Striking It Rich
By Alexander L. Taylor III
A new breed of risk takers is betting on the high-technology future
It is among the most durable of American dreams. The young man with a bright idea for a new product or service decides to form his own company. He invests his family's savings in the new venture. He is soon working 18-hour days but does not mind because the company is his own. Sales start sluggishly, and he makes enough mistakes to fill a textbook. Eventually it all pays off. Profits boom; he makes it big. He becomes wealthy beyond his wildest hopes.
That is not just some Walter Mitty fantasy. New businesses are being created in the U.S. today as never before. Last year some 587,000 companies were incorporated, 80% more than in 1975 and 53,000 more than in 1980. During the past 18 months, hundreds of people became millionaires or multimillionaires when shares in their new companies were sold to the public for the first time. Among the stock winners: Bill Saxon, 53, of Saxon Oil Co. ($212 million); Philip Knight, 43, of Nike athletic shoes ($178 million); Herbert Boyer, 45, and Robert Swanson, 34, of Genentech ($32 million each).
Some of these successful new capitalists are tinkering innovators in blue jeans, while others are button-down bankers with M.B.A.s. Some are immigrants or the sons of blue-collar workers, while others are from old established families. Most are still little known outside their own fields. Frederick W. Smith, 37, is just another guy named, well, Smith. Yet his company, Federal Express Corp., has become a $600 million firm by delivering packages that "absolutely, positively have to be there overnight," as its ads claim. Nolan K. Bushnell, 39, invented Pong, the first video game, in 1972. He then sold his company, Atari, to Warner Communications in 1976 for $28 million. Steven Jobs, 26, the co-founder of five-year-old Apple Computer, practically singlehanded created the personal computer industry. This college dropout is now worth $149 million.
Even though the U.S. languishes in its third recession in ten years, and industries like autos and steel seem incapable of competing with the Japanese, the bright, bold and brassy risk takers are not only thriving; they are leading the U.S. into the industries of the 21st century. Writes George Gilder, a supply-side theorist, in Wealth and Poverty: "Entrepreneurs are fighting America's only serious war against poverty. The potentialities of invention and enterprise are now greater than ever before in human history."
New companies have become a vital source of American economic growth. According to Stanley Pratt, editor of the Venture Capital Journal, small businesses created 3 million jobs in the past ten years. The largest 1,000 American firms, on the other hand, recorded virtually no net gain in employment during the same period. Says Benjamin Rosen, an electronics industry analyst and a financial backer of new enterprises: "These companies represent the true vitality of the American economy. We are wasting too many of our resources trying to keep alive dying industries like steel and automobiles rather than paying attention to and helping these new firms." he odds against success, of course, are high. In 1981 the number of U.S. business failures was 45% higher than 1980, reaching a 20-year high of 17,040. Indeed, only one in ten investments in a new company may ever return a profit. Investors are already wondering whether the early promise of some gene-splicing firms will pay off.
Nonetheless, its entrepreneurial spirit is perhaps the greatest advantage the U.S. has in the highly competitive world marketplace. Neither Europe nor Japan has a strong tradition of adventurous small businessmen starting up their own firms, and neither has matched the American record for developing revolutionary new products. Financial backing for such ventures in Europe is more difficult to get. Says Alan J. Patricof, who is forming a British venture-capital fund: "The attitude in Europe has been much more paternalistic. Stories about big killings by 26-year-olds just aren't known."
Japan is skilled in the mass production of high-quality goods and has become a formidable competitor in established industries like memory chips and home electronics. But Japan encourages corporate development at the expense of individual initiative. Says Kenji Tamiya, president of Sony Corp. of America: "Japanese society is more highly organized, and big organizations tend to avoid risk. Particularly in new fields like personal computers or video games, you must take risks and make decisions quickly. This gives the U.S. an advantage."
Only a few years ago, American risk taking almost dried up. In 1969 Congress increased from 25% to 49% :he maximum tax on long-term capital gains--the profit made by an investor on the sale of stocks, real estate and other property.
The effect was devastating. The amount of money that Americans were willing to gamble on a long-shot business dropped sharply. In 1969, $171 million was amassed in venture capital. By 1975 the amount had fallen to just $10 million.
In 1978, however, Congress rolled back the capital gains tax rate to 28%. With the potential payoff increased, investors were again willing to take a risk. Last year $1.3 billion in venture funds was accumulated, more than 100 times the amount of only six years earlier.
Throughout American history, the nation's entrepreneurs have been the catalysts that sparked the formation of new industries. Three of those pioneers:
In 1813, Francis Cabot Lowell, a Boston merchant, created the first modern textile factory to combine yarn spinning and cloth weaving under one roof. He traveled to Britain to study established operations, took on some partners and raised $400,000 in venture capital from family and friends. Lowell then sold his cloth through a few large wholesale outlets in New England. He added to his profits by selling copies of the machines he developed to make the cloth. By 1817 his business had annual sales of more than $34,000, and Lowell paid his investors a dividend of 17%.
George Westinghouse, the son of a farm-equipment manufacturer, speeded the growth of two modern industries. The airbrake that he invented in 1869 at age 22 made highspeed railroad travel safe for the first time. Then, 17 years later, he formed the Westinghouse Electric Co. to develop alternating current and make the first big generators and transformers. These made possible the wide-scale use of electricity. By 1900, Westinghouse's enterprises were valued at $120 million and employed about 50,000 workers. Then, as now, risk takers can run into trouble. Westinghouse was forced out as head of the companies during the financial panic of 1907.
Edwin Land, a tinkering scientist, founded the Polaroid Corp. in 1937 to make nonglare lenses. In 1948 he marketed a new camera that could produce pictures immediately. Competitors like Eastman Kodak thought it was a gimmick, but the product was an overwhelming success and opened up a whole new industry. When Land retired as head of the company in 1980, he had accumulated Polaroid stock worth more than $75 million.
Certain regions of the U.S. have always seemed to lure venturesome people more than others. At the beginning of the 20th century, many automotive pioneers came to Detroit. There they found a deep-waterport and a good railroad system that gave easy access to supplies of coal and iron and a convenient way to ship their new cars back to local markets. They also found a prosperous wagon-making industry with a pool of skilled craftsmen, as well as a bustling atmosphere that encouraged innovation and manufacturing.
In today's high-technology industries, proximity to raw materials or water transportation is not as important as it was for the auto industry. The entrepreneurial spirit now seems to flourish best near universities. There companies just getting started can find research help for their projects. In addition, discoveries made in laboratories frequently have a commercial application in new products.
One such place is Minneapolis. Engineering Research Associates, a pioneering computer company, was founded there in 1946. After the firm was absorbed by Sperry Rand, William Norris, one of its founders, left to start Control Data Corp. in 1957, which he financed by selling 615,000 shares of stock for $1 apiece. Today a share of the original stock is worth $324. Another alumnus of Engineering Research was Seymour Cray, who built the world's fastest computers at his company, Cray Research. Both firms thrived in the Minneapolis area, and many other high-technology companies have sprung up near by, where they have benefited from a steady supply of new engineers from the University of Minnesota and an established system of local financing.
Other pockets of entrepreneurial activity are found along the Boston beltways of routes 128 and 495, at the foothills of the Rocky Mountains in Colorado, and to the north and west of Dallas. Several former employees of Dallas-based Texas Instruments have set up their own companies specializing in communications, including Digital Switch Corp., Intecom and Danray. Gordon Matthews, 45, worked for IBM and Texas Instruments before starting companies of his own. His third and latest venture is ECS Telecommunications, which sells a computerized system that stores and transfers messages by telephone. Last year the three-year-old firm had sales of $4 million, and Matthews bullishly says they could double this year.
The most explosive area for growth companies today is south of San Francisco Bay in a 250-sq.-mi. area in Santa Clara County, where orchards of apricots, prunes and cherries were once a main source of income. Tiny semiconductors made with chips of silicon that were first manufactured there at the end of the '60s gave the region its nickname--"Silicon Valley." Growing up alongside the semiconductor companies in such towns as Sunnyvale, Los Altos and Cupertino are a host of new, high-tech industries. Says Michael Shields, a catalogue marketer in Palo Alto: "Living here is like riding in the nose cone of the space shuttle. We're riding into the future."
A range of other industries is also growing up in the region. Some say it should really be called the Siliclone Valley because of the 16 genetic-engineering companies now located there. Robert Swanson, an M.B.A. from M.I.T., and Biochemist Herbert Boyer, for example, started Genentech. Collagen Corp., a bio-medical products company in Palo Alto, makes a biological implant called Zyderm, which helps remove the effects of scars from the human skin. Companies like Coherent Radiation in Palo Alto are doing pioneering work in the industrial use of lasers.
There are now no fewer than 786 electronics firms in the fertile valley at the foot of the Diablo Range. In 1980 they produced $8.7 billion worth of goods. The American Alliance for Innovation now gives two-day seminars on marketing strategies and venture capital for hopeful entrepreneurs. Says William Hambrecht, a San Francisco investment banker whose firm, Hambrecht & Quist, helped launch Apple Computer and Genentech: "Being a successful entrepreneur here is one of the most privileged positions in today's world."
The mere presence of so many profitable businesses leads to the creation of still more companies. The entrepreneur has become the local cultural hero and role model, just as movie directors are in Los Angeles or oil drillers in Houston. Nearly everybody knows someone who left a company and started up his own.
David Steininger, 33, a graduate of Purdue University, is currently a project manager with Palo Alto's Electric Power Research Institute, an energy think tank. Says he: "I want to make my own mark and do something that has a lot more challenge. If you can't win a Nobel Prize, the next best thing is to start your own company." Steininger is thinking about forming a firm that will develop new oil-recovery technology.
One secret of the valley's success is a well-developed business network. An informal group of experienced executives, consultants and development services has sprung up to help start new businesses and then help them manage rapid growth. With a couple of local phone calls, a budding businessman with the right ideas can round up $1 million in venture capital in a day. Says British-born Adam Osborne, 42, who has already accumulated $70 million in orders for his year-old personal computer company, Osborne Computer Corp.: "Every single thing we need is within an hour's drive for us."
Just as important as the network is the attitude of businessmen and backers toward infant enterprises. They see failure as a demonstration of an adventurous intellect, not as a shortcoming. Says Gordon Moore, 53, the chairman of Intel Corp., a major semiconductor manufacturer: "Even when someone starts a company and fails, he'll be more valuable than someone else the next time because of his business experience." The result is an effervescent creative spirit that bubbles like California's best sparkling wine. Says Dallas-based LJ. Sevin, managing partner of Sevin Rosen Partners, which invests heavily in the new firms: "Between 60% and 70% of the most interesting ideas for new companies come out of the Bay Area."
Stanford University, near Palo Alto, was the source of much of the valley's spirit and success. Two Stanford graduates, William Hewlett and David Packard, opened a small company not far from the campus in 1939. Hewlett-Packard is now the area's largest electronics employer and a leader in computer-based technologies. Moreover, many of its employees have left the company to start a host of new businesses. Among the most successful: Apple Co-Founder Stephen Wozniak and Tandem Computers' James Treybig.
Other firms were started by Stanford University professors. William Shockley, co-inventor of the transistor, taught electrical engineering at Stanford. Eight alumni of Shockley Transistor Corp., which he founded in 1956, went on to form Fairchild Camera and Instrument, which launched the microchip industry. Some 53 so-called Fairchildren who left the firm have started their own semiconductor companies.
The adventurous businessmen of Silicon Valley also created a style of management that is likely to have a strong impact on business in other parts of the U.S. Executives in the valley face a few acute problems because of their highly competitive environment: keeping workers satisfied in order to reduce job hopping, arid maintaining the small-company entrepreneurial spirit as firms grow larger. Experienced technicians are in short supply and can easily win large salary increases and hefty bonuses by changing employers. Executives are also fearful that as their firms expand, they will lose the ability to respond quickly to changing market conditions and new technology.
ROLM Corp. in Santa Clara, a manufacturer of computerized telephones and computers for the military, has been a pioneer in developing a new corporate life-style that encourages worker loyalty and innovation. The company built a $1 million sports complex at its headquarters that is used by two-thirds of the staff members. They can stretch their muscles on Nautilus body-building equipment, take lessons in aerobic dancing and Kung Fu and then relax in a Jacuzzi or a tanning parlor.
To keep workers intellectually fresh, ROLM gives each employee three months of paid time off for every six years of service. Most people use the time to travel. One engineer crossed the Sahara Desert during his sabbatical, another trekked to Mount Everest. Says Executive Vice President Robert Maxfield: "When our people return from sabbaticals, they bring back a fresh attitude. They don't settle into the old ways of doing things."
At Tandem Computers, which built the first fail-safe computer systems in 1974, employees gather every Friday afternoon with President Treybig, 41, for a beer party around the company swimming pool. The sessions help keep everyone informed about what is happening inside the company. Other companies in the valley have started similar gatherings.
Another way to keep creative workers from wandering is to give them a stake in the company. Tandem widely distributes stock options to employees at all levels so that they can participate in the growth of the firm. So far 25 of Tandem's 3,000 employees have earned $1 million through company stock ownership, 100 have earned $500,000, and 1,000 others $50,000 each.
Sudden wealth can transform the way the entrepreneurs live and work. A few unabashedly flaunt their new riches. WJ. (Jerry) Sanders III, 45, who delivered milk and dug ditches while growing up in Chicago, started Advanced Micro Devices, an early semiconductor manufacturer, in the dining room of his home in 1969. Today he owns houses in the Bel Air section of Los Angeles and in Malibu, and has a Bentley, a Ferrari and a Rolls-Royce. A year ago, Sanders rented San Francisco's Civic Center to treat 7,000 workers to a $350,000 party. Atari Founder Nolan Bushnell owns two yachts: the 41-ft. Pong, which he has lent to a friend, and the 44-ft. Sea Rat, which he uses himself.
Many young risk takers regard their accumulated wealth as a yardstick of success rather than as an end in itself. K.P. (Phil) Hwang, 45, emigrated from Korea in the early '60s and worked as a busboy and waiter while attending Utah State University. In 1975 he used $9,000 in family savings to found Tele Video Systems, a company that makes computer screens and keyboards. Although Hwang is now a multimillionaire, he says that his wife still fusses over utility bills and turns down the thermostat at home.
A few serpents, however, have begun to crawl into northern California's economic Garden of Eden. Though renowned for their liberal personnel policies, some Silicon Valley employers are under attack for their treatment of hourly production workers. Assembling circuit boards or inspecting chips is a tedious dead-end job that has attracted thousands of Mexicans, Filipinos and Vietnamese immigrants. Many earn wages of less than $5 an hour, low by industry standards.
In addition, the blue sky and open spaces that attracted the area's pioneers 25 years ago are now becoming obscured by industrial parks and a thin layer of smog. Crime is on the rise. The theft of computers and semiconductors has become an estimated $20 million-a-year problem. Housing is scarce and expensive. The price of an average home in Santa Clara County is now $128,484.
One result is that some Silicon Valley companies are looking around the U.S. when they want room to expand. Many states, in search of industries that are clean, fast-growing and pay good wages and fringe benefits to skilled workers, would like to attract such companies. North Carolina is spending more than $24 million to build a microelectronics center near Durham in what is called the Research Triangle.
The spirit and support structure of the risk culture can be hard to duplicate. Starting a successful new business requires a unique combination of characteristics that has little to do with geography. John Welsh and Jerry White of Southern Methodist University's Caruth Institute of Owner-Managed Business have studied the personality traits of risk takers. Chief among them are self-confidence, vision and the need to be in charge. Indeed, many have been frustrated at larger companies. Says White: "Entrepreneurs have a fundamental need to control their own destiny. Seldom can they find this in someone else's organization." Although most entrepreneurs have worked for large corporations, they usually stayed only a short time.
Headstrong and independent, risk takers are rebels with a cause--themselves. William F.X. Grubb, 37, left Atari, the successful manufacturer of home video equipment, and formed Imagic, which makes video game cartridges and hopes to have sales of $25 million or more this fiscal year. Says he: "Entrepreneurs want to be able to test their abilities and see how far they can go. It's the ultimate report card." That same pioneering spirit can make these businessmen hard to live with. Many are workaholics who lock themselves up in their offices for long stretches and have little tolerance for socializing.
One Wall Street adage has it that if a person has not made his first million dollars by the time he is 30, he is never going to make it. In 1776 Adam Smith wrote that it was young people who had "the contempt of risk and the presumptuous hope of success," precisely the skills needed to found new businesses. Indeed, a large number of entrepreneurs have achieved success at a very early age. One of many examples: William Gates, 26, dropped out of Harvard in 1975 during his sophomore year to form Microsoft, which makes software for personal computers. Its 1981 sales: $15 million.
Patrick Liles, a former Harvard Business School professor now with the Charles River Partnership, a Boston venture capital firm, says that the best time for a businessman to start a company is between the ages of 26 and 36. Says he: "Earlier than that, a young person lacks business experience, competence and self-confidence. And by his late 30s or early 40s, the person is usually too embedded in his corporate career or facing too many financial commitments to take a chance."
In some exceptional individuals, however, the entrepreneurial spirit never ages. Henry Kloss, 53, founded his first company, Acoustic Research in Cambridge, Mass., at the age of 22. It made stereo speakers, and he eventually sold it to his partner. Headstrong and impulsive, Kloss has since gone on to establish three more home electronics firms, including Advent, which is now in receivership. His latest is Kloss Video, which makes large-screen-projection TV sets and was started in 1977. But Kloss may now be too tired for another new venture. Says he: "Each one of those enterprises started with a bare room, and I don't have the heart for it again."
Entrepreneurs like Kloss often move restlessly from one field to another, starting new companies like an industrial Johnny Appleseed. S. Allan Kline, 61, is a physicist by training, so it is not surprising that he helped found Xicor, a company that makes memory chips for computers. Less expected was his development of a nutritional snack. New Generation Foods, which he founded in 1977, last year sold $3.6 million worth of Spicer's WheaTwists, a low-calorie, high-protein snack chip. Quips Kline: "I'm in the chips business: one edible, one inedible."
A few risk takers are immigrants who came to America to reap the benefits of its entrepreneurial climate. Sirjang Lai Tandon, 39, left his native India in 1960. In 1975 he founded a firm that makes disc drives for personal computers that are sold by Radio Shack and other companies. Last year his firm had sales of $54.2 million. Jesse I. Aweida, 50, the Palestinian-born founder of Storage Technology in Louisville, Colo., turned the computer memory company into a $922 million-a-year business. Both Altos Computer Systems in San Jose, Calif., and Osborne Computer Corp. in Hayward, Calif., were founded by businessmen who had moved to the U.S. from Britain.
The very factors that make entrepreneurs successful in starting companies can lead to problems later on. Frequently egotistical, the upstart executives seldom admit failure and sometimes refuse to share responsibility or hire good people to help run the company. A crucial turning point comes when a new enterprise reaches sales of about $250 million. In some cases, like that of Engineer Kenneth Olsen of Digital Equipment Corp. in Maynard, Mass., the innovative founder develops the managerial skills to run a large, complex organization. In other cases, the entrepreneur gets in trouble and must get help from professional managers. Centronics Data Computer Corp., a New Hampshire maker of computer printers founded by Robert Howard in 1968, ran into financial problems in 1980. Managinto financial problems in 1980. Managers from Xerox and Raytheon were brought in to help. Losses ran to $24.5 million on sales of $123.9 million from June 1980 to June 1981. The company has signed an agreement with Control Data that could bring in $25 million in new cash, and Howard may be forced to step down as chairman.
Sometimes a company's backers insist on professional management from the start. David Lee, 44, of San Jose, invented a high-speed printing system, known as the daisy wheel, which is now widely used in office machines. In 1973, when he started his own firm, Qume, in Silicon Valley, he and his backers agreed that an outsider should be head of the organization. Robert Schroeder, a Harvard M.B.A., then came in to run the company.
Once the risk takers have established their firms and developed new customers, they face inevitable challenges from older and bigger companies that are attracted to the growing markets. The semiconductor industry shows what can happen. Intel in Santa Clara invented the first memory chip in 1968. Then American giants such as Motorola and Texas Instruments jumped into the market. After them came the Japanese, who now control 40% of the business for the most, popular size, the 16K memory chip.
Partly as a result of this increased competition, Intel sales fell by $66 million last year, and its profits were down 72%. National Semiconductor, whose earnings dropped from $30.2 million to $1.2 million during the last half of 1981, has halted construction of a plant in Arlington, Texas, and last year asked its employees to take twelve extra unpaid vacation days.
Intel President Andrew Grove predicts that his and other semiconductor firms can defeat the Japanese challenge. Says he: "Our industry is in a critical stage of development, with our market under attack. We are now fighting a vicious assault; but so far as I am concerned, we will succeed."
That kind of can-do confidence has always been the hallmark of American entrepreneurs. At a time when the U.S. sees its economic power eroding, these businessmen are a unique source of strength. They are pioneering new industries in telecommunications, bioengineering and lasers. They are providing U.S. business with a fresh burst of energy. Says Arthur Levitt Jr., chairman of the American Stock Exchange: "If there is any hope for our economy, it rests with these people. They are the most challenging, irreverent bunch around." They are also the bunch leading the U.S. into the high-technology future.
-- By Alexander L. Taylor III. Reported by Michael Moritz/ San Francisco and Frederick Ungeheuer/New York
With reporting by Michael Moritz, Frederick Ungeheuer
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