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In the Studio

HATTIE: Hi. I'm Hattie Bryant, and this is SMALL BUSINESS SCHOOL. You can learn here how to start, run and grow a business from people who've already done it. Remigius Shatas took his idea from mind to market and on to Wall Street. Step into our Master Class to learn from a man who's done it all.

(Voiceover) Every town needs people like Remigius Shatas. They cultivate dreams, the deep-seated dream, that "every adult American has an idea for a business." Shatas has taken the Silicon Valley model into the heartlands of America.

And if it can happen in Huntsville, it should happen everywhere.

Wires, connections, security, control.

Headquartered in Huntsville, Alabama, Avocent, formerly Cybex, prior to its 2000 merger with its largest competitor, Apex, makes a box to remotely control PCs and servers from 25 feet to 25,000 miles.

STEVE THORNTON: For each one of these buttons, you can have a computer attached and only have one keyboard and monitor and a mouse. And you can just switch to any one of those by pushing a button, or you can do it from your keyboard. You can select from any computer right your keyboard. Without this type of product, if you had a thousand servers, you would need a thousand keyboards and monitors and mice.

But now you only have to have one.

HATTIE: (Voiceover) After years of struggle, founder Remigius Shatas, who likes to be called simply Shatas, and company CEO and president, Steve Thornton are proud of $371.8 million in sales in 2005. And they enjoy a market capitalization of $1.525 billion. They have facilities like this one elsewhere, in Redmond (Washington), Shannon (Ireland), and offices in Steinhagen and Munich in Germany, Singapore and Tokyo. Avocent is the world's leading supplier of KVM, or Keyboard, Video and Mouse, switching extension and remote access products.

SHATAS: The bottom line of the KVM switch market is that we take and we provide the services to keep the backbone of the network running, and we make a very large problem manageable.

STEVE: It's just astounding how we change the access and control of servers. That's why we're successful.

SHATAS: When we started and didn't have a lot of money, it was all we could do to build 25 of a product, and we would agonize over building 25 boards and then 50 boards, and then we got to nirvana. We were able to build 100 boards at a time.

STEVE: Yeah. Well, I can give you an example of that. The first year I was here, we did $169,000 in sales. Today that would be a bad morning.

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SHATAS: My illumination came when I was working in a grommet factory about 50 miles away from here in a very poor region of the state. And I couldn't get a job back after the space boom collapsed in 1969 and I had to go 50 miles away. And I had a degree in mathematics, but there were no jobs in Huntsville. I started out as a computer operator and became a programmer, and I enjoyed my job. I didn't enjoy the way the employees were treated.

And a lot of times I'd have to work all night to get all the work done; you couldn't do the programming during the day because we were running production. So I remember one time leaving early in the morning, the sun was rising, and I was having to drive into the sun. It was in December and there was frost on the ground and a million sparkles of frost everywhere.

I just thought, `I would like to start a business where people enjoyed coming to work every morning.' I never looked at it as, `I have to start something for myself.' I always looked at is as, "What could I do for the other people?"

I had a lot of ideas, and I watched the ideas done by other people; they're making money on it. After awhile it gets to you. But I was working for a well-known company here in town, and I finally realized that the training that I was getting and the responsibilities that I had at that company would let me go on and do my own business.

And so I got a little bit of confidence. I think I was about 29 years old when I decided, `I do have to leave and do this thing.'

I got the bug -- I call it the bug of ambition -- and I found out the bug of ambition is fatal. Once you've caught it, there's no cure except success. And it just drives your life. I didn't know at the time -- in my early 30s -- that what you have to do is look at markets. I was still looking at products. And the difference between a small company and a large company is the transition between the product mentality and the market mentality.

HATTIE: OK. So are you saying, "Don't just start a business based on something you think you might want to make; look at what the market wants."

SHATAS: Look at what the customers want. The success of Cybex was driven by what customers asked for. We always listened to what the customers wanted. Our very first product was successful because I was the first customer; I'd been installing computers on a contract we had with Marshall Space Flight Center. And I remember distinctly that the PCs that we were installing were PC XTs with 10-megabyte hard drives. They wouldn't fit on the desks.

HATTIE: Too big.

SHATAS: Yes, and I remember trying to give myself bend radius for the cable, and I couldn't get the bend radius for the cable without hurting the printer cable and get the keyboard to fit on the desk. I thought, `This is too big for the desk. We've got to get the computer off the desk,' and that's what led to our first successful hardware product, which we called the Extender.

Well, what was intriguing about it was; I'm a mathematician, not an engineer. Every engineer said it was impossible, and I just didn't believe it. So I came in that Saturday morning and I was kind of excited. I hooked it up in the new way that I had thought about hooking it up, and by that afternoon I had it working.

I was stupefied.

So I left it working over the weekend, and everybody coming in that Monday morning was able to see a keyboard and a video 150 feet away from a computer that was still running. I knew we had a product.

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HATTIE: OK, so six years of what? Struggle?

SHATAS: Struggle, starvation, problems. I was so bad off that two of the founders left before we got started; and so I started thinking, `I've got to change the way I'm doing things. I'm not thinking the right way.'

So I turned to a friend of mine who had worked in the same company with me, and who was probably the best manager that the company ever had. He had made it up to the title of vice president and he was looking for a job and I was recruiting him for my board of directors.

And he said, `Why don't I just come to work for the company?' And I thought, `This is great. This is what I need.'

HATTIE: Right.

SHATAS: `I need someone that understands business' because I had proven that I didn't.

HATTIE: And that person was?

SHATAS: Steve Thornton.

STEVE: In one year I was turned down seven times by different banks, and nobody would loan us any money. We're too risky; or, it was not a good loan for us. We heard all sorts of reasons. But eventually we found somebody to loan us some money, and once we became profitable, we'd been able to increase our line of credit consistently since then. And we have had record profits since 1989.

When you go through something like this, if you ever become successful, it was fun. If you're not successful, it wasn't fun.

Shatas has always had a good vision of what the market's going to be doing.

SHATAS: And so one day a person at a nuclear power plant up somewhere in the New York area called us, and said, `We need a way of taking two computers that are 25 feet away from the operator and building a switch to use one keyboard and one video screen to look at both of those computers.' And so Steve came back and asked us, 'Could we do such a thing?' And I said, `Yes, we can do that.' And Steve said, `I wasn't asking you, I was asking Bob,' because I said yes to everything.

HATTIE: I was going to say, 'Then Bob said?'

SHATAS: Then Bob says, `Well, I think we can.' So Bob did a drawing and we gave it to the ladies that were in manufacturing, and that very afternoon we had our first product of that type.

We called it the Commander.

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HATTIE: (Voiceover) Bob Asprey joined Shatas in 1982. Because Shatas says that you're the person who knows how to make things work.

BOB ASPREY: I try to do that, and sometimes I get lucky and it does.

HATTIE: Sometimes. So in terms of entrepreneurship, how many times do we have to get lucky in order to make it as a business owner?

BOB: Each time. There's always luck involved in it.

HATTIE: There's always luck involved in anything.

BOB: Right, but you have to be ready to take advantage of it when it strikes.

HATTIE: Did you ever have a dark moment when you said, `I don't know if we're going to make it or not'?

BOB: Oh, yes. Very dark moments.

HATTIE: What lessons could you give someone who's tweaking a product now and frustrated they don't have an end result?

BOB: The major thing is keep your focus on what you're trying to do. In other words, avoid bells, whistles and all the other stuff, look at what your customer really wants. The temptation--all engineers want to put--you know, the guy says, `I need a flashlight,' and he ends up with one with six switches on it and six adjustments, and that's not what you want to do. And it's so easy to fall into that trap of just keep adding, adding, adding, and that's--you lose your market windows, you lose your cost advantages and everything else. So, you know, stay focused.

HATTIE: So peel back, find out exactly how the customer's going to use the product, and only give them what they're going to use.

BOB: Find out what they really want, not what you think they want.

SHATAS: Bob's important to the mix because I could dream things up, but Bob could get them to work.

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HATTIE: (Voiceover) In July 1995, the company went public on the NASDAQ stock exchange and was listed in BusinessWeek's hottest growth companies in the USA in 1996, '97 and '98, and was recently ranked 78th in Forbes magazine's top 200 small companies in the USA.

SHATAS: So what you have to do in the explosive growth phase is you've got to change your thinking. You've got to quit thinking small, you've got to quit thinking `How could I capture this market?' And I think that's what happened to us.

We realized that we had something that was so hot that we couldn't do it all ourselves.

In fact, we tried to build the first auto boots and load the PC boards back in the shop. We built a hundred boards. And we had great people working for us, but we found out that of those hundred boards we'd built, only a very few of them worked.

HATTIE: So did you have to outsource?

SHATAS: Steve and I looked at it, and said, `We can't continue with this.'

HATTIE: Right.

SHATAS: And it broke our manufacturing manager's heart because he wanted to build it in house because he'd been trained to do that. So we said, `Jimmy, we're going to have to outsource this.' And so we did that. So today the company has about the same number of people using a soldering iron as it did 10 years ago.

We were experts in finding what the customer needed to have for the next generation. So we became an engineering-software firm and basically a marketing company. And that's how the company has grown so well.

HATTIE: Why do you think you all became so successful?

BOB: We lucked out and got the right team together, picked a market that wasn't saturated -- nobody was in it -- and essentially pioneered the market, and managed to keep a big chunk of it.

The main thing you need to know is that you can't do it all yourself. You have to get like-minded people and build a team, because a one-man show just is limited to a one-man show.

SHATAS: The way that you build a great company, it's like if you go to a stream and look where the water's been running, all the pebbles are round. You don't find any square pebbles. So what you've got to do is get a mix of people where things get rubbed off and that can work together as a team and not be ego-bound. The founding team has to have a clear vision of what they want to produce and they've got to hatch the baby, and then they've got to get the baby to where it can crawl, and then where it can walk. And then they've got to say, `OK, this is where my limits are.' Then there's a point in your life in a company where you've got to change from being the person that's doing the molding and the shaping and the guiding to where you're just a parent and the child goes off.

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HATTIE: How'd you keep believing in your ideas?

SHATAS: It was very simple. We had no other choice but to keep on doing it.

HATTIE: But no, no, no, no, no. You guys all are smart, you have degrees, you could have gotten a job.

SHATAS: Sure, but that means giving up, and it means the humiliation of giving up. I look at people in two groups. I look at the people that say, `What can I do to help?' and then the other group says, `What's in it for me?'

I try to find people that are willing to work toward a common goal, and I try to find people that are willing to believe in the future and that things can be done. It's the person who may not be fully grown up who says 'That's impossible.'

HATTIE: You're looking for matched values, because your goal is for everyone to be successful, and you can't bring someone in the group who personally is the only one who says, `I want to be successful.' It can't be about me. It's to be about us.

SHATAS: That's absolutely correct.

HATTIE: Beyond that, I mean, how do you make sure people are happy and coming to work with joy and doing their best?

SHATAS: Well, you share the wealth. The one thing that we did at Cybex is we always made sure that we had something for everyone.

HATTIE: OK. What do you mean `something for everyone'?

SHATAS: Well, we had so many years of hard times that when we started having some profits, we had bonuses. The very first bonus that we had, was given out because we didn't have the cash to pay the taxes on the income that we would have had. So we declared a bonus.

HATTIE: Right, and then you didn't have to pay any taxes.

SHATAS: You have 75 days to pay the cash and still take the expense, and we made it just in time. And then the people that are very, very key to the effort, they should be equity partners.

HATTIE: OK. At what point? Talk to me about this, because there are people watching this right now who have good companies and great people, and maybe they need to figure out a way to share the ownership, and they've never done that before.

SHATAS: It really depends on the owner. There are some owners that aren't comfortable in thinking of this, and it causes them grave mental distress.

And so they shouldn't do it.

But if they can't share the wealth, they should sell their company.

LB - 7

In the Studio

HATTIE: Shatas hit a home run with Cybex (Now Avocent.). It looks easy now, but don't forget that many years of struggle preceded what we see today.

Learn this from Shatas: The inventor is probably not the person who can grow a company. Shatas moved himself out of the CEO position early on. Even though there wasn't a lot of cash, he brought in Steve Thornton to run the company and took the Chief Technology position himself. Only after Cybex came through a successful initial public offering, a merger and got a new name, leaving it large and strong, did Shatas leave for his next start-up. To understand this to the core, we can go back to another entrepreneur who told us to run a business, you need a strong ego, not a big ego. This means you don't have to be in charge of everything, and you don't have to have CEO on your business card. If your business is stuck, maybe you are the obstacle. Maybe you need to be the chief bottle washer and hire a person who can lead your company into the future.

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At the monthly Angel Investor breakfast, Shatas and Bob listen as Terry Heaton, the CEO of Ansir.com, pitches for a second round of funding.

TERRY HEATON: Ansir itself is an acronym. It means `a new style in relating.'

HATTIE: Why is Shatas important to your venture?

TERRY: Shatas is a real angel. I mean, he personifies that word `angel.' He invests in people, not in business plans, and we needed somebody like him. He's kept us going. Without Shatas, Ansir Communications would not exist today.

SHATAS: I invested in Terry because he and his wife Sandra had put their entire lives into this product, and secondly, he was willing to listen.

HATTIE: (Voiceover) Shatas and Bob formed RNR Ventures to provide seed money for ideas that venture capitalists and bankers would consider to be too risky. Jeff Cameron's research attracted their attention.

JEFF CAMERON: And one of the things we have found from this particular experiment is that the rotor is moving in the direction that apparent ion wind is being generated. SHATAS: With RNR Ventures, it's got about between 20 and 30 investments.

HATTIE: I mean, if I don't have a million dollars, if I just have a few thousand, can I be an angel? Can I invest?

SHATAS: Everyone can invest. That was one of the things that we looked at with Cybex. It helped early on, not just by people who were angels, but friends and family.

I think almost everyone knows an entrepreneur that's trying to make a business happen. And I think that people should get involved, but they shouldn't get involved in just one. I've always felt they should get involved in several because investing in the beginnings of companies is very risky, and so you shouldn't put all your eggs in one basket.

And, you should only use money that you can afford to lose.

HATTIE: How do I go about selecting the investment that I'm going to make?

SHATAS: That's a difficult thing. What you've got to do is you should invest in the person. You should look at a person that's committed to making the enterprise work. And don't just invest in some great idea, because great ideas have a way of disappearing or being eclipsed by somebody else.

HATTIE: Why is this investing locally better than investing in Wall Street?

SHATAS: You should do that, too, but investing locally is a walk on the wild side, and what you can't get investing in Wall Street -- you can't always get that satisfaction of seeing that business grow and prosper.

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HATTIE: (Voiceover) Shatas serves on the board of BizTech, a business incubator that offers a jump start to technology companies.

SHATAS: Because these people are my clients.

HATTIE: You mean--have you invested in some of these people?

SHATAS: Yes. On that left-hand side, I've invested in all of those, and this is the perfect place to start a small business.

HATTIE: (Voiceover) Joanne Randolph is the executive director of BizTech.

JOANNE RANDOLPH: We do have a very stringent admissions process. We're looking for technology-oriented companies that are developing emerging technologies for the global marketplace. And they have to have a business plan. They have to have the beginnings of a good management team.

HATTIE: (Voiceover) Its client companies raised over $2 million in year 2000, all of which is angel funding, mostly at $10,000 and $25,000 and $50,000 increments. They also produced annual revenues of almost $4 million, created 70 new jobs at an annual payroll of $2.7 million.

Not bad for a handful of start-ups.

Unidentified Man: Shatas is one that we go to for logical investments, logical development steps. Shatas is one that just has that knack of understanding, you know, the entrepreneur, you know, step that you need to take. So we go to him regularly for that.

HATTIE: Good.

Unidentified Man: And we try to access him, you know, once a month, at least touch base with him.

HATTIE: So what do you think he's doing or how has he infected other people with his enthusiasm?

JOANNE: Oh, yes. Sometimes it takes that first check, and then other people are, you know, right behind him. And he's hit some pretty successful investments here, so now a lot of people are starting to pay attention to what he invests in. And if all the other successful entrepreneurs in Huntsville would do a tenth of what he does, this would be an amazing world.

HATTIE: What's driving you now?

SHATAS: What's driving me is the prospect of giving back. What we all can do is give so much back to the community and help new enterprises start faster and blossom quicker. Huntsville is a fantastic place to build a technology company. First of all, we've got one of the highest concentrations of engineers and scientists of any place in the country. We've got a great standard of living, we've got a low cost of living, we've got excellent schools.

My goal is for Huntsville to be the most generous city in America.

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HATTIE: Our marketing adviser, John Wargo, says all marketing is not the same.

JOHN WARGO: Marketing is your plan. This is the way you're going to take your product or service to the marketplace. So think of marketing as your plan, direct marketing as how you execute your plan. Now within direct marketing, there's a couple of different phases. You have direct sales, telephone sales, direct mail. So what it is, it's the difference between planning and execution.

HATTIE: OK, but if when I see big companies, big Fortune 500 companies with big, full-page ads in the newspaper and there's no call to action, there's no phone number to call, it's just a big `We're great,' that kind of ad, to me that seems like marketing whereas when I get a piece of mail, `Do you want to buy this?' that seems like direct marketing. Am I right or wrong?

JOHN: Well, I think that advertising does a variety of different functions. Frequently when you see these ads that are really corporate ads--and what they're designed to do is to try to convince the public to have a different view or a different perception of that company or that brand. And they may be trying to influence them either because of their stock, because of a variety of other issues, but they're using advertising for a corporate communication, which is far different than using advertising directly for sales. And you're right, most small businesses don't have the luxury, OK, of actually promoting their brand or their company without some call to action. My personal belief is a good product at a good price at the right place is the right kind of advertising. Most small business owners, what they do, they execute and they do it right. What you need to do is to just sit back and say, `What is it that I did and what did I do right?' Then you write your strategy. You don't have to write your strategy first.

HATTIE: Wow, I love this.

JOHN: All you have to do is to say, `What works?' and then figure out why it worked. So tactics could drive strategy, which is not what they teach you in business school. Make it work, then figure out the strategy.

HATTIE: Remember, if your business is stuck, maybe you are the obstacle. Maybe you need to be the chief bottle washer and hire a person who can lead your company into the future. We'll see you next time.