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13th Annual Inc. 500: A Do-It-Yourself Guide

A quick introduction sampling what the 1994 winners of the Inc. 500 think about small-business success and growth.
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As interest in the Inc. 500 has grown over the years, so too has the scale of our coverage. Taking a page out of the book of many Inc. 500 companies, we've decided to do a spin-off of our own. This issue of the magazine is the first that's entirely devoted to the annual listing of America's 500 fastest-growing private companies. It is a special addition to our 12 regular monthly issues.

Maybe you're running a business right now, grinding away in low gear and wondering, "Why them?" Or maybe you're ensconced in the velvet coffin of a large corporation somewhere and all you can dream about is breaking out and making the list yourself one day. Perhaps you're one of the thousands who want a piece of the action -- who will prospect for a job or a hot sales lead or a blockbuster of an investment opportunity among the 500 growth companies heralded in the pages that follow. But then, maybe you're simply one of the cast: a founder of one of this year's Inc. 500 companies.

If you're more than a little curious about how companies grow (and no one -- not even a confirmed spectator -- can expect to prosper in the new economy without being at least interested), this elite corps of entrepreneurs offers a trove of advice about the business of building a business. So when you put this issue of Inc. down in an hour or so and resolve to start your own company, remember what the veterans suggest you do to win yourself a place on the Inc. 500 list, come the new millennium.

First, do what your parents told you to: stay in school, get a job, save your money. Yes, it's a drag, but if you look at the educational backgrounds and employment histories of the people who built this year's battalion of growth companies, you'll find few dropouts or neophytes. Nearly half the entrepreneurs on this year's list hold four-year degrees. More than a third hold advanced degrees -- and not necessarily M.B.A.'s. Jay Basil received his in dentistry. Today he runs FUNacho (#145), a nacho distributor. For most of the founders ranked here, building a company was hardly a first job. Or a second or a third job, for that matter. Most had experience in their industries, which enabled them to spy a niche in the first place, and then spent months preparing for the launch. The overwhelming majority had been managers elsewhere before becoming the bosses of their own shops. Indeed, more than 100 had done time in a Fortune 500 company before defecting to the Inc. 500. Moral: do a tour of duty at a megacorporation first. Among this year's group, the most popular alma maters were the downsizing duo of GE and IBM. If you're setting out to start an Inc. 500 company tomorrow, perhaps you should be working now at a next-generation titan such as Microsoft or Apple.

Then, start a business that goes nowhere. One that you have to fold or sell or liquidate. Preferably one that you run into the ground because you didn't understand cash (and you won't) or you hired the wrong people (and you will) or your competition ate you alive (it's been known to happen). That is ideal preparation for the Inc. 500. Half the entrepreneurs who earned a spot on the 500 this year have founded other businesses. A third of those businesses died untimely deaths. About half were sold. In short, the founders didn't necessarily get it right the first time. And they lived to sell another day.

When you do get around to getting it right, don't brave it on your own. As one CEO reminded us, "Business is hard." So call in reinforcements: partners. At least one, preferably two. And none of them friends -- although almost a third of the founders on this year's list counted their spouses as business partners. Be cautious about striking equity partnerships with people who will not be living and dying by the daily travails of the business. You'll have to "work your butt off," says Stephen Bernard, owner and president of Chatham Village (#33), so you may appreciate the company. And two butts, as they say, are better than one.

In assembling your founding team, include someone with a gift for finding and keeping cash. As Ken Marshall, CEO of Object Design (#1), informs us, "Cash is more important than your mother." It helps to have friends who are flush. Robert Benson of Lokring (#278) turned to 10 rugby buddies to pull together a quarter of a million bucks for his start-up. Most will not be so fortunate. While banks have demonstrated more willingness to lend lately, few have shown any inclination to supply debt without a history of positive cash flow to soothe them, our respondents warn. So expect to tap personal savings. Actually, within a few years you'll probably have drilled a pipeline through your passbook or borrowed heavily against your house. Stoking sales by spending on salaries and inventory may keep the cash tight even as you come into your high-growth glory. Finance will be the demon that keeps you up at night. So try to make a profit every month, says Pamela Coker of Acucobol (#226).

Of course, in the vise of a cash crunch, you will be able to fall back on your unfailing ability to sell. Nearly a third of this year's class cited sales and marketing as their greatest managerial strengths. Knowing how to inspire and lead was a close second. Over time, you will become profoundly dependent on a team of key people. You will wager the company on the quality of your people and your ability to motivate and retain them. As Daniel Gilbert of Rock Financial (#265) puts it, "Great people build the company for you. Lousy people ruin it." You will overcome your early aversion to firing people who don't work out, but you'll also develop a quality of mercy and learn to tolerate mistakes, "to be compassionate," says Ann Bailey of EcoChem (#327).

You will not start a computer-networking or -distribution business or a software company, which collectively make up a third of this year's list. Those businesses will be well past their prime for a start-up with grand ambitions, and growth, as a result, will be harder won. (See "Growing with the Flow," by Martha E. Mangelsdorf, [Article link].) That said, go ahead and do it. There is always room on the list for a contrarian who excels in a crowded field by changing the rules: a different pricing structure, a new distribution strategy, a superior product. But you're better off picking a market that is just about to take off than one that is soaring. Bring your own crystal ball.

Since the South is booming now, you might want to head west or find a comfortable spot in the heartland in which to headquarter your operations. California, which has been down so long, is due for a comeback. So is Texas. If you're planning to market locally or even regionally, look for big markets ready for a rebound.

Whatever nook or cranny of the market you occupy, government regulation will find you there. Regulation was most often identified as the number one enemy by this year's 500. Jittery about health-care reform, feeling bound and nearly gagged by red tape, these entrepreneurs bemoaned the burdens of complying with local, state, and federal mandates that often conflict with one another and that always cost money. So if you're starting the Inc. 500 company of the next century, you have two choices: you can either expect to shoulder the burdens laid upon you by Uncle Sam, or you can build a business that will lighten that load for others. That may, in fact, prove to be a perfectly appointed niche for a savvy start-up. Even if the word is now out. See you here in the new millennium.

Last updated: Oct 15, 1994




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