Profile of computer companies from the Inc. 500.
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How many times in recent years has the press proclaimed the end of the computer industry's go-go era? Way back in 1983 Business Week told us that IBM and a few other giants would be dominating personal-computer manufacturing -- no openings for new companies there. And just a couple of months ago the Wall Street Journal announced that the software business was consolidating. "I don't see major opportunities" for start-ups, one expert said. The refrain is familiar. Growth in computers is slowing. Smaller companies are being squeezed out. Entrepreneurship? Forget it.
And yet every year more than one-quarter of the Inc. 500, the fastest-growing privately held companies in the United States, turn out to be in the business of providing the hardware, software, systems, technical expertise, and everything else required for the computerization of the world's homes and workplaces. Year in and year out, company builders seem to find in computers widening niches that others have somehow overlooked, and they create businesses that can hardly keep up with demand. Admittedly, the companies on the Inc. 500, which by definition are at least five years old, aren't last week's start-ups. Even so, the fact that so many young enterprises keep growing suggests that there's more to the business than meets the media's jaundiced eye.
The 135 computer-related companies on this year's list are sprinkled all over the industry's map. A few, like top-ranked Gateway 2000, make PCs. Another dozen or so manufacture components and peripherals -- circuit boards, cables, networking devices, add-on memory. There are retailers and distributors, systems integrators, consultants and trainers, maintenance-and-repair specialists. And oh, yes -- there are software developers. Numbering about 50 (thus accounting for one-tenth of the list all by themselves), the software companies provide programs for supermarkets and science labs, for logistics specialists and land planners, for UNIX users and Macintosh mavens and DEC devotees. The aptly named Incredible Technologies (#64) even designed the software for Chicago's BattleTech Center, a futuristic dream world that lets adolescents (of all ages) enter a Star Warslike battlefield and blast away at opposing players.
Like the rest of the 500, the computer-related companies on the list have experienced blistering growth. American Megatrends (#2), a manufacturer of the printed circuits known as motherboards, zipped from less than $200,000 in 1986 sales to nearly $45 million in sales last year. Liuski International (#345), a distributor of PCs and components, ballooned from $12 million to almost $130 million. Even the most modest ventures have undergone a sometimes-bewildering expansion. Small Systems Management (#461), a maintenance and sales company started in 1985 by two young men right out of college, had revenues that rose more than eightfold between 1986 and 1990.
How can such growth coexist with the corporate power and consolidation tracked by the pundits? News reports on the industry naturally focus on its biggest, most visible players -- IBM and Compaq's joint 23% share of PC manufacturing in the United States, for example, or Microsoft's 32% share of the world software market. Were computers a traditional mass-production business, those shares would probably grow, and smaller players would find themselves relegated to the sidelines or the grandstand. But computers aren't like cars; their value derives not just from mass production but from customized configurations of hardware and software. Small companies with specialized, close-to-the-customer knowledge can thus create their own growing markets, well away from those dominated by the giants.
In PC manufacturing, for example, booming upstarts such as Gateway skirt the shadows of IBM and Compaq by targeting knowledgeable, price-sensitive buyers. (See "Betting the Farm," [Article link].) Even smaller manufacturers such as Daniel Armbrust's Softworks Development (#29) can carve out rapidly growing segments of the market simply by serving particular sets of customers. Armbrust sells his Citus line of IBM clones to customers such as a nearby value-added reseller who provides turnkey systems to hospitals. Softworks' competitive edge: the ability to provide buyers with the exact configurations they need, within 48 hours if necessary, and at a price lower than that of any big national marketer.
In software, too, specialized knowledge and service frequently count for more than sheer size. Lori Sweningson's Job Boss Software (#336) sells a proprietary program for quoting, job tracking, and accounting to job-shop manufacturers all over the country. That's a market, says Sweningson, that large producers of manufacturing-management software haven't had much luck in; their programs are all designed for bigger operations. Roger Nelson's System Innovators (#182) provides specialized cashiering programs to utilities, government tax-collection agencies, and other customers that must collect previously generated bills. "It's a different kind of transaction than retail," says Nelson, explaining that his system tracks items such as late payments and delinquent charges. Yet most large-scale cashiering systems are designed for conventional retail applications.
Maybe, of course, it's only a matter of time before the Microsofts of the world snap up or shove aside these niche marketers. Even so, the computer industry as a whole won't be any less entrepreneurial, simply because it's so far away from maturity. Computers aren't like TV sets, which zipped from first use to near-saturation in a decade or two. Rather, the process of computerization is like the process of electrification, which took decades to reach any kind of maturity. Not until the mid 1930s -- half a century after the first generating stations -- did even two-thirds of American homes have electricity. And how long must it have been before companies were created to, say, manufacture patio lighting or install electric air conditioners?
Today more than one-third of small businesses still don't have personal computers. Neither do the millions of households that may someday want one. So purveyors of home and small-office software, such as Intuit (#47), still have a huge untapped market. Then, too, the hundreds of nooks and crannies that characterize fully mature marketplaces -- those air-conditioner installers and patio-lighting manufacturers -- have only begun to open up. Consider a trio of examples from this year's 500:
* InfoSource (#268), founded in 1983 by Michael Werner and Thomas Warrner, began its corporate life as a run-of-the-mill computer-training firm: the founders traveled all over the country giving workshops and seminars. But why couldn't training be done on the machine itself? It was an interactive apparatus, after all, and from a customer's perspective, computer-based training would be easier and cheaper than daylong seminars. Intrigued, the founders began developing disk-based tutorials for hot-selling programs such as Lotus 1-2-3. Today the company has about 20 products, some 60,000 customers, and little across-the-board competition. "There's no 'name' company in the business," says Werner. Then too, InfoSource provides a service that the big software developers would just as soon forgo. "There's such a rush in the software business to get new products out," Werner explains; no company wants to take the time to prepare a tutorial.* * *
* Impact Printhead Services (#87) started out as a general computer-repair company; founder David Gillett repaired the occasional dot-matrix printhead, along with disk drives and monitors. Then Gillett developed an add-on component for the Macintosh that he tried to market nationally. He found no takers. But the dealers he mailed to did respond to a little notice at the bottom of the brochure mentioning that Gillett's company also refurbished dot-matrix printheads. Today the Mac product is dead and general repair a thing of the past: Impact will do an estimated $7.5 million this year solely as a remanufacturer of dot-matrix printheads. Among its clients are Ford Aerospace, Lockheed, and several third-party repair companies responsible for maintaining corporate America's computing systems.* * *
* Sean Repko, founder of Exsel (#298), wanted to sell used computers, but not the same way the dozens of tiny exchange services springing up around the country did. On the contrary: he would buy in large lots, remanufacture the computers and issue new warranties for them, then sell through the mail at prices no new-computer dealer could hope to match. Then, just this year, IBM announced the computer industry's first trade-in program: like auto buyers, customers can bring in their old machines and walk away with new ones. And who will be refurbishing and reselling the old computers? "We just signed a national agreement with IBM," crows Repko. "Its 3,000 retailers out there? All their used equipment will be picked up and sold by Exsel."
What's striking about the computer business is how easy the Inc. 500 entrepreneurs found it to enter -- and how many opportunities for growth presented themselves along the way. Marc Greenberg and Geoffrey Snelling of Small Systems Management started with $920 and little business experience; their chief asset was a willingness to listen to (and learn how to solve) the variety of computer problems their small-business customers encountered. Daniel Armbrust of Softworks Development was a college dropout with $600 in his pocket when he set up shop. Gregory Jameson, founder of LANDCADD (#464), was pursuing a professional career as a landscape architect and developed his land-planning program in his spare time.
Despite such beginnings, many of the young companies have expanded overseas. LANDCADD, for example, expects to collect more than one-third of its revenues this year from foreign sales. And several of the companies have moved almost effortlessly from one product to another. Armbrust began in software, as his company's name suggests. But when his cash flow began to dry up, he segued smoothly into hardware manufacturing. Incredible Technologies, the software company, started out in home video games, won the contract to develop BattleTech Center, and moved into the development and manufacturing of coin-operated video games -- now, it's creating computerized point-of-purchase displays for the likes of USG, the building-materials giant. "We're going to keep advancing our technology," says founder Elaine Ditton. "I see us continuing to grow."
Maybe someday all this growth will truly slow down: the industry really will mature and consolidate, and computer-related companies will be overrepresented on the Fortune 500, not the Inc. 500. That day, however, isn't right around the corner. For at least the next couple of decades, entrepreneurs who are looking for fast growth will still be placing plenty of bets on the not-yet-moribund computer business.
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The industries that growth companies love
The quickest route to membership in the Inc. 500? Build your company in an industry that itself is booming -- an industry where no one loses sleep over market share, because the market as a whole is expanding so rapidly. Computers are the obvious case in point. (See "Hot Markets," [Article link].) But several other industries also have proved to be engines of growth over the past half-decade, as evidenced by the makeup of this year's 500:
Environmental services. From Delta Environmental Consul-tants (#19) to Marine Shale Processors (#476), some 30 companies make their living in environmental analysis, hazardous-waste removal, and a half-dozen other businesses spawned by modern ecological rules and procedures. Niches you didn't know existed: Environmental Remediation (#370) is the United States' largest supplier of the bacteria used in waste-water treatment plants. Growing and selling the bugs accounted for 40% of the company's $12.8 million in fiscal year 1991 sales.
Health care. New technologies offer opportunities for growing businesses: just ask $36-million Maxum Health (#25), which provides magnetic resonance imaging, CAT scans, and renal lithotripsy (dissolving kidney stones with radiation) in 21 states. But the United States' voracious health-care marketplace also creates niches for companies such as PPOM (#154), a network of health providers that promises to cut insurers' costs, and American Biodyne (#349), which operates managed-care mental-health programs. All told, 28 of this year's 500 are in health-related fields.
Personnel management. About a dozen Inc. 500 companies are in this narrow but blossoming business: temporary-help agencies, employee-leasing companies, payroll-services providers, and so on. First Benefit (#255) administers employee-benefit plans. Amstaff (#466) operates as an off-site personnel department. Unlike in the past, temp agencies don't just provide secretaries and hourly workers; Lab Support (#62) can send over analytical chemists, molecular biologists, and dozens of other highly skilled professionals for temporary work.
Other business services. The 120 companies on this year's list are hard to classify -- but overall employment in business services nearly doubled during the 1980s, a sure sign of a booming market. Inc. readers looking for vendors among this year's 500 would find public-relations agencies and printers, consultants and cleaning services, day-care centers and direct-mail experts, travel agencies and time-management specialists. Creative Marketing Incentives (#191) will organize a board of directors meeting or any other event your company might want to sponsor. Insta-Plak (#416) will commemorate the event with photographic plaques made on the spot.
To be sure, not every hot market will show up in the stats. Nature's Recipe Pet Foods (#170) began operations 10 years ago with an original line of meat-and-rice dog foods. Now, says founder Jeffrey Bennett, it has 13 or 14 competitors. Who knows? Maybe a couple will make 500s of the future.