Nor does Leyshon's plan anticipate much competition from semiconductor makers. Texas Instruments and National Semiconductor tried and failed to capture significant shares of the appliance-control market. They never took the time, in Leyshon's view, to understand the old-line industry they were trying to sell to.
ACT's chief competition comes from two groups of firms: electromechanical-control makers trying to convert their products to the new technology and electronic-equipment makers.
The first group knows the market well, he concedes, but he holds that it is difficult for companies organized around one technology successfully to make their own products obsolete by converting to a new technology.
The second group he takes more seriously. Motorola, which was the market leader when Leyshon left the company two years ago, has fallen behind a relative upstart, Digital Appliance Controls Inc. DAC is headed by its founder, Peter W. Sognefest, the man who originally put Motorola into the appliance-control business in 1977. Sognefest left Motorola in 1984 when he was promoted out of the job he had and wanted to keep. Like Leyshon two years later, he launched his own company. With projected 1989 sales of $25 million, DAC claims it will hold the largest single share of the electronic-control market next year. But unlike ACT, DAC manufactures overseas, sells its products through OEM purchasing departments, and stresses proprietary design and quality over standardization and low pricing.
The total U.S. and European market for appliance controls of both types now runs some $2 billion a year, about equally split between each side of the Atlantic. By 1991, Leyshon projects, electronic controls will account for close to half this market, and ACT, his business plan predicts, will have grabbed about 12% of the domestic market for electronic controls. It will also be competing in the European market, although just how European sales will be handled is still murky.
Capital does not seem to be a current problem for Leyshon, which is not to say that raising it was easy. It wasn't. Chicagoland is no Silicon Valley, Route 128, or Research Triangle when it comes to financing start-ups. "You mention start-ups in this community," Leyshon says, "and nobody wants to talk to you. Real-estate people, for instance, treat you like dog poop." He launched the company largely on the expectation that he would be able to attract investors. Indeed, with the first purchase order in his pocket, he was able to sell a first round of equity financing in early 1987 to raise $1.1 million. And with several months' production under his belt and a respectable order backlog, he raised an additional $2.2 million in a second round that closed in May 1988. A large portion of the second-round financing came through a venture capitalist, but even so, Leyshon and his key managers together have managed to retain 48% of the equity in the company. He expects to finance growth through cash flow and a line of credit. No further equity offerings are planned.
Estimated sales for 1988 were $7.2 million, less than half of his original business-plan projection, but not bad for a company's first full production year. ACT lost an estimated $900,000 in 1988, down from its $1.2-million loss in 1987 -- its first, partial operating year. Projections call for a $1.4-million profit in 1989, when sales, by the company's rosy predictions, will more than double. In fact, by 1991, Leyshon projects sales greater than $60 million, more than eight times 1988 revenues.
Besides the microwave controls sold to Tappan, ACT has added Maytag's Magic Chef division to its customer list. And it has development contracts in laundry and dishwasher products for Sears, Frigidaire, and White-Westinghouse.
But one thing isn't working as he planned. In his business plan, Leyshon said ACT would find eager customers among Japanese microwave-oven manufacturers with plants in the United States. After all, he reasoned, having a domestic supplier would help satisfy those manufacturers' Just in Time inventory demands. And the appreciated yen was making Asian-produced controls expensive to install in U.S.-made products. But the Japanese weren't as eager as Leyshon thought they would be -- or should be.
"It's a joke," he says, "I don't think they're the least bit serious about doing business with American companies. . . . The yen has appreciated 50% in two years, and I'm still not doing business with them. The economics don't add up."
For an update on this company, see Anatomy of a Start-Up Revisited: Making Money, Raising Money
EXECUTIVE SUMMARY
THE COMPANY
Appliance Control Technology Inc. (ACT), Addison, Ill.
Concept: Manufacture electronic controls cheaply enough to break into midline appliance market (where they haven't been used before); achieve low-cost production goals by introducing standardization, a changed sales process, and onshore manufacturing to an industry that has embraced none of the above
Projections: Profits in 1989 of $1.4 million on sales of $18.9 million; 1991 sales of $62.2 million
Hurdles: Getting big-company appliance makers to change their habits in the ways ACT's concept calls for; keeping onshore manufacturing costs competitive
THE FOUNDER
Wallace C. Leyshon, 39, president and CEO
Before founding ACT, he was business director of the electronic appliance-control division of Motorola Inc., which had sales of more than $30 million, head count of 584 persons, and sales, engineering, and manufacturing facilities in the United States, Western Europe, and East Asia. He has a B.A. from Ohio University and an M.B.A. from DePaul University.
Somewhere along the line, Leyshon turned into a fervent industrial patriot -- which may explain his near obsession with onshore manufacturing. Bob van Dusen, vice-president of sales, recalls a call he and Leyshon made to the U.S. plant of a Japanese appliance manufacturer. "The Japanese told us we weren't smart enough to redesign their control," says van Dusen, "and you could just see the little American flags starting to pop out of Wally's head."
PROJECTIONS
ACT Inc. projected sales and profits
($ millions) Pretax income
Sales (loss)
1987 (actual) 0.9 (1.3)
1988 (estimated) 7.2 (0.9)
1989 18.9 1.4
1990 38.2 4.3
1991 62.2 7.9
WHAT THE EXPERTS SAY
FINANCIER
JAMES FITZPATRICK
