At the Crossroads

The founders of Independence Technologies, flush with initial success, now confront the decisions about capital, management capabilities, and growth ambitions that have wrecked so many fast climbers before them. Here, Inc.'s ad hoc advisory board weighs in

THE RULES

The Challenge In the course of a one-day strategy audit, advise start-up founders how to (1) maximize their net worth, (2) cash in their rewards, and (3) keep from making knucklehead moves in the meantime.

The Challenge Takers (1) A Silicon Valley deal-making lawyer, (2) a director of an active investment bank, and (3) a general partner of a Big Six accounting firm.

The Founders Three middle-aged engineer-buddy middle managers from a large corporation.

The Vehicle A three-and-a-half-year-old bootstrapped computer-systems developer in a hot new field, with annualized revenue growth of 68%.

The Setting The company's corporate offices in an East Bay industrial park near San Francisco; mineral water, sandwiches, recording tape abound.

The Session Three founders present history of the company, discuss intentions, and disclose financial, operational, philosophical details as needed; three experts ponder company's future.

The Result Inc. condenses eight hours' worth of experts' deliberations, publishes highlights here.

Started in may 1988 by Kalyan V. Krishnan, Jeff Stern, and Michael L. Dierker, Independence Technologies Inc. (ITI) has been entirely self-financed ever since. As of mid-1992 the company had no venture investment and no bank loans. Yet by 1996 the owners expect to have exceeded $100 million in sales and to have reaped their just rewards. "Our wives," they concede, "keep asking us, When are we going to get some money out of this thing?" Put to upper-management novices, it's a legitimate question.

ITI is already a leader in the burgeoning market variously called "open systems," "software reengineering," or "object oriented." The company designs and implements on-line transaction-processing (OLTP) software products and services. Generically, OLTP manipulates masses of data from hundreds of simultaneously active input locations and might be used, for example, in airline-ticketing and car-rental agencies, and banks. Once the turf of expensive mainframes, that market is now open to low-cost alternatives. ITI's main distinction is that, unlike other OLTP software (including products from established competitors like Unisys and Oracle), ITI's isn't restricted to a given hardware technology -- hence the corporate name.

ITI's first OLTP product was paid for by the company's first client, health insurer Blue Cross and Blue Shield of Philadelphia, which hired the three (then) engineers to develop a turnkey informational infrastructure. Not only did that consultation seed the start-up with $10 million, but the installation served as a cost-free sales demo, attracting a dozen major customers to ITI's leading-edge capabilities.

Sales momentum rapidly pushed the organization into engineering. Now numbering more than 100, staff engineers were recruited on a project-by-project basis, delaying the founders' intent to structure the enterprise as small groups focused on specific types of products. Instead, each project has been booked as a discrete cost center, so consistency of pricing is elusive. So is consistency of customer: "Should we go after a few $150,000 accounts, or lots of $20,000 ones?" the founders ponder. Partly to entice customers into one-stop relationships, and partly because it's "such easy money," the company acts also as a reseller of the computer hardware its software runs on. That relatively low-margin source of income has been responsible for an increasing percentage of total revenues. Even so, ITI has been able to sustain pretax margins within pure-software industry standards.

Following a break-even strategy calculated to leave competitors in the dust, management plows all profits back into the company, mainly into marketing to boost revenues. Despite such hectic spending, ITI's balance sheet has remained "very clean and very boring." But the founders are tempted to sully it at last with a couple million dollars of outside financing to "propel the company into a prominent position." With the help of someone else's money, they'll be able to cement their hold on a 10% share of an OLTP market expected to be worth from $1 billion to $5 billion in 1995. If they don't take in more money, however, they're guaranteed control, and they won't be dictated to by -- or, worse, risk dismissal from -- outsiders.

To reach and maintain that level of market share, the founders are shifting slowly toward an emphasis on "shrink-wrapped" retail products. (See financials, page 5.) They already have a jump on the field: one early packaged offering, an OLTP-applications-development tool kit, was a "best products of 1991" selection of a leading technical magazine. But it sells for prices starting at $10,000 -- grist for a direct-sales force. A wide retail market calls for prices less than $1,000 and the ability to distribute product.

Ahead of product development, expansion of sales and marketing is likely to sop up any capital infusion. At the start of '92, ITI had only three direct-sales offices in the United States, plus one overseas presence, a Finnish franchisee. Indirect sales and distribution channels had yet to be faced up to and budgeted for -- or even understood. "What we're most scared about is telemarketing and retail," the founders admit. "Those are models we confess we don't understand."

They also confess to "not knowing anything about accounting" -- a stubborn seat-of-the-pants posture for a company going on $20 million, in that it lacks a chief financial officer and much of a finance department. It also lacks a board of directors and a layer of middle management. The three founders are accustomed to doing everything themselves -- engineering, sales and marketing, product development, contract negotiating. "In the old days," they complain, "we were involved half the day in engineering discussions. Now we don't have any engineering discussions." Clearly, they're running out of time.

Nonetheless, as one expert was moved to declare at the close of the exhausting session, "You have thought through your strategy and business orientation more thoroughly than most start-ups. You have an unusually deep understanding of the principles that will guide your future. It's rare for a bootstrapper scrambling to meet payroll to have this degree of thoughtfulness. This is a big company in the making."