Some of the best ideas are those offered by employees to employers. And some of the best companies are born when those employers say no.
Inc 500 Opportunities
Heating polymer-based coatings in a Cleveland suburb back in 1988, Carol Latham hit upon a startling truth. The future -- at least the future of keeping computer parts cool -- really was plastics.
A staff chemist at British Petroleum (BP), Latham was convinced that polymers could help solve one of the biggest problems that computer makers face: how to dissipate heat that's produced by components. Working out of BP's research lab in Warrensville Heights, Ohio, Latham had discovered that as heat conductors plastic- or polymer-based compounds compared favorably with ceramics, the focus of most of her colleagues' energy. And she had the data to prove it. "I was getting 8 to 10 times higher thermal conductivity numbers than any polymers cited in the scientific literature," she recalls.
The chemist believed she was onto something. Something lucrative. Something big. But Latham's bosses didn't share her excitement. Her appeal for funds to launch a commercial venture under the aegis of BP went nowhere. "To get a large company to make a decision is very, very difficult," says Latham, who left BP in 1989 to start her own company, Thermagon Inc. "Basically, I was held in limbo."
Over the past five years, the Cleveland-based Thermagon has seen revenues from its polymer-based products grow at a rate of 746%. That puts Latham's company -- whose customers include Motorola, Sun Microsystems, and Dell -- at #385 on this year's Inc 500 list. As for British Petroleum, last year, in the wake of its 1998 megamerger with Amoco, it brought in $148 billion in revenues. The company, with more than 100,000 employees worldwide, isn't exactly hurting for extra business. Yet it did let a promising new technology (not to mention a profitable little sideline) slip away.
Of course, that kind of thing happens all the time. At least half a dozen companies on this year's Inc 500 -- including the four profiled here -- were founded by employees whose day-to-day exposure to particular markets, materials, or methodologies inspired ideas for new businesses. And all of the company founders broke out as entrepreneurs only after being told "thanks, but no thanks" by their employers.
Such rejection is hard to figure, given that so many companies big and small routinely encourage staffers to flood suggestion boxes with proposals for products and services. But Stanford Business School professor George Foster, an expert on innovation, notes that there are many reasons a business might not jump on a potentially hot new idea. For example, management may be too worried about quarterly performance to gamble on a longer-term investment. Or the person pitching the new venture may have offended a key decision maker or work in a division that lacks real clout. "Corporate politics can kill a great idea," says Foster.
There are also sound reasons for leaving tempting paths unexplored. A young growing company may simply lack the management and financial resources to back a new venture. Or the plan may stray too far from its core business. "Oftentimes, it's not a good idea for the company, but it's a fantastic idea for the entrepreneur," says Ian MacMillan, who heads Wharton Business School's center for entrepreneurs.
In Latham's case, bad timing may also have been an issue. In 1987, BP had just become sole owner of Sohio. Oil stocks were sagging industrywide. Struggling to integrate Sohio and ride out the price slump, BP's management chose to concentrate on the company's core oil business. As a result, capital that might have once been available for projects like Latham's grew scarce. "When oil prices slumped, there wasn't cash to fund all those kinds of businesses," recalls Don Anthony, vice-president of BP America's research and development at the time. "The emphasis was to refocus."
Still, Latham tried. Lab results in hand, she brought the idea for developing polymer-based materials first to her higher-ups in the R&D group. They were noncommittal at best. Next she tried to pique the interest of BP's business units which, she figured, would be quick to pounce on a promising new product. She sent pitches to top executives at Carborundum Co., which was then BP's ceramics subsidiary, and to decision makers in BP Chemicals' marketing group. She even snagged audiences with a few. But no one bit. "I wanted to turn this into a business," says Latham. "And BP perceived that it was just some little thing that might be kind of useful."
Latham believes it didn't help that she was a 50-year-old woman with a bachelor's degree, whereas many of her colleagues had doctorates. "I had no credibility," she says. Fred Pesa, a former research director with the R&D group at BP, contends that the higher hurdle was stiff competition for funding new projects. And the payoff from Latham's discovery was unlikely to be huge -- at least by BP's standards. "They were funding core businesses or ones that had the potential to be material" to revenues, says Pesa. "Even a $20-million business unrelated to BP's core interests would have been viewed as pretty small."
Today Latham oversees 120 employees and 12 products. That wouldn't have happened if she had remained a bright employee whose good idea was turned into a reality by someone else.
Resigned to BP's cold shoulder, Latham, in late 1989, decided to launch a business on her own. She had no funding and nothing yet to sell. But the entrepreneur, a divorced mother with three children, was convinced that her basic concept was solid. And she was sure she could develop that concept into an actual product.
Latham drafted and redrafted a business plan and managed to raise an initial $70,000 from family, angel investors, and friends. In the beginning, she labored long hours in her home's basement using a kitchen blender, cookie sheets, and mixing bowls to try to turn polymer-based compounds into something commercial. Soon she found bargain-priced work space at a factory and moved into a studio apartment. She rented out her house and lived on the proceeds from that, along with some part-time consulting income.
Looking back, Latham recalls being anxious at first because BP might claim that her business was based on an idea she had developed while she was employed there -- and try to stop her. "A lawsuit would have destroyed me," she says.
But if BP was aware of Latham's venture, the company never bothered her. (Pesa says BP was selective about protecting ideas that weren't considered big moneymakers.) By 1992, Latham had samples of an actual product -- superthin polymer sheets cut to fit between computer components. "Basically, they sold themselves," says Latham, whose initial customers included IBM and Silicon Graphics. In its first three years, Thermagon raised only $100,000 in capital. After those early sales, says Latham, new investors fought to get in.
Today the 62-year-old Latham oversees 120 employees and 12 products and boasts 1,300 customers, who are concentrated in chip-making meccas like Silicon Valley and Taiwan. Sarosh Patel, an advanced-development manager with Teradyne Inc., a maker of semiconductor test equipment, says Latham's company quickly developed a solid reputation in the industry. "We started with one Thermagon product," he says. "Now we use three."
At this point, Latham has reason to be grateful that BP passed on her idea. Thermagon, which had revenues of nearly $19 million in 2000, has made the Inc 500 list for three years straight. Two years ago Latham was inducted into the Ohio Women's Hall of Fame. Those things wouldn't have happened if she had remained a bright employee whose good idea was turned into a reality by someone else.
Al Wasserberger is the first to admit it. Back in early 1996, when he pitched a whole new way of doing business to his former boss, he looked pretty scruffy. "Yeah, I had the ponytail and the beard," he says. "I was a tech."
Wasserberger's Jerry Garcia look probably wasn't wholly to blame for his plan's rejection. His former employer, Universal Networks Inc., in Elmhurst, Ill., was a typical systems integrator, with a revenue model built on consultants' racking up billable hours loading software and configuring routers and switchers at client sites. Wasserberger had devised a program to automate much of that work. Instead of traveling to client sites, consultants could install and upgrade software on dozens of remote desktops without ever leaving Universal's offices. "I knew you could do it faster, with higher-quality, higher-consistency work if you used automation," says Wasserberger. He proposed charging clients on a flat-fee, per-project basis, which, he contends, would have increased employee efficiency and overall revenues. "I was asking for permission to develop this in detail," he says.
But Universal's president wasn't interested in shaking things up. "He told me, 'Al, I don't need you to tell me how to run the business. Go be a good engineer," says Wasserberger. He ignored that advice and promptly quit to launch his own company, Spirian Technologies Inc. (#62), which offers automated flat-fee IT services.
Wasserberger's former boss, who left Universal after the company was acquired by IKON Office Solutions, could not be located for comment. But Joe Taylor, Universal's former vice-president of sales, recalls that he, too, never had much luck pitching new ideas.
Universal is history: in 1997 IKON sold off the company's remaining assets. Meanwhile, Spirian, which Wasserberger started with just $5,000 and a Best Buy credit card, is flourishing. In the company's first five years, revenues have shot up from $247,000 to $8.1 million -- an increase of 3,177%. Wasserberger now has 70 employees, including half a dozen from Universal, and a client roster that includes Cisco, Lotus, and Bristol-Myers Squibb. He also has a deep-pocketed strategic partner: systems-integrating giant EDS Corp., which this year bought an 8.5% stake in Spirian. In fact, the only thing Wasserberger has less of is hair. In keeping with his new CEO status, Spirian's founder cut off the ponytail and shaved the beard.
Ask Robert Schmidt why he left his last job and he doesn't mutter vaguely about conflicting strategic visions. "I got fired," he says.
It was probably inevitable. In 1990, Schmidt was director of technology for Life Systems Inc., a research firm headquartered in Cleveland. Rick Wynveen, the company's president, had built a thriving business in space and military research projects for NASA and the Pentagon. Schmidt, who has an M.B.A., a law degree, a master's in urban environmental studies, and a B.S. in mechanical engineering, couldn't contain his entrepreneurial zeal. He believed that some of the company's work -- such as a device to test hospital catheters -- could be easily spun off into profitable side businesses. He even laid out cost projections.
But Life Systems balked, and when Schmidt continued pressing his case, Wynveen advised him to find another job. "I was a thorn in their side," says Schmidt. "I was trying to push the organization in a direction they didn't want to go."
Wynveen, for his part, insists he didn't relish losing Schmidt, who excelled at generating new business. "He's one of the three best proposal writers in the country," says Wynveen. But Life Systems was content doing what it was doing. "Our plate was full with regards to R&D work," says Wynveen, and he believed Schmidt wouldn't be happy unless the company branched out. "It was the right decision for him," says Wynveen, "and the right decision for me."
Schmidt didn't waste time brooding over being fired. In January 1991 he tapped into $20,000 in personal savings and set out to prove his point -- that basic R&D could yield a wide variety of commercially viable products. The result? Two Cleveland-based start-ups, both incorporated early that year. One, Cleveland Medical Devices, recently unveiled a portable wireless brain-wave monitor. The other, Orbital Research , is a military and government contractor, which, among other projects, is developing robotics software and hardware for the U.S. Navy. (The navy contract permits Orbital to spin off that work into commercial ventures as well.) Both companies have had to win research contracts and develop ideas from scratch, since all of Schmidt's earlier product plans stayed behind at Life Systems.
The CEO received early support for both ventures from Cleveland's Edison Technology Incubator, a state-funded center that provides low-cost office and lab space. He's done the program proud. Last year the 23-employee Cleveland Medical Devices was #336 on the Inc 500 list, with revenues of $2 million and a sales increase from 1995 through 1999 of 812%. This year Orbital Research secured the #482 place on the list with a 600% sales increase from 1996 through 2000 and $1.8 million in revenues in 2000.
Jeff Weber doesn't miss the high drama of his last two years at Educational Resources. The backbiting politics. The constant turnover. "It was almost like a soap opera," Weber recalls. "There were all these strange things going on."
Given those distractions, it's hard to imagine how Weber could concentrate on something so mundane as moving the company, a reseller of educational software to K-12 schools, into a new market from its base in Elgin, Ill. But throughout 1994 the company's former marketing and merchandising manager quietly plotted strategy.
Weber wanted Educational Resources to extend its reach to colleges and universities, which he believed could be a $100-million market. He says that educational institutions were really starting to use their technology resources for marketing. "In terms of total technology spending, colleges were at the bottom of the bell curve going up," he says.
Weber's idea was to create a new college sales division, which he would head. "My first thought was that this could be a good career move in the company," he says. He pitched it to the vice-president of marketing, who shared it with other Educational Resources higher-ups. The proposal fell flat. "They said, 'We looked at it and we don't want to do it," recalls Weber.
Bob Dumke, the company's chief financial officer at the time, says he remembers thinking that Weber's idea was great, but the company was preoccupied with more immediate challenges, like high turnover and a new competitive threat from retailers. "We were basically telling him, 'We want to pursue new strategies, but we need to stabilize the ship," says Dumke, who is now president of Technology Literacy Network, a company in Elmhurst, Ill., that specializes in technology training for teachers.
But waiting for some indefinite period of smooth sailing didn't appeal to Weber. All along he had been mulling the prospect of launching his own business. In mid-1995, unbeknownst to his bosses, he quietly incorporated Technology Resource Center (#210), cashing in stock options in Educational Resources' parent company to help get the venture rolling. Nine months later he exited Educational Resources for good. (Since then, Educational Resources has been bought and sold twice and is now owned by French conglomerate Vivendi Universal.) Meanwhile, Technology Resource Center, based in West Dundee, Ill., has established relationships with key vendors and sells products from Adobe, Microsoft, and other marquee-name companies to universities at an academic discount. That has enabled Weber to land big contracts with state-university systems in Michigan, Nebraska, Iowa, Massachusetts, and California, and has fueled a sales increase from 1996 through 2000 of 1,356%.
Technology Resource Center has 22 employees, including 5 hires from Educational Resources, and revenues that topped $8.5 million last year. Looking ahead, Weber sees even more room for growth. "We estimate that 90% of college students aren't aware of academic discounts," says Weber, who is never one to miss an opportunity.
Susan Hansen is a senior editor at Inc.
View the 2001 Inc 500 list .
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