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Contents

“This started as a side business, a way to make a couple thousand bucks. Now, I’m living a nightmare.” —CRAIG ZUCKER, who is fighting a government lawsuit over his product, Buckyballs

PG.

PHOTOGRAPH BY RYAN PFLUGER

48 MARCH 2014 - INC. - 5


30 • lead

How Do you grow Without losing What Makes you great? Lessons from Starbucks, In-N-out, Facebook, Intuit, and more on the delicate art of scaling a business by Leigh Buchanan —

48 • Made

craig Zucker vs. the united states of america

• goINg places elaine Osgood, founder of atlas Travel, gave customers what they wanted: better data. a new business was born.

100 • innovate

The Dream Machine D-Wave’s founder claims to have built the world’s most powerful computer. has he? Let’s just say he has his share of critics. by Will Bourne —

66 •

build

grow. Hire. repeat.

How does a company manage to grow year in and year out? We found 100 elite companies that have done just that, and we asked them. by scott leibs —

Cover ILLuStratIoN by MaTT DarTforD 6 - inc. - marCh 2014

contents

thIS page: aNDy ryaN; Cover: jeFF CurteS/burtoN SNoWboarDS

Features

the maker of a controversial toy says he was bullied by the government. the Feds say his company deserved to die. by Burt Helm —


Our business is all fun and games, but The UPS Store takes us seriously.

SMALL BUSINESS: YOU’RE NOT ALONE OUT ThERE. Stacey and Gail, co-owners of Toys with Love, Inc., share a passion for making kids happy. So when they need to spread the love, be it shipping a gift nationally or printing event mailers for the whole town, they turn to their neighbors at The UPS Store®. Because while play is their business, The UPS Store experts don’t play around when it comes to providing the right packing, shipping and printing

solutions for their unique needs. At The UPS Store, we love small businesses. We love logistics. check out Stacey and Gail’s video and learn how The UPS Store can help your business at smallbiz.theupsstore.com

POSTERS • FLYERS • BROchURES • BUSINESS cARDS • cERTIFIED PAcKING EXPERTS Copyright © 2013 The UPS Store, Inc.


14 Editor’s Letter How empowered consumers brought back Made in the U.S.A. 124 Founders Forum Jon Oringer of Shutterstock —

46

18

17 • lead

Departments

24 90

— 18 Tip Sheet A micromanager’s guide to delegation 20 True Confessions What Jive’s founding CEO, Dave Hersh, discovered by stepping down 22 Books The best nonmanagement management books 24 How I Did It Jake Burton Carpenter, on building his iconic snowboarding company 28 Inc. 5000 Insights A restaurant chain that turns chefs into entrepreneurs 43 Norm Brodsky What I’ve learned from military entrepreneurs —

45 • made

— 46 Tip Sheet How cinda b makes its products in the U.S.A.—and earns a profit 56 Best in Class High-end Ping-Pong tables and other grown-up toys, all crafted by entrepreneurs 62 Mark Dwight Kickstarter as a serious business tool —

65 •

87 •

innovate

— 88 Tip Sheet The next generation of same-day-delivery companies 90 4 Questions For Author Warren Berger, on why questions are more powerful than answers 92 Disrupter Kaggle holds contests to get more out of companies’ Big Data. 97 Alexa von Tobel Innovation meets intuition. 106 Audacious Tech Meet the starship Enterprise of the sea. 108 Jason Fried Why I shrank my company — 8 - inc. - MArCH 2014

contents

frOM TOP: IllUSTrATION: SHOUT; BryAN MUllENNIx/COrBIS; COUrTESy COMPANy; ADAM KrAUSE

build

— 66 The Build 100 Our groundbreaking look at companies with sustained growth 72 Up Close Meet three Build 100 companies that have grown for more than a decade. 78 What They Get Right Survey results highlight the shared DNA of Build 100 companies. 80 The List The Build 100, A–Z 84 Gary Kunkle Sales reps and other partners can help you expand, but look before you sign. —


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I n c .c o m / l e a d

What Motivates You: calling or ego? Do you have a real vocation for your work, or are you in business just for egoistic reasons? Inc.com columnist Shelley Prevost shares a few ways to decipher what’s really driving you. Inc.com

Top Videos on inc.com —

I n c .c o m / I n c - l I v e

Gary Vaynerchuk Ceo of VaynerMedia

On wOrk-life balance

“On our third date, I told my future wife, ‘I’m a workaholic.’ And she was cool with that.”

1

2

3

You know that feeling of deep satisfaction when you’re doing something you absolutely love? That’s your calling showing itself to you.

Without a satisfactory result, your ego feels that all your work is pointless. A calling, however, comes from within. It can handle the stress of ambiguity.

A calling may begin with the self, but it moves toward the needs of others. Author Frederick Buechner describes it as “the place where your deep gladness meets the world’s deep need.”

eGo leads to burnout. callinG leads to fulfillMent.

eGo focuses on the result. callinG focuses on the process.

eGo Wants to preserVe the self. callinG Wants to affect others.

Go Beyond the Page

You’ll find the icon at the left on selected pages throughout the issue. That’s your signal to grab your smartphone or tablet and go deeper with the content on the page. Here’s how:

I n c .c o m / I d e a l a b

Malcolm Gladwell Author, David and Goliath On entrepreneurial underdOgs

“As the saying goes, ‘If it doesn’t kill you, it makes you stronger.’ That is the unexpected upside to adversity.”

1. download the free layar app from the apple or android store or at layar.com. 2. launch the app and scan any page carrying the icon. 3. Inc. videos and other bonus content will instantly appear on your mobile device.

12 - inc. - MArCH 2014

contents

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Re-Imagine Your Business

Featuring the perspectives of thought leaders: • Vala Afshar, CMO for Extreme Networks and author of The Pursuit of Social Business Excellence • Christine Comaford, executive coach and author of SmartTribes: How Teams Become Brilliant Together • Jeff James, vice president and general manager, Disney Institute “Business Re-imagined” will offer targeted, relevant content that can help you think differently about your organization and drive sustainable business results.

Scan Image For Additional Insights

www.inc.com/disneyinstitute.

A

MADE TO BE GREAT (NOT JUST BIG) IN THE U.S.A.

s I wrIte this, stock markets around the world are panicking over the realization that china is losing its monopoly as manufacturer of the world’s brands. That shift should be no surprise to Inc. readers, because a good chunk of china’s lost share is going to American entrepreneurs. Just this month, you can read about eleven Ravens, BRD motorcycles, U-Turn Audio, and cinda b, U.S. makers that chose to assemble their world-class products in los Angeles, San Francisco, Boston, and Fort wayne, Indiana, respectively. economists can give lots of reasons for U.S. makers’ inroads, but the most powerful reason is the simplest: customers want it. Bayard winthrop, founder of American Giant, which assembles highquality knitwear in california from fabrics made in South carolina, credits the mainstreaming of online retailing and consumer intelligence. “Apparel shoppers can now disaggregate the cost stack,” as winthrop puts it. “In the old model, they had no choice but to absorb the cost of physical stores and of mass branding campaigns; now they can choose to pay only for what matters to them, like quality, design, or a Made in U.S.A. label.” Randy Komisar, a partner at Kleiner Perkins caufield & Byers, calls this the “atomization” of demand. It’s good news for artisanal U.S. manufactur-

ers and bad news for traditional giants—including china—that focus on scale at the expense of quality. But, of course, there is scale and there is scale, and great entrepreneurs have always found ways to grow without losing what made their companies successful in the first place. That’s a theme you’ll find repeated throughout this issue. on page 30, editor-at-large leigh Buchanan takes the precept for a road test (literally) by touring companies—including In-N-out, Intuit, and Facebook—that have grown massive while preserving their scrappy essence. Thirty-six pages later, executive editor Scott leibs unveils the results of a yearlong Inc. research project into the practices of 100 companies that pulled of the stunningly rare feat of growing each of the past five recession-marred years. All this work had just one goal: to ofer you some of the inspiration and insights you’ll need to construct your own blueprint for scaling wisely. Having poured so much of your soul into your company, after all, why settle for building something merely big when you could build something great?

Eric Schurenberg erics@inc.com

editor’s letter

Christopher sturman

“Business Re-Imagined,” a collaboration between Inc. and Disney Institute, is an initiative designed to bring you topical, applicable insights on: • Customer Service • Leadership • Innovation • Team-building, and much more.

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50 True STorieS The New York Times Best Seller from the celebrated storytelling phenomenon The Moth Available online and at your local bookstore

Featured in the October 2013 issue of this magazine

AS TOLD BY

Annie Duke, nAThAn engLAnDer, MALcOLM gLADweLL, SeBASTiAn Junger, DArrYL “DMc” McDAnieLS, richArD Price, AnDrew SOLOMOn, AnD A cOP, An ASTrOnAuT, A nOBeL LAureATe, AnD OTherS


Inspire. Empower. Get Results.

The fine art of delegation PG.18 Getting big—and better! PG.30

“I snowboard 100 days a year. That’s my first goal as CEO: to stay connected.”

—JAKE BURTON CARPENTER, founder and CEO of Burton Snowboards, on the slopes in British Columbia

24

JEFF CURTES/COURTESY BURTON SNOWBOARDS

PG.

ŦŦŦŦ

MARCH 2014 - INC. - 17


Tip Sheet

juST TruST Delegating power to others may not come easily. But your company and employees need you to let go Liam martin can Laugh now. A few years ago, he was overwhelmed by the work he faced as founder of VTA Method, a tutoring company. So he asked an assistant to handle refunds. Not a good move, as it turned out. For example: A customer asked for $1,500 back; her child didn’t need the extra sessions. Easy enough request, right? But the assistant, instead, refunded the entire semester’s payment of $10,000. Says Martin: “I almost had a breakdown.” Now, he is the owner of Staf.com, an Ottawa temp employee firm. You might think he maintains a tight grip on everything, given the refund debacle. In fact, he has gone the other way. “When you delegate tasks to others, the orders shouldn’t be easy to understand—they should be impossible to misunderstand,” he says. At Staf.com, Martin came up with a novel solution: He created a wiki that describes how to handle some 500 operational issues. “How can I lead a large company if I’m still doing credit card refunds?” he says. Of course, tales of micromanaging entrepreneurs messing up and finding redemption seem to date back to the Jurassic period. But as the economy improves and the pace of business picks up, it doesn’t hurt to take a look again at

how you’re spending your time—and how to manage more efciently. In other words: Relearn what you already know. As Harvard professor Linda Hill points out, understanding something intellectually and actually acting on it are two diferent things. Some entrepreneurs just can’t let go. “Many company leaders won’t delegate until they’re so exhausted and burned out that they have to,” says Hill, who deals with the topic in two of her books (the most recent being 2011’s Being the Boss: The 3 Imperatives for Becoming a Great Leader). Inc. talked with business owners who found religion and came up with ways to become better delegators—even if their first instinct was to do every last thing themselves. Their advice:

BE PatiEnt “As you get a clearer sense of how your employees work, you get more peace of mind around the idea of shifting more duties to them,” says Alfredo Atanacio, CEO of Uassist.me, a Miami company that provides online personal assistants. For instance, Atanacio teaches a course on entrepreneurship. At the beginning, he delegated research to an assistant. But the assistant delivered such a huge pile of

potentially relevant material that it took Atanacio longer to go through it all than it would have taken him to seek out the best sources himself. “But I liked her work ethic and her thoroughness,” he says, “and over time, I showed her how to find exactly the kinds of things I wanted and how to efectively summarize them for me. Now, this delegation saves me a ton of time.”

FOLLOW thE 80 PErcEnt ruLE Trevor Sumner, founder of LocalVox, a New York City marketing firm, takes a

•••• Only 9 percent of executives are “satisfied” with the way they spend their time. The others? They fall into four time-management categories: crisis managers, cheerleaders, online junkies, and schmoozers. Where they go wrong: 18 - inc. - march 2014

67% “Crisis managers” spend

more time on short-term, unexpected issues compared with the “satisfied” 9-percenters.

spread: illusTraTiOn: shOuT; clOckWise frOm TOp righT: geTTy; veer

time troubles


the micromanager’s guide to delegation 1. Keep a diary

Jefrey Pfefer, a Stanford business school professor, is a big fan of keeping track of tasks in an organized way. Take notes daily. From there, you can figure out the best use of your time—and empower your best employees as well. “You may discover that you aren’t really involving other workers in decision making,” he says. 2. Have more people report to you

By increasing your so-called span of control, you can force yourself to delegate, simply because you can’t micromanage the activities of so many people. The result? You will have more time to get your claws into the tasks that really matter. 3. Know your people (really know them)

close look at every one of his employees and assesses his or her skill level. “If you have a direct report who can do a task 80 percent as well as you can, you need to let them do it,” says Sumner.

TAKE A HIKE That may be the hardest thing for you or any chief executive to do, but it’s a great way to find out who on your staf really has the chops. “Train your employees, then go on vacation,” says Vanessa Van Edwards, founder of Science of People, a Portland, Oregon–

17% “Schmoozers” spend

more time with clients and customers at the expense of communicating with their colleagues.

based consulting firm. “Sometimes we need to get away to prove that people can do it on their own.”

IF YOU DON’T HAVE IT, BUY IT Says Chuck Cohn, founder of Varsity Tutors in St. Louis: “If you realize you aren’t doing a great job managing your team, bring in a professional manager.” Adds Clay Hebert, co-founder of WorkHacks, a personal-productivity company in New York City: “Great leaders hire amazing people and then get out of the way.” —SCOTT LEIbS

New York City consultant John Beeson recommends assessing the skills of each team member and determining where training may be needed. (Or decide to hire someone who can do the job right away.) Also, he says: Look for things that take a lot of time but you don’t do well, and give those tasks to someone else. Then, of course, get the heck out of the way. 4. Be a good coach

Each employee is diferent, right? So delegate diferently, and evaluate your talent much as a good coach would. One employee may excel the first day on the job. Others may need you to stay involved longer. “Think of delegation as an investment,” says Beeson. “You’re making a capital outlay of your time now in order to reap benefits longer term.”

36% • 45% “Online junkies” spend

“Cheerleaders” spend

more time on email and voice mail at the expense of face-to-face communication.

more time on pep talks with staf, but 39% less time with clients.

lead SOURCE: 2013 McKinsey & Co. survey.


dave Hersh: Why I Quit When is it time to leave behind the company you helped launch?

T

hese days, Dave Hersh describes himself as an investor in earlystage tech companies. (He hangs his hat at Andreessen Horowitz.) He was 29 when he became CEO of the startup Jive Software, a pioneer in social-business software, which allows employees and customers to communicate via Facebook- and Twitter-like tools. By the time he stepped down, Jive was gearing up for its IPO. (It is trading just below its ofer price. Revenue is expected to be around $145 million in fiscal 2013.) That was almost five years ago. Hersh says he is ready to take up his next position as soon as he figures out what it will be. In the meantime, he has launched a management blog at davehersh.com. Hersh spoke with Inc. editorat-large Bo Burlingham, who is finishing a book on business exits for Portfolio, about the toll the company took on his life.

Photograph by CODy PICkEnS

20 - Inc. - March 2014

••••

TruE CONfESSIONS

How long after you founded Jive Software did you decide to step down as CEO? About nine years. I was actually what’s called a founding CEO. The software was developed by two guys I knew who were doing it as open source in their spare time. So anyone could download and use it for free. But it was getting popular enough that they decided to incorporate in 2001 and become a real business. I came on shortly after to take what they had built and turn it into a company.

headquarters, to California, where we were opening an ofce, and where my wife is from. The idea was to reestablish the family in a place we wanted to be. But it became clear that I couldn’t play the role the company needed while also playing the role I wanted to play at home. By then, the board had begun talking about taking Jive public. I said I didn’t want to be a publiccompany CEO. So I became chairman, and Tony Zingale, who was on the board, became CEO.

Did you have investors? Not to start out. I think the founders paid $70 for business cards. Other than that, no one put in capital until 2007, when Sequoia invested $15 million.

Was that hard? It was incredibly hard. I’m a very loyal leader. What motivates me are the people whose lives I afect. By moving out of the CEO role, I felt I was letting people down. But I also understood that my family needed more from me than I could give while I was CEO, and so I knew I’d made the right choice, and I would find my way in the world again.

Of course, once you bring in venture capital, you know that you’re eventually going to sell or go public. Was that why you stepped down as CEO? It was a factor. But mainly I did it to repair my marriage. In 2009, Jive had had a great year. While our competitors were hunkering down because of the economy, we just kept growing. But in order to get to that level of success, I put a lot of pressure on myself and was on the road a lot. I was so preoccupied with the company that my marriage started to sufer. We had been married eight years and had two kids under 6, and our communication completely broke down. What did you do? We tried moving from Oregon, where Jive had its

Is it behind you now? Most of it was out of my system when I stepped down as chairman a year later. But it’s a long process. Parts of it I’m still not totally reconciled with. Maybe when I do my next company, I’ll fully be out of it. How will your next company be diferent? I want to do it my way and have complete ownership and flexibility in the way I run it. I think I can do it at a more relaxed pace and create a culture that works for me and the people I surround myself with.

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MY BOOK LIST

The Best Management Books (That Aren’t About Management)

manager, I couldn’t read enough: managing employees; managing customers; how to look for the guys who stole my cheese; how to become great. I read all those books. They didn’t help. To tell you the truth, they all felt kind of generic to me—no matter how smart or famous the author was. I slowly figured out that the best books, with the greatest lessons, weren’t always the ones with “five ways to do something” in the title. I was finding the best leadership lessons in novels and nonfiction that would never get onto the business-book bestseller lists. Looking for a great leadership book? A few years back, a lot of business folks discovered one in the story of early-20th-century Antarctic explorer Sir Ernest Shackleton. A whole industry, it seemed, was built around his failed but heroic mission to the South Pole. You can find similar books, and lessons, out there in the most unexpected places. —DANE STANGLER

IKE’S BLUFF: PRESIDENT EISENHOWER’S SECRET BATTLE TO SAVE THE WORLD, by Evan Thomas — Abraham Lincoln is the go-to former President for management writers, but add Dwight D. Eisenhower to that list. This book, by former Newsweek writer and editor Thomas, portrays Eisenhower as a canny strategic thinker and a master of managing strong and conflicting personalities during the Cold War. Eisenhower showed how to control the egos of his team members and his adversaries during negotiations. And he was a pretty darn good blufer as well: Would he actually use nuclear weapons?

THE PASSAGE OF POWER: THE YEARS OF LYNDON JOHNSON, by Robert A. Caro — There are lessons galore here. One is the price of complacency. Johnson veered from all powerful to a lot less powerful, in what seemed to be the blink of an eye, when he lost the Democratic nomination for President to John F. Kennedy in 1960 and became a weak Vice President. How did that happen? Kennedy and his team secured the Democratic nomination partly because they put in years of grunt work—aggressively recruiting allies in primary states, for example. Johnson’s team, meanwhile, assumed the nomination was his for the taking.

THE BONFIRE OF THE VANITIES, by Tom Wolfe — If you haven’t read this classic, take it on your next business trip. Even when you think you have got it made, foreseeable and unforeseeable threats lurk. The big takeaway? Hubris, especially after a period of rapid growth and wealth building, is your worst enemy. You can throw greed in there, too (and booze and drugs and fast cars). Sure, you can get some of these same lessons from Nassim Taleb’s 2007 bestseller The Black Swan, but Vanities is a lot more entertaining.

LITTLE CHILDREN: A NOVEL, by Tom Perrotta — You’re probably wondering what business lessons a book about suburban dysfunction could possibly deliver. Maybe it’s just me, but the book helped this young manager understand that you’re never dealing with rational, mature adults on your team, even if that’s the way everyone appears on the surface. If you can’t deal with your staf members’ emotional swings—often a direct result of their screwy home lives—get out of management. And if your employees are really getting you down, pick up a copy of Little Children and check out Perrotta’s crowd. Holy cow!

THE MASK OF COMMAND, by John Keegan — Heroism is always a popular topic. But must entrepreneurs be heroic? Or charismatic? It depends on the battle, says Keegan, the great military historian. The “hero” of this book is General Ulysses S. Grant, who, says Keegan, provides a case study in efective “unheroic leadership.” Grant was no Alexander the Great. He was no Steve Jobs or Sam Walton, if you want to look at it that way. But winning the Civil War didn’t require charisma, says Keegan: It required someone who could relate to soldiers and who grasped the political dimensions of the war. Charisma would have just gotten in the way.

Dane Stangler is vice president of research and policy at the Ewing Marion Kaufman Foundation.

22 - INC. - MARCH 2014

LEAD

BOOK BODIES: iSTOCK; BOOK COVERS, FROM LEFT: LITTLE BROWN AND COMPANY; VINTAGE BOOKS; PICADOR USA; ST, MARTIN’S PRESS; PENGUIN RANDOM HOUSE

WHEN I FIRST BECAME A


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•

carpenter at work Jake Burton Carpenter built his snowboarding company from a couple of relatives to 845 employees.

24 - inc. - march 2014


••••

Success, One Board at a Time

How I Did It

Jake Burton carpenter, Burton Snowboards —

Carpenter was 14 when he got a Snurfer, the first snow surfboard. It became such an obsession that 10 years and 100 prototypes later, Carpenter produced the Burton Backhill, one of the first snowboards. (He figured Burton was a better brand name than carpenter.) That was in 1977, and Carpenter thought he would get rich quickly selling these boards. The same year, he opened Burton Boards in southern Vermont, expecting to sell 50 boards a day. Instead, he sold 300 his first year. Snowboarding was just a backyard hobby back then, but Carpenter slowly built his favorite pastime into a real business. Today, snowboarding is an Olympic sport, and Carpenter’s Burlington, Vermont, company, which he co-owns with his wife, Donna, remains the industry leader—with five international ofces and 845 employees. (The company wouldn’t reveal financials.) Carpenter, 59, explains how he pulled it of and what he has learned along the way.

A

s a teenager, I loved my Snurfer

and knew there was a sport developing there. But I wanted to make a better board, so I tried all diferent types of constructions—water ski, surfoard, skateboard. It took almost a year to develop the final product and another year trying to get people to buy it. That was the loneliest and toughest time. People were like, A skateboard for the snow? Hardly anyone had heard of snowboarding. It was borderline embarrassing. I was a punky kid, and my dad, who was always in my corner, said that I never finished anything. That was it. I wanted to prove him wrong.

as told to LIZ weLcH

My second year out, I hit rock bottom financially. I was taking my boards door to door like Willy Loman, but no one was buying. I remember one trip when I loaded my station wagon with 35 boards and came back with 37

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the first people I hired were

two relatives and friends. That was a mistake. I didn’t know how to manage people then—that skill comes with experience. What I’ve learned is that from the very beginning, you need to surround yourself with people who are diferent from you and who complement you. Do not hire your spitting image—or people you like. I did, and that failed for me. After that, I started hiring high school kids on a parttime basis. They lived and breathed snowboarding, and a couple of them went on to become world champions. Through them, I learned

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tors look at what we’re doing and try to do it better. We don’t have that luxury. We have to always be coming up with new ideas. That is a burden and challenge, but you can never let go of that ambition if you want to maintain that leadership position. We started out With snowboards. But then it became clear that people needed specific footwear for them. So we got into boots. And then we started making jackets, and then more technical waterproof outerwear. I pushed product extension. There were naysayers and purists who would say, “We can’t make long underwear!” I’d counter, “Yeah, we can!” I realized that there was no room for conservative thinking if you want to lead a successful company. i learned the hard way that

more about the sport and the market than I knew possible. That turned out to be a brilliant move, because they understood the market differently than I did. We have 35 percent-plus

market share in a youthdriven sport, which is not easy to maintain. People want variety and individuality, but they always come back to our brand because we’re so focused on product. We invest way more than anyone else in research and development because we have to continue to make the best product out there. The minute we get beat on an innovation or make a mistake on quality, we lose our lead. Most of our competi-

••••

We started sponsoring the world’s best snowboarders in 1981. Craig Kelly [who died in 2003] was among them and taught me the importance of listening. At first, I made all the decisions—from the graphics to snowboard design and everything else. But Craig got the point across that snowboarders, who are on the snow 200 days a year, have important opinions, too. Every year, I host a roundtable where I bring in six or seven men and an equal number of women from our team, and we go through every product in the entire line. It takes a whole week, but it’s crucial to making the best possible products.

• aloft in 1982 “No room for conservative thinking if you want to lead a successful company.”

Burton snoWBoards, at a Glance —

1977 $10 Company founded —

The approximate price of Carpenter’s first Snurfer, a surfboard made for the snow —

845

Number of employees worldwide, 348 of them in the U.S. —

35%

Burton Snowboards’s share of the board market* *SoUrCe: BUrToN SNowBoardS. BaSed oN gloBal SaleS of BoardS aNd CerTaiN aCCeSSorieS

you cannot presume anything is going to work well. You have to think through every possible failure and test the hell out of products. We released a board with binding that fell out when you were on the slopes. We had not tested them properly, and that was a catastrophic mistake. When you are out there in the freezing cold and something breaks, it is a real letdown. Our mantra is to assume the product will fail—and then make sure it does not. i snoWBoard 100 days a year.

That’s my first goal as a CEO: to stay connected to and be part of the sport. When I come back from snowboarding, I come back to the ofce amped up and infused with energy. It’s also where I get my best ideas.

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because one of the shop owners returned two he had previously bought. It was depressing. So I decided to stop worrying about immediate profitability and focused instead on cultivating the sport itself. I don’t know if that was luck or timing or foresight, but that’s what I did then and have done ever since.


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InC. 5000 InsIGhTs

How Tender Greens Turns Top Chefs Into Fast-Food Cooks A quick-serve chain lures kitchen stars by treating them like entrepreneurs For cheFs erik Oberholtzer, David Dressler, and Matt

Lyman, the thought of a chain restaurant evoked bland, homogenized, suburban strip malls. They rebelled against that stereotype when they launched Tender Greens, a series of quick-service restaurants that serve fresh organic dishes made from local produce, cheeses, and meats. To give each restaurant its unique vibe, the three men set out to hire fine-dining chefs to run each location. It was a good idea, but executing it proved tough: Great chefs don’t usually aspire to work at quick-casual restaurants. The three solved that problem by turning each chef into a kind of entrepreneur, giving each control of his or her individual restaurant—including operations, culture, and menu items. The strategy is working. Tender Greens has grown to 12 restaurants and an estimated $40 million in annual revenue. Below, Oberholtzer, Tender Greens’s CEO, shares his tips for attracting top employees and keeping them engaged. —JEnnIfEr ALsEvEr

Tender Greens Culver City, California 2013 Inc. 5000 rank: 1,407 Three-year growth rate: 285% 2012 revenue: $28 million 2012 employees: 599

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Cooking at an upscale restaurant is very often a young person’s game. It can be highly competitive and usually requires long, grueling hours. What Tender Greens may lack in prestige for chefs, it makes up for in worklife balance. Many chefs hit a wall around age 40, Oberholtzer says. Those chefs proved to be the perfect candidates for Tender Greens. He sought out those fine-dining chefs facing burnout and lured them to Tender Greens with better hours, six-figure pay, and control over their restaurants.

Chefs are held to high standards for the restaurants’ financial performance, quality, and service. But Oberholtzer encourages them to take risks on new ideas, whether their own signature dishes or adding new items like organic sodas. A flop is considered a “microfailure,” because it may run only a day, week, or month at a single location. The right idea, however, could have a big impact across the company. “The key here is not success or failure; the key is that we continue to evolve individually and as a company,” he says.

Many chefs who leave the kitchen dream of opening their own restaurant, but few have the business know-how to pull it of. Oberholtzer and his partners teach them how to be entrepreneurs. Chefs attend leadership workshops, receive bonuses for hitting financial goals, and learn software tools for tracking product cost, labor, and daily revenue. They also get full access to all company financials at quarterly meetings and monthly P&L reviews. Should they need help, the founders make themselves available.

Like Google, Tender Greens gives chefs plenty of freedom to pursue their personal interests. Tender Greens chef Eric Hulme’s passion for craft beer led him to host a whole-animal roast and beer garden each month on the patio of his Hollywood restaurant. Likewise, when chef Peter Balistreri developed an award-winning Italian cured salumi, Tender Greens partnered with him to launch a brand called P. Balistreri Salumi that it distributes to restaurants, hotels, and specialty grocers across California.

emphasize work-liFe balance

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leT cheFs make (small) misTakes

make Them accounTable For business resulTs

Give cheFs The Freedom To do Their own ThinG

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How Do You Go From This

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to This

Without Losing What Makes You Great? Lessons in the art of scaling a company By LEIGH BUCHANAN

“DO YOU SMELL ANYTHING?”

Robert Sutton sets his cappuccino on the table and thoughtfully inhales. I follow suit. “I don’t get much of an aroma in this one,” says Sutton. “Oh, well.” We are snifng for cofee in a Palo Alto, California, Starbucks. The absence of cofee in the air suggests that this company has not entirely recovered from last decade’s scaling debacle, when it famously lost its way in an overcafeinated expansion. “Companies that scale well have sacred constraints, things they can never screw up,” says Sutton, a management professor at Stanford. “At Starbucks, it’s the whole cofee-drinking experience. The smell, the sound of beans grinding.” Sutton, a rumpled, bespectacled man equally

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From Humble beginnings

Starbucks, Facebook, and In-N-Out Burger followed diferent approaches to reaching a massive scale, but all three paid careful attention to preserving culture and building smart systems.

StarbuckS: The first cofee shop opened in 1971 at this spot in Seattle’s Pike Place Market.

Facebook: Mark Zuckerberg (right) and three friends launched the site at Harvard in 2004.

In-n-out: The first burger joint opened in Baldwin Park, California, in 1948.

venture capitalists install Ferrari engines inside hastily assembled chassis. Technology has made it easier to scale quickly but also to scale badly. As Sutton and I tool around this region of congested roads and not-too-

corporate campuses, we talk about scaling as a series of balances, between speed and thoughtfulness, size and simplicity, repetition and reinvention. The overarching balance, it seems to me, is between optimism and prag-

matism. Optimism inspires the belief you will reach the next level. Pragmatism warns what will happen if you don’t prepare for it. (For more examples of companies that have excelled at scaling, check out the Build 100, starting on page 66.) Maintain the Mindset starbucks How fortuitous that Starbucks, where we begin the day, provides both liquid fuel and an object lesson in scaling. “Companies grow well and scale badly when they focus on running up the numbers but not the quality,” says Sutton. “They get bigger and start to look like just any organization. And there goes the value.” In 2007, Howard Schultz lamented the “watering down of the Starbucks experience” as the business ballooned to 13,000 stores. “They made all these decisions about efciency and standardization and cost that seemed sensible at the time,” says Sutton. “They didn’t step back to see how the buildup was damaging the brand.” Such expediency may create opportunities for competitors. Sutton points out that Peet’s Cofee & Tea, which was founded before Starbucks but has expanded more slowly, appeals to some customers who have grown disenchanted with the ubiquitous chain. Now “thirdwave” cofee companies like Blue Bottle Cofee are vying to replace Peet’s in cafeineanados’ afections. Scale too fast, in other words, and you risk competing against the new you. To protect their brands, Sutton advises companies to spread not just a “foot-

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conversant in academic literature and industry gossip, is author of numerous business books, including The No Asshole Rule and Good Boss, Bad Boss. His latest is Scaling Up Excellence: Getting to More Without Settling for Less, written with his colleague Huggy Rao. The subject of scaling is so meaty that I want time and space to give it a good chew. So I have asked Sutton to spend a day with me, touring Silicon Valley and talking with some of his book’s subjects about what he calls “the problem of more.” He has agreed, so long as I don’t make him drive in San Francisco. In their book, Sutton and Rao argue that scaling isn’t just about getting bigger. It is also about getting better. It’s about spreading exceptional ideas, systems, or business models, and then persuading—ideally inspiring—others to make them their own. “The question we started with is, How do you spread something good from the few to the many, or from those with to those without?” says Sutton. “It starts with, You’ve got something good.” I like that question, because it positions scaling as an activity diferent from— and more nuanced than— growth. Rao, whom we meet later in the day, captures the distinction with a metaphor: “When people think growth, usually they think of anatomy,” he says. “How big are the limbs? But the real thing is physiology. Is stuf circulating well—the blood and the oxygen? Even if your anatomy is very developed, your physiology can be bad.” That problem is acute here in Silicon Valley where, to use another Rao metaphor,


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choose your religion in-n-out To rif or to replicate? To customize or to clone? This is the question we’ve come to Mountain View’s In-NOut Burger outlet to discuss. We are meeting Michael

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kiMPton hotels —

1981 60 year founded

Hotels in 16 states and the district of Columbia

8,000 employees

How to scale a culture, quirk by quirk Impton HotelS operateS boutique

properties with distinctive personalities and an emphasis on spontaneous, personal connections between staf and guests. even with 8,000 employees, it can’t aford the kind of corporate, dehumanizing culture that squeezes the life out of many large companies. The late founder, Bill kimpton, believed that to build a company, you must help people grow, and not just professionally. So in the mid-’90s, when kimpton owned a handful of hotels and employed just a few hundred people, he introduced a “self-insight” program. a psychologist led senior managers through one-on-one sessions to help them understand their patterns of behavior. Managers and colleagues received lessons on how to mesh their personalities in the workplace. Frequent of-sites gave departments the chance to learn more about one another. as a result, trust—which tends to dissipate as companies grow—has deepened. The program also broadcasts a kimpton value: individuality. The best way to care for guests, the company maintains, is to relate to them as one unique person to another unique person. That

doesn’t happen when employees are pressed into molds. “we’ve created an inclusive, supportive, human culture, where we demand people show up and be who they are,” says CeO Michael depatie. “I want the people with the nose rings and the preppies. we celebrate people’s diferences.” To get that message out, senior leaders stage “road shows” at each of the 60 kimpton properties every year, at which they exhort employees to lavish equal care on the guests and on one another. “we don’t talk about how to be the biggest hotel company but how to improve a guest’s life,” says depatie. “How do you make your fellow employee’s day better?” another value that size often sufocates is humor. at kimpton, humor contributes to individuality, creativity, and a level of comfort that allows staf to respond to a guest’s joking request for a bath full of reese’s Pieces with a bag of the candy and a drawing of a tub. New employees get the message at orientation, which features tequila shots from the udders of a life-size plastic cow on wheels. Hula-Hoops come out at general managers’ meetings. The need to sustain culture afects the rate of hotel openings. kimpton refuses to franchise and has been cautious about expanding overseas, wary of how the “kimpton magic” will translate to other markets. “I’ve got a golden goose here,” says depatie. “But it can lay only so many eggs so quickly.” —l.B.

•••• Dearing, another Stanford professor whose resumé includes Disney, Bain, eBay, and now Harrison Metal, an early-stage investment firm of which he is founder. Dearing, who eschews a bun in favor of lettuce wrap, ofers an elegant parsing of the choice between creating

perfect copies of a successful formula and allowing people to get jiggy with it. As you open new units or ofces, should you dictate strict adherence to rules based on what you know works? Or should you encourage each location to experiment and innovate? Dearing

characterizes this as a tension between Catholicism and Buddhism. My assumption is that Dearing will swing Buddhist. Silicon Valley loves its tablets, but not the stone kind with commandments etched into them. However, Dearing starts by declaiming the

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print”—their geographic and market presence—but also a “mindset”—the deeply ingrained beliefs and behaviors of their people. It’s the inverse of author Marshall Goldsmith’s “what got you here won’t get you there.” What got you “here,” after all, includes shared convictions, inviolable standards, even small experiential details like the sound of cofee grinding. Sacrifice those, and you may never get to “there”—or to any “there” that’s a worthwhile destination. Silicon Valley, where growth happens at the rate of time-lapse photography, is hyperaware of the mindset issue. Post-startup, hiring here can be a slow afair and onboarding analogous to indoctrination. Sutton describes how the process works at Facebook, where he was once a consultant. There, engineers rather than HR run a vaunted boot camp program, in which new hires spend six weeks working on small projects, up to their elbows in the code base, living and breathing the company’s “move fast and break things” manifesto. By the time they emerge, they’ve imprinted on the company culture like technically brilliant baby ducks. All Facebook employees “internalized in a very deep way what is sacred and taboo at Facebook,” says Sutton. “They are not going to take their eyes of that mindset ball.”


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advantages of Catholicism. “It’s really good for the expansion phase of a company when people don’t want to sit around having a navel-gazing exercise,” he explains. “They say, ‘Give me the playbook.’ ” In Dearing’s formulation, In-N-Out Burger has scaled in a “Catholic” way. The company, with close to 300 restaurants, has resisted franchising to maintain quality and a consistent customer experience. Every unit looks the same and ofers the same Spartan menu. At McDonald’s, products like the Big Mac originated in individual franchises. By contrast, In-N-Out Burger “is wired to generate exact reproductions of that exact menu,” says Dearing. “None of the folks here are paid for their unique insights

about what else might go on that menu.” They are, however, compensated handsomely by industry standards, incentive to execute flawlessly on the In-N-Out formula. The young man who takes our order is preternaturally cheerful. He ofers Sutton a napkin to wipe his glasses, wet from a sudden rain shower. “The productivity here is substantially higher because of the standardization, the division of labor,” Dearing points out. “If I’m going for volume and mass appeal, the Catholic playbook is a pretty good one.” By contrast, says Dearing, leaders competing on innovation should consider adopting a more protean, Buddhist approach. That means providing the clay of values and goals, and

then giving employees room to shape them for specific locations, markets, or customers. Buddhist scaling makes more sense when you are trying to spark new ideas, says Dearing. “There’s a wonderful notion in Buddhism that sufering comes from attachment,” he explains. “If you can just let go of the attachment to an outcome, paradoxically, the outcome is better, because you focus on doing your very best work, right in the moment.” Most companies choose a strategy somewhere along the Catholic-Buddhist continuum. Pressures to globalize and customize make achieving that balance especially critical. Companies must be Buddhist enough to flex their oferings—some-

times their whole business models—for new markets and customers. But without doctrine dictating, in Sutton’s words, “the sacred and taboo,” the risk to brand and performance is much greater. subtract before you add ideo Our next stop on the tour is Stanford, where we meet with David Kelley in his tinkerer’s-workshopcluttered ofce. The founder of the university’s HassoPlattner Institute for Design (known as the “d.School”), Kelley recounts his experience scaling a diferent organization, IDEO, his design and innovation consulting firm. IDEO ofers a good example of how companies can grow without being overwhelmed by complexity,

•••• Scaling a business model? Get good at taking notes or yearS, tHe HaulInG business

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Painting in 2010 and you Move Me last year, the JuNk manual covered more than 200 processes, roughly 70 percent of which could be ported to the other operations. Scudamore also exploited JuNk’s infrastructure. The company’s killer app is a homegrown booking-anddispatch service called Junknet used by franchisees: Minimal adaptation produced Paintnet and Movenet. all three companies use the same marketing strategies— heavy on pay-per-click. and JuNk’s call center expanded easily to accommodate wOw 1 day and you Move Me. The result? within three years of launch, wOw 1 day was a $5 million company. and you Move Me hit that benchmark in just six months. —l.B.

1-800-got-Junk? —

1989 220 1,150 year founded

Total franchisees

Total trucks for all three brands

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1-800-gOT-JuNk? drew attention for its seven-minute daily “huddles,” in which all 100 or so corporate employees assembled to exchange status updates. This check-in kept staf aligned as founder Brian Scudamore scaled his company from a single unit to a franchise operation with $137 million in sales and 220 operators. Today, the daily huddle serves the same purpose but for twice as many people. It’s helping to align three companies: JuNk and Scudamore’s new house-painting and moving companies. expanding into adjacent industries is obviously easier than green-fielding a whole new market. Processes that translate among companies make scaling smoother still. “In 1996, I read Michael gerber’s The E-Myth, and it taught me that people don’t fail; systems do,” says Scudamore. He spent the next 14 years optimizing systems—like the huddle—for JuNk, hoping many would be replicable in businesses he knew would someday follow. Scudamore began by collecting the company’s best practices for everything, including greeting a customer and closing a sale. “when we identified systems and processes that didn’t exist, we’d decide how to solve them,” he says. Scudamore wrote each process on a single sheet of paper. If it didn’t fit, it was too complicated. By the time Scudamore launched wOw 1 day


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create catalysts in your coMPany intuit Next, we meet Kaaren Hanson, vice president of design innovation at financial software giant Intuit and a master of “cascading.” As used by Sutton, that verb describes how good things ideally proliferate through organizations—naturally and powerfully, like a waterfall. Cascading assumes someone in the business is already doing something right. The challenge is to create a process for difusing those practices to change-resistant employees. “It becomes a chain reaction,” says Sutton. “The expertise or whatever it is just flows from person to person or group to group.” In 2007, Intuit couldn’t get its new design methodology to trickle, let alone cascade, through 8,000 employees in multiple loca-

slowly—and strategically— scaling a retail business

T

He FirsT TiMe Stephen Silverstein tried to scale his restaurant business, Not your average Joe’s, things didn’t go smoothly. he had raised $6.5 million; beefed up the staf at his middleborough, massachusetts, headquarters; and opened 15 restaurants. But “I hadn’t developed the real estate pipeline; I had no new property in which to invest that capital,” says Silverstein. Joe’s was burning cash and unable to open units quickly. Following the one-two punch of a 2007 credit card breach and the 2008 recession, “we pulled in our horns and stopped growing,” he says. For two years, Silverstein concentrated on making his existing restaurants more profitable. In 2010, the ceO tried once more to scale. he started by aggressively scouting locations and created a rigorous vetting process, approving only sites that could produce $4 million in annual sales not your and a 35 percent return on investaverage Joe’s ment. The three locations Joe’s has — opened under the new formula are performing 30 percent better than older restaurants. year founded Silverstein also decided to push most of his talent investments out of headquarters and into the restaurants. rather than hire a restaurants in four states multi-unit manager for every five or six locations—as some large chains do—Not your average Joe’s hires one for every 10 or 12 restaurants. But it New eateries pays each unit’s general manager coming in 2014 roughly 10 percent above market rates, and it will launch stores with only gms and chefs who have proven themselves at other Joe’s locations. Joe’s is now prepared to scale more rapidly. The company, which had sales of $65 million in 2013, now has 19 locations, including three in maryland and virginia. This year, it will open four more, including two in Philadelphia. Silverstein recently raised $15 million in private equity, the amount he needs to grow to $100 million without bank debt—and without losing control. “we will not let the founding vision and the focus on the food get lost as we grow,” he says. —l.B.

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choose which studio to join. Over the years, IDEO has divided itself in diferent ways for diferent reasons. But one goal remains: to prevent the wet blanket of bureaucracy from extinguishing the embers of innovation. Now at 650 people, IDEO continues to simplify where possible. Rao recommends that companies wary of complexity be alert for vestigial tails—rules or systems that have outlived their usefulness. He ofers this rule of thumb: “If you are getting big, before you add a new meeting, figure out which meeting you can kill. Before you put in a new rule, see which rule you can kill. “Subtraction is very important,” says Rao, “because in an overloaded organization, when you subtract, it is like giving a gift.”

••••

hierarchy, and general corporate ickiness. The secret, says Sutton, isn’t postponing the kinds of systems and processes required to scale. Instead, leaders should make a habit of subtracting, even as they add. When Sutton talks about subtraction, he doesn’t mean reducing head count. He means simplifying structures. Often that requires “breaking into more, smaller teams that work together better,” he says. “In a sense, you’re adding complexity, because there are more of them. But if they are well coordinated, the organization can be more nimble.” Depending on their goals, companies can be as Buddhist as they like about how they divvy themselves up. Kelley and his team treat IDEO like one of their beloved prototypes, reworking it when something gets clunky or, as Kelley says, “it starts to feel like work, rather than a calling.” The IDEO story begins as such stories always do: a growing company, an overtaxed leader. “There was no way around it,” Kelley says. “We had to put another layer of management in place.” So when IDEO started feeling big, Kelley asked a group of leaders to form “studios,” distributed in buildings around its Bay Area neighborhood. Studio creators chose their own focus on the basis of, among other things, their interests and what they thought would be profitable. “Calling it a ‘studio’ didn’t make it feel like you were in a department,” says Kelley. “It suggested equal participation as opposed to hierarchy.” Enhancing that perception, employees could


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tions. Hanson had been charged with ensuring the program—a priority of founder Scott Cook—would be adopted throughout the company. Her first attempt failed miserably. Hanson chuckles as she shows me the original diagram of the methodology: a dog’s breakfast of arrows, circles, and callouts with the pithy tag line “Evoking Positive Emotion By Going Beyond Customer Expectations in Ease and Benefit Delivery Throughout the Customer Journey.” Hanson’s team had begun the rollout by displaying the diagram on several enormous posterboards in every Intuit building. Then, it staged forums about the program with outside experts and Cook acting as host. “After a year, no one was doing anything diferently,” says Hanson. “Word in the hallways was, ‘This, too, shall pass. Just duck your head, and we’ll go back to the regular stuf.’ ” So Hanson took another shot. She started with an act of subtraction. She ditched the tag line and boiled down the convoluted model to three key principles under the minimalist rubric “Design For Delight,” or D4D. Then her team identified 10 in-house experts and anointed them “innovation catalysts.” The catalysts guided adoption of D4D within their own teams and spent 10 percent of their time helping other teams, from which more catalysts were born. Today, Intuit has 200 catalysts trained to embed D4D in every pocket of the organization. The waiting list for catalyst training exceeds 300. More recently, catalysts began proliferating lean-startup principles. “The way you know you’ve succeeded is to ask yourself, ‘If I stopped putting energy into this, would it continue to go well?’ ” says Hanson. “The answer is, ‘Hell, yeah.’ ”

the Left Bank Brasserie, in Menlo Park. It was here, seven years ago, that Sutton and Rao began discussing the problem of scaling. Rao maneuvers through the happy-hour crowd to join us. As we chat, Rao returns to the pervasive tension between growing fast and growing well. Fast growth, he points out, makes it tougher to identify and nurture the practices worth scaling. At the same time, people are so focused on ratcheting up the positive that they don’t both-

“the way you know you’ve succeeded is to ask yourself, ‘if i stopped putting energy into this, would it continue to go well?’ ”

grow well, not quickly Escaping from the vehicular thrombosis that is Route 101, we drive to

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er to clear away the negative— bad stuf that, left to its own devices, will invariably overrun the good. Leaders, for their part, have no time to teach or to make sure the organization is learning. “With fast growth, the rate of change is phenomenal,” says Rao. “The challenge is to scale the practice of scaling.” Scaling poorly may not cause a fast-growth business to fail outright. But it won’t live up to its potential. And the people will be too stressed out and whiplashed to enjoy what success they have. We order another round of drinks, and Rao talks about visiting an online daily-deal company that had grown rapidly from nine employees to more than 900. “I asked, ‘Were you elated by that?’ ” recalls Rao. “And I was struck by the wistful response of one of the founders. He said, ‘No, it felt like we were drowning.’ ” The goal, Sutton and Rao agree, is to build a business that is as beautiful on the inside as it is impressive on the outside. “In the end,” says Sutton, “you have to ask: Are we happy living in the world we’ve built?” — LEIGH BuCHANAN is an editor-at-large

for Inc.

lead


street smarts

Norm Brodsky •••• Service Above and Beyond Military entrepreneurs have a higher calling, and we can all learn something from that

was whether to accept an ofer from a holding company to purchase 49 percent of his business. Nothing I’ve worked on recently has been more rewarding than the opportunities to mentor military entrepreneurs like tim. Veterans, reservists, and spouses of active-duty service members have been starting businesses like crazy over the past five years. In 2011, Inc. launched a program to support them, including mentoring im Smith iS aN army veteraN who served by Inc. 5000 entrepreneurs. I was fortunate to in Iraq. He saw combat there, lost eight be involved. friends in a horrific truck bombing, and these are not your typical entrepreneurs. What returned home with posttraumatic stress you notice first are their impeccable manners. It’s disorder. His PtsD gave him night terrors all “yes, sir” and “thank you, sir” and “here’s what and impeded his ability to reconnect with I’d appreciate your advice on, sir.” You know immehis wife and their two young sons. He was diately that you’re dealing with people who are also unemployed for six months, which deeply grateful for your help, which naturally makes made it even more difcult for him to put you want to help them even more. the war behind him. they face unique challenges. Imagine starting a But he fought back. He did it by refocusing on service to others. business and factoring in not only all the usual after earning his master’s degree in social work, he began working considerations but also the possibility that you with veterans facing challenges like his. His desire to help them led might have to pick up and move far away on a him to start a business, Patriot Commercial Cleaning. Its mission: moment’s notice. Yet they are undaunted—because to provide jobs for returning service members and their family they have a higher calling. Like tim, most of them members, while delivering superior service to the company’s are in business to help other military people and commercial customers. By the time I met tim, the business was their families. sure, they want to make money, but established and growing. the most pressing question he posed mainly they want to support their peers. that said, tim couldn’t help being tempted by the ofer from the holding company. I suggested that, before deciding whether to accept it, he and Norm Brodsky is an Army veteran his wife, terri, should talk about what was most important to them and where they wanted as well as a veteran entrepreneur. to be—in life and in business—10 years from now. When they did, they realized that their His co-author is editor-at-large Bo Burlingham. They also are cohighest priority was to continue providing jobs for returning veterans and their spouses. authors of Street Smarts: An “When I was out of work, my PtsD was worse because I had too much time to think about All-Purpose Tool Kit for Entrepreneurs. Follow them on Twitter at the past,” tim said. “Our mission is to help veterans out, be a part of a team again. If I’m @normbrodsky and @boburlingham. independent, I can make sure we stay focused on that.” He turned the ofer down. at my suggestion, tim and terri also put together a seven-year life plan, including a list of goals detailing what they want out of their lives, right down to the number of vacation days they want to take as a family. that was a life-changing experience, tim said. I guess that makes us even. Working with tim and the other military entrepreneurs has been a lifechanging experience for me.

evAN kAFkA

T

ScaN the page to See Norm aNSwer aNother queStioN from aN eNtrepreNeur. (See page 12 for details.)

Do you have a question for Norm? Write to him at AskNorm@inc.com.

LEAD

MArcH 2014 - iNc. - 43


Be Honored as One of America’s Fastest-Growing Companies Apply today at Inc5000apply.com


The United States vs. Buckyballs pg. 48

Kickstarter’s next incarnation pg. 62

Design. Craft. Excellence.

One gOOd turn A team of young Boston friends unveils U-Turn Audio’s fresh spin on the classic turntable. pg. 56

•••• phoTograph By Craig Cutler

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Tip Sheet

Homegrown and Hyperlocal How the founder of cinda b makes it pay to make her handbags in America

W

hen Cinda Boom-

ershine started her handbag company in 2004, people scofed at her mission to make products in the United States. Buyers at trade shows actually considered it a strike against her company, cinda b. “They made me feel like an idiot,” she recalls. Now, as the Made in the U.S.A. movement picks up speed, those people praise her for her homegrown poly-nylon purses, bags, and dufels. Cinda b makes all its accessories, which run from $12 to $179, at its Fort Wayne, Indiana, headquarters. Sales have risen an average of 53 percent over the past two years and are projected to top $8 million this year. Meanwhile, one of Boomershine’s main competitors, Vera Bradley, makes many of its bags overseas (that’s sooo 2009). Boomershine shared four ways cinda b stays competitive:

design BaCkward Cinda b’s team members will reverse engineer a popular bag’s design, tweaking it for easier and faster manufacturing. To make a “cell phone wristlet,” which could hold a cell phone, credit cards and cash, they looked at similar bags on the

“we’re not gambling as much as we would be if we went overseas.” —Cinda Boomershine

market to determine a competitive price, then sketched out their ideal version and reworked it for the fastest, most efcient sewing possible. For instance, instead of the three pieces of fabric in the initial design, cinda b simplified it by using a single piece of fabric that would wrap

We’re Back! A few very good years for American industry– and workers 46 - inc. - mARCh 2014

2009–2012 Rising wages, transportation costs, and currency rates make China’s export boom increasingly unsustainable. — A Boston Consulting Group survey shows 80 percent of Americans would pay more for products made in the U.S.

2012

Apple announces that one of its Mac lines will be built in the U.S. And Whirlpool opens plants in Tennessee and Ohio.

SpReAd: CloCkwiSe fRom top: CoURteSy CompAny (5); Bill pUGliAno/Getty; iStoCk

••••


REGIONAL RECIPES

around the bag, eliminating unnecessary seams and sewing time. And that lowers labor costs. On another bag, a decorative piping around the outside was replaced with ribbonlike bias tape to cut sewing time. “We design it so we can manufacture it for the price we want,” says Boomershine. ORGANIZE YOURSELF In keeping with the ethos of lean manufacturing, cinda b relies on a companywide calendar to coordinate the workflow, deadlines, and projects. Boomershine holds weekly meetings at which everyone gathers around a calendar covering an entire wall in the conference room. She uses colored sticky notes to flag important dates such as when product lines must be finalized, upcoming purchase orders, shipping deadlines, or when new products will arrive in showrooms. The team reviews upcoming projects as well as things that fell through the cracks—and why. The result: a unified efort that leads to less scrambling and fewer costly rush orders. “The more efcient you can be

day to day, the lower the price,” Boomershine says. FOCUS, FOCUS, FOCUS Cinda b created a design advisory board to provide feedback on new bags: thirty women from across the country who love fashion and aren’t afraid to speak their minds. Do they use that interior zipper pocket? If not, cinda b eliminates it—and the cost. Would they buy that bag for the price? Would they pay $2 more for a bag with a diferent clasp? Nearly every product in the line has gone through this review process to eliminate unused features or add new ones to make bags that will really sell. STAY CLOSE TO HOME Cinda b reduces costly mistakes, back orders, and overstock by locating its factory under the same roof as its ofces. And unlike with Chinese factories, which generally require large orders, having a local factory lets cinda b test smaller quantities of a new pattern or design to see how it does in stores. “We’re not gambling as much as we would be if we went overseas,” says Boomershine. —JENNIFER ALSEVER

2012 More than one-third of U.S.-based manufacturing executives at companies with more than $1 billion in sales say they plan to bring back production to the United States, according to the Boston Consulting Group. 2013 Walmart unveils a Buy American Initiative and promises to source $50 billion in domestic goods in the next 10 years.

Designers at cinda b learned early on that fabric and style preferences vary dramatically by location. Some of their biggest hits: Mod Tortoise Tote $129 The East Coast bestseller is a purse and laptop bag.

Jet Set Hipster II $63 The choice of practical Midwesterners, the Hipster hangs across the body.

Verde Bonita Weekender Dufel $95 Amore Vertical Cosmetic Tote $65

Queen of the Southeast, this bag’s color and pattern are “sunny like the region.”

The South loves bright patterns, and this bag delivers—for cinda b.

2013

Ford says it will hire 2,200 workers as part of its plan to invest $16 billion in U.S. operations by 2015.

$1.9

TRILLION Total U.S. manufacturing, 2012 (a 0.4 increase in percentage of GDP, the biggest annual rise since 1977)

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CRAIG ZUCKER VS. THE UNITED STATES OF AMERICA —

The creator of Buckyballs says he was bullied by the government. The Feds say his company deserved to die —

W BY BURT HELM

ILLUSTRATION BY BEN VOLDMAN

E COULDA been a Lego! We coulda been a Rubik’s Cube!” Instead, Craig Zucker is in a shared workspace in Brooklyn, New York, hanging on. It’s like a bad dream: He’s no longer selling Buckyballs—the tiny magnetic desk toys that did $40 million in sales in just four years. Instead, the 34-year-old is selling Liberty Balls, chestnut-size magnets that are weaker, lamer, and much less lucrative. His trendy Manhattan ofce is gone, and so are all his employees, save one. The two


of them rent this cube inside a former warehouse where the lobby is raw concrete and the elevator reeks of cigarettes. Posted on the glass walls are stickers advertising Liberty Balls and layouts for sales promotions: They’re What Lincoln Would Have Played With reads one. Juvenile? Maybe. But Zucker needs these slogans in his fight against the monster (every bad dream has a monster). In Zucker’s case, it’s the federal government. As Zucker sees it, the government destroyed his business—and now, by suing him personally for the cost of recalling every Buckyball he ever sold, it’s hellbent on destroying him, too.

were a competitor’s brand. To Wolfson, they may as well have been Zucker’s. “It’s about safety,” he says. “Zucker only talks about the impact on himself.” The CPSC’s battle with Zucker reveals what happens when an entrepreneur provokes regulators. It also shows how this small, long underfunded agency has become more aggressive than ever— taking hard-line stances with businesses and using heavy-handed tactics to rid America of the products it deems dangerous. “It’s a sea change in the way the agency’s behaved in the last 20 years,” says Michael J. Gidding, a productsafety lawyer based in Bethesda. The agency’s lawsuit has riveted small-

“This started as a side business, a way to make a couple thousand bucks. Now, I’m living a nightmare.” Losing this battle will ruin him financially. Winning, which could be years and millions of dollars away, might well ruin him, too. “This started as a side business, a way to make a couple thousand bucks,” he says. “Now, I’m living a nightmare.” About 200 miles south of Zucker’s ofce—across the street from a high school, upstairs from a day care center—is the headquarters of the Consumer Product Safety Commission, or CPSC, in Bethesda, Maryland. Inside, Scott Wolfson, head of communications, sits with a framed photo of his son and a #1 Dad ribbon on his desk. But behind him are pictures of other children. There’s 16-month-old Danny Keysar, who died after a crib collapsed on his neck. There’s 22-month-old Kenny Sweet Jr., who died after eating loose parts from one of his brother’s toys. And next to them is the most recent addition to the collage: Braylon Jordan, just 23 months old in the photo. He must eat through a tube for the rest of his life because he swallowed eight little magnetic balls that tore holes through his intestines like gunshots. Those magnets weren’t Buckyballs; they

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business advocates, and they aren’t the only ones watching. Consumer-interest groups and product-safety lawyers are glued to it, too. The outcome could have implications for anyone who sells stuf in America. UCKER SMILES when he tells the beginning of the story. He was in his 20s and had just failed launching a product called Tap’d NY—filtered New York City tap water that he bottled and sold back to New Yorkers as “local.” (No Glaciers Were Harmed Making This Water! the labels read.) Looking around for his next thing, he had come across a YouTube video marketing tiny balls of neodymium that snapped together to make cool shapes. He thought he could sell them better. In 2009, he and his business partner, Jake Bronstein, ordered $2,000 worth of magnets from China, dubbed their product Buckyballs (simply because it sounded catchy), and called their company Maxfield & Oberton (same reason). They made the brand

all about fun. At early trade shows, the founders concocted origins for Bucky on the spot. (“He was my dog!” they would say. “He was my science teacher!”) They had even more fun with the latter part of the name: “Play with our balls!” they’d yell. Sales took of right away. At each new trade show, the founders signed up dozens, sometimes hundreds, of new retail accounts. By Christmas, Buckyballs had been in Real Simple’s holiday gift guide and in Rolling Stone as a Toy of the Year. But in January 2010, at a gift show in Atlanta, Zucker received an ominous call from a sales rep. The 2-year-old son of a retail client had swallowed two magnets. The boy was fine— the balls passed through his system without harm—but the store didn’t want to carry Buckyballs anymore. “It was a nauseating feeling,” recalls Zucker. Unsure what to do, he went back to his booth and wrote more orders. A few weeks later, the CPSC detained Maxfield & Oberton’s latest shipment of Buckyballs at John F. Kennedy International Airport in New York City. Oddly enough, the CPSC’s inquiry wasn’t related to the incident with the 2-yearold. It had to do with the warning labels on the Buckyball packages. Zucker didn’t realize it at the time, but magnets were a sore spot for the agency. When Congress established the CPSC, in 1972, it gave the agency sweeping authority to set safety standards, ban products, order recalls, and levy fines in more than 10,000 product categories. But in 1981, the Reagan administration slashed its budget and added onerous rules that cowed it to industry. (For instance, the CPSC had to get companies’ permission to disclose their brand names during most recalls.) With a budget smaller than that of the National Endowment for the Arts, the CPSC had to carefully pick its battles. So it cut a lot of deals. If a company agreed to recall a product quickly, the agency allowed it to deny its product posed a hazard—vital armor against the nation’s hordes of personal-injury lawyers. But in 2007, crisis struck. An investigative reporter at the Chicago Tribune published a series of scathing productsafety articles. The first began with a


NOTHING LEFT A couple of years ago, Craig Zucker had a hot company with $18 million in annual sales. Now, it’s all gone, and he’s fighting a government suit that could ruin him.

PHOTOGRAPH BY RYAN PFLUGER

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warning-label issue. (Basically, the labels should have said Ages 14+, not Ages 13+.) To be extra safe, they changed the warnings to Keep away from all children! and stopped selling to stores that mainly carried children’s toys. In March, Maxfield & Oberton issued a voluntary recall of all 175,000 units it had sold so far and replaced all the labels. (Just 50 sets were returned.) Zucker felt he was securely on the right side of the law. The children’stoy standards didn’t apply, because Buckyballs was not a children’s product. Schoem agreed. By the end of 2011, Maxfield & Oberton was selling $18 million worth of Buckyballs annually online and through national retailers, including Urban Outfitters and Brookstone. (Bronstein left

Buckyball sets were becoming a hot holiday gift. Unfortunately, some wound up in children’s stockings. words that were later read aloud to CPSC commissioners at a congressional oversight hearing. Later in 2007, millions of toys were recalled for illegal levels of lead—news that dominated the headlines, given that it raised concerns that America had ceded quality control to China. The media and Congress flayed the CPSC for all of it. In 2008, Congress overwhelmingly passed legislation to overhaul the agency. In addition to nearly doubling the CPSC’s (still small) budget to more than $118 million, the law tightened toy standards and increased penalties. A separate rule banned children’s toys with neodymium magnets small enough to swallow. The Chicago Tribune article remains a painful memory for staf at the CPSC. A printout is tacked on Wolfson’s wall next to the children. The headline: Not Until a Boy Died. Zucker wasn’t up on this history, but he hired a lawyer who was. Alan H. Schoem was a product-safety lawyer and a 31-year veteran of the CPSC. Together he, Zucker, and Bronstein untangled the

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NOT A TOY At right, a set of Buckyballs. Doctors surgically removed 37 of them from the insides of 3-year-old Payton Bushnell (below).

the company after disagreements with Zucker but kept a 50 percent stake.) There had been more ingestion incidents, but Zucker had stayed in front of the issue, participating in a CPSC press release that warned parents. To him, the good news outweighed the bad: Buckyball sets were becoming a hot holiday gift, making People magazine’s “hottest trends of the year.” Hundreds of thousands of Buckyball sets flew of shelves

that Christmas season. Unfortunately, some wound up in children’s stockings. After the holidays, the number of ingestion incidents spiked. In the first half of 2012, there were 25 reported cases— more than in the entire year before. In the scheme of things, the number was small (there were 265,000 toyrelated injuries resulting in emergencyroom visits in 2012). But the status of Buckyballs as a hot new product, paired with the gruesome nature of the injuries, made for a sensational news story. On the front page of The Washington Post appeared an article about Meredith DelPrete, a 10-year-old girl from Virginia who was hospitalized after swallowing two Buckyballs. (She had tried to use them to mimic a tongue ring.) Both Good Morning America and the Today show ran a segment on Payton Bushnell, a 3-year-old girl from Portland, Oregon. The child went to the hospital with what her parents believed was stomach flu. An X-ray revealed she had eaten 37 Buckyballs, punching three holes in her lower intestine and one in her stomach. IN LOUISIANA, Dr. R. Adam Noel, a pediatric gastroenterologist, was spending a quiet evening at home when he got a call from the emergency room. A boy had some sort of necklace in his stomach. It turned out to be 39 Buckyballs inside his intestines. Noel had the boy rushed to the New Orleans Children’s Hospital, where he removed the magnets in a two-hour operation. In the months that followed, Noel witnessed two more cases at the hospital. One was Braylon Jordan, who had swallowed eight magnets (not Buckyballs). The damage was so severe that the boy had all but about 5 inches of his small intestine removed—requiring him to eat through a chest tube and use a colostomy bag for the rest of his life. Alarmed, Noel emailed other pediatric gastroenterologists, asking if they were seeing similar incidents. More than 30 other doctors said they had. Something had to be done

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FROM TOP: COURTESY COMPANY; KPTV FOX 12 OREGON

preschool teacher pleading with a rep on the CPSC’s hotline: Magnets from a building toy called Magnetix had come loose, a 5-year-old boy had swallowed them, and he’d almost died. The agency took the report but did nothing. Six months later, little Kenny Sweet Jr. was killed by the same toy. The story, which later won a Pulitzer Prize, showed a pattern of ignored warnings, inefectual recalls, and avoidable deaths—much of it because, the series alleged, the CPSC was “a captive of industry.” “Kenny Sweet’s death is emblematic of how a weakened federal agency, in its myopic and docile approach to regulation, fails to protect children,” wrote the story’s author, Patricia Callahan—


about this. In June 2012, a group of 14 doctors went to Bethesda to urge the CPSC to stop the sale of these magnets, and then to Capitol Hill to lobby their representatives. A handful of senators, including Robert Menendez of New Jersey, Sherrod Brown of Ohio, and Kirsten Gillibrand of New York, wrote letters to the CPSC, urging the agency to take action. The CPSC staf was determined to do something. It wouldn’t wait until a child died—not this time. The problem for the CPSC was that there was no rule that Maxfield & Oberton was violating, exactly. The magnet standards applied only to children’s products. And there were no incidents involving the product’s intended audience, adults. The agency had one nuclear option, reserved since the ’70s: It could declare an “imminent hazard” and file an injunction to stop sales. It had almost never used that power, and with so few Buckyball incidents, it might be hard to prove in court why it was necessary now. One thing was sure: Any efective action against magnets had to include Maxfield & Oberton, which had a 70 percent share of the market. By July 2012, the CPSC staf had devised a plan: It would target Buckyballs’ warning labels. Incidents had increased despite Zucker’s enhanced warnings. Once adults removed the magnets from the box, the warnings were no longer visible. And the shiny balls were incredibly attractive to toddlers and older kids. Therefore, the warnings were defective, the agency’s lawyers argued. Because there was no way to put warnings on the small metal balls themselves, Zucker should recall the product completely. The agency sent letters to Maxfield & Oberton and a dozen of its competitors, saying it had determined that small magnets could pose a “substantial product hazard” (a couple of grades down from “imminent”) and demanding a plan to remove them from the market. Two days later, Schoem wrote a detailed response disagreeing with the assessment. The next day, he received an email from the agency. So, was Maxfield & Oberton going to stop selling Buckyballs or not? No, Schoem responded.

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The CPSC immediately launched its next phase of its attack: It wrote to several retailers that sold Buckyballs, requesting that they voluntarily stop selling small magnets. The letters were framed as requests for information and were careful not to name a manufacturer or brand (doing so would have violated regulations). But the retailers just happened to be Maxfield & Oberton’s biggest clients. And Buckyballs was the only brand of magnets many of them sold. Maxfield & Oberton’s phones started ringing of the hook. “Retailers were scared,” says Bethel Costello, who managed the company’s retail accounts. Many thought the letter meant it was no longer legal to sell the magnets. (At Max-

donate $10,000 to the Red Cross if Scott Wolfson would debate him on CNN. Next, he ofered to donate the $10,000 if Wolfson would just arm-wrestle him. The stunts got the company a lot of press—CNBC, Fox News, The New York Times, and this magazine all ran stories. All the while, Maxfield & Oberton tried to sell as many Buckyballs as possible. It had a glut of inventory for the holiday season—some 300,000 units— and since the CPSC letters, almost no retailers to sell it. So, as Christmas Day grew closer, Maxfield & Oberton held a closeout sale to end all closeout sales: BUCKYPOCALYPSE! read the banner on its website, alongside a countdown clock. Ofering discounts and promotions,

“It’s a sort of tyranny. It’s like, ‘Oh, yeah, you may have these legal remedies or rights, but by God, if you exercise ’em, you’ll pay a penalty.’ ” field & Oberton’s request, the CPSC sent a follow-up letter clarifying that selling the magnetic balls was still technically legal—“although your willingness to stop sales voluntarily pending resolution of the matter helps us to safeguard children,” it read.) On July 25, the CPSC filed a lawsuit against Maxfield & Oberton. The agency also sued Zen Magnets, a smaller competitor. The 11 other companies agreed to stop selling magnets. THE PROBLEM WITH SUING a man who built a multimillion-dollar business using ball jokes is that he fights back like a smartass, too. Zucker and his eight employees quickly launched a publicity campaign called Save Our Balls. They bought a full-page ad in The Washington Post. They posted silly caricatures of the commissioners and Scott Wolfson online, along with their phone numbers and email addresses. They launched a site called Ban This Next, encouraging the CPSC to ban things that killed more Americans than Buckyballs every year, such as hot dogs (“delicious but deadly”) and falling coconuts (“tasty fruit or deadly sky ballistics?”). Zucker ofered to

Maxfield & Oberton managed to sell almost everything by Christmas, and Zucker closed up shop. He paid his staf members bonuses and their last paychecks and ofcially dissolved the company. Days later, his lawyers filed a motion to withdraw from the CPSC’s lawsuit because Maxfield & Oberton no longer existed. Then Zucker took of with his girlfriend for a six-week vacation in Thailand. Zucker says his campaign was in keeping with the Buckyball brand—a fun way to stand up for his company’s rights. To others, it looked like a reckless entrepreneur flooding the market with dangerous products, joking about it, and then skipping town. After Zucker got back from vacation in February, he was personally added to the CPSC’s lawsuit. Wolfson, the CPSC spokesperson, says the decision to add Zucker was not vindictive but a necessary next step. “He dissolved Maxfield & Oberton,” Wolfson says, and so the government needed to hold someone responsible for a recall. “We look at the domino efect, to who was still standing,” CONTINUED O N PA G E 1 1 0 he says. “We made

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best in class

playtime

Three new spins on high-energy entertainment —

Great things happen when entrepreneurs focus on fun. There’s nothing better than a classic toy that’s gotten reimagined by a master designer and built by people who really put everything they have into what they make. The three examples here may be a little too nice—or dangerous—for Junior, but you’re never too old for a little fun. Or adrenaline. —AdAm BAer — Photographs by CraIG CutLer

CHOPPING BLOCK

You know Ping-Pong is having a moment when you can buy a bamboo table that aspires to the level of sculpture—for the price of a small automobile. But the Theseus table ($15,875) from Los Angeles–based Eleven Ravens is not just a high-end piece of Pong-themed art. It’s a cause: The company donates part of the proceeds to the Sport and Art Educational Foundation’s efort to battle Alzheimer’s disease, a condition that playing Ping-Pong may help treat. Eleven Ravens has developed a scratch- and damage-resistant melanin-resin surface so you can chop and slice with abandon. The company builds the tables to order (it makes pool tables, too). Options include the elegant table seen here, another that looks like a martini (complete with a lemon twist), and several others. To get yours, you will need to put 30 percent down and have at least 11 feet by 12 feet of space. Wait time: nine to 14 weeks. And no, it doesn’t rock—your beer’s safe.

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“With the game’s unusual combination of elegance of movement and natural aggression, it made us think, Why should we compromise design for functionality when we can have both?” —Michael JaMes Jackson, co-founder, eleven Ravens

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“It’s a true rider’s bike. It elevates your game and makes you feel like a hero.” —MaRc Fenigstein, ceo, BRD Motorcycles

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best in class

GreeN DeMON

motocross may not be where most motorcycle geeks look to ďŹ nd cutting-edge specs, but the RedShift mX from BRD motorcycles ($14,995) is more than just a supercool dirt bike. The 40-horsepower machine goes from zero to 60 in 3.3 seconds; it runs for 50 miles on one charge; and according to cEO marc Fenigstein, it can last for 1,000 hours of use before it needs an oil change (about 70 times longer than its fuel-injected peer from honda, the cRF250R). BRD, which was founded in San Francisco in 2010, employs active racers and riders, and this lovably noisy bike (it can be heard a block away, solving a safety concern that plagued early electric bikes) was designed for intermediate to pro racers. Another $500 gets you the Sm, or Supermoto, model, which has been retooled to be street legal. So you can enjoy your low-carbon footprint—at 85 mph.

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best in class

TURNTABULOUS

Today’s vinyl enthusiasts have limited turntable options. They can buy one for $1,000–plus or settle for the toylike versions that don’t get close to aural Nirvana. But U-Turn audio’s minimalist $179 Orbit Basic produces sound as good as equipment twice its price. Built by a Boston-based startup that earned its seed money via Kickstarter, the black Basic model does away with nonnecessities such as electronic tone-arm lifters and USB ports and performs remarkably well in terms of maintaining speed and minimizing motor noise. For another $100, aspiring audiophiles can pick up the Orbit Plus, which has a heavier acrylic platter and three grades of cartridge, and also comes in green or blue. Either model ofers balanced tone arms as well as “moving-magnet cartridges” with diamond tips that produce clear, warm sound and are better for preserving records than the ceramic-tip cartridges on cheap models. and setup is incredibly easy, right out of the box.

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“Vinyl is the best way to experience music, and the Orbit’s simple, inexpensive design really lets you get the most out of your record collection.” —RoB heRtig, co-founder, U-turn audio

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MADe SMART

Mark Dwight •••• Kickstart Your Market I never thought of crowdfunding as a powerful tool for established companies. Then I tried it at mine

entrenched enterprises are looking to use the platform to gauge demand for new products and lower the risk of rolling them out. Launching a product is risky business, after all. In extreme cases, a new product can make or break a company. Wouldn’t it be great if you could sell your next one before you made it—validating the market and getting paid in advance? If we could build everything we sell to order, perfectly hen I fIrst dIscovered Kickstarter, I matching supply and demand, we would earn figured the fledgling crowdfunding site more, waste less, and have a lot more fun. was little more than a sandbox for DIY My maiden voyage on Kickstarter came three geeks and wild-eyed inventors trying to years ago. I was on the site to check out a new fund their pet projects. And it’s true watchband design that promised to turn my iPod that Kickstarter and other sites like it Nano into “the world’s coolest multi-touch watch.” still feature their fair share of lovably I joined a growing group of backers, pledged my unhinged ideas—steampunk-theme money for the nonexistent watchband, and looked cupcake sprinkles, say, or a smartphone-controlled paper airplane. on during the next month as the project raised But crowdfunding is growing by leaps and bounds, and it’s revolualmost $1 million from 13,500 people. As an entretionizing the go-to-market playbook for serious inventors, entrepreneur who knows the exhausting and sometimes preneurs, and small companies. humiliating experience of raising money from In just five years since its debut, Kickstarter has raised nearly professional investors, I was mesmerized by $1 billion for more than 50,000 projects, with pledges from more this revolutionary “consumer direct” technique: than five million individuals worldwide. With a few extraordinary Design a cool product, tell a great story, and sit projects having raised millions of dollars each, plus thousands of back as people fund your first production run. more modest successes, Kickstarter is undergoing a scale shift. Absolutely brilliant! Now, not only established filmmakers like Spike Lee but even I became a bit of a serial Kickstarter after that, backing projects such as flashlights, space-age titanium guitar picks, an iPad stand, and even a documentary film. To date, I’ve backed 50 campaigns; other people have backed hundreds. The more I pledged, however, the more I wanted Mark dwight is the founder of Rickshaw Bagworks, a San Francisco to be on the other side of the deal. I decided to launch my own Kickstarter project from inside maker of custom bags, and SF Made, a nonprofit focused on building the my company, Rickshaw Bagworks, to test-market a new custom fabric for our messenger bags, city’s manufacturing sector. backpacks, and tote bags. Over a 30-day period, we received pledges from 430 people totaling more than $20,000—and the short video we produced about our project was viewed more than 2,000 times. Not huge numbers, but pretty thrilling for a company our size. I learned several things during that month. First, Kickstarter is addictive. I have never been so obsessed with my iPhone as I was while watching the pledges roll in. Second, the site’s audience is mostly male, by a 3-to-1 margin, which probably cut into the appeal of our fabric pitch. Third, crowdfunding is a lot of work before, during, and after your project launches. We foolishly promised delivery by Christmas, so we were frantically sewing the tote bags and zipper pouches we ofered as rewards just days before Santa’s deadline. In the end, though, we delivered nearly 1,000 bags and pouches to 10 countries—enough to convince me that crowdfunding is a revolution in consumer engagement. My next project is already under construction.

62 - inc. - MaRch 2014

MaDe

cody PickenS

W


52%

of accountants would rather run a marathon than try to crack the code on sales tax laws.

Really, we can’t make this stuff up. Isn’t it time to consider sales tax automation?

Get your free copy of the Wakefield Research Report. 1-855-886-4886 www.avalara.com/inc


Achieve Scale.

BUILD “Our key to success has been the speed at which we grow, while preserving the mysteriousness of the Mom’s brand.” —SCOTT NASH, CEO, Mom’s Organic Market

76

PG.

PG.

66

MEET THE BUILD 100: COMPANIES THAT GROW AND GROW PG.

72

BOUNCING BACK AFTER A SIX-MONTH CATASTROPHE ŦŦŦŦ PHOTOGRAPH BY ANDY RYAN

MARCH 2014 - INC. - 65


66 - INC. - MARCH 2014


What does it take to expand year after year, even through the Great Recession? Very few companies have ever done so. You can learn a lot from those that have By Scott Leibs

SHUJI KOBAYASHI/GETTY

“He not busy being born is busy dying.” THAT BOB DYLAN LYRIC no doubt has a particular resonance for entrepreneurs. Companies die by the hundreds every day—and those that survive know they must keep moving and focus relentlessly on growth. The alternative: Well, you know. By some measures, 25 percent of all businesses fail within the first year, and nearly half fail by Year Three. But what happens once a company makes it through the entrepreneurial phase and reaches a certain level of maturity? What challenges do business owners and their executives face as companies move from 10 employees to 100 to 200 to 500? How do they need to change to keep growing? And why do so few companies manage to grow consistently? To find out, Inc. economist-in-residence and consultant Gary Kunkle launched a research study of more than 100,000 U.S.-based midsize businesses

BUILD


(those with 85 to 999 employees). Conducted throughout 2013, his project, which was sponsored by the Principal Financial Group, established the goal of identifying companies that are sustained-growth champions: that is, those that added head count for five consecutive years, from 2007 to 2012. It’s a remarkably difcult standard to meet: Fewer than 1.5 percent of companies made the cut. From there, we selected a repre-

less likely it was to grow again in the future (and the more likely it was to fail). Also, absolute growth (as measured over several years) had no influence on the odds of future survival or growth. But the more frequently a company increased in size, as measured by the addition of head count year over year, the more likely it was to grow again. What do these companies have in common? Well, let’s first take a look at what they don’t. First of, these companies don’t look much alike. They don’t cluster in predictable industries or geographic locations. They don’t serve the same customer segments. And they’re no more likely to be long-established organizations than to trace their roots back only as far as the dotcom bust. But they do have certain commonalities and noteworthy diferences from other companies. A few highlights from our initial survey, conducted in the third quarter of 2013, jumped out at us: 1. More than 50 percent of respondents said “people/ talent” and “customer service” were the only drivers of competitive advantage and identified those attributes as core to their company’s identity, ahead of nine other factors. 2. A “big change in senior management or leadership” was among the top three factors credited for triggering company growth “breakouts,” ahead of six other factors. 3. Two of the top three challenges or obstacles to growth were “attracting top managerial talent” and “training future supervisors and managers,” ahead of 11 other challenges. 4. More than 82 percent of respondents said “sharing financial success with your employees” helps a company grow—tying that practice for the highest response among six management practices. 5. Some 81 percent of respondents named “sudden loss of a key employee” as a concern—the highest such percentage among 11 “unplanned events” that were rated. (For more, see charts on pages 78 and 79.) The bottom line: There are two big themes to come out of the first Build 100 survey. First, the leaders of these companies repeatedly indicated that growth owed more to cultural factors such as how well employees work together, how they interact with customers, and how they collaborate on problem solving than to, say, financing or product attributes. The survey also showed that how you treat your employees really does matter. For example, there’s a direct connection between the sharing of financial success with employees and higher revenue growth and productivity. Also, the companies that were the most generous to their employees, in terms of compensation and benefits, not only achieved higher performance; they also reported a boost in attracting and retaining the best talent. That all sounds straightforward, but of course it isn’t. It’s not easy finding good people. It’s not easy balancing profitability with generosity. And these companies don’t get everything right. But as you’ll see on the following pages, which present the survey results in more detail and describe the remarkable journeys of three Build 100 companies, they do know how to create a vision, inspire their employees, innovate efectively, and maintain very close ties to their customers. In short, they know how to build.

You can measure growth in diferent ways. Only one predicts success. sentative subset of companies that agreed to collaborate with us in analyzing the managerial DNA of their success. Thus, the Build 100 was born. (For a related look at how companies scale successfully, see “How Do You Go From This to This Without Losing What Makes You Great?” on page 30.) In addition to unveiling the list (see page 80), Inc. will continue to report on these companies throughout 2014, to learn—and share—how they have managed to grow consistently year after year, even when times are tough. The project has, as you will see, already uncovered a trove of insights. First and foremost: All growth, as Kunkle puts it, is not created equal.

A

company’s growth (assuming, of course, that it has any) typically follows one of several patterns: It might burst on the scene with years of expansion and then decelerate and decline. Or it could grow in fits and starts, possibly in sync with the overall economy, or as the result of opportunities seized or missed. Or it might enjoy a brief boom and then plateau. The challenge for company leaders is to understand that some forms of growth can’t be sustained—and others virtually guarantee a hard fall. In comparing the Build 100’s long-term performance with that of a larger universe of similar-size companies, one key finding emerges: The only statistically significant predictor of a company’s future success is steady growth; short- and even long-term bursts mean almost nothing. “It’s akin to Aesop’s tortoise and hare story,” Kunkle says. “Slow and steady wins the race. Incremental advancement, repeated over time, achieves greater results. That said, Build 100 companies grew, on average, 35 percent annually during the five years studied.” Studying company performance over a 20-year span, we also found that the faster a company grew in one period, the

68 - inc. - march 2014

build


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PARTNER PERSPECTIVE

A Lesson in Staying Ahead of the Curve How a Wilmington, Delaware high school leveraged BYOD in arming its students for the future

At St. Elizabeth High School in Wilmington, Delaware, faculty and administrators take pride in the fact that 98 percent of their graduates go on to achieve a college education. “At the end of the day, our mission as educators is to fully arm our graduates for the future—both academically and technologically,” says principal Shirley Bounds. For that reason, St. Elizabeth embarked on an ambitious plan to put Apple iPads in the hands of every student beginning with the 2013-14 school year. Using a mandatory Bring Your Own Device (BYOD) policy, the plan meets the school’s needs for access, security, and future-readiness. Here’s how a BYOD program fulfilled St. Elizabeth’s goals for student technology access: • Ubiquity. The primary objective of the program was to ensure that every student had continuous access to the technology on a one-to-one basis. “We kicked off our initiative by converting part of our library into a media center with 30 PC workstations, arranged in collaborative pods, and then upgrading an existing PC lab with 32 workstations,” says Bounds, but even with the addition of a third computer lab of 30 iMacs and a mobile iPad station holding 30 iPads, demand far exceeded supply—not to mention that the structure could not be scaled at a reasonable cost. “We began to look at a BOYD model in which students retain ownership of the devices,” says technology director Christopher Matarese. “The solution really became putting a device in each student’s hand that is capable of doing everything that they need and that travels with them. We have essentially turned every classroom into a lab with the student’s personal device.” Thanks to a pool of “foundational” apps such as Google Drive for sharing, Notability for note-taking, and Apple’s iMovie, Pages, and KeyNote, the school is better positioned to teach the critical skills of presentation, collaboration, and research. • Security and management. A central concern at St. Elizabeth—as it is with any organization—is security. They not only needed to protect data integrity, but also comply with government regulations such as CIPA (Children’s Internet Protection Act) and address the concerns of parents. The school uses Gaggle, a service specifically designed for K-12 populations, to monitor usage of Google Drive and Gmail, K12USA’s SecureSchool to monitor web use, and as JAMF Software’s Casper for centralized Mobile Device Management (MDM), which allows secure network access, remote wipes, and other features. The system also lets faculty push schedules, assignments, and required apps directly to a student’s device. On campus, the school uses a network of Cisco Meraki wireless access points to distribute WiFi while adding an additional layer of monitoring. • Versatility. Even as security remains paramount, the educators at St. Elizabeth wanted to make

BROUGHT TO YOU BY

BUILD


sure that students got the most out of their devices. “We wanted them to feel like it was their device, so we didn’t want be super restrictive,” Matarese says. “We want the kids to understand that these devices are great for education, but they’re great for other things, as well.” • Cost-effectiveness. BYOD has also proven highly cost-effective for the school community. Rather than worrying about keeping individual devices up to date, the school can invest in infrastructure and delivery. Students have a device that they can use beyond the classroom— and even take with them to college—and parents are saving an average of $500 on textbooks, 95 percent of which are currently available in electronic form. Even just a few months after implementation, Bounds says it’s hard to imagine life without an iPad in every student’s backpack: “They pretty much use them for everything,” she notes. “I think if you had a student today who forgot their iPad, their parents would be here first thing in the morning to bring it in for them. They’ve become indispensable.” MEETING THE CHALLENGE Faced with the prospect of 350 devices accessing the Internet simultaneously using bandwidth-intensive applications such as streaming video, Matarese quickly realized that the school’s multiple bonded T1 lines were not up to the task. “They were unreliable,” he says. Comcast upgraded the school’s access with a Mbps Ethernet Dedicated Internet connection, and gave its legacy PBX system a boost with fast, reliable PRI trunks. “It’s been an incredibly smooth transition,” Matarese says, “and we can scale up to 100 Mbps and beyond with a phone call.” To learn more about how Comcast Business Ethernet can benefit your organization, visit business. comcast.com. For more information about how mobility is enabling the workforce and improving productivity, download the free white paper, Empowering the Mobile Workforce: Hosted Voice Solutions Help Boost Productivity and Customer Service, at business.comcast.com/empoweringmobile-workforce at business.comcast.com/empowering-mobile- workforce.


• CPO Commerce

The Power of Transparency When a technology crisis triggered chaos in the warehouse, this e-commerce company found the fix in open-book management By Adam Vaccaro Photograph by Andy Ryan

It was, wIthout a doubt, his company’s “darkest moment,” says CEO Rob Tolleson. Growing at a 30 percent annual clip, CPO Commerce, an online retailer of power and hand tools made by Black & Decker, DeWalt, Makita, and other manufacturers, embarked on a major IT upgrade. The resulting software malfunctions would have crushed a lesser company. Unprocessed orders began to pile up in the warehouse, generating zero revenue even as vendor invoices poured in. Products that were in stock were listed as out of stock. Adding to the company’s woes was the need to train and then retrain staf as new systems came online, stretching everyone’s patience, and bandwidth, to the breaking point. CPO, which had never missed a quarterly forecast, missed two in a row. Not a single employee bailed during that hellish six months, a source of considerable pride to Tolleson. What kept the team together? The company’s commitment to total transparency, including an embrace of open-book management. Finan-

7 2 - inc. - march 2014

cials, inventory, order volumes—there was nothing going on that every employee didn’t know about. Alan Lenertz, CPO’s vice president of operations, says that made all the diference. Because everyone had ready access to inventory and order information, employees spotted the problems more quickly than they might have and, accustomed to a collaborative work style, were able to collectively brainstorm on solutions. More important, transparency kept morale from plunging of a clif. All employees knew the company had a mess on its hands, but, counterintuitive though it may sound, because they could see exactly what was happening (or not happening), they knew the management team wasn’t sugarcoating the situation. “There was more respect and confidence than there might have been otherwise,” says Lenertz. “They didn’t have to worry that any other, unacknowledged things were also out of control.” Tolleson is quick to point out that this sort of transparency has served the company in the best of times, too—and most of its times have, in fact, been extremely good. Since

2007, the company has more than doubled in size and now employs 115 people, with sales of $80 million. It expects to grow 20 percent this year. CPO’s open-book approach has helped keep everyone on the same page even as the company has expanded geographically. It has more employees at its Lawrenceville, Georgia, fulfillment and customer service facility than it does at its Pasadena, California, headquarters. Lenertz says that though executives regularly bounce back and forth between the two locations, it’s the constant flow of information that really keeps the company united. “All the operational data we receive from Lawrenceville every day makes me a lot more comfortable,” Tolleson agrees. And you can be sure that he is not the only one looking at that data—not by a long shot.


••••

empowered

radical transparency is one of cPO’s most valuable tools, says alan Lenertz, vice president of operations.

cpo commerce At A GlAnCe Founded:

2004 Headquarters:

pasadena, calif. employees:

115 2013 Revenue:

$80 million

build


••••

above the fray

Elaine Osgood’s travel agency is flying high, both despite and because of technology.

AtlAs trAvel At A GlAnce Founded:

1997 Headquarters:

Milford, Mass. employees:

170 2013 Revenue:

$250 Million

(Includes revenue passed through to airlines, hotels, and other travel vendors)

74 - inc. - march 2014


• Atlas travel

Undisrupted Facing a growing army of Internet competitors, this travel agency gave customers what they really wanted: better data. And it never missed a beat By Ilan Mochari Photograph by Andy Ryan

four years after Elaine Osgood launched her corporate travel agency, Atlas Travel, in 1997, the industry experienced a seismic shift. Sites such as Expedia, Orbitz, and others debuted with a splash, promising ease of use and big savings. “Online, DIY booking became the shiny new thing,” Osgood says. “A lot of our corporate clients had a mandate to at least try it, in an efort to save money. After all, travel is often a company’s third-largest expense.” Rather than panic, Osgood relied on a core tenet of her success to date: listening very closely to what customers wanted. In an ironic twist, technology turned out to be Osgood’s ally, not her enemy. Corporate clients soon found that when you’re jetting of to close an important deal and an erupting volcano or a massive blizzard disrupts those plans, having instant access to an agent who can sort it all out matters a lot more than saving $20 on a ticket. But the private companies, government agencies, and educational institutions that make up Osgood’s client base still wanted to save money. Osgood credits her education (she earned a graduate degree in psychology) and her previous work experience (she was a schoolteacher and a child-welfare investigator) for giving her a keen ability to listen, and it came in handy as she spoke to customers during this period. She realized they were frustrated with the typical travel data available to them. Things such as which airlines they flew the most, which routes they flew most often, and average ticket prices didn’t help them manage their budgets efectively, because those metrics looked only backward. What customers wanted were tools that would

answer questions such as which airlines flew the same route and how much might be saved by consolidating all travel with one of them, or how much could a customer save by consistently booking 14 days in advance rather than seven? Osgood saw an opportunity and began to create new analytics tools. Initially, Atlas planned to provide this richer data solely to its own customers, as a way to diferentiate itself from the competition. But as she and her team thought harder about how to build the best possible benchmarking service, they realized that the key was to capture a critical mass of data. So Osgood spoke to her competitors about pooling their data. They were intrigued, but had, ahem, reservations. To assuage their fears that Atlas would gain an unfair advantage as the aggregator of this data, Osgood created a separate company, Prime Numbers Technology, which sells an expanding array of benchmarking data to other travel agencies and directly to corporate travel managers. Last year, Osgood united Atlas Travel and Prime Numbers Technology under a single corporate umbrella, Atlas Travel & Technology Group. Among its recent innovations: new self-service technology that provides consolidated access to all Atlas services. Sometimes you can beat ’em and join ’em.

build


• Mom’s Organic Market

From Scarcity to Plenty this grocery chain grew slowly at first— very slowly. that was always part of the plan, and now that plan is paying of By Anni layne Rodgers Photograph by Andy Ryan

It took scott Nash three years to get his organic grocery business from its launch phase in his mother’s garage to the opening of an actual store. Thirteen years later, he was up to a whopping three locations. But that slow-growth approach belies a deliberate strategy that Nash credits for the success of Mom’s Organic Market. Even as he took things not so much one day at a time as one year at a time, Nash studied a select group of A-list companies, including Trader Joe’s, Costco, and Apple, analyzing what they did well. The biggest lesson he learned: These companies excel at playing the long game. “Strategic growth includes an element of scarcity,” he says. “The key for us has been setting the speed at which we’re able to grow structurally while also protecting our scarcity—the mysteriousness of the Mom’s brand.”

76 - inc. - march 2014

Mom’s has no formal advertising or marketing programs. Its stores open at 9 a.m. (to allow it time to stock that morning’s deliveries). It provides free electric-car charging stations. And, even as investors come knocking, it vows to remain independent. Nash doesn’t mind that he had to endure a decadelong learning curve before he was confident that he finally knew how to replicate success. In fact, he says his approach is an intentional reaction against the prevailing business ethos. “Wall Street has everyone managing by the quarter,” he says. “As a result, corporate America is afraid to change or to look very far into the future.” Having absorbed some important lessons along the way, Nash is now adjusting the speed at which he builds the company. Mom’s has 10 locations in Maryland and Virginia and plans to open eight stores in the North-

east corridor by 2016. Revenue grew 33 percent from 2012 to 2013. Even as he ramps Mom’s up, Nash emphasizes that its prolonged gestation period not only helped him learn how to build the business; it gave the company time to fully integrate its mission—to protect and restore the environment—to its corporate culture. That culture is all about making sure that Mom’s walks the walk when it comes to healthful eating and to all things environmental. Having launched an initiative in 2005 called Environmental Restoration, which addressed issues including carbon ofsets, recycling, and composting, Mom’s now holds regular employee-education sessions that inspire workers to suggest additional go-green projects.

That’s why customers won’t find plastic bottles in the beverage aisle. Inspired by a documentary chronicling the damage wrought by such bottles, employees pushed to have them banned from Mom’s stores and had video monitors installed that play that documentary for customers, impressing upon them the importance of purchasing beverages packaged in bottles made from corn and tapioca root. “We get the most out of our people by giving them the freedom and autonomy to do things their way,” Nash says. “It’s been proven over and over again that money is not the chief motivator: People need to feel good about where they work and about the good things they are contributing to the world.”


••••

reapINg the bouNty

after taking a slowand-steady approach, Scott Nash plans to open eight more stores by 2016.

MoM’s orgAnic MArket At A GlAnce Founded:

1986 Headquarters:

rockville, Md. employees:

587 2013 Revenue:

$100 Million

build


they’re big, but they think like startups

• Exclusive inc. Survey

60%

What Inspires (and Worries) the Build 100

of Build 100 companies label themselves as “entrepreneurial” even though, on average, they have 273 employees and $85 million in annual revenue and trace their founding back 16 years.

Our steady-growth champs aren’t identical, but there are distinct patterns to their success.

change has been constant, but they cope How diferent is your company today versus five years ago regarding: Very diferent

Somewhat diferent

Somewhat similar

Very similar

none of them lack for confidence…

36% 16%

36%

12%

•••• How confident are you that your company will grow over the next five years? Very confident

BuSineSS moDel

Somewhat confident

almost all are rigorous about setting growth targets Create annual target in some other way

Set a predetermined rate every year 52%

33%

37%

86%

25%

mix of proDuCtS & ServiCeS

11%

27%

14%

…except maybe about their salesmanship What are your company’s top strengths? Set a benchmark rate on an external metric 5%

38%

Do not have a growth objective 10%

19% 33%

67%

profile of CuStomer

10%

Customer service

55% Hiring innovators

they worry most about Major challenge

Minor challenge

Not an issue

top external obstacles to growth 28% 42% 25%

19%

finanCial StruCture

42% Consistency &

27% Design &

efciency

marketing

28%

8%

poor state of u.S. economy

20% 43%

25%

SaleS & DiStriBution

78 - Inc. - marCH 2014

25% product development

23% Selling

14%

rising health care costs

37%

41% 45%

38%

37%

39%

20%

technology changes in industry 35%

16% 47%

new behavior among customers or consumers 7%

16% 52%

41%

49%

rising competition

price increase in supplies or resources

iConS: la tiGre

28%


they are going global slowly (if at all) What portion of your sales comes from outside the u.S.? no sales

1%-20% of sales

54%

they are split on execution vs. innovation

they value brand and design over tech and workplace trends

39%

Important trend we’re watching

Vital part of business

Temporary concern; not critical

Which of the following sums up your “secret to success”?

Too soon to tell

innovation, bold new ideas 45%

exceptional implementation of business basics 52%

48%

9%

32%

BiG Data SyStemS

11%

to support decision making

21%+ of sales

7%

68%

they get their best ideas from within

timing and luck

3%

27%

90% 79% 68%

BranDinG New techniques, social-media push

individual employees

60%

4%

1%

they see a strong connection between values and success portion of Build 100 companies that believes these values boost long-term success:

30%

DeSiGn Innovative look and feel of company’s products, services, and messaging

10%

86%

teams within the company

transparency 35% 41%

flexiBle WorkplaCe

16% 8%

Hours, telecommuting, dress code

Customers

82%

Sharing profits with employees

81%

Diversity of employees

73%

flexible workplace

competitors and talent top internal obstacles to growth 12%

16% 44%

attracting top management

28%

37%

41%

40%

47%

timing expansion

16%

56%

training future supervisors and managers

24% 39%

acquiring new customers

17% 39%

Potential disasters of most concern

17% 38%

44%

using data to inform decisions

45%

managing the need for facilities or space

26%

28%

32%

23%

48%

46%

rapid change in technology

22%

20%

32%

53%

market disruption by competitor

22%

24%

17%

46%

61%

u.S. economic malaise or collapse

Sudden loss of key employee

expanding too quickly 13% 39% 48%

Data security and hacking

65%

Giving back to the community

54%

environmental responsibility

Which of these breakout events has helped propel your growth? Big change in senior management 44% Breakthrough branding or market position 55% new hot product or service 55% adoption of disruptive technology 35%

BUILD


80 - inc. - march 2014

location livermore, california Burlington, massachusetts Powell, ohio chicago des Plaines, illinois woBurn, massachusetts hayward, california milford, massachusetts vancouver, washington franklin, massachusetts eugene, oregon lexington, kentucky los angeles carmel, indiana centennial, colorado sandy, utah

access InformatIon management

acquIa advocate radIology BIllIng ahead amerIcaneagle.com aptIma arBorwell atlas travel audIgy group Barrett dIstrIButIon centers Beau delIcIous! InternatIonal BIg ass fans BlacklIne systems Blue horseshoe Blusky restoratIon contractors carIloha

2007 1998 2007 1978 1995 2001 1986 2004 1941 1997 1999 2001 2001 2004 2007

2004

year founded

software health it services media government services environmental services travel & hosPitality health logistics & transPortation food & Beverage manufacturing software software construction retail

285 330 112 198 126 150 160 131 175 235 296 135 113 150 246

510

2013 head count

$45.4 million $20 million $165 million $28 million $26.4 million $18 million $250 million $25.9 million $35 million $13.9 million $86.9 million $25.1 million $23.9 million $46.7 million $12.7 million

$59.4 million

2012 revenue

••••

on head count rather than revenue because we found that increased hiring is more predictive of future sustained growth, and that’s what this project is all about. For more details about the Build 100, see “Grow. Hire. Repeat.” on page 66.

Business Products & services

industry

percent of the companies met that standard. Of those that did, we selected a representative sample that agreed to work with us on a longterm research project to understand the factors responsible for sustained growth. We focused

company

more than 100,000 U.S. midmarket companies (those with 85 to 999 employees). We then looked at how many increased head count in every year from 2007 to 2012. Remarkably, fewer than 1.5

we Began the BuIld 100 project by collecting data on

It’s remarkably difcult to sustain growth year after year. These companies are among the elite that have managed to do it even during the worst of times

The Build 100


Chiro one Wellness Centers ChoiCelunCh Chop’t Creative salad CliCkaWay ConserviCe Consumer united Coyote logistiCs Cpo CommerCe Crp industries dealer.Com deg drexel Building supply dyn effeCtive environmental emkay england logistiCs enservio fairplay finanCial flexprint fulton CommuniCations gloBeComm systems gtm plastiCs gtm sportsWear h&h shooting sports Complex horizontal integration hospiCe Care of south Carolina huBspot invue seCurity produCts iostudio Joseph B. fay knight point systems kyyBa landpoint lease a sales rep linkteCh WorldWide little sprouts maQ softWare marathon data systems media fusion mom’s organiC market m s international (mt) media temple nextCare urgent Care

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1992 2003 2001 2001 2000 2006 2006 2004 1954 1997 1999 1985 1998 2003 1946 1997 2004 2006 2005 1964 1994 1964 1989 1981 2003 2002 2006 2007 1997 1947 2005 1998 1986 2003 2004 1982 2000 1984 1995 1986 1975 1998 1993

HealtH fOOd & Beverage fOOd & Beverage COnsumer prOduCts & servICes BusIness prOduCts & servICes InsuranCe lOgIstICs & transpOrtatIOn retaIl manufaCturIng advertIsIng & marketIng advertIsIng & marketIng COnstruCtIOn It servICes envIrOnmental servICes lOgIstICs & transpOrtatIOn lOgIstICs & transpOrtatIOn BusIness prOduCts & servICes fInanCIal servICes BusIness prOduCts & servICes teleCOmmunICatIOns teleCOmmunICatIOns manufaCturIng retaIl retaIl It servICes HealtH sOftware seCurItY advertIsIng & marketIng COnstruCtIOn sOftware It servICes engIneerIng advertIsIng & marketIng advertIsIng & marketIng eduCatIOn advertIsIng & marketIng sOftware advertIsIng & marketIng fOOd & Beverage COnsumer prOduCts & servICes It servICes HealtH

445 157 286 106 494 186 1,180 100 113 699 109 142 220 138 126 299 360 310 250 125 380 111 782 127 250 331 429 115 225 390 124 290 110 120 181 430 99 102 110 587 738 207 905

$55 mIllIOn $15 mIllIOn $42.2 mIllIOn $18.7 mIllIOn $45.3 mIllIOn $10.2 mIllIOn $786 mIllIOn $71 mIllIOn $85 mIllIOn $182.6 mIllIOn $14.5 mIllIOn $68.6 mIllIOn $30 mIllIOn $39.2 mIllIOn $650 mIllIOn $400 mIllIOn $50 mIllIOn $22.4 mIllIOn $30.4 mIllIOn $19 mIllIOn $382 mIllIOn $16 mIllIOn $76 mIllIOn $22.2 mIllIOn $31.5 mIllIOn $29.1 mIllIOn $52.5 mIllIOn $103.3 mIllIOn $28 mIllIOn $150 mIllIOn $43.7 mIllIOn $24.7 mIllIOn $12 mIllIOn $9.9 mIllIOn $10.9 mIllIOn $21.8 mIllIOn $19.4 mIllIOn $21 mIllIOn $12 mIllIOn $84 mIllIOn $457 mIllIOn $49.2 mIllIOn $90 mIllIOn


build

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nfrastruCture open systems teChnologies other World Computing payCom people’s Care poWer home teChnologies premier Business Centers proJeCtline serviCes Quantix Quantum health reCondo teChnology red vision systems researCh sQuare safety serviCes Company sales foCus signature foods smileBuilderz spigit strong-Bridge summa teChnologies sWat environmental

tdk teChnologies telogis tenaCity solutions 3pillar gloBal tiger CorreCtional serviCes tista sCienCe and teChnology tm one transnation title agenCy of miChigan trissential underground printing utest valkyrie enterprises vdart verengo solar versaBar vitals WeBpt Windy City limousine and Bus xChange teleCom xifin

2001 2001 2003 2006 1999 2005 2002 2008* 2003 2001 2007 2007 2007 2008* 1981 2007 2006 2006 2002 1997

1992 1997 1988 1998 1998 2004 2002 2003 2002 1999 2006 2001 2004 2003 1998 2003 2006 2007 2003 1996 2002 150 222 129 615 85 150 777 143 116 93 120 201 281 854 750 110 122 400 86 160

240 113 154 548 620 350 196 211 116 315 251 517 104 500 195 218 170 130 126 137 135 $10.8 mIllIOn $69.5 mIllIOn $32.1 mIllIOn $23.7 mIllIOn $12 mIllIOn $16.2 mIllIOn $13.2 mIllIOn $13 mIllIOn $22 mIllIOn $12.2 mIllIOn $17 mIllIOn $23.4 mIllIOn $22 mIllIOn $108 mIllIOn $150 mIllIOn $9.8 mIllIOn $8.9 mIllIOn $17.5 mIllIOn $23.6 mIllIOn $29.2 mIllIOn

$55 mIllIOn $80 mIllIOn $97 mIllIOn $76.8 mIllIOn $23 mIllIOn $19 mIllIOn $49.9 mIllIOn $29 mIllIOn $18.5 mIllIOn $33.6 mIllIOn $30.4 mIllIOn $50.6 mIllIOn $13.8 mIllIOn $29 mIllIOn $8.5 mIllIOn $67.6 mIllIOn $16.3 mIllIOn $17.4 mIllIOn $24.1 mIllIOn $26.1 mIllIOn $13 mIllIOn

*Employment figure for 2007 is based on company’s pre-spinoff or pre-roll-up operations.

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ACHIEVINg SCAlE

Gary Kunkle •••• Avoid Morning-After Regrets Rep firms can play a big role in helping you expand into new markets. Just be careful not to throw yourself at them

The lesson to be learned here was that my client had done a lousy job of choosing its partners. It had followed one of the most common paths of geographic expansion, both domestically and abroad. Companies with great products are often approached by individuals eager to be appointed exclusive reps in new markets. It’s easy to believe signing such folks involves negligible costs and risks. But once someone is granted exclusive rights, other candidates—who are often more qualified— ot long ago, I had a client that made must usually be turned away. It can take years to computer peripherals for defense untangle yourself from these poor decisions. and heavy-equipment manufacturHow can you avoid a similar fate? Whether you ers. In the U.S., its business was are expanding to a new country or simply to a new booming, but in Europe, it had state, consider the following three-step approach: hastily cobbled together an ad hoc First, think hard about the attributes of your network of independent reps who most successful partners—the agents, distributors, sold very little. Except for one, resellers, franchisees, etc., that have worked best for who outsold the others combined. you to date. What kinds of complementary products I paid a visit to find out why. In and services do they ofer? How do they develop Düsseldorf, I spoke to this top rep, leads? How do the best ones provide postsale supor tried to—I couldn’t help being port? Try to locate prospective partners in new distracted by his assistant, who markets that have those same attributes. was wearing a wire-frame pyramid on her head. That may not be Next, talk to prospective customers in new typical attire in most ofces, but it wasn’t out of place at a Bhagwan target markets. Tell them you are looking for commune, where followers of an Indian holy man seek spiritual someone to serve them locally and ask whom enlightenment. As it turned out, that’s exactly where I was: This they would recommend. (This can also help you group was my client’s top-performing European rep. The group sold identify hot prospects that you can deliver to your my client’s devices because it said they gave followers “inner peace,” partner once the ink is dry.) which was an interesting spin on the products’ stated ability to reFinally, once you’ve signed on a new partner, duce carpal tunnel syndrome. incorporate a methodical planning and review process into the relationship from Day One. Communicate regularly. Visit customers and prospects with the partner. Share any information or tips that dr. gary Kunkle is can make the partner more successful, and be ready to learn from the partner as well: You want to economist-in-residence for capture the best of what a partner is doing and replicate those practices everywhere else. Inc. and research fellow at the Nasdaq-funded Institute for Forging strong partnerships is a great way to help scale your company, but you have to make Exceptional Growth Companies. time to nurture these relationships as carefully as you would a new senior hire. In fact, maybe more, because these partners aren’t under your direct control, yet they often serve as customers’ primary contact with your products. In short, don’t marry your first date. The more time you spend a-courtin’, the better the relationship will turn out to be. Scan thE pagE to SEE gary KunKlE dEScrIbE othEr mIStaKES to avoId. (See page 12 for details.)

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build

JErEmy m. LaNGE

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A race for speedier delivery PG.88

The starship Enterprise of the sea PG.106

Ideas. Breakthroughs. Disruption.

QUANTUM LEAP D-Wave’s technology has the potential to revolutionize computing. That is, if it actually lives up to the hype.

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MARCH 2014 - INC. - 87


1860

Built for Speed

Amazon wasn’t the first company to disrupt the delivery space. Here are a few milestones in the quest to make delivery quicker and more efcient.

The Pony Express begins carrying mail from Missouri to California. Before the transcontinental telegraph, it represented the most practical means of East-West communications.

•••• tip Sheet

Same-Day Delivery’s Second act

Thanks to improved technology, a new batch of companies is closing in on the Holy Grail of e-commerce— reliable, profitable same-day delivery

o

ne of the lessons to come out of the dot-com crash of 2000 was that same-day service for local delivery was a fool’s pursuit. Kozmo and Webvan learned that lesson the hard way. A logistics nightmare with razor-thin margins, same-day delivery was where companies went to die. Lately, however, things have changed. With help from Big Data, mobile technology, and sophisticated algorithms to optimize the delivery flow, several companies are changing the way same-day local delivery is done. (That’s without even mentioning Jef Bezos’s slightly spooky plan to ship items before you buy— see “Is Amazon reading your Mind?” on page 89.) That’s good news if you want your order delivered before you leave the ofce. It’s bad news if you are in the local-delivery business. The competition just got tougher.

instacaRt

A few big players—like Amazon— have recently started doing sameday grocery delivery, but Instacart is convinced it can do it better. Its secret? Big Data and an army of “personal shoppers” on call to buy, pick up, and deliver items from local grocery stores. When customers place orders on the Instacart website or app, the company’s fulfillment engine calculates the optimal way to get those items of the shelf and to the customer. From there, the order is assigned to one of the personal shoppers using an app. The order often

88 - inc. - MArCH 2014

arrives to customers in around two hours, often for a delivery charge of less than $5. “We can predict how long it takes to pick individual items, check out at the store on a Sunday afternoon, and how long it will take to travel from Point A to Point B,” says CEO Apoorva Mehta. The team also collects data on the deliveries themselves—things such as weather conditions and trafc patterns—so the next trip goes more smoothly.

Zookal

College kids are notorious for putting things of until the last

1878 Milkmen now leave milk on customer doorsteps in glass bottles, boosting delivery speed over previous pail-andladle method.

minute, which is why efciency is so important to Australian textbook-delivery startup Zookal. Zookal CEO Ahmed Haider streamlined his operations but was unable to avoid one kink in the supply chain—the Australian mail system. “We could get an order ready in a minute, but we had to sit around and wait for Australia Post to come,” he says. To get around the limitations of traditional delivery, Haider is investigating the use of unmanned drones to deliver textbooks. A year before Jef Bezos announced Amazon’s intentions to use drone delivery service, Haider became a venture partner in Flirtey, a flying-bot service Down Under. Flirtey is seeking regulatory approval from Australia’s Civil Aviation Safety Authority. Once approved, Zookal will be the first company to make use of Flirtey’s unmanned delivery drones.

PostMates

San Francisco–based Postmates wants to become the world’s go-to platform for same-day delivery of just about everything: lunch, ofce supplies, clothing, toys, you name it. Like the car service Uber, Postmates equips individual contractors with an iOS device, so that when an order is placed, it gets routed to the closest available courier. “The first factor is to decide who delivers,” says Bastian Lehmann, the CEO and founder. The computer determines whether the size of the order requires a car or bike and then dispatches the right courier to complete the order. “Each delivery makes our system better,” he says. Because the couriers play such a vital role, the company has Facebook groups and community events at which highly motivated couriers meet and exchange ideas. —JILL KrASny

Rise of the Machines Australia-based drone company Flirtey tests one of its bots near Sydney harbor.


DomiNick’s in Ypsilanti, Michigan, opens. Eventually rechristened as Domino’s, the chain launches its famous “30 minutes or less” delivery guarantee in 1973.

1973



FedEx pulls its first all-nighter, delivering 186 packages to 25 cities across the U.S. It’s the dawning of the air/ground express era.



1999 Netflix launches its subscription p y DVD-by-mail service. Blockbuster Video has no idea what is about to hit it.

IS AMAZON READING YOUR MIND?

SAFETY FIRST To keep customers safe from the drone’s rotors, packages are lowered to awaiting recipients using retractable cords.

MULTITASKER Beyond e-commerce deliveries, Flirtey’s founders also envision the drone being used for more important tasks, such as emergency medical and rescue missions.

NO HEAVY LIFTING The Flirtey Mark I drone can carry packages weighing up to 5 pounds, making it a good fit for Zookal’s textbook-delivery service.

SPREAD: CLOCKWISE FROM TOP LEFT: CORBIS; ALAN SCHEIN/CORBIS; iSTOCK; COURTESY ZOOKAL

1960

Quite a few eyebrows were raised when Amazon’s patent for an “anticipatory package shipping” system came out earlier this year. The idea that Amazon presumed to know its customers well enough that it could begin shipping their orders even before they click Buy seemed almost paranormal. In fact, all the patent was really laying out was a process by which items would begin to move to the general geographical area of the buyer in the event that he or she completes the purchase. Given Amazon’s ability to analyze customer data such as purchase history, product searches, wish lists, and shopping-cart contents, it actually doesn’t seem too outlandish to think it might know when a purchase is likely. The patent does mention the possibility that a package may occasionally be delivered to a customer who never actually completed a purchase. Rather than pay the cost of returning or redirecting the package, Amazon would simply give it to the recipient as a gift “to build goodwill.”

INNOVATE


4 queSTIOnS FOr

want a big idea? ask better questions

When so much information is readily available to anyone online, the key to innovation is not gathering more data but rather asking more questions— the ambitious, frame-changing sort that send companies down unexpected paths of inquiry. So argues business journalist Warren Berger, author of the new book A More Beautiful Question: The Power of Inquiry to Spark Breakthrough Ideas. Berger supplied the answers, for a change, in a recent conversation with Inc. editor-at-large Leigh Buchanan. Photograph by AdAM KrAuse

Q ••••

What makes a question “beautiful”? A beautiful question reframes an issue and forces you to look at it in a diferent way. It challenges assumptions and is really ambitious. Often, these questions begin with the phrase “How might we...” They have a magnetic quality that makes people want to answer them, to talk about them, to work on them. They make the imagination race. The Polaroid camera came out of a 3-year-old girl’s asking, “Why do we have to wait for the picture?” That’s a beautiful question.

90 - inc. - MArch 2014

In A More Beautiful Question, Warren Berger cites the revelatory questions that inspired a number of successful innovations. These are a few:

What if we could map the DNA of music? InnovATIon: Pandora

Why can’t everyone accept credit cards? InnovATIon: Square

Why aren’t football players urinating more? InnovATIon: Gatorade

What questions don’t get asked early or often enough in innovation projects? There are two kinds. First, the fundamental ones. Why are we doing this? What do people really care about? Second are the crazy questions. What if we did this backward? What if we were to subvert all the assumptions in the

field and do something that sounds ridiculous? Interesting ideas can come out of exploring impossible things. There’s a place for asking those out-there questions early on, when you are in the most open stage of thinking.

Companies generally reward people for coming up with answers. How do you motivate employees to ask questions? It has to start with leaders asking questions themselves. That’s a difcult adjustment, because a lot of leaders are trained to think, People look to me for answers. If I start asking questions, it

will shake their confidence. But great leaders do ask questions, and as long as they are interesting and ambitious, people don’t get freaked out. So it starts with the leader and flows downward to create a culture of inquiry, where people feel they can ask questions without necessarily knowing the answer. It drives me crazy when bosses say, “If you are going to bring a problem to me, you’d better have solutions.” Great questions don’t get answered in 10 minutes. They may take six months. You want people to bring you those great questions, and maybe the whole company ends up working on them. You talk about replacing mission statements with questions. Why? I think people can rally around a question more than a statement. A question tells you we are on a journey together: “How might we use robotics to make the world a better place?” A statement says we’ve done it already: “We use robotics to make the world a better place.” The statement is a little arrogant and maybe a little bit of a false claim. The question declares the great thing you want to do with your company. It’s much more empowering.

innovate


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Steve Young Football Legend


Disrupter

By darren dahl

O

dds are, you have more data about your cus-

tomers (and other things) than you know what to do with. If so, meet Anthony Goldbloom, who does know what to do with it. He’s the founder of Kaggle, a San Francisco startup that makes contests out of solving Big Data problems for companies. Since Goldbloom launched Kaggle in 2010, it has raised more than $11 million in VC funding and built a community of 140,000 data scientists who compete for cash prizes to solve complex problems for companies such as Facebook, Expedia, and GE. Recently, Goldbloom spoke with Inc. 92 - INc. - MArch 2014

Fortunetellers Kaggle data scientists use historical data to predict customer behavior.

I saw a need for smarter statistical models. I grew up in Melbourne, Australia. My background is in statistical modeling, and my first job out of university was working for the Australian Treasury, calculating figures such as gross domestic product and the unemployment rate. The idea for starting Kaggle came in 2008, after I entered and won an essay contest for The Economist. Part of my prize was to go work there as an intern in London for three months. I pitched an idea for an article about how companies used data

INNOVATE

chIen-chI chAng/MAgnuM PhoTos

Big Data Divination Kaggle’s community uses your data to predict the future


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••••

analysis and algorithms. After I got the assignment, I started calling up people at big companies like caesars casino, and I realized that I could do a better job solving the problems they were dealing with.

A Little Friendly competition

here are some recent Kaggle contests businesses have run.

clear to me that if I stayed in Melbourne, Kaggle would have a 1 percent chance of success. so I moved to san Francisco. And in november 2011, we were able to raise $11 million from investors.

Ge

I got data scientists to compete for prizes. I think crowdsourcing works particularly well when success can be objectively judged. our approach really is an elegant way to arrive at solutions. We call it arriving at the “ground truth,” where the best solution is not swayed by subjective measures or gut feelings. I found that it was remarkably easy to recruit data scientists to the site. In 2013, we went from 72,000 to more than 140,000 members. People like solving brain teasers and puzzles, and this taps the same people. competitions are like honey pots for the smartest and most creative data scientists. Word spread after we predicted reality-show winners—and the progression rate of HIV. our first competition was held in April 2010, and the challenge was to predict the winner of the Eurovision Song Contest, which is the equivalent of a european-wide American Idol. You see some really bizarre acts on the show, and you also see how countries trade votes based on their political allegiances. For instance, Turks who live in germany were voting for the Turkish contestant. The BBc picked up the story. so did blogs. soon after that, we were contacted by someone at Drexel university who wanted to know if we were interested in solving a real problem: predicting the progression

94 - INc. - MArch 2014

Design an algorithm to help airplane pilots make better decisions. Prize: $220,000

deloitte Predict which customers will leave an insurance company in the next 12 months. Prize: $70,000

expedia Devise a better formula for determining the order in which hotel rooms are displayed to customers. Prize: $25,000

stumbleupon Develop an algorithm for categorizing webpages as new or evergreen. Prize: $5,000

Facebook Create a formula to predict which tags should go on Facebook posts. Prize: a job interview

• data driven Kaggle founder Anthony goldbloom turned statistical modeling into a group activity.

rate of hIV. soon after, we worked with nAsA’s Jet Propulsion Laboratory, which wanted a study about dark matter. That was enough of a foothold for word of the site to start spreading virally. Moving to San Francisco helped me take the company to the next level. About two years ago, I was working out of my bedroom in Melbourne. It was ridiculous. I realized that I was spending a lot of time traveling back and forth to the u.s. to visit clients and attend conferences. It became

Algorithms don’t work for everything. Kaggle is really a terrible name, because people in the Midwest pronounce it the same as they do the word for doing pelvic exercises. I actually came up with it by writing an algorithm to find one-word names that I might be able to get a urL for. I knew there was no chance of finding a real word, so I was just searching for something that was easy to pronounce and available. Kaggle was the one name on the list that my friends and family voted for. We rent the winning formulas to businesses. We now have 15 employees and have worked for 15 Fortune 500 companies. our biggest prize to date was $500,000 from the heritage Provider network, a health care organization that wanted a model for predicting which patients would become hospitalized. A team of seven data scientists submitted the winning algorithm and split the prize. Kaggle earns revenue by charging companies for the algorithms. There’s a flat fee, which gives the customer access to an algorithm for six months, and then a monthly license fee after that. one of the things that we have learned so far is that certain industries are more promising when it comes to the impact of data science. oil and gas, for example, is an industry that has a lot of data—from the drill bit or from seismic surveys—that is hard to process by hand or to make decisions on just by looking at charts and graphs. Algorithms can take that data and make a better decision than a human can when it comes to deciding where to drill or whether to abandon your lease. Some experts are worried. so far, we’ve gotten the most resistance from subject matter experts who used to make the kinds of decisions we’re ofering. They are afraid that their skills have become obsolete. But we feel like the best decisions are the result of both data analysis and experts working together. If you don’t have an expert in the loop, you won’t be asking the right questions.

INNOVATE

courTesY coMPAnY

I turned data analysis into a game. I came home to Australia with the idea that I could create a meritocratic way of solving problems through data science. companies could post their problems on my website, and then any statistician who was interested could submit a solution that would be scored against any other entries. An example would be if you were an insurance company, and you wanted to predict which of your policyholders would be most likely to crash their cars. We would give the competitors two sets of data, say from 2010 and 2011. Then we would also give them the customer base for 2012 and ask them to predict who would be most likely to submit claims. Whoever submits the most accurate prediction model wins the prize.


F I NA N C I A L LY F E A R L E S S

Letting intuition FueL innovation

John Borthwick, co-founder of Betaworks—a tech studio that creates and invests in emerging Web services—attributes much of his success to gut instinct. He and his team are known for Web tools such as Bitly, the URL shortener and analytics provider, and Chartbeat, a real-time Web analytics service, that have become integral to our everyday lives. Creating “essential” companies is the ultimate goal, says Borthwick, and that’s the metric he uses to weigh risk of an investment against potential reward. Together with Inc. associate editor Jill Krasny, LearnVest founder and CEO Alexa von Tobel recently put some questions to Borthwick. He explains how he places his bets.

BiLL waDMan

On risk versus reward The risk of building a company is that you will be wrong or

innovate

it won’t work, but our job is to take that risk. We have gotten markedly better at refining products at every stage of the process, all the way from concept to scale. Sixty percent of the things we start get all the way to the scale phase. That’s because we have better people, better processes, better data than we had five years ago. Data helps inform intuition. Building products that create even more data, such as Digg Reader, Chartbeat, and Bitly, has helped us measure the performance of other products. Our people are also passionately in love with our products; they want to be in the studio environment building them. The role of intuition We use data a lot here, but at the end of the day, we decide where to invest Betaworks’s time and money by intuition. Ultimately,

••••

Creating essential businesses When we use the term essential company, we mean products or companies that are essential to people’s habits and daily workflow. We always start by trying to build insanely wonderful user experiences. We measure that by the engagement these services have. Are they essential to everyday use on the Internet? We want to be deeply ingrained in people’s minds, day in and day out. We want to understand deeply the quality of the user interaction and the emotion in the interaction around the products. There are also metrics to measure engagement, such as daily and weekly active users, how long people engage, and so on, which tell us if our intuition was accurate.

Some Betaworks investments that prove intuition pays TweeTdeCk/ SummIze Twitter acquired Summize in 2008 and TweetDeck in 2011 for a reported total payout north of $50 million in cash and stock. Betaworks was a key investor in both firms. TumBlr Yahoo acquired this microblogging service for a reported $1.1 billion last summer, making it one of Betaworks’s most lucrative and high-profile exits. Summly Last March, Yahoo purchased Summly for a reported $30 million. Summly had raised more than $1 million in funding from investors, including Betaworks.

we’re doing things because we believe they need to exist in the world. I come from a family of creative people and

artists, so I believe you try to create beautiful things to stir the soul and make a diference. Design is part of that, and understanding the human implication of design is what should come first and foremost in the development process. In praise of fast Innovation happens when you believe fervently that you need to get the product in front of people. You start of with a question: “If I do X, will Y happen?” You build an initial product and see if it solves a problem. You then roll it out to a set of people and beta-test it as soon as possible. We take feedback from that test and refine the product, make changes, and put it back out there to see if we did it right. It’s a rapid prototyping process. It’s not just throwing it out there and hoping it works.

March 2014 - inc. - 97


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• revolution or vaporware? The controversial black box at D-Wave’s headquarters outside Vancouver, British Columbia

THE DREAM

D-Wave thinks it has built the world’s most

100 - INc. - march 2014


MACHINE

powerful computer. Mother Nature has other ideas by will bourne

photographs by spencer lowell

INNOVATE


“I wasn’t smart enough,” says Geordie Rose of his days getting his physics Ph.D. at the University of British Columbia. “Mathematicians and physicists can wrap their heads around things that are really hard to understand for a normal human. They would be talking at three miles a minute about some 28th-dimensional whatnot, and I’m like, ‘I have no idea what you’re talking about.’ ” The average visitor to D-Wave Systems, the computer maker Rose co-founded in 1999, probably feels the same way. Housed in an unremarkable Vancouver ofce park, behind the British Columbia Automobile Association building, D-Wave has set out to build—and sell—a machine many computer scientists believe exists only in theory. There are other supercomputer makers, of course, but their machines follow the familiar dynamics of Moore’s law. Rose’s device, however, is powered by the brain-knotting concepts of quantum physics. That makes D-Wave a place of otherworldly extremes: computing speeds “100,000 times faster” than traditional computers, temperatures “150 times colder than interstellar space,” time spans longer than “the age of the universe.” And the potential payof is just as surreal. Although many physicists doubt that a quantum computer would be all that useful except as a way to study quantum physics, D-Wave believes it would change the very definition of impossible, that the world’s computing infrastructure would be transformed overnight, with a quantum cloud forming to handle some of our gnarliest computational challenges. Problems that have been unsolvable with current computers—whether molecular modeling for drug development or “optimization” problems routinely encountered by logistics-dependent companies like UPS—would suddenly give way. Existing industries, including software design, nanotech, and machine learning, would be transformed, and massive new markets would grow up around them. In D-Wave’s vision, a quantum computing age would seem as foreign in 2014 as today’s digital age would to someone living under Herbert Hoover. Not surprisingly, building such a computer entails a series of absurdly difcult theoretical and engineering challenges. And yet, a decade and a half after its launch, D-Wave has come out the other side with a 10-foot-tall refrigerated black box that does more than almost anyone thought possible. Along the way, D-Wave has acquired the trappings of a technology powerhouse: state-of-the-art superconducting expertise, a team of 35 in-house mathematicians and physicists, a wafer fabrication deal with Cypress Semiconductor, and nearly $130 million in venture capital. D-Wave has a patent portfolio ranked No. 4 worldwide in the computer systems category by IEEE Spectrum in 2012—after only IBM, HP, and Fujitsu. It has two blue-chip customers: Lockheed Martin picked up a D-Wave One in May 2011, in a $10 million multiyear “lease” deal; last May, Google and NASA went in together on the

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next-generation D-Wave Two in a similar arrangement valued at about $15 million. (Lockheed got what Rose calls a “forklift upgrade” at about the same time, for another $10 million.) And D-Wave has Rose, who at 42 has now bet well over a decade of his life on the company. Rose happily recites these achievements, and he is perfectly comfortable striking a heroic pose. He is given to forecasting, for example, that his company will efectively become the next Microsoft. But the mythic figure Rose may most resemble in the end isn’t Bill Gates but Icarus. Questioning D-Wave’s real accomplishments has become a cottage industry, with physicists and computer scientists worldwide debating whether the company’s black box is a real quantum computer and whether it does—or could ever do—anything an ordinary computer can’t. At one time, Rose could toss of such criticism as the carping of propellerheads. Not any more: With his $15 million machine now on the market, he has to prove that it can be useful on a commercial scale. Now it is becoming clear that mere determination may not be enough, that even a fighter like Rose can’t overthrow the laws of physics.

Q

uantum physics is the study of very small things, the atomic and subatomic scale where nothing behaves as you think it should. There, apples don’t fall from trees with a satisfying thump—they appear in multiple trees at once, and on the ground, and everywhere in between. If classical physics examines the way things seem to behave, quantum physics looks at how protons, electrons, and other invisible doodads really do behave at the most basic level. What it has found is almost impossible for normal humans to believe, let alone understand. The idea of harnessing quantum mechanics to create a so-called universal quantum computer first entered the mainstream via physicist Richard Feynman in 1982. In a traditional computer, the standard bit of information is binary—it can be either a 1 or a 0. Feynman theorized, however, that a quantum bit, or qubit, would take advantage of quantum behavior and be capable of being a 1, a 0, or both simultaneously. This ability to hold more values at a given time should, he reasoned, translate into a dramatic increase in computing power. For decades, scientists have worked to build qubits that perform as Feynman imagined, only to find that “quantum superposition”—the state of being both a 1 and a 0 simultaneously—is incredibly hard to maintain. The outside world


• the grappler In his quest to build a quantum computer, former Olympic wrestling hopeful Geordie Rose is tackling a problem that stumped a generation of physicists before him.

quantum computer has stalled out at a handful of qubits. The closest sci­ ence has come is a system that can’t factor a two­digit number as quickly as a 10­year­old child. (A universal quantum computer would in theory excel at factoring very large numbers, destroying most digital encryption schemes—hence the interest of the National Security Agency, as recently revealed by Edward Snowden.) Into this unpromising scenario, circa 1999, strode Geordie Rose. Rose doesn’t look like your average physics Ph.D. He looks like a corn­ fed, detoxed Colin Farrell, with extra eyebrow, a barrel chest, and arms capable of inflicting serious hurt. Born in Tanzania, Rose spent his first two years in Moshi, a jump­ ing­of point for the Ngorongoro Crater, where his father was a wild­ life­management ofcer. When his father brought the family home to his native Canada, it was to Wawa, a small town in northern Ontario. “So, when I was very young,” he says, “basically we lived in the bush.” Rose moved around a lot growing up, eventually getting recruited to wrestle at McMaster University in Ontario. He was on the winning 1994 Canadian national champion­ ship team and says he was an alter­ nate for the 1996 Olympic Games. “I really wanted to compete at the Olympics, but it never happened,” he recalls glumly. “It’s a little bitter­ sweet, but you do what you can.” After graduating from McMaster, —GEORDIE ROSE Rose pursued a doctorate in physics at the University of British Columbia, where he met the three co­founders constantly interferes in the form of vibration, temperature, of what would become D­Wave. The most important of them sound waves, light; just about any perturbation leads to “de­ was Haig Farris, a central figure in Vancouver’s transformation coherence” that commits the qubit prematurely to one state or into a tech hub; his course on entrepreneurship, Rose says, another, robbing it of its quantum juju. As with conventional “was the first time I had ever seen anything related to busi­ computers, the power of a quantum computer is a function of ness. I remember thinking that the people who were coming the number of qubits on the chip—but unfortunately, the more through and talking to us, I felt I could be like that—whereas qubits, the more likely it is that decoherence will swamp the I knew I wasn’t as good as the academics at the science.” system. To date, every attempt to pick the lock on a universal Over the next couple of years, Farris and Rose struck up

“Building a business around this was laughable. The chance of it working was zero.”

INNOVATE


••••

a friendship, and Rose started talking about quantum computer. “You could tell he wanted to do the deal,” Rose computing, a concept he had encountered in his thesis work. remembers. “So I kind of invited myself in to his ofce. We “Four to six months later, we had a business plan,” he says, had a term sheet the next week.” and in April 1999, D-Wave was founded. (Farris remains a So brazen was Rose that Jurvetson didn’t even know co-founder and board member; the other two co-founders D-Wave was in trouble. “I didn’t realize the paaiiin he was in,” have left the company.) Jurvetson says with a laugh, “the anxiiiiety, whether this was Quantum computing was still a highly theoretical, arch-nerd one of his laaaast shots to get funding. All that context was pursuit. “Building a business around this idea was laughable,” lost on me because he’s projecting into the future, projecting says Rose in a D-Wave conference room, his scary arms popping strength, all that. So I have to chuckle: I actually wasn’t even under a tight black T-shirt. “The aware that he’d been in a tough spot!” chance of it working was zero.” DFJ led a $7.1 million (U.S.) round, quantum bits Rose and his partners initially transforming D-Wave’s mission in the Since 2007, MIT computer science planned simply to corner the market process: The company was no longer professor and “chief D-Wave skeptic” on expertise in quantum computing, just looking to gather IP in the hope Scott Aaronson has been at the centhen “partner with or be acquired by” of flipping it down the road. DFJ and ter of the debate about the company. someone who was building an actual other investors were banking on A few choice morsels from his blogcum-soapbox, Shtetl-Optimized: machine. Farris had thrown Rose a D-Wave to build the world’s first — few thousand dollars in seed money, commercial quantum computer. Rose On ROSe’S cRITIcISM: I find it amusand they raised half a million (Canawas suddenly responsible for bringing that Geordie is now trying to spread the meme that I’ve been dian) from local angels; over the next ing to market a technology that an “wrong exactly 100 percent of few years, they pulled in another $4 entire generation of physicists the time about everything.” I million from Vancouver-based startcouldn’t even get to work in a lab. admit that I’ve been wrong in up funds and the Business DevelopOne of Rose’s early decisions was underestimating human credulity and herd behavior. ment Bank of Canada—money they not to try to build the “universal” — used to lock up as much intellectual machine that had frustrated so many On GOOGle’S pIckInG up A D-WAve TWO: property as they could. “[The scienof his predecessors. Instead, he Imagine yourself in command of tists] basically gave it to us for free,” decided on a more limited design a $100 billion empire, when one Rose says. “They thought, Hey, these that would target only certain sorts of your subordinates comes babguys are going to give us $50,000 to of problems, including optimization, bling to you about a new startup that’s building interdimensional do what we’re going to do anyway. machine learning, and molecular flux quantum jigga-transponders. We need to sign away our IP? I don’t modeling. Even if he succeeded in A perfectly reasonable response care.” All of that seeded what is now only that more scaled-back goal, he would be: “I don’t understand this. I don’t have time to understand the biggest IP portfolio in the world would be a very rich man, indeed. it. In fact, it sounds a bit fishy, so in quantum computing. The DFJ seal of approval eventuwhat the hell, throw $10 million at ally got the venture dollars pouring it just in case. Next agenda item!” uch as he relied on into D-Wave from Goldman Sachs, — academic researchers, Jef Bezos, and the CIA’s venture On MAGIcAl ThInkInG: Commenters on Rose never had much arm, In-Q-Tel. At the same time, D-Wave threads remind me of the kid who thought there were little patience for their even Rose’s downscaled project was men inside his TV. Hearing this, grinding pace. He wanted to ring in so intriguing to theoretical physicists the kid’s engineer mother took the age of applied quantum computand mathematicians and hardcore a few hours to explain to him all ing. He wanted to help create a new engineers that he could draw talent about digital signal transmission, liquid crystal displays, etc. The industry. He wanted to get rich. from the most famous brainiac cenkid listened with interest, asked Then D-Wave ran out of money. ters on earth: NASA Ames, the Jet intelligent questions, and seemed By late 2002, Draper Fisher JurPropulsion Laboratory, Santa Fe to understand. But finally he said: vetson, the archetypal Sand Hill Institute, MIT, Cal-Tech, Germany’s “But, Mom, there must be at least a few little men inside the Road venture capital firm, had alMax Planck Institutes, and the MosTV, right?” ready turned D-Wave down. But cow Institute of Technology. — Rose had noticed that managing D-Wave spent the next two years On The lOAD he cARRIeS: I can either partner Steve Jurvetson was drawn in “a little lab at UBC,” building its respond [to critics] and get called to companies most investors shied first qubit, using a design developed an asshole or not respond and get away from, companies with “a 5 by a number of professors at MIT, called a coward. Or I can respond when and how it’s comfortable for percent chance of success,” as Rose including Seth Lloyd, a ponytailed me, and get called both an asshole puts it. Rose also knew that Jurvetprofessor of mechanical engineering and a coward. So, in summary, I son was interested in nanotechnolwho calls himself “probably the first no longer feel like I know how to handle the burden of being right. ogy, a field that would instantly be person to propose CONTINUED —LyDIA BeLANGer O N PA G E 1 1 2 • transformed by a working quantum how to build a

M

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Outside deck Furnished with two handling cranes for lifting equipment

Solar skin As part of the SeaOrbiter’s sustainability eforts, 350 square meters of solar panels will help generate power.

BRYAN CHRISTIE DESIGN

Illustration by JOE LERTOLA

the SeaOrbiter is the brainchild of French architect Jacques Rougerie. Set to begin construction this spring, the 190-foot-tall semisubmersible vessel will be the culmination of nearly 30 years of Rougerie’s research and development. Six of the SeaOrbiter’s 12 floors are below sea level, allowing for uninterrupted underwater observation. Although the ship’s main mission is to research the biodiversity and climate of the sea, the real goal for Rougerie is to give the public a better understanding of how crucial the ocean is to Earth’s well-being. Ninety-nine percent of the $50 million project was financed through the French government and private companies. To get people more involved, Rougerie is crowdfunding the last 1 percent of the project. “The more humans understand about the underwater world, the more respect they will have for it,” he says. —LIZ WELCH

GARNERING COMPARISONS to Star Trek’s starship Enterprise,

Space isn’t the only unexplored frontier. The SeaOrbiter is designed to help uncover the secrets of the abyss

22

Command bridge This is both the captain’s helm and the ship’s main communications hub.

Keeping busy won’t be a problem for the crew. The “modular lab” can be used as a laboratory for scientists as well as a fitness room equipped with treadmills. The lab also includes a medical zone. A certified doctor with basic surgery skills will be on board in the event of an emergency.

HARD AT WORK

FEET

FEET

88

total height

190

above water. The height helps with the ship’s overall balance and buoyancy.

“We want people to appropriate the project to themselves,” says Rougerie. Which is why he raised money through KissKissBankBank, a French crowdsourcing website, to fund construction of the Eye (left) of the SeaOrbiter. Equivalent to a ship’s crow’s nest, the Eye towers 60 feet above the surface. It serves as a lookout and houses a communications system that lets the crew send live broadcasts of life on board.

PEOPLE

Number the SeaOrbiter can host. The ship will carry a mix of scientists and crew members.

QUITE A VIEW

Vertical wind turbine Will generate sustainable power for the ship’s operations

Communications tower Houses radio and satellite antennas that will keep the SeaOrbiter well connected

Science Fiction Beneath the Sea

AU D A C I O U S T E C H


INNOVATE

The total number of SeaOrbiters Rougerie eventually hopes to build, one to sail in each of Earth’s oceans. A number of partners have given their support to the SeaOrbiter project, including National Geographic and UNESCO.

SHIPS

5

The diving room Gives divers direct access into the sea at a starting depth of 39 feet. Divers can either use scuba tanks or breathe through an umbilical attached to the ship.

The SeaOrbiter was designed primarily to float along with the ocean’s natural currents, allowing scientists to study the relationship between those currents and climate. The keel (right) weighs 180 tons and helps provide stability to the ship. It can be retracted when the vessel is in shallow water.

GO WITH THE FLOW

Deep exploration The SeaOrbiter is equipped with a two-man submarine that can descend 3,280 feet as well as an autonomous underwater vehicle, or diving drone, that can go down to 19,685 feet.

Retractable ladder Provides access to the vessel from sea level

(See page 12 for details.)

SCAN THE PAGE FOR A VIDEO TOUR OF THE SEAORBITER.

Given that voyages will last three to six months, there will be ample time to collect data and perform experiments. The underwater area, known as the hyperbaric lab, is equipped with an observation deck made of transparent polycarbonate panels, allowing for direct underwater observation. Because the conditions underwater are similar to those in space in terms of pressure and isolation, the SeaOrbiter will be used by NASA and ESA (the European equivalent) for protocol training as well as physiological and psychological experiments.

A LIFE AQUATIC

The overall weight of the ship. It is built from 500 tons of Sealium, a recyclable aluminum designed for marine environments.

TONS DISPLACEMENT

2,600

Propulsion system In addition to wind and solar energy, the propulsors can be powered by generators that use an algae-based biofuel.

FEET

below water

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Jason Fried •••• When Staying Small is the Bigger Bet We’re refocusing our company on a single product—and it’s going to let us do even more for our customers

clearly than I had in years. So I dropped an email to David and two other company leaders and said, “I want to spend a few days together of site to discuss the future of the company.” I didn’t let on what I was thinking other than to say I’d present a vision for where I thought we should be going. I asked them to bring their own visions. One morning the following week, in a hotel downtown, I started the meeting: “David and I have few months ago, I got into a heated debate been talking about what products to build and how with my business partner, David Heinemeier we should grow. We keep talking about doing more Hansson. We were discussing ambitious things, but we haven’t entertained the other option: plans for new products and updates to existDo fewer. So I want to pitch something radical. I ing products. I argued that we’d need more want us to put all of our eforts into a single prodpeople. He said he didn’t want to run a comuct—our main product, Basecamp.” pany with 60-plus people, which is what we Basecamp, our project-management tool, repreestimated we’d ultimately need. I wasn’t sented about 87 percent of our revenue, 90 percent thrilled about going from 40 people to 60 of our revenue growth, and 90 percent of our Web people, either, but I didn’t see an alternative, given our plans. trafc, I noted. Our second most popular product We realized that we really wanted the same thing: a company that was Highrise, a contacts manager that was very was not too big, not too small—just right. But what did that company successful but represented a small fraction of look like? We agreed to sleep on it for a while. revenue. Basecamp was our big hit, and it was time Fast-forward a few months. I’d just gotten married and returned to be honest about it. from an extended vacation, my first in years. As I checked in with Then I dropped the big surprise: “Besides going everyone to see what people were working on and what they were all in on Basecamp, let’s do something even more excited about, everything suddenly clicked. I saw the company more radical. Let’s change the name of the company from 37signals to Basecamp. When we talk about who we are and what we do, we’ll be saying the same thing. Basecamp the product, Basecamp the company.” We talked about pros and cons. What about the brand equity we’ve built into the name Jason fried is co-founder of Basecamp (formerly 37signals over 15 years? A lot of people, mostly in the tech community, value the name. But 37signals), a Chicago-based when you zoom out, far more people in the world know Basecamp. So while we were attached software company. to the old name, we knew that Basecamp was the bigger bet. We talked about how focusing on Basecamp would allow us to do more things with fewer people. We started rifng on all the things we’d be able to do. We could expand Basecamp’s reach: Basecamp for the Web, Basecamp for iPhone, Basecamp for iPad, Basecamp for Android. We were getting fired up. Every time we pushed back on the idea, we were able to push forward harder. It just made sense. Many big questions remained: how to communicate the vision to everyone at the company, how to communicate it to customers, what to do with our other products and their users. By the time you read this column, the changes will have been announced, and in future columns, I’ll talk about how we deal with some of these open questions. One thing is certain: We’ll be able to give them the attention they deserve.

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jeff sCiortino

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C R A I G Z U C K E R V S. T H E U N I T E D S TAT E S C O N T I N U E D F R O M PA G E 5 4

a decision as an agency not to walk away from this case.” But product-safety lawyers see glaring problems with the CPSC’s case, which is now in the middle of discovery. First, it could be hard to show that Buckyballs’ warning labels were insufficient—plenty of adults-only products use warning labels, after all, and the agency itself approved Buckyballs’ warnings back in 2010. Plus, adding Zucker personally in a case like this was unusual, if not unprecedented. It may not have even been legal, given that there wasn’t a commission vote. “This is a really hard case to prove,” says Gidding, the product-safety lawyer. “If you’re saying a product intended for adults can hurt children because it’s too attractive for them, where does it end? Is the agency now saying that warnings aren’t any good?” Zucker has since become a cause célèbre in libertarian and conservative circles. And more than 2,000 letters have poured in to the CPSC supporting Buckyballs and its competitors. Last fall, government-accountability nonprofit Cause of Action helped Zucker countersue the CPSC in Maryland federal court. Zucker began selling those chestnut-size Liberty Balls as a way of generating income to support his legal fees. He positions buying the balls (which are too big to swallow) as a way to assert American freedom. So far, he has sold $250,000 worth, which is just 10 percent of what he has already spent on legal fees, he says. And how much money did he make from Buckyballs? Zucker claims that he and Bronstein ended up with less than $5 million each, before taxes. “You know who got the largest benefit from Buckyballs?” says Zucker. “The federal government.”

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In the meantime, the CPSC has proposed a rule to ban all small, highpowered magnets. And the agency continues to take a more aggressive approach toward product safety. The acting chairman, Robert Adler, has been encouraging staf members to hunt down products they think are dangerous before incidents pile up. “More proactive is the term I use,” says Adler. “If you have a product that’s new to the market, we should be able to say it’s something we should be addressing.” The agency is also becoming more adversarial toward business. In November, the commission proposed tough new guidelines for voluntary recalls that would make agreements legally binding and sometimes require companies to implement federally monitored safety programs afterward. Worst of all for businesses, it would remove some longheld liability protections for participating companies. The agency still won’t be able to mention brands by name without permission or a lawsuit, but this, too, is something Adler wants to get rid of. Adler declined to comment on Buckyballs. But speaking generally, he boiled down his philosophy on lawsuits to a troubling phrase: “Even if we win, we lose. And even if we lose, we win.” The first sentence means that CPSC litigates as a last resort, because lawsuits are costly and time-consuming. The second sentence is a bit more sinister: “We win,” he says, “because this company is going to sufer terribly adverse publicity for years. They will take a hit not just to the product at issue but to the overall product line.” In other words, disagree with the CPSC and face the consequences. “To me, it’s a sort of tyranny,” says Anne Northup, a Republican commissioner at the CPSC until 2013. “It’s like, ‘Oh, yeah, you may have these legal remedies or rights, but by God, if you exercise ’em, you’ll pay a penalty,’ ” she says. Back in 2012, Northup voted to sue Maxfield & Oberton—she believed Buckyballs posed enough of a hazard that the case should be heard in court. But she says she doesn’t approve of how the agency has pursued Zucker since. It comes down to this: Every time a new product like Buckyballs arrives, a decision must be made. Do we keep

this new thing and warn against the dangers—like we do with balloons, trampolines, and plastic bags? Or do we banish it? The CPSC exists to make this decision. But how should this judgment be carried out? And what should happen to the entrepreneur who introduced the new thing? Over the last few weeks of 2013, attorneys representing Zucker and the CPSC met to discuss a settlement, but the talks fell apart. Zucker declined to comment on the negotiations specifically but says he won’t agree to any settlement that doesn’t “include language respecting the corporate form and limited liability of individuals”—in other words, that doesn’t release him from personal liability. He needs that to avoid personal-injury suits. (There’s already one suit looming.) However, Adler has said that holding someone liable is what the agency demands in cases like this (again, he declined to comment on Buckyballs specifically): “If we litigate a case, the court is going to find liability. That’s one of the inducements for companies to reach voluntary recalls with us instead.” In efect, the CPSC won’t agree to a settlement unless it ruins Zucker and makes an example of him for other entrepreneurs to see. Is that what he deserves? Well, the following is true: Craig Zucker profited from products that hurt children. When regulators asked him to stop, he mocked them and sold more. He has shown little contrition or sympathy for the children hurt by Buckyballs. Rather, he is quick to pity himself. But these things are also true: Craig Zucker followed the law. He sold a product that adults loved, and he looked for ways to keep children safe—first through warnings, then limited sales, even a magnet-safety website. He sought guidance from and complied with the CPSC—that is, until the agency attacked his business. Then, he tried to defend himself in court and with free speech. Now, every day Zucker wakes up, and there are no Buckyballs in sight. Yet he’s still trapped in his bad dream. It’s a chilling reminder for entrepreneurs who hope to sell the Next Big Thing. Burt Helm is an Inc. senior writer.


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quantum computer.” That phase flamed out at a much-anticipated 2007 demo at the Computer History Museum in Mountain View, California. With his “quantum computer” being run remotely from Vancouver, Rose took the stage and had the thing “solve” a Sudoku puzzle, among other problems. But D-Wave refused to let anyone under the hood of its black box and offered no proof that anything “quantum” was happening at all. The event produced what Lloyd calls the “first D-Wave backlash. It was really quite bogus. [D-Wave] made these really exaggerated claims about the kinds of problems they could solve.” Rose retreated to his little lab. It would be four more years of iteration—including more than 20 distinct chips—before the sale of the D-Wave One to Lockheed.

R

OSE IS A MASTER of the strategic adjustment, both in his business and in his conversations with the press. He pivots, retools, scales back. But no amount of dancing will change the basic question the market will ultimately force him to answer: Is his computer better at something—anything—than the ones we have now? Will it ever be? A commercial computer is judged by how fast it solves a given problem. So when Google was deciding whether to buy the D-Wave Two in 2013, speed was central: “Several times we’d tried to get Google to buy one of our machines,” Rose explains. “The first two failed. One of the conditions of the purchase on this third [try] was that Google be allowed to set a bunch of acceptance criteria.” It was an understandable request.

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But authorizing the tests was “a really difcult decision to make,” says Rose, “because we didn’t know what the results would be.” He knew a bad showing could finish of D-Wave. At the same time, declining Google’s challenge would cost D-Wave its ideal customer, one that could give the business a whole new kind of traction. Rose bowed to the inevitable. He hired Catherine McGeoch, a computerscience professor from Amherst College, to conduct three benchmarking tests comparing the D-Wave Two’s chip with a conventional PC running ofthe-shelf software. (If the computer survived McGeoch, Google reserved the right to try to reproduce her work on its own.) He couldn’t have hoped for much better results than the ones McGeoch published in May 2013: The D-Wave machine had been “3,600 times faster” on one test than the PC running commercial “solver” software, she said, and about equal on the other two. If D-Wave’s future had been hazy, the clouds seemed to part with McGeoch’s report. The press worldwide seized on the 3,600 figure: D-Wave’s Quantum Computing Claim Gets Boost in Testing, announced the relatively cautious IEEE Spectrum, while The New York Times went for broke with A Quantum Computer Aces Its Test. Google took its machine home—it now lives at NASA’s Ames Research Center in Silicon Valley—and D-Wave ran a long-awaited victory lap. Referring to his computer, Rose wrote on his blog: “The way I thought about it was that we’d have succeeded if: (a) someone bought one for more than $10M; (b) it was clearly using quantum mechanics to do its thing; and (c) it was better at something than any other option available. Now all of these have been accomplished.” About six months later, McGeoch accepted a job at D-Wave as the “benchmarking team lead.”

C

OMPANIES SUCH AS GOOGLE and Lockheed can’t aford to be late to an emerging technology with the potential— however speculative—of quantum computing. As Steve Jurvetson puts it, companies could purchase a D-Wave

“just to be on the learning curve,” laying the foundation of what might become a radical competitive advantage. If the bet goes bust, that $15 million is simply a cost of doing business. In fact, although the D-Wave’s chip is still tiny at 512 qubits, Google is reported to be using it already, albeit in tandem with its traditional servers, in the Google Glass technology that distinguishes a wink from an involuntary blink. NASA, meanwhile, hopes to use its D-Wave to discover exoplanets. And Lockheed Martin told Inc. it plans to deploy the device one day for software “verification and validation,” as one executive said, examining vast amounts of code to assess whether the software would perform as intended—“whether the plane would fly,” an impossible task for today’s computers. Yet even as the “3,600 times faster” figure was sweeping the globe, there were signs that the future might be more complicated. A month before McGeoch published her results on the D-Wave Two, a paper was released by a team of scientists who had been studying Lockheed’s D-Wave One at the University of Southern California. The team found that the speed advantage McGeoch would report was entirely attributable to the of-the-shelf software chosen for the comparison. According to one co-author, Matthias Troyer, a tidy and precise computational physicist from Zurich’s Institute for Theoretical Physics, one of his postdocs quickly wrote code that could match the speed of both D-Wave One and D-Wave Two. Other scientists have since done the same. If speed is the criterion of success, it seems, D-Wave isn’t there yet. But all the talk about raw speed misses the point, says Troyer. What his tests reveal, he explained to an audience at the Microsoft Research Faculty Summit last July, is that as D-Wave packs more qubits onto its chip—from the 128-qubit D-Wave One to the current 512 qubits to the thousands that will be needed to take on “hard” optimization and machine learning problems—the time needed to solve the problem appears to rise exponentially, in precisely the same way it does on a conventional computer. There appears to be no speedup over


existing machines on the very problems the D-Wave is intended to solve. Troyer says he has tried to help D-Wave understand his results, going so far as to send his team’s “faster” code to Vancouver. “I sent it to them, they tested it, and it works,” he says. “And then…silence.” He believes scientific rigor and transparency are being clouded by Rose’s commercial ambitions and “hype,” and he fears that Rose’s overreach could tarnish the entire field of quantum computing research, setting it back years. Troyer’s co-author, Daniel Lidar, is a professor of electrical engineering, chemistry, and physics at USC and is generally considered to be one of the pro-D-Wave authors on the paper. Lidar also happens to be the scientific director of the USC-Lockheed Martin Quantum Computation Center. In other words, he says he has been “involved from the very start in the whole engagement between Lockheed and D-Wave.” Choosing his words painstakingly in a phone interview, Lidar says the “time-to-solution” issue Troyer points to suggests that decoherence is a clear and growing threat to the D-Wave machine. He explains that although he has seen some encouraging results in the lab, “solving” D-Wave’s decoherence problem is “an extremely tall order and is likely to require substantial changes to the existing D-Wave design.” Asked whether it would be appropriate to call the state-of-the-art D-Wave Two a science experiment as opposed to a product, Lidar replies, “I think that’s fair.”

"T

hat’s total bullshit,” says

Rose, on hearing that his computer may have a flaw—possibly a fatal one—in its architecture. Suddenly he sounds not at all like the man who felt intellectually inferior back in grad school: “That’s just wrong. That’s a misunderstanding of the underlying physics of the problem.” Rose says the misunderstanding stems from his highly pedigreed col-

leagues’ mistaken belief that “what they’re measuring from the machine is some fundamental property of nature. It’s not.” He adds that D-Wave has already achieved more than almost anyone thought possible. “The physical artifact we’ve built—in 10 years, with $100 million—is performing at par with 60 years and trillions of dollars of investment” in traditional computer technology, he says, blithely contradicting his own oft-repeated claim that his artifact is actually superior. “That’s a remarkable thing.” Many of Rose’s critics readily agree

[D-Wave] hardware outperforms the best known algorithms running on classical hardware?” It added that although “there are problems for which the [D-Wave] hardware does much better” than a given classical solver, taken together, classical solvers can still do anything the D-Wave can do. The blog post also laid out “a list of other hardware aspects still limiting performance that future iterations will need to improve,” including “longer coherence times” and “error correction”—the very concerns Troyer, Lidar, and others have been raising. (The post also confirmed

“We are going to become one of the most significant companies in the world.” —geordie rose

that it is remarkable he’s built a machine that works at all. Even some skeptics refuse to bet against him. Like any good scientist, Troyer won’t guess about D-Wave’s future. And MIT’s Lloyd says D-Wave has proved some of his predictions wrong in the past. “Who knows?” what they’ll pull of, he says, before conceding, “D-Wave is not my idea of a good investment.” D-Wave won’t say whether new customers are lining up or when they might pull the trigger. But the company tells Inc. it is now “looking to raise between $40 million and $60 million, which we believe will be our last round before a breakeven financial scenario.” It says its current investors are “in this for the long term. They’re great investors.” As for Google, the company didn’t respond to requests for comment before a version of this story went online in early January. But on January 19, it posted a progress report. Though the Google Quantum A.I. Lab Team was clearly enjoying its machine, it noted that “at this stage, we’re mostly interested in answering the question: Can we find a set of problems where the

that Troyer’s postdoc coder, Sergei Isakov, now works for Google.) If there is no detectable scent of fear hanging over the D-Wave ofces, that’s because, in Rose’s mind, there has “never been a question that this thing will succeed.” Engineering will win the day. He and his crew will iterate the nonbelievers into submission. “In 10 years, virtually everybody in the world will be using a product that was designed on one of our machines,” he vows. “We are going to become one of the most significant companies in the world. I’m pretty sure of that now. It’s just a matter of time.” Time, unfortunately, has a tendency to take down even the fiercest opponent. Acknowledging the challenges ahead for D-Wave, Steve Jurvetson allows that “this is a watershed moment.” For Rose to succeed on a level that will get him and his investors paid, everything will have to go their way. That’s starting to look like a wager only a venture capitalist would take. WILL BOURNE is an Inc. editor-at-large.

His last article was on GitHub.

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march 2014 - INc. - 113


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The label of “fast-growing” is one of the most sought after in the world of franchising. But despite its appeal, fast growth alone does not always make the best franchise opportunity, advises Rob Bennett, co-founder of FranFinders, a Charlotte, North Carolina, franchise broker and consultant. “I always caution people -- don’t go for the quick dollar,” Bennett says.

or styles but on fundamental needs addressed to expanding markets.

Whether a system’s growth rate is high, low, or in-between, the franchiser must have infrastructure to support it. Without that, rapid expansion can turn out to be a mistake, Bennett says. If a concept is based on a solid trend, however, and can effectively help franchisees with site When a franchisee is contemplating investing in a rapidly selection, marketing, training and other needs, rapid expanding franchise system, it’s important to consider the growth is one of the most attractive features a franchise reasons for the growth, Bennett says. Some franchises opportunity can offer to would-be franchisees. grow rapidly because of the short-term popularity of fads or fashions, while others are grounded on long-term BodyBrite presents an appealing combination of fast growth and a well-established concept that serves an trends. That’s a critical distinction. enduring need. The Minneapolis-based chain of hair “You don’t want something that’s going to run out in three removal and skin rejuvenation centers has more than years,” Bennett says. To help franchisee candidates 200 centers open in Europe, the United Kingdom, determine whether a concept has staying power, he Mexico, and Central America and, since beginning U.S. suggests looking for high-growth businesses that offer franchising in 2012, has grown from four locations in products and services that aren’t based on fluid fashions January 2013 to 16 today. TO ADVERTISE CONTACT 646.322.4290 | WWW.INC.COM


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CEO Chris Hardy says BodyBrite’s customers are attracted by its use of intense pulsed light therapy, which is gentler and less costly than conventional laser hair removal, and luxury ambience. Franchisees benefit from a well-tailored business model. “We have eliminated a lot of the waste and unnecessary overhead in the traditional spa and salon business and focus on core revenue services that create bottom-line profitability in short period of time,” Hardy says.

Bojangles’ growth is based on customers’ appreciation for its food, Newman says. The company’s core menu items including chicken, biscuits and iced tea have built powerful fan bases that keep diners returning. “Those are the pieces that make up the franchise appeal,” Newman says. Bojangles’ system is spread across 10 Southeastern states, and Newman says the plan is to build out the existing footprint while gradually expanding to nearby markets. “We believe first of all in strong market share,” he explains. In 2014, Bojangles’ plans to add about 60 new units, including about 35 new franchised locations. “We’re trying to avoid the mistake of helter skelter development and at the same time harness that growth rate into stronger expansion,” Newman says. Bricks4Kidz is all about building -- building children’s enrichment with after-school classes and special events, building a global network of franchised businesses to deliver those classes, and doing it all with the help of LEGO® plastic building bricks. Brian Pappas, managing director of the St. Augustine, Florida-based franchise concept, says Bricks4Kids is a proven business model that requires modest investment, allows franchisees to work flexible hours from home, is easy to learn and operate, and offers high-profit margins, low overhead, and fast ramp-up.

BodyBrite’s centers are spread from New York to Texas, and Hardy says they are particularly interested in expanding in those markets as well as the Midwest and the greater eastern seaboard. The company anticipates having 40 centers open within the next 12 months and accelerating growth after that. According to COO Emmanuelle Hardy, “The potential for BodyBrite is limitless.” Bojangles’ Restaurants is an example of a franchise concept based on long-standing needs and a carefully thought-out strategy to maximize its potential. The Charlotte, North Carolina, chain of 577 corporate and franchised locations has been around for 37 years and yet is the fastest-growing chicken restaurant concept in the country, and one of the fastest-growing quick-service restaurant chains, according to Eric Newman, executive vice president. “We’re seeing major growth in terms of system sales growth year to year,” Newman says. “That number is in or near the double digits and we’re going to hit a billion dollars in annual system sales if not this quarter then the second quarter.” In addition to top line sales growth, the company is also experiencing strong expansion in locations, cash flow, and profitability, he adds. To adverTise conTacT 646.322.4290 | www.inc.com

Bricks4Kidz franchisees conduct after-school classes, entertain at birthday parties, and organize summer camps that engage and enrich kids with activities involving the popular LEGO building system. The franchiser trains franchisees to conduct classes as well as execute marketing, accounting, and technology functions. The company has expanded rapidly from 236 locations in early 2013 to 430 in more than 40 states and 22 countries. Pappas projects the system will grow to more than 500 operating franchises within a year or so. They are targeting markets worldwide, with no special focus on any areas, he said. Seniors Helping Seniors is a franchise opportunity focused on supplying an affirmative answer to the question of whether it is possible to do well while also doing good. The Reading, Pennsylvania-based company provides in-home non-medical care for seniors and others. Its special difference in the fast-growing niche of senior care is that Seniors Helping Seniors hires moreactive seniors to serve as caretakers to those who are less active. That’s an important distinction, says Philip Yocom, co-founder and CEO.


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“Seniors Helping Seniors non-medical home services are given by loving, caring, compassionate seniors who truly understand what it means to be aging,” explains Yocom. “These older adults provide both the physical and emotional help seniors need to live independently in their own homes with dignity and respect.” Yocom says franchisees also gain personal enjoyment as well as financial rewards. Nearly 250 Seniors Helping Seniors territories have begun operations to date. During the coming year, plans call for adding 100 new territories. Strong underlying demographic trends indicate need for the company’s services is growing both rapidly and durably. People age 85 and old are the fastest growing age group of Americans, and over half need some level of personal care, according to the company. As this group expands, need for Seniors Helping Seniors services will also expand. One group that never seems to get smaller is parents who need help caring for their children. Kiddie Academy started satisfying this need in 1981 with childcare centers that now number 120 and are located in most major metro areas throughout the country, says Sue Hilger, vice president of franchise development for the Abingdon, Maryland-based company. Parents are attracted to Life Essentials, Kiddie Academy’s proprietary curriculum for educating the whole child, as well as the center’s quality and friendly service. Franchisees benefit from a model tuned over more than 20 years of franchise operations, a family-friendly work schedule, and a chance to be active members of the community while building a valuable business asset. Those features are helping to drive rapid expansion. “We’re opening between 15 and 20 new locations per year and anticipate growth to continue and very likely exceed this number,” Hilger says. She expects their biggest growth areas to be Texas, Illinois, California, New Jersey, and Maryland.

Today, Daycare Cleaning Services serves clients in a broad market area including New Jersey, Pennsylvania, Delaware, and New York. The company’s customers include many of the largest national child care chains. Repeat business is a strong point, Nestore says, with account retention levels of 95 percent. The company’s achievements in growing beyond its initial service area prompted Nestore to begin seeking to expand nationally using a franchise model. For would-be franchises, he says, Daycare Cleaning Services offers an affordable ground-floor opportunity to take a proven, recession-resistant business model to a large and growing market. The company is offering two types of franchises. Unit franchisees have exclusive rights to service cleaning customers in territories selected on the basis of region and population density. Area developers are awarded exclusive development rights to geographic markets, with the opportunity to sell and support their own teams of unit franchisees.

These examples of growing businesses show that franchises of many different types can post strong records of expansion. And sometimes macroeconomic trends as well as individual business characteristics can affect which franchises are fast growing. For instance, the tight credit of recent years means lower-cost franchises including Daycare Cleaning Services is founded on the premise home-based and service franchises are experiencing that run-of-the-mill cleaning and maintenance services faster growth than those requiring large investments in are not up to the special needs of facilities where children bricks and mortar retail locations, Bennett says. are present or healthcare is being provided. CEO Rob Nestore began the Cherry Hill, New Jersey, company in But some things about fast-growth franchises don’t 2001 with the goal of filling that missing link, applying change, no matter what the economy is doing what is established hygienic procedures and green cleaning fashionable at the moment. “Brands that successfully materials to meet the higher standards of child care serve customers are the brands that grow quickly,” Bennett facilities. That has proven more than enough to sustain says. “In my opinion, there’s no magic formula. It’s brands that serve customers that make raving fans.” a healthy and growing business. To adverTise conTacT 646.322.4290 | www.inc.com


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What’s one rookie mistake you made early on? I hadn’t really worked in an ofce before Shutterstock, so I didn’t have the experience of building a culture, nor did I understand how important that is for attracting and retaining the best talent. That’s been a major lesson for me.

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Jon oringer Bootstrap billionaire Jon Oringer, founder of Shutterstock, says getting venture capital is optional. Building a great company culture is not By issie lapoWsky Photograph by João canziani

• pictures of success Jon Oringer launched Shutterstock with 30,000 of his own stock images in 2003. Today, the site ofers more than 30 million photos, videos, and illustrations.

What was the hardest lesson you learned in your first year of business? Figuring out how to interview people so I could tell if they’d fit our hacker, entrepreneurial, data-driven company. What’s the toughest part of being in charge? The decisions you make afect a lot of people. You have investors, employees, and customers who all rely on you. Being a leader is a 24-hour-a-day job. What’s the biggest myth in business? That venture capital is necessary to start a business. I started Shutterstock without any outside funding; I believe in creating a lean startup. By not taking outside investors early, I was forced to use every dollar I had as efciently as possible. And I was able to keep a large part of the company. What’s one skill you want to improve upon? I still find public speaking to be a challenge. The good news is that lots of people feel that way, and you can solve it if you work at it. What’s your proudest accomplishment in your business? I love meeting contributors and hearing how we inspire them to create art. I’m also proud of creating hundreds of jobs. Whom do you admire most as a business leader? Sir Martin Sorrell. He’s been leading advertising company WPP for almost 30 years and continues to build it. There is nothing better I can imagine than growing this company for another 20 years.

scan the page to Watch Jon oringer discuss Why you should (almost) never take venture funding. (See page 12 for

details.) For the Founders Forum video with Inc.’s Scott Gerber, go to www.inc.com/ founders-forum.

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founders forum


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