#1: Working a Deal
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Object Design was far from alone in its new market niche. To pull ahead of the pack, it focused single-mindedly on capturing the attention of some of America's best-known corporations
Part of the allure of the Inc. 500 comes from the vicarious pleasure of trying to deconstruct, after the fact, just what made these premier growing companies break out so fast. While there may be just tidal shifts in the overall list from year to year, it's a fact that each new number one company manages to wend its way to the top spot by an entirely different strategy from those of its predecessors.
For instance, last year's number one company, Drypers Corp., found growth in being a cheaper alternative in the diaper industry, putting up its dukes, and delivering Procter & Gamble a poke in the knee in the process.
Kingston Technology Corp., a manufacturer of gadgets that boost computer memory and processing power, sprinted not just to the lead position of 1992's Inc. 500 list but to the top of its industry sector as well by being faster to market with new products (and faster with customers' orders) than its rivals.
Gateway 2000, a designer and distributor of IBM-compatible computers and 1991's winner, was one of the shrewder number one companies. It owed its growth spurt in the crowded but expanding personal-computer industry to an amalgam of clever product design, competitive pricing, and from-the-gut advertising that played on the company's South Dakota Podunk persona.
And Cogentrix Inc., the top company in both 1990 and 1989, carved out its unprecedented consecutive number one spots by taking a perennial demand (electricity) and an oft-disregarded source (coal) and combining the two with new production and delivery plans (operate cogen-eration plants and sell power directly to utilities and manufacturers).
This year's winner, Object Design Inc., most closely resembles Kingston Technology in its climb to the top. Like Kingston, it's in a field of computer technology that can make you weep with bafflement if you're not part of the industry: Object Design builds software for object-database management. But the concept is easy to grasp: imagine computer screens full of photos and diagrams that a user can scroll through. Object Design sells the software that lets program designers build databases for those nontext images. In fact, Object Design's entire growth, its complete raison d'être for all six of its years, has rested on one product, a program called ObjectStore.
The young company's stature as a powerhouse in its field comes in part from the raw dominance of its technology over others, and in part from the creativity the company has shown in getting that technology into the hands of customers. As important, Object Design and its $3,500-and-up software program are in a niche of the market that is currently being touted as one of the hottest in computing.
"We haven't seen a small market so overcrowded since the early 1980s, when an excess of venture-capital enthusiasm created some 300 personal computer and workstation companies," effused the industry newsletter ComputerLetter this past spring. Venture firms have invested some $100 million in object-database software companies, which are vying for both legitimacy and market share in the industry. And according to the high-tech market-research group International Data Corp., all that money is going to a market that is only on the verge of blossoming: total industry sales in 1992 were just $36 million but more than doubled, to $76 million, in 1993. Many people are estimating that the market will reach $1.5 billion by 1998.
Object Design, with 1993 revenues of $24.5 million, is the market-revenue leader of the moment. With 253 employees (170 of them at the main office, in Burlington, Mass., and the rest at 18 offices around the country and the world, including Japan, Germany, the United Kingdom, France, and Australia), this year's number one Inc. 500 company is determined to stay at the head of the pack.
"This has not been an entirely friendly battle," says Ken Marshall, Object Design's 41-year-old president and CEO, who joined the start-up in January 1990, a year and a half after its founding. He knows from battles: he came from Oracle, a major database developer (and a member of the Inc. 500 Classes of '83, '84, and '85), where he'd been group vice-president for sales and operations for the eastern half of the United States, helping usher in Oracle's own growth in the late 1980s from $25 million to $1 billion.
Marshall walked into another intense situation. "Object Design pulled out to a very early lead in the marketplace," he says, "probably earlier than has happened in a lot of markets where you've got five or six new companies trying to position themselves at the top. We've become the enemy for every other company in the market because we're approaching 40%-plus market share, and they would very much like to see a more level playing field. As a result, everyone's got their guns pointed at us."
If Marshall's perceptions of animosity and envy seem extreme, think about it this way: Texas Instruments ($7.4 billion) has teamed up with Microsoft ($3.8 billion) to develop object-database technology. In the head-to-head battle IBM ($64.5 billion) two years ago picked little Object Design (then $0.0106 billion) to be its partner in the same task. For a competitor, what's not to hate?
It was a rapid ascent. The company was put together in mid-1988 by a group of database engineers who'd begun planning their own venture during meetings in one another's living rooms. Thomas Atwood, now the company chairman, got together Eugene Bonte, now vice-president of strategy and tools; David Stryker, now senior vice-president of engineering; and four other colleagues. The seven worked up a business plan on Macintoshes in their basements and attics.
Object Design's first stab at gaining legitimacy was to search out high-profile financing. Harvard Management Co.'s Aeneas Group (the venture-capital arm of Harvard University's endowment), the Vista Group, and Orient Ventures put up a total of $2.75 million in 1988 to launch the business based on its plan. The venture capitalists had found three things appealing: the object-oriented-database market, Atwood's reputation within the computing industry, and the team of people who had already come together. The financiers brought on Marshall, who had put out word that he was looking for an opportunity to move into a small, growing company.
Object Design missed being first to market but still took an aggressive approach in its pitch. Looking at who would buy the technology, the management team decided to target engineers, narrowing in more specifically on CAD (computer-aided design) engineers, and then aiming even more precisely at the top five CAD-engineering companies in the country. In an attempt to get those companies to incorporate ObjectStore into their own software products, Object Design set out to nail licensing and development agree-ments with them; it succeeded with three.
"Single-minded bulldoglike persistence is what differentiates Object Design," says Natasha Krol, vice-president and service director of advanced information-management strategy at the META Group, a research company in Westport, Conn. "And ambition. This is an extremely, extremely ambitious management team."
The company barreled into the marketplace partly on the basis of personality. "Ken Marshall came from Oracle, which has always been known for its strong marketing and sales strategy," says Krol. (Swearing he's not a type-A personality, Marshall will concede he's usually doing two things at once, either driving and talking on the phone, or going through his electronic mail while taking calls at the office.) And Atwood has a reputation for eloquence. Competitors were targeting the CAD market as well, but, says analyst Krol, "Object Design's team was much more persuasive; it had a vision of where it wanted to go."
The company barreled into the marketplace partly, too, because of its technology. Object Design's early releases came out on time and were well received; they went on to win the Readers' Choice award from the trade magazine DBMS (DataBase Management Systems, for the neophytes) for three years running.
But the company's early success came mostly from its fastidious strategizing. "Everything we did from a product-development standpoint, from a marketing standpoint, and from our sales-and-distribution network was geared toward bringing our product to those top five CAD companies," says Marshall. "Rather than sell to the 27th player in the market, we proactively went after those five."
The reasons were straightforward -- young businesses, especially in the computer industry, are known by the company they keep, and the second wave of sales would follow much more easily if the first wave went to brand names. The first sale, to CAD system designer Computervision, in 1990, was "hard, a killer," says Marshall. "And any first deal is a great one for the customer, because you're willing to do a lot to get it -- discounting, free support. We pretty much said, 'Tell us what you want and we'll do it, as long as you let us use your name.' "
Markets beyond computer-aided-design engineering opened up more quickly than the team expected. "Partly it was because the product was better than we thought," says board member Scott Sperling, a founding partner of the Aeneas Group and now a general partner with the investment firm Thomas H. Lee. "Software development is always late, and it always costs more than anticipated. But this one was on budget and came in in less time than anticipated -- a rare occurrence."
The company was prepared to take advantage of a receptive market. In extraordinarily short order -- about 18 months, between the end of 1992 and the middle of 1994 -- Object Design signed on a truly spectacular array of corporate partners. Intel, AT&T, Olivetti, Kodak, and IBM linked themselves with Object Design not just as customers but as comarketers and equity partners as well. Says Sperling: "Almost every one of our major customers has demanded to become an investor in the company. It's really quite an extraordinary situation."
Each customer had been sought out as an entrée to a specific market sector -- AT&T, for instance, to telecommunications and multimedia services; Kodak to computer-aided publishing; Intel to desktop computing; and IBM, well, to everything. "What IBM is is mainstream," says Marshall. "It's not as safe as it used to be, but clearly it has been a leader in providing management technology to Fortune 1,000 companies for the last 30 years. Our objective in developing a close relationship with IBM is really to make objects safe for the masses."
How does a barely-out-of-the-gates start-up get on a first-name basis with such towering technology corporations?
By being brash, to start. "I'd be surprised if Steve Mills, our chief contact at IBM, didn't say that we were incredibly obnoxious when we started talking to them," says William Blundon, vice-president of marketing. "We treated IBM as an equal, and we were far from that."
The IBM deal came after a number of corporate alliances were already in place. But the story of how that relationship developed is representative of Object Design's style. It is a story of aggressiveness, timing, well-tended early contacts -- and patience, lots and lots of patience.
"Our management team was off-site for a planning meeting down on Cape Cod in June of '92," says Marshall. "And we got an urgent fax from one of our sales guys, who'd just gotten wind of a major deal that was going to happen between IBM and one of our competitors. The deal was, according to him, a fait accompli, but he had gotten through to somebody on the IBM management team and arranged an audience the following Monday -- this was on a Friday." (Object Design was still smarting from having missed out on a relationship with Digital Equipment Corp. [DEC], which had aligned itself three years earlier with a competitor. "It was particularly galling to us," says Marshall, "because the competitor was a West Coast-based company, and we were 20 miles down the road from DEC. Our founder had even come from DEC.")
Over that June weekend, the group abandoned its original agenda. Instead it headed out to IBM's Santa Theresa Lab, in Coyote Valley, Calif., on Sunday night for the Monday meeting. "We met with a group of about 10 decision makers," says Marshall. "They were looking to form a strategic partnership with an object-database vendor. At the end of the meeting they told us, 'Nice try, but a little bit late.' We spent that week trying to figure out how to get back in there." Pleading its case by phone, the team was able to get a one-hour meeting the following Monday. On that same day, the IBM group recommended Object Design for the contract.
The triumph was particularly sweet for Marshall. "The CEO of the company that didn't get it used to be my boss at Oracle," he says. "When I first ran into him at a trade show after joining Object Design, he said, 'Boy, I really feel bad for you because you have kids.' I said, 'Yeah?' And he said, 'I don't know how you're going to send them to college.' So it was a nice personal victory, to put it mildly."
The initial agreement, though, was just a start: the real work took place in stages over the next six months. Eugene Bonte, the vice-president of strategy and tools, took on the negotiations full time for four months, as did an Object Design sales rep, who worked on what became a series of contracts. Every week, Bonte would travel to IBM sites with his laptop, sit in different people's offices, and work on a joint business plan. "We were working on Macintoshes, and they didn't have Apple laser printers, which meant we had to go to the local copy shop to print things," says Bonte. "The deal had a lot of moving parts, and we discovered you had to put everything in writing just so everyone could follow it."
At the same time, Marshall was talking to other companies that had formed partnerships with IBM to get their advice; Object Design also worked with Forrester Research Inc., a technical-research firm, to get an outsider's perspective on the industry.
The negotiations were mind-boggling; there were about a dozen separate contracts to execute, ranging from deals for equity investment and exchange of intellectual property to internal licensing agreements and templates for how to do joint development. Says Marshall: "We'd go to a meeting, and it would be me and our sales rep and our attorney, and 25 or 30 of them." That caused trepidation in and of itself: would everything the two companies did together require six levels of management and a battalion of legal toadies? Marshall had pangs of anxiety. "I was not interested in becoming roadkill on the IBM highway," he says.
Essentially, though, the negotiations went smoothly. "You work with calculators for a while, then you talk; you go calculate some more, and you talk," says Steve Mills, the general manager of IBM's $2.8-billion software-solutions division. "Ken and I agreed that our working relationship had to be grounded in a mutual focus on the technology and how we can leverage the technology."
IBM also was kicking in money (around $27 million), which gave it an undisclosed equity stake. (Seven corporate partners own a total of 30% of Object Design, and IBM's share is the largest.) And last year IBM ramped up the business it was doing with Object Design to between $5 million and $8 million worth.
It had been the "sales call of a lifetime" back in June 1992. On April 27, 1993, Object Design announced the alliance to the public.
"It was almost anticlimactic," says Marshall. "With small companies, a lot of times when you do a financing deal you work so long and so hard that by the time you get to the end you're just kind of sick of it and glad it's over." The impact, though, was huge. "This was at a time when we were ahead in the market," says Marshall, "but only slightly ahead."
Moreover, as important as the equity investment and the increase in business was to Object Design, probably equally important was the psychological impact of the alliance. "At the time, IBM was probably -- no, not probably, definitely -- the most significant of the partnerships," says Marshall. "It was very large, very visible, and kind of a watershed not just for the company but for the industry. It really established object technology and object databases as a real technology that people should stand up and pay attention to."
Now, a year into the association, Marshall is even more sure that beefy relationships with powerhouse companies distinguish the men from the boys in the high-tech world. "I really think, more so than in the past, that these relationships are the key," he says. "Industry just moves so fast, and there are so many megacompanies right now, like Oracle and Microsoft and Computer Associates and Lotus and Novell, that unless you've got big friends, you're always at risk of disappearing."
(Steve McClure, an analyst at International Data Corp. who follows the object-technology market, says that Object Design should give itself more credit. The IBM deal, he says, was important -- but it wasn't the only thing the company was riding on. "The investment from IBM was unique. But I also think the strong financial position Object Design is currently in is due as much to its own direct sales efforts as to the deal with IBM.")
But the company is still vulnerable. The object-database industry continues working on basics: that is, raising the comfort level of potential corporate customers. The marketplace remains a little edgy about the industry's technology, age, and size. Object-database management is still new to potential corporate customers, and the two share awkward embraces, like people who have only recently met. Object Design's biggest threat comes less from other companies also on this new frontier of software than from established companies' inertia, routine, and huge investments in standard relational databases like those sold by the $1.76-billion Oracle and the $426.7-million Sybase.
Object Design plans to spend 33% to 35% of its revenues on research and development this year, and projects sales of $30 million to $40 million. A lot of that money will go toward developing "tools" to make it easier for the non-techno-wiz to use the product. "We joke that we want to cut the average IQ of our customers by 40%," says marketing vice-president Blundon.
The potential spoiler looming on the horizon is Microsoft (another Inc. 500 alum, from the Classes of '84 and '85). "I think everyone in the industry has a certain mixture of fear and loathing regarding Microsoft," says Marshall, "although I'd add a lot of awe and respect, myself, for what it has accomplished." Microsoft has said it will create an object-oriented operating system by 1995, which prompts both love and hate on the part of Object Design. "We kind of go around and around on it," says Marshall. "As a $25-million or a $50-million or even a $100-million company, we don't want to be carrying the flag for objects. We'd like larger companies to do it -- companies like IBM and Microsoft, Oracle and others -- and then we can figure out how to capitalize on the markets they create by adding value around what they are doing." On the other hand, in the back of every software company's mind is the same fear: that "two years after that, Microsoft could decide to sell an object database for $22 that does 85% of what ours does."
That's part of the reason the venture-funded company hasn't yet gone public. Having raised $36.4 million, half of which has gone toward research and marketing, and with plans to pour more of that cash into R&D, marketing, sales, and further alliances, profits like 1993's $650,000 may get leaner this year and next. It's easier on management to be unpredictable in private than in public.
Staying private seems to be fine with investors. "We've exceeded all the targets we originally had for this company," says board member Sperling. "Every now and then you hit a company, like this, where your expectations start to grow. Our expectation is that Object Design could be a very, very successful company. So you adjust your strategic orientation, including potentially delaying a public offering, so that you can realize this potential."
"We're fortunate," says Marshall. "We've got 12 investors, 7 of which are corporate partners, meaning that they're using our technology as well as being investors, so their interest is more in having a good product and a stable company around that product. The venture guys are certainly motivated by return on investment, but because of the IPO market of the past two or three years, a lot of them are floating in cash. The good fortune they've had with other companies has taken some of the pressure off us."
The CEO of last year's number one Inc. 500 company liked to say that it's pressure that makes diamonds. For today, Marshall and his team think they'll stick with the pressure in the marketplace, and save for tomorrow the pressures of the public forum. "We could go public today and hit a home run," Marshall speculates, "or we could let this roll for another couple of years and hit a grand slam."