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Gabriel P. Fusco, Sequoia Systems Inc.

The Chairman and the Board

"Boards come in a variety of flavors," observes Gabriel P. Fusco, Chairman, President, and CEO of Sequoia Systems Inc. And some of the flavors aren't too appetizing. The head of this fast-growing computer systems company based in Marlborough, Mass., was reflecting recently with Directors & Boards on his experience with boards during times of great duress --trying to turn around shaky start-up companies while reporting to boards dominated by venture capitalists and other financial types.

Following a 26-year career in sales and marketing with International Business Machines Corp., Gabe Fusco seized an opportunity to run Iomega Corp., a manufacturer of computer data storage devices. The company badly needed sales and new capital. He characterizes his first six months there as "taking a firehose M.B.A." From sales of under $1 million when he arrived in 1983, sales grew to $126 million when he left four years later, following a disagreement with the board on strategic direction. His tenure with Iomega was his first experience with boards, venture capitalists, and the investment community. The lessons, not all pleasantly learned, he admits, would come in handy again at Sequoia Systems, which he joined after leaving Iomega.

In a conversation with D&B Editor James Kristie, Fusco describes how the "flavor" of the Sequoia board changed from one dominated by the founding venture capitalists to a more balanced board composed of strong individuals with different backgrounds and a shared commitment to the company's success.

"Sequoia was very much an analogous situation to Iomega, only a bit worse. The company was broke and was relying on the largesse of the lead venture capital firm, which was basically funding the company on a week-to-week basis.

Sequoia's product is a high-performance multi-processing, fault-tolerant system in the online transaction processing marketplace (OLTP). With this system, you process a transaction instantaneously when it's made available to the system for processing, as opposed to batch processing -- accumulating data and then processing it once, twice, or several times a day. OLTP is probably the single fastest-growing market in the data processing community, because everybody wants to do everything yesterday, we don't want to do it tomorrow. What I saw at Sequoia was an architecture that could be exploited over a long period of time.

I had four assignments when I got there. One was to take a product that was running behind schedule and get it to the marketplace. The second was to raise some badly needed capital. The third was to find a way to sell this product, because we really did have a great architecture and a great product. Last, but not least, was to create a team that could make this happen. Fortunately, most of those things came to pass -- we raised the money, we've sold the product, we've never been behind schedule since that time, we have a good team, and we're now a public company. We've also achieved something else that has contributed importantly to our success. We've built a superb board, one that dramatically increases our management resources beyond those that any company our size could afford.

The most important thing in a board is who manages the board and how the board participates in the day-to-day activities and in the strategic planning of the company. The first flavor of a board is the one at Iomega, which was totally dominated by one person. Strong people tend to want to exercise power. I certainly like to do that myself, so that's not a negative comment. What historically happens when you have a board that is dominated by a non-active chairman -- and by people who owe their allegiance to that chairman and not really to the company -- is that when things are good, you never hear from the guy. However, when things are bad, then all of a sudden you get into a lot of interaction. And it becomes horrendous when, the way I describe it, there is a belief on the part of management that you should go to the West Coast by way of Chicago and the other guy thinks you ought to go by way of Toronto.

When I came to Sequoia, the board was very different than the board we have today. On the board were David Arscott and Leal Norton of Arscott and Norton, the original investors in Sequoia -- the founding venture capitalists, in a sense. Over a period of seven years, Arscott and Norton had put about $29 million into this company and at one time owned about two-thirds of the company. Leal clearly was the dominant board member. He managed the board as well as the company, which can cause many problems. There had been a lot of management turnover. The board lacked balance and diversity, basically because Arscott and Norton controlled the funds.

The board at this point was composed of three company insiders and three venture capitalists, all from the same firm. The first step in balancing the board was to limit insider participation to myself, and to ask one of the venture capitalists to step down. We would be a three-person board until we financed the company. |In return,' I told them, |you won't have to send us any more checks. I'm going to cut the executives' salaries, including my own, by 50%. And I won't bring the salaries back up until I find a bank to lend us money.' I had been told I had to raise $3 million to make the company successful. It was clear after being there for two weeks that we needed a minimum of $8 million. So there was a major task ahead of us.

It worked. We convinced banks to lend us a quarter million dollars, then a half million. We never missed a payment. Everyone was on half-salary for about 10 weeks. We actually ended up raising $12 million instead of $8 million. Unfortunately, Leal passed away a year ago last April, just before the company really turned the corner. I'll be the first to admit that the company wouldn't be successful today without Leal and David's support.

The second flavor

The second flavor of a board is what we have today -- a group that is very active, very supportive, and non-interfering, and where the clear dominant force is myself. And although some of the directors are here in part by virtue of their investment, the difference is we had built up a relationship, and they invested in some measure because they trusted my ability to make it happen.

This board is what I think a board should be for a company like ours -- successful individuals who are committed to the company and to working in harmony. The board consists of representatives from three different venture capital firms and three different operating companies. Each brings a different strength, expertise, and experience.

I asked Joe Henson to join the board because of his strong operational background and his prominent position and 30 years of experience in the computer industry. He has run Prime Computer Inc., a billion-dollar computer company, and had been an IBM vice president in two of its divisions -- marketing and development. Joe and I had been associates at IBM. When Joe joined the board, he had retired as CEO of Prime Computer. But about six months later he went back to work and is now chairman of Legent Corp., a provider of software.

Mike O'Donnell is chairman of The Ultimate Corp. Ultimate is the world's largest distributor of Pick systems, a unique operating system that runs on many different hardware platforms, one of which is Sequoia. Ultimate had been looking for a high-performance system. We worked together, and they became our distributor. As part of that transaction, Mike came on our board and I went on the Ultimate board. Ultimate Corp. is also an investor in Sequoia. Mike is another strong operational man with a different background than Joe. He is younger, he has a CPA, and he had been CFO at Ultimate for some time. So he has a strong heritage as a financial person.

Dean Campbell is partner in a company called Campbell Venture Management, a successor company to Arscott and Norton. Dean has an M.B.A. from Stanford and is on the boards of several other technology-based companies. He has a very good working knowledge of Sequoia. During the most tyring days he was the guy who would visit once a week to decide whether we should get paid.

The anchor investor

Bill Harding is a partner at J.H. Whitney & Co., one of the leading venture capital firms in the country. Bill is also a board member by virtue of J.H. Whitney's investment. In all candor, I did turn down some other people who made that a conditions of their funding, but where I just didn't think it would work. Bill was really the anchor investor that I brought on board. Whitney is about an 8% holder, and at one time was closer to about 12% before our public offering. Bill has a Ph.D. in computer science. Prior to becoming a venture capitalist, he had been a computer architect at Amdahl Corp. So he has a very rich technical background and is very helpful in technical kinds of issues. And when I need to have a consultation outside the management team, Bill is a terrific guy to have it with.

Frank Hughes is a partner at American Research & Development, another venture firm. Typically, someone with ARD's investment -- it owns less than 5% -- would not really be a candidate for the board. I asked Frank to join because I found him to be a terrific, competent person. His background is engineering. He has an M.B.A. from Harvard. He has been with The Boston Consulting Group. He is a tremendously analytical person. I can call Frank and get his opinion on any situation. He is direct and honest, and that is what you need. He serves as the chairman of the audit committee. He is very thorough and willing to give it all the time it needs. Because he is in Boston, it is easy to see him, and the Arthur Andersen people respect him.

Hewlett-Packard Co. is a major investor in Sequoia. It has an observer who is allowed to come to board meetings. He is the senior executive in their general systems division, which is the division with which we did the strategic alliance. The agreement is that no one below his level would be allowed to come to board meetings or to join the board. He is very sharp, technically oriented, and attends about 75% of the board meetings. He gets treated exactly like any other board member. The only time he is excluded from meetings is when we're discussing the HP relationship or other competitive situations. So he has the best of both worlds. He can come and here everything, but he doesn't have any of the responsibilities or any of the liabilities.

The board is there when you need them. I will call them because they will be helpful and instructive.

An example of our board support is when we're negotiating major contracts. I believe in getting the board involved early. But you don't have tome to get the whole board involved. So I adopted a technique that gets two of the directors working on a particular project. When we did the strategic alliances with HP and Samsung Electronics, I asked Joe Henson, because of his operational background, and Bill Harding, because of his technical background, to get involved. It was mainly to test ideas as much as anything else. Just the ability to bounce ideas off of somebody who isn't in the bowels of the process really is a pickup.

A master salesman

Because of his long history in marketing and sales, Joe Henson is very helpful to us in these areas. The funny things is, I haven't met anybody in the computer industry who doesn't think he knows how to sell a computer. But Joe really knows how to sell.

Right now our business is approximately 75% indirect sales and about 25% direct. Indirect means selling your machines to somebody else who puts them in the end users' hands. HP is an indirect channel. It buys our machines and resells them. Direct sales is through your own sales force. Our goal is to be about 60 percent indirect, 40 percent direct over the next two years.

The second aspect of our growth is to develop strategic alliances of one type or another. We have three of these today that take different guises and we have several others in process. Our goal is to continue to find markets that these parties can penetrate for us because they have a unique presence in those marketplaces. Our strategic alliance with Samsung, for example, opens up Korea, one of the world's fastest-growing marketplaces, for our product, as well as having them as our development partner in new products. The way I describe it when I meet with a company is, "We have a blank sheet of paper. We can construct any kind of deal that's a win/win for both companies.'

Board of Directors Sequoia Systems Inc.

Dean C. Campbell

General Partner

Campbell Venture Management Gabriel P. Fusco

Chairman, President, and CEO

Sequoia Systems Inc. William J. Harding

General Partner

J.H. Whitney & Co. Joe M. Henson

Chairman and CEO

Legent Corp. Francis J. Hughes Jr.

General Partner

American Research & Development Michael J. O'Donnell

Chairman, President, and CEO

The Ultimate Corp.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:The Chairman and the Board
Author:Kristie, James
Publication:Directors & Boards
Date:Jan 1, 1991
Previous Article:Consultants get the nod.
Next Article:The director as servant and leader.

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