Doing Well by Doing Good

Seth Goldman's Honest Tea (page 60), which joins Timberland, Patagonia, the Stonyfield Farm yogurt company, and many others in the ranks of the Inc. 500 over the years who have made social responsibility a core part of their business mission.

Goldman's company, based in Bethesda, Md., has been steeped in social reform since his student days at Harvard, when public-service pioneer Alan Khazei was a mentor. Goldman still describes managing his $4 million tea company as "running a national service group but wearing a for-profit hat." He chose a small farming village in western South Africa to supply the ingredients for his Haarlem Honeybush tea and sends the town a royalty check for the use of the name "Haarlem." A similar partnership with the Crow Indian community of Montana supplies Honest Tea with leaves for its First Nation peppermint tea. "Tea is a product that's enjoyed by the wealthiest countries in the world but produced by the poorest," says Goldman. "We view that disparity as a chance to create wealth where it wasn't before." Honest Tea is also working to raise awareness about the amount of sugar Americans consume. Jess Mccuan

What causes a sleepless night?

Some Inc. 500 entrepreneurs see challenges on the horizon, some don't. Here's how they rank the factors most likely to limit their growth next year.

  • 35% Sluggish markets
  • 27% Nothing
  • 15% Personnel issues
  • 12% Lack of financing
  • 9% Strategic decisions
  • 2% Operational concerns

The Eureka Moment

Where did you get the original idea for your business?

  • 52% The same industry I was working in
  • 17% A related industry
  • 14% My experience as consumer or client
  • 12% From another source
  • 5% I researched start-up ideas

Lessons From Corporate America

What do all Inc. 500 CEOs have in common? They work for themselves. That's not to say they don't admire big corporations such as IBM, Microsoft, and Starbucks: In our survey, more than half said they do. But would these CEOs want to spend their lives at one of them? Not really. Nearly a quarter said they started businesses because they wanted to be their own boss, and nearly 14% said they didn't like working for someone else. Corporate America did provide some useful lessons for those who toiled in its field. Working for 27 years as a meat manager at Kroger Co. motivated Larry Metz, CEO of L.E.M. Products (page 108), to maintain a small, close-knit feeling for his six-person meat-processing equipment distributing company. "Big companies don't go to the bottom where all of the work is being done," says Metz. "People have excellent ideas. Companies don't become big companies because of the bosses." Andrew Nadel, CEO of Pride Products Distributors (page 110), a distributor of corporate logo products, says Wall Street was a fabulous training ground. As a bond salesman at a boutique investment firm there, Nadel competed with some of the Street's biggest firms. He learned very quickly how to develop relationships, make a sale with no initial leverage, and earn faithful clients through follow-through and honesty. Nicole Gull

Masters of metamorphosis:

Inc. 500 companies have yoga-like flexibility. Here's how this year's group has changed in the years since they were started.

84% of Inc. 500 owners started companies without benefit of any formal market research.
  • 42% We have added products or services that fit with our original business idea.
  • 29% We have taken our original products or services into new markets.
  • 15% We are in the same business, with the same target market, as when we started out.
  • 11% We're in a completely different industry than when we started.
  • 2% Other

Raising more money:

Among companies that raised money subsequent to their seed round, banks were the most common funders.

  • 29% Bank loan or credit
  • 17% Private equity investment
  • 15% Personal assets
  • 12% Venture capital
  • 8% Other founders' assets
  • 8% Family or friends
  • 6% Other business entity
  • 5% SBA loan or other government fund

Born to Run:

If practice makes perfect, it's little wonder that some Inc. 500 members were entrepreneurs when others their age were barely surviving puberty. At 15, Myers Group (page 66) founder A.C. Myers grew vegetables in his parents' garden. He paid them for use of their land and rented his grandfather's truck. When he reached college, he had a five-acre farm that employed up to 10 people at harvest time and netted $5,000 to $7,000 a season. As a high school junior, Yuchun Lee, CEO of Unica (page 26), launched Apollo Software, a drawing and painting program for early Apple computers. Lee eventually turned his attentions to his studies at MIT, but not before selling enough software to buy a car. Kenyon Hayward's big idea literally fell from the heavens, when a violent storm tore down branches and trees in the high school freshman's neighborhood. The V-Span (page 132) CEO raked in cash during the cleanup and liked the work so much he convinced friend Chris Miller to co-found H & M tree surgeons. In its best year, the company had gross revenue of nearly $50,000, which helped cover tents, a truck and eventually, college tuition. Hayward's neighbors still call him for services, though he's changed his fees somewhat: He charges them a cold soda and a chat. Josh Stewart

Who scares the Inc. 500?

Companies on the list fear their peers most among all rivals. Here is where they pointed when asked about their major competitors.

  • 56% Other established small or midsize companies
  • 38% Large corporations
  • 4% No direct competitors
  • 2% Recent start-ups
50% of the Inc. 500 companies have raised capital since start-up.

Picking partners:

The Inc. 500 entrepreneurs who started companies with partners typically teamed up with business associates and friends rather than family.

  • 58% Business associates
  • 22% Personal friends
  • 20% Spouses or family

Getting Financing Now

A lack of cash keeps Michael Visnich up nights. The CEO of Orlando-based Quality Assured Services (page 66), which sells devices such as blood clot tests and glucose monitors, started looking for financing more than a year ago--and he's still looking. He's outgrown commercial bank sources for now, and he's not willing to give up control of his company to venture capitalists. He's not alone. Of those Inc. 500 companies seeking to raise cash in the second half of 2003, just 8% plan on receiving venture capital. Most established companies also shy away from Small Business Administration loans, which tend to charge higher fees than banks. But the SBA actually saved Todd Stennett's Los Angeles-based laser-mapping company, Airborne 1 (page 50). The company, which uses lasers mounted in planes to map out large areas of land, was crippled after the September 11 terrorist attacks, when airspace restrictions grounded its flights for five months. In March 2002, Stennett secured a $375,000 loan through an SBA disaster relief fund. "The money saved our business, without question," says Stennett. What else is working now? Private equity investments are gaining popularity, but traditional bank loans and lines of credit remain the most popular sources of cash. But, perhaps owing to the lagging economy, an overwhelming majority of survey respondents are shying away from raising capital altogether--72% had no plans to drum up financing in the second half of this year. Nadine Heintz

Staying on pace:

Still set on growth, here's how the Inc. 500 plan to increase sales.

  • 38% Enter new markets with existing products or services
  • 24% Introduce new products or services
  • 30% Sell "more of the same"
  • 8% Pursue acquisitions or a merger

All in the Family

Family businesses are certainly not new to the Inc. 500, but the desire to hang out your own shingle may well be genetic even if you don't inherit the company. Consider Adam Brotman, founder and CEO of PlayNetwork (page 96), an outfit based in Redmond, Wash., that provides music and entertainment systems for restaurants and retailers. His father and grandfather founded successful clothing stores in the Pacific Northwest, and his uncle Jeff founded a little company you might've heard of--Costco. "I grew up around entrepreneurs, and just figured everybody did this. My family taught me a lot about living and dying and breathing and sleeping for your customer."

Andrea Anaya built her medical transcription training school, Career Step (page 48), based on the experiences of her mother and aunt, both of whom ran transcription services. As a teenager, the work helped Anaya pay for college. Later, seeing a lack of training and experience among job applicants, she designed a training program. Early on, she could turn to her relatives for advice but insists the most important family lesson was more subtle. "I had been exposed to what it takes to start a business," and realized "it wasn't this colossal, undoable thing."

Such lessons can span not only generations, but also whole continents. Murugadass Krishnan, co-founder of Smartsoft International (page 118) in Norcross, Ga., was born in India, where his family runs a wholesale foods company. When Krishnan first arrived in the U.S. in 1991, he already knew he would one day start his own company, in large part because of the model his father and brothers provided. "Everything," he says, "I learned from them." Rod Kurtz

Winning through tech:

Does your use of new technology give you a competitive advantage?

  • 41% Very much
  • 40% Somewhat
  • 17% Minimally
  • 1% Not at all

The infosystems budget:

Inc. 500 execs don't have buyer's remorse when it comes to technology. This is what they said when asked to review their IT expenses in recent years.

  • 51% We have been conservative in our spending, but we are about where we want to be.
  • 43% We have invested aggressively and now enjoy a competitive advantage.
  • 5% We have been too conservative in our spending and are now at a disadvantage.
  • 1% We invested too much and are unlikely to get the return we expected.

Finicky Financing

A business plan may be brilliant, but getting start-up capital is still a challenge. As usual, the majority of this year's Inc. 500 companies were launched using the founders' personal assets, loans, or funds from friends and family. However, a few crafty Inc. 500 founders secured cash elsewhere. Some asked the man upstairs. Scott Pipitone, founder of Scott Pipitone Design (page 26), was lucky enough to have a neighbor with more than a handy pantry. The upstairs tenant, an IBM salesman, lent him $10,000. (Pipitone used some of the money to buy a Mac.) With nothing more than a scant $1,500 credit line and deeply in debt with student loans, Jeanne Battaglia-Dillon, founder of Managed Care Network (page 66), and husband Stephen moved into the attic and rented their three-story home to five college students. For four years, their young tenants supported the growth of the company. And Dean Soll, president of SubZero Constructors (page 102), credits frequent-flier miles with getting his company off the ground. With no money to start his business, he turned in his miles for a first-class ticket to Atlanta, adopted a "think big, act big" attitude, and landed a $1 million contract with a large former client from a previous job. The $100,000 down payment was enough to get started. Bobbie Gossage

Night-table necessities

Even busy Inc. 500 CEOs find time to read. These volumes were particularly helpful:

The Great Game of Business by Jack Stack. "Benchmarking, open-book management, cross-training, and countless other 'common' principles used in great companies but alien to dentistry. We've been able to change the face of dentistry thanks to these principles," says Rick Workman, Heartland Dental Care (page 70).

Socratic Selling by Kevin Daley and The Power of Focus by Jack Canfield are recommended by Dayne Williams, Co-Advantage Resources (page 73).

The Ecology of Commerce by Paul Hawken "makes a strong point that companies look at the bottom line and short-term financial results, while completely disregarding the untold damage to our environment," says Jeff Weltzin, Juxtamark (page 29).

Mastering the Rockefeller Habits: What You Must Do to Increase the Value of Your Fast-Growth Firm by Verne Harnish. "It taught us to set shorter-term targets and what Harnish calls a BHAG, or big hairy audacious goal. It has really kept us growing at astounding rates," says Jeffrey Rogers, Kaizen Direct (page 28). Matthew Fogel

Who's keeping the books?

The accounting firms retained by the Inc. 500 tend to be small.

  • 50% Small local firm
  • 30% Midsize regional or national firm
  • 20% "Big Four" firm

Online, and the top line:

E-commerce and Web-based procurement are deemed important by fewer than half of the Inc. 500.

  • 33% Somewhat important
  • 28% Minimally important
  • 26% Not important
  • 13% Very important-the basis of our business

Markets to watch:

Inc. 500 companies have grown on the strength of good customers. Here they rank their primary source of sales.

  • 41% Large corporations
  • 27% Small or midsize businesses
  • 16% Consumers
  • 14% Government agencies
  • 1% Nonprofit institutions (universities, charities, etc.)

The year ahead:

We asked the Inc. 500 to rank their biggest concerns for 2003.

  • 34% Finding and retaining customers
  • 14% Collecting receivables/managing cash flow
  • 13% Financing growth
  • 13% Finding/retaining employees
  • 13% Fending off competition
  • 7% None
  • 6% Maintaining employee morale/motivation

They Work on Many Levels

As they have in past years, direct selling and multilevel marketing have a presence on the Inc. 500. Tastefully Simple (page 60) in Alexandria, Minn., sells gourmet foods through house parties, and 4life Research of Sandy, Utah (page 64), sells health supplements through 250,000 independent reps--or "consultants," as they are known in MLM circles. Such booming ventures are not uncommon in the industry, which has doubled in size to $28 billion in a decade. According to the Direct Selling Association in Washington, D.C., that growth has been driven by women, who make up 74% of all MLM consultants, and the expanding population of the southeastern states, where MLM is particularly popular.

While the statistics make direct-selling seem attractive, the essential paradox of the strategy is that it can help you grow real big real quick--but people will always wonder if your success is legitimate. Indeed, a 2000 report on MLM from the Federal Trade Commission declared that "most people end up with nothing to show for their money except the expensive products or marketing materials they're pressured to buy." Around the same time the report was released, the FTC and six states had sued 1997's No. 1 Inc. 500 company, Las Vegas-based Equinox International, a maker of environmentally friendly cleansers and shampoo. Ultimately, the company agreed to shut down. Then there's HerbaLife, the weight-loss supplement business whose dance along the line of infamy and respectability seems to have subsided following founder Mark Hughes's death from a drug overdose in March 2000.

"I know that there is a stigma," says Tastefully Simple CEO Jill Blashack. But she asserts that the basic structure is sound. "It is not a scheme, and it's not quick. It's about perseverance. It's a business." Mike Hofman

Current financing plans:

Most Inc. 500 companies are not in the market for financing. Those that are want a decent amount.

  • 72% No plans
  • 26% Expect to raise more than $100,000
  • 2% Expect to raise less than $100,000

Banking on it:

At those Inc. 500 companies looking for more money, the first choice is debt.

  • 50% Commercial bank loan or line of credit
  • 26% Private equity investment
  • 8% Formal venture capital
  • 4% SBA loan or funds from other government program
  • 4% Personal assets
  • 4% Financing from supplier, customer, or other business entity
  • 3% Other founders' personal assets

Loving the Top Job:

Looking to the future, current Inc. 500 CEOs in large numbers intend to continue building their companies. They said the following when asked what they see themselves doing in 5 years:

  • 66% Stay as CEO
  • 18% Sell the the company
  • 9% Hire a new CEO, but stay at the company
  • 7% Retire

Enrons in their midst:

Are sketchy ethics as common among private companies as they are among the big corporations that have been hammered for bad behavior over the past two years? The Inc. 500 is roughly split.

  • 54% Yes
  • 46% No

True Grit

Exulting in a company's birth is difficult when the founder is confronting death. On Christmas Eve, 1994, three weeks after Ken Montgomery and his two children incorporated drug maker PharmaFab (page 66), Montgomery was diagnosed with lung cancer. He was told he had two months to live--maybe.

Until then, PharmaFab looked ripe with potential. Much of it resided in Montgomery, who had a lifetime of industry experience. His children knew his death would devastate the family. They feared it might devastate the company as well. But "we had to go forward," says Ryan Montgomery, PharmaFab's treasurer, "if for nothing else, to give my dad something to live for."

The strength to go on in the face of disaster is striking among members of the Inc. 500. Setbacks that would drive most into a dark corner only steel their resolve. "I just hung on, bit my lip, and white-knuckled it through," says Mina Mann of the time a flood in Houston left a major client's mailroom underwater, postponing desperately needed payments to her ad agency, Grant Harrison (page 29). Deborah Weidenhamer endured a dark night when Auction Systems Auctioneers & Appraisers (page 105) almost collapsed. "The conventional wisdom said close," she recalls. "But my driving force said don't." Then there's Randy J. Slager, whose Army career was cut short by a severe spinal injury. Low-stress civilian life beckoned, but he chose instead to start a business: Catapult Technology (page 34), a federal contractor. Personal grit doesn't rate with banks, unfortunately; some two dozen turned him down because his injury posed an unacceptable risk. But he persevered, ultimately working with a House committee to open SBA development programs to disabled vets. Certification in hand, Catapult won its first contract, and the cash started flowing. PharmaFab also prospered, despite its founder's illness. Against doctor's orders, Montgomery set out on a road trip to pitch the new business. He died in January 1997--the company's first profitable month. Leigh Buchanan

Welcome to the Real World

The market's waning appetite for fly-by-night Internet concoctions proved it doesn't pay for neophytes to jump into e-commerce. With eyes bigger than their stomachs, entrepreneurs hungry for instant gratification watched fortunes and fragile business plans crash like bad diets. Meanwhile, Web operations built by those with time-tested understanding of their business not only survived but flourished.

42% of companies have hired a CFO since start-up.

Stephen Antisdel, CEO of FurnitureFind (page 106), applied firsthand knowledge of customers' shopping frustrations--gained through 25 years in his family's furniture business--in building his online store. Its vast selection, combined with a staff steeped in customer service and product knowledge, helps eliminate endless weekend store-to-store searches for the right sofa or table. A typical fan declares, "You saved me three Saturdays, and I got on the golf course." (page 117) grew out of Ancestry Publishing, which has a 21-year history providing genealogical research materials. But the folks there recognized its true mission: helping people stay connected in a world that scatters family faster than ever. The Net simply was a more efficient way to fulfill "people's desire to find out about who they are, and to discover people who can help color and reinforce those stories," says CEO Tom Stockham.

Folks like Jay Steinfeld, CEO of No Brainer Enterprises (page 38), an online retailer of window coverings, never even considered e-business different from any other. "We just do online what we used to do in person," he says. "We don't rely on the Internet or technology to do the selling for us." Cara Cannella

Legal woes:

Spent time huddling with lawyers lately? Among 130 Inc. 500 companies that say they have been involved in litigation or investigated, here are the most common trouble spots.

  • 47% Dispute with customer
  • 24% Dispute with supplier
  • 15% Patent litigation
  • 8% Fraud
  • 4% Product liability
  • 2% Employee injury
68% of Inc. 500 companies have independent directors.

Coping with health costs:

With their ranks of employees swelling, Inc. 500 companies are particularly vulnerable to the rising cost of health insurance. Here's how they've reacted.

  • 36% We have not reduced benefits or increased the share paid by employees, but we have attempted to find lower-cost alternatives.
  • 25% It's a problem, but we don't feel there's much we can do.
  • 20% We have reduced benefits or increased the share paid by employees.
  • 9% It's a problem that we plan to address but haven't done so yet.
  • 9% It hasn't really affected us.