Company Profile: Crash Course
In 1990 Radar Control Systems was an obscure and productless R&D company -- and all but dead. Then a professional entrepreneur took the wheel and built a robust business that's outpacing the likes of General Motors, Ford, Rockwell, and TRW
Don't get so caught up in business details that you can't sustain your vision, and don't get so drawn into the vision that you can't make a business of it. If you insist on vision only, the risk is, you never escape being a small company trying to do it all."
-- Paul J. Bouchard* * *
It was no accident that Paul Bouchard accepted the position of chief executive officer of Radar Control Systems (RCS) in 1990. He was in a Lincoln Towncar hurtling along Interstate 5 in San Diego when the vehicle in front of him slammed on its brakes and nose-dived to a sudden stop. "I felt this chattering," Bouchard recalls. "I was sure it was my teeth saying good-bye." The sensation actually was the Lincoln's antilock brakes saying hello: the Towncar had slammed on its brakes, too.
Outfitted with the latest in automotive collision-avoidance technology, the Lincoln was responding to an RCS-developed radar transmitter-receiver in its grillwork, which had scanned traffic conditions down the road and sent real-time data to a computer processor. Intricate software had identified the car ahead, calculated the rate the Lincoln was closing with it, concluded that both vehicles would be accordioned into scrap unless something was done, and fired off a signal that automatically applied the Towncar's brakes -- all before the swiftest of human feet could have begun to stir.
Bouchard's 42-year past may not have flashed before his eyes, but his future did: let's see, if every car in the world were equipped with this device, there would be no accidents. . . . 8.5 million new cars are sold each year. . . . RCS could sell its invention to automakers for maybe $500 each. . . . Bouchard sponged his forehead and announced to his fellow riders, "OK, I'll take the job."
His companions, a pair of executives from Allstate Insurance Co.'s Product Development investment arm, mopped their brows as well. The job in question involved Bouchard's taking over the administration of RCS, an obscure research-and-development company vying for a place in the emerging market for intelligent-vehicle highway systems (IVHS) -- a market that was also likely to garner its share of federal funds. The San Diego-based company was going up against the R&D labs of huge corporations -- Ford, General Motors, TRW, and Rockwell among them. As the major backer of RCS for the past two years, Allstate was about to throw in the towel when, after two decades of tinkering, RCS's founder had yet to come up with a commercial product. As a last try at establishing a beachhead in the soon-to-emerge multibillion-dollar market, the Sears-owned company hoped to lure entrepreneur Bouchard from Boston, where he had just founded his own traffic-advisory-service company.
In October 1990 Bouchard crossed the Great Divide. On the other side awaited what he deemed "an inventor culture -- technology plus opportunity -- that no one had pieced together. To the extent that the IVHS industry had developed, I knew as much about it as anyone, because there wasn't yet that much to it. The founder had invented and engineered the product; I'd invent and engineer the company."
Not so fast there, Bouchard. Here are the components he inherited:
Prepaid expenses and other current assets $76,155
Total current assets $270,552
Accounts payable $47,286
Accrued payroll $259,732
Other accrued liabilities $32,692
Current portion of long-term debt $46,307
Total current liabilities $386,017
Long-term debt $1,949,022
Revenues (fiscal year ending 10/31/90) $180,000
Expected value of market within 20 years $200,000,000,000
Number of customers 0
As if those numbers weren't discouraging enough, the radar sensor's housing was too big to fit into a passenger-car bumper, its parts were too fragile for the rigors of winter, and its protuberant parabolic surface curiously inspired passersby to test-kick it as if it were a tire. But RCS's product worked, which was more than any competitor could claim. "There's nothing like being first," Bouchard exulted -- for the cashless moment.* * *
"Perception is reality. When you're a pioneer playing with established big guys and you create momentum in the perceived leadership role, be nervy enough to fling open your doors and let them see in. Then be capable enough to keep them open. If you claim you're doing a certain thing and then have to duck down and hide, no one will believe you from that time forward."
-- P.J.B.* * *
Among the new CEO's first steps was to dismiss the company's local auditor and install Big Six accountant Ernst & Young. Not because the local firm had been the bearer of bad news, but because a Big Six firm will cut deals for small companies, reducing bills and deferring costs in the expectation that the acorns will grow and buy services at normal rates. Such arrangements are venture capital of a sort, Bouchard holds, and when he went after real capital, investors would feel more comfortable with a Big Six firm behind the numbers.
Among the accounting firm's first steps, in turn, was officially warning stockholders that "the Company has a net capital deficiency [of $1,808,942] at December 31, 1990. This condition raises substantial doubt about the Company's ability to continue as a going concern." The caveat contradicted inventor-founder John W. Davis, who in a business plan composed just a few months before had asserted that with the product "priced at $500 per unit, revenues from sales and installations could easily increase to one billion dollars within ten years." In a perfect world, where original equipment manufacturers reach decisions in a week, competitors are compassionate, and lawyers sue only with great reluctance, Davis would have been right; but shown that in reality his company was way behind, with meager prospects of catching up, he amicably departed.
Bouchard realized he needed to dress up the company so outsiders would perceive it as a substantial entity -- something it was lamentably short of being. "I wanted the image -- from logos and literature to the way people dressed and answered the phone -- to come across as a bigger company."
Bouchard calls the technique "polishing" -- just making things shiny, not fake. RCS's world headquarters, then a dingy machine shop, was a prime candidate for the treatment. Neat premises not only impress a company's visitors, Bouchard believes, but inspire its employees to higher productivity. But you can carry the concept too far. "Small companies tend to go for lavish facilities because that's how to impress investors. Then the reaction that crosses investors' minds is, 'So this is how they waste their money!" Bouchard rented a warehouse-type facility in an office park for 60¢ a square foot per month. "I could have got something in the low forties, but you wouldn't have wanted to bring someone there," he says.
Next came a reorganization. The off-putting sound of "Radar Control" had to go. Radar hinted at police speed traps and the need for constant vigilance; control suggested unwilling constraint. RCS's product (when it came out) would convey the opposite -- worry-free driving. Bouchard devised the acronym VORAD to stand for "vehicle on-board radar," and rechristened the company VORAD Safety Systems. Within the year a document published by the federal Department of Transportation listed the acronym VORAD in a glossary of generic terms associated with the IVHS industry. While Bouchard was at it, since the name IVHS remained commercially unclaimed, he claimed it. He incorporated IVHS Technologies to obtain "a name that immediately tells the story of what business we're in." As such, IVHS Technologies would be the enterprise's parent, a holding company through which to raise money for fueling operating-company subsidiaries within.
"It was obvious we couldn't make a $100-million business out of VORAD yet -- the market was too far away," says Bouchard. "But if we didn't put our stake in the turf here and now, when the time came we wouldn't even be a contender." The way for a small company to look like a contender, he determined, was to become affiliated with one.* * *
"Consider strategic partners over straight venture capital. It's not as quick a process, but you end up with a higher valuation and less dilution. Find a strategic partner who not only will invest money but will actively step in and take you where you want to be."
-- P.J.B.* * *
Bouchard sought to convince a big-league player that it needed VORAD as much as VORAD needed it. The unwitting candidate: Eaton Corp., a $4-billion truck-component manufacturer and distributor listed on the New York Stock Exchange. Eaton, he had heard, was interested in the technology but didn't have the in-house capability to pursue it. "Having a tier-one supplier is an important part of the equation" for a company like Eaton, Bouchard believed. But from Eaton's perspective, VORAD was tier zero. VORAD's calls and letters went unanswered. But didn't Eaton also use Ernst & Young? Eureka! "I approached E&Y and they said, 'Sure, we can get you in."
Eighteen months later, in February 1993, Bouchard signed an intricate, nine-inch-thick investment document -- a supplier agreement and a preferred-shareholder agreement, with first-rights conditions, and who would do what for whom and how much each would get for it, and so on -- with Eaton Truck Systems, a Cleveland subsidiary of Eaton Corp. "They were actually eager," Bouchard marvels. "They realized it would take a couple of years and tens of millions of dollars to get to the place we already were. In the process, we took out a serious potential competitor."
Also investing in VORAD was M/A-Com, a $341-million microwave manufacturer from Massachusetts, plus Chicago's Allstate. The ownership flowchart twists like this: In parent IVHS Technologies, Eaton owns 26% of the stock; Allstate owns 28%, converting to equity the principal and interest RCS owed it (thus wiping out all debt from the chain). M/A-Com owns 10%, and the founders and management own the remaining third. At the next level, IVHS Technologies owns 100% of developer-manufacturer VORAD Safety Systems (the original Radar Control Systems), which connects with Eaton to form a 50-50 joint-marketing venture called Eaton VORAD Technologies.
Why three investors? "Let's not get only one investor and allow that one to dominate, at least not until we get the thing further along. Let's first create as much value as we can for ourselves," Bouchard thought. With three deep-pocket contributors, the 1993 package was worth an estimated $20 million, and when the deal had been consummated, the valuation of the company was $32 million, of which founders and management owned some 35%. "The gnat," pronounced Bouchard proudly, "has swallowed the camel!"
But to get it down, the gnat had to give up control, a diet that entrepreneurs typically reject. But, Bouchard asked, isn't it better to have these companies as allies than to go head-to-head against them? "No young company with a market or technological lead admits anyone else can catch up. At first, neither did I. But the reality is, they have the horsepower to, and they eventually will," he says. A competitor looking in now, however, had to admit it was VORAD who had harnessed the horses. "When you have behemoths like a $16-billion Allstate and a $4-billion Eaton on your side, the competition isn't going to take shots at you. If we tried to do it ourselves, we might have retained control, but at the end of the day we were going to get run over by 800-pound gorillas rushing past us to the finish line."* * *
"It's easy for a small company to fall into the R&D trap of trying to invent the ultimate product. What typically happens at R&D-driven companies is, work never gets finished. I've known some who've had a great idea, hunkered down to develop it further, and when they finally stood back up, found that the rest of the world had gone past. The rule is, Get it out there, learn from it, and then come out with another version."
-- P.J.B.* * *
How did VORAD, flat broke and outgunned, attract such big-time spenders? Let's return to the fall of 1990, when the board of directors (since reshuffled) rationalized to Bouchard that the reason there was no product after 20 years was that the radar-sensor element was still too big and too costly. "Freeze this eternal tinkering and make the thing salable now," Bouchard insisted. "We'll find out how to make it $25 cheaper and half an inch shorter later." Not too much later, however. "In order to keep the lead," he says, "we had to be perceived as being in the lead." And that meant finding someone who had both engineering zeal and respect for the exigencies of the marketplace.
Within six months, by mid-1991, with Allstate supplying go-ahead capital as needed, vice-president of engineering and product development Jerry D. Woll, a military-radar expert grabbed by Bouchard from the area's ever-downsizing defense and aerospace industry, had commercially modernized the apparatus. At that point, with VORAD quietly working with the University of California at Berkeley, Bouchard thought the company's automatic-braking technology was field-tested sufficiently to chance inviting then secretary of transportation Samuel Skinner -- in San Francisco to celebrate the region's progress in highway-safety technology -- for a ride.
Hired especially to get IVHS Technologies' and VORAD's names into print as often and as sensationally as possible, high-tech public-relations specialist Ralph Silver delivered a throng of expectant journalists as Bouchard and Woll shined up the trusty Towncar with its new and improved innards (now digital rather than analog, reducing the part count) and drove it to a closed stretch of highway in San Francisco. Fail here, thought Bouchard, who'd been on the job for a mere nine months, and he might as well keep on driving -- off a cliff.
The accelerator was turned over to Skinner, who revved up the engine and, like a gray-suited Evel Knievel, gamely aimed the Towncar at a target car in front of the media entourage. The front page of the July 20, 1991, Chronicle carried an item headlined "Radar Rescue." The piece read in part, "A Bush cabinet secretary risked his life in a demonstration of new safety technology for cars. . . . [The car involved] was equipped with an IVHS system known as VORAD . . . that automatically stopped the swiftly moving vehicle, just in time to avoid what might well have been one of the most publicized crashes in history." Was Skinner scared? "Yeah, I was nervous," the secretary admitted.
And Bouchard? "Terrified," he later confessed. VORAD's daring was calculated to rattle the other would-be market sharers, revealing that some thitherto-unknown upstart was way ahead of them. But being the leader has a drawback, Bouchard discovered. With no one to follow, even a radar developer flies blind.
"We needed to have the system evaluated by honest-to-goodness customers," was how he saw the next step. "It's the nature of engineers to think they know what the thing should look like and how it should work, without ever talking to end-users. But the product stands to invade those cocoons of quiet that Detroit is turning out. Would drivers accept the lights and beeps? Would they allow a machine to operate gears, to apply brakes? And none of us understood the price threshold. What would a buyer be willing to pay for a warning system?"
Seeking fast answers, VORAD approached just-out-of-bankruptcy-court Greyhound Bus Lines, then suffering an unusually high accident rate and itself seeking national PR, to serve as a beta tester for warning-only (not automatic-braking) systems. The company agreed to install prototypes on four buses. The units used bright lights and assertive beeps to advise drivers on such matters as when they were following too closely or when there was a vehicle in the bus's right-side blind spot. They also recorded a running 10 minutes' worth of the given driver's steering, shifting, and other operating maneuvers.
The invention would reduce accidents by 25% to 40%, Greyhound calculated. It would pay for itself within the year. Greyhound retrofitted the remainder of its fleet of more than 1,600 vehicles with VORAD systems at around $2,000 each. It decorated the outside of every bus with a message declaring the vehicle equipped with radar collision-avoidance technology, providing what amounted to free national advertising for VORAD. By now a veteran at promotion, VORAD enticed Bush's new secretary of transportation (this time the gentleman's name was Andrew Card) to a press conference in April 1992 announcing the sale. The first sale to an entire commercial fleet by a developer in worldwide IVHS ranks, it jump-started what was to become IVHS Technologies' first million-dollar year.
"Greyhound was the validator of the application of a collision-prevention device by putting it in its fleet and allowing us to make a big deal about it," Bouchard grants. The unfamiliar trickle of incoming cash inspired Bouchard's post-1992 business-plan assumption that "with a proven warning system in the marketplace (both OEM and aftermarket), we will then seek strategic partners capable of introducing the next-generation product, automatic cruise control and braking."* * *
"Every entrepreneur thinks he's totally integrated, that he can go from inception to initial public offering in three years without any help. It doesn't work that way when you hope to make it into the big leagues, where the players are the General Motors of the world." -- P.J.B.* * *
The components were right, but as Bouchard saw when doors to commercial-trucking customers refused to open without a sales force, they were in the wrong order. "I was nave enough to think we could get these products into the marketplace ourselves. I didn't want to be a cost-center R&D effort for somebody else; it's not my way. What entrepreneur doesn't think he can go all the way on his own?" But, Bouchard now realized, "I'd better put that strategic-partner thing on the other side of the sentence, because we aren't going to get there otherwise." The joint venture (Eaton VORAD), of which VORAD Safety Systems owns 50%, purchases goods from and pays a commission to the manufacturer (VORAD Safety Systems), 100% owned by IVHS Technologies, 35% of which is owned by VORAD's founders and management.
In addition to the raw capital Eaton provided, around 100 Eaton salespeople in North America alone were now selling VORAD's products. That immediately increased VORAD's sales effort by a factor of 100. One salesman was an automotive specialist who "talks to Chrysler every day." Says Bouchard, "It gave us confidence. We sat here in San Diego and played like we were a tier-one supplier in Detroit, like we were a big company and could walk right in there and get it done." As a result, VORAD was told it was one of four finalists under consideration by Chrysler for a rear-looking collision-avoidance product. "When it comes to bringing a product to a customer," Bouchard realized after Chrysler subsequently invited VORAD to outfit a prototype New Yorker for evaluation, "a venture capitalist can't deliver what a strategic partner can."
Through its new partner, VORAD also gained access to full-grown testing grounds, handier facilities than the five-mile strip of public highway that the state police would occasionally cordon off to let VORAD -- now also in possession of a test 18-wheel-trailer diesel cab -- drive on. Even farther off the balance sheet were the three dozen or so trade shows that partner Eaton participated in, which would have cost VORAD several million dollars to attend on its own.
Nor could VORAD have sunk $100 million into a dedicated radar-on-a-chip foundry. Only a handful of high-tech manufacturers in the world perform the intricate steps involved in making such chips. To Bouchard "the next best thing was to get one on our side." Thus the 10% share in IVHS Technologies for M/A-Com. "They have guys running around in bunny suits in clean rooms -- impressive stuff. We don't have them and never will. But as a result, today we can answer any argument a larger company can make, and we're far more fleet-footed," he says.
"We had to give ourselves credibility," Bouchard pronounces. "I've seen small companies go to the marketplace and drum up some interest, but in the end the market is afraid they won't be there in two years and reverts to known quantities. By structuring our deal this way, first we got investors who were less concerned with valuations and returns than with what they could be involved with. They were buying opportunity, which to a small business is the better motivation because you don't want them pulling your strings, you don't want them doing what big companies often do in this kind of relationship: fix something that isn't broken. They snap the wings off your product and shove it into a big-company mode and proclaim, 'Now you're part of our culture."
"Everyone understands that when you go public, you waste an inordinate amount of time dealing with stockholders. Entrepreneurs should likewise understand there's a toll associated with the strategic-partner route, too. Time is spent managing partnership relations, and it falls on you to spend it, because you asked to be able to cherry-pick from their resources. They don't volunteer anything or come forward with plans -- you have to."
-- P.J.B.* * *
As a small company fending off big guys, VORAD needed other big guys on its side. Bouchard could only hope they wouldn't get in the way. Of course, they did. "One of the disadvantages of teaming up in strategic relationships with large companies is, sometimes you get sucked up into their pace, which is slower than in a company like ours."
Eaton insisted that VORAD's product be rugged and rigged with heavy wiring and connectors. The seemingly simple revamp ate into the better part of a year. "With RCS," the entrepreneur in Bouchard fidgeted, "if they needed a bracket, they drew it on the back of an envelope, went to the machine shop and bent the metal, and 10 minutes later installed it. Now if you wanted to redo a bracket, you'd have to go through three months of design review first." When all was said and done, however, he had to admit the "Eatonizing" was salutary. "We had a better product and we were better off for it," he acknowledges, "and we learned what it takes to become a player in the automotive industry. I only wish it had happened faster."
Hold on, what's the rush? The smart-vehicle industry is like the biotech industry: because of vast product-liability legal considerations and the molasses decision-making pace of truck and auto original equipment manufacturers, unusually long lead times transpire before products can be sold in quantity. During the interval, capital must be poured into the hopeful supplier if it is simply to stay in place. Since the big payoff, the passenger-car market, was expected to flower only after the turn of the century, how could Bouchard defend both his lead and his treasury? The answer: seemingly change the nature of the business. What better diversionary tactic to keep the competition guessing -- and the coffers full?
True, the automotive industry viewed VORAD as, essentially, simply having a smart sensor. But a sensor needn't only gaze down the highway 300 feet. Outfitted with the right accoutrements, that same sensor could anchor a broadly integrated system that gathered and processed data and routed the results to the driver, the mechanic, and, if it were on a commercial vehicle, the fleet owner. "We're not in the radar business, we're in the information business, like everyone else nowadays!" Bouchard declared. "It just so happens that our information saves your butt."
With that epiphany, in March 1994 Bouchard bought a company called Microprocessor Systems Inc. (MPSI) from downsizing Dynatech Corp. and dropped it into the mix. MPSI boasted computerized diagnostic products that determined the condition of the components of an engine from the outside. Bouchard's idea was to market that ability along with the driver- and vehicle-handling recording capacity of the VORAD process and come out with products that together advised fleet managers when a given truck engine, transmission, braking mechanism, or other part needed service. A driver who habitually used the engine to slow the vehicle on hills, for instance, would draw a particular preventive-maintenance pattern. Whether the heavy-vehicle industry would pay for such products was unclear, but one thing was certain: no one else was out there with similarly comprehensive offerings.
Despite VORAD's consciously high profile, some fellow collision-avoidance players remained oblivious to its dramatic inroads. "Competitors whose products are years away assume that everyone else's are years away as well," Bouchard observes. An example: General Motors had purchased two radar units from RCS way back in 1972, ostensibly to test the accident-preventing merits of the technology. Mysteriously, GM wasn't heard from for 20 years, until one day in 1992, alerted by the inescapable publicity emanating from VORAD's Greyhound deployment, GM phoned to express interest in an update. Last year GM called with a request that VORAD comment on a certain spec that GM was developing. Bouchard's conclusion: "What undoubtedly is a well-financed internal effort hadn't yielded hoped-for results."
And only a few months ago VORAD attended an international radar symposium at the Hotel Del Coronado in its hometown, San Diego. As a roundtable of would-be developers discussed the problems of government constraints on power and bandwidth, a representative of the Federal Communications Commission cut in. "Gentlemen," he's reported to have pronounced, "I must tell you that the feats you're talking about achieving by the end of the decade are already being done by a little company right here in town."
Indeed, before any of those gentlemen had a true IVHS product to offer, the "little company," now the employer of more than 100 people, the holder of numerous patents, and the seller of fleet-maintenance, driver-monitoring, and automatic collision-prevention systems, was taking in $4.2 million in 1993. It would do another $12.5 million in 1994. "We're out there with a product that no one can come close to," observes Bouchard ebulliently. "It'll take them years to get to where we are, particularly at a price point."
At the turn of the century -- about when the passenger-car short-range obstacle-detection systems that the billion-dollar corporations were striving for in 1994 will be poised to kick in -- the little company could already be doing $140 million. But by then its impatient CEO no doubt will be gone, elbow deep in another salvage job. "Guys who are good at growing," he confesses, "aren't necessarily good at maintaining."
THE JOURNEY FROM R&D TO P&L
A VORAD Safety Systems time line
Radar Control Systems (RCS) is founded in San Diego by inventor John W. Davis.
General Motors orders two RCS collision- warning radar units for $53,800 and isn't heard from again for 20 years.
An initial patent, protecting low-energy radar hardware, is issued.
A second patent, protecting Doppler-effect expert-systems software, is issued. An early entrant into the expected multibillion-dollar intelligent-vehicle-highway-systems market, Allstate Insurance begins funding RCS.
Davis fiddles and diddles but doesn't produce a product. Allstate recruits Massachusetts entrepreneur Paul J. Bouchard, 42, to replace Davis as CEO. The company has six employees and revenues of $180,000.
Bouchard changes RCS into VORAD (an acronym for Vehicle On-Board Radar) Safety Systems and creates IVHS Technologies as a holding company. Product design is stabilized. The daring Department of Transportation secretary defies death in a VORAD-equipped automatic-braking passenger car. The company has 22 employees and revenues of $2 00.
VORAD makes the first major sale of a collision-warning system, to Greyhound Bus Lines. The company has 30 employees and revenues of $1.1 million. Four more patents are filed.
Allstate takes a 28% position in IVHS Technologies. Eaton Corp. buys 26% of IVHS, and M/A-Com 10%. Eighteen million dollars is raised. A joint-venture distributorship is formed with Eaton, called Eaton VORAD Technologies. Additional patents are filed. The company has 40 employees and revenues of $4.2 million.
At a state-of-the-art conference in San Diego, Ford, TRW, GM, Rockwell, and other big R&D labs are told that VORAD has them beat, but good. Parent IVHS embarks on strategic side business, acquiring engine-diagnostics capability. Eaton VORAD submits a prototype collision-avoiding passenger car to Chrysler and is named one of four finalists as an OEM supplier. The company has 100 employees and revenues of $12.5 million.
"Eventually, you'll be able simply to slip into your car, push a button, and be driven safely to your destination," Bouchard predicts. VORAD projects revenues of $26 million.