One Executive’s Spinoff Begat Second Venture : Technology: After an industry veteran built his own computer company, two of his workers found a non-competitive application for a business.
It was a pink slip that prompted Ted Smith to strike out on his own a decade ago.
A computer industry veteran, Smith had been chief executive of a Tustin computer maker called Basic Four Corp. for five years, building its sales to about $240 million.
But after a quarrel over the company’s future direction with executives of Basic Four’s parent company, he was fired. Determined to run a large company again, he scouted around for ideas. He discovered that no one was really exploiting the computer and the then-emerging optical disk storage technology to reduce the flood of corporate paperwork.
“I went to all the market research firms to find out what they knew about this application, and when I walked out of the last one, I had a big smile on my face,” Smith recalled. “I was the first to see the opportunity.”
Smith conceived a computer system to process and retrieve documents and recruited a key engineer from Xerox Corp. to help develop it. The company engineered a system to digitize information such as photos and police reports into data that could be easily stored and retrieved. Then Smith talked five venture capital companies into giving him $4 million in September, 1982.
Smith found the engineering talent he needed at Basic Four, where he recruited more than a dozen of its best managers. Then he hired a group of young engineers who could grow up with his new firm, called FileNet Corp. He halted the recruitment effort after management at Basic Four threatened to sue him for hiring away their staff.
As a tactic for recruiting, Smith promised he would let the engineers observe how the company was built from the ground up. He encouraged people to ask questions about how the company was run and gave them answers.
Some of the young engineers digested that knowledge quickly. Former Basic Four engineers David Silver and Dean Hough, both 27 when they joined FileNet, watched Smith in action. After helping launch FileNet’s first product, they decided to test their own entrepreneurial talents.
“It was clear to me that the industry was going to support more than one company,” Silver recalled. “After work and on weekends, we started kicking around ideas and found one that didn’t directly compete with FileNet.”
In October, 1985, Silver and Hough left FileNet and started Kofax Image Products. Smith was stunned by the defections, especially that of Silver, whom he privately considered a potential future leader of FileNet.
He cautioned Silver not to recruit FileNet employees, and Silver says he found the warning a bit ironic. But the pair stayed on good terms, and Smith was ultimately relieved that Kofax recruited only two of his people.
“There was this loyalty thing,” Silver said. “But we gave Ted three of our best years and did more than what he asked us to do. It would have been selfish to leave in the middle of something, so we left only after the first system was in place.”
While Hough worked on product development in a laboratory in his Irvine home, Silver drew up the company’s business plan.
Within a few months, the company lined up $4 million from investors.
Unlike FileNet, which built huge document processing systems based on minicomputer technology, Kofax focused on making circuit boards that could be added to personal computers to convert them into image-processing machines.
Kofax’s first products hit the market in 1989, and now the company has more than 100 employees at its Irvine headquarters. At 33, Silver and Hough own 25% of the privately held firm, richer than they ever could have been working for someone else. All that remains is to take the company public and become millionaires, which is a long-term goal, Silver said.
FileNet, whose sales now top $100 million annually, is about to become a customer of Kofax.
And what would Silver do if his employees left to start their own company?
“If they take 10 of my people and compete, I’d run them over with a truck,” he joked. “But if they’ve been here for years and aren’t working on a critical project, I’d give them advice and try to put them in touch with the right people.”