Paradise Lost

System Connection's Rick McCloskey wasn't the first founder whose company thrived on bootstrapping-nor will he be the last to learn how easily, and sometimes irretrievably, a bootstrapping culture can slip away

Even the modest comfort of Rick McCloskey's office embarrasses him, so he quickly explains that the desk came from a failing law firm and the new partitions were bought at cost from an office-furniture dealer that wanted a showplace in Utah for prospective customers to visit. The dealer paid for the wallpaper and wainscoting, too, and prints for the walls. Still, McCloskey thinks maybe he should have taken some decorating tips from Sam Walton, one of his heroes, whose company's offices were often made of unfinished plywood. He worries that System Connection's decor sends the wrong message to workers, contradicting the bootstrapping frugality that the company profited by in its early years, that it lost as it grew, and that it must now revive.

In the beginning bootstrapping was easy. It wasn't even a choice. When McCloskey started the company (first known as Dare Systems International), in late 1985, he was 27 years old and freshly arrived at Brigham Young University, in Provo, Utah, after converting to the Church of Jesus Christ of Latter-day Saints -- the Mormons. He was also essentially penniless. But he'd worked in California's high-tech industry long enough to be startled by the prices he saw people paying for computer cable at BYU -- $30 for stuff that cost $6 wholesale. And he figured he could sell enough cable at $16 to make more than any student job could pay him.

He began to buy small quantities of cable (or switch boxes or IBM cards or modems or other such paraphernalia) on a net-30-day basis, posting flyers on campus to advertise his wares and selling COD. "I was living like a student," he says. "And my overhead was so low, I could get deals." After he got married, in April 1986, he could travel to Salt Lake City to sell, while his new wife, Kim, fielded phone calls from a desk made of boxes and a particleboard plank in the kitchen of their tiny, inventory-clogged, one-bedroom basement apartment.

In 1987 McCloskey was joined in the kitchen by his high school friend Bob Sorensen, also a California high-tech refugee and also a convert to the Mormon church. "Rick is very much a penny-pincher, and I'm the same," Sorensen reasons. "I knew we wouldn't squander anything." Cash flow -- the fruit of McCloskey's frugality -- allowed them to buy larger volume from overseas at lower cost and better terms. The company took off: $600,000 in 1987, $1.4 million in 1988.

If they needed any bootstrapping inspiration along the way, the System Connection founders could turn to Mormon history. When the young church could no longer afford wagons to bring settlers to Utah from the East, 3,000 made the journey on foot, pulling handcarts behind them. The huge Mormon Tabernacle building is held together with wooden pins because nails were so scarce in the new land. Just as Utahans today invoke those stories as they face subtler social challenges, so do the managers and employees at System Connection address the challenges of fast growth by invoking their own early days.

There were the trips McCloskey made to Long Beach, Calif., where he picked up packages of cable from Taiwan, to save further shipping. And the night he ran out of gas in transit. With the needle edging toward empty at St. George, Utah, near the Nevada border, McCloskey pushed on to Las Vegas, where gas was cheaper. At 2 a.m., seven miles from Vegas, the truck died. He woke up Sorensen, who was sleeping in back. "Rick thought that if we could just push the U-Haul to the top of the hill, we could coast in," Sorensen recalls.

Or the time Sorensen and Dale Erling, now director of marketing support, set up the warehouse in Philadelphia -- the two of them building all the shelving, Sorensen spending nights in a sleeping bag on the warehouse floor and showering in a health club.

And there was the controversy over the three-hole paper punch that Sorensen bought a few days after he started full-time. "I was pretty upset," McCloskey remembers, "because we already had a one-hole punch." When Vonnie Koutz started as the fourth employee, in March 1988, Sorensen told her to save the tiny circles of paper that the paper punch made, joking that McCloskey used them as Post-its.

That bootstrapping ethic gave System Connection the flexibility to take risks that its competition couldn't and to reap the rewards. Because McCloskey picked up shipments himself, because he recycled scrap, because he bought wire at closeout sales for pennies on the dollar, he had cash available when the time came to invest it. When he foresaw the demand for small-computer-systems-interface (SCSI) cable, now a huge market, he was able to lease the necessary equipment to manufacture it. Meanwhile, competitors bought SCSI cable from him and resold it. Guess who sold more?

But McCloskey discovered that bootstrapping got harder as he grew. When he started System Connection, he and his partners knew what needed to be done, so they did it. There was no money to spend, so they didn't spend any. Motivation? They owned the dump.

With 100 employees, things were more complicated. McCloskey couldn't simply pine for more "self-starters"; he had to direct people. As Koutz, now head of human resources, says, "In the early days it was easy to be a self-starter. I sat outside Rick's office and heard everything, so I knew what had to be done. But we couldn't all sit outside Rick's office anymore." McCloskey also had to tell people why they had to pinch pennies, because the reasons were no longer so obvious. It looked as if there were plenty of money for one more three-hole paper punch.

Like most businesses that expand, System Connection needed to become more orderly to be efficient. It needed budgets, job descriptions, chains of command -- things that make a founder's skin crawl. McCloskey thought, and still thinks, that budgets give people an excuse to spend as much money as allocated, whether they need to or not, and job descriptions permit them to say, "That's not my job" when they should be volunteering to pitch in.

But as System Connection continued to grow (to $2.7 million in 1989 and $5.1 million in 1990), and as it outgrew the basement apartment and several offices and added dozens of employees, McCloskey knew he needed "to do some letting go." His partners offered not-so-gentle encouragement. While McCloskey was away on vacation, they removed file cabinets from his office, and when he returned, they told him he was giving up purchasing, at least.

Over the next few years he gave up a lot more, in three failed attempts to divest himself of the day-to-day operations and introduce greater controls in his company. And for a company built on bootstrapping, there were consequences McCloskey hadn't bargained for.

The man who inherited the file cabinets eventually inherited the president's title, too. Jon Tingey took over in May 1991, becoming responsible for day-to-day operations. The then-27-year-old M.B.A. believed it was time for System Connection to grow according to a plan, instead of entering every market it spotted. He introduced some management organization, even a budget. Meanwhile, the company took on increasing inventory, anticipating continued growth, and the economy stalled. As profitability plummeted, McCloskey balked and, less than a year later, resumed the presidency.

Next he turned to "the outsiders." Dan Ellertson came from Black Box, a high-end catalog retailer of connectivity products, to join System Connection as vice-president of marketing. Mark Seastrand came from MegaDiamond Tool, a manufacturer, to become vice-president of operations. Both of them refugees from companies much larger than System Connection, they would inject much-needed professionalism. They began in the spring of 1992.