Kings of the Hill

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The snowboard business comes with inherent cash challenges, most of which are due to the seasonal nature of the sport. That seasonality, says Adams, results in cash spurts that render Switch's balance sheet "almost meaningless." Sand and Anderson are developing cross-seasonal products (the exact nature of which they decline to discuss) to offset some of that seasonality.

Switch has other kinds of revenue bumps to deal with. As many small companies know, a big order can come as both good news and bad. The good news is that you got the order. The bad news is that you have to produce the goods, which takes cash. When boot maker Vans signed on as a partner in the summer of 1995, Switch agreed to produce 6,000 bindings, which cost Switch $50 a pop. The company engineered two three-month loans, totaling $300,000, from a private party -- "a friend of a friend," says Anderson -- who required the owners to put up 10% of their equity as collateral and make principal and interest payments of $75,000 a month. Adams puts the effective interest rate at 4% a month, or 60% a year. "It's easy to say, 'We were robbed," he says, "but we would rather have had that money than no money at all. We couldn't have done the Vans deal without it."

Another cash challenge lies ahead. Currently, most snowboard-equipment sales occur in small specialty shops, which pay Switch C.O.D.; well-established shops get 30-day terms. But as the sport grows, chain stores and large sporting-goods retailers will want to carry the bindings and other equipment for the sport. "They are used to getting pretty crazy terms, like 120 days," says Anderson. "If we can't match that, they'll just look elsewhere."

So, in early 1996, Switch began to market a private placement to sell 25% of the company for $3 million. One of the large established industry players offered to take the whole deal itself, but the founders declined. "We thought it might hurt our licensed-partner relationships," says Anderson. The founders closed the placement prematurely in May, having raised $1.8 million for 17% of the equity, because certain venture capitalists expressed interest in investing, a possibility the founders happily entertain. "They can provide a lot of added value," says Anderson. "Help with distribution, finance, international sales, and all those things we could use help in."

Anderson plans to use some of the money from the placement to produce 100,000 bindings for the 1996-1997 season. He'll also expand Switch's marketing budget to strengthen its advertising presence, produce a biannual customer newsletter, and introduce a fax-on-demand information system for retailers. And he wants to add marketing, administrative, and sales staff with international expertise, raising the number of Switch employee s from 16 full-timers to 20.

No More Bunny Slope
Switch's Autolock has a strong chance of becoming one of the standards in this new equipment category. Anderson claims his company's sales and market share are neck and neck with K2's. He also claims that in consumer tests -- "on the slopes, in the snow" -- Switch's binding usually prevails. But cofounder Sand sagely adds that "if there is any problem with K2's system, it's only a matter of time before they work it out." Also, both Anderson and Sand acknowledge that the best product doesn't always win. Lots of people thought Betamax was the better video-recorder technology, but VHS won the marketing war.

Litigation has inevitably become an issue. Of the nine lawyers that do work for Switch, six are patent lawyers, and they've already seen some action. There are only so many ways to attach a foot to a snowboard, Anderson says, so whether by a company's design or not, many systems are similar. In April, Preston Binding Co., a division of Ride Inc., sued Switch, alleging patent infringement. Anderson claims Ride's suit is just an attempt to "harass and intimidate a smaller competitor," but even if he's right, the suit is still a potentially costly nuisance that could frighten off licensing partners.

Nonetheless, Switch has graduated from the bunny slope and is headed toward the black-diamond trails. Anderson reports 1995 sales of $1.5 million and projects $9 million in sales for 1996. "I constantly hear about competitors comparing themselves to Switch in some way," says Sand, "and even if what they say is negative, it still shows we're to be reckoned with." Anderson argues that Switch's two-year head start gives the company some advantage in the minds of consumers and retailers. "Burton and Airwalk will come in with an unproved product," he says, "which is not an easy hurdle to overcome." Of course, Burton and others have a lot more resources to spread around than Switch does. "We'll give them a run for their money," Anderson responds. After a pause, he adds, "Still, we have a lot of running to do."

EXECUTIVE SUMMARY

Company: Switch Manufacturing, in San Francisco. Manufactures and distributes the Autolock step-in snowboard binding and its companion Flexible boot line

Concept: Create and produce a step-in snowboard binding; achieve wide distribution through licensing partnerships with boot manufacturers

Projections: Revenues of $19 million in 1997, with a pretax profit of $2.8 million

Competitive advantages: An improved product and a head start

Hurdles: Gaining enough market presence to establish its brand as an industry standard; surviving lawsuits

THE FOUNDERS
Erik Anderson, president, age 37

Jeff Sand, director of design and manufacturing, age 37

Tony Guerrero, director of sales and marketing, age 33

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