Despite runaway growth, ZF Micro Devices is hiring new workers only sparingly. That's because founder David Feldman still agonizes over a mistake he made a decade ago

One day in 1990, as most Americans focused on the misdeeds of Saddam Hussein, sales at Ampro Computers dropped like a Scud from the sky. To keep his doors open, CEO David L. Feldman went so far as to factor his accounts receivable, pledging his car and home as collateral. Soon after, his doctor told him he had developed sleep apnea, a medical condition that is sometimes stress related and also sometimes fatal. At one point Feldman told his wife that his backup plan was to work at Radio Shack. But despite those dreadful circumstances, the company survived. Years later, only one facet of the whole awful episode still haunts Feldman -- that he had to order layoffs. Tears streak his cheeks when he recalls how he had to cut nearly half his workforce.

Today Feldman runs a second company, ZF Micro Devices Inc. Though the six-year-old business, based in Palo Alto, Calif., is growing rapidly, Feldman is loath to hire -- fearful that he will again overextend himself. Is his caution justified, or is it merely a form of self-flagellation? And will his hesitance stifle ZF's growth? Feldman, a former social worker, discussed some of the pros and cons of running a tight payroll with Inc. senior staff writer Mike Hofman.

Inc.: First let's talk about your latest venture, ZF Micro Devices. How's business?

Feldman: The state of the economy is actually doing wonders for us right now. ZF has reduced all the chips on a computer's processing board to a single chip that can power systems like factory assembly lines. As people automate more of their company's functions, demand for our product grows. Last year we had sales of $3.2 million. By the end of the year we'll do about $25 million.

Inc.: That level of growth must have a huge impact on your workers.

Feldman: It's absolutely hectic. We have only two tech-support people answering the phones. For a while we had to pull engineers off the work they were doing to take calls. Now we try to answer all the standard customer questions by E-mail using a database we set up.

Inc.: I understand that you're holding back on adding staff because of the layoffs you had to order at Ampro. What happened there?

Feldman: I cofounded Ampro in 1983. By the end of 1990, Ampro had done about $14 million in sales and was growing nicely. Forty-five percent of our business came from Europe and the rest from the United States. Then Desert Storm came along. Europe froze on us. Sales there dropped to 10% of what they had been, and by the first quarter of 1991 the economy in the United States had ground to a halt, too. We were sitting on $2.7 million in inventory and had $38,000 in cash in the bank. We called our creditors together and said, "We can't pay you now, but if you work with us, we'll pay our debt a dollar on the dollar in quarterly installments." The creditors accepted the deal, even though we owed them $4.4 million.

Inc.: Layoffs were part of the plan?

Feldman: Yes. There was no way to continue to make payroll, which was almost $400,000 a month at that point. We had 65 workers, and we had to cut back to 36, which was very painful. I don't think I've ever recovered from that.

Inc.: How did you break the news?

Feldman: Three months before the layoffs I told the employees what was going on -- so some were already looking. We tried to help everyone find jobs. And I told my creditors that we needed to give these people 10 days of severance, even though that would deplete the rest of our cash. If the company was going to survive, our reputation would be in the hands of the people we laid off.

"It's still hard. The people were not just numbers. I know they have families."

--David Feldman

Inc.: In retrospect, do you think you staffed up too quickly?

Feldman: It didn't seem as if we were going overboard at the time. We had gone from $5.7 million to $14 million in sales over the previous three years.

Inc.: Do you think about the layoffs often?

Feldman: It's not something I think about a lot, but I do think about it when we hire people. No job can be posted at ZF without my signature on the form. Every time I sign my name, I think about that. It's still hard. The people were not just numbers. I know they have families.

Inc.: How else do you make sure that ZF is cautious in staffing up?

Feldman: I encourage my people to use contractors. One of the things that companies tend to do is that if they need something done, they hire someone to do it. Then, once you have an employee, you find work for that person to do. We did that at Ampro to a degree. Now we look to see if we can outsource each specific task in a department.

Inc.: But is that an easy way out? A contract worker's fate may be tied to you as much as the fate of a full-time worker.

Feldman: Typically, our contractors wouldn't take a job from us if we offered it. In the Valley right now, people are getting together in groups of two and three and offering their services to a handful of clients. They insulate themselves from downturns because there is less chance that all of these projects will disappear than there is that an individual worker will be laid off.

Inc.: Is that a good trend?

Feldman: To a degree. But I'm concerned that if an industry is going to encourage this, it has to make sure that these people can survive. We work with a young group of engineers who weren't billing us on a regular basis. We said, "Look, you're going to go broke one of these days, and we're going to lose a good source of engineering." So we spent a lot of time helping them build an accounting system and picking out invoicing software. We taught them to send invoices to the accounts-payable department. Before, they were just handing invoices to the engineering manager, who had to remember to pass them on to the accounting people. That's not the way to run a business.

Inc.: Are there ZF managers who want you to hire more people more quickly?

Feldman: Um, yes. And we've had some people who have come and gone as a result. People from big companies, where cash is rarely an issue and where no one ever says to you, "I don't know if there's enough cash to make payroll this month." Unless you've been there and done that, it's very hard to teach someone that mentality.

Inc.: Have you had success at teaching people that mentality?

Feldman: Yes. I tell managers, if you hire someone and it's one too many, you're the one who's going to have to tell that person. You're going to have to say, "I'm laying you off, and you're not going to be able to make your mortgage payment." You're not just bringing a body in here -- it's a life. There's a family. They have responsibilities.

Inc.: Have managers ever told you that you were wrong -- that a worker's mortgage is less their concern than finding the right person?

Feldman: Numerous times. People say: "Look, they're adults! They make their own decisions! I'm not their keeper!" Maybe it's the social worker in me, but I think we still have a duty to let job applicants know that this is not a company with a billion dollars in the bank. If we can't raise the capital to buy the inventory to fill the $17 million worth of orders we have, then it doesn't matter that we have those orders. You need to know that before you make the decision about yourself, your family, your mortgage.

Inc.: Some would think that in Silicon Valley everybody understands the risks of working for a start-up.

Feldman: Not at all. You dangle this big carrot, and you don't tell people that half the carrot could be rotten. I believe you have to tell them who you are and where you stand. I think that's only fair.

Inc.: Where do you need more staff at this moment?

Feldman: Salespeople. I have said to the VP of sales, "You need more feet on the street to close business." He has actually said to me, "Let me wait. I can work a few more hours on this. As soon as we have this funding in, we can hire." So the lesson has been well learned.

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