But just when Icon started to roll, it hit more snags. It was running low on a key component, woofers for the Parsecs, because of a mix-up with the German manufacturer. Then Fokos's bank failed, denying Icon's customers the ability to charge their orders on credit cards. In mid-January war broke out, and Icon's phone fell silent.
In February Icon started getting speaker cabinets from a new source Fokos had met at the stereo show in New York the previous April. The quality was higher, but so was the price. The cost of cabinets for the large speakers rose from $90 to $150; cabinets for the small ones increased from $45 to $55. The price of his elusive German woofers, now reordered, jumped 36%. Product returns -- 19% for the last six months of 1990 -- were greater than Fokos had allowed for. (Shipping a pair of Parsecs round-trip costs $486.) Those factors put pressure on Icon's margins.
Fokos all along had wanted to achieve a gross profit margin of 50% -- to sell a pair of speakers for twice his cost. But that target was always too ambitious. It conflicted with a key marketing aim, to hit certain price points Fokos had deemed attractive ($695 for the Lumens and $1,495 for the Parsecs). By early 1991 Icon's gross profit margin had dwindled to 25% and 29% for the big and small speakers, respectively.
Fokos knew he had no choice but to raise his prices, an action he fretted over. "People will assume I'm shafting them," he says. "But these speakers are still a good deal at the new prices." On February 1 of this year the price of the Lumens went up to $795 a pair. On March 1 the Parsecs went up to $1,795. That raised the gross margin on each to 37% and 38% respectively -- still well short of 50%.
And yet the higher prices didn't seem to put people off. In February the phone started to ring steadily. Fokos was getting about five queries a day. One out of seven callers bought speakers. People had seen his handful of ads. They had heard of the speakers by word of mouth. Icon had more magazine reviews to look forward to in late spring, including one in Stereo Review. Stereophile was going to put the Parsec on its Buyer's Guide list of recommended components. Maybe now there was hope. Maybe Icon's best days lay ahead.
With things perking up, Fokos plans to introduce two new speakers -- the Micron ($1,395 per pair) and the Millennium ($5,695 per pair) -- in October to coincide with a large trade show in Santa Monica, Calif. Extrapolating from past performance, seasonal swings in the business, and the prospect of increased exposure, Fokos revised his projections. (See "Financials," page 4) He now believes 1991 will be his first break-even year.
* * *
The Hurdles Doubts and questions dog any start-up, but with Icon Acoustics they abound. Can Dave Fokos really count on word of mouth and favorable reviews to generate critical mass? If he needs to advertise and pay his debts, will he lose controlling interest in Icon in exchange for a capital infusion? And what about his investors, with visions of 70% dividends clearly on hold? At what point will they get antsy?
On the other hand, if Icon takes off, will Fokos, so dependent on inconsistent suppliers in the past, be able to manage the surge? Will he get squeezed again on costs and see his margins erode once more?
Dave Fokos acknowledges those doubts but confronts them without flinching. He is sure there is a big market of economy-minded audiophiles who will see the value of his speakers as more favorable reviews start to come in. Yes, he has thought about selling more stock to an angel to get out of debt and pay for some advertising. He doesn't see that strategy changing the dynamics of Icon. He considers his current suppliers reliable. He labels his investors "concerned but optimistic."
But for now Icon's is still a tale written in red ink. Fokos recites his litany of financial woes: "Last year I paid myself $9,500 in salary; the year before that it was $8,300 for nine months. The company has $50,000 in bank debt and $30,000 in bills that need to be paid. My interest on the bank debt alone is $500 a month." He draws an audible breath, considering the weight of it all. "This is certainly the toughest thing I've ever done," he says. "It has influenced my health a little. I can feel the stress inside. At times I ask myself, Is it worth it?" He pauses, then smiles. "But that doesn't last very long."
EXECUTIVE SUMMARY
The Company: Icon Acoustics Inc., Billerica, Mass.
Concept: Sell high-end stereo loudspeakers direct from the factory, with a 30-day free trial period. Icon thus avoids dealer markup, achieves national distribution, and offers a high-quality product at a reasonable price.
Projections: Revenues of $303,000 in 1991, rising to $1.3 million in 1993, with pretax profit rising from $1,746 to $302,000, respectively.
Hurdles: Financing a marketing effort to achieve name recognition in a crowded and highly fragmented market.
THE FOUNDER
David Fokos
Age: 30
Family: Single
Source of Idea: Worked as a speaker designer for a major manufacturer. Needed the freedom to implement his own ideas. Saw deficiencies in the relationship between high-end manufacturers and dealers.
Personal funds invested: $10,000
Equity held: 58%
Salary: $12,000
Workweek: 50 hours
Education: B.S. in electrical engineering, Cornell University
Other companies started: None
Last job held: Loudspeaker designer, Conrad-Johnson, a manufacturer of high-end audio equipment in Fairfax, Va.
FINANCIALS
Icon Acoustics Inc. Projected Operating Statement
($ in thousands) 1991 1992 1993 1994 1995
Pairs of 224 435 802 1,256 1,830
Speakers Sold
Total Sales $303 $654 $1,299 $2,153 $3,338
