Paul Farrow wanted more than his own company. He wanted to be the company, all by himself. With Walden Paddlers he has laid the groundwork for the ultimate 'virtual corporation': one employee, a network of suppliers and retailers, and -- best of all -- real growth potential
Walden Paddlers' workshop occupies space in the rear of a building in an office park in Acton, Mass. Against one wall half a dozen kayaks in various stages of prototypical development lie beached on the concrete floor, while on the other side of the room stands a workbench, sparsely appointed with an assortment of clamps, glue, and cutting tools. The company's founder, Paul Farrow, sits in an adjoining cubicle, with little more around him than the requisite start-up gear of an undersize metal desk, a fax, and a phone, leaving the impression that he opened the doors last week and still is waiting for the electrician to arrive and turn on the juice.
Actually, Farrow started up 10 months ago, and in that time Walden Paddlers has designed, produced, and marketed a technically sophisticated kayak fashioned from recycled plastic, one that significantly undercuts its competition on price and outmaneuvers it in performance. Moreover, Farrow has done all that with just one employee -- himself. He deliberately set out to weave a web of strategic partnerships around Walden to avoid building a costly, cumbersome, slow-footed organization. Farrow sought, instead, to leverage as much as possible the skills of creative outsiders and dedicated specialists like himself to share risk, reduce development time, and save money, while hitting a broad slice of the market as fast as he could.
Walden Paddlers, for all its low-tech aura, is what is known in today's fast-paced economy as a "virtual corporation," a company that outsources just about everything in the pursuit of eternal flexibility, low overhead, and the leading edge. Actually, virtual corporations have been around since time immemorial in spirit, if not in name, because they define, in part, the bootstrapping ethos behind many entrepreneurial endeavors. Still, virtual corporations are now more relevant than ever.
Bill Bygrave, director of the entrepreneurial-studies department at Babson College, in Wellesley, Mass., believes there's growing awareness of the virtual-corporation model for fundamental reasons relating to today's economy. "Big companies increasingly realize that smaller companies have been doing this all along -- and getting higher productivity from it," says Bygrave. He cites Apple and Compaq as two aggressive outsourcers from the world of high technology that have prospered at the expense of larger, more integrated rivals.
The phenomenon, adds Bygrave, reflects an imperative that companies must increasingly specialize in a more complex and competitive economy. That creates a self-reinforcing dynamic, as the needs of one specialist spawn demand for the skills of others. "Your success is based on keeping tight control over your area of expertise -- and then subcontracting everything else out," says Bygrave. "The key is to keep overhead low, own as few resources as possible, and keep productivity high."
Though Walden Paddlers is what might be called the ultimate virtual corporation, with just one employee, Paul Farrow's impetus for launching it was more emotional than macroeconomic. It was triggered when, at 43, he found out one day that his well-cushioned, six-figure job as executive vice-president of manufacturing and finance at Groundwater Technology, an environmental-services company in Norwood, Mass., had been restructured right out of existence. That presented him with a stark choice. "I could return to the corporate world and go through all the rituals, or I could start my own business," he says. On the one hand, Farrow, who oozes caution, was given to the neatly secure life of the American corporation. But on the other hand, once burned was enough for an incisive thinker like Farrow. "Working in corporate America is no longer a loyalty game," he says. "That has made it harder for me to go back and do it again, because I'm one of these people who gets so invested in what I do. There has been a real change in the economic landscape. I don't say that out of bitterness. That's a reality."
And yet Farrow was pretty much clueless about precisely what sort of a business to start in order to paint himself back into the workaday landscape. To be sure, he had a carefully crafted set of criteria, which he could articulate in his typically earnest fashion. "I wanted a business that would be healthful and related to outdoor exercise. I wanted it to be environmentally responsible and get people out into the environment and make them more sensitive to it. And I wanted it to have a manufacturing aspect -- I wanted to make something -- as opposed to just being a service." Farrow notes that despite his having such a well-defined template, "lightning had never struck before."
Until last August.
That's when Farrow took his family on vacation to Maine, during which his sons, Luke, now 10, and Adam, now 14, rented a small kayak in which to paddle around the lake they were staying at. Farrow took more than a passing interest in the boat, and two things about it struck him. It was an "entry-level" kayak and performed as such, moving through the water with all the grace of a dinghy. Second, Farrow knew enough about manufacturing, materials, and money to know that what his son was sitting in amounted to 35 pounds of plastic costing 40¢ a pound. And yet the boat retailed for $400.
Electricity began to build in the air around him.
Farrow knew his idea, combining his need for a job with the evident business opportunity of reconfiguring that $14 worth of plastic into something more technically elegant, could at least keep him busy, and maybe even generate a new career and identity for him in the process.* * *
Starting From Scratch: Market Research
Farrow returned from Maine in early September, delved deep into the kayak market, and otherwise began relying on the skills and intelligence of strangers. He contacted boating organizations and read their literature. He spoke with kayakers and trade associations. He talked to dealers. He conducted formal and informal market surveys of people ranging from professionals steeped in the ways of the industry to neighbors who happened to wander over to the backyard fence. He soon, to his delight, discovered there was indeed a scant selection of products at the entry level of the kayak market. Moreover, what products there were provided little in the way of performance.
The kayak market is almost entirely given over to the enthusiast, making the sport intimidating to the uninitiated. Farrow uses the analogy of going to a bicycle shop and finding only racing bikes on the rack -- no simple ev-eryday machines to ease the interested beginner into the sport. Kayak prices range from $400 to $2,500, and you've got to spend at least $600 for any kind of quality. And most kayaks are as temperamental as thoroughbreds -- tippy when you step into them, as fluid as silk only when you're out in the midst of the white water's rage.
Farrow wanted to design some ability to perform into a kayak that would retail for $390 -- a price point just below the low end of the market -- and could be paddled by a middle-aged person on a languid pond. What's more, he believed that a kayak built from recycled plastic would have clear appeal in the water-sport market, in which environmental awareness is a core value. Every other kayak came in fiberglass or complex virgin plastics, and conventional wisdom held that recycled plastic simply couldn't meet the necessary performance requirements. Even more galling, Farrow also found, manufacturers shipped kayaks in shrink-wrapped plastic or huge cardboard boxes -- classic landfill-clogging material. He vowed to package his in a sturdy, tarplike cloth bag.
Further market research told Farrow that an increasing number of people want to get out in nature, often in solitary pursuits like kayaking. The canoe, his instincts told him, is to the family station wagon what the kayak is to the sports car. And all people, to some extent, want to put some zip into their lives, even if it means just a two-hour getaway from the larger cares of life.
Farrow also found that 70% of the kayak market is controlled by just three large manufacturers. At the same time, there are no significant distributors standing between those manufacturers and retailers. The kayak market is very open. Manufacturers, perhaps because of their enthusiasm for the sport, often readily share information. When Farrow wrote to them and asked for their dealer lists, they obliged. All used pretty much the same dealers -- a meaningful nationwide universe of only about 300. And a relative handful of those dealers -- 75 -- sold 80% of the units, offering Walden the potential of substantial penetration, provided Farrow could come up with an appealing product.
Finally, Farrow perceived an underserved market. There are 280 million people in the United States and Canada combined, but no more than 30,000 kayaks are sold each year. All the available research told Farrow a lot more people would participate in the sport if they felt less intimidated by the cost and the technology. When Farrow talks about his company, he often uses the term mission, as if to say that simply getting people into boats and exposing them to a new experience is as much on his mind as making a sale. "I don't want to take market share from other makers," says Farrow. "That would actually be detrimental. I want to expand the market." Coming in at the low end of the market with a high-performance boat, Farrow has kept one basic objective in mind: "I'm not selling kayaks. I'm selling access."* * *
Alliance #1: The Manufacturer
Paul Farrow had a business plan written within six weeks after returning from Maine. He had thus far relied on his ability to ask questions, to psych out the market. He had some money saved up after 20 years in the work force, and he was able to take that equity and borrow against it. Then came the hard part, reaching out and finding partners who could turn his idea into physical, salable reality.
Farrow knew, given his limited resources, that building a full-blown manufacturing and marketing organization would prove slow, costly, and nigh impossible. He also believed that people work smarter, better, and cheaper alone or in small groups. On a practical level, he estimated that building a single organization that would design, manufacture, and market kayaks would cost in excess of $1 million -- money he most assuredly lacked. Farrow figured that with his plan, his total investment, to get from idea to market, would be in the "low six figures," or roughly one-tenth what he might have spent otherwise. But for all that to come together, he knew he had to forge the right strategic alliances and make what he now acknowledges was a "leap of faith."
Leap, in this case, is a synonym for luck.
Farrow knew the key link would be the molder who would actually make his kayak. He began with a contact he knew. Back at Groundwater Technology he had engaged a molder, Hardigg Industries, that just happened to be in South Deerfield, Mass., an easy two-hour ride by car from Farrow's shop, west of Boston. Moreover, Hardigg was one of only a dozen U.S. companies with rotomolding (a low-cost method of molding plastic) machines large enough to produce a kayak. Of those 12, only 5 took on custom work from the outside. And of those 5, 4 were in the upper Midwest. The fifth was Hardigg.
It also just happened that Jamie Hardigg, son of the company's founder and its director of marketing, was a serious white-water kayaker who had ventured all over the world to pursue the sport. (Under his prodding, Hardigg Industries had once considered getting into the kayak market, long before Farrow appeared on its doorstep.) And the company just happened to be feeling the recession. Hardigg Industries, whose staple is internally generated "captive" business -- that is, molding for its own production -- had capacity sitting idle and was looking to build its business by adding custom work from outside sources.
The man in charge of building that custom business is Joe Strzegowski. He says that typically, when outsiders approach Hardigg looking for a part to be made, he simply quotes them a price for the mold and expects payment upon delivery of the first -- costly -- piece out of the mold. But when Paul Farrow showed up at Hardigg, he reconsidered. Strzegowski knew that charging Farrow a large sum up front would preclude his getting into business -- and deny Hardigg a promising customer for its custom business. The two men, Strzegowski realized, shared a common risk and a common interest. And so he bent the rules.
Instead of just quoting Farrow a price, Strzegowski negotiated an agreement with him in which Hardigg, in effect, agreed to share the start-up cost with Farrow. Rather than charging a prohibitive sum for the first kayak out of the mold and having the cost of subsequent units tail off sharply from there, Strzegowski agreed to spread the cost over the life of the project, lowering Farrow's barrier to entry.
For Strzegowski, doing business with Walden Paddlers was more a question of "making an investment in Paul" than just fulfilling a contract and producing a molded piece at an agreed-upon price. Strzegowski says that he was willing to enter into such an agreement because he believed Farrow had skills that could build the business to their mutual benefit. He saw Farrow as more than just another wild-eyed entrepreneur who had mortgaged his house and drained his bank account. "Paul understands, he listens. He's a sponge for information," says Strzegowski. "I think he appreciated the magnitude of the problem. Paul's background is in finance, so he set his company up from there. I saw that as one of his strong points. He's not trying to design this himself. He's very receptive to input."
What Strzegowski is banking on is the "anticipated volume" that he figures Walden Paddlers can produce in this, its first year. This year Farrow figures he'll sell at least 1,000 units, and perhaps as many as 3,000 in 1994. Strzegowski, meanwhile, sees 500 units this year as enough to keep the project running and recoup Hardigg's start-up costs. Moreover, Strzegowski can use the venture as a discrete profit center, which he can use for alternative production once the kayaking season ends. "We can take that business to the bank and borrow against it for a new molding machine if we need to," he says.
"We thought -- briefly -- about getting into the kayak business ourselves," Strzegowski also notes, "but we're a manufacturing company. We don't have a marketing mechanism to make that work." In fact, he says, for Hardigg there is more to be gained -- and learned -- by working with a committed outsider like Farrow than there is in trying to emulate him. For example, Farrow has pushed Strzegowski on the applications for recycled plastics, something Hardigg has not done much work on up to now but knows it must. "That's a market I'd like to get into," says Strzegowski. "It's a challenge for us to match the plastics waste stream with [plastic's] suitability for rotomolding. I would like to develop other relationships using recycled material."
Strzegowski describes the agreement between Hardigg and Walden as "flexible" and "more in tune with what you might see in Europe. It's more of an understanding of what we both want to do as we go forward." He elaborates, explaining that in Europe, where agreements are less bound by the law and more steeped in the traditions of artisans tied to more local economies, "a contract is often a 'trail' you follow rather than something that is written in blood." Strzegowski adds that Hardigg's agreement with Farrow means that "we can drift in different directions as we go along."
Farrow describes the agreement as "a letter written by one businessman to another." It's three pages long, and though it was given the once-over by Farrow's lawyer, it is largely devoid of legalese. It gives each party an escape clause should Farrow not realize his anticipated volume. Should the parties split up, each is barred for two years from entering the other's business. As Farrow is intent on increasing the percentage of recycled material in his boats, he agrees to shoulder whatever additional costs that effort will entail. However, both parties agree to share whatever savings they realize. Under the agreement, Farrow and Strzegowski can mutually agree to extend the partnership, which currently lasts two years.* * *
Alliance #2: The Designer
As he looked for a molder, Farrow knew he needed to forge another core partnership, with someone who could give him a good design so he could get to market with a technically superior product. He started by calling the engineering departments at major technical universities, looking for a design team. Farrow recalls the typical response as ranging from indifference to active discouragement. "They said, 'Who cares?' To do the high-level design work I wanted would cost a lot of money." Finally, out of desperation, Farrow asked his brother-in-law -- who happened to be getting his doctorate in materials engineering from Rensselaer Polytechnic Institute, in Troy, N.Y. -- if he had any contacts. Farrow's brother-in-law put him in touch with Steve Winckler, a professor of advanced materials at RPI, who is considered one of the top materials scientists in the country. It was a long shot at best, considering the response Farrow had previously received from academia. But Winckler, who also had a business on the side, heard Farrow out and then told him, "You need to talk to my partner."
Winckler's partner is one of his former students, Jeff Allott, and their company is General Composites, based in Clifton Park, N.Y. In addition to having learned at the foot of such an accomplished master, Jeff Allott is a river rat. He spends his weekends racing canoes all over northern New York State and New England. If anyone has a feel for how a boat moves through water, it is Allott. And if anyone has a passion for such matters, it is Allott as well. When Farrow first called him, Allott recalls, "he hit the right button with me. We talked for an hour and a half." Allott gave Farrow all that time, even though his expertise really lies in the realm of what are known as "continuous reinforced" plastics, which are found in ultrahigh-ticket, high-tech items such as satellites and America's Cup yachts -- and not in recreational canoes and kayaks.
But, uncannily, Farrow was also hitting Allott at the right time. Like Joe Strzegowski at Hardigg, Winckler and Allott were trying to reposition General Composites away from the sagging fortunes of defense and aerospace -- which last year accounted for 70% of their revenues -- and more toward the realm of sporting-goods development, in which Winckler, an avid cyclist, and Allott, the river racer, know their hearts truly lie.
Like Strzegowski, who had a good first impression of Farrow and sensed his financial acumen, Allott saw strengths in Farrow that would reinforce their potential partnership. "I feel real good about his marketing skills," says Allott. "Paul did a bunch of formal and informal surveys, and every time he met with us he had another piece of information that was valid." And like Strzegowski, Allott was impressed by how much of a quick study Farrow is. "He's one of those people who are real thirsty for information."
Allott wanted to work with Farrow, and he was willing to meet him more than halfway. "We try to keep our rates down, and we work at a discount rate if we like somebody and want to get that person's business," he says. Farrow drove up to meet Allott in early October, two weeks after their first contact by phone. Allott laid six boats out on the lawn as possible shapes to pursue. Recalls Allott of Farrow: "He had a large list of wants, and some of them were mutually exclusive from a design standpoint." But like Strzegowski, Allott found Farrow willing to listen to technical reason, and soon they agreed upon a shape that met Farrow's criteria and could also be executed.
Allott and Farrow struck a deal not unlike the one Farrow had forged with Hardigg. Their contract, which Allott dubs a "working agreement," spread Farrow's payments out over the eight months from design to final production. Two-thirds of the payment was pegged to milestones such as the design of the first and second prototypes and approval of the first article out of the mold. That way Farrow is ensured that Allott is wired into the entire process all the way through to production and that he does not simply produce a design and is never to be heard from again. Allott wouldn't have had it any other way. The arrangement gives him a chance to work closely with Hardigg -- whose shop, if not for Farrow, he might never have heard of -- and thus learn more about rotomolding and its applicability to his design work.
Allott will get, as the final third of his payment, a percentage of each boat sold, again to ensure that he will have a vested interest in consistent production and even marketing, not simply in the execution of a design. Allott labels that "engineering support." Moreover, he has agreed to act as a representative for Walden in upstate New York and Vermont -- a natural fit, as Allott is plugged into the local white-water racing scene in those regions. "What better person to have peddle your boat than the guy who designed it?" Allott reasons.
If all goes well, Walden will also produce succeeding generations of boats. They will be principally designed by Allott -- and again he will take some of his compensation as a percentage of sales. That is a risk Allott can live with, for, as he notes of his company, "this is our life. It's more than just our business."
If Farrow had any doubts about Allott's commitment to the project, they were consumed by the electrical fire that broke out in the shop at General Composites and burned it to the ground -- a week after the two parties had signed their agreement. Recalls Allott: "Most people would have just called Paul and said, 'Look, we've had a fire, and we can't do it.' But we'll do anything to make sure it works." Allott had to work out of his house to complete the design, and by then he was working 20-hour days to meet an early-January deadline for Farrow. Meanwhile, because of the fire, he had to shift the building of the prototypes to a friend's boat shop in Canton, N.Y., four hours away. That occurred in the middle of winter, with Allott driving to Canton three or four times a week in an old station wagon that broke down as often as not out in the wintry nowhere of upstate New York.* * *
Alliance #3: The Dealers
April was the kindest month for Paul Farrow, as boats started coming out of Hardigg's molds, just seven months after Farrow had started writing his business plan. Back in the fall, Farrow had visited key dealers, explaining his product and how it might fit into their lines. They seemed receptive, for two reasons. Kayaking seemed a good follow-on sport to backpacking for the baby-boom market. Even though a kayak, like a bicycle or a backpack, is not a high-margin product, it is a solid core offering around which a dealer can sell higher-margin accessories. A dealer can work merchandising wonders with a smart-looking kayak hung on the wall. On top of that, because Farrow had taken a bare-bones approach with Walden, he was, in fact, able to offer dealers better margins, thus increasing the incentive for them to carry his product. Whereas the typical dealer's margin for a kayak was around 30%, Farrow could offer 10 points higher than that.
Farrow's strategy regarding the dealer network was to whet its collective appetite with a cleanly drawn brochure and a clear idea of his kayak's niche, all along being careful not to overpromise. On the other hand, once boats were out of the molds, Farrow delivered -- in spades. He simply gave dealers demo boats for 30 days. They could do whatever they wanted with them -- paddle them, sell them, or take them apart. All Farrow asked was that after 30 days each dealer either paid him for the boat or returned it. Farrow calls the marketing strategy "a cheap sales call," and it also gave him good "reach through" to his ultimate customer base. He figured that putting a lot of kayaks into the hands of people who love kayaks for 30 days would earn him not just distribution but also plenty of free advice.
The strategy started paying off by mid-May. Eastern Mountain Sports (EMS), a major outdoor retailer with 47 stores in the eastern United States, which Farrow had started cultivating back in the fall, showed immediate interest after receiving a demo boat. Before long Farrow was making plans to head out to Seattle to talk to Recreational Equipment Inc. (REI), which is, with 36 retail stores mostly in the West, the West Coast equivalent of EMS. Farrow figured that if he could land those two accounts, he would be immediately addressing 20% of the market, and that between them, those two outlets could sell 3,000 units in 1994.
Farrow also hit a local hotbed of kayaking, Charles River Canoe and Kayak, in Newton, Mass. "He's interested in using us as a trial location. Things he may not see about either the boat's performance or the market's reaction to it would be accessible to us," says Dave Jacques, Charles River's co-owner, who was very impressed with the boat. "That hull design affords in a very short boat the ability to track [go straight]. That's unusual." Jacques and his partner, Larry Smith, agreed to have input in the design of future hulls coming out of Walden. Jacques labels Walden's boat "very user-friendly and environmentally correct. It has real appeal."* * *
Creating Value and Managing Growth
Almost before they were out of the molds, Walden's first 100 boats sold via the network of dealers Farrow had started to patch together. In May he hooked up with IMTRA, a New Bedford, Mass., wholesale marine distributor, which ordered 100 boats to distribute to its network of 1,600 dealers. William Farnham, IMTRA's president, who had met Farrow through a friend of a friend, figured that before the summer was over he'd be ordering a few more batches of boats. "Then, in September, we'll sit down and formalize some sort of an agreement with Walden. There seems to be a need for this type of product."
Farrow has considered the possibility of rapid growth and thus wonders how virtual he will really be able to keep the corporation. His strategy, for now, is to continue to "reverse integrate" by keeping business outsourced to suppliers. For example, currently Hardigg ships unfinished boats to Walden Paddlers, where Farrow and high school students who work part-time put the trim on them. He says Hardigg has expressed an interest in taking over that work and likely will if business takes off. Likewise, that will enable boats to be shipped directly from Hardigg to dealers without having to go through Walden. "When we hit bigger volumes," says Farrow, "we have to reduce the amount of handling of the boats."
Another growth-related issue for Walden relates to managing demand. Farrow sees a balancing act between "seeding" the pipeline with enough product to "keep existing dealers happy," and bringing on new dealers. One strategy Farrow is pursuing is to try to limit the dealer base to fairly large dealers as a way of concentrating the customer service at that level. A large-volume dealer has the resources to deal with customer needs and queries, and it can also be a reliable conduit of technical information from end-users that will help Walden refine its design.
Other questions remain. In a virtual corporation, is there virtually nothing of value? How does Farrow not only create value, or equity, but also retain it? Farrow says the value is in his network of alliances. Obviously, he says, one reason he wanted to do business with Hardigg is that it's an established company -- unlike Walden -- that could survive the shock if, say, five key employees left tomorrow. That, he believes, helps impart value to his fledgling organization.
As for the possibility of a partner's turning into a competitor, Farrow says he has discussed it at length with Strzegowski and is convinced that Hardigg has no interest in getting into the kayak market beyond its current relationship with Walden. "I think Hardigg sees our relationship as a good way to build its custom business and move away from military contracting," says Farrow. Suddenly getting into the manufacturing and marketing of kayaks would run counter to Hardigg's plan and diminish its focus on building its custom business.
Farrow says that three years from now, if all goes well, he'd like to forge a distribution deal with a major national company that has marketing experience in the leisure and sporting-goods industry. Such a deal, which would include advertising in national media to reach a more general audience, would, like Walden's alliance with Hardigg, contribute to establishing some equity in the company. "I'm convinced that a good distributor adds a lot of value," says Farrow. The key, he adds, is for the entrepreneur to be egoless enough to give up something of value to create, in turn, something of more enduring worth.* * *
Leveraging Knowledge and Information
When Paul Farrow talks about the relationships he has forged in getting Walden up and running, he rarely talks about "building equity" or "creating value." Instead, he uses the word alignment to explain a key factor in the future success of Walden Paddlers. He uses the term in the sense of "aligning" his interests and his personality with those of the people he does business with, to produce a partnership that tracks nicely through the competitive waters.
But there is something else here, too, and the best word for it, quite clearly, is leverage. Paul Farrow, who less than a year ago didn't really know much about kayaks and their construction, or about marketing, has tapped into a deep and varied reserve of expertise that he can recycle into the building of his company. "I tell Paul to think of us as his library card," says Jeff Allott. "We're a resource he can come to whenever he wants; that's part of our agreement." In turn, that gives Farrow access not just to Allott but also to Allott's mentor, Steve Winckler.
By doing business with Hardigg, Farrow does more than just leverage that company's 25 years of experience in molding plastics. The relationship has also allowed Walden to tap into one of the best mold makers in the country, Kelch Corp., of Cedarburg, Wis., which Hardigg engaged to make the original mold from which the kayaks were made. Making a mold that can produce a 12-foot-long object of uniform thickness is a true feat. Hardigg also connected Walden with Clearvue Plastics, in Amsterdam, N.Y., which, at the prodding of both Strzegowski and Farrow, produced a high-quality plastic that at the outset no one had believed was technically feasible, given the constraints of using recycled material.
For their part, Hardigg Industries and Allott get a payback beyond the immediate business they hope Walden will bring them. They get access to each other's knowledge, and each foresees referring work to the other. "The access to sources is fantastic for us," says Farrow, acknowledging the potency of his confederation of dedicated specialists. "We have more design and manufacturing horsepower than any of my competitors do.
"There are a lot of creative people out there," adds Farrow, who seems to have found his share, creating a whole that's much greater than the sum of its parts -- a new corporation where virtually nothing existed such a short time ago.