the gold star of Iowa
By Joan Indiana Rigdon
May 15, 2001
This article is from the May 1 & 15, 2001, issue of Red Herring magazine.
"Silicone Valley," as Clark McLeod calls it, has grown queasy over a telecommunications
So has Wall Street. But here in flyover Cedar Rapids, Iowa, the chairman, director, and co-CEO of
one of the industry's greatest grabbers of market share, McLeodUSA (Nasdaq: MCLD), is having a
wonderful day. In a war room on the second floor of the company's tornado-resistant
headquarters, he flips through his presentation for investors: slides that boast about his company's
projection of more than $2 billion in annual revenue, its 19 consecutive quarters of meeting Wall
Street expectations (for mounting losses -- McLeodUSA is building a nationwide fiber network), and
its 13 consecutive quarters of positive earnings before interest, taxes, depreciation, and
As Mr. McLeod (pronounced McCloud) goes through the slides, he carefully
battlefield. AT&T (NYSE: T) is still a monopolist. WorldCom (Nasdaq: WCOM), Qwest
Communications (NYSE: Q), and the like are no better. They are all just "incumbents," or
"mega-Bells," as he calls them, companies that mostly inherited their customers instead of winning
them. McLeodUSA, he says, is a scrappy startup. No matter that it is ten years old and has 10,700
employees. It intends to use old-fashioned customer service to grab and keep what the incumbents
won't protect: customers and the millions in profits that come with them. Mr. McLeod explains all
this in rhetorical questions that he answers himself, stage-whispering certain words for emphasis:
"Why wouldn't they like that? Because all of their profits would go away!"
Our eyes wander to a bar chart, hand-drawn in purple, black, and yellow.
The bars stair-step
higher, depicting how McLeodUSA's stock will rise over the next decade if it can continue to
achieve its compound annual growth rate of at least 35 percent. At the top step, a stick figure
leaps for joy, a huge smiley face in the middle of its big yellow head. "Did you draw that?" we ask.
Mr. McLeod momentarily loses his train of thought but recovers nicely: "Aren't I good?" he grins.
And suddenly it's obvious. The too-big smile, the lanky frame, and that
condescension left over from his first career as a junior high school math teacher -- that's right, a
math teacher: Mr. McLeod bears an unsettling similarity to Mister Rogers. The founder of
McLeodUSA, the David to the Goliaths of AT&T and company, the former Hy-Vee grocery store
carry-out boy who married his grade-school sweetheart, reminds one irresistibly of the TV icon who
assured generations of American children that it was a wonderful day in the neighborhood.
Is this what it takes to run a technology company after the days of futile
Mr. McLeod is an unlikely subject for a Red Herring 100 profile. At 54, he is old enough to have
fathered most of the entrepreneurs we write about. And he is boring. He tends to lunch in his
office, on tuna and crackers. He talks in bullet points; one of his favorites, about growing a
company: "Focus. Simplify. Stage." And although he once jazzed up his image by dressing as a
vampire ("Count Clarkula") to videotape his quarterly report to his employees ("We were able to
take a bite out of the competition!"), he is generally austere. We saw him in a black suit, white
shirt with monogrammed cuffs, a muted tie, and the name tag he always wears, even on road
shows. It is his way of being friendly to potential customers, a carryover from his Hy-Vee days.
In other words, Mr. McLeod is decidedly unhip to the habits of modern entrepreneurialism,
disdainful about the frenetic birth and death of companies on the coasts. He's also decidedly
uninterested in technology. Although several acquisitions have bought McLeodUSA hundreds of
Internet points of presence and 31,000 miles of fiber -- thus a major chunk of America's
telecommunications backbone, which in turn carries services like DSL, wireless, and cable -- he
showed no interest in our questions about possible partnerships with technology companies.
Whenever we pressed him for his thoughts on Silicon Valley and its ways of doing business, our
scrappy school teacher -- the same man who had just thrown his arms out and whispered "Boom!"
to show what happens to entrepreneurs who can't execute -- dropped his eyes, bit his tongue,
and politely claimed ignorance of what happens "out there."
Maybe he doesn't have to know. Mr. McLeod is one of very few entrepreneurs
who can rightfully
claim to have started two separate billion-dollar companies. He sold his first startup, Telecom USA,
to MCI for $1.3 billion in 1990 before starting McLeodUSA in 1991, the moment the ink dried on his
noncompete clause. All this from a man who cares little about technology.
Mr. McLeod was born less than ten miles from his company's headquarters
in Cedar Rapids, the
home of painter Grant Wood. His parents, who both started out teaching "commercial" (business) to
grade-school students, grew disenchanted with the profession after the students lost discipline and
the schools gave up imposing it, says Mr. McLeod's mother, Jane McLeod. (She adds, "And we are
firm believers in discipline.") So the McLeods weren't disappointed in 1972 when their youngest
child quit teaching after just three years to enter business.
He had already started working nights at the Hy-Vee, where he learned the
art of customer
service. One of his fellow grocers, Don Drake, says Mr. McLeod worked his way up from carry-out
boy to helping run the store at night. "I think that shows today," Mr. Drake says proudly, of the
Along the way, Mr. McLeod built up a certain intensity, the kind of thing
that used to drive him to
yell, bang his fist, and even jump on tables. He's mellowed considerably, says Art Christoffersen,
president and CEO of McLeodUSA Publishing. Now he channels that intensity in other ways: when
people like WilTel Network Services founder Roy Wilkens tell him they're happily retired, he
strongarms them to come work at McLeodUSA. (Mr. Wilkens is now president and CEO of data
network operations.) And every weekday morning at 7:29, he calls McLeodUSA's cofounder and
co-CEO, Stephen Gray, with an "overnight thought." (After years of hearing these, Mr. Gray allows
that if Mr. McLeod were a baseball player, "he'd bat only .200 but hit 80 home runs a year.")
The rest of us might call Mr. McLeod's intensity "pushiness." But he describes
it as "passion" in This
Way Up: An Insider's Guide to the Climb of Your Life, a ghostwritten inspirational tome that he
self-published. It is required reading for new McLeodUSA employees. Featuring gold stars -- the
McLeodUSA logo -- throughout, it looks and reads like The Little Prince, only it is about a
metaphorical mountain climb.
The book outlines Mr. McLeod's recipe for success: G.R.I.P. (Growth, Relationships,
Passion). In the Growth section, Mr. McLeod tells of a fellow teacher who wanted to change
careers, but had no clear plans, except that he might try "some day." It was this man who scared
Mr. McLeod into becoming an entrepreneur. Later, he writes that G.R.I.P. is not an 8-to-5
phenomenon, but a value system for life. He quotes one employee who says G.R.I.P. has made him
a better worker and brought him closer to his family and God.
Mr. McLeod seemed shocked when we asked if his zeal for G.R.I.P. was in
any way religious. He
swears it's not. Clarifies Bryce Nemitz, McLeodUSA's vice president for corporate communications:
"It's more of a passion to be the best."
Still, Mr. McLeod really believes in G.R.I.P. "People get very turned on
when they understand and
deal with a value system that they like," he says. It's this belief that has given his company a
certain junior high ambience. Workers must wear their name tags at all times; if they forget or lose
them, corn-fed security guards send them to a special desk to sign in. Gold stars are everywhere;
all workers are rated on G.R.I.P. twice a year.
There is playtime, too. Workers can fish for bass (catch and release) or
take paddle boats out on a
man-made lake in front of the building. McLeodUSA holds a party there once a year -- this could be
"Silicone Valley," minus the kegs. "That wouldn't be appropriate," a spokeswoman says.
In some ways, Mr. McLeod's operation is not so different from those he disdains. After all, his
company expects to spend and lose hundreds of millions of dollars for years to come. He secured
funding of $1 billion from Forstmann Little and gained $750 million from sales of senior notes. But
here's the twist: while most high-tech founders build their companies on the technology itself --
hoping its innovations will create or disrupt markets -- Mr. McLeod takes more of a Procter &
Gamble approach; he just wants to buy, package, sell, and service the innovations of others.
Mr. McLeod knew little about any business back in 1980 when he started
what later became
Telecom USA. Indeed, his plan to follow MCI's then-floundering attempt to break AT&T's monopoly
was so brazen that one man who heard it, a certain Cedar Rapids insurance executive, threw Mr.
McLeod out of his office and told his secretary to never let him return, because he was "nuts." So
says witness Albert Ruffalo, who now works for McLeodUSA as group vice president and "Chief
People Development Officer."
By the time MCI acquired it nine years later, Telecom USA had grown into
long-distance carrier. Mr. McLeod's ensuing retirement coincided exactly with the length of his
noncompete clause, and when the latter ended, he raided MCI for some of his favorite former
lieutenants, including Mr. Gray.
With this second company, Mr. McLeod has a new mission. He is out to build
and buy a keeper
empire (for the buying, he not only has money, but Anne Bingaman, a former U.S. antitrust official,
on his board). He hopes McLeodUSA will eventually generate annual revenue of $30 billion to $50
His strategy for getting there is unique. While the incumbents obsess over
eradicating static and
the wonders of using speech recognition to dial phone numbers, Mr. McLeod prefers to work the
nontechnical angles of his business, like customer service and ... phone directories. In 1996, when
his competitors were talking Internet, Mr. McLeod spooked investors by announcing plans to buy
back Telecom USA's directory publishing business from MCI.
"The market threw up," Mr. Nemitz says. So Mr. McLeod went on the road
to explain that a phone
directory with McLeodUSA's gold star on the cover was like a piece of direct mail with a 12-month
shelf life. It's cheap advertising and a way to sell ads to boot. "It was certainly puzzling at first,"
says James Henry, an analyst at Bear, Stearns. "But it didn't take long for them to explain it."
Publishing now produces 15 percent of McLeodUSA's revenue.
In general, Mr. McLeod concentrates on second- and third-tier markets.
"Sound familiar?" he asks
us, raising his eyebrows hopefully, as he would for a very slow student. Then he helps us with the
answer: "Wal-Mart? People like that?"
The strategy is working so far. While regional carriers like Qwest, Verizon (NYSE: VZ), and SBC
Communications (NYSE: SBC) together hold 90 percent of the overall market, McLeodUSA has
managed to grab as much as 30 to 40 percent share in some markets (Iowa and Illinois), while in
others, it has "north of 10 percent," Mr. Henry says. That writing is literally on the wall. Co-CEO
Gray works under a large map of the section of the United States from Kentucky to Kansas.
Some customers are clearly swayed by the customer service emphasis. Bonnie
Pemble of K&L
Distributors, an Anheuser-Busch distributor based in Renton, Washington, became a McLeodUSA
believer almost three years ago when, as a new customer, McLeod representatives gave her their
pager and home phone numbers.
Perhaps Mr. McLeod's biggest strength comes from his ability to see past
the promise of technology
and, like his public television doppelganger, know what makes people feel good. Mister Rogers likes
kids just the way they are. Mister McLeod knows customers like to feel loved -- or at least have
access to a live customer service agent. It's a trend that might even play well on the coasts.
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