Ten bought in, giving the partners the capital they needed to formally incorporate their new venture. It was an astute combination of smart money and dumb money, with industry people providing the credibility and knowledge that would help spread the word and also assuage the other investors' apprehensions.
"George and Jim got a lot of technical information from us and distributed it among other investors," recalls Gary Sharpe, a consulting civil engineer who split a share with his partner. "When they went to the money people, they could show them that they had knowledgeable people on-line." Matthews says that "the people who were in the contracting business were very reassuring. It was nice to know that they were aboard."
For their part, businesspeople like Matthews offered management expertise that other investors lacked. "Whenever we get into a controversial discussion, Peter does a lot of listening, and he can summarize things very succinctly," says Sharpe of Matthews.
Nichols is counting on those investors to wait longer than the typical seven-year venture-capital time frame for a return on their investments. Because he had such high expectations, he drew up a generous shareholder's agreement, giving investors two seats on the board and the right to attend every board meeting and to review all financial statements. "We wanted their continued support," says Nichols, "and their willingness to stick with it."
WINNING CUSTOMERS
Creating Demand by Building Trust
Nichols and Haines predicted sales of $1 million with a $70,000 loss for 1987, their first year in business. Instead, the company made an $80,000 profit on more than 30,000 Infiltrator chamber systems. State regulatory approval was just the first barrier; Nichols and Haines also had to create demand for their product among their customers, which include plumbing-supply wholesalers and septic-tank manufacturers.
With the help of regulators, Nichols and Haines could identify the leading septic contractors. They would then invite a contractor to install an Infiltrator system, training him on the spot while engineers, other contractors, regulators, and distributors watched. Infiltrator Systems would foot part of the bill for the system (from $650 to $850), feed the onlookers, and answer any questions. "Contractors understand making money," says Nichols. "And the huge advantage of an Infiltrator system is that you can install it in half the time."
The demo strategy was just the beginning of Infiltrator Systems' long journey toward establishing a series of interconnected, carefully nurtured relationships that would help fend off emerging competition. Distributors would meet with regulators, in some cases helping Infiltrator Systems gain local approval. And contractors, convinced that Infiltrator Systems' product was better, would approach distributors and create demand. Along the way, Nichols and Haines took care to assure distributors that they had no plans to sell their product directly to contractors. They needed distributors to support their product and eventually to take it nationwide. And the best way to win distributors' loyalty, Nichols figured, was to create relationships that transcended the traditional vendor-customer alliance.
Hence, the birth of the Infiltrator Systems "sales service representative," who would behave more like a consultant than a salesperson, helping contractors with installations and any other problems or concerns. The tactic not only would create demand for Infiltrator Systems' products but also would help distributors forge stronger relationships with contractors. "The Infiltrator reps went out with us to individuals who are now our customers and showed them the system and how to use it," recalls Kathy Herbert, vice-president at Parnell-Martin, an Atlanta plumbing-supply distributor and one of Infiltrator's largest customers.
SWAYING SUPPLIERS
Insisting on a Proprietary Relationship
In 1990 Nichols and Haines--characteristically ignoring the fashionable trend of "outsourcing" then spreading among their entrepreneurial peers--decided to build their own manufacturing plant. About half of the $5.2-million price tag would go for a proprietary machine to be built by Johnson Controls, a $10-billion maker of building-systems controls and plastics machinery. More specifically, the two were counting on Ed Hunerberg, now director of the structural-foam-technology division of Johnson Controls. Nichols and Hunerberg had known each other for 20 years; Hunerberg had actually hired Nichols as a consultant back in the early days of Infiltrator Systems. Five years after that consulting stint, when Nichols asked Hunerberg to manufacture the custom machinery, Hunerberg was willing to "go to our vice-president and convince him that it was a good deal. We were taking a risk," he says, "because the machinery was specialized for Infiltrator, and it would have been difficult to sell it on the open market if the company had not been able to make final payment."
Hunerberg's faith in Nichols and vice-president of manufacturing Moore clinched that first deal. Since then, Johnson has built four more machines for Infiltrator Systems. Hunerberg, Nichols, and Moore meet twice a year with Infiltrator's machine operators, maintenance people, and the folks at Johnson who actually build the machines, for "continuous-technology-improvement meetings," says Hunerberg. They're tire-kicking sessions that typically lead to the kind of project Hunerberg is currently working on for Infiltrator Systems--a state-of-the-art machine that will give Johnson the opportunity to test a new technology. "A lot of customers would say, 'We don't want to be the first ones," says Hunerberg. "But Jim and Roy are willing to stick their necks out." In addition, Johnson has granted Infiltrator Systems exclusive rights to the technology in their market. "We've never given anyone exclusive rights to our technology," says Hunerberg. "But it was important for Jim to have that proprietary position. We felt we were going to hang on to his star."
