by Bob Andelman

In the first six chapters of PROFIT DRIVERS, we examined the six most enduring and reliable signals of profitability in business.

The seventh and last profit driver combines all six of the others and turns the laws of probability inside out and upside-down. It is the element of surprise.

From what thin air did MBNA and Capital One emerge? Where did Fiserv come from? All three took advantage of industry-wide, structural changes in financial services. In other words, they applied an appropriate business design model to the structural change, and built themselves into high growth, multi-billion-dollar companies. Capital One, for one, has more than 20 million customers. That was as many customers as AOL claimed before its merger with Time Warner. That's big money.

An investor looking around for a new Cinderella growth company in the financial services sector must pick up on some structural change that they think is under way, and then figure out who it is that benefits from that change.

The people who have all the business today will not keep it. It is the same as the trucking company versus the railroads. Once upon a time, the railroads controlled virtually all interstate commerce business. But then the federal government laid down a vast Interstate highway system across the United States, and the trucking companies could provide more targeted services. They grew by taking business away from the railroads because they could provide a better service at a lower price. MBNA does that in the personal loan business, Fannie Mae does it in the mortgage business, Fiserv does it in the processing business, and so on and so forth.

Who in their right mind predicted eBay would be one of the most credible, enduring and profitable concepts to emerge from the Internet free-for-all? It's the world's largest and most inclusive garage sale, millions of people selling their unwanted junk and dust collectors to millions who do.

Maybe the same people who called eBay right predicted the success of the Home Shopping Network correctly 20 years earlier. Oh, that's right ­ not many people saw that as a long-term business, either.

And what about Celera Genomics, the come-from-nowhere private company that decoded the humane genome in two years, a project the federal government ­ which was funding its own study ­ said would take 20. Nobody took Celera seriously. Not, that is, until it announced it was done, 18 years ahead of the United States Government.

eBay and Celera are two companies on the radar screen today that people are buying with an eye toward potential long-term growth. How do these companies beat all the odds and the naysayers to materialize out of thin air and turn the world around them on its head?

Management, a finely tuned business model design, the spirit of innovation, a need for profitability, peerless connectivity and ­ you see it now, don't you? ­ an element of surprise.

Flame On, Flame Out

One of the questions we explored is, how does management really operate its business? Being profitable is about more than just marketing. The dot-coms flamed out because they didn't know how to operate. They had great marketing plans, great volume plans ­ and great Web sites, of course ­ but once they got big enough to do something big, they didn't know how to operate a business.

Before the dot-com virtual bubble burst in late 2000, the business press was filled with stories of experienced managers and financial people leaving Old Economy operations for New. They moved over because of the options and the Gold Rush mentality. They thought they could get rich quickly.

Priceline.com looked great ­ until people started studying it more carefully, reading the fine print, and listening to the cacophony of unhappy customers who did not. Finally, the elder statesmen on Wall Street dared to point out, "You know, you really do need profits to make money."

Take CompanyGreenhouse.com. It leased three floors at the height of Internet mania near the famed Harvard Club in Manhattan. It was still expanding when it signed long-term leases for similar space in Atlanta and Charlotte. And, of course, it recruited high-salaried technology workers to fill those new offices. Those were dumb things to do. An experienced manager should have said, "Let's see where the market is going before making those moves, because that is money we will never get back." When a company signs a lease for 10 years, it will pay for 10 years. It can't get out of that. Those are fixed costs, and smart business leaders want to keep fixed costs as low as possible.

Sure enough, CompanyGreenhouse.com, which started life with 14 employees, swelled to 143 across its three offices. But shortly after opening in Atlanta and Charlotte, confidence in the Internet sector collapsed. CompanyGreenhouse.com shrank back to 60 employees and one location: Manhattan. It hopes to one day sublease its dark Atlanta and Charlotte offices ­ if its New York City location doesn't close first.

Many of the dot-coms felt that marketing expenses really weren't expenses. They believed they had to spend and spend and spend to get their name out, develop buzz. That really was an expense in dot-com companies, just as it is in traditional businesses. But the dot-coms would say to people, "We are making a lot of money ­ if you discount the marketing expense." Well, that doesn't make sense. It is an expense. You can't discount that.

That said, there are still some good dot-com ideas out there, but ideas don't manage companies. If you want to see well-run, profitable dot-coms, look for the ones that are privately held and have been at it for more than six months. They're growing at a scale that reflects their immediate business prospects, operating outside the sphere of Wall Street's expectations and pressures. They are the proof that you can do business profitably on the Internet, but maybe not the way Wall Street expects it to be done.

Chocolate Tastes Good;
Internet IPOs Taste Bad

People got a little carried away with just how relevant and how profitable the Internet would ultimately be, so as those perceptions were reeled in, it affected every Internet company, the good, the bad and the ethereal.

In Portland, Ore., there is a little Internet-only company called Chocosphere.com. All it does is sell premium, international brands of chocolate. Call Chocosphere on the phone and Jerry or Joanne Kryszek will take your order. They don't run a store, they don't do mail-order catalogs. And while families like the Kryszeks are tarred by the whole dot-com fiasco brush, they never went the IPO route. Instead, their business grows organically, and it's been modestly profitable since 1999.

"We're doing it the old fashioned way, from the ground up with a helluva lot of sweat," Jerry Kryszek says. "I can say that our bottom line is better than Amazon's, but that's pretty easy."

Started for less than $50,000 of their own savings when Joanne thought her government job might be eliminated (she has since retired; he has a hand in a family clothing business), the Kryszeks keep on truckin' by keeping overhead low and funneling all profits back into the business. That keeps them from borrowing or taking on stockholders.

Chocosphere relies on word of mouth advertising, endorsements by the Wall Street Journal and Food & Wine magazine, and online search engines for advertising. Its all-important Web site, which makes Chocosphere a neighborhood sweet shop for the entire United States, was designed in 1998 by the Kryszek's then 15-year-old niece.

Among the company's 200 SKUs are brands such as Café-Tasse, Callebaut, Jacali, Côte d'Or, Valrhona, Michel Cluizel, Galler, Schokinag, Max Brenner, Nirvana, and Scharffen Berger.

All the chocolates sold on the Chocosphere Web site are available elsewhere; the Kryszeks don't make any of it themselves. What do they offer? "A quality product and service, service, service," Jerry Kryszek says. "If I can't offer service, what do people need me for?"

If the other dot-com folks hadn't screwed up so badly, the Kryszeks would probably do dramatically more business, Jerry Kryszek says. "I imagine there are a lot of people who got burned by the big boys that grew too fast for their britches and those people will never do business with a dot-com. But the people who have done business with us judge us by who we are and what we've done, not what other people have done."

There are no IPOs in the Kryszek family's future. But they're always open to making a deal.

"If Bill Gates came around and wanted to buy my chocolate company, we could probably work a deal," Jerry Kryszek says. "I'm married to my wife, not my company."

There are more companies out there just like Chocosphere that are doing a good job running their Internet businesses; they are just not publicly held.

There are some dot-com business design models that simply made no sense. You cannot make any money selling low-margin pet food online because the weight of shipping it one 30-lb. bag at a time is unreasonable.

Other companies spent money against a possibility of making money, but the window was narrow and they spent themselves into bankruptcy. A lot of those companies would still be viable on a much smaller, Chocosphere-scale but they gave up under pressure from the public markets and venture capitalists.

An even bigger issue was a lack of knowledge about what the Internet's fundamental economics were and what rate of relative investment made sense. There really is only one Amazon, and for all the criticism the company took with regards to its stock price, it is still in business, and its market is still quite rich. Amazon was first in, it lost a lot of money, and it was terribly inefficient about the way it started out, but it survived. It is a viable business. Nobody knows exactly how big or at what level profit, but it made it.

Amazon's success created pressure for other ambitious Internet companies ­ if they were going to make it big too, they had to go for it while the window was open and the capital was available.

What drives the profitability of an industry and our understanding of the inherent profitability of an industry and why a company might be able to do better than that, has to do with competitiveness and the opportunity for differentiation. Some of these Internet businesses simply ­ economically ­ didn't make sense at start-up. But an existing player that can leverage its assets ­ whether it is a brand name or a marketing budget or a fulfillment center ­ might see the Internet as a complementary new channel, contrasting with a startup that sees it as the only channel.

Pre-Internet mail order catalog companies do wonderfully on the net because they are already marketing a catalog. The heavy-duty lifting ­ creating the catalog, photographing the product, writing descriptions, building an inventory and fulfillment infrastructure ­ is already in place, so adding the Internet channel is a relative walk in the park.

Most pre-existing catalog companies should kiss Amazon.com founder Jeff Bezos' feet for his ground-breaking work that made millions of customers adroit and at-ease with online purchasing. At the very least, they might consider buying a few more books from Bezos. He sure does need the money.

Bay of Fleas

When eBay started out in 1995, it was envisioned as a San Francisco regional service that primarily attracted buyers and sellers of collectibles. That evolved quickly and you can now sell almost anything from almost anywhere in the world on eBay.

Collectors exist in a virtually underground economy of flea markets, garage sales, antique stores and conventions. But all of these businesses are inherently inefficient. Think about the person who gets up at 4 a.m. on a Saturday morning, packs the station wagon, drives to the flea market, stands behind a table for 12 hours, packs it back up and comes back the next day. What eBay offered for the first time was an undeniable reason for the Internet as a more efficient means of trading than the alternative. The customer, both seller and buyer, found it more efficient to trade.

When people used it primarily to trade collectibles, eBay was a tool for acquiring products that you couldn't buy in a mall. That made it a grass-roots kind of industry.

eBay is far more than collectibles and flea market vendors now. It attracts all manner of sellers and merchants. Traditional retail sellers who once bore lonely vigil at their cash registers all day waiting for customers to find their shops now put their entire inventory up for sale to the highest bidder. And the seller in Moosehead Lake, Maine, now has access to the same people as merchants on Madison Avenue, South Beach, Rodeo Drive, the Champs Elysees, and the Englishtown, N.J., Flea Market. The customer came out ahead on both sides.

Think how many B2C ­ business to consumer ­ companies imploded while eBay, once a relative mutt in the online Westminster Dog Show, apparently picked the right model and the right ingredients for long-term success.

What's strange about eBay is the number of closet buyers and sellers you find. There is the trade magazine editor, a wife and mother, who somehow found time to build a thriving eBay business by buying and selling antique jewelry. She did so well with it that she now supplies brick and mortar retail boutiques in Las Vegas and Key West with her finds. Or the regional manager of an audiovisual equipment company who feeds his Beatlemania by bidding simultaneously on dozens of mementos that bring him closer to John, Paul, George and Ringo.

The flea market business has been around for probably a thousand years. But it always bore barriers to entry. You had to deal with the public face to face, haggle over price, be patient. eBay is a long-term, sustainable business because sellers can post their items for sale and not do anything for up to 10 days as potential buyers place bids on their goods. Buyers, meanwhile, can shop at all hours of the day or night, hunting down their fondest desires in the privacy of their own living room. Even their spouses need not know they've bought a complete set of 1964 World's Fair glasses until UPS knocks at the door.

eBay rapidly developed a high-end as well, culminating in its acquisition of Butterfield's Auctioneers (now eBay Premier), iBazar S.A, a Paris-based online auction house, and strategic partnership deals with Walt Disney and Warner Bros. and the NFL. A partnership with Wells Fargo led to the creation of an exclusive online eBay e-payment service, Billpoint.

This is the most efficient, democratic auction model ever conceived. And eBay is so popular and easy to use, not even Yahoo!'s competing no-fee auction could approach eBay's volume of merchandise and eyeballs.

In 2000, according to the company's Web site, the eBay community spent more than $5 billion in annualized gross merchandise sales.

"All that, to me, says that there is a reason why this sector will continue to grow," says David Ricci, a principal and securities analyst at William Blair & Co. LLC in Chicago.

What is the underlying customer proposition at eBay? Is what it is doing for consumers that much better or different? In the end, it is all about selling something to someone, right?

Think about customers. What is the underlying customer proposition that this company offers that would cause more and more customers to want to do business with it?

Why would any customer prefer to do business on eBay versus the old economy? And why would someone want to do business on eBay versus some other online alternative?

Yet another method of selling merchandise around the world is via a newspaper's classified ads. A three-line ad in a Chicago newspaper might cost $100 for four days. Somehow, every pertinent detail must be squeezed into those three lines or the price goes up. The seller must wait at least a day for the ad to be inserted, go to press and be distributed to homes, offices and newsstands. In one of the United States' biggest newspapers, it might be printed in 500,000 to 1 million copies. If the ad is even a modest success, the seller will answer telephone calls from genuine and screwball callers for the four days ­ and four nights ­ the ad runs and beyond, because that's just the way people behave. Then the general public will traipse out to the seller's house to look at the item, play with it, test drive it, or chat about how they had one just like it as a child.

Now, compare that experience to selling a product on eBay.

The eBay seller writes as in-depth a description of the item as he or she chooses; there is no extra-charge for verbosity in this corner of cyberspace. The seller can post an unlimited number of color photographs or even short videos at no extra charge. Listing fees are set on a sliding scale based on asking price; the seller also pays a percentage of the final value price to eBay, a bite that newspapers don't take. Once the seller is satisfied with the design and content of the ad, he or she decides on a 3-, 5-, 7- or 10-day bidding period, clicks "Submit the Listing" and the bidding is on, instantaneously. Within seconds, potential buyers from Addison, Ill., to Zanzibar will view the product, description and photo and place a bid. A new feature, "Buy It Now," allows eager buyers to snap up items at the seller's dream price and short-circuit the traditional auction process.

What does eBay offer that other online auctions don't? In hindsight, it is so obvious, although in the beginning it was not as obvious. There is an element of scale in this business in terms of buyers to get sellers and sellers to get buyers. They all want to go where everyone else is.

In this business, being first and being fast means everything. Scale is the key. Yahoo! and Amazon.com both host online trading venues that never took off. eBay beat them to it just as Yahoo! beat AltaVista, Hotbot and Lycos and Amazon trumped Barnes & Noble and Borders. In Japan, a Yahoo! joint venture is the leading online trading platform because it got there first. eBay got there second.

The issue of innovation is crucial here. eBay was first, it is fast, hard to knock off, and its lead time on the rest of the market proved devastating to competing ventures. Even if you didn't understand what eBay was in the beginning, once you checked it out, why go anywhere else?

Why indeed? People go where they can buy things for less money or sell things for more money. Yahoo!, before it began charging for listings, argued that sellers would rather come to it because it was cheaper. But if you're selling something, it is not necessarily how many dollars per widget you are getting, it is how many widgets are selling. The sellers also want to be where the eyeballs are. Yahoo! just didn't generate the auction volume. If you want to buy a widget and there are more widgets to choose from on eBay, chances are you will get a better deal there. And ditto on the seller's side. If you get more buyers to choose from, chances are you will get a better price for a product or sell more of them or sell them faster. So eBay's scale actually reinforces the economics.

Ultimately, if a company does something better than anyone else for the customer, that creates the underlying success of a business.

Some businesses are inherently more profitable than others. eBay's economic model is outstanding because of the nature of what it does. It doesn't carry any inventory, it doesn't have much relative capital investment. It is basically a conduit, a facilitator of other people doing business; that makes for an extremely profitable model. The fact that eBay is a scale-driven model where essentially it is the only player in many of the countries it is in, gives it pricing flexibility.

The profitability of the business is extraordinarily high. The challenge for eBay from this point forward is simply how much auction business can be had online, because it will carry the majority of it.

In terms of its management team, eBay's continuously refreshes the business's newness in a relevant way that improves either the size or profitability of the business. eBay's management team does a tremendous job, developing ways of making it easier and easier for people to trade merchandise and introduce more and more innovative trading platforms. A new fixed-price platform, in addition to the auction format, opens up a whole new set of possibilities.

eBay's strategic acquisitions include Half.com (purchased in July 2000), a fixed price, person-to-person marketplace where people buy and sell new and previously owned products, combining the bargains of an auction with the ease of a retailer.

Amazon, which was pretty much first in what it did and boasted a fairly unique business model. But it was criticized for diluting the focus of what it was and it still isn't profitable. eBay, on the other hand, hasn't gone off into too many unrelated tangents and is immensely profitable.

All that being said, eBay's stock ride has been anything but smooth, lumped in as it is with every other dot-com and Internet company on Mr. Toad's Wild Ride. From the date of its IPO, eBay has been an unbelievable success, but its stock price peaked out around $120. Today it is typically a third or less of that, so investors definitely had an opportunity to lose money. But volatility of eBay's stock has been completely correlated to the volatility in the Internet technology.

"If you ask me what are some of the things eBay did well," offers Ricci, "one thing is that they inherently had a great value-added business concept. Those are hard to find. And they executed it in a way that was strategic.

Business is all about relevant spheres. You don't define your business to narrow it, you define it broadly, but you expand in a way that is through adjacent spheres. An existing business is a sphere and then it keeps broadening the definition of where it wants business today through relevant, adjacent spheres.

That means you don't go from running The Home Depot to opening up a toy store. If you define The Home Depot as being all about the home, then you say, "Push out from there and open EXPO Design Centers." Or you could expand the business for the pro customer versus the consumer, leveraging your inherent competencies and existing assets. That is an intelligent spherical business expansion. It is profit driven and in many ways is low risk; you are just constantly building off of an existing asset base, both physical and non-physical.

What eBay did is let its buyers and sellers tell management what they want. For example, when people started selling used cars online, eBay created a separate auto site, eBay Motors. Then it formed a promotional alliance with General Motors and another with Auto Trader Publications. It filled adjacencies along the way and never bet the farm on a single opportunity.

When some people started trade high-end luxury goods on eBay, the company created eBay Premier. It didn't work out as well as other spheres did. But did eBay bet the farm on it? No. Ironically, more people probably know the eBay name than ever knew the name of any of the premier, old-line auctions houses, including Christie's and Sotheby's.

Existing customers of the premier auction houses will still go to those places, but far more people will go to them because they are eBay-related than would have in the past. All that money out there is looking for a place to be spent.

eBay, which is considered by the market to be a technology company, is really a consumer trading platform. David Ricci follows it as a consumer company, not as a technology stock. "I picked up coverage of eBay ­ but not Amazon ­ because I always thought that the platform of eBay was much bigger than anything else out there. That is the difference between looking at it from a technology basis versus a consumer basis."

The Best of Breed Model

You can find a great steel company, but maybe steel isn't a good business to be in. In pharmaceuticals, industry dynamics may allow a mediocre company to generate returns, but you'll get substantially greater returns at the intersection of the best company in its category with the most attractive category. Look for the interaction of a best of breed company and an attractive market.

There are life science instrumentation companies with a genomics base that are large and profitable. But it is a category that you should enter into knowing that it may take a while before blind faith is rewarded by blinding profits.

Most of these companies will show a loss for at least the next two to five years, even those following straightforward business models. These are companies that beg for people with patience.

"But contrary to Internet companies," says Winton G. Gibbons, a genomics and medical technology analyst at William Blair & Co. LLC in Chicago, "they don't burn cash the way the Internet companies do, so they have breathing room. They probably have on average five years of cash, so they have time to prove their point."

In other words, while many of the dot-commers burned cash and were largely hype and buzz, most companies in the life science category are working toward producing something almost larger than life ­ but not.

Genomics is an attractive market. Not to be trite about it, but genomics is real, it's big, and it's important. There is a track record here of new biological technologies. The public might focus on DNA sequencing, but we can also look at the generation of potential drug libraries by pharmaceutical companies.

Genomics Drug Discovery Chain

Epidemiology

Incidence, distribution and control of disease

Population Studies

Genetic study of select groups

Sample Acquisition/Purification

Collect, purify and stabilize biochemical samples

Sample Processing

Prepare samples for analysis

Genomics

Elucidate genetic information

Functional Genomics

Determine gene function

Proteomics

Identify proteins and their function

Combinatorial Library

Generate potential therapeutics

High-Throughput Screening

Identify potential effective therapeutics

Pharmacogenics

Stratify patients to conduct more efficient clinical trials and identify more effective therapeutics

Clinical Trials

Conduct studies to determine safety and efficacy of potential therapeutics

Clinical Applications

Diagnose and treat disease

(Source: Adapted from research by Winton G. Gibbons, William Blair & Company, L.L.C.)

Over the last five years, these technologies experienced a Moore's Law curve that is almost doubling productivity every 18 months. (In 1965, according to an Intel Web site, Gordon Moore noticed that each new memory chip contained roughly twice as much capacity as its predecessor, and each chip was released within 18-24 months of the previous chip. History proved Moore correct: in 26 years the number of transistors on a chip increased more than 3,200 times, from 2,300 on the 4004 in 1971 to 7.5 million on the Pentium II processor.) A logical conclusion, considering so many of these new genomics technologies are dependent on computers, is that there will be a point where one outstrips the other. Sandia Laboratories signed up Compaq and Celera to help it push the envelope on computing because what Celera is doing on the computational side will cause many government agencies and private companies to have computer envy. They simply need more computing power.

These technologies are different than the biotech revolution of the 1980s, when science figured out how to do genetic engineering, making artificial proteins or proteins in an artificial way. And it's different too from the early biotech revolution of the 1990s, where a particular protein such as Interluken or Interferon would be the hammers and everything was the nail. It turned out that things were much more complicated than first thought, that there were lots of versions of all these different things.

But in the coming genomics revolution of the 21st Century, there will be a sustained set of technologies, not just one but multiple technologies. And the path of discovery will double its breadth going forward. Science has not yet hit the wall.

"There really is a revolution under way," Gibbons says. "There is sustained productivity improvement in multiple technologies related to drug discovery. The approach used to be one gene, or one protein at a time. Now it is, 'Forget about that, let's take a comprehensive view of everything.'"

The genomic revolution is real.

Is it big? Gibbons estimates that the prescription pharmaceutical market's piece of the genomics revolution could be a $250 to 300 billion market. Of that, the pharmaceutical and biotech companies spent about $60 billion in R & D in 2000 and at least 10 percent more in 2001. About a third of that is spent on the discovery side, the rest on the development side pushing new drugs through patients to gain regulatory approvals.

And don't be surprised to read that with all this R&D money, this is a more than modestly profitable industry.

Now add genomics on top of that market and there is a $100 billion market for which the life sciences are aiming. That $100 billion is growing at a low double-digit rate, too. There are compounding goals because the technology will be used more frequently within that pool, and that pool is getting bigger, and it is part of a profitable industry, so people are willing to pay the money.

People are willing to pay money to cure Alzheimer's, cancer, and HIV, and that equates to a highly profitable market. It also equates to a good investor base. Don't discount society's willingness to spend money to live.

The year 2000 was "Y2K." But in some circles, the previous year was more significant. On October 12th, 1999, the human population topped 6 billion ­ "Y6B." Now there are 6 billion people who want to live forever, and many are willing to spend whatever it takes.

So all of this equates to an attractive market that is rather different from the dot-com market. The genomics market is real, it's big, it's important, and it now is well-funded, and the burn rates are such that today, even with it doubling productivity every year, these companies can survive for at least five years even if they don't turn profitable.

The Insider

Celera, a division of Applera Corp. (formerly PE Corp.), announced the completion of the study of the human genome in June 2000. The company name ­ it comes from the word accelerate ­ probably doesn't ring many bells with the general public today, but in its industry, it is legendary.

One of the strange quirks in Celera's discovery is that as fast as President and Chief Scientific Officer J. Craig Venter, Ph.D., and his gang were in mapping the human genome, their timing in announcing it was unforeseeably horrible.

The release of a new Harry Potter mystery knocked the genome project off the front page of many newspapers in June 2000. Editors were faced with a choice between the breakthrough sequencing of the genome and Harry Potter mania. Which do you think was considered easier to explain in headlines and photos? It was all Muggles, all the time.

The government was already funding the study of the human genome, but Celera took it on as a private project and raced ahead of the government's plodding research.

Gibbons puts the mapping of the human genome in perspective.

"This could go down in the history of mankind," he says. "It is like Einstein, Man of the Century. Even though a lot of people on the academic side think that Craig Venter is a mercenary, who cares? The man did what they couldn't. I think what he and his company did will go down as being one of the most important developments ever. And it is not just going to be the fact that it was done. It will also be a matter of the way it was done. It wasn't just that they won the game, it was how they won the game."

Count Wired among the impressed. In the magazine's April 2001 cover story, "The Protein Hunters," David Ewing Duncan broke down what lies ahead of this burgeoning industry:

Step One: Crack the genome.

Step Two: Unlock the molecular structure of amino acids.

Step Three: Get ready for the robo-fast, custom-drug future.

Think of the sappiest Walt Disney movie imaginable, something like "Air Bud Goes to Washington." Imagine a basketball game in which the home team shoots hoops virtually unopposed for the first 50 minutes of the game, running up the score at will. But with 10 minutes left to play, the visiting team shows up, hits every basket and wins the game by 100 points.

In this case, the home team was the federal government and the visitors were Celera. Each came to play ball with vastly different motivations.

Government scientists lacked the incentives of private industry (which may also explain why NASA won't even attempt a manned mission to Mars until 2017, almost 50 years after it landed a man on the moon). Celera put pressure on the government by its mere interest in the project. The fact that Celera completed the job in a fraction of the government's timetable only confirmed the company's status as a revolutionary young turk in the emerging genomics space.

Innovation is, in part, what separates the best of breed companies from an also-ran. The products that are successful and the companies that are successful are the ones that identify unmet needs of the customers for which the customer is not yet expressing a desire, because the customer may not know something is even possible.

Celera says, "We know that the complete human genome will be good for you," but there were people who said, "Well, I don't know." First of all, they didn't conceptualize it because they didn't think it could be done. And that is one of the reasons customers don't often express their needs. But when they see an unspoken need realized, they say, "Of course I want that­ it fulfills my needs."

There is an infamous IBM story where the company was spending millions annually on R & D, but if you looked at the new products it brought out, there weren't any of note. Yet it kept spending so much money!

When Alexander Graham Bell invented the telephone, he spawned an industry that revolutionized the world in a way that few could have imagined in 1876. Phones in cars, phones in airplanes, satellite phones, modems, video conferencing, the Internet ­ all that and more goes back to Bell.

Celera's mapping of the human genome will probably impact society by a factor of hundreds more than even the telephone did. Some people already equate Celera as the Microsoft of genomics. That means there is a standard. Everybody else will work around that standard.

Dozens of new companies have already arisen in the human genome space. Some people say that what really created the genomics industry was not Celera but its sister company, Applied Biosystems (ABI), because it possesses most of the tools. But Celera's discovery crystallized the financial community to give all these new companies the R&D money that will bring the discovery to the practical marketplace.

It isn't always reasonable to put a percentage rate on R&D spending for some companies. Whether it's 12 percent or six percent, what counts is what the company is actually doing and what new products result. Are its new products market-leading products? What do customers say about the new products?

A danger sign would be that a company is putting out lots of new products but to reach its numbers and meet Wall Street estimates it cuts R & D as a percent of sale.

Conversely, if a medical technology company is spending only three percent on R & D but bringing out its industry's next-generation of products and leap-frogging existing approaches to diseases, then the proof is in the pudding. The proof is that it is spending the money and delivering a solution.

Celera sees itself as the center of definitive genomic and biological information. In addition to decoding the human genome, it did the same for mice and the common housefly. To make its work profitable, Celera established what it calls the largest genomic production plant in the world, supported by one of the largest civilian supercomputing facilities.

Best of breed companies such as Celera do not compare themselves to other people so much as comparing themselves to themselves. They say, "We did X last year, we want to do Y this year. We want to move into a new area, and this is how we will do it. This is how we will obsolete our own product line." The not best of breed companies often say, "We are just like Company A, we are just like Company B." Well, that's a good sign that Company A and Company B are good, but it is not.

Particular Management

In genomics, we can divide management into various categories. Celera is topped by Venter, a visionary who says, "If I combine this piece with this piece and this piece, I will leapfrog the status quo by a magnitude of 10."

Beneath Venter is an entire stratum of Celera superstars in algorithms and production sequencing processes. When you see those people, and add to them an incomparable infrastructure, a big supercomputer and a factory, that will generate the desired end result.

Then combine all of that with an innovative product development management team and an innovative business development management.

By comparison, when another, smaller genomics company lost its head of business development, what some observers believe kept that company from being successful is not the product, but the right business development executive.

Product innovation is not enough in any business category, let alone medical technology. These companies need brilliant marketing and business development, sales management and staff to capitalize on a great product. And sometimes they only have a limited window.

What is as important is the business side of things ­ does a business have good marketing and sales professionals and quality-standard manufacturing? Can it make the product inexpensively enough to shake up the market?

The standard CEO package in many genomics companies is $150,000 to $200,000 of cash compensation per year and stock ownership starting from five percent and up. Gibbons considers that a reasonable deal.

"But companies where the top person is making a half million dollars a year ­ that person is overpaid," he says. "There is no reason that a developmental-stage manager should be making a half-million dollars a year, whatever their options, because there is a diminishing utility function."

Making the CEO of an up-and-coming medical technology company rich now removes the fire from their belly. They should be compensated sufficiently to afford a housecleaner and dry cleaning, and a standard of living that won't cause the CEO to be embarrassed with the neighbors. But that's it. "Companies are driven more by people who want to build the business," Gibbons says.

They should not be overpaid in cash. And they should have enough skin in the game to care about profitability. If they have too much money, if their options are worth too much or become worth too much, they may prematurely cash out and move on.

Celera's Venter is a man who is personally motivated, a visionary who says, first of all, "Is this important?" Because some people said, "Who cares about the complete human genome? We can find the genes that are being transcribed, so we don't need to see the genes in place."

His competitors disparage Venter. But there are real scientific reasons why we need to have the complete human genome in place, why we need to know where the genes are.

In May 1998, Venter saw that this was important, and he also saw a path that could lead him there, which meant combining a variety of technologies. And he found a way to get the resources. He is actually more than a visionary, because a visionary might just say, "Wouldn't it be neat to have the human genome?"

But Venter went further. He said, "It would be great to have it, and it would be good to have it all in one place, and I can take these technologies and put them together."

What had Venter done before this? He created a not-for-profit organization in the 1990s called The Institute for Genome Research (TIGR) in the 1990s. He later founded Humane Genome Sciences, although there was a falling out with him there. Celera is his third entity.

He revolutionized the discovery of genes through express sequence tagging (EST) and then he revolutionized it again with something called whole genome shotgun sequencing. Venter has enjoyed repeated successes. And the type of people that are hired at Celera are also winners. Celera looks for people who succeeded in the past. They are not just smart people, but smart people with an attitude of, "The heck with what you say can't be done, I will do it anyway and prove it can be done." These are people with fire in their bellies and success in their back pockets.

There are people who get a job done because they plod, but Venter is a person who gets a job done not just because he is focused and diligent but because he exploits an innate capacity for bringing together technologies and people in a way others never before conceptualized.

Of course with a personality as strong and as motivated to conquer mountaintops as Venter is, there are concerns that he is already looking for the next bigger mountain. And if he does, there whole markets that will not hesitate to follow him to the next summit. Because that's where profit drivers go.