After them, however, the deluge. This fall, as many as 26,000 more students are expected to pay $49.95 each to enter WSG's collegiate investing contest. Armed with the usual $100,000 worth of gossamer, entrants will trade the market for four months. If they're particularly good, they won't just find their names on some obscure list: the top 10 will divvy up $62,000 in WSG-provided ante.
In his marketing plan, such as it was, DeMello had intended to establish this campus contest in '88, then go after cash-paying sponsors the next year (see '89 financial projections, page 5). But sponsors couldn't wait that long. Before summer even began, AT&T had grabbed the title (the event is now officially called The First Annual AT&T Collegiate Investment Challenge) for $200,000 in cash and advertising; Dow Jones had arranged for a scholarship tie-in; and Reebok International had signed up to provide merchandise awards. "This is big for us, credibility-wise," DeMello grants. "AT&T, Dow Jones, and Reebok are definitely three top companies."
By mid-June, WSG had enlisted participants from some 500 campuses in the United States, Canada, Mexico, and England, at which point DeMello decided he'd better limit enrollment before it overwhelmed his ability to service it. And that's only one promotion. Next spring comes a three-month, cash-prize contest, with a $150 entry fee, marketed and promoted with Players International Inc. The response so far has been spectacular, reports DeMello, looking toward yet another sizable piece of change -- and an apparently lawful one in at least 44 states, WSG's attorneys have advised.
Because of such easily placed sales and the possibility of more (WSG has been considering concentrating on such would-be clients as the American Association of Individual Investors, the American Association of Retired Persons, and even Wall Street brokers), DeMello so far has been content to exist without a sales force. "That will kick in in year three, when we have other products," he plans. Until then, DeMello himself insists on doing the selling. "If I had a full sales force going after every market we could possibly get into, and they all hit, I couldn't service all the business," he explains. "I'd rather find out where we're headed and directly identify every market, then put together a sales force and tell them this is what you can sell. We have to make sure we have the core of it right before we can expand." On the other hand, DeMello is willing to second-guess himself: "Maybe we should have the sales force first. If I could throw in $50,000 to increase sales 20%, I definitely should.'
While promotions seem to be catching on by themselves, equally fertile but tougher ground awaits in the training market. So does a higher pricing structure, inasmuch as a training course isn't particularly price-sensitive. "Employers know that just to put an employee on a plane is a $500 expense without adding in anything else," assesses DeMello. "We can train them through self-study." Several corporations already have solicited WSG, among them multiservice financial institutions that must familiarize customer-service staffs with the stock market. In Boston, National Financial, a Fidelity Investments company that processes brokerage orders for correspondent banks on the side, has been asked by some of the banks to set up dummy accounts as teaching vehicles. But fearful that the fakes might get mixed up with the real thing, National Financial refused and is now reviewing WSG's proposal to set up a riskless program through its trading desks.
And if pure training works out, won't training cum promotion do even better? In the fall, as part of the Fidelity deal, WSG is proposing to stage such an amalgam for 500 employees of the brokerage arm of New York City's Irving Bank Corp. While the employees sop up training through game play, they also vie for a substantial cash prize. Corporations with employee stock ownership plans also are WSG's fair game. Wide-scale employee education helps the employer in the end, the pitch goes, because ESOPs are a cheap source of capital.
DeMello ought to be familiar with cheap sources of capital, having seeded his enterprise with $20,000 of his own, then offered outside investors 20% of the company for $500,000 in May 1987. Simple arithmetic appraises DeMello's share of Wall Street Games at close to $2 million even back then. And there were no products, no prototype, and no assets; what's more, start-up charges of about $65,000 (of which software design alone ate up $35,000) had yet to hit the books. There was, however, a reassuring written pledge from key personnel (the chief executive officer, treasurer, and sales manager -- each in the person of one Tim DeMello) to work full-time for two years at $60,000 a year plus a bonus of not more than 10% of EBIT (earnings before interest and taxes). Since the second year's EBIT was estimated to be $375,000, that would give key personnel another $37,500 and put DeMello back close to six figures.
"My plan was not to go for debt financing," he explains. "I knew there had to be a certain amount of equity, because if I went in and tried to do the whole thing on debt, no bank was going to give me enough. So I figured, let's get the equity taken care of first to show it's in line, and then the bank will respond positively." (Subsequently, the bank did, extending $250,000 in a line of credit, of which WSG has used $100,000 -- its only debt.) Over the next three months, DeMello doggedly hawked stock, accumulating commitments from fellow brokers and old clients. He stopped when he got to $325,000, concluding that it was enough to proceed with.
Many variable costs haven't settled in yet, but DeMello feels he has understated them in the '89 projections, which are based on selling 35,000 units. Labor is well controlled, because, as DeMello notes, "if we don't sell product, we don't use the students." And if they do sell product, there's no problem, either: in June alone, 26 job applicants were turned away. Shipping will go up as product is freighted to more than 500 campuses. Sales commissions also will rise noticeably: WSG pays campus reps $5 to $10 per game sold for the college competition. As demand for service increased, DeMello hired a full-time director of computer operations. To pay for expanding operations, this time around DeMello intends to do some debt financing. The reason is sound enough: "If I have $300,000 committed from sources like AT&T, it would be crazy to go out and dilute the stock by selling more equity.'
