URL: http://www.entrepreneur.com/magazine/entrepreneur/1999/march/17278.html

A small high-tech company must scale many walls if it wants to transform itself from a wannabe into the next Amazon.com or Intel. In addition to the typical demands of running a business, tech entrepreneurs have a whole different set of issues to deal with when growing their companies. With today's dearth of technical workers, they must find creative ways to retain employees who could quit and find a higher-paying job the very next day. High-tech entrepreneurs must learn to strike a balance between their dual roles as chief technologists and CEOs--and bring in help if their shortcomings become apparent. And they must struggle to reinvent their companies if market demand evaporates with just one move from Microsoft or another giant.

Growing a tech firm, one that manufactures or provides technology products or services, or sells products or services exclusively through the Internet, is subject to unforeseen circumstances well beyond an entrepreneur's control.

But that doesn't mean small high-tech companies are letting reality rain on their parade. By and large, tech firms see good times ahead. In fact, according to a recent study by PricewaterhouseCoopers LLP, CEOs of small high-tech companies expect to achieve stronger revenue growth than their larger counterparts: Small companies anticipate a 27.1 percent revenue increase through midyear, compared to 18.5 percent anticipated growth at large companies.

"The outlook at many high-tech companies is quite optimistic," says Murray Alter, tax partner in charge of tech and venture capital with PricewaterhouseCoopers. "Many have grown in sales and customers, and geographically in outreach. Despite [the Asian economic crisis], they continue to see strong growth in the near future."

Indeed, the economic outlook remains rosy for high-tech businesses. Still, cutting-edge entrepreneurs anticipate several potential barriers to growth. According to the study, more than two-thirds of the CEOs surveyed at small tech firms cite a lack of qualified workers as a stumbling block to achieving their revenue goals. Concern over market demand (43 percent), legislative and regulatory pressures (32 percent), competition from foreign markets (13 percent) and their own ability to manage or reorganize (26 percent) weigh heavily on their minds as well.

Taking this into account, we look more closely at these and other growing pains plaguing small high-tech companies--and what some successful entrepreneurs are doing about it.

According to the PricewaterhouseCoopers study, 84 percent of small high-tech firms plan to add more workers by midyear. Small tech firms desperately need more workers if they want to achieve their lofty revenue goals. Consequently, the majority are laying out the welcome mat for new employees.

Yet finding and retaining qualified employees remains a tall order for tech companies of all sizes. Competition for talented techies is verging on the cutthroat in a job market that remains startlingly constricted.

Experts say offering flexible work environments, generous stock options and an anything-goes dress code isn't enough anymore. One of the best ways to attract and keep talented technical personnel is to embark on new, innovative projects. "These are people who need a challenge," Alter says. "They put their heart and soul into their work--and need to have excitement."

Linda Yates, CEO of Menlo Park, California-based Strategos Inc., an innovation strategy firm that specializes in collaborative learning software, is providing just that. "We wanted to become the antidote to Dilbert," laughs Yates, 35. "So many people are disconnected from work, yet they spend so much time there. We wanted to find a way to get people really excited [about their work]."

A key part of Strategos' philosophy is creating opportunities for innovation within the company, which now has 30 employees. "Companies are losing out on opportunities by not providing their employees with what they need [to be innovative] inside the office," Yates explains. "There's no law that says companies can't build inside if they create a space for people to do that. That way, [employees] don't need to create spin-off companies."

It's not surprising that Strategos is taking a creative approach to building employee loyalty. In fact, innovation is what the firm is all about. So far, three businesses have been created under the company's umbrella: Strategos, an innovation consulting company; Strategos Institute, a think tank for innovation ideas; and Strategos Innovation Environment, a software company that creates Web, video and CD-ROM tools for collaborative innovation. Employees are given responsibilities in all three businesses to keep their interest level high, and many have been influential in developing these companies from the ground up. "We give employees more free rein," says Yates. "We don't micromanage people. They get to be innovative."

At Strategos, all 14 high-level directors earn, in addition to their salary, a yearly bonus divvied up according to how members' contributions to the firm are rated by their peers.

Another sign Strategos doesn't follow the crowd: Employees are actually encouraged to take time off. Many members take long trips, sabbaticals and mental-health breaks, with the assurance their jobs will be there when they get back.

"Our belief is that [travel] actually makes people better participants in the company," Yates says. "They get the opportunity to pursue those interests that are good for their personal development."

This laissez-faire attitude has paid off. Since its inception in February 1995, Strategos has grown from a
$7 million to a $15 million company.

Although not all high-tech companies offer new and innovative products and services, those that do need a market that's ready and willing to buy. With the flood of products and services available today, market demand remains another chief concern among today's tech entrepreneurs.

Rudy Prince, president and CEO of JetFax Inc., a Menlo Park, California, document communication company, knows firsthand what it's like to be ahead of the technology curve. In 1988, Prince started JetFax to build multifunctional laser printer/fax machines, long before Hewlett-Packard's OfficeJet was a household name.

With an initial $1.7 million investment, JetFax introduced the first fax interface for laser printers in 1988. But the concept was too new and sales weren't what Prince had hoped they'd be. "Being on the front end [of the multifunctional-product market] definitely had its problems," admits Prince, 41. "You want to hit the ramp, but not too early."

For JetFax, market education proved to be the best course of action. The company spent a lot of its resources acquainting copier dealers with laser-printer technology and software installation. Then, in 1994, the multifunctional-product market started to pick up with the release of the OfficeJet from Hewlett-Packard. Xerox entered the market shortly thereafter, driving prices down and further familiarizing consumers with the concept.

Because of its solid core technology and early experience in the market, JetFax was able to capitalize on the growing trend. During the following years, it developed strategic alliances with Hewlett-Packard, Samsung Electronics and Xerox to jointly build multifunctional products. "There was a certain amount of market confusion," Prince says. "So rather than doing it on our own, we partnered with companies that had the marketing power we needed."

Today, JetFax is a leading developer and provider of multifunctional system technology; its M900 product line has garnered many industry awards. The company has grown to 125 employees and three locations, and Prince projects $40 million in sales this year.

And Prince is at it again. Last December, his company released the JetFax M900e series of multifunctional products, which merge e-mail capabilities with fax machines. He knows that, once again, he's slightly ahead of his time. But, for Prince, it's a matter of patience, perseverance and trust.

"Even though we're in the market early, it's moving quickly," Prince says. "So many people are sending documents via e-mail. There's definitely a market. It can't turn overnight, but when it does, it can turn fast."

In 1986, Dawn DeBruyn formed her company, Concurrent Controls, based in South San Francisco, California, to develop software that allows multiple users to share the power and resources of a single computer. The company's first product, a multiuser DOS solution, met with fair success. But with the growing popularity of Microsoft Windows, DeBruyn knew it was time to change direction.

"The DOS market was going away," DeBruyn says. "We really needed a high-profile product to push us forward."

Like Concurrent Controls, many high-tech companies start out with a bang. But all too often, their moment in the spotlight is short-lived, and without new products or services to back up their original success, they quickly fade into obscurity.

"Building one great product just doesn't cut it," says William Stitt, director of the Center for Entrepreneurship of New Technological Ventures at Rensselaer Polytechnic Institute in Troy, New York. "Many companies reach a fork in the road and need to follow up with a second or third product."

A new product from Microsoft finally catapulted DeBruyn's company forward: Windows 95. Unlike previous versions of the operating system, Windows 95 came with built-in multitasking features that allowed users to run several programs simultaneously. Concurrent Controls began developing Applica U2, a product that would harness those multitasking features to let a PC user with the Windows 95 (and now Windows 98) operating system share his or her computer with another user who has a second monitor and keyboard. "We knew Windows 95 would be a big success because of the marketing power of Microsoft," DeBruyn says. "We were convinced that if we could build [Applica U2], we'd have a unique product."

Concurrent Controls released Applica U2 in 1997, and more than 60,000 copies have been sold to date.

But the innovating didn't stop there. Last December, DeBruyn's company released Applica for TSE (Terminal Server Edition) for use in network computing environments, and it has a Windows NT version in the works. "You have to constantly be reinventing yourself," DeBruyn says. "It's all about natural progression."

Although high-tech entrepreneurs may excel in coming up with innovative product and service ideas, or developing a company that is a sure-fire hit on the Internet, not all are gifted in the area of growing and managing their businesses. Sometimes the real barrier to success is the founder.

"If the CEO becomes a constraint to growth, [he or she] needs to have the wisdom to [adjust his or her] role," Stitt says. Smart owners aren't afraid to pay for people who can handle positions they're not strong in.

Having difficulty letting go is a trap many entrepreneurs fall into. Matthew Glickman and Mark Selcow, both 33, know this problem well. In 1996, they founded BabyCenter, a San Francisco Internet company that provides a complete online information resource and store for new and expectant parents; it also has a division that designs Web sites for health-care organizations.

Early on, Glickman and Selcow wore many hats, playing crucial roles in the development of BabyCenter's Web site (http://www.babycenter.com), online store and Web site development division. "As founders, we had to do everything," Selcow says. "But we quickly realized we were both becoming overwhelmed."

After long hours and sleepless nights, Glickman and Selcow realized they needed to concentrate on building the company. Three rounds of venture capital from such companies as Intel have helped, as has the partners' focus on long-range issues, such as developing their online store and forging strategic partnerships.

Last year, the partners created several management positions and tripled their staff from 20 to 65 employees. They also adopted a management strategy that lets the reins out further: team management. "They have to be justified, but we let the team make its own decisions," Selcow says.

These are just a few of the many challenges facing today's high-tech companies. Others include concern over possible legislation that might hinder company growth and how to manage fast growth.

But due to their tenacious nature, many tech entrepreneurs continue to find ways to overcome these obstacles. "Most have eternal optimism, and unbelievable faith and hope," says Alter. "In the end, they believe they'll be successful. After all, that's the reason they're entrepreneurs in the first place."

Names and ages: Mie-Yun Lee, 31; Brenda Chin Hsu, 32

Company name and description: BuyersZone employs technical talent to develop and operate a Web site, http://www.buyerszone.com , to help busy entrepreneurs evaluate and purchase office equipment and services.

Based: Watertown, Massachusetts

Founded: 1992

Start-up costs: $20,000

1999 sales projections: $2 million

Number of employees: 15

Testing the waters:To acquire and retain the best technical expertise, BuyersZone initially hires software engineers on a consulting basis. This gives the company a chance to evaluate their technical skills and how they work with other employees before bringing them on board. "It's hard to evaluate [technical] employees by resume only," Lee says. "This way, we can work with them to see how they communicate with us."

Way to grow: With sales increasing at an ultra-fast clip of 30 percent each quarter, BuyersZone has been forced to institute many policies for managing its brisk growth. Among them: forming partnerships with such companies as Excite, Netscape and Yahoo; monthly meetings to assess operations and goals; and the development of a "great ideas" database to document employees' thoughts on new products and company operations.

What a pair: Realizing she lacked the necessary skills to grow her business, in 1996, Lee went in search of a CEO with strong sales, marketing and financial-management experience. She found it in Hsu, who now oversees BuyersZone's strategic and operational activities. "It was too big an idea for me to do on my own," admits Lee, who is now editorial director. "I needed someone with a vision that would complement mine."

Contact Sources

BabyCenter, (415) 537-0900

JetFax Inc., fax: (650) 326-6003, http://www.efax.com

Strategos,http://www. strategosnet.com