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Cardinal Technologies exemplifies all the characteristics that make for start-up success
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No one should be surprised at the accomplishments of Cardinal Technologies. If you looked for one company that exemplified all the characteristics that make for start-up success, this is the one you'd come up with

The RCA executives who bought their division when it went up for sale in 1987 would not have been pegged as likely candidates for self-employment. All had chosen large-company careers. Some had spent decades in the corporate cradle. None appeared to have an entrepreneur burning inside.

"It was always my dream to start a business. I just didn't expect to do it this way," says Harold Krall, 54, formerly a new-product manager at RCA and now chief executive of Cardinal Technologies. Like several other of the company's seven cofounders, he "grew up in a small-business family in which having your own business was considered normal. People who knew me knew I always said I would do it, even if they were beginning to doubt it."

The wait was worthwhile: Krall launched the right company. In five years the Lancaster, Pa., business has become an entrepreneurial juggernaut. Sales of Cardinal's modems, monitors, desktop systems, and other computer-related products reached $50 million in 1992. Employment tops 220. And make no mistake about it: the path Krall and his colleagues took before they founded Cardinal not only prepared them well for the marketplace but actually is prototypical of how the most successful start-ups in the country begin. Take a look at the demographic traits of start-ups that achieve success (see "The Eight Habits of Highly Effective Companies," [Article link]), and take a look at Cardinal. Without quite realizing what they were doing, the Cardinal founders set their company on a course that comes as close to guaranteeing success as any.

To start, the Cardinal founders had the most rudimentary elements down cold: they knew their industry, and they knew how to run a business. They launched with a full management team -- heads of manufacturing, engineering, marketing, sales, finance, and systems, as well as a CEO -- so that "basically, we just lifted ourselves off and became a company," says Krall. Not only had most of the partners, by coincidence, either grown up in family businesses or run companies themselves before their stints at RCA, but also they had been seasoned by running their corporate division with a fair degree of autonomy. "We were intrapreneurs at RCA," says Krall. "We had very firm credentials starting many businesses there; we had the skills to put a business together and knew basically what it would go through. And while we did that under the cloak of a big organization, where there was a safety net -- I mean, you didn't face loss of your personal assets if you failed, you just risked being terminated -- we did that for a long time."

Moreover, the Cardinal founders were already plugged into the industry. They knew suppliers, they knew marketing partners, they had contacts at other companies that would become their customers. Krall says past relationships were more transferable than he had expected, even though he hadn't consciously been constructing extensive networks. "In hindsight, we all were more proactive in developing relationships than we thought, even though we didn't see ourselves that way. We didn't understand that that's what we were doing."

Like the majority of highly successful start-ups, Cardinal started as a team and was the smarter for it. Management that was in place at the beginning would see Cardinal through all the needs of the start-up years. Of the seven cofounders, six are still active officers, and no new top managers from outside have yet had to be brought in to help the company shift from small to midsize.

Team management, though, has not been without its challenges. "It didn't relieve as much of the stress as I'd hoped," admits Krall. "For all the burden sharing that the partnering allows, there is an offsetting cost having to do with maintaining harmony and convergence of ideology and purpose. You have to spend more time arguing, disagreeing. Being a physicist, I see that it's hard to win: for every action there's an equal and opposite reaction. I'm not speaking against partners -- we've been successful, basically we've stuck together, and it's working -- but it was not free."

Few things are, and when it came to capital, Cardinal was also like many successful start-ups: healthy, but not extraordinarily so. The seven officers along with 13 other former RCA employees who joined on pooled about $800,000 of their own money to seed the launch. (From General Electric, which acquired RCA in 1986, they bought the intellectual rights to technologies under development in the New Products Division and the Display Systems Division, and factory equipment from a GE "Factory of the Future.") Again, like the majority of highly successful start-ups, the company has traded away equity for cash. Just 33% of the stock is still held by the cofounders; the rest was sold in pieces to raise a prodigious $25 million total from private investors. "Being the Pennsylvania Dutchmen we are, we were willing to give up some of our equity to maintain our balance sheet and not become as leveraged as many start-ups," says Krall. "We have a healthy apprehension about debt, and even today Cardinal has no significant long-term debt."

Of course, when the company opened its doors, it had no product, significant or otherwise. The engineering technologies it possessed at launch time still had to be crafted into salable items, and the company was toying with which to do first, its own line of goods or contract manufacturing for other companies. (It now does both.) Cardinal had the fortune, though, to be approached in its first year by a company that wanted a partner to help develop a few specific products. Even more fortunate for Cardinal, that company was Fuji.

Krall had dealt with some people at Fuji Photo Film USA in his RCA days, and one of them recommended Cardinal to another Fuji exec overseeing the development of digital photography and electronic imaging. "They were kind of shocked that GE and RCA broke up the way they did, and I think they saw us as still RCA but with a different name or something," says Krall.

Cardinal has gone on to develop alliances with other corporations including Prodigy, whose on-line service is bundled with some of Cardinal's modems. The two companies have forged a joint-marketing partnership, with Prodigy contributing marketing dollars to Cardinal's efforts. Cardinal, say those who have worked with it, is an aggressive partner, open to suggestion and faster than its peers at turning around everything from packaging to distribution.

"Not all the partnerships we've attempted to craft have worked," says Krall. "In fact, probably more haven't worked than have." Although Cardinal was formed by people who instinctively believe partnerships are good and can be made to work, sometimes the vibes just weren't right. "Usually, the failure occurs either because of a win-lose sense, where a partner thinks he's going to get a lot more than he's going to give, or because of the inability to couple the cultures of the companies -- where the partner sees things in a much different light, and you diverge in your ability to reach an agreement on anything you're going to do."

Walking away from a nascent alliance was hardest in the early days: "We were maybe more hopeful, more romantic, or more patient with the outcome of these things." Now, Krall says, he and his colleagues can sense almost at the first meeting if a partnership will work. "I believe these kinds of partnerships are going to become very prevalent in the 1990s, even though for many people they haven't yet worked. We've been able to move much more quickly than we would have without them, in that they brought a lot of confirmation and credibility and confidence to the directions we were taking. But it took finding the right people. Japanese companies, for instance, tend to be a bit more intrapreneurial than equivalent-sized American companies, and at Fuji we were dealing with the right people."

Like all start-ups, Cardinal has had its setbacks. After edging into profitability in 1990 (on sales of $33 million), it posted a $2.3-million loss on revenues of $43 million in 1991 and had another approximately $2-million loss last year. The problem, says Krall, has been that many of the materials the company has in inventory have dropped dramatically in price. "If we talk about earnings before these kinds of adjustments -- asset devaluation -- we were profitable in 1991 and 1992. But we took that devaluation on the P&L." He expects Cardinal to show a net profit in 1993, as early as the first quarter.

Earlier, in 1988, Cardinal entered into a major deal to be a supplier for Leading Edge, a computer manufacturer. Early the next year that company filed for bankruptcy. Cardinal had to lay off 35 people and had to deal with a loss of confidence as well. "It was a real challenge to maintain everybody's sense of well-being," says Krall. "But I think it also gave everybody confidence in our ability to recover."

It built confidence, too, in the basic premise that a young U.S. company can effectively compete in the global high-tech marketplace. Cardinal uses robots and computers for everything from design to manufacturing, and as a result is producing close to $230,000 worth of merchandise per employee, while "IBM, DEC, and GM struggle to get even $175,000 per employee," maintains Krall. (IBM edged up to $188,000 per employee in 1992.) "The automation many people thought didn't work in the 1980s is working here. The difference is in the culture and in creating an environment where people are motivated to make automation work."

Perhaps the key to what made Cardinal most likely to succeed is, in essence, this: it didn't look like a start-up. The principals were too experienced to be taken for novices, even though their venture was new. They already had the trust of too many potential partners to be deigned nonplayers. They quite naturally merged into that nebulous thing called "the global economy."

The key was that although the start of Cardinal Technologies was probably as traumatic for the people involved as any start-up is for any founder, to the rest of the world the company was just the next face and conduit for the talents of this group of people -- a seamless transition from what they had been doing in the past to what they were going to be doing in the future.

Last updated: Mar 1, 1993




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