Let’s set the stage. Michael Dell started what we now know as Dell, Inc, from his University of Texas dorm room in 1983. He took orders by phone and delivered PCs to his customers two to three weeks later. Of course it wasn’t named ‘Dell, Inc’ at the time; this first business was incorporated as ‘PC’s Limited’. The following passage is taken from Dell’s autobiography Play Nice But Win (all emphasis ours):
In certain ways, PC’s Limited was doing amazingly well, given our fiscal limitations. Because I’d started the company with only $1,000 of invested capital—as contrasted with the almost $100 million that Compaq, our rival down the road in Houston, had raised from investors by late 1983—I had to figure out how to stretch the limited capital we had to the max. I got pretty good at it.
Our initial sales were usually by credit card. This meant that we got paid exactly when we shipped out an order. That was a good thing, but at first we often had to pay for materials ahead of time—hard to do when you have limited cash on hand. As we grew, however, we were able to convince suppliers to sell to us on terms, meaning we would pay them thirty days after we received their product.
In addition, by selling directly to customers and not having to build finished goods inventory, we could keep our parts inventory very low: if you know exactly what the customer wants to buy, you only need the parts required for those orders. By contrast, companies that build finished-goods inventory in multiple configurations and stock it in multiple locations find their inventory mounting up—and aging—quickly. By having fresher inventory, we benefited from the latest costs—and as material costs were almost always coming down, this gave us another advantage.
Credit card sales, paying suppliers on terms, stripping parts inventory to the bone: all these things kept our cash conversion cycle—the time it takes for cash to be converted into inventory and accounts payable, through sales and accounts receivable, and then back into cash—far lower than most other companies. This was very good.
On the other hand, our fastest growth was selling to companies, government agencies, and education and medical institutions—entities that were not going to pay us with credit cards. We needed to extend them terms, which meant that we needed more credit. A lot of it. And that was something I definitely needed help with.
That spring I was so busy running my own new company that I had no idea how close to real financial trouble we were. But Lee [Walker] found out just before he joined us, when an officer of MBank, our backer, took him to lunch and advised him to stay away from PC’s Limited. CompuAdd, an Austin company with a business similar to ours (though they were more component- than systems-oriented and had opened several retail stores), was the horse to bet on, this banker told Lee. As for PC’s Limited, the banker said, MBank had decided to freeze our credit line at $600,000.
“I did some mental math,” Lee later recalled. “I remembered Jim Seymour had told me that Michael’s sales were about a hundred thousand dollars a day. That meant MBank was financing only about six days of sales. My rule of thumb gleaned from hard years of experience was that you need funding for at least twenty-four days of sales. Six days, six hundred thousand dollars was impossible. MBank had decided to put its boot down on Dell’s financial windpipe. Michael’s suppliers had to be way past due in getting paid. And they must be kicking down his doors, screaming for money.
It wasn’t quite that dramatic, but money was sorely needed, and Lee Walker knew where and how to get it. Luckily for me, this extremely tall, very thoughtful, and knowledgeable guy suddenly reversed his decision not to be president of PC’s Limited, and from the day he walked in the door we shifted into a brand-new gear.
For context, Michael Dell was 21 years old at the time. Lee Walker was 45 years old; he was already a highly accomplished entrepreneur. Earlier in his career Walker started out in Union Carbide, but quickly learnt that a corporate life was not for him. In short order he had a shortening company in Chicago, a nuclear metallurgical laboratory that made americium dioxide pellets for smoke detectors, he had a specialty valve company and a medical products company. He was known around Austin as a man of no small competence. Dell caught Walker right as he was considering taking a step back from his businesses.
And so you can imagine the kind of lessons Dell learnt, at the age of 21, watching Walker taking on the mantle of president, coming into the company, looking at the cash situation, and immediately getting to work on increasing the amount of liquidity on hand.
It was dire. At the time, PC’s Limited had made $52 million in sales for the fiscal year, but had just $300,000 in cash in the spring. Almost all the revenue that went into the business went straight back out into salaries and parts. Worse, the state of Texas was in the midst of a severe recession, with state government layoffs following a tech bust. And the $600,000 line of credit from MBank was at risk because — unbeknownst to almost everyone in Austin at the time, and on top of MBank’s scepticism of PC’s Limited — MBank was itself in dire financial straits.
Walker’s first job was to get rid of PC Limited’s CFO and chief accounting officer. Dell’s legal advisor Kelley Guest was adamant: “The fact that they’re married to each other is just the beginning of the problems with them.”
Dell himself didn’t mind the marriage. He was mostly bothered by Mr Bolton’s (name changed for obvious reasons) unwillingness to raise additional working capital. Each time Dell asked for an increase, Bolton would throw his hands in the air and whine about ‘how tough it was out there’. And although Dell didn’t call it out explicitly in his biography, it was clear that the Boltons were up to some shenanigans with the business.
When Walker told the couple to leave, they asked for fifty thousand dollars to not ‘hit the destruct button on this business.’ And this was no idle threat: as CFO and chief accountant, the Boltons had many ways to make PC’s Limited go away. The only problem was that the company didn’t have $50,000 lying around to pay them off.
Walker was unfazed. He had recently helped a failed computer company named Balcones through Chapter 11, ensuring that the company’s financial backer, Texas Commerce Bank, got back every penny of the $1.5 million it had lent the startup. TCB’s president, Frank Phillips, was so impressed and grateful to Walker — and taken with the fact that Walker had thrown in his lot with Dell — that he immediately extended PC’s Limited a new line of credit.
The Boltons went away, Walker added CFO to his title, and PC’s Limited’s risky liquidity problems were solved in one fell swoop, giving Dell and Walker the breathing room they needed to compete against their far larger rivals.