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Although every cosponsor's contract differs slightly, the general agreement looks like this: The cosponsor pays around 8% of the consumer's purchase to START. START then contributes 1% to the consumer's annuity account if he or she spends up to $1,000 a year with START businesses. The contribution goes up to 3% for consumers who spend a total of $1,000 to $2,000, and up to 6% for those who spend more than $2,000. The contribution accumulates in an escrow account held at Chemical Bank, and those accounts that have reached $100 are swept quarterly into the MetLife annuity, which pays around 6% annually.
START makes money two ways. First there's the up-front $25 enrollment fee. Then START gets the difference between the 8% paid to them by the sponsor and the 1%, 3%, or 6% START then pays out to a customer's annuity account.
So why should these Fortune 500 giants fork over that kind of money to a little-known start-up? "We've now got the credibility," Andreini says. "With names like MetLife behind us, these guys know we're going to be in the marketplace." He goes on, "It's a matter of, Do they want to be with us or competing against us?" Remember, Burger explains, "some of these guys pay out $20 million in advertising in the hope of reaching customers, and they never know if it works. With us, they don't pay us a penny until we bring them a customer."
It's an argument that got the ear of a lot of marketing executives. Although START plowed along slowly in 1989 and 1990, signing up only one cosponsor, Andreini says he's now negotiating with more than 30 cosponsors, and contract-closure time has narrowed from six months to three.
As for signing up customers, half of START's new members come from indirect streams -- or agents. An agent can be a Spiegel catalog that advertises and sells the START memberships to its customers. Or a broker who routinely sells benefits to associations and corporations. Agents assume the entire cost of selling and are paid $17.50 of the $25 enrollment fee for their efforts as well as an average of .5% of all the customers' purchases. "These acquisition costs are minuscule," says Andreini, "compared with the $110 it typically costs to acquire a bank-card customer."
The other half of new-membership sales is direct, harnessing the power of direct mail, TV, and radio. And -- no surprise -- Andreini and Burger have hired only the best to do their bidding. Their ad agency, Messner Vetere Burger Carey Schmetter, in New York City, voted Adweek's 1992 eastern-region agency of the year, will orchestrate the image campaign. Tactics will include dropping direct-mail pieces at the doors of qualified frequent fliers and heavy long-distance-phone-service users. "Documercials" -- whose format is a cross between a commercial and a documentary -- will be used on TV as a way of combating the it-sounds-too-good-to-be-true quandary START faces.
The total bill for direct marketing for 1993: $30 million. It's a much more costly route than indirect -- sometimes three times more -- but it's essential. "It builds awareness," Andreini declares, adding that forgoing an awareness campaign would double the work of his agents.
Given START's cash needs, the company's investor group has widened out of necessity. Andreini and Burger's credibility strategy seems to have paid off, attracting some of the biggest names in marketing and finance. Fayez Sarofim, one of the largest money managers in the country, kicked in $6.8 million. Sarofim has invested his own money in only three other deals: Intel, Teledyne, and Apple Computer. START is the first company in which he's invested personal capital in 11 years. Robin Burns, CEO of Estee Lauder, is also an investor, and although she publicly refuses to sit on any outside boards, she sits on START's board of directors.
Andreini's 25 largest investors bring not just marquee value but hands-on value as well. They've actively taken a role in shepherding Andreini to key contacts -- one even built the cubicles at START headquarters. To routinely tap into their collective wisdom, Andreini formed both a board of directors to discuss broad-based strategy and a board of advisers to hash out tactical questions. And he isn't shy about calling on board members between the quarterly meetings. "I talk to one or two directors at least once a day," he says.
Andreini knows he's lucky to have such a relationship with his investors. In START's early days, he had a very different experience. "One day one of my then-investors phoned to tell me that Burger was planning to take the company away from me," Andreini recalls. He felt burned -- and helpless. It was Burger's money. Andreini had only the idea. But the next day Andreini found out there was a very different plan unfolding. Through an air vent in Burger's home (which was START's base of operations), Andreini overheard the investors trying to coax Burger in on the deal they had masterminded. When Burger refused, the investors pulled out, leaving Andreini and Burger with a strong bond of trust.
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Until START was launched, on March 24, 1992, it had been in a prelaunch phase for nearly six years. Andreini and Burger were adamant about putting into place -- well before the first year of full operations -- the systems they'd need to sustain a company that could potentially reap sales of $52 million and service a million customers in its first year. They think their management team is key to that commitment.
Heading up the team is Lloyd Mahaffey. No stranger to exponential growth, Mahaffey spearheaded the turnaround of Commodore Computer in 1989, and headed Apple Computer's education division as it grew its sales from $250 million to $1.2 billion in three years. Mahaffey brought with him a collection of nine managers, all schooled in the art of high-velocity management.
And all were familiar -- many from their Apple days -- with the toll that fast-paced growth can take on employees. "Just as we have accounting and legal systems in place, we need to have our people ready," Andreini says. That's why he hired a human-resources manager two years ago, even though he had only 11 employees below management level at the time. Before the public launch day, the company sponsored two management retreats to delve into such esoteric topics as psychological barriers in the workplace and personal-growth plans.
