As QSP field managers refine their selling techniques, the 26% penetration rate may be conservative, Gruenberg says. "At 30%, we'll only need around 300 schools." What's more, if the new schools are located close to one another, field producers may be able to handle more schools -- perhaps more than 30. The company is negotiating with manufacturers of cameras and editing equipment for discounts or free equipment; it currently gets free tape from 3M Co. Gruenberg is also considering the sale of paid on-tape advertisements, which would drive costs even lower. "We're working a lot of angles -- controlling costs and boosting penetration are the name of the game."
Gruenberg, who owns 26% of the business, admits that it's taken more time and more money to crack the market than he expected. In March, VideOvation was preparing to borrow $500,000 from its investors, who had already supplied $3.3 million in equity, to cover the anticipated cash shortfall for the next few months. Before the business becomes self-funding, Gruenberg figures he may need at least $1 million more. "How much we need really depends on what happens in the schools this spring." The student sign-up rate, the location of the schools, and whether the company can get breaks from equipment suppliers -- each will tell part of the story.
Gruenberg says he's watched competitors of all types -- from small independents to the big yearbook publishers -- enter the video market. But he claims he isn't worried. "There is a huge number of schools out there. So there's plenty of room for three, four, even five viable competitors."
He's banking, too, on a loyalty factor: once a school has worked with VideOvation and is happy with the results, he doesn't think it will change. "We're building barriers to entry for other companies whenever we sign and re-sign schools. Rather than steal our schools, they'll try to find new ones of their own."
And what about competition from schools that think they can make their own tapes? Gruenberg thinks that it's inevitable. But not many will actually do it -- not when they figure out what's involved. Editing, he says, takes an enormous amount of time, which neither busy students nor their overworked advisers have -- not to mention equipment and expertise. And who would do the packaging and selling? For uncertain benefits, he claims, few schools will want to take on the burden.
"We give students maximum creative control over the product without any of the back-end hassles." In the end, he hopes this approach will feel right to both principals and students. The future of his business depends on it.
* * *
Research assistance was provided by Leslie Brokaw.
EXECUTIVE SUMMARY
THE COMPANY:
Gruenberg Video Group Inc., d/b/a VideOvation, Philadelphia
Concept: Sell a video-production package of equipment, training tapes, and field support to middle and high schools to produce a video yearbook
Projections: Losses of nearly $1 million in 1990; projected earnings of $1.1 million on sales of $7.9 million in fiscal 1992
Hurdles: Achieving market penetration with outside sales force; covering anticipated $1-million cash shortfall before break-even; overcoming reluctance of school principals to invest students' and faculty's time in production
THE FOUNDER
Paul T. Gruenberg
President and CEO
Gruenberg Video Group Inc. d/b/a VideOvation
Age: 40
Family status: Married, three children
Source of idea: Competitor's business plan
Personal funds invested: $175,000
Equity held: 26%
Salary: $75,000
Outside board of directors: Yes
Other business started: Antique and classic-car restoration business
Other jobs: Five years working for two venture capital partnerships
College degrees: B.A. from Lake Forest College; master's in management from Yale
Typical workweek: 65 hours
Last vacation: A week in Maine last August
Favorite hobby: Formula Ford race-car driving
Why I'd quit: When it's no longer fun or if the initial assumptions about the market don't stand up
FINANCIALS
VideOvation Projected Operating Statement
(in thousands) Fiscal 1990 Fiscal 1992
Net video yearbook sales $563 $7,841
Interest income 14 61
TOTAL REVENUE 577 7,902
Cost of goods (copying, packaging) 82 952
Commissions 136 2,260
Total cost of sales 218 3,212
GROSS PROFIT 359 4,690
Percent gross profit 62% 59%
OPERATING EXPENSES
Other marketing & selling costs 89 53
Field producer salaries, travel 193 1,280
(in thousands) Fiscal 1990 Fiscal 1992
Editing, postproduction 200 1,004
Headquarters
Staff salaries, benefits 375 725
Building occupancy, other G&A 191 202
Depreciation 96 309
TOTAL OPERATING EXPENSES 1,144 3,573
Interest expense 97 0
NET INCOME BEFORE TAXES (882) 1,117
Percent net income before taxes -- 14%
Number of schools 118 833
Tapes sold at each school 145 286
Total units 17,110 238,238
WHAT THE EXPERTS SAY
CUSTOMER
RICHARD DuFOUR
Principal/assistant superintendent, Adlai Stevenson High School, Prairie View, Ill., with 1,900 students and no video yearbooks
I like the effort the company has made to involve students in the creation of the video and that it's created an actual curriculum -- because principals always have to ask, "Is there an educational component to this?" If I were one of their sales reps, I'd really push that.
