Russ: This is The BusinessMakers Show, heard on the radio and seen online at TheBusinessMakers.com. My guest today is the co-founder and former CEO of the most successful startup in history. Over $111 million, first year, fastest company to $1 billion in sale, none other than Rod Canion. Rod, welcome to The Business Maker Show.
Rod: Thank you, Russ happy to be here.
Russ: You bet. So this time, your third time on the show, we're here to talk about Open, your brand new book that tells the story in detail. Tell me what went through your mind thinking, "I need to write this book."
Rod: The trigger really was time. Time was going by. I had always felt like the story needed to be told, but I'm a pretty good procrastinator, so I had put it off, and when it was a couple of years before the 30th anniversary that it's like, it's now or never, and that's really what got me started.
Russ: As you know, I participated to a degree in many chapters in this book, first as a competitor with IBM, even IBM PC product centers.
Rod: Hope I wasn't too hard on you [laughter].
Russ: Well, I changed teams pretty quickly and started operating a Computerland franchise. We sold IBM, Compaq and Apple, but obviously saw Compaq sales actually skyrocket and I also participated as a customer of Compaq and what a story it is. I thought I knew a whole lot about it until I read Open. The first thing that I thought was real enlightening was the very beginning when you and Mr. Harris, Mr. Murta, decided we're going to leave TI and start a company and that first meeting when you all talked about what you wanted it to be, tell us about that.
Rod: You know, just happened naturally. We had actually kind-of kidded each other about it for a while, and then it just reached a point where we decided we're going to actually meet. The first time we had a meeting we went over after work and let's talk about it, and without any planning, the first thing we all started talking about was what kind of company we wanted to build, and that tells you a lot about what we were really trying to accomplish.
Russ: It's a interesting read, that part for sure, and how it seemed like all of you were in sync and this was in 1981, right?
Rod: That was - it was September 1, 1981.
Russ: So from there, you head down this path and start kind-of getting connected to people that were venture capitalists, you're talking about Mr. Seven and Mr. Rosen before there was even a Seven Rosen.
Rod: And we knew nothing at that time, we had to learn all that [laughter].
Russ: Well, and you do a good job of describing that, even business plan writing. It was kind-of a different era to, though.
Russ: There weren't as many startups, but it was interesting to me that there wasn't a Seven Rosen venture capital firm yet. They were just getting ready to form. In fact, throughout, the people you met with, Bill Gates, Andy Grove, was just so impressive that led me to believe you obviously played a role in their successes, a big role.
Rod: Well, we all played a big role in everybody else's success, because if the industry hadn't done what it did, then none of us would've succeeded like we did.
Russ: Well, I know you headed down this path the three of your first, thinking you could go build a Winchester drive and sell it to augment IBM PCs, but it was the IBM PC that came out in '81 that really spurred everything forward, but that wasn't going to be funded, so you guys went back to the drawing board and then you came up with the killer idea. It seemed like it was an idea that came from just your thought processes. Share us - that with us.
Rod: It took us a while to come up with an idea that we really felt like dedicating years to, and after Seven Rosen turned down the original idea, we just all started trying to think through different areas. We understood enough about marketing to know we needed to find a user need that wasn't being met, and so one of us would think about games, one of us would think about educational area, and one of my likes had always been and still is today the whole portable area, and so I was thinking about that one day and it's so vivid to me because there was electricity literally that went down my spine when the idea finally gelled, because see, the idea for a nicely styled portable that was rugged, I think there was a market for it, but I knew there was - we weren't going to have any software. It was just too much competition for the existing software companies to get around to a startup. But when the idea that if we could run the software that was written for the IBM PC on our portable, very different product, but just be able to do the same things, that was a powerful idea. And as I say, the first thing I felt was this is too good to be true. Something's got to be wrong with it, so I started writing down the things that might be wrong with it.
Russ: Well, it was definitely an interesting read and for those of our viewers and listeners who are young, you can't imagine what the PC world was like in the beginning. There was - if somebody wrote a software, I think even Vizicap was written for every different hardware platform, there was no cross utilization of it at all, but you are the guy that had the idea, hey, if we could standardize our system on the most popular software, the most popular hardware now, because everybody wants to build software with that, it would make a huge difference. So then you started pursuing how easy that would be and then you started with DOS, right?
Rod: Now, to be fair, we weren't the only one. There were a handful of others. We didn't know it at the time, but we found out later from Microsoft that there were a few others that had actually approached them about the idea around the same time. What eventually separated us was that it was so hard to do. It was almost wilting for a startup to imagine it, but we had gotten into it and we were totally committed and so we just - we did whatever it took and it was very, very hard and very time consuming and resource intensive to make our computer run all that software.
Russ: And very early on, you decided you needed to make a trip and visit face to face with Mr. Bill Gates. According to my calculations he would've been 27 years old at the time, and describe that meeting.
Rod: Even back then, and I guess they still have some form of it now, the major companies would have these parties off site and it was really a networking opportunity. A lot of things, a lot of deals and information transferred there, and Bill was in a back room and I used to say Bill was holding court because people were lined up literally, physically standing in line waiting for their turn to go in and so I got in line and waited for my turn and when I walked in, here's this really young guy. Obviously I have a lot of respect for him without even having met him, but -
Russ: You hadn't met him before.
Rod: I had not met him before that, but Ben Rosen, who had - was our investor did know him and set up the meeting, and so and the meeting went fine. Bill was interested in what we had to say and what we did - none of us knew at the time, see I was still hoping that they were going to actually be able to provide us with software that already ran the IBM PC software. It was after that meeting, after we had asked him for it, he goes back and they really study it and then finally come back and say, "No, we can't do that."
Russ: Right, well what's interesting about that part, that's when I was with IBM, the PC business, and we had PC DOS often referred to also as IBM DOS and then there was also MS-DOS, and you as a manufacturer could use Microsoft DOS and you wanted it to be totally compatible with the IBM version, that's how you could run the software.
Rod: That was the only way it would work. Now remember, before that time, everybody ran different software and that was the accepted norm, and so the real competitors, the Digital Equipments, the Hewlett Packards, the TIs, were doing the same thing they had done in minis. They made theirs run MS-DOS, it was totally incompatible with IBM and that was fine with them. They didn't know there was this other thing, it was really out of need. Truly necessity in this case, was the mother of invention, because we needed it or we were dead, the company was over.
Russ: But it was interesting how rightly you recognized that you had to get there, and how you knew enough about engineering and about software to know that it could be done, it might be hard, and so you headed down that path quite aggressively, which according to several major instances in the book, you ran into some pretty difficult challenges. It had to do with reverse engineering and there's a legal way to reverse engineer, and you knew you had to follow that right, and then eventually you started gaining enough confidence that you started having more investors and you decided that you needed to kind-of replicate and you hired a designer. Talk about that, the meeting where you met him at Computerland on Westheimer and -
Rod: We needed funding or we weren't going to get off the ground. When we first put together this business plan it was very quick. They had turned down our other business plan, for the add-on Winchester discs for the IBM PC. And so we created this business plan, but one of the key features of this product was that it was going to be styled so that it would look nice in an office and that was different from the portables that were already in the market. So differentiation was key, and to communicate that, rather than just say ours is going to look nice, anybody could say that, we hired a guy we knew was a good designer, and we met him at the Computerland there on Westheimer, trying to be sort-of secretive. We showed him the IBM PC and said, "This is how it's going to work," and so some things have to be - have to look the same, and then we showed him the Osborne. Is that a name from the past? The Osborne 1.
Russ: Absolutely the portable at the time.
Rod: It was very successful and it was really ugly. So we said, "We're going to arrange it something like this, but it can't look at all like this. It's got to look nice, plastic with curves and all that," and we actually asked the manager of the store if we could take the IBM PC apart, and he said no [laughter]. So we said, OK, we're done here, and we walk across the street to discuss it further, turns out there was nobody in the House of Pies, so we go to a back booth and get a cup of coffee and realize we had left all of our stuff in the car all the paper and pencil, so that's when Ted Papajohn turns over a paper napkin.
Russ: He's the designer.
Rod: We actually had to borrow a pencil from the waitress [laughter] and so he started sketching it. We'd say no, it should be like this and what he sketched on that placemat was very much like the final product. It was amazing how close it came.
Russ: And you needed that actually, you needed that to show to investors, right?
Rod: Four page business plan, that was page four.
Russ: Eventually you got to the - momentum going on the reverse engineering building to have what was really a prototype of the first portable, right?
Russ: And there's a story in the book about you taking it to New York. I don't know if that was for one of your press presentations or if that was an investor presentation, and there was a pretty rough cab ride on the way into town, right?
Rod: It was actually for press. I mean, we're down in Texas. We're not in the heard of Silicon Valley or any of the other places where you're going to automatically get press, and fortunately Ben Rosen had good press connections in New York. So as soon as we felt comfortable taking this fragile prototype to New York, we set it up. Well, it was fragile enough that we actually bought it - now back then, you couldn't do it now, but we bought it the seat next to me and strapped it in.
Russ: To fly there.
Rod: Fly there, and the plane flight was fine. We get out and get through, pick up my luggage and go wait in the cab line and get in the cab and so we're taking off. If you've ever gone down FDR, you know, and this guy was in a hurry, literally we were bouncing a foot off the seat, me and the portable, bouncing along, and finally I said, "Slow down, slow down," he slowed down ten miles an hour and we were still bouncing. Well, of course the problem was the next morning, we go in to see Dick Shafer at the Wall Street Journal and set it up on the table and plug it in and nothing happens [laughter]. Well, I'm an engineer, so I know the first thing you do is reseat, plug in boards. It was modular so I took the top off and reseated all the boards, plugged it in, came up and ran perfectly. It was fine the rest of the day.
Russ: And it was a good show for him too.
Rod: It was a good show and I think it - we accomplished what we set out to do. Because we did get an article the day of announcement in the Wall Street Journal, not just about us but about that type of product, and it mentioned us.
Russ: Well talk about the announcement itself, I mean, when this is it, we're Compaq Computer Corporation, here is our first product.
Rod: Well, when we started the company, we wanted to be very stealthy. We didn't want people to know even that we were building a PC. So we picked a name called Gateway Technology and we stayed as Gateway Technology all the way up to the day of announcement. So the day of announcement, November 4, 1982, New York City, the library room of the Helmsley Palaces, nice old beautiful room, we're going to announce both the name of the company and the name of the portable. One of the things we had very purposefully done was make sure the company name and the product name were the same, so you don't have to build awareness about two different things, so Compaq computer, the Compaq portable were the names. I was petrified. I was not good at speeches and was afraid of doing it and here were literally a room full of wall to wall, 100 press, TV, there were TV cameras around the side and the back.
Russ: What did you do to attract them to this?
Rod: Part of it was Ben Rosen's name as an investor and him cajoling people to you better come check it out. I'm not sure how we got all of that, but it - I guess it was the timing was right, there wasn't IBM across town doing something else. So we had a full room, which was good news and bad news because I step up to the podium and I'm about to start my speech and I read about a sentence of my speech and the TV cameras come on and all the electricity in the room goes off [laughter]. I mean, it wasn't like it threw a circuit breaker. It blew fuses, that's what they had in - because this was a 100 year old room. Maybe that was the first challenge, I didn't skip a beat, I just kept going with the speech and after a while the lights came back on and the guys knew enough to take turns turning on their TV lights and we didn't have any more trouble.
Russ: Cool. Well I know another huge decision, strategic decision, and that's what's so good about the book, there's so many points along the way and you shared how you guys evaluated the risk and the alternatives and a lot of times, the risk was going to be real high but none of the alternatives were any good, so you took the risk anyway and it - and executed I might add. But was the idea that you checked about distribution and the way these important things sort-of were coming at you week after week but the decision was made to go through the dealer network that IBM was also using, but to do it loyally and to only do that.
Rod: We knew we were going to go through dealers to begin with because it was well known that that was the single largest channel. We were a startup, didn't have many people, we knew we couldn't handle a lot of different channels and we also had enough experience do know that competing channels created conflicts that we couldn't deal with very well, and so we put all of that together and then finally the last thing that made us decide to go dealer only was some inputs that Bill Murta was getting, Bill was one of the co-founders, he was the marketing guy and he was out showing the prototype product to dealers, potential dealers because we didn't - we hadn't signed any then. Part of the time, every now and then a dealer would say, "You know it's really been a problem with IBM, they take business away from us," and even a few of them that I think had gone as far as to say we'd consider it a big plus if you guys didn't sell around us, didn't take business away from us. So Bill brought that key piece of information back and we studied it and talked about it and finally made the decision, look, we've got this thing that really fits their needs well, and this could be the cherry on top. This would really help the dealers make the decision to go with us if we go with them loyally.
Russ: Well, and not only that but you would go and you would show up and you would show them that for the first time, there was an alternative to IBM that all of their software, the IBM software ran on, which that was huge. I mean, inventory wise, training wise, in all categories it was an A+.
Rod: That was really a key piece of information, because if you just read the press you would've believe that there were half a dozen other companies out there running all the software, but when we saw the reaction of the dealer, we knew that we were the only ones that had showed him that, because they got really excited about it and they wanted to order them on the spot, and then that was the other key piece of information. I mean, so much came out of that just the pioneer going down getting the arrows in your back, but being the first and learning all this is we discovered an unmet, pent up demand that was gigantic.
Russ: Well, you certainly satisfied it. I'll tell you on the loyalty thing, I personally was attending a Computerland national conference in Vancouver, it was probably a few years after that, it was probably in '85, '86 in that time frame, and the IBM PC guy spoke and almost got booed off the stage. I mean, it was - the group was - and there was 2,000 people in the audience, and then you were announced before the IBM guy was all the way out of the room and the room erupted into a standing ovation. I mean, it was exhilarating, I assume it made you feel that way, but it was just unbelievable.
Rod: Well, it - you know, to told me we were doing the right thing and we were. We were not just dealer only, but since we were dealer only, the dealers were very much our customer, so we studied what their needs were and tried to meet their needs as best we could and better than anybody else.
Russ: You know, and a prior interview with you when I was sort-of congratulating you in your success, you said, "Oh, you know, shucks, it was just the right place and right time," to which I always responded, "Well, we all try to be at the right place at the right time but we very rarely get there." But the execution, the $111 million of computers that you managed to sell and ship and get paid for within that first full year of operations, and you point it out very well in the book, I mean, you're going out and leasing new space, building new assembly lines, hiring, training. The training was critical on the culture itself, on quality and what it was all about. Was it an exhilarating time, was it a stressful time?
Rod: It was absolutely exhilarating. Stress is something you deal with, and if you don't, you don't go very long, but so we dealt with the stress basically probably by denial, and when things kept working, when we'd discovered these things that we felt like - it's like a pioneer, we discovered this path that we dint think anybody else knew about, so we charged down it. It's hard and some things don't work, and so we're constantly fixing things, but yet, at the end, we're accomplishing all these things to get the chance to get up to 100 million, we go for it, and then the execution that's the people. Let me tell you, the - we had this most unbelievable. Now, a lot of it we owe to TI. TI had trained the founders about how a company ought to run. Now, it had some flaws, TI had some flaws so we made some changes to make it better in our minds, but we hired mature people. The people we knew the best that approached us, now we did - we had made a pact, we're not going to go recruit people from TI, but people that come want to work for us, we'll interview them and decide. Well a lot of people came to interview because we had worked with them for five or ten years and they respected what they had known about us back at TI, so it - the networking you've done and the people you respect and who respect you, that became the base from which we drew the team, and they were an unbelievable team.
Russ: Well, I - they had to be to accomplish that. I also had a personal experience there, I was invited out one time as a president of a dealership company to speak to people that ran the assembly line and they just said, "We need to get a guy to come in here and tell them what they think," and my comment is not about what I said, but what I felt. And it was like you could just tell and I've seen this several times in my business life. It was like they were so jazzed and it was also like their self esteem was just much higher because they were working for a great cause, a champion company, and you could tell it. And these were - a lot of these people were new hires, it was incredible.
Rod: What you just mentioned is the core of the culture. One of the things I discovered through my early career was what motivated and what de-motivated people, and it's common sense at a very real level, but the ability to get people to feel good about themselves, to feel like they're doing something worthwhile and that what they're doing matters is fundamentally at the heart of happiness and so, what I always emphasize to my team and to the whole company which we continue to speak - I spoke to the whole company every quarter all the way through that first ten years, is you matter. You are important to our success, and if you don't do your job well, it's going to hurt all of us. I wasn't feeding them a line, that was true, and they could tell I meant it and when they believed it, it happened.
Russ: An interesting side note, the other place that I felt that was in the '70s at IBM. I felt like everybody there was just so proud of what was going on and stuff. I actually do think that kind-of changed over time, clearly, at IBM. So speaking of IBM, along the way, you finally started getting on their radar quite seriously and you kept upgrading your systems and enhancing them, bringing out the Deskpro, getting right into their world, being faster in processing faster, in having more reliability in your shock mounted drives, and finally you kind-of started sensing that they're getting ready to do something about it. And it was kind-of - wasn't it when they didn't bring out a 386?
Rod: The first sign of something funny going on, and we really didn't know what it was at the time, because we saw an opportunity there, was when each new processor - now the first one was the 8088 and our portable ran the same thing. It worked exactly like the IBM PC. But then when the 286 came out, the second generation, IBM worked with Intel to get it ready for prime time and then we were on the fringes. We were helping them with some incompatibilities. IBM really never studied incompatibilities, that was our technology.
Russ: You were helping Intel with -
Rod: Helping Intel, so it was both IBM and Intel. So the next time, the next generation, the 386 comes along, all of a sudden, we don't sense that IBM is in the loop. It seems like Intel is really just working with us, so we study that a while and realize that they're behind. They're not at the same point we are and so we actually begin to rush - to decide if we really should try to bring out a 386 PC ahead of IBM. That was one of the most risky things we did from the outside world. That was just not done. Everybody that had tried it historically was buried somewhere.
Russ: Taking the lead was suicide.
Rod: Going out and find out about - they were the technology leader, and so - but what happened, what people didn't realize, what IBM certainly didn't realize is this industry standard that I had become the missionary for or the preacher about, really did make a difference. And so with the industry standard and our technology of knowing how to make advanced things run all the old software, we could bring this thing out in very safe form factor, a very safe product, because it became a PC that run - that would run all the old software but three times faster than the previous one. And so yeah, there was an insatiable demand for speed at the time, and this met that need.
Russ: Well the backward compatibility thing that you just mentioned was enormously important. I mean -
Rod: It was fundamental.
Russ: When you talked about making a computer that would run IBM software that's one thing, but when you brought out the next model, you wanted to connect it to the old software capabilities which being in the business at the time, was huge. You could - you just - nobody could understand how disappointed people were to upgrade and get a better computer from IBM and then all of a sudden some of their software would no longer work. That was huge.
Rod: Well, so we could tell. I mean, there was no doubt that from a user standpoint, they really wanted it to work. Before that remember, no - none of it had worked in the computer industry and in PCs, that just didn't happen, but because a lot of it worked when they went to their next generation, people's expectation arose and they wanted it, and so that's when our technology that we had developed with our first and second and third product, that's when it really came to bear. We could do it and IBM couldn't do it.
Russ: What they were doing in the background was trying to veer off of their strategy and bring out microchannel architecture, a proprietary architecture, very un-dealer friendly, un-manufacturer friendly to everybody else, trying to separate themselves and based on what your engineers and yourself looked at, you weren't that impressed with it when they finally did announce it.
Rod: I mean, it depends on how you look at it. Now, if IBM did it, we were impressed with it. So this was a big deal. I called it the Death Star. I mean, even at that point, it was so threatening to not just us but really to all of the compatible makers, all of the clones as they were called, absolutely. And it was - there was no doubt, I mean, it was thinly veiled. They said we had to make it incompatible in order to advance the technology.
Rod: Well really in order to make it proprietary so they could control everything. Well the shocking thing was, not only did all the press and analysts believe it, but all of our competitors started signing up to their license. See they would license you to build it, that sounds nice, all they would charge you is five percent of your sales.
Russ: Which is huge.
Rod: Well, it's more than some clone companies made, so it was a big deal and they would - not only would they have that, but they would also control the rate of technology being entered into the market.
Russ: So you went through this gut-wrenching decision of do I just keep going to try to reverse engineer microchannel architecture, it probably wasn't a real popular thing in the company, and lo and behold one day you made a decision.
Rod: Well, from day one we didn't want to do. We were committed to finding a way to not have to make a clone basically of the PS2. But one of the ways we mitigated risk is we didn't wait till we decided then six months later or so. We started reverse engineering right away on the possibility that we might need it. But we were really committed to finding another alternative. It took us nine months before we finally figured it out and it was one of those things, it was as plain as your face, but until we could see it, it was almost impossible to figure out, because it was - it'd never happened before, it was totally unexpected which was why it was so successful, I think.
Russ: So what happened when you announced to the company that this army that you had working on microchannel architecture would have a shift in their responsibilities?
Rod: Well, Hugh Barnes was engineering manager and he called them all together in a kind-of a dramatic way to announce that we were going to end the microchannel reverse engineering and shift all our effort to developing and advanced bus that was our own, and when he announced that, there was this deafening roar, a cheer really, because that is so much what we all wanted to go do, and then we got really focused to go make this happen. So for the first nine months, we covered both sides, then the next nine months we went and developed it, we recruited the rest of the industry, so the key to this success was not just us trying to compete with IBM with a better bus, but recruiting every other PC company to join with us because we gave it to them. We developed, we spent our tens of millions of dollars on it, and then we went and gave it to everybody else.
Russ: And it being extended industry standard architecture. And so how could another manufacturer other than IBM not want to go along with it, and it sort-of shocked the - particularly IBM and became very successful and essentially became sort-of a standard strategy that technology companies I think follow to this day. Affected us all about how prevalent computers came. It was just a huge success story.
Rod: The technology advanced at an accelerated rate through the '90s and 2000s as a result of this industry standard levels the playing field. It creates intense competition which causes prices to go down faster, it causes wider variety of features and choices and then new technology and innovation has to come faster.
Russ: Well Rod, thank you for what you did and congratulations on the success, and I highly recommend anybody that knows anything about the PC world or particularly those that don't should probably read Open. Thank you very much.
Rod: Thank you.
Russ: I appreciate your time. And that wraps up my discussion with Rod Canion, the co-founder and former CEO of Compaq Computer Corporation. This is The BusinessMakers Show, heard on the radio and seen online at TheBusinessMakers.com.