The Year in Start-ups
A survey of some of America's most fascinating new companies
We begin with the story of William J. Texido, our nominee for Start-up Most Likely to Succeed: "If you're going to find yourself unemployed, 50 is not the right age. Starting up again was a very humbling experience. I went from a view of the Golden Gate Bridge to one little room with no windows, from having 1,500 employees to doing my own copying at CopyMate, from a company Learjet to the back of the bus on commercial flights. I was able to make those adjustments. I'm proud of that.
"Now," he adds, "I have a new company that's affected me in ways I never imagined would happen. A great many of the rewards I've gotten have been the emotional rewards from helping people. I never aimed for that, and I've been absolutely amazed at how good you feel about it. You go through your entire life totally committed to economic returns -- which I'm still committed to -- and all of a sudden a big part of your day is when someone tells you how much more enjoyable you're making their life. It's just amazing."
Texido's company, started last fall, is Providential Home Income Plan Inc., a provider of reverse mortgages for senior citizens (Insider, "On the House," March 1989, [Article link]). It's a good bet for at least two reasons. In finding a way to unlock the assets of brick-rich, cash-poor seniors, it represents a can't-lose demographic play. And in Texido, it has a passionate, proven entrepreneur -- until 1986 he ran BRAE Corp., a $500-million leasing company he founded and took to #1 on the 1983 Inc. 100.
There's another reason we like Texido -- the same reason we're thrilled by start-ups generally. We like his sense of discovery.
Of course, there are other things we like about start-ups, too: their shiny innocence, the feelings of unsullied hope and unchecked enthusiasm, and the way they embody business ideas -- raw thought and instinct -- in their purest, most fascinating form.
But it's still the personal test that's most exciting to see -- maybe because it's the most revealing. Things happen in new businesses, often bad things. Life gets tilted to extremes. What does one discover? Terror maybe, or unimagined strength, or simple grace under pressure. Anyway, this is certain: start a company, and you can't hide. As the founders of the companies that follow -- some of the hottest start-ups in America -- are finding out.
Keeping It Simple
It's no surprise that aircraft manufacturers don't start up every day. Barriers to entry are high. There's expense, for one thing; Las Vegas-based Bromon Aircraft Corp. is reportedly using some $100 million to get up and running. There's plenty of entrenched competition, for another.
So what leads former Hughes Aircraft Co. executives James Brown and Joseph Monaco to think they can survive the fray with Bromon? Three factors, mainly, all products of their decision to eschew the ever-more-sophisticated planes that most manufacturers are designing. Instead, they are making a simplified craft that is essentially a "flying box."
First, the plane's shape lets it carry A-series mail containers, used by overnight-freight companies, that others in its class can't. Second, the plane can transport military trucks that otherwise would need larger carriers. Third, it's cost competitive both in price -- helped in large part by low-cost labor at its Puerto Rican factory -- and in operation, thanks to the efficiency of the square shape and the easy maintenance that should result from its uncomplicated design and off-the-shelf parts.
The idea isn't new. The concept of a box-shaped plane was developed by another start-up in the 1970s, and that company went bankrupt -- Bromon later bought the assets and redesigned the plane. The reconceived aircraft has been in development at a converted air-force base in Puerto Rico, with 450 people working on it. At peak production the company expects to employ 1,000 workers and turn out five planes a month -- which translates into more than $300 million in annual sales.
Will it fly this time? Introduction of the finished BR2000 has been delayed once, to early next year, and the plane has yet to undergo Federal Aviation Administration certification tests.
Still, Monaco says the company has letters of intent for the purchase of about 50 planes from the Philippine govenment, Toyota Tsusho Corp. of Japan, and others -- enough to keep the plant busy for a couple of years.
Bye-Bye, Big Blue
"At IBM, the further you go up the organization, the less hands-on creative work you do. I went to meetings, and I said no to the creative people. It was like an issue of Time magazine: 90% of it ends up on the cutting-room floor, and I was the guy with the scissors. That's not nearly as much fun as creating is. There is, though, a -- I don't know what to call it -- entrepreneurial shock or big-company-to-small-company shock when suddenly you find that the massive resources and bank accounts aren't behind you anymore, and in order to do anything, you have to sell something, you have to finance something, you have to deliver something. And you have to do that every day in order to grow a business."
-- William Mount, former communications director for IBM's general systems division and now cofounder of Metaphor Advertising & Marketing Communications Inc., in Atlanta
HOT CONSUMER PRODUCT:MONTAGUE
Folding bikes, David Montague concedes, have a nasty reputation. All those teeny wheels and little seats -- hardly the stuff for a comfortable spin around the park, let alone a high-performance tour in the mountains.
"Typically what people did," Montague says, "is they thought, OK, I want my end product to be the size of a briefcase, so how can I telescope this out and that out and unfold this and unfold that so I have something that vaguely resembles a bicycle and is somewhat ridable? That creates a folding bicycle, not a bicycle that folds."
The difference, he asserts, is more than semantic. The bikes made by Montague Corp., in Cambridge, Mass., are designed to be more comfortable than novel, structurally more like the typical, nonfolding all-terrain bike it competes with than the children's bike most other folding bikes resemle. True, the end product isn't as compact as a conventional folding bicycle, but it's small enough to fit in a car trunk or a closet. Which is, Montague posits, all an urban bike needs to be.
This year the company will sell 2,200 of its $500 bikes. It expects to more than double that with revenues of $2.8 million next year and to ramp up to $40 million by 1993. Certainly the market is hot enough: the mountain-bike rage that started in the early 1980s is still in high gear, with 2.5 million of the fat-wheeled bikes sold last year alone. According to one industry observer, West Coast bike dealers are doing 80% of their business in the all-terrain variety.
"We're going slow now," the 26-year-old company president says. "We didn't have word of mouth initially. It takes some time."
The company has, however, been an international distributor almost from the start: Montague sells bikes in Canada, Europe, and Japan and has a joint-marketing deal with Raleigh, in Great Britain. The company also is talking with several large Japanese corporations about a distribution arrangement there, where it predicts the market for smaller bikes will be huge. Foreign sales, in fact, are likely to make up at least half of next year's total sales.
Those are big plans for a little company. Montague Corp. has only five employees, with manufacturing done in Taipei and selling handled by independent reps. Although Montague says maintaining quality control from abroad will be his continual challenge, right up there with getting more U.S. dealers signed on, he's also confident that broad distribution will be a boon. "We're selling technology, and we can sell it everywhere," he says. "Even if the U.S. dollar goes down, we'll still be getting yen, Deutsche marks, and pounds. It evens out our business."
Concept: $500 full-size all-terrain folding bicycles
Founders: Harry Montague, architect, and David Montague, his 26-year-old son
Financing: $300,000 of family funds
Source of Idea: Harry was tripping over too many bicycles in his house
Critical Hurdles: Convincing dealers to carry a new product and maintaining quality control with foreign manufacturers
Projections: $2.8 million in 1990; $40 million in 1993
It's hard to imagine an industry better positioned for modern times than bioremediation. What bioremediation companies do is develop microbes -- "bugs" -- that speed up nature's decomposition process and eat the refuse of humankind, such as spilled oil and toxic chemicals. Done right, bioremediation has the potential to join and even surpass landfills and incinerators as the way to tackle many environment-threatening wastes.
One of the hottest companies in the young industry is Ecova Corp., which in its third full year of operation expects to do $7.5 million in business. It already has a successfully demonstrated proprietary technology for breaking down trichloroethylene (TCE), a degreasing solvent and common groundwater contaminant.
"Actual cleanup has yet to really take off; it's been slowed by regulations and liability concerns and court fights over who's at fault," says John Cioffa, Ecova's vice-president of corporate development. "But it's starting to go now, and we intend to be a big part of it."
It won't be alone.
HOT INDUSTRY: CLEARVUE RESOURCE MANAGEMENT
All in the Timing
A business plan won't help Doug Wadsworth plot the course of Clearvue Resource Management Ltd. What he really needs is a stopwatch. "The window of opportunity is closing," says Wadsworth, cofounder and president of the Troy, N.Y.-based plastic-recycling company. "We're not the only people looking at this as a business opportunity."
Wadsworth plans to elude his competitors by quickly moving his company through three steps: from a service business that collects and brokers plastic, to a maker of refined recycled plastic, to a manufacturer of goods made of recycled plastic. "This has all been thought out very, very carefully," he says.
So far Clearvue has enlisted about 50 municipalities, all within a 200-mile radius of its headquarters, to sign on to its turnkey recycling program. Wisely, Wadsworth has focused on communities where newspaper recycling has been popular and landfills are overflowing. "The problem may be magnified here," says Linda Dillon, recycling coordinator for Albany, N.Y., "but it is going to be a nationwide concern."
Currently Clearvue is taking in roughly 50,000 pounds of plastic a month and doesn't do much other than clean it, sort it, and broker it to companies that use it to make such items as drainage pipes. But Wadsworth is trying to raise $250,000 to buy machinery that will blend and pelletize the plastic into a virgin-plastic substitute, raising his gross margins from a thin 20% to 30%. "We'll open ourselves to a much wider market," he says. The substitute will cost about half as much as virgin plastic, yet manufacturers will be able to mold it into parts for products such as flowerpots or chemical containers.
Step three is only a couple of years away. Then Wadsworth plans to raise another $500,000 -- "from anyone but venture capitalists," because he wants to stay in control -- to buy machinery that could make such high-margin items as toy components or trash barrels. The company plans to franchise its plastic-collection business in as many parts of the country as possible. "This is a race," Wadsworth says, "to see who the leader in plastics recycling is going to be."
Indeed, it is. Big manufacturing concerns, Wadsworth fears, are going to feel political pressure to start recycling plastic; they may link up with other giants that specialize in recycling. "At any moment the big companies in this industry could go into this area full tilt," says Wadsworth, whose company's revenues should hit $100,000 this year. "That's something we're very cognizant of."
Concept: Plastic recycling and eventually refining collected plastic for use in own manufacturing
Founders: Doug Wadsworth and Dave McGraw, both 26; after meeting in college, both worked as engineers at Fortune 500 companies
Financing: $50,000 from savings and home-equity loans
Source of Idea: An article in a trade magazine called Modern Plastics
Critical Hurdle: Eluding competition long enough to establish itself in what could fast become a market crowded with much bigger companies
Projections: At least $50 million in revenues by 1994
A Good Ear for Solutions
Here's a market you can bet won't shrink: customer-service departments that need help answering the questions of technology-illiterate users. Answer Computer Inc., of Sunnyvale, Calif., has developed a $15,000 software package that walks service reps through likely solutions to the typical and the not-so-typical problems of harried callers.
Market size right now? There's about $500 million worth of business in high-tech customer support alone, figures Louise Kirkbride, one of three Answer cofounders -- and Answer plans to capture 10% of it within the next five years.
Not by peddling its package to service departments, however. That would pit Answer against the internal software developers at its large corporate clients. It might also miff customer-service managers, who'd interpret Answer's proposed alternative as an implication they aren't doing the job. So Answer's opening pitch usually goes to a company's vice-president of sales.
"We call it our 'Tom Peters Sell,' " Kirkbride says. "We help companies get the competitive edge with better customer service. Selling to a happy old customer is five times easier than finding a new one."
Another reason Answer targets the sales VP: the higher up the management chain you can reach, the more likely you are to find someone who has the ear of the CEO.
HOT ENTREPRENEUR:DOUBLE SHARP GARMENTS
It seems simple enough: Joanne Marlowe makes weighted beach towels. Before that, though, she founded separate companies that made custom dresses, retailed clothes, and produced and telemarketed garments. In 10 years of self-employment, she has survived embezzlement, near bankruptcy, and life as a Chicago carriage driver. Now, she is on pace to do $4.5 million in towel sales by March 1990. She is 23 years old.
"It was a Sunday morning at the end of June 1988, and I was -- how should I say this? I'm basically a great person for having rabbits up my sleeve, and I didn't have any more rabbits. The theft in the fall had cost us about $450,000 in lost sales, this only six months into the company [Double Sharp Garments, first incarnation]. I closed down my plant June 6, after struggling to get it back on its feet. I was seriously considering bankruptcy. I'd gone from a sizable small company to back where I'd started eight years before.
"I was pretty depressed, and one of my friends pointed out that I lived across the street from a beach but had never gone. Never had time. So we got a cooler, a bottle of wine, decided to relax.
"It was a beautiful Lake Michigan day -- puffy white clouds, light breeze, not too hot. I laid out my towel. To pamper myself, I spent a lot of time putting suntan oil on. Just as I stretched out, a gust of wind picked up the towel and covered me in sand. I hit the roof.
"My friend said, 'Joanne, instead of getting angry, why don't you figure out a fix? I bet that pisses other people off, too.' This particular person had come up with a lot of really impractical ideas over the years, but this one seemed feasible. A weighted beach towel would be a low-cost product to introduce, for instance, and it could be telemarketed. So instead of relaxing at the beach, I spent the day coming up with prototypes in my mind and had the product developed within five weeks and had it to market within eight weeks.
"Developing the towel was extraordinarily easy for me, because I started out in fashion, and fashion is cutthroat. I had learned how the larger retailers function, how the markets function, how the seasons sell, all with a much more difficult product. Clothing was five different colors, 10 different styles, and three different lines -- twice a year. I went from managing that to managing five different weighted towels, two sizes, one color. And when you make product introductions to domestics buyers, they actually like to talk to you, as opposed to clothing buyers, who never return a phone call.
"I took an odd job to pay the bills, driving a carriage for three months in downtown Chicago. It was the kind of thing where I'd get up at 5:30 a.m., do all my office work, work with the couple of employees I kept on staff from 9:00 until about 3:00, then run downtown, clean my horse, clean my tack, get on the street by 6:00, and be out until 2:00 in the morning. I was sleeping about three hours a day from July until October. I wasn't very healthy, but it worked.
"I've kept it very small this time. I have only two assistants and me. I work with five manufacturers, and all the towels are drop-shipped by the printer I'm working with domestically. It's allowed me to move fairly freely without the overhead, which has been the key for getting this thing back together.
"I like the idea of doing a lot of this out of house, because it's easier to define costs. My history has been to do distribution and production and sales all in house, and it's very hard to formulate exactly how much a garment costs based on those three segments of overhead. I kind of like being sent bills; you go, 'Oh, this cost that much, huh? We'll put that in the file.' It makes bookkeeping just an absolute dream.
"By March 1990 I'm expecting we'll have sold $4.5 million of the towels [at $25 to $37 each]. My goal is for us to be doing $7 million to $8 million in sales by the end of 1990 with fewer than 10 people on staff. I think I'll be able to do it the way I've laid the groundwork.
"If there's an obstacle in the way, I'd have to say it's my own emotional readiness, because after being down on the canvas, you become extremely cautious. I don't want to be unprepared for the success because I got hit so hard before."
Concept: Beach towels with weights in the corners so they won't flip in the wind
Founder: Joanne Marlowe, 23, founder of a clothing-design company at age 14 and later of Double Sharp, originally a clothing manufacturer
Financing: $750 of her own money
Source of Idea: A gust of wind blew her towel and the sand underneath it all over her freshly oiled body
Critical Hurdle: Maintaining quality control on a product she never handles
Projections: $4.5 million this year; $7 million to $8 million next year
Battle on the Beach
Standing in sharp contrast to Joanne Marlowe and Double Sharp Garments (see previous profile) is Dave Mednick.
Like Marlowe, his inspiration came during a day at the beach. Also like Marlowe, his idea had to do with taming flighty beach towels -- he decided to create a kind of clothespin-on-a-stake gadget to clip towels in place.
But the similarity in company creation ends there. Mednick spent two years and $20,000 developing his idea. He signed on Mike Mayer, a former Parker Brothers sales rep, to carry the project forward. They went to the Wharton Small Business Development Center to write a business plan to entice investors, who plunked $170,000 into the company. Then they contracted with a school for the developmentally disabled to assemble the Sand Sharks, expanded the line with two other products, and moved into a 2,300-square-foot warehouse.
To date, the company has used foreign manufacturers who produce a complete product. "I send them an order, and eight weeks later it shows up on my dock, which is a little bit easier than trying to coordinate five contractors to land on the same point at the same time," Mayer says. "That can lead to five mistakes." Still, Mayer, who runs the operation full-time while Mednick pursues his career as a commercial diver, is convinced that in-house production will make Shark Products Inc. more flexible to do special packaging and labeling. So the company will do manufacturing both in house and out.
One market. Two companies. Two approaches. Choose the smartest.
ADVANCED FORMING TECHNOLOGY
The industry that Advanced Forming Technology is trying to forge is so revolutionary it doesn't have a name yet. AFT, in Longmont, Colo., has developed an injection-mold process to turn powdered metal into small, complex, high-precision parts usually made by casting and machining. The payoff? Dramatic reductions in the cost of metal components -- a result likely to affect the manufacture of everything from airplanes to sunglasses.
The company was launched with $4 million from venture capitalists and corporations -- including Xerox Corp.'s venture capital group and Alcan Aluminum Ltd. -- each a potential acquirer. Customers include such blue chippers as ITT, Johnson & Johnson, and Teledyne, and AFT's 1990 sales goal of $6 million is already backlogged. "We're at cash-flow break-even right now," CEO David Bruce says. "Next year we should be profitable."
For the moment the industry is small, although big companies in Japan and West Germany are entering the marketplace. As many as 20 U.S. companies also are struggling to get involved. "We are analogous to the plastics industry 30 years ago," Bruce says.
HOLLYWOOD MAKE A MOVIE
Sorry to sound primitive, but some problems are just aggravated by technology. Take, for instance, those boring people who are always showing you snapshots of their adorable, brilliant kids. Now, they've all bought video cameras, so "they can pay $1,000 to tape hours of their family in the act of walking," as John Marco puts it.
Marco, who used to sell and rent movie equipment, has come up with an antidote. His three-year-old company, Hollywood Make A Movie Inc., in Toms River, N.J., sells moviemaking kits -- complete with scripts, sound effects, and props. The kits, ranging from slapstick to horror, retail for $9.95 to $39.95. "They've bought the equipment," says Marco, who is seeking to raise $500,000. "We're just giving them the software to use it."
HOT SERVICE COMPANY:TCOM SYSTEMS
Two things suggest TCOM Systems Inc. is headed for a prosperous future: (1) it has already attracted $25 million in venture capital, a reasonable sign of serious potential; and (2) it aims to provide a better alternative to the U.S. Postal Service -- the business-strategy equivalent of shooting fish in a barrel.
What Washington, D.C.-based TCOM Systems does is shortcut the Postal Service for corporate clients that send a lot of mail, such as direct-mail ads, pitch letters, bills, and customer-relations messages. At a typical cost of 55¢ per piece, TCOM bypasses 19 of the post office's 23 steps, electronically sending letters to seven sites across the country, laser printing them, sorting them by postal route, and direct depositing them for delivery by local post offices -- the postage is included in the price. Clients such as Dun & Bradstreet, AT&T's American Transtech, and Marriott could save the overhead of doing mailings themselves, president Arpad de Kovacsy says, and get letters into recipients' hands days sooner because of TCOM's 24-hour turnaround and local postings.
"Our main competitors are the in-house mailrooms of major corporations," de Kovacsy says. TCOM studies show that internal mailroom costs are generally more than 55 a letter. Convincing corporations hasn't been easy, though.
"When we started, we had the misimpression that we could get major corporate accounts to switch to us overnight, and that's not the case," de Kovacsy says. "It takes them a while to feel sure that you're here to stay, that you really do provide the quality service they demand, and that you're cost effective. Plus, there's the natural desire to stay with the way you've been doing things."
Still, the opportunities are enormous: 12 billion of the 140 billion pieces of mail sent each year are electronically generated. By TCOM's calculations, that represents a potential $6-billion market. The U.S. Postal Service itself once tested the concept, but rejected it under pressure from the telecommunications industry, which didn't want the competition. TCOM expects to take less than 0.5% of the market next year -- which still adds up to 56 million messages for $33 million in revenues.
Concept: A mass-mailing service that utilizes electronic transfer to shortcut the post office, saving clients both time and money
Founder: William Bolger, former U.S. Postmaster General
Financing: $25 million in venture capital
Source of Idea: The U.S. Postal Service looked into the concept but abandoned it under pressure from the telecommunications industry
Critical Hurdle: Convincing corporations that it's more effective and efficient to do mailings out of house
Projections: $33 million in 1990; potential $6-billion market
Playing the Float
At this moment a couple hundred million dollars is sitting in mailboxes. It will take a couple days before those mortgage and car-loan payments reach their destinations and another couple days before they're cleared and the money is transferred into collectors' accounts. Until then, consumers will earn the interest.
If, however, the float time was cut, collectors would draw the interest -- about 27¢ a day on a $1,000 payment. For a lender or insurance company handling 100,000 transactions a month, that adds up to more than $300,000 a year.
Those numbers are compelling enough that Nationwide Remittance Centers (NRC), in McLean, Va., has spent four years trying to set up a system that will trim that float by a few days -- and has bet its existence on one big sticking point: the plan needs the cooperation of the U.S. Postal Service.
NRC's idea is to intercept bill payments right at the post office. By diverting coded payment envelopes directly to its own local processing centers and then moving the money electronically, NRC would prevent checks from having to move from postal bin to carrier sack -- chopping off at least a day of delivery time. For a transaction fee of 10¢ to 15¢, clients would get their money earlier and eliminate the overhead required to process the payments themselves.
If the post office OKs the system this fall, as many expect it will, NRC is well poised to exploit it. It's already collected $7.8 million in venture capital and has 30 processing centers, compared with its competitors' half dozen or so. "We shall rise or fall depending on whether the post office approves it this year," CEO Ed Bartlett says. If it does, NRC expects to do $5 million next year; if it doesn't, the company will likely close up shop.
A Small Piece
"The reason we went into business, obviously, was to make money. We saw an opportunity here -- there were no small, high-end, premium-niche players in the liquor market. What had happened to the wine and beer industry was remarkable; 15 years ago there weren't any mass-marketed, high-quality California wines. Same thing with brewing. You can buy great beer in America now. That hadn't happened in the liquor business before. It's such a huge industry and dominated by so few players, it's very hard to break into. But it's worth $24 billion a year, and you don't have to have a very big piece of that in order to be happy. We're not trying to be the next Seagrams; we're just trying to have a nice little business. We've been doing it on a wing and a prayer from day one."
-- Brian Tyrol, cofounder of Vermont Distillers, a microdistillery that makes a liqueur from maple syrup
The problem with editing videotape, Bill Warner knew, is that you can't change your mind. Reinserting a frame that's been cut is as cumbersome as retyping a letter to fix a typo. Now, Warner thinks he's solved the problem -- and more important, so do the folks at Apple Computer Inc.
Warner's idea: copy complete video footage in real time to digital hard disks, so editors can view shots easily and make trial cuts and changes quickly. At $50,000 to $80,000, the systems produced by Avid Technology Inc. are a third the price of the fancier systems they emulate. "We make the sale," he says, "on the time you save and the creativity you get." The company's Apple connection won't hurt sales, either. Though Warner originally designed the product on an Apollo computer -- he was marketing manager there -- Apple wooed him to the Macintosh after its reps saw Avid's preliminary system at a convention last fall. "We shipped him a Mac, then pestered him until he tested its power," says Tyler Peppel, Apple's manager of multimedia products.
In its informal relationship with Apple, Avid gets marketing help, technical support, and matchmaking with distributors. Apple gets to display leadership and innovation, Peppel says -- and sell more computers. So important does Apple consider these relationships, in fact, that it's dedicated the resources of the large Apple Development Group to helping 10,000 companies now developing Mac hardware and software.
HOT MEDIA PLAY: AMERICAN COLLEGIATE NETWORK
Big Mag on Campus
It's old news: big company gets so bloated it loses touch with its market, only to find itself displaced by an upstart. Not exactly man bites dog.
Except when you consider the number and sheer heft of big companies that have failed in the same market in which The American Collegiate Network Inc. (ACN) has become a $3-million-plus business since February 1988. Started by someone with no previous publishing experience, the company puts out a national monthly newspaper aimed at college students -- thus competing in a market that's been as cluttered as a sophomore's dorm room. Time Inc., McGraw-Hill, and the Washington Post Group, among other heavyweights, have launched -- and abandoned -- publications for the same audience. "The largest media houses in the