'We were just two guys in a little house on the prairie'

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The Independent Online
I SUPPOSE I should have grown up to be a cowboy. My father had a stockyard and feed lot in Iowa, on America's Great Plains, but he always told me the cattle business wasn't a good one to be in. So I had to figure out something else to do.

That something else turned out to be selling computers by telephone. It's a far cry from raising beef, but Gateway 2000 did start out in the old ranch house across from the cow barn and we still ship our computers in boxes printed with that distinctive black-and-white Friesian pattern.

I became fascinated with computers when I left the University of Iowa, where I had studied business management, and got a job in a retail computer store. I realised it was possible to sell something expensive over the phone if you had a good product and knew what you were doing.

I met my partner, Mike Hammond, at the computer store and the two of us decided to set up our own business in 1985 selling PCs from the ranch house, which had been converted into an office.

We had no financing and no money. We even had to rent a computer to write the business plan at the kitchen table where the hired hands used to gather for their meals. We paraded that around to the local banks. None of them would loan us any money until my grandmother was kind enough to let us use one of her certificates of deposit, for $15,000, as collateral for a $10,000 loan.

From then on we were constantly visiting the banks to try to solve our cash flow problems. The thing is that we were growing so fast, we were always struggling to pay for the next month's parts with the last month's income.

Our first business was selling peripherals, add-ons and upgrades for the Texas Instruments PC. It was technically superior to IBM's PC, with a lot of functions we're only getting today, like three-dimensional graphics, but they didn't take into account market dynamics.

Texas Instruments only sold about 100,000, mostly to other parts of the company. The machine wasn't really compatible with IBM, so it was an orphan, and other suppliers were able to charge high prices for parts.

In 1986 we began selling IBM clones under our own brand name. My brother had joined the company by then, and we employed up to 20 people assembling the components and selling over the telephone.

One of the first mistakes I made was paying the salesmen a base salary that was too high. When we went through a slow patch I put them all on straight commission. Most of them left but those that stayed really performed.

Our first jump in sales came the next year when we began taking the Texas Instruments PCs as trade-ins for our IBM clones. The machines we took in were cannibalised for parts which we sold back to Texas Instruments.

It was a bizarre irony, but Texas Instruments had stopped making parts. Our sales that year were $1.5m. With the extra volume, our purchasing power was strong enough to make us competitive in the national market.

And then sales exploded. In January 1988 we ran our first advertisement in national computer magazines for $3,500. It had a pictures of cows on my Dad's ranch and said: "Computers from Iowa?" That's how we became known as the cow company. We sold $12m worth of computers that year.

There were three secrets to our success. The first was that we kept our margins low. At first we were just two guys in a little house on the prairie. We didn't need much so we didn't charge much. A lot of the time I was living on $200 a month and paying my personal bills late, although the company's bills were always paid on time.

The second secret was that we were selling what people wanted. Most of our competitors were selling stripped-down kits. They decided how much people were willing to pay, then pulled out everything so they could hit that price point.

But we knew that people didn't really want the minimum. When our competitors were selling machines with one floppy drive, we had two; when they sold monochrome screens, we sold colour. When they had 512Kb of Ram, we had one megabyte. The computers we were selling were people's dream machines. And we continually upped the ante.

And finally, we are in for the long term. A lot of our competitors were marketing people who shift from one product to another depending on what's hot. Right now they're probably selling mobile phones or something on the Internet.

One of the reasons we were able to keep our prices down was that we weren't trying to make a fast buck. When Compaq made its big price move a few years later, we were already there.

I guess if I have one piece of advice for other entrepreneurs it would be to do it young, before you're married. Once you've got a family you've got much more at stake.

Ted Waitt's $2.5bn (pounds 1.6bn) Gateway 2000 computer company is currently invading Britain, but he got his start in business operating from the kitchen table in a converted ranch house on his father's cattle farm in Iowa.