Penguin wiggles its flippers

Can an upstart Linux box-maker grow like mad -- and still keep its soul?

Published July 1, 1999 4:00PM (EDT)

The high-pitched whir of cordless electric screwdrivers fills the air in the main manufacturing room at Penguin Computing in downtown San Francisco. Cardboard boxes of motherboards and Pentium III processors are stacked next to tables where men and women wield the screwdrivers with calm efficiency, assembling CD-ROM drives, power supplies and cooling fans.

Penguin makes computers pre-installed with the Linux-based operating system, but the manufacturing side of the business isn't as high-tech as it sounds -- it's more like building with Lego blocks and Erector Sets: Plug this video card into a slot here; screw that drive in there. It's a quiet kind of industrial clamor: Only the screwdrivers zip and burble, like supercharged hummingbirds.

Scrawled on a whiteboard on one side of the room is the phrase "Goal 1,100,000." It's a revenue target. In May, says 25-year-old Penguin founder Sam Ockman, the company cleared $1 million in revenue -- not bad for a 1-year-old startup. Four more whiteboards line the opposite wall, listing incoming orders from a motley assortment of universities, technology companies and Internet startups as fresh-faced as Penguin itself. There's even an order from the "City of S. Sioux City" in northern Nebraska. The dates of the orders are recent, freshly written -- hard evidence of spreading Linux fever.

The hardcore geeks and marketing flacks can argue all they want about which operating system is truly the best -- Linux, FreeBSD, Windows NT, Be, Mac. They can strut their benchmark biceps and natter on about the relative merits of networking code and multiprocessor support ad infinitum. But there's no arguing around the simple reality that to be a Linux start-up in the summer of 1999 is to occupy a very juicy niche in the techno-economy. The venture capitalists are hovering, eager to lavish capital on the newest buzzword -- open source -- to sweep across Silicon Valley. Got an open-source business plan? Get ready to go public -- the time is now. Red Hat Linux, the leading Linux distribution vendor in the United States, is already on the runway, and many more are lining up behind it.

For Sam Ockman and Penguin's executive vice president, 23-year-old Alison Huynh, the possibilities are tremendous: Unlike many Linux-related companies, Penguin enjoys actual revenue and is moving real product. The venture capitalists are suddenly calling them, which is, as Ockman notes, "a good sign." But pitfalls also loom. Like many open-source entrepreneurs, Ockman and Huynh talk a lot about "giving back to the community." Their conversation is laced with idealistic references to the democratic, anti-monopolistic qualities of the open-source software development model. At the same time, they make no attempt to hide their ambition to build the next great computing company -- the Dell or Compaq of the early 21st century.

Can these goals be reconciled? When push comes to shove, will the venture capitalists hungering for a piece of Penguin's action support open-source idealism or crush it beneath their wingtips? Silicon Valley is littered with companies whose founders have been forced out or pushed aside by investors who could not care less about whatever idealism may once have driven the business plan. Will Penguin join that list?

Such questions are unanswerable for now; all one can do is watch and see what happens. But Penguin may be especially worth tracking. It's not your typical startup: Penguin's director of communications, Andrew Kaufman, has a Ph.D. in Russian literature from Stanford. Its first "angel" investor, Al Smith, likes to quote the German philosopher Ernst Cassirer and talk sincerely about how important it is to fund the possibility of "ideas" that threaten the status quo. And even though a penguin (the Linux mascot) may not seem like the most intimidating of corporate symbols, Alison Huynh says that "underneath the fuzziness there is a fierceness." Watch out -- this penguin might bite.

Sam Ockman's roots as a hardware hacker go deep. He remembers getting his first computer, an IBM PC, when he was 7 years old. His story is the familiar tale of the geek in formation. He learned to program -- "embarrassingly enough," he confesses, "mostly with Microsoft programming languages." He joined the world of bulletin boards that preceded the mainstream Internet, serving as the co-sysop of a BBS called "The Institute of Artificial Insanity."

But all the while, he and his father were endlessly tinkering, taking apart their computers and reassembling them with new parts. The messy splendor of Penguin's main manufacturing room is really just Ockman's old bedroom writ large. He might be young, but his sense for the value of a good part -- the relative merits of a particular cooling fan or RAID card -- goes back decades.

He was always fascinated, he says, by the direct order model of computer sales pioneered by Gateway and Dell.

"We would get PC Magazine," says Ockman, "and the first thing I would always do every two weeks when it came out is I'd go and look through the pages and compare the Dell and Gateway ads to see how they compared to the ads in the previous two week's issue and see how the prices had changed and see how the parts had changed. So I was always into the idea of direct-built computers. It was always sort of my passion."

Penguin is young enough in its corporate evolution that it doesn't yet have its own mythology encapsulated in predigested, media-honed chunks. When Ockman starts talking about his passion for direct-built computers or how he and his father would be disappointed when Gateway or Dell "compromised" on the quality of individual parts, I can see Andy Kaufman, Penguin's director of communications, becoming intrigued. Here's a ready-made marketing spiel just begging to be employed as propaganda for Penguin Computing -- high quality parts, directly built to a customer's order! -- delivered by the company's founder utterly without pre-calculation.

That's just the way Ockman is. He takes considerable pleasure in simply showing off the high-end Linux machines that his company makes, and boasting about such details as the requirement that only the highest-quality cooling fans be installed in Penguin computers. When he speaks, his words come out in a rush, tumbling over each other in eagerness.

Ockman first started dabbling with Linux in 1994, while on summer vacation from Stanford. He was volunteering for a neural net project at the University of Pennsylvania, but was frustrated because the project used Sun computers running Solaris Unix, an operating system that didn't run on the PC he had at home. But Linux -- a clone of Unix -- was designed precisely for the PC. Like many other early Linux hackers, he got the early-adoption impulse from that basic motivation: the need to get a Unix-like operating system running on a cheap, relatively low-powered home personal computer.

After graduating from Stanford, Ockman first wanted to work for Red Hat Linux, but didn't want to move to North Carolina. So he did the next best thing, and joined VA Research, a Linux hardware startup founded by another Stanford alum, Larry Augustin. But after a year there, he decided to move on and start his own company. At the time, says Ockman, VA Research was specializing in dual-boot systems that ran both Windows and Linux. Ockman wanted to be pure Linux, all the way.

Ockman says he isn't interested in being compared to VA Research (now VA Linux Systems), but in interviews, he and Alison Huynh bring up the name of their main competitor frequently. They are quite mindful that in mid-June VA Linux Systems raised $25 million in venture financing from a fleet of name-brand venture capitalists. They are well aware that VA is poised for a potentially lucrative public offering. And they are quite happy to point out where they think they have the advantage over VA. Huynh touts Penguin's 72-hour "burn-in" period for all Penguin computers, a rigorous test designed to ensure that any computer that leaves Penguin is bug-free and ready for workhorse duty. VA, says Huynh, has only a 24-hour burn-in.

And while they are respectful of the millions of dollars that VA has raised, Ockman and Huynh claim that they hope never to need to raise that much cash directly from venture capitalists. Huynh is mindful of what happened to Excite, the Internet search engine company founded by seven Stanford students.

"Our goal," says Huynh, "is to build a really high-quality organization and to be able to have two young entrepreneurs who are still leading their company through its life cycle. We've had friends who have started companies, the most famous being Excite -- seven friends started this company, and within a year all of them combined owned less than seven percent, and most of the decision makers were these new implants from IBM and Sun. I just think that's incredibly boring."

There's a trap, says Ockman, inherent in the prevailing Silicon Valley belief that to succeed one must focus primarily on insanely fast growth and "building infrastructure."

"I think it's a lie told by the venture capitalists," says Ockman, "this whole idea of building infrastructure. All of a sudden you have 140 people but you don't have the sales to support them at all, so you get into debt and then have to go out and get $25 million more in order to pay for all 140 people for the next few years until sales catch up. The VCs get you the first time in the first round of financing and then after you have already employed all these people all of a sudden the VCs own almost all of the company. What's left for the people working there? The VCs tell us that, and I just sit back and go, 'Why do we need to grow that quickly?'"

Ockman says Penguin is in the black from month-to-month -- that it has been able to support its growth, so far, from earnings. But if that's the case, I ask, why is it seeking venture capital at all? Why did it sell off part of the company in April to veteran financier Al Smith?

Ockman smiles.

"We wanted to do things like spend money on really big booths at LinuxWorld so we don't get left behind eventually," he says.

"It's for marketing, advertising type projects," adds Huynh. "There are some key people that we want to hire that we think would be really cool to have on board because we want to do some research and development."

Where Sam Ockman is rough and utterly without guile, Alison Huynh is polished and quick to deliver the kind of investor-friendly soundbite that most Stanford graduates seem to have mastered. The daughter of a high-ranking South Vietnamese military officer who was airlifted out of Saigon in 1975, Huynh says she knew pretty much from the get-go that she wanted to start a company.

But she was doubtful that Linux was the way to go. At first, says Huynh, she was heavily influenced by the ideas of Geoffrey Moore, author of "Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers."

"In 'Crossing the Chasm' there's this idea that you can never go up against the 800-pound gorilla," says Huynh. "There's going to be a prince and there's going to be a serf. There's this hierarchy and you have to respect this hierarchy. The way you become a gorilla is that there is a paradigm shift in technology and it has to be proprietary-type technology in which you can gain the competitive advantage.

"I really believed in this for a long time, and I think most people in business and marketing believe this because they read 'Crossing the Chasm' and Regis McKenna and all these books that are pushed out by Harvard Business School and Stanford Business School. So I was always arguing with Sam -- this is why Linux will never work, you can't go up against three of the largest companies in the world, you're going up against Microsoft, you're going up against Compaq, you're going up against Dell. You're just an idiot and you are going to be squashed by the 800-pound gorilla. No, no, no, you're my friend and I don't want to see you wasting your time -- why don't you become a sysadmin for an Internet company?"

Eventually, Huynh changed her mind -- and in October, she joined Penguin full-time. Linux's surge in popularity over the past year certainly didn't hurt, and now, instead of quoting "Crossing the Chasm," she can spout open-source dogma as well as anyone in the business. Today, she says, she can see a multitude of business models for open source.

"You can do this through distribution," says Huynh, "you can do this through service and support, and you can do this through value-add, either with a hardware or a software component."

Penguin is choosing to go the hardware value-add route. From one perspective, it's a canny move: The company doesn't have to worry about making money off "free software" -- software that can be freely copied, changed and distributed -- like Red Hat or other distribution vendors. Hardware is quite tangible, and there's a clear market hunger for machines pre-installed with Linux.

Can small companies continue to survive in the Linux hardware niche as established giants like Dell start to ramp up their Linux offerings? Penguin is rightfully proud of its million-dollar sales month -- but Dell sells $18 million worth of computers a day just through its Web site. Some skeptics wonder how companies like Penguin and VA Linux Systems will be able to compete with Dell on the bottom-line level of price. Dell can buy motherboards by the million, presumably more cheaply than a company like Penguin, which even now is only selling around 600 or so computers a month.

Ockman and Huynh talk a good game of leveraging their Linux knowledge and creativity, of tightening their own "supply chain management" to rival Dell, and of pumping back enough support into the Linux and open-source community to ensure that the Penguin brand retains the good karma that is so crucial to succeeding in the volatile world of free software. But there are serious questions as to whether the kind of specialized knowledge that Sam Ockman has can scale higher as demand grows.

At some point Penguin may well find itself returning to that vexing issue of "infrastructure," and looking to expend greater resources into marketing and advertising. That kind of money will only come from financiers looking for a good return on their investment. Will these financiers care about good karma?

Al Smith says he does. Smith offers a classic prototype for the "angel" investor -- the investor who arrives very early in a company's life cycle, offering the essential cash to get a startup through to the point where it can start seeking big-time venture capital. Smith is an eccentric character who takes delight in acting the part of a man of mystery. Four years ago, he was one of the first investors in the Internet directory startup Magellan, and more recently, the first outside shareholder in the e-mail services startup Critical Path. He describes himself as someone who has "been and gone" before the name-brand venture capitalists even begin to arrive.

He found out about Penguin Computing after seeing them listed at -- the Web site started by former Apple executive Guy Kawasaki dedicated to helping startups find investors, and vice versa.

"I walked in the door and said hello," says Smith. Within weeks, the deal was done. Neither Penguin nor Smith will divulge details.

Why was Smith interested?

"I think it is important to deny tyrants and dictators or misers what they think can only be their own," says Smith. "I want to give new ideas a chance to survive."

Such rhetoric might sound self-serving coming out of most people's mouths -- and particularly so in the case of investors who specialize in extracting high rates of return out of early investments in struggling startup companies. But Smith is not your typical investor. As we sat down to lunch together to discuss why he was excited about Penguin, Smith handed me a sheet of paper in which he had scrawled out some handwritten notes for our meeting.

The first subject header on the page read "Molding Objects: Molding with clay" and then asked: "If someone controls all the clay, how can a sculptor dream of objects, much less make clay pots at all?"

Smith's all-too-obvious insinuation is that Microsoft controls the operating system market to such an extent that it is inhibiting the creativity possible in the software marketplace. So Smith wants to help give Linux a chance to break free.

"Ideas need to be turned into tangible reality," says Smith.

I ask Smith if he thinks that any of the big venture capital firms that flock over Silicon Valley -- Like Kleiner Perkins or Sequoia Capital -- share his idealism. He shrugs. He won't be drawn into direct comment on the motives of other possible investors. His reticence is maddening -- he's been playing this angel investor game for awhile, and some of his more off-hand comments indicate that he doesn't have the highest regard for a few of Silicon Valley's most famous names. There are sharks out there, he intimates. But he won't go so far as to name them.

Those sharks are no doubt waiting for a nice plump penguin to waddle by. But so far, life has been good to Penguin Computing. The company is growing like mad, it has founders with charisma and drive -- and it has lined up a well-heeled angel who likes to talk compellingly about his belief in socially responsible investing.

Still, there are no survival guarantees in this particular ecology.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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