Armed with their patent-pending prototype in one hand and a thoroughgoing market-research survey in the other (a paper Dornbush had written for a marketing class), they told all to potential manufacturers' representatives with contacts at major-department-store chains. "We had built quite a bit of equity in our idea by the time we contacted potential sales representatives, so it would have been fairly difficult for them to take it over," says Erickson. "We weren't shy about saying we had patents pending."
The manufacturers' reps shared equally detailed information with Dornbush and Erickson, helping to bring their business idea one step closer to reality. They told the young duo what the price to, say, Sears would have to be for the retailer to sell the unit for $99, what their commission structure was, and what margins small-appliance manufacturers worked with.
And when he was price shopping for components, Erickson reports, he didn't care if vendors knew he was building a food dehydrator, but there was no way he was going to disclose the company's mass-marketing plan. By 1977 Erickson and Dornbush had refined their prototype so the dehydrator could be mass-produced at the desired price point. And thanks to the recommendation of a vendor, they had lined up a manufacturer to fill the orders.
A manufacturer's representative with ties to major catalog companies agreed to take on their product and opened doors that got their FD-200 model on the inside cover of the 1978 Montgomery Ward catalog, as well as in the Sears and J.C. Penney catalogs, among others.
By the summer of 1978, the gush of orders was overwhelming the manufacturer, which had decided to cut the sales projections given to it in half. Worse still, the manufacturer changed the contracted price, jacking it up $5 a unit midway through the summer selling season. (The shop had become unionized and subsequently labor costs had risen.) To compound matters, entire truckloads of bad products were being returned to the manufacturer, as the defect rate approached 26%. Dornbush and Erickson's Alternative Pioneering Systems was in danger of going under.
"We decided to focus on one account and delay shipment to the rest," says Erickson. (They chose Sears.)
Then, at a January 1979 home show, Erickson discovered the first knockoff of the FD-200, made by a company called Excalibur. "When I saw it," he says, "I had an overwhelming urge to break pencils." Without the funds to hire a cadre of patent lawyers to close down Excalibur, Erickson realized that the only way he could really defend his product would be through technological innovation and sales. "I concluded that no matter how good our patents were and no matter what we told people, there would always be someone trying to knock us off," he says.
Excalibur went in and cleaned house, snatching four of Alternative Pioneering Systems' five catalog accounts. After two years of minding their p's and q's, the cofounders' worst fear had come true. "Our own problems allowed them to come in and steal our business," admits Erickson, who could afford only to send nasty letters to defend his patents. The two estimate they lost $6 million worth of business because of the manufacturing debacle.
Amazingly, their company survived. Erickson came out with a revolutionary round design. And when the gardening market took a nosedive so severe that for the first time in 100 years Sears pulled canning equipment from its catalog, Erickson and Dornbush repositioned their product for the snack market and squeaked by. They also found a white knight, who gave Alternative Pioneering Systems an infusion of working capital in exchange for an equity position. (Excalibur, meanwhile, was #85 on the 1983 Inc. 500 list and in Chapter 11 in 1985.)
After a few tough years, Dornbush, now CEO, and Erickson, chairman of the board and executive vice-president of research and development, finally regained the precious catalog accounts and repurchased the stock from the investor. These days American Harvest's products are knocked off all the time by copycats in the Pacific Rim. "That just makes our salespeople sharper," says Erickson.
-- Teri Lammers Prior
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6. Where Do You Go for Capital?
How much is half of nothing worth?
A smirk? A hundred thousand dollars? Something in between?
Few tasks are more enigmatic when raising money for a new business than figuring out how to value this thing that is little more than a plan and a promise.
Patrick Lammert and Mark Weber were 25-year-old expatriates of several color-separation houses -- places that do a key part of print production for publishers and catalog companies -- when they decided to start their own color-separation business, Wisconsin Technicolor (#117). But like a lot of young, green, and naïve entrepreneurs, they were shocked -- shocked! -- to discover that all three banks they approached for a loan were heartless enough to demand collateral. And though they'd scraped together $50,000 of family money, they needed another $50,000 to lease equipment, buy office furniture, and cover payroll for a couple of months.
They were lucky, though: Lammert and Weber found a private investor -- the son of a friend of Weber's grandmother, a guy who also was in the print business -- who was willing to front them the $50,000. The terms, however, were more than most entrepreneurs would be able to stomach: 51% of the business in return.
