Burn the Business Plan

by Carl J Schramm

  Kasbar and Stebbins are much like Dyson and Head. They saw a way to solve a problem that others had yet to recognize, much less act upon. By envisioning a way to enter the global-supply chain for fuel, then leveraging their knowledge and experience, they became a global force.

  Startups as Innovation Platforms

  Stebbins told me that the success of Trans-Tec, and eventually World Fuel Services, was related to how he and Kasbar saw themselves as outsiders in the world of fuel brokerage. Their vision of controlling oil quality from the refinery to its delivery to a customer’s vessel was a new approach to their business. They heard, “That can’t be done,” time and time again from old hands in the business who knew much more than they did, yet they remained self-referencing.

  Common to the experiences of all of these entrepreneurs was that once early success seemed at hand, as their startups became viable businesses, their roles changed dramatically. They had to run companies, a different job from organizing a startup. Stebbins described the experience as “turning one path-breaking innovation into a company, then pivoting to managing a nonstop cycle of innovation to make the company grow.” He smiled. “There had better be another innovation up ahead. The manager’s job is to search for it.”

  Head learned this same lesson in a more difficult way, and much to his chagrin. When I asked why he had bought his way into Prince, he answered, “Selling Head Skis was a mistake.” He had come to see himself as a good designer who hated the management side of building a company, but came to recognize that he still wanted in. Head told me, “If I had it to do over again, I would’ve stepped back from running Head and promoted myself to chief designer. I could’ve tried to learn tennis on the side. It would have been so much easier to have gotten to the big sweet spot in a new kind of racquet if I’d been inside my first company. There, my crazy ideas would’ve been seen in the context of the innovation culture that I’d built into the company.”

  Dyson has this figured out. He doesn’t want the fun to end. From the outset, he saw his company’s future as more than making vacuum cleaners. He wanted it to be a platform for innovation and, like many entrepreneurs, he continues to see his company as a work in progress. His latest startup is the Dyson Institute of Technology, an engineering university that opened its doors in 2017 on his company’s large campus in Wiltshire, England. The twenty-five students in the inaugural class pay no tuition—they actually receive a salary—as they combine rigorous academic engineering studies with the opportunity to work with Dyson’s engineers in England, Singapore, and Malaysia. Dyson is an indefatigable innovator-entrepreneur, always wanting to tackle and solve new problems.

  This fluid reality may explain why it is that Dyson, Head, Kasbar, and Stebbins never started their endeavors with business plans. They weren’t even sure that what they were toiling to achieve was a “company,” they were just sure that they had really good ideas. Head disliked planning, perhaps because he found most management prescriptions “wrongheaded, because innovation and planning are not compatible.” In one conversation in his study at home, surrounded by early versions of his skis, Head pointed to the first pair to have steel edges that bound the laminated layers together. After this model was introduced, Head learned that the edges made turning so much easier that skiers called them “cheaters.” For Head, finding a property in his skis that he didn’t envision and didn’t design for, was pure magic. “Invention is a funny thing. While you’re searching for something, you may stumble upon something else that proves vastly more important.” He added, “Innovation is the gift that comes back to those who persevere. You can only improve your product when you have one.”

  CHAPTER 6

  Big Companies Can Be Schools for Startups

  At the dawn of the industrial revolution, sociologist Max Weber observed that, as companies grow and mature, they create internal rule-making bureaucracies that make innovation more and more difficult. Some established companies, however, are known to produce innovative products year after year. Among them are Amazon, Apple, BMW, GE, HP, IBM, Intel, Procter & Gamble, Medtronic, Nike, and Toyota. These companies also produce a constant stream of former employees who start companies; they are schools for entrepreneurs. Steve Wozniak so loved how much he was learning at Hewlett-Packard that Steve Jobs, who had worked for the game maker Atari, had to beg him to quit so that they could start Apple. Weber knew that what he called the “spirit of capitalism” created a counterforce to bureaucracy, one that causes big companies to spin out startups, some of which have proved to have more potential for success than their parents.1

  The entrepreneurs you are about to meet launched their companies after careers in big companies. Their stories tell how much they learned about doing business that became essential when they unexpectedly found themselves starting companies. In each case, these entrepreneurs took away rich sets of lessons and experiences that proved crucial to their success.

  * * *

  Art Ciocca was inspecting grapes in a Napa Valley vineyard, 2,500 miles from his New York office, when he had an “E.T., phone home” moment. Ciocca was president of The Wine Group, a subsidiary of the Coca-Cola Bottling Company of New York. A friend had called saying that he’d heard that Coke was selling Art’s business. Art couldn’t believe it. He had just pulled off a three-year turnaround, receiving kudos and bonuses from Coke’s board.

  Coke’s CEO confirmed the news, telling Ciocca that, the next day, the company’s board would vote to sell The Wine Group. Besides feeling betrayed, he was devastated for another reason. “My team had worked so hard to get things turned around. Just as we were taking off, Coke decided to get rid of us. The great team I had built so carefully would never survive an acquisition by a big wine company.”

  Ciocca flew to New York that night. He argued to the board that the demand for wine would double every five years and that the soft-drink market, where Coke faced intense competition for its traditional products, didn’t hold such promise. When one director said that Coke should never have gotten into wine in the first place, and that it had nothing to do with soft drinks, Ciocca surprised himself saying, “If you think so little of The Wine Group’s future, then I’ll buy it.”

  As soon as the meeting was over he flew back to San Francisco to talk with the only banker he knew. His banker told me that Ciocca’s first question at breakfast the next morning was, “What’s a leveraged buyout?” Ciocca learned that he would have to persuade investors to back him with enough money to meet Coke’s best offer from another buyer, likely a giant beverage company with a strong balance sheet. For any one of them, buying Coke’s wine business would be a routine acquisition.

  Ciocca, however, had an advantage. He had remade The Wine Group and knew every aspect of its business. He had built a great team, established strong supply and distribution relationships, and overseen substantial growth. Ciocca announced that he would leave The Wine Group if it was sold to someone else. He got the support of lenders and bought the business.

  The Making of an Entrepreneur

  Ciocca grew up in a close-knit Italian-American family in the Hudson Valley. As a teenager, his grandfather taught him how to tend grapes, and, in the fall, make the family’s wine for the coming year. In college, he studied biology, thinking that he might follow in his father’s footsteps as a doctor. After college, however, he was drafted and served three years in the military. As a Navy officer, Ciocca was stationed in Brooklyn and studied for his MBA at night.

  His first job, with General Foods, took him to San Jose. Ciocca fell in love with California, especially its beautiful wine country. He quit when the company decided to move him to its New York headquarters, taking another job in San Francisco. Three years later, he went to work for Gallo Brothers, then a winery selling blended red wine in glass gallon jugs.

  When Ciocca joined Gallo in the 1970s, enjoying wine with meals was not a common experience for Americans. Compared with today, California wine production was a cottage industry. Ciocca’s job
was to grow the market for Gallo, which meant understanding how to get more people to drink wine. He looks back on working closely with Ernest Gallo as a great piece of luck. “He was the best role model I could have had. Gallo was an extraordinary entrepreneur leading a small winery with a vision that, at the time, no one else in California saw. He worked day and night, making Gallo from a wine mostly consumed by Italian-Americans into a product that any American would want to drink.”

  Gallo was, however, a family business. Despite helping double its sales, Ciocca knew his career prospects were limited. His growing visibility in the wine industry resulted in his being recruited by Coke New York to head its fine beverage business, The Wine Group. “Coke’s wine business was losing money. I knew it would be an overwhelming grind for three years, including commuting back and forth to California, but I was sure I could make The Wine Group profitable. If I pulled it off, I thought, someday I might run all of Coke.”

  It was just as The Wine Group turned profitable that Coke had second thoughts about running a business not directly related to what consultants call a company’s “core competency.” Coke was losing market to Pepsi. To efficiently compete, it would have to invest in new, more efficient plants and crank up its advertising. Suddenly, Coke’s management saw its wine business as a distraction.

  Ciocca knew that he was taking a big risk when he bought The Wine Group, but he did not fully know what that might include. Just as he completed his purchase, the economy crashed. Interest rates went to nearly nineteen percent. Ciocca, then in his midforties, owned a new company that had twenty-six times more debt than he had projected as first-year income. Worse, demand for wine was dropping as the economic downturn continued.

  Within the year, however, Ciocca caught a lucky break. A bumper harvest resulted in much lower grape prices than he had forecast. The Wine Group had a chance to make money. But the company faced a different problem. Not looking forward to competition, several big wineries launched aggressive advertising campaigns aimed at taking market share from The Wine Group’s products. His company, deep in debt, could not respond in kind.

  Ciocca knew he couldn’t survive by making better wines less expensively. He had to invent new products that would appeal to mass markets. With the team he had held together, Ciocca bet on an idea that changed everything. By mixing cheaper wines with fruit juice, The Wine Group became a big player in a craze now all but forgotten: wine coolers. In its second year, the company shipped one million cases. Sales doubled the next year. Ciocca used the profits to pay down debt, which allowed him to set the stage for more innovation.

  Ciocca recalls that the key lesson was to keep innovating rather than doing more marketing. “Innovation was the critical component of The Wine Group’s success. Every year, thirty-five percent of our profit comes from products that didn’t exist three years before.” Since he purchased and restarted The Wine Group thirty years ago, it has grown to twenty-five times its original size. Its brands include Franzia, Concannon, Almaden, Corbett Canyon, Inglenook, Foghorn, and many others. Today, Ciocca’s company is the world’s third-largest producer. In 2013, its Cupcake label, developed with young professional women in mind, became America’s best selling premium wine.

  Spin-Out Entrepreneurs

  Ciocca never saw himself becoming an entrepreneur. He was climbing the corporate ladder, hoping to run a big company, when an unexpected situation changed everything. His experience, however, is more common than you might think. Research has now shown us that mature large companies cradle thousands of spin-out businesses.

  Taken together, big companies produce more innovation than they can ever absorb. Existing companies, not entrepreneurial startups nor universities, are the single largest source of innovation in our economy. Ninety percent of all patents issued every year go to established companies. IBM, for example, received more than seven thousand patents in 2015, two percent of all those awarded. As large companies continually adjust strategic direction in response to emerging innovations, one result is an ongoing outflow of operating units and the jettisoning of potential creative initiatives that no longer are seen as key to a company’s future. Coke New York once saw wine making as a way to diversify and grow. But, faced with mounting pressures on its core business, it retreated to accepted managerial wisdom, “Do more of what you’re good at.”

  About ten percent of all new ventures result from their founder’s experience with their last employer. In this chapter, we will meet other entrepreneurs, none of whom expected to leave their employers, and certainly not to own startups. Like Ciocca, some became entrepreneurs by owning businesses their employers had decided were no longer important to the parent’s future. Others, frustrated that their employer refused to develop an idea that they were sure held great promise, quit to build companies on those ideas. Both are called “spinout” entrepreneurs.

  Blowing the Future

  At fifty-four, Fred Valerino became a first-time entrepreneur. Much like Ciocca, the circumstances came as a complete surprise. Valerino had worked for Lamson Manufacturing since college. The company had invented pneumatic tubes in the late nineteenth century as the state-of-the-art means of moving sales slips and cash around department stores. Most big stores had Lamson systems; at the beginning of the twentieth century the company had installed thirty-nine miles of tubing at Harrods in London. Today, the same technology can be seen in every Home Depot. Cash is sent to and from the manager’s office in cylindrical carriers, pushed along in metal tubes by compressed air.

  As Valerino celebrated his twenty-fifth year of employment, the nation’s biggest maker of bank vaults bought Lamson. Diebold had supplied safes and more modern technology to the banking industry since eight hundred of its vaults survived the great Chicago fire of 1871, and it decided that it needed Lamson’s pneumatic tube systems for drive-through banking, a service innovation that had come with suburbanization.

  Diebold, by acquiring Lamson, found itself the largest supplier of pneumatic tubes to hospitals. Since 1904, when Lamson installed its first system at the Mayo Clinic, connecting operating rooms to labs so that specimens could be analyzed in the middle of surgeries, hundreds of hospitals also had installed pneumatic systems to move drugs, patient records, and billing information. After the merger, Valerino was put in charge of Diebold’s hospital customers.

  Diebold, however, was never comfortable serving hospitals; its DNA was banking. When Diebold decided to become the dominant maker of automatic-teller machines, and to manage the 24/7 communications between ATMs and banks, it decided that pneumatic systems in hospitals were no longer among its core competencies. In fact, many hospitals were abandoning their antiquated tube systems.

  As Ciocca had done with Coke, Valerino pleaded with Diebold to see healthcare as a way to transition the company to a bigger market in the future. He argued that the demand for healthcare would grow as the population aged and healthcare coverage expanded. Pneumatic tubes would be needed to move more lab tests and drugs in hospitals, nursing homes, and newly forming surgery centers. Valerino also was sure that the demand for Diebold’s banking technology would slow as the cashless economy continued to evolve.

  Despite his advocacy, Diebold was so eager to end its healthcare business that it proposed that Valerino take the business in exchange for maintaining existing customer-service contracts until they expired. He was offered an operating business and a little income.

  But Valerino’s “free” startup came with a daunting price. While he had no debt, he didn’t have a competitive product. Before sending an item in a tube, users still had to adjust numbered brass rings on each carrier to steer it to the intended destination. This was the same mechanical method that had been used for a century, and it was far from perfect. A carrier containing a blood sample, drugs, or paperwork had only an eighty percent chance of getting to the right place on the first try. While hospitals were using computers for transmitting lab results back to caregivers, specimens still had to get to the lab. Some
hospitals had reverted to using human couriers.

  Fortunately, Valerino also got lucky within a year of starting Pevco, his new company. Hospitals came under fire for mistakes that were killing patients. One sensational study linked four hundred inpatient deaths a day to mistakes, including mixed-up lab samples and drugs administered to the wrong patients. Newspapers compared the problem to the equivalent of three 747s crashing every two days.2 Valerino knew that if he could build a zero-defects tube system that never mixed up lab samples or sent nurses the wrong drugs, his new company just might survive.

  He approached a hospital in rural Maryland with a make-or-break proposition. The hospital agreed to buy a new system if Pevco could provide ninety-eight percent destination accuracy. If not, the new system would be free. Valerino designed a new guidance system using computers and bar codes for every carrier, continuously tracking the containers as they traveled from place to place. His first installation, his bet-the-ranch deal, delivered one hundred percent destination accuracy the minute the system went live. He had a happy customer who then served as a reference to other hospitals. Valerino had invented a new life for pneumatic communication in healthcare.