Inc Gateway - Early History

EARLY HISTORY

Gateway was founded in 1985 when partners Ted Waitt, who dropped out of the business management program at the University of Iowa, and Mike Hammond launched TIPC Network, a computer mail-order business, in the Waitt family farmhouse in Sioux City, Iowa. The upstart was funded by a $10,000 loan from Waitt's grandmother. Initially, customers were charged a $20 membership fee to gain access to TIPC's mail order inventory, which included peripheral hardware and software for Texas Instruments computers. Within four months, TIPC generated $100,000 in sales. In 1986, the company began assembling its own computers; however, sales of these machines accounted for only a small percentage of annual revenues, which reached $1 million.

In 1987, Gateway developed an IBM-compatible personal computer (PC) using components from other PC makers. Although Gateway's PC was similar to one sold by Texas Instruments, with two floppy disk drive and a color monitor, it cost only $1,995, roughly half the price of Texas Instruments' machine. The firm changed its name to Gateway 2000 in 1988, which proved to be a pivotal year for the direct-sales PC upstart as its low-cost machines, powered with 286 processors, began to garner attention. Increased growth prompted Gateway to move headquarters from the Waitt ranch to a 5,000-square-foot building. The firm also launched its first major advertising campaign, running a full-page ad in which a photo of the Waitt family cattle herd appeared above a caption reading, "Computers from Iowa?" In addition, Waitt launched a performance incentive program for his staff, rewarding hourly employees with monthly cash bonuses that were tied to profits. Efforts paid off as sales skyrocketed from $1.5 million to $12 million in less than 12 months.

Sales grew nearly sixfold in 1989, exceeding $70 million. In 1990, Gateway relocated to South Dakota, a state with no income taxes. The firm also launched several light-hearted advertisements that poked fun at its rural location and portrayed a Holstein cow as Gateway's mascot. Continued growth prompted Waitt to bolster his management team with six executives from large PC firms. Sales jumped to $275 million that year as the firm shipped roughly 225 PCs per day. Employees totaled 185. Gateway was named the fastest-growing private company in America by Inc. magazine in 1991. To house its expanding operations, Gateway built a new 44,000 square-foot headquarters building. The firm also began targeting corporate markets for the first time. Sales continued to soar, reaching $626 million.

In 1992, Gateway unveiled its first notebook computer, The HandBook, which weighed less than three pounds. The Handbook proved to be one of the few Gateway products that sold poorly in the early 1990s. Although the recession at that time had taken a toll on other PC makers, Gateway found its sales exploding as those in the market for a new PC began seeking out less expensive models. As a result, revenues exceeded $1 billion for the first time. Earnings of $1.1 million boosted Gateway into the first-place spot among mail-order computer companies. Because demand for its products was so high, Gateway found itself unable to fill orders. When clients began complaining about lengthy delays, as well as flaws with the computers that did finally arrive, the firm hired 200 new workers.

International growth took place for the first time in 1993, when Gateway opened a complex in Dublin, Ireland. That year, the firm completed its initial public offering (IPO), selling nearly 11 million shares for $150 million. Upon completion of the IPO, the Waitt family owned 85 percent of Gateway. The firm used the fresh capital to diversify into software as well as peripheral equipment, such as printers, fax modems, and networking devices. In an effort to improve service to its business customers, Gateway increased its support staff more than twofold, hired additional technicians, and added a separate phone line dedicated to providing support services to companies using Gateway machines. Although many rivals had begun to levy fees for technical support, Gateway continued to offer its services for free. The firm created a sales and customer support unit in Kansas City, Missouri, in 1994. International expansion continued with the creation of showrooms—which allowed potential customers to examine Gateway merchandise prior to making a purchase—in France, Germany, Japan, and the United Kingdom. Sales reached $2.7 billion that year.

Gateway made its first foray into the Pacific Rim in 1995, creating a manufacturing plant in Malaysia to make PCs. The firm also moved into Australia with the purchase of Osborne Computer, based in Sydney. Steady demand prompted the firm to create a third U.S. manufacturing plant, located in Hampton, Virginia, in 1996. To gain a foothold in Greece, the firm forged a distribution alliance with Dakos S.A. In a similar move, Gateway also inked a distribution deal with Al Yousuf Computers, based in the United Arab Emirates. Growth in Europe was bolstered with a new showroom in Sweden. New product developments included a large-screen PC and television set combo known as Destination; it was the first Gateway product to be marketed by traditional retailers. It was in the mid-1990s that Gateway also established its Country Stores Inc. subsidiary. Gateway's 8,000-square-foot Country Stores, similar to the firm's European showrooms, gave customers the chance to examine Gateway merchandise before purchasing it via mail or telephone. The first Country Stores were based in Connecticut and North Carolina.