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Cultivating a Company in Cyberspace

Hal Barbour, President, CAST

When I started Lineage and four friends of mine simultaneously started Computer Aided Software Technologies, now merged as CAST, we worked for zero salary the first year—and the second year wasn't much better. The first step in starting a virtual company, it turns out, is to check your ego and your taste for the good life temporarily at the door.

If your identity is tied to a modern high-rise office and an expense account, then the reality of a virtual company may not be right for you. If, on the other hand, it is ownership of the business and control of your destiny that you value, then starting a virtual company can have great appeal.

Our primary reason for starting "virtual" was to conserve cash, so our future would not be mortgaged to short-term investors. A good virtual company utilizes unconventional approaches to conserve cash while, at the same time, providing the outward appearance typical of a well-financed pre-IPO startup.

In a business like ours-developing and selling intellectual property software products and services used in the design of electronic integrated circuits-the more complex your product and/or service, the more flexibility you'll need to capitalize on emerging opportunities. When we started our business more than thirteen years ago, the current market for our products did not even exist.

We began in a related area, software simulation models, and early on recognized the opportunity for this new, synthesizable IP market segment. Luckily, we were able to shift our focus quickly and take advantage of the market opportunity we saw.

Keep Appearances Up, Expenses Down

Behind every virtual company is some very real, sophisticated machinery. We've found these elements to be most important.

  • Home offices. Recent advances in communications, computing, and Internet services make it possible to operate from home offices much more productively and cost-effectively than from expensive, central office space.
  • Communications storefront. Advanced telecommunication hardware and services give our "virtual storefront" the outward appearance of a much larger company.
  • Web-centric business focus. From sales and marketing to product delivery (we have an advantage here, being a software company) and issuing invoices, nearly all our critical business processes utilize the Internet. For example, few of the hundreds of bills we generate each year require a paper invoice, and collections for overseas sales occur electronically.
  • Outsource non-core services. A key to any small-business success is to understand your distinctive competence and focus your efforts on that area. This is particularly true for virtual companies. At CAST, we are mostly electrical engineers with superb software-development and support skills. We focus on creating first-class software products and customer-support services for chip designers and rely on outside partners for a substantial percentage of our total labor. This includes services such as payroll, legal, financial, tactical marketing, distribution, and engineering subcontracting.

Real Connections with Real People

Once it's established, keeping the virtual company running successfully brings some challenges not usually present in the traditional firm. Most significant, team members spend a great deal of time working alone in their home offices, and there is a real danger of isolation, fragmentation, and detachment from the real world. We've found several steps that help prevent isolation problems.

  • Regular operational reviews. Every two or three weeks we all meet in person to review all relevant aspects of the business, including the current balance sheet, the order forecast, and an actions list containing prior commitments and necessary future actions.
  • Create an operational structure. In some respects, virtual should not mean informal. It's easy to fall into the trap of not writing down a set of managerial and operational guidelines that people can use to measure their own contribution against return. There should be a formal document, reviewed and approved by the core team, dealing with issues of compensation, bonus, individual responsibility and authority.
  • Maintain outside relationships. Everyone is encouraged to develop relationships with and and maintain relationships with outside experts, includingAlso It can be beneficial to establish  people in the investment community. You may not be looking for outside funding right away, but these connections can be important later on.

What Lies Beneath

Another sometimes-overlooked step for a virtual company is to establish a set of founding principles or "shared values" that the company lives by and with which everyone agrees. For CAST, these are:

  • Survival means meeting payroll. The company must do whatever is necessary to meet its primary obligation to provide compensation to its employees and subcontractors.
  • Name and reputation are your only assets, so guard them like crown jewels. This may require that everyone go far beyond initial anticipations to ensure that every customer is happy.
  • Develop a focus plan. This doesn't have to be written out, but the company's business focus must be discussed and understood by the core team. Then all reasonable attempts must be made to take only business that conforms.

Frugal With Finances

The virtual company should also employ simple and conservative financial methods. For example, we only declare revenue when the check is deposited in the bank, simplifying cash-flow calculations, and we utilize the Simplified Employee Plan (SEP) as a means to create a retirement plan with minimal overhead.

We also give outside obligations priority over those to the employee-owners, meaning that obligations to subcontractors are met ahead of those to the core team. By being self-financed, all owner-partners share in the company's successes and develop from the outset which leads to more efficient operations and frugal spending.

Life in our virtual company hasn't always been ideal, and our conservative approach meant that we had to wait for the material rewards. We continue to experience excellent growth, and at some point will have to consider a more traditional structure.

© 2007 Hal Barbour. All rights reserved.

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