Packing Them In

Can Puff Pac Industries, touting an unproved but allegedly revolutionary product, break into an industry owned by giants?

It started by accident, on a summer evening in 1983. Dan Pharo was at his art studio, where he made designs for balloons, preparing to visit a friend's young son in the hospital. He had a toy truck for the boy and a balloon to go with it, one of those Mylar numbers with a get-well motif.

Fortunately, as it would happen, Pharo overinflated the balloon and the side blew out. As he repaired the seam with a heat sealer, he decided for the fun of it to put the truck inside the balloon -- it could be the gift wrap. So he inserted the toy, sealed the balloon back up, and reinflated it.

At the hospital Pharo's little invention, essentially a gift inside a gift, like a ship inside a bottle, was a big hit. The boy was so fascinated by the thing that he didn't want to open it. "The real thrill for him was the packaging," Pharo says. "Everybody was trying to guess what was in there."

The doctors and nurses, equally intrigued, started calling Pharo to see if they could get one, too. A friend with a stationery store looked at it and said he could sell an item like that. Then Pharo showed his creation to the management at M&D Balloons, a San Francisco company for which he was making designs. Patent it, they told him.

Pharo, then 32, had already proved to be an incorrigible entrepreneur. After dropping out of college, he started a company that made macramé beads out of dead cactus. In 1977 he launched Grapevine Tables, making exotic furniture out of old Napa Valley grapevines. He sold that in 1980 to open the art studio near Sacramento, Calif.

Still, Pharo says, all his life he had invented things and more or less given away the ideas. Not this time. "I decided I could make a real business out of this one," he recalls. He sold his sports car, his van, and his hot-air balloon to scrape together about $125,000 for his new venture. Family and friends contributed another $100,000. And in July 1986 Pharo set up shop in the Los Angeles area, calling his company Puff Pac Industries Inc.

By late 1988 he was ready to market the inflatable gift wrap, and for initial production he turned to M&D Balloons. An equity infusion of $150,000 from five limited partners helped finance Puff Pac's early going, and distributors sold the products to stores across the United States and Canada.

People loved it. Bearing a gift in a decorative Puff Pac pouch eliminated the need for boxes, wrapping paper, and ribbon. It was new and fun. Al Trotter, who at the time handled merchandising for a Canadian drugstore chain, brought the pouch into Canadian shopping malls that Christmas and did very well with it. "A kiosk selling Puff Pac gift wrap could do $25,000 a month," he recalls. Trotter liked the product so much, in fact, that in early 1989 he visited Pharo to request licensing rights for all of Canada.

It would prove to be a watershed meeting, for it was then that Pharo showed Trotter his latest innovation on the bag, the breakthrough that would turn Puff Pac from a fledgling novelty company into something far more promising.

Pharo had discovered a way of putting a bag inside a bag. More precisely, he had hit upon the idea of heat-sealing a polyethylene bag inside a Mylar bag. By means of an "air exchanger" he created a double-chambered Puff Pac.

What it could do, in essence, was suspend an object in midair. The item could be held snugly in place by air pressure inside the inner bag and cushioned on all sides by equal air pressure in the outer bag. "I realized immediately what I had," Pharo says. "This was a new way to package things."

Trotter saw the potential, too. The double-chambered bag could add value to the gift-wrap line. But more important, it represented a serious opportunity in industrial packaging. If successfully produced, it could replace such environmentally unfriendly packaging materials as bubble wrap, fabricated foams, and polystyrene peanuts.

Here, perhaps, was a solution to an urgent problem -- the fast-dwindling capacity of landfills. Packaging waste takes up 30% of landfill space by volume and 10% by weight, and the packaging industry is under attack for its prodigious leavings. By Pharo's reckoning, Puff Pac could reduce the amount of packaging trash by 90% or more, because once the bag is deflated, all that remains is a thin membrane of plastic film. And used bags didn't even have to be discarded. They could be recycled or, up to a point, reused.

All Pharo lacked was cash to move the product beyond the prototype stage. He had scoured the country for funding but had come up empty. Investors were concerned, he says, that a patent hadn't yet been awarded for the double-chambered device. But Trotter volunteered to take a shot at fund-raising and soon found backers in his native British Columbia.

Among them was a financier named Don Farrell. He was so impressed by Puff Pac's prospects that he invested $700,000. Then in November 1989, using a reverse merger, Farrell and his associates took the company public on the Vancouver Stock Exchange. It remained a U.S. corporation, but the move enabled Farrell, who assumed the role of Puff Pac's market maker, to raise some $3 million in private-equity placements.

Pharo knew he was ill-equipped to run the business himself. He was an inventor, an idea man. He would serve as chairman and product-development chief. But he needed the kind of people who could take his concept and run with it, people like Trotter, who quit his job in Canada in 1989 to head up Puff Pac's sales and marketing operations.

Recruiting talent was easy; the company's potential seemed obvious to everyone who studied it. One was engineer Henry Swartz, an expert on machinery for processing and packaging plastics. He had helped Dow Chemical develop the Ziploc bag in the 1970s. When he saw Pharo's double-chambered air-packaging device, he was astounded.