INC.: And, of course, you might mention that most of Compaq's founding management team came out of Texas Instruments. What's remarkable is that they've remained virtually intact for all eight years -- probably the most stable set of executives in the entire computer industry. How so -- is there some special chemistry?
ROSEN: That and the fact that, unlike many other entrepreneurial companies, they had an average of 15 or so years' experience when they started, and knew one another and had worked with one another. Further, the company is based in Houston, where there's a different ethic from Silicon Valley -- more stability, less job-hopping, fewer temptations. Plus the company has been very successful with many products for eight straight years, and that tends to keep people there.
INC.: Oddly enough, when you invested in Compaq, observers felt it didn't have a chance. The personal-computer field seemed already too crowded.
ROSEN: There wasn't a more crowded field around. Which proves you can invest in crowded markets and still be stunningly successful. When we invested in Lotus, it was competing against a giant called VisiCorp. In 1982, VisiCorp's sales were $20 million, and Lotus's were zero. VisiCorp dominated the industry, yet we invested in that industry. That's the way the system works. There's no central planner decreeing that there shall be only three companies per industry. The nice thing about venture capital is that when you lose, you lose only the amount of your investment; when you win, you make 10, 30, 50 times your investment. The rationale is that the successful ones more than make up for the failures. There's an analogy in baseball: great home-run hitters are also great at striking out. This is not a place for cautious investing -- prudent, but not cautious. We make multimillion-dollar investments when there is no product, no company, and one or two people with an idea. In Compaq's case, it was three guys and a sketch on a placemat.
INC.: But why even chance swinging when there's already a big player -- IBM, when Compaq started -- in the market?
ROSEN: Because all you have to do is do it better -- not a little better, of course, a lot better. There's a saying in venture capital that "slightly better is dangerous." And it's a trap entrepreneurs often fall into, going with a product a bit better than what's out there. A product has to be substantially better to make the world change its ways.
INC.: But even that product could be superannuated overnight. Doesn't it scare you as a long-term investor, how rapidly technology is changing?
ROSEN: I love it! Without change, the entrepreneurial sector of the economy would be dead. That's why it's so hard to have a successful venture business in nontechnology areas: there's no opportunity. We ride innovation, and we want it to change -- the faster, the better. We survive only because technology changes.
INC.: What do you mean, "only"?
ROSEN: If nothing changes, how are you going to compete with a billion-dollar company? Usually we go up against a large company whose decision making is much slower and that has a vested interest in protecting its old technology and not obsoleting itself. That allows us to obsolete the company.
INC.: Maybe some other innovative small company is thinking the same way at the same time, and will obsolete you.
ROSEN: We're willing to bet that our expertise allows us to identify the new and better technology. The edge is that in technology, there are barriers to entry -- technological know-how or some proprietary aspect.
INC.: By the way, do you actually use all the proprietary gadgets your companies produce?
ROSEN: Oh, yes! From day one. When I was an analyst, the thing that really got me started was when the companies I was following began building products I could play with. The first calculators -- Bowmar, and then Texas Instruments, and the professional calculators from Hewlett-Packard. When the PC came out, I was like a pig in -- how should I say it? -- heaven.
INC.: Lotus's huge out-of-the-gate promotional budget is cited as the factor that raised the entry ante for software companies forever after. In 1982 that line item was a bold stroke.
ROSEN: It was more than had been done before, and several companies actually did go bankrupt trying to emulate what we did at Lotus in the early days. They figured you just go out there and spend $3 million on an introduction, and that's the path to success. But it wasn't as much as they thought -- the perception was we spent that much. Actually, we spent only around a million dollars on the 1-2-3 introduction. The rest was done with mirrors. We got to the press, we got to the influencers -- the luminaries and consultants -- and created a swell of enthusiasm that fed on itself.
INC: Free stuff, in other words.
ROSEN: We're big on free stuff. When you don't have resources, you go for the free stuff.
On the face of it, a small company shouldn't be able to compete with a large company. The large company has all the advantages -- a well-known name, an installed base, financial resources, marketing clout, advertising dollars. Fortunately, the small company has advantages, too -- fast decision time, tremendous incentives to succeed (if it doesn't, it's out of business), its ability to attract creative people. But the levelest playing field is in public relations, where there's only a finite amount either can spend. We try to help out there.
