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Change of Viewpoint

With a little luck and a lot of fast thinking, a new CFO rescues a distressed start-up from the brink.

1Feb

In the fall of 1994, when then-31-year-old Eliot W. Jacobsen joined Viewpoint DataLabs International Inc. as its first CFO, circumstances were far worse than the confident alumnus of Harvard Business School and Boston's Bain & Co. had realized. Far from a promising young technology firm in need of better financial management, the Orem, Utah-based developer and marketer of three-dimensional computer models had lost its way under John Wright, the entrepreneur who launched Viewpoint in 1988 with a good idea and great expectations.


Ensuing months would test the skills, ingenuity, and moxie of a young CFO with, seemingly, all the right stuff. Could the former management consultant with elite credentials restore the cash-strapped software firm to financial health before frustrated backers pulled the plug? A crystal ball might have revealed a thriving company in calendar 1997, with $8 million in sales and five-year revenue growth approaching 10-fold. But in late 1994, few observers would have given tiny Viewpoint Godzilla's chance against the U.S. Marines.


When he first realized the magnitude of his task, even Jacobsen became alarmed, as an opportunity to prove his mettle as a manager encountered a serious glitch. He was barely accustomed to his new office when he discovered what his due diligence had missed. Finances were so stretched that the six-year-old enterprise was on the verge of missing a $100,000 payroll and reneging on $200,000 in long-overdue payables.


Wasting no time, Jacobsen took the matter straight to the three-member board of directors, which consisted of Wright; Wright's ex-boss, Ron Woolley, who had provided some start-up capital; and a representative of Motorola Corp., which had invested $2 million only a few months before. The new CFO demanded to know where all the money had gone. Instead of an answer, his heated memo exposed a more serious problem: The three directors were not on speaking terms.


Wright's ex-boss, Ron Woolley, who had provided some start-up capital; and a representative of Motorola Corp., which had invested $2 million only a few months before. The new CFO demanded to know where all the money had gone. Instead of an answer, he learned that relations between the three directors were badly strained.


"There wasn't any mutual respect among the three," Jacobsen says, "so there were never face-to-face discussions. They sent out faxes and signed them and sent them back. That was their board meeting!" The money had evaporated after Wright banked the Motorola check and did what any nouveau riche founder might do--moved into roomier facilities, bought fancier equipment, and launched indulgent projects. By the time Jacobsen arrived, six months later, Wright had "blown through it like candy."



Off and Running

This was a long way from the company's auspicious start. John Wright had launched Viewpoint on the strength of a novel concept. "He was a great visionary," says Jacobsen. While Wright was working at a low level for a business that produced animated representations of traffic accidents that lawyers use in courtrooms, he had noted that each customized portrayal of an accident required actual measurements of vehicles and laborious translations of the data into computerized renderings. This observation sparked an insight: Instead of discarding the models after each use, why not build a computerized stable of three-dimensional images to license for use in television, movies, and computer games?


"We'd work on a law case and have two or three new cars," recalls John Thomas, an original Viewpoint mid-manager, of Wright's epiphany. "Another case and we'd have a few more. Pretty soon we had a hundred cars, all digitized. One day, a competitor called and asked if we had an '87 Thunderbird model. We did, and we licensed it to them. We realized there was residual value in our collection, so we started letting people know that we had cars. It was a novel concept."


"Most people in their right minds wouldn't have started a company like this back then," says another associate. "When we made the decision to stop doing service work and just sell these models out of the library, we cut off all our revenue, because the market wasn't mature. But John put everything he had on the line, from credit cards to student loans." Wright had a fountain of ideas; the problem was that he would act on the worst as often as the best. He nearly sank the company when, on a whim, he decided to package 3-D dinosaurs for the home market, pulling his graphic artists off Tauruses and putting them on Brontosauruses. Viewpoint ended up eating software by the palletful. Another time, he trekked some key engineers to the Indianapolis 500, where they hung around the pits merely measuring race cars. Again, several hundreds of thousands of dollars later, no market.


With growing cash flow and bright prospects for the fledgling company, the inexperienced Wright overlooked such management tools as budgets and cost controls--to say nothing of leaving the CFO post unfilled. Instead, he ran the company subject to his whims. To slash overhead, he determined one day to fire all his artists and replace them with outside artists paid by commission--until appalled colleagues convinced him not to outsource Viewpoint's primary source of revenue. On another occasion, Wright recast his egalitarian no-title, no-turf culture into the opposite--a hierarchy of vice presidents each directing a handful of employees. Wright appointed Jacobsen president more than once, only to withdraw the title a couple of days later.


Jacobsen calls Wright's pattern of lurching from one decision to the next "guardrail-to-guardrail" response. That's okay, says Jacobsen, "if you're driving a little car." Wright, who was interviewed for this story, disagrees with a number of points made; other sources substantially support Jacobsen's account. But as Viewpoint surpassed $3 million in annual sales, the system was breaking down. "There were no rules," recalls one veteran. "No development plans. [Wright] prided himself on keeping the company stirred up, because that was the way he maintained control." By the time Jacobsen arrived, however, the guardrails were ready to crumble. In 1994, Viewpoint posted record revenues and record losses. Downward momentum continued into 1995, when revenues topped $5 million while losses exceeded $2 million.


In hindsight, Jacobsen's arrival was serendipitous for both him and the company. Coincidentally, while at Harvard, he had helped develop a business plan for a mock company called The Digital Production Studio. (The plan subsequently would become, with IBM funding, today's Digital Domain.) On a business trip in 1994, he happened to be seated near Wright on a plane and spotted his catalog of digitized models. The two computer-simulation aficionados got to talking, and the then-36-year-old Wright invited Jacobsen to visit Viewpoint on his next trip to Utah. "Our VP of finance is a fine accountant, but I need help on the strategy side," he explained. "That's good," replied Jacobsen, "because I'm not an accountant."


One of Jacobsen's clients at Bain had been Dun & Bradstreet, whose core-content business, selling and reselling data out of a computer archive, Jacobsen admired because it "makes money while they sleep"--the correct course for Viewpoint, even if Wright did not yet realize it. "D&B supplied the Legos and let their customers put them together as finished content."


But no sooner did he unpack at Viewpoint than the evidence of turmoil beyond financial statements began to unfold. "Ten people a week poured into the office, each complaining about lack of leadership and how the company was screwing up," he says. One disgruntled worker complained that Wright "would have a screaming fit when he found out someone was working outside the company." Although Wright may have had grounds for sensing disloyalty, his volatile response only aggravated disaffection among the artists Viewpoint relied on. In equally mercurial fashion, he dissolved teams of artists he'd assigned to particular projects after three members of one team left suddenly to start their own company. "He resented the loyalty that teams engendered," Jacobsen learned. No wonder that, on a visit to the production area to give a pep talk to the company's creative corps of some three dozen computer-trained artists, Jacobsen found them not at workstations concocting fanciful images for clients, but playing Frisbee in a nearby park.


Faced with imminent disaster, Jacobsen called on Viewpoint's only short-term funding source, Motorola, and coaxed $1 million more from it--$300,000 to meet payroll and accounts payable, $700,000 to "tide us over." That had to suffice, since Motorola had the right of first refusal on all new investments and to acquire Viewpoint in its entirety when its holdings reached 50 percent of Viewpoint's equity capital. For a mere $8 million more, Jacobsen calculated, Motorola could own the whole shooting match. "I didn't come all this way to become a Motorola employee," Jacobsen told himself. He staved off that prospect by convincing Motorola to fund Viewpoint through convertible debt. Proceeds from a subsequent offering to new investors would be used to redeem the convertible and reduce Viewpoint's dependence on Motorola.



Little Fish

It so happened that investment banker Hambrecht & Quist LLC was holding a red-herring conference--at which capital-aspiring companies present their cases to professional investors--just up the road. Too broke and disorganized to make a presentation themselves on such short notice, Wright and Jacobsen brought a stack of catalogs and piled them on a table. "We heard this guy call out, 'Hey, whose is this? It's great!'" reports Jacobsen. It was Roger McNamee of Integral Capital Partners, who got so excited that he called Kleiner Perkins Caufield and Byers, the well-known Silicon Valley venture firm. "You've got to see this," he urged its technology partner, John Doerr. One VC led to another, and shortly Hummer/Winblad Venture Partners joined the group. Soon the three firms together had put in a heady $5.75 million, spiriting operations from the rut it was in and reducing the company's hapless founder to a little fish in a big pond--at 5 percent ownership, a very little fish.


The investment round reconstituted the balance sheet by forcing Viewpoint's original investors--a dozen of Wright's family members and friends--to sell their shares. "We had to do it," he says, "because the VCs required more ownership than the company's dilution could afford." Viewpoint began the fall of 1994 with a new board--and a search for a new president. "While some founders can go from 0 to $50 million," Jacobsen realized, "John worked best in first gear--from 0 to $3 million. He was 100 percent right-brain. He had the kind of contagious enthusiasm that no business can replace. If he hadn't been that way," Jacobsen realizes, "I wouldn't be here today." Even so, as a leader, Wright often blurred the line between persuasion and manipulation. "If he wanted your opinion," says Jacobsen, "he'd give it to you."


Jacobsen began repairing the damage. "I wouldn't call it a turnaround," he says. "It was more a restart, like a computer. If a business crashes, you load the programs in a different order and, sometimes, it works." One such program was sales. Viewpoint had a reactive sales force used to selling models one at a time. "We'd send out the catalog and sit back until the phone rang," Jacobsen complains. "Well, you can't sell models one at a time. It's like selling one aspirin at a time to whomever calls in with a headache." Appointing himself vice president of marketing, he composed a product line called Collections and Libraries. It comprised bundles of models offered as discrete entities "so we could proactively turn ourselves into a product business."


If the transition from reactive to proactive was a key to reviving Viewpoint's growth, so was the transition of the chief executiveship to Martin Plaehn, a charismatic leader who had run a software company that had been purchased by Silicon Graphics Inc. and whom the board (now controlled by the venture group) hired in April 1996. "You have to hand it to John," says the sympathetic Jacobsen, who admires Wright's acquiescence to a new CEO and his subsequent distancing from day-to-day participation as nonexecutive chairman. "It never got ugly, although before Plaehn's coming [Wright] was a bit nervous. He recognized what was going on and wanted to sell the company quickly, rather than, in his words, 'give it to Martin.' I told him, 'John, that's a suboptimum outcome.'"



Instilling Trust

Among the legacies Wright left was an inchoate salary structure that none of the company's 40-or-so talented computer artists--modelers--understood. And radically changing it is among Jacobsen's legacies. "I would describe the culture in production as sick," he says. "Morale was horrible. One modeler would be working next to another whom he knew was making twice as much, yet was only half as productive." To restore order in their ranks, Jacobsen and vice president of production Walter Noot devised a method that compensated the artists not randomly as before, but by work/reward accounting.


In bare bones, it goes something like this: Every job that comes in is appraised in terms of time and skill needed and is bid for in-house by artists who are seeking a position on the project. And every model generates the same pay, regardless of who works on it. Experienced and inherently fast team members get their work done more quickly than less experienced and slower team members, and are then free to move on to bid for another job. So, although everyone is paid the same scale, the experts and harder workers can complete more jobs in the same amount of time, taking home more pay. And on the P&L, productivity soars while total payroll hardly budges.


"The biggest problem with the old culture was that people didn't trust the company," says Jacobsen. "Our new meritocracy is a practice people trust. Creative people want to control their own destiny. It changed from a 40-hour-week-and-forget-the-company to a 55-hour-week-remember-the-company; you see them here at 2:00 in the morning. Nobody talks about moonlighting anymore, because they can make more money right here."


"This is a different company," claims long-time employee and now vice president of operations John Thomas. "We were ready for change. We wanted something to happen so badly that our people weren't as scared as they might have been in other companies. This wasn't a shock to anyone."


Far from the disheveled nest of grousing workers that was the company just three years ago, Viewpoint is now home to 90 contented employees. Productivity leapt 60 percent, with revenue per employee soaring from $40,000 to $100,000 a year. Viewpoint dominates the 3-D modeling market, its digitized creations utilized in TV commercials for Oldsmobile and Dodge, Reebok and Nike, Miller and Bud, as well as in such Hollywood phantasmagoria as Independence Day, Apollo 13, and, yes, Godzilla.



Robert A. Mamis is a writer in Hull, Massachusetts.

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