Where Did You Learn How to Grow a Company?
"Education made us what we are," asserted French philosopher Claude Adrien Helvétius. For company builders, that's a matter of contention. The CEOs on this year's list spring from varied academic backgrounds, suggesting that formal study is a way, but not the way, to master business.
One graduate of the school of hard knocks is Jim Sharkey, CEO of $3.5-million Linac Systems (#259), which refurbishes and sells machines that treat cancer. Sharkey, 45, entered the military right after high school and worked as a field-service engineer at Siemens Medical Systems before starting his own company. By contrast, Richard G. Rebh, 48, holds a flock of sheepskins. The CEO and chairman of $59-million Floorgraphics (#39), which provides in-store advertising for retailers, received both a J.D. and an M.B.A. in 1982 from Stanford. He started Floorgraphics after working as a management consultant and for a high-tech company and cofounding two other businesses.
We asked Sharkey and Rebh how their formal schooling -- or lack thereof -- affected their climb to the Inc. 500.
Rebh: In business school I learned the basics: accounting, finance, strategy, how to identify markets and beat competition. It enabled me to think about what business is.
Sharkey: In my 15 years at Siemens, I was tainted toward business school. It seemed as if a lot of the guys running the business had blinders on. I used to chuckle because it was like their saying, "This is the way things are supposed to go," and me thinking, "Well, that's not the real world." For me, what mattered was gut instinct. You needed certain personality traits to be a leader, to manage people.
Rebh: I agree that business school doesn't teach you how to manage people, how to sell, how to work through personal issues with employees. But it does compress much of the foundations of understanding business into two years, so you can contribute at the strategy level right away. If you're trying to raise venture capital, you have to know how to do revenue recognition and put together a financial plan. Floorgraphics was funded initially with about $150,000 from friends and family, but the real financing was $5 million of private equity when the company was two and a half years old. If you're doing venture-backed financing as opposed to bootstrapping, business school gives you the ability to look at a business from the top down.
Sharkey: I've never used venture capital. I just emptied my 401(k) [about $50,000], bought a van because I needed transportation, paid off all the bills I could so my monthly net was down, and winged it from there. But I know that if you go looking for capital, for some reason they like to see degrees.
8 % of the Inc. 500 CEOs surveyed had only a high school education
Rebh: The degree gives VCs comfort, but it also gives the business-plan numbers credibility, because the VC will push around the assumptions in trying to understand how optimistic the numbers are. The degree lets you have a dialogue with the people who are doing that, to defend your plan.
Sharkey: You must be one hell of a good salesman.
Rebh: Business school really does not teach you anything about salesmanship. And salesmanship is probably the most important lesson in life, because life is sales. Sales is probably the most lucratively compensated area in business, and it's one that is largely taught in books and in seminars and on the job.
Sharkey: I'm an avid reader -- books by Mark H. McCormack and Harvey Mackay. Some of it was like "Duh, no kidding." But there was revealing stuff, too. Consider negotiating. I mean, hell, they can't teach you negotiating. But I've picked up a lot of things in books, such as you negotiate your second point first, concede to that one so that you're getting what you really want anyway.
What I learned at Siemens was how to deal with customers on a daily basis. The machines I work on treat cancer. So the first thing I had to do as a field engineer was calm down the customer so I could actually work on the machine. It was people skills.
Rebh: I don't think that business school does a good job of teaching practical marketing, sales, or how to deal with customers. But it does teach you about strategy. We're looking to expand the business, and strategy is very important in thinking through those next moves because they relate to higher-level issues, like competitive dynamics and cost sharing.
Sharkey: I've got a pretty different background. I'm a recovering drug addict and alcoholic, and I've got 15 years clean. Before I got clean, my strategizing was just to keep out of trouble. The way I lived before was my training ground for everything.
For example, at Siemens, when I was using, I wouldn't show up at the site I was assigned to. My only saving grace was that I was great on the equipment, but that only lasts so long. So I had to learn to be very perceptive, to know how far to push things. It was "OK. I'm going to go into the office, and they're going to say this and be pissed, and blah blah blah." I had the whole thing worked out so I could walk out of there and still have a job. So as far as strategizing goes, my mind works in a way where I form an out: figure out the most variables I can in any given situation so I have options as problems come up.
Rebh: That's definitely on-the-job training.
Sharkey: Now, on the issue of going to another level, do you find that business school hinders you as far as risk taking goes? You know, you've got to have the plan first, and if the plan doesn't look good, you don't do it?
Rebh: Well, no. We plan out things to a certain extent, but I believe feedback from the marketplace is equally valuable. Business school allows you to quantify the risks, to scope out the potential rewards. It teaches you how to get everybody on board so you have a good shot at success.
18 % of the Inc. 500 CEOs surveyed had an M.B.A.
Sharkey: So it teaches you how to minimize the risk?
Rebh: Minimize the risk and build consensus.
Sharkey: Right now I'm starting a company in Argentina. And everybody is saying I'm crazy for doing that, because of the economic turmoil and the chaos down there. Normally, in chaos everybody is paralyzed, so whoever can move in, that's the opportunity. Of course, minimize your risks as best you can, but there's always going to be something.
Rebh: And we curiously are expanding our business into Argentina as well. We just signed Wal-Mart down there. And I suspect we wouldn't be able to find [such retailers] in normal times.
I never would have considered starting a business right out of business school. That wouldn't have been prudent. My on-the-job training has given me the confidence to make a lot of essential judgment calls. But having said that, I don't think Floorgraphics would be where it is today if it were being run by someone who hadn't been to a business school. For starters, I don't think we would have gotten funded without a formal business structure -- that is, the business plan and the financials and the analyses -- because the idea was relatively unstructured.
Sharkey: Both experience and business school, in your case, definitely helped. But I believe that, even with experience, if you don't have certain personality traits, you can start all the companies you want, and unless you're the luckiest son of a bitch in the world, it ain't gonna happen.
Rebh: I totally agree. A successful start-up is based on a great idea that generates a whole lot of momentum, people dedicated to persevering through the inevitable disappointments, and a lot of luck. If you don't have all three, you won't make it.
Thea Singer is an associate editor at Inc.
A Little More Than Kin
Inc. 500 acorns often turn up in the vicinity of entrepreneurial family trees. Asked who inspired them to start a business, many CEOs over the years have cited their fathers and mothers. Elizabeth Harrison, cofounder of Harrison & Shriftman (#347) -- a special-events, publicity, and marketing service -- traces her role model a generation further back.
"My mother has often said that I have my grandfather in me," says Harrison. "But until recently, I didn't see it. My grandfather, Sandy Smith, was one of the founders of the Anne Klein fashion label in 1968. But his entrepreneurial roots go deeper. He made the money that permitted him to launch Anne Klein by introducing fake fur to the United States.
"To me, my grandfather was the essence of glamour and success. He and my grandmother would pack their Louis Vuitton steamer trunks and travel to exotic places. He had a beautiful mansion in Woodmere, Long Island; beautiful cars; and a lavish lifestyle. While intimidating to my mother and her brother, he was extremely loving and approachable to me. My entrepreneurial drive, I think, derives from that mix of adoration and admiration.
"Like my grandfather, my mother, Marianne Smith, saw entrepreneurship as a way to control her destiny. It was also a way to escape the boredom of suburban Connecticut. Trained as a knitwear designer, she'd stopped working when I was born. But when I was 12, she borrowed money from the bank and secured it with our home. Then she and Jill Kollmar -- her best friend from boarding school, who also happened to be the daughter of gossip columnist Dorothy Kilgallen -- rented a tiny office in the garment district, and Smith Kollmar was born. Her customers included the best department stores and specialty shops in the country.
"Smith Kollmar flourished, but after seven years my mother decided to move on. Her entrepreneurial instincts came to the fore again 15 years ago, when she and my father spotted a dilapidated 1820s plantation house in Beaufort, S.C., and decided to restore it as an inn, even though neither had previously set foot below the Mason-Dixon Line.
"When I started Harrison & Shriftman, in 1996, my parents were anxious but optimistic. Today my business partner, Lara Shriftman, and I have 35 employees; offices in New York, Miami, and Los Angeles; and clients that include Miramax, Jimmy Choo, and Cartier. In 2000 we jumped to $2.3 million in revenues -- an increase of 488% over two years before. I guess that's when I realized I really did have something of my grandfather in me."
Thea Singer is an associate editor at Inc.
The Company I Kept
Inc. 500 CEOs share what they learned from earlier passages through the entrepreneurial ringer.
The Parent Trap
Who: Robert Wolters, president, CookTek (#270), a food-service-equipment maker in Chicago.
What he learned: Don't make family members officers.
Where he learned it: Global Contract Manufacturing, a kitchen-gadget manufacturer in Chicago.
Wolters started GCM in 1993 with his mother (president) and father (treasurer). Wolters himself was chairman and majority shareholder, with 66% of the company. At first everyone was on the same page. But as GCM grew, so did the choices about how to run the business. Questions arose about salaries, reinvestment of profits, customers, bank debt, and on and on. Consensus vanished. The page began to shred.
Because they felt they were more experienced, Wolters's parents thought they had the last word. Because he was chairman, Wolters knew that -- legally -- he did. "I had to either walk away from the business or force them out," he says. "I chose to force them out." His parents learned of his intentions and hired a lawyer. Wolters followed suit. Finally, convinced that the law was on their son's side, the elder Wolterses left to start another company, with a similar business plan. The camps didn't speak for two years. Now they talk occasionally and spend holidays together, but largely for the sake of the grandchildren.
How he applied it: When Robert founded CookTek, in 1995, he let his parents take a 34% equity stake but kept them out of the boardroom. Following the GCM split, his parents stopped investing in CookTek. Eventually, their stake was diluted to just 4%.
Who: Paul Stannard, CEO, SmartDraw.com (#483), an Internet-based software developer in San Diego.
What he learned: Establish a formal management system.
Where he learned it: SoftEngine and Megahaus, software companies in San Diego.
At his first two companies, Stannard expected his employees to learn to execute his vision just by watching him. He held no regular meetings, set no objectives, and never talked about the big picture. "People often drifted, and then I would get mad," he says. As for the hiring process, Stannard relied on gut instinct rather than on objectively assessing how candidates would fit into his fast-growing company.
How he applied it: Stannard created for SmartDraw a formal management team whose members meet as a group every two weeks and individually with Stannard for debriefings every other Monday. To take the subjectivity out of hiring, he engaged a psychologist. Now managers narrow the field to two candidates and send their picks to the psychologist, who conducts a battery of tests. Ten people have been hired using the process, and only two haven't worked out.
Exits, Staged Right
Who: Jim Scott, CEO, In Zone (#31), an Atlanta manufacturer of beverageware and coolers.
What he learned: Position your business for sale from the get-go.
Where he learned it: Alpha Products Inc. (#76 on the 1988 Inc. 500), a promotional plastic- container manufacturer in Atlanta.
In 1982, when Scott started Alpha Products, he had no business plan and no exit strategy. "I thought I was going to grow the company into infinity," he says. By 1993, Alpha Products had no debt and revenues of $30 million. Multiple buyers came knocking, but Scott was too fixated on growth to answer. Instead he took out a $13-million bank loan and built a 250,000-square-foot manufacturing facility to consolidate his three plants into one.
41 % of the Inc. 500 CEOs surveyed had started another company before starting this one.
But the fancy technology that was meant to run his new operations didn't work. No product shipped for a month. Scott defaulted on his loan, and the bank prepared to reduce his line of credit by $1 million a month. "What happened blew our toes off," Scott says. He hired an investment banker and auctioned off the company for $23 million. By taking out the loan, says Scott, "we'd devalued the company by $13 million in 12 months."
The experience taught Scott a lot about the impact of market conditions on value. "You'll always sell for more to a strategic buyer than to a financial buyer," he says. "Those conditions existed for Alpha Products the year before I sold. Had I had an exit strategy, I would have had a plan at that juncture."
How he applied it: Upon founding In Zone, Scott appointed an advisory board of industry experts to constantly monitor market condi-tions.
Thea Singer is an associate editor at Inc.
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