three years at Montgomery Ward & Co., and six transfers. Two years at Speigel Inc., nine transfers. Starting Tek-Aids Industries Inc., a distributor of microcomputer products, was more than just a chance to cut down on his moving bills. It was a way for Beamsley to determine his own destiny for a change.
For others, control has meant having the chance to follow their own ideas with no one to stop them, and no one else to blame for failures. Craig M. Mascolo spent eight months in semiconductors at Motorola Inc. before the frustration drove him out to start his heavy-construction company. "You're never told your ideas are good or feasible or plausible," he remembers. "I like instant results, and they wanted me to put things into the system and let them digest." As he was preparing to launch his firm, Mascolo lives for six months on unemployment checks and his wife's modest salary, waiting to get his first break."But at least it was my own choice," he says.
It is one thing to control your own ideas and time, however, and quite another to keep control when you create a business. But as a group, the INC. 500 CEOs did everything they could to keep power to themselves. They started modestly, 60% of them raising less than $10,000 in seed capital, most of it from personal savings. Only a handful of them used venture capital, the vast majority preferred taking on debt rather than giving away equity. The typical chief executive kept a majority position -- and 41% owned the whole thing.
The need for control may help explain the ambivalence that these business people have about partners. Over two-thirds started with a partner, most often one or two colleagues who together held a minority position. In 8 out of 10 cases, the partner is still involved in the business today. But few subjects elicited so much advice from the CEOs we surveyed, or provoked so many horror stories.
"If partners are required for financial or emotional reasons, choose very, very carefully, because a divorce in business is just as traumatic and expensive as a personal one," says James P. Gore of Avtec Industries Inc., in Fairfield, N.J. The problem is finding partners "that will complement and contribute," warns Donald L. Eberly of Qualimetrics Inc., in North Highlands, Calif. Others point out that partners may not share your passion, work habits, ethics, or management views.
Before he started manufacturing kitchen-ventilation equipment, Robert L. Luddy had been forced to dissolve a fiberglass company because of "bad blood" between him and a former partner. Luddy had run the business side, and his partner had been in charge of technology, and never the twain did meet. "He'd say, 'We need a bigger plant," Luddy remembers, "and it was hard to explain to him why that wasn't good for the business." Luddy has decided that working in tandem was no better than working for someone else. "If I have to be encumbered with a partner, then I'd rather not do it," he explains.
Edward J. Yohman started an electric equipment manufacturing firm with a group of "nine guys, all amateurs," and remembers the early years as a nightmare. With 10 equally loud voices to listen to, all representing a financial stake, there was a lot of squabbling and very little flexibility or responsiveness. Three dropped out of active involvement when the game got risky, then one of them "later decided to come back in when the going was good." Yohman eventually bought him out. But if Yohman ever starts another company, he'll insist that any partners sign a buyout contract to make the inevitable parting less painful.
Now that their companies are growing and relatively successful, CEOs no longer feel quite so indispensable as they once did: half say they have at least identified a potential replacement inside their organizations. They put in less time at the office -- on average 54 hours per week -- which is down an hour a year on average for each of the 10 they have been in business. And although they claim to take off 15 days each year on the average, for most it has been a year since they had a solid week away.
The challenge now is to learn to let go a bit, to share ideas and let others share in the responsibility. Although only 15% say they think it is "very likely" they will turn over day-to-day control of the company in the next year, half hope to be able to delegate more responsibility to their employees. But delegating, they say, proves easier to praise than practice, particularly when you're convinced you can do the job better yourself.
Donald B. Peschke of Woodsmith Publishing Co. has managed to let go of accounting and finance, but keeps his finger in everything else. "I want to be publisher and editor," he admits. "I still do all the writing and half the editing. I want to keep the marketing, too."
"When I think of changing, it gets down to what's going to cause me more grief, to make the change or keep the statuts quo," says Joe M. Thacker Jr., a jewelry manufacturer. For now, it's an easy choice, "but latter, maybe, I'll feel more like stepping back."
Aaron Zohn warns of the dangers of waiting too long for later on. Zohn remembers how stifled he felt as a vice-president and minority stockholder in a graphic art and typesetting business years ago. Now that he is running his own company, he wonders how he can keep good people productive and content if he continues to make all the decisions. How can he keep them from going out and starting a company of their own, just of he did? "That is something I'm still trying to work out," he admits.
One answer favored by management experts is the sharing of equity with employees. But only 27% of the INC. 500 CEOs have given it a try. Herbert Antone, who runs a computer-service firm in Pleasanton, Calif., speaks for many when he talks of the fear of having employees peering over his shoulders all the time, thinking they have a say in how the business should be run. Adds Charles T. Stumpf, an insurance broker in Overland Park, Kans., "I took the original risk, it was all my capital. Besides, there are other ways to reward people besides giving them the store."
Most of the INC. 500 companies have been approached by potential buyers, but only the older chief executives believe it is likely that they will sell their businesses within the next five years. Even fewer will consider going public.
"The reporting requirements are onerous," explains Ted Snipes of Greenville, S.C., "and I don't want to run my company based on what I do this quarter." He has built his financial-planning firm to $36 million in sales by taking the long view, a perspective rarely favored on Wall Street. Publisher Peschke agrees: "A public company gets judged on the numbers. We'd rather have service as our goal, with profits to follow. That takes a long time to explain to investors."
Charles Stumpf is typical in how he approaches the questions of control, ownership, and succession. Like most, he's not convinced that anyone could run his business any better. "I'd love to have someone who could take over," he says. "And they might be able to continue the company. But how well? And for how long? "Besides, I like holding all the strings."
THESE GUYS BET THE RANCH -- AND WON
Just a handful of the INC. 500 CEOs admit they gamble for a hobby. Perhaps that's because they gamble for a living.
In our survey, nearly 8 out of 10 admit that they would have been severely damaged, or wiped out completely, if the businesses they'd started had gone under. Most had to face a reduced standard of living to keep the company alive, or miss a paycheck, or take no salary at all to keep things going.
The gamble has now paid off, at least financially. Starting with an average initial capital investment of $34,000, they now take home solidly upper-class salaries, drive fancy cars, and have amassed an average net worth in the millions. The overwhelming majority say it is all much more than they could have ever hoped for from their previous jobs. And despite all the headaches along the way, 95% say that they'd do it all again.
And what of the other 5%?
"The sacrifices may have been just too great," says Robert A. Satter. "I have been at this game for 15 years now, and for 15 years the light has remained at the end of the tunnel. Don't get me wrong, I love business. But there are limits. There can be too much of a good thing."
On the surface, The Satter Cos. looks to be a good thing, indeed. Over the past 15 years this West Point grad has taken $40,000 seed capital and tranformed it into a real estate development company with revenues of $84 million and profits of $1.3 million. Satter owns 68% of the stock.
"But if you ask me today, I'd have to say I'm just not sure if it's all been worth it," he admits. "Everywhere I look I see the signs of the sacrifices I've made -- family, friends, personal interests. About the only sacrifices I haven't had to make have been financial ones."
WOMEN: STILL LAGGING BEHIND
Start-ups by women may be spurring the entrepreneurial revolution, but so far, their firms have made them less rich and famous.
The most obvious thing to say about the women of the INC. 500 is that there aren't many of them: only 4% of the total. And if you are looking for other signs of exclusion in the survey data, they are here as well.
Nearly a third of the women said it was the lack of advancement at their old jobs that was an important component in the decision to strike out on their own -- that's nearly double the rate for men. And to finance their start-ups, women were twice as likely to have relied on family money. Since the start-up, women have raised only $1 in outside capital for every $24 raised by men. And the net worth of these successful female executives is about a third that of their brethren.Salaries still lag far behind.
Ironically, it was the desire to make money more than the urge to be their own boss that most motivated these women to start their own businesses (the men had it the other way around). But once in control of their own firms, women are even more determined than men to keep the reins tight: they are less eager to delegate day-to-day responsibilities, less inclined to take the company public, and less likely to have a replacement in-house.
Women are decidedly more pessimistic about their companies' future, and more conservative about growth. Among the explanations, we were intrigued by the one from Edwina Muhawi, who runs a wholesale bakery in Clovis, Calif.:
"If the women-owned companies aren't raising as much outside capital or hiring as many employees, I bet it's because most of the married women in the survey probably have husbands who don't want their borrowing to jeopardize the financial picture of the family. I know I've got that problem."
Indeed, you can't help but notice how prominent a role husbands play in the fast-growing companies run by women. Fully 78% of the married women in the survey report their spouses have had some role in their companies over the years. For men, the figure is only 57%. No doubt all this working together generates a sense of shared achieveness. It generates friction as well.
"We can't ever cook dinner together, much less work together on new products," says one women, "so we really have to be careful to keep the jobs separate." But Judith Kaplan of Ocala, Fla., a distributor of museum gift items who has included her huband in all three of her start-ups, disagrees. "I don't understand those people who say they can't be with their spouses day in, day out. What a terrible statement on the relationship! My husband and I don't segment. My business is part of both of us and of the relationship itself."
Women executives worry about the kids more, and how their work affects the family. "Regardless of how successful I am," insists Muhawi, "I know that if I'm not providing a nurturing atmosphere at home for two children, I won't be successful."
For those looking to debunk sexual stereotypes, meet Jean Radtke, an advertising executive in Elm Grove, Wis., who left home at 17 to play pool competitively. She now keeps her pool table in the living room, along with her 43 championship trophies.
GOOD NEWS FOR REAGAN AND THE GOP
For some years now, Democratic strategists in Washington have been trying to figure out how they might make the entrepreneurial issue their own. Based on our survey, we have some advice for them: forget it.
More than half our CEOs can't ever remember voting for a Democratic Presidential candidate -- not peanut farmer Jimmy Carter, not Johnson in the '64 landslide, not even Franklin D. Roosevelt. And some of those who have voted Democratic later came to regret it.
"Yeah, I voted for FDR in the '40 election," admits Tom Duck Sr., the Tucson rent-a-car king. "But I honestly feel that he would have kept that war going if it killed him, because the war kept him in office. And the New Deal? That was just phony. Those projects had no long-range economic value."
Eight out of 10 INC. 500 executives are now solidly in the Reagan camp, but there are a few soft spots. The President and his party suffer a gender gap in our survey of around 20%. And, contrary to all the post-election hoopla about younger voters flocking to the GOP, the youngest of our executives lagged 20 points behind the oldest in supporting the President. Geographically, East Coast respondents were decidedly less conservative and less Republican than their brethren across the country.
CEOs with Fortune 1,000 experience, we discovered, were more virulent in their conservatism than the others. And non-founders described themselves as being to the right of founders. But most surprising to us was that those who came from poor backgrounds were no more inclined to support social welfare programs than those from comfortable backgrounds.
"I've gone through plenty of tough times, and I've found that the only one who is going to help me out of them is me," explains Roger Orton of Sacramento, whose father, a laborer, kicked him out of the house at the age of nine. "I don't believe in giveaway programs, and people who rely on them, in my opinion, are worthless."
Charles R. McDonald of Willoughby, Ohio, remembers his machinist father as a "good Roosevelt man." But now he votes for "what is best for me and my business. . . . All these socialized programs -- that's just the members of Congress buying votes."
An almost palpable disgust with welfare and "handouts" seems to motivate and energize the conservative political values of the men and women in our survey. The unfettered marketplace seems to them not just efficient, but fair. As they see it, they are living proof of how it's possible to make good without any government assistance. Or almost none. Like Orton and McDonald, about 40% of our sample took a degree from a government-subsidized state college or university.
WHAT -- ME WORRY?
It isn't the competition that keeps them up nights. For all the talk about the rigors of the marketplace, the INC. 500 CEOs ranked their rivals as merely fourth on their lists of worries -- after business finance, time commitments, and the pressure to succeed. The reason is probably because they don't have much competition: they've found a niche that allows them to define their own market.
Here are executives who measure the health of their business by its profitability -- things like revenue growth, productivity, and market share are secondary. And on the matter of profits, they are decidedly bullish. The typical executive is forecasting a whopping 35% growth in profits next year on a similar growth in revenues. And employment will climb as well, with the average company planning to add 17 new names to the 126 already on the payroll.
But David Duffield, who runs a software company in Walnut Creek, Calif., Warns his colleagues against too much optimism. "It's when you start thinking you're invincible that you get into trouble," he says. "Just because you make a million dollars in your first five years of business doesn't mean you are going to make another million in the next five.
"I'm not real humble," Duffield admits. "But I try to be."
AS INVESTORS, THEY LIKE TO GAMBLE
If the managers of INC. 500 companies are unconventional in any way, it is in their portfolios.
"A very aggressive posture," is how investment adviser Gary M. Goldberg describes the investment patterns that emerged from our study. What he means is risky. Cable TV systems. Aircraft. Fine cars. Metals futures. Even fast-food franchises. These are people who know that the way to make big money is not by clipping coupons and following the Dow Jones Industrials. But in the process, some of them have learned how to lose big money as well.
Take Len Wallace of Camarillo, Calif., for example. At one time, he had as much as 30% of his net worth in oil-drilling deals that came his way through a respected brokerage firm. At first he'd get reports saying how wonderful everything was going, but soon these gave way to reports of cost overruns, then dry wells, then rigs that were shut down. Now he is heading up a group that is suing the brokerage firm to recover the $750,000 he lost.
The INC. 500 CEOs had a median net worth of $4.7 million, nearly two-thirds of it tied up in their own businesses. Another 16% is in houses. That still leaves 22% -- or about $1 million -- to play around with. And play they do. The average portfolio sets aside 4% for new stock issues and another 10% for growth stocks of one kind or another. And more than a quarter of the CEOs report making substantial investments in new ventures.
Jack Dean of Erie Creative Coatings Inc., in North East, Pa., has 70% of his net worth tied up in new companies, among them an industrial park. "None of them made me rich, but that's the way I make my living," explains Dean, who claims to have had $200,000 stolen from him once by a shady partner. He now prefers new ventures in which he can take an active part.
James L. Earl of Tazewell, Va., says he has never lost more than $100,000 in any one of the nine new companies he's backed, most of them related to coal mining and steel. Earl says he puts 80% of his net worth into companies like these because the potential return is higher. "I'm gambler," he concedes.
Adviser Goldberg was surprised that, with so much money wrapped up in their own firms, the investment strategies of INC. 500 CEOs aren't more conservative. He'd recommend more bonds or real estate. But John D. Chaney sees it another way:
"Once you've been tried by fire -- where if the business fails everything goes -- then a growth stock doesn't look all that risky. Besides, once you have that base of wealth, you're willing to take a chance."