And then there were the telecoms. Remember that industry's irrational exuberance? WorldCom and Global Crossing were growing like there was no tomorrow. The Baby Bells and others were pouring money into fiberoptic lines. The Telecommunications Act of 1996 -- "the first major overhaul of telecommunications law in 62 years," according to the FCC -- was designed "to let anyone enter any communications business." The word was that new entrants could snatch as much as 25% of the market from the Bells and other established firms.
For entrepreneurs, the pull was irresistible. "We were part of that initial euphoria," acknowledges Dan Moffat, of New Edge Networks (No. 28) in Vancouver, Wash. "I had top-tier venture capitalists calling me at home, 11 o'clock at night, saying, 'Take our money!" Moffat dove in with a plan to take broadband capabilities to nonmetropolitan areas -- "broadband for the rest of us." Paul Chapman jumped in too, though his own niche was different. A GTE veteran, Chapman set up a little company called Pathwayz Communications (No. 121) in Amarillo, Texas, to provide local and long-distance service to towns in West Texas. "It was this crazy time," he remembers. "There were lots of start-ups."
It wasn't long before that fiery enthusiasm all but evaporated. Big firms downsized, start-ups vanished, e-commerce and telecom ventures were suddenly reclassified as likely losers. Silicon Valley seemed particularly toxic. It was a terrible time -- except, of course, for our exemplars, who not only lived but thrived.
Common lessons emerge from these survival tales, even though the companies come from very different industries. Call them the Lessons of Keeping Your Head Even When People Around You Are Losing Theirs.
Lesson No. 1 might be titled Don't Take the Money. One thing that distinguished Smooth Corp. and other e-commerce survivors such as shoe seller Zappos (No. 15) is that they didn't go after venture bucks during the boom and so didn't find themselves overextended later on. "Because we didn't raise $20 million, we didn't spend $19 million on marketing," says Smooth Corp.'s Simonson. "We didn't build an infrastructure bigger than the business would serve." Same with Pathwayz. "We didn't think we needed the kind of dollar amount that group tends to want to invest," recalls Chapman, "and we had concerns over what they wanted."
Relative to so many of the players in their respective fields, Simonson and Chapman began their companies with small amounts of money from small groups of investors. They built the business slowly, and they made a virtue of austerity. Simonson's programmers created a homemade, low-budget Linux platform that proved robust and capable enough to coordinate the deep back-office support required by big-ticket items like flooring. Chapman spent $5,000 on his phone system instead of $50,000 -- and made it a point for Pathwayz to be the company "that answers the phone with a person who's trained well" instead of the voice-mail hell offered by so many of his competitors.
Evolve's story wasn't so different. Kenny started the company on "just my credit cards plus whatever cash I had," taking outside funds only in the form of short-term cash-flow financing from an angel investor. Today, the fact that she has no debt allows her to keep prices low and revenue growing. Even New Edge Networks, which did need big infusions of capital, spent the VCs' money carefully, focusing on profitability more than on sales growth. "We knew it was going to take a long time" to make money, says founder Dan Moffat. "There's a huge infrastructure required. But we told investors it would take four years, and we actually went cash-flow positive in the 47th month."
Lesson No. 2 follows from the first: Take Advantage of the Fools Who Did Overextend Themselves. When the bust hit Silicon Valley, larger manufacturers began shuttering factories, laying off employees, and outsourcing what work was left. Evolve snapped up errant product lines and the people who knew how to make them. Pathwayz found the collapse of the telecoms equally a blessing. "It took the people that were doing crazy things out of the market -- people paying too much for customers, things like that," says Chapman.
Smooth Corp. may have hit on the cleverest strategy for capitalizing on the change in the market. When e-commerce companies began hurting, Simonson went shopping for acquisitions -- and found a nice but struggling little company that had some $4 million in cash. He engineered a buyout using Smooth's stock, and presto: His company's bank account was $4 million richer. "That cash gave us a really long runway" to survive the downtimes, he says.
Lesson No. 3, finally, is that old chestnut -- Don't Stand Still! But it takes on new meaning when the economy is heading from boom to bust. If you have a solid business and your competitors suddenly don't, you can do things they can't. That means expanding your horizons, shifting your strategies, and undertaking ventures that you thought might be beyond you. Smooth Corp. continued on the acquisition trail, and at this writing has scarfed up close to half a dozen would-be competitors. Pathwayz has bought its first switch, as the specialized computers that control telecommunications are called, and is evolving from a pure sales and service outfit to a company with its own facilities.
New Edge Networks retrenched during the collapse, too, laying off some 150 people and holding off on buying more switches. That allowed it to reach its profitability target and to position itself for a comeback as the market picked up. The comeback involved a host of strategic shifts. "We stopped focusing on consumers and went to business customers," says Moffat, and "we came out of the hinterlands and started doing more nationally." Another shift: At the outset, the company had sold its wares through Internet service providers, which resold to consumers; in other words, New Edge Networks was purely a wholesaler. Now it began selling to businesses directly. What emerged was a thriving cash-flow-positive company with close to $100 million in sales last year -- and a company that didn't look much like the New Edge Networks of 1999.
"When the meteor hits," concludes Moffat, "you want to be a small, furry, nimble omnivore. If you're big and slow you're going to be challenged." That could serve as the motto for all the exceptional enterprises that launched themselves in one epoch and learned to survive through a very different one. That so many should not only live but grow fast enough to make the Inc. 500 -- well, as George W. Bush might say, never misunderestimate an entrepreneur.
