Bennett intends to blanket the map with distributors, to whom he will hand over existing house accounts. As of the end of '89, the company had signed up seven independent distributors -- in New England, the mid-Atlantic, the West Coast, Ohio, Michigan, and Florida, plus one who deals with the military. Accounts elsewhere will stay on a direct basis for the time being.
Where a distributor is in place, MicroFridge passes on qualified leads generated by one full-time, in-house telemarketer. "That's another thing you get with a distributor: follow-up," the salesman in Bennett savors. In turn, distributors "love" the affiliation, he claims, because the appliance opens discrete markets they've never had before, such as schools, hotels, and office-food services. And in making end-user sales rather than selling to a dealer, distributors enjoy from three to five points more margin than the 15% they customarily work with.
For its part, the company backs up distributors' sales with joint marketing. After contracting with its first major distributor last July, $50-million, 18-salesperson Choquette & Co., in Seekonk, Mass., MicroFridge got it moving by designing a mailing piece that was sent to 4,000 hotels in New England. The response was so positive that in August, for the first time, the by-then-full-time partners began paying themselves salaries.
Last June Microfridge raised $100,000 through a private placement of equity, at that time bringing the company's capital base to $221,000 (including a loan from the founders of $61,000). But it could hardly be called a base, since the sum had already been spent on start-up activities, some $50,000 going to legal fees, $6,000 to the market study, and much of the rest to appearances at national trade shows. How, then, to pay Sanyo its $100-per-unit down payment, never mind the $170,000 for tooling?
The latter could wait a bit; the former couldn't: by July, MicroFridge had booked orders for 2,400 units. A Korean trading company offered to finance them, and Bennett signed on for $170,000 credit at 2% of the amount financed plus an annualized 3/8 of a point over prime. MicroFridge's first order went to Sanyo for 1,700 units. The rest was backlogged. When the Korean company "tried to get higher rates out of us," Bennett reports, "we dumped them." For its second order, MicroFridge switched to Transamerica Commercial Finance Corp. at 1% plus 4 points over prime. "It may seem expensive, but it's very short money -- only days at a time." And Sanyo agrees. With the less burdensome terms, Sanyo rescinded its $100-in-advance demand. A third equity placement completed last November for $350,000 ought to relieve the rest of the credit crunch.
Raising private money -- most from relatives and friends -- has been comparatively uncomplicated. "The concept is easy to grasp -- after all, it's not gene-splicing," explains Bennett. Initially, however, the partners hoped to get funding from venture capital firms. "They wanted at least half," Bennett complains, "and were prepared to wait us out until we were absolutely desperate. So we said forget it, we'll operate on a shoestring." On purpose or not, the strategy continues to bring in just enough capital to take the business to the next stage. Even after last fall's sale of $15-a-share equity, the three original owners still owned 70% of the company -- at an investment of 56¢ a share.
That round at last made MicroFridge bankable, confirms consultant Peter A. Chapman, 55, a small-business specialist whom the principals brought in as treasurer and part-time CFO last April. Even though MicroFridge still owed Sanyo $170,000 for the tools, the company probably achieved the positive net worth status that commercial banks require. Soon, some loan officer should be willing to extend conventional debt financing for round four. When that happens -- maybe late this year -- MicroFridge will be off the inventory-financing factor's costly hook.
Until then, a current $1-million credit ceiling will impede MicroFridge's ability to satisfy distributors' demands for product. For example, the line will nearly have been used up paying for 1990's first two shipments -- 1,700 units due to arrive this month and 3,400 to arrive in March. When the company opted to forgo warehousing in favor of frequent production runs, it had to learn to live with Sanyo's four-month lead time. Forecasting had better be accurate, because coming into 1990, operating expenses were running close to $50,000 a month. Bennett projects that 40,000 units will be sold in 1990, and demand beyond that may have to be placed in backlog. If demand gets too brisk, distributors probably will be put on allocation -- a resolution they're apt not to like.
Clearly, Transamerica's financing can carry Micro-Fridge just so far. It must move ahead cautiously, since every new distributor likely will want a few container-loads (at 220 MicroFridges each) to start with, and putting them on hold won't do, thanks to the expense-free power of the press. "At first we were having a hard time finding distributors," Bennett relates. "But publicity has created a condition where distributors are calling us."
In just one week late in '89, a Boston-based 35-outlet office-supply chain purchased 220 units from Choquette and committed to 220 more, and the University of Massachusetts another 232. The torrent caused Bennett to conclude that New England, which he estimates is about 8% of the national market, was starting to gel. That left 92% of the country yet to come on with equally strong demand. It also caused Choquette president Normand Choquette concern, lest MicroFridge not be able to keep the product flowing. "And I don't know what the cure for that is," he grants, "because we sure can't inventory it that deeply." On the other hand, Choquette isn't about to drop the hot line: "We only need to deliver 2,500," says Choquette, "and we go over $1 million in billings."
