Principal, Canaan Venture Partners, Royalton, Conn., formerly General Electric Venture Capital, experienced in electronic-control business with GE, Texas Instruments, and Motorola
I think ACT's notion of building onshore is right. It's absolutely correct that labor costs are a minuscule part of this product. Manufacturing in the United States should provide ACT with an enormous advantage.
Will ACT succeed? I don't know. You've got a very experienced team, people who know what they're doing. But I'm concerned that they may be trying too many things at once. A good company, a good entrepreneur, a good venture really does one thing very well. And here they're proposing to use a new design approach, a new marketing approach, and the onshore manufacturing approach -- three big bites. I don't think they're wrong on any of them, but if they flunk in any one area, they're in trouble. I'm not sanguine about their ability to survive, but I hope that they do.
COMPETITOR
PETER W. SOGNEFEST
President and CEO, DAC Inc., Hoffman Estates, Ill., electronic-control maker with 1988 sales of $15 million
I believe it will be very difficult for ACT to overcome the many obstacles that lie ahead. Leyshon started his company after less than six months' experience managing the appliance-control business at Motorola. It is difficult to learn any business in six months. Leyshon is on the right track in focusing on service and quality. However, a lowest-price strategy is seldom successful, especially when coupled with a high-cost factory (ACT's U.S. factory versus competition in Singapore and Korea). He's right to have a U.S. factory, but he also needs an offshore factory to meet the total needs of the appliance business. His major competitors, companies like mine, have factories in both places. And the DAC U.S. factory cannot compete with the DAC Singapore factory.
During my 20 years in this business, I have never seen Leyshon's sales approach work over the long term. The supplier must serve the needs of his customer's purchasing and engineering departments. The customer's purchasing and engineering departments are quite able to work with their own marketing organizations. It is necessary to sell to those who give the order in this market.
I think there'll be a capital problem, too. ACT has raised $3.3 million and plans to grow to $18.9 million through retained earnings. However, just licensing the required technology has cost my company $750,000. ACT will also need these licenses. If ACT has similar licensing costs and cumulative losses through 1988 of $2.1 million, it won't have a lot of money to support growth. Contrast this with $16.1 million in equity raised by DAC to reach $25 million in 1989 sales. The numbers suggest that much more equity will probably be required.
CUSTOMER
JAMES WEST
Executive vice-president, marketing sector, WCI Major Appliance Group, Columbus, Ohio, which buys from ACT and other control suppliers
Their sales approach is working here. Marketing people are working with ACT along with the purchasing and technical people. Can others copy that? I think they can, but at this point most haven't. This is a great marketing strategy for getting new business, but it's not without risk. What happens when you get the new business? A year after a control goes into a design, the purchasing guy is going to take that wonderful new system that ACT has developed with the marketing and engineering people and take it out for quotes -- "OK, industry, have at it, beat this price." That's the nature of the industry. It's very cutthroat. Given that, ACT will be in the position of continually having to defend business that it's already gotten. Your ability to gain business is only as good as your ability to keep business, and you do that only by keeping costs down and prices competitive -- great relationships won't do it. They've got a tough, competitive road ahead.
It's uncomfortable to think about how much of its competition is overseas. It's hard to believe only Wally Leyshon has been able to figure out that that isn't smart. But I'm relying on what he's said to us, which is that direct labor is indeed no more than 10% of product cost, and that's more than offset by the longer supply-chain issues. He's very committed to this made-in-the-U.S.A. strategy, and I'm on his side -- I hope it works. But he is all alone on that one.
FINANCIER
KYLE LEFKOFF
Venture associate, Colorado Venture Management Inc., Boulder, Colo.
The company's credibility, I think, is excellent, evidenced by a $3-million purchase order from Tappan before the first venture financing. To our minds, that's a real feather in Leyshon's hat. Because a guy who comes to me and says, "Hey, I've got this new product, would you be willing to put up some seed capital, and by the way I have a $3-million purchase order on the table," is a very impressive guy to us. That's the kind of guy you love.
Also, the entire team comes from what was the industry leader in the business, Motorola, so they're not reinventing this business. They've already made money at it; they just want to do it for themselves now instead of for a big company. And that's a story that appeals to a venture capitalist.
The projections look reachable given the size of the market and competitor DAC's experience. DAC reached $25 million in a couple of years. It got big fast, and venture guys like to see that, too. Here's a company that is, in a sense, an analog to ACT, and it shows that little companies can get into this market and make it work.
Would I invest? Obviously, it depends on price, but the answer would probably be yes. It looks like a good deal. I would have liked to have gotten in on the first round, not the second. I think ACT will get to pretty significant revenue fairly soon; the numbers are achievable. The plan is aggressive, but it has a team that looks like it can do it. Even if the company gets to $15 million the third year, that's pretty good. Do I think the company will succeed? Yes. My definition of success is 10 times the investment in five years, and I think they'll do it.
One nagging question, though: why is ACT in Chicago? This business could be anywhere. If I needed to build a factory, I'd go looking in the boonies and see who'd give me the best deal. There are places that would love this business. It's basic, hard-core, nonpolluting manufacturing. States like Colorado would have rolled out the carpet for him, given him a free building and equipment grants and tax breaks.
