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HUMAN RESOURCES

Management By Necessity

Interview with one CEO and the steps behind his $80 million, no venture capital, computer software company.
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How Philippe Kahn built an $80-million growth company without even knowing how to write a business plan

Blessed with the cherubic countenance of a natural mischief maker, Borland International Inc.'s Philippe R. Kahn has had an easy time living up to his reputation as the brash bad boy of his industry. To rattle the chains of the in crowd, it doesn't hurt also to flaunt standards of conduct, capital, and market, then become, at $82 million in sales for fiscal 1988, one of the largest microcomputer software manufacturers in the country -- totally without venture backing. This from a French math teacher who came to the United States in 1983 at age 31 not to start a business, he insists, but merely to cadge a good job in Silicon Valley. Or failing that, at least to interest some local money maven in the proprietary programming tool he had developed. Kahn failed on both scores, and the rest is, as they say, histoire.

Borland International was incorporated in May 1983, and its flamboyant founder began peddling his lone product, Turbo Pascal, joined shortly by a second, a desktop organizer called SideKick. Dispensed largely via mail order (or 800 number, the coupon's modern equivalent), both retailed for under $100 -- a margin-squeezing price point eschewed by competitors, but exploited by Borland to grab quick market share. Five years later not only had more than a million copies of each been sold, largely through Kahn-authored magazine ads, but two other publishers -- Analytica Software and Ansa Software -- had been swallowed by Borland. For Kahn, still ahead lay such stalwarts as Lotus Development Corp., whose long-lived spreadsheet he explicitly has challenged with his own Quattro. And -- who knows? -- IBM, with which he has forged a product-development affiliation.

INC. senior editor Nancy J. Lyons and senior writer Robert A. Mamis talked with the intrepid yachtsman in his office at Borland's newly sprawling facilities in Scotts Valley, Calif., several months after a jolting second-quarter loss and a subsequent reorganization. By then, Borland had returned to profitability, the turmoil had settled down, and they found the captain as reflective as a windless sea.

* * *

INC.: For various reasons -- aggressive pricing on the one hand, a glib tongue on the other -- you became known as software's enfant terrible. When you started out in '83, was thumbing your nose at corporate convention a philosophy?

KAHN: No, it was a necessity. I couldn't afford to be corporate. I was looking for a job, not trying to start a company. All I had in mind was how to pay the rent. I didn't even know how to write a business plan.

INC.: You did have a highly salable product, as it was to prove. Yet you attracted no capital, no investment interest whatsoever?

KAHN: People who see Borland today -- even employees -- have a hard time imagining that six years ago there was really nothing, that the company never had venture capital, never borrowed money. Everybody advised me to try for venture capital, but no venture capitalist would put in a dollar. In '83 and '84, they were looking for companies based on a Lotus model, founded by someone who had done it before.

INC.: So it was to rankle them that you did things that companies like Lotus explicitly chose not to do, such as your shunning copy protection?

KAHN: That view presupposes I had a choice -- I didn't. I was forced to be different. I was new to the country, I was not part of the network, no one knew who I was, and I certainly didn't know anyone. People wouldn't even return my phone calls. I felt there would be demand for the product, but I didn't have the money to create that demand, so I had to be inventive. It wasn't to get under Lotus's skin. I hated copy-protected software and decided the company would make it a battlehorse.

INC.: The story goes that Borland was launched by a single ad, without which we wouldn't be sitting here talking about the company. How much of that is apocryphal?

KAHN: It's true: one full-page ad in the November 1983 issue of Byte magazine got the company running. If it had failed, I would have had nowhere else to go.

INC.: If you were so broke, how did you pay for the ad?

KAHN: Let's put it that we convinced the salesman to give us terms. We wanted to appear only in Byte -- not any of the other microcomputer magazines -- because Byte is for programmers, and that's who we wanted to reach. But we couldn't afford it. We figured the only way was somehow to convince them to extend us credit terms.

INC.: And they did?

KAHN: Well, they didn't offer. What we did was, before the ad salesman came in -- we existed in two small rooms, but I had hired extra people so we would look like a busy, venture-backed company -- we prepared a chart with what we pretended was our media plan for the computer magazines. On the chart we had Byte crossed out. When the salesman arrived, we made sure the phones were ringing and the extras were scurrying around. Here was this chart he thought he wasn't supposed to see, so I pushed it out of the way. He said, "Hold on, can we get you in Byte?" I said, "We don't really want to be in your book, it's not the right audience for us." "You've got to try," he pleaded. I said, "Frankly, our media plan is done, and we can't afford it." So he offered good terms, if only we'd let him run it just once. We expected we'd sell maybe $20,000 worth of software and at least pay for the ad. We sold $150,000 worth. Looking back now, it's a funny story; then, it was a big risk.

INC.: Yet millions of dollars later, you haven't changed your style.

KAHN: True, for a long time the company was not perceived as a serious corporate entity. I resisted that for a long time.

INC.: Resisted what, exactly?

KAHN: Normal corporate things, like how big your office is as an indication of where you stand in the hierarchy.

INC.: How can you realistically expect to avoid office jockeying, when even the most casual corporate culture is structured that way?

KAHN: One way is by example. You tell yourself there should be no fluff in what you're doing if that's how you want others to do it. How can you ask people to listen if you don't listen yourself? How can you ask them to work hard if you don't work hard yourself? The problem is not the hierarchy; it is the threat that good ideas may get lost within it. What I don't like is someone claiming to be right simply because he's the boss.

INC.: What's the answer? How do you participate in decision making without being regarded as "the boss"?

KAHN: I act as kind of a referee, asking questions. I'm pretty good at asking tough questions, whether they're in technology, finance, or marketing. I spend time roaming. I know everybody in the company more or less by first name, and I go through and talk to them -- without a goal, actually. By randomly going places at random times, you discover things that you never would discover otherwise. If people expect you at a given time in a meeting, everything is set up for you, and there are no surprises. But walk around and see someone copying an invoice 13 times over. . . .

INC.: Then you show them how to do it right?

KAHN: Well, I don't sit down and design a better system. I try to motivate. I simply ask open-ended questions: don't we have computers that can do it better?

INC.: Doesn't a CEO's poking around two big buildings leave a bit much to chance?

KAHN: I also use electronic mail.

INC.: As a management device?

KAHN: Yes. I want opinions to come through different levels of the hierarchy without being muzzled. Creating open discussion happens naturally using electronic mail. It answers the challenge of how to get people to understand that there is no loss of authority in creating an open discussion in which every opinion can be expressed. Even R&D opinions about marketing, say, where the conventional reaction from marketing would be, what does R&D know about marketing, we are not even going to talk to them about it.

INC.: Describe how e-mail encourages their open-mindedness.

KAHN: Say a guy from R&D sends a memo to marketing, and copies me. Of course, the marketing guys can decide to erase the electronic-mail message, but maybe I will have sent a message back: that's a good idea. Then everybody has to pay attention.

INC.: That sounds more like coercion than encouragement.

KAHN: Not really. It means that people who have an idea can just pop it into my mailbox, and it will be given a hearing. It doesn't mean that suddenly everybody reports to me. Not at all. In fact, it flattens the organization. In electronic mail, every person in the company is merely a number, no matter what his title; anyone can get to anyone else in a confidential manner. In the typical corporation, management claims its doors are always open, come on in. Great! What's an employee supposed to do -- walk over to the administration building, talk his way through four secretaries, knock on the door, and find the guy's busy anyhow? Here, you press "enter" and you're in.

INC.: Still, everybody in the system understands that you're the final arbiter, whether or not you claim otherwise.

KAHN: One of electronic mail's greatest attributes is that I cannot write louder than anyone else.

INC.: How, then, do you impart your vision to the company?

KAHN: It's already imparted. I have a focus that will take Borland into the next century. Everyone knows I believe the long-term future of the company is built around R&D, and that there's no way around that fact. If R&D needs something, they're going to get it.

INC.: Because you're technologically oriented?

KAHN: That's very important. I think it's easier to find good marketing people than it is to find people who understand technology. Something along those lines happened recently. Customer service was complaining that they didn't get respect from the rest of the company, so I asked all the VPs, all the managers, all the R&D guys, to work in customer service for a day. Some of the biggest nerds in R&D turned out to be amazing salespeople. Customers would call to buy a $50 upgrade, and the R&D guys would sell them a $200 one. The others weren't as good at it.

INC.: Back at the beginning, what convinced you that selling software directly through the mail, rather than indirectly through distribution to retailers like everyone else, was the way to go?

KAHN: Not only was nobody in the software industry doing mail order, they insisted it couldn't be done. I asked myself why the hell not, everyone else in this country seems to be able to sell things that way.

I was seeing the opportunity as a French guy, not as an American businessman. There was no mail-order industry in France at that time, no 800 numbers. The first time I saw an evangelist raising funds on TV, I thought it was a Monty Python sketch. Friends had to convince me it wasn't. I figured I had as good a product, and people out there are going to send me money, too.

INC.: Didn't it occur to you that the reason software companies weren't selling by mail was that they had already examined it and decided it wasn't feasible?

KAHN: The point is, whatever the experience was for software people at that time wasn't applicable to me, because those were already large companies with their strategies in place. If I had played the game by their rules, obviously I would have lost. For Borland, the idea was to create new rules.

INC.: Why the name Borland, and not Kahn?

KAHN: Because Borland International sounded more important than Kahn International. It's made up, of course. But there was a problem I didn't anticipate: as the company became better known, we began to receive mail addressed to a Mr. Borland. So we had to compose the guy. The first SideKick manual, in 1984, happened to have a drawing of a sidekick -- a little prospector. We named that guy Frank Borland and wrote that he lives in the Santa Cruz mountains, travels with a mule named Lotus, and communicates with the outside world only through electronic mail. It was hype.

INC.: Do you ever wish you had sold out to McGraw-Hill back in '85 when it made an offer, and spared yourself having to get serious?

KAHN: No, I have never regretted the decision.

INC.: You didn't have a green card and could have turned over a year-and-a-half-old company for big money. Who could resist?

KAHN: The arrangement was for an earn-out over three years, and I had to commit to working there, probably in Manhattan. That was the hitch -- living in a corporate environment, which was very new to me. I like mountains better.

INC.: For $75 million, couldn't you have tried to like sidewalks?

KAHN: Well, it was a lot of money, and extremely tempting for early stockholders. At that time I had no experience with such things -- I had never been to New York -- so I said certainly, let's talk. I mean, how much more can you do than go for the first time to Manhattan and stay at the Plaza and have your first appointment on the 49th floor of the McGraw-Hill building? It was my first encounter with big corporate America.

INC.: And it turned you off?

KAHN: It's a long story.

INC.: Let's hear the highlights.

KAHN: First thing in the morning, I enter the boardroom. It has a totally glossy table, and there are portraits of the founders on the walls, and there are typical executives dressed in white shirts and navy blue suits with burgundy ties, and everybody turns around to see who is this guy

(continued)

we're supposed to talk to for two hours. It was like a movie.

INC.: Just you alone? You didn't bring an attorney?

KAHN: Just me alone. And not only was I wearing the wrong shirt, the wrong tie, and the wrong jacket, but the wrong shoes. It was winter, and I thought I'd better wear my big, rubber-soled shoes. I didn't realize that suddenly I would be in a corporate suite with everybody wearing thin, Italian shoes. All the time I was talking, I kept thinking I have on the wrong shoes, this is not going to happen.

INC.: But it did.

KAHN: I felt it went terribly, but it went very well, actually, and their board approved the essence of the deal. The next morning, a newspaper article came out about me and Borland, and I got a phone call from the guy I was dealing with at McGraw-Hill. He said, "You're on the front page of The Wall Street Journal." I said, "Great, great!" "They say you're an illegal alien, and our people don't want to buy a company from an illegal alien. You didn't tell us you were illegal." I said, "Our lawyers did tell your lawyers that I'm in the process of getting a green card." "The article also talks about your toga parties and other stuff," he said. For two weeks they tried to keep the ball rolling, but I got fed up. If this little problem can become a big problem, what's the rest going to be like?

INC.: You have to admit you did have a reputation as a party thrower.

KAHN: That image was very much overblown. It was a marketing ploy.

INC.: You promoted that image?

KAHN: Yeah, the toga affairs and all. The truth is we were a bunch of people working hard building products, and there weren't that many parties. But the image paid off. When you're a contrarian, you get noticed.

INC.: In July 1986 you brought Borland public. Always the contrarian, you did it in London, rather than New York City.

KAHN: There's a simpler explanation: Wall Street is not a place to make deals if you don't know whom you're talking to. I had a friend who had been an investment banker in London, and he arranged it. It achieved the same goal -- to raise capital and create a public market for our shares. It was very efficient, and it worked out well for the company. But I realize there are trade-offs. For one, American business publications follow you less. And now that there's a lot of stock held by U.S. institutions, we have to report to the SEC; we do the filings of a U.S. listing, but we don't get the benefits.

INC.: Just before your offering came out, Mrs. Fields Inc. also went public in London, but apparently that issue didn't go smoothly. Did its difficulties affect yours?

KAHN: Yes, it was a problem in the end, because British institutions kept comparing it, as an American company listed in London, with Borland. "Mrs. Fields Cookies has such-and-such a ratio, therefore. . . ." I would say, "Wait a minute, ever try to eat a floppy disk? We're a high-tech company."

INC.: We can't help but notice that the incremental sizes of your sailboats about match Borland's sales growth. Is there any significance to that as a ratio?

KAHN: You're right, there is a certain parallel. When I was in France, I couldn't afford big boats, so I sailed very small boats. When Turbo Pascal began selling, I bought a 20-foot boat even before a house or car. The year after, when we were doing about a million dollars a month, I bought a 37-footer. Then right after we went public, a 43-foot boat. This year [1988] I went into a 70-foot racing machine.

INC.: And in July you won the Pacific Cup race from San Francisco to Hawaii. But at the same time, back in Scotts Valley, Borland was undergoing its first losing quarter.

KAHN: That was a strange coincidence. Before leaving the dock, I went to the store and there was a magazine with stories about business guys who had lost it all. So I bought it and stuffed it in the boat in case I wanted to read something entertaining about business. There was a piece about Nolan Bushnell and Pizza Time Theatre, how he was so successful and how he was also into sailboat racing. Then it went on about how the year he won the race from Los Angeles to Hawaii, as soon as he got into Honolulu there was a telegram waiting for him saying the company had just suffered a huge loss, and he had to fly back. It was the beginning of the end of his tenure at Pizza Time. I said to myself, wait a minute, maybe I shouldn't be reading this. The next thing I did was get on the marine radio and call the office: how are things?

INC.: Obviously, not so great.

KAHN: As a matter of fact, the summer quarter was definitely slow, to the point where I decided we'd have to restructure the company to run more efficiently. So there was some importance to having read that article, because it put in mind the worry that maybe something should be done quickly. I realized after talking to the office that as soon as I got to Honolulu, I, too, was going to have to fly back.

INC.: And terminate 13% of your work force.

KAHN: That was when it hit me -- hey, this is not a game, this is real serious. Numbers don't care about human problems. Numbers mean whether you're going to be able to meet payroll or you're going to be able to launch a product or even if you're going to be able to stay in business. What happened was we went from $31 million to $82 million in revenues in a single year, with basically the same structure. But we weren't paying attention to structure, we were just meeting demand. We kept hiring more people and buying more computers for those people. Then July, August, September were slow, and we realized we had to do something.

INC.: Why a whole reorganization, while others in the industry simply cut back personnel?

KAHN: Hey, everybody had hiccups in that period. We were the only ones who called it what it was -- a reorganization. You can't merely lay off people. In a growing company, fewer people doing the same jobs doesn't work. We had to consider ways to restructure dramatically -- whether to farm out production, for example, or advertising, which had always been in-house. It was like driving without seat belts and passing an accident on the side of the road, and seeing people put into an ambulance. Suddenly you clip your seat belt on and you drive more carefully. One thing I decided was I would like marketing, sales, and product management to report to a single person, because I didn't want to be the guy to run all three things. So we began recruiting.

INC.: Why was it apparently so hard for you to delegate responsibility?

KAHN: Actually, I am a pretty good delegator. Some of those problems arose because I delegated too much too early, and trusted a team of management that didn't perform its job well. Delegation has to do more -- in my case, anyway -- with the people I delegate to, rather than what it is I delegate. Keeping the balance between taking risks and running the day-to-day operations of the company is not easy. You rapidly find out that "trained, seasoned professionals" make OK decisions, but they can be dangerous, because OK decisions end up turning the company into an OK -- an average -- company.

INC.: Part of the pleasure of working at Borland is its giant-killing attitude, as it were. As we've just seen, that's also what makes it hazardous.

KAHN: A company that doesn't take risks is not going to lose many battles, but it's not going to win many, either. Sometimes you have to spend money you don't have. The introduction of Quattro was a huge risk. We bet a lot of the company on it, and if it hadn't sold we would have been in trouble. But if you think too carefully about building a business, you make decisions that are too rational. In the beginning of a company, something out of the ordinary has to happen. I cannot think of many venture-backed companies that have succeeded in which there wasn't something crazy at some early point, something not normal in a business sense. We're not a venture-backed company, but we've acquired two of them, and can see all this. Take Analytica: more than $8 million in venture capital, and everything was done right from a business standpoint. The ratios were there, accounting was clean, the offices were neat, the furniture was beautiful. The only thing that wasn't there was something that professional managers would no doubt radically have disapproved of -- the spark that would have made it explode.

INC.: Speaking of which, you've described the software business as thermonuclear war. Isn't that putting it rather melodramatically?

KAHN: What I was saying is that if business is war, then high-tech business is global thermonuclear war. Nobody dies, but that's what it is -- a nasty struggle for territory. There are only so many customers who are going to buy products, and you're fighting to get them on your side, and you'd better have something powerful to fight with, especially if the guys up ahead are 10 times bigger.

INC.: And could easily crush you by, say, a price squeeze.

KAHN: Well, they can't, because any dollar they try to squeeze us out with comes off their bottom line. They don't have the margins. If Lotus went down 30% in price, say, they'd probably lose money.

INC.: Oh? Why?

KAHN: It boils down to different corporate philosophies. We know how to do things simply. Where we have 12 people working in R&D on spreadsheets, they have more than a hundred. When I take a plane, I travel coach.

INC.: It's no secret that ever since your own spreadsheet product came out, you've relished goading Lotus -- especially Jim Manzi, its CEO. The recent verbal exchange covered by The Wall Street Journal is a good example.

KAHN: In that case, he really stuck his foot in his mouth. I was just pointing out the repeated delay of their new spreadsheet -- how else would you talk about a competitor to a reporter? His answer was, "Oh, yeah, well, Lotus's bill for toilet paper will be bigger than all of Borland's sales," or something like that. You know what the most popular brand of toilet paper is in France? Lotus! When I read the article, I was in Paris, and Paris was covered with billboards showing a roll of Lotus toilet paper coming down from the sky. I had the laugh of my life.

INC.: So you admit that you're a tease at heart?

KAHN: Yes, a tease of the establishment.

INC.: But you're done with that?

KAHN: I'd love to still do it, only I realize now I'm part of the establishment. How can you be developing products with IBM and claim that you're not part of the establishment?




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