Anatomy of a Start-up
Vincent Yost built a parking meter that's a 'better mousetrap.' But his customer doesn't care. His customer is the government
Once again, Vincent Yost is feeding a parking meter. Not, like most businesspeople, prior to making a sales call, but during his sales call.
Two years ago Yost founded Intelligent Devices Inc. to create and bring to market a "smart" parking meter that could sense the arrival and departure of a car. On this day in October he has set his two-foot-high demo model atop a table in the office of Leonard Bier, acting executive director of parking for the Camden, N.J., parking authority. Yost has just parked a late-model chair in front of the meter, which senses its presence with an infrared detection system. He buys an hour's worth of time with four quarters and starts describing the many unique features of his state-of-the-art electronic meter.
Again and again Bier nods his head. Then Yost vacuums up the dirt on the carpet, so to speak. He tugs the chair away from its place in front of the meter. Four seconds later the meter's digital display automatically zeros out. His intelligent meter has just recaptured 50 minutes of "free parking."
"That's beautiful," says Bier, who knows parking meters the way Martha Stewart knows potpourri. Called in to rescue Camden's troubled parking authority, he's legal counsel to the New Jersey Association of Parking Authorities and owns a parking consulting business. His summary assessment to Yost: "If the mechanical meter is a single, and the electronic meter is a double, this is a home run or a grand slam, even."
Unfortunately, Yost has yet to triumphantly circle the bases. In fact, he's stuck in the batter's box, still looking to collect his first nickel, desperately trying to generate some sales momentum so he can stay ahead of his well-entrenched, far bigger competition. Welcome to an entrepreneur's worst nightmare: create a better mousetrap; then feel like the mouse.
For the first time in his business career, 44-year-old Yost is selling not within the competitively predictable realm of the business-to-business market but rather to a classically risk-averse customer. He's now selling to cities and towns, a universe of slow-to-change, monopoly-like entities, where, to his dismay, the rules and the reality are different--and for the most part, stacked against him. If only his smart meter could solve his core problem: how to speed up a torturously slow sales cycle, which even in the most responsive municipalities appears likely to top two years.
"I didn't anticipate this," admits a frustrated Yost, the former president of a pioneering computerized-cash-register company, which he left when it chose not to develop his innovative new meter. Yost swapped his 20% stake in the company for the rights to the meter and six months of severance pay. In December 1994 he set up an answering machine, a fax machine, and a computer in a den-sized room in his home in Harleysville, Pa., and started answering the phone, "Intelligent Devices."
His home-based company of the 1990s has done a limbolike job of lowering the bar on overhead. Yost types his own letters. His four technicians work out of their homes. When he shaves in the morning, he sees his entire sales force in the mirror. Meter manufacturing is contracted out--to a Doylestown, Pa., company called Aircraft Instruments, which followed an investment of a quarter of a million dollars in Intelligent Devices (for 22% of the company) with loans totaling twice that amount.
Give Yost high marks for spotting a ubiquitous product in need of technological innovation and for anticipating and addressing most of the potential pitfalls. The concept: grab a healthy, high-end share of the roughly 5 million parking meters that line U.S. streets, by offering a high-tech meter that will outperform anything sold by the industry's entrenched triumvirate: Duncan Industries, POM Inc., and MacKay Meters. Yost's intelligent meter will not just increase revenues by automatically resetting to zero when it detects the departure of a car from the parking space. Its sophisticated software package will also, via handheld remote units, download to parking-authority computers data on everything from an average parking time by zone to missed ticketing opportunities--the kind of comprehensive parking stats that cities currently pay consultants upwards of $10,000 to compile through clipboard-toting note takers.
Yost's timing is also good. After a half century of small refinements, the mechanical parking meter (first introduced in 1935 in Oklahoma City) has begun to give way to a new generation of electronic meters featuring digital readouts, more reliable innards, and most important, coin-counting capabilities aimed at curbing the all-too-common problem of employee theft. Currently, according to the International Parking Institute, only about 10% of the nation's parking meters are electronic; 90% are mechanical. In the next 10 years those percentages should flip-flop. Yost figures he can ride the crest of that wave.
Of course, his meter must outperform the competition as promised--no small engineering feat for a tiny start-up. Initial field testing, begun in the spring of 1995 in cities ranging in size from the touristy borough of New Hope, Pa., to Pittsburgh and New York, identified both promise and problems in a quarters-only prototype. In Hoboken, N.J., smart meters increased revenues by 45%. In New Hope, the increase topped 50%. Pittsburgh, a city with nearly 8,000 parking meters, tested 10 units and collected upwards of $20 more per smart meter per month and a wealth of helpful parking data. "He's got me sold and my staff sold," says Guy Costa, executive director of the city's parking authority.
As in most beta tests, there were also problems. New York City's double-checking of its 75 test units revealed that some meters undercounted vehicles. In other cities, Yost says, malfunctioning sensors counted some cars twice. The engineering challenge: boosting the power of the sensors without unduly draining the meter's batteries. Yost says his technicians fixed those and other bugs during their 1996 reworking of the prototype.
Yost has also addressed two additional potential stumbling blocks-- one philosophical, one financial. Parking, as he soon discovered from early local-newspaper accounts of his test installations, is an emotional issue. Mayors and council members could take early retirement if they had a nickel for every motorist who complained his time had just expired when the meter maid swooped in with her ticket book. And now an intelligent meter was going to automatically reset itself--taking away one of life's "inalienable rights"--the lottery-like good fortune of finding free time on a meter. Yost's solution: help a city position the new equipment as "friendly meters," by allowing officials to program them with a given number of goodwill free minutes--perhaps 5 minutes up front to run in and get a newspaper or maybe 10 minutes at the end of the purchased time to help erase the shadow of the hovering ticket writer.
Pricing remains a concern, but less so, Yost hopes, because of an attractive leasing program. Unavoidably, the Intelligent Meter carries a premium price. Small production runs, contracted out, do little to bring down costs. And to save development time, Yost decided not to create his own coin-handling mechanism; he's paying top dollar for the proven unit that Mars Electronics International, a subsidiary of the candy giant, developed for the vending-machine industry. Consequently, his current price of $400 a unit is roughly three times as high as the price of the competition's electronic meters purchased in any kind of quantity. To soften that sticker shock, Yost offers a five-year lease--and the argument, bolstered by test data, that the meters will more than pay for themselves on a monthly basis.
Back in his old sales universe, selling computerized cash registers to fast-food restaurants, a pitch backed by solid numbers, demonstrated in an on-site test, generally turned the tide. Then, as now, Yost was selling state-of-the-art technology. He'd arrange for a demo, showcase his product's cost-saving and revenue-generating features, and submit a proposal. Typical time lag till order: nine months to a year. So Yost thought he was "battle hardened" and ready for the job of winning orders for his smart meter.
He thought wrong. Having honed his sales skills on businesses looking for a competitive edge and on slow, but not unreasonable, sales cycles, Yost now seems almost shell-shocked by the bureaucratic inertia and glacially creeping buying cycles of municipalities. In Hoboken, he averaged the city's parking revenues for years 1992 to 1994, applied the 45% increase he'd gotten on its streets, and showed the five members of the parking-authority board that even after paying the $9.90-per-meter monthly lease, they could expect to realize a profit of $3.60 per month per meter.
"It's a real point of braggadocio when a manufacturer can say, 'This product will pay for itself.' I'm going beyond that," says Yost, shaking his head. "I'm delivering an extra $3.60 per meter. It pays to put them in."
To date, he feels hapless in Hoboken. And he can't afford to court the board indefinitely. Though a recent investor, KLT Inc., a subsidiary of Kansas City Power & Light, armed him with additional capital, Yost needs to capture a few cities--and soon. The next chunk of his company may cost him his controlling share, and he worries that his competitors may be working on their own smart meters. Time, the essence of his product, is also his enemy.
Although Yost has projected 1997 sales of 2,000 to 5,000 meters, or upwards of $800,000 in revenues, Intelligent Devices has closed only one sale in its two-year history. New Hope, Yost's first test site, bought 58 meters in early September. But as of mid-October, Yost still hadn't received the check from the leasing company.
More than a year into his relationship with Hoboken, he sees little sign of a breakthrough. Little wonder he bounces his sales strategy off New Jersey parking expert Leonard Bier: "Most of the time, I have to convince the executive director of parking. If I'm successful doing that, they say, 'Give me a proposal, Vince.' So I give them a proposal. Now--"
"Now," interrupts Bier, "is when the hell starts."
Not the answer Yost wants to hear. But by all accounts, it's not much of an exaggeration, for all sorts of speed bumps lie in the path of an entrepreneur trying to sell to municipalities. If entrepreneurs are risk takers, cities are risk avoiders. Disinclined toward change, they move cautiously, if at all, and brake repeatedly for political and procedural reasons.
"Bureaucrats try to do one thing, and that's not rock the boat," observes small-business expert Scott A. Clark, author of Unleashing the Hidden Power of Your Growing Business and a onetime government vendor . "Most don't think past the next election." And ultimately, that group, not just the guy in charge of parking, must come to believe in and act on the merits of a new product such as Vincent Yost's smart meter. Listen to Guy Costa, executive director of the Pittsburgh Parking Authority, whose commissioners recently purchased 1,000 electronic meters made by POM for $140 apiece, and none of Yost's $400 meters, despite Costa's lobbying: "There was the cost factor, but also I think it was a matter of 'This is new on the market. Do we really want to be the first to do this?" Consider how long a corporation would lead its industry if it continually followed a similar prebroken path to the future.
Moreover, even in towns more predisposed to change, the local government rarely has the ability to turn on a dime. "Our board's not divided. We move quicker than most towns," says Doylestown, Pa., borough manager John Davis, Yost's point of entry in the town where his meters are manufactured. "But there's a need to move slowly, if only to gain consensus among the 8,500 borough residents." Two weeks before demonstrating his meter in Bier's Camden office, Yost called on Davis. It had been six months since he first demonstrated his meter in Doylestown, and the borough now wanted to take him up on his offer of a free test of the meters on its streets.
Here's what Yost is looking at, under a best-case scenario: Having talked Doylestown down from a one-year test of 75 meters to a three-month test of 25, he will deliver the units in the spring of 1997, after the winter snows have melted. If the meters perform as advertised, Doylestown will keep them, paying Yost a rental fee, into and beyond the approval of the next budget in October. "We could order the meters, probably 100 or so, in December," says Davis. Yost would get paid early in 1998, nearly two years after his first demo in Doylestown.
"We find that two years is the minimum," says David L. McNeff, vice-president of sales for Printrak International Inc., of Anaheim, Calif., which sells automated fingerprint-ID systems to government agencies, including cities. "You miss an annual budget, you lose a whole year, and it's not unusual for that to happen two or three times."
Even when money is budgeted, entrepreneurs face one more speed bump--the democratic safeguard known as the request for proposal (RFP). Even in a situation like Yost's, where he's currently the sole source of a particular product, a municipality must advertise in search of the lowest responsible bidder, stating its specific needs-- x number of units capable of doing y. At least a month--often three months--goes by before a contract can be awarded.
"I kid you not, this is not an easy place for an entrepreneur," says Frances Burke, a professor of management at Suffolk University's Sawyer School of Management, in Boston, and a consultant specializing in business-to-government relations. "Remember, you're dealing with things that are positive in a democracy. Every step of the way, you have to have openness, so the citizens who are paying for this $400 meter, as opposed to a $150 meter, know there's no hanky-panky, that the taxpayers' money is being spent efficiently." She's equally certain of something else: selling to cities, versus selling to business, "really is apples to oranges."
There is one bright spot in this rather gloomy parallel universe: cities are sheep. Persuade one or two key municipalities to sign on, and more will follow. Bigger orders spell manufacturing efficiencies, which enable price cuts, which help facilitate future orders. Yost can see the light off in the near distance. His plan is this: manufacture 200 of his new and improved meters and seed the market with them in 1997. (Why not build 500 meters and thereby increase his odds of success? "That," he insists, "pushes considerably forward the time I run out of cash and puts tremendous stress on me to get things done." He's acting on a real fear rather than on as yet unheard competitive footsteps.) Yost believes that if he can limit a city's test to three months, the same meter might realistically be used in trial runs in three cities. And if he can restrain the requests of big cities and hold small cities to 10 meters a test, Yost thinks he can arrange as many as 15 on-street trials.
Most important will be his return to New York City, home to 70,000 meters and a decentralized Bureau of Parking with an annual budget of $100 million--and even its own research-and-development facility. "We're more like a Fortune 500 company," says the bureau's executive director, Larry Berman. He adds, "The city lets us manage our own resources. They don't micromanage." Bingo: a portal back to a more businesslike sales universe. Berman has both the funds available for a Big Applesize "small order," say 3,000 to 5,000 meters, and the inclination to place one. "The first version produced some interesting data for us," he says. "We need creative solutions to replace people we can no longer afford." He cautions, however, "We're very thorough in New York. We need to prove everything every step of the way."
Will Yost's 200 new, improved seed meters bear fruit? Can he--will he--be firm? Beverly Hills has told him it would like 20 of the new meters for at least six months. New York City wants 75 for six months. "How can he push it forward?" says Printrak's Dave McNeff. "I wish I knew. The fact is, most of these agencies move at the speed they do. As a larger, established company we can survive that better than the guy who is trying to get off the ground."
Yost knows that only too well; it's one sharp horn of his dilemma. On the drive home from Camden he breaks a reflective silence: "So, one more day the sun will set and I will think, 'I've got to crack this nut."
John Grossmann is editor and publisher of NewsReach, a monthly small-business newsletter based in Jamison, Pa.
COMPANY: Intelligent Devices Inc., in Harleysville, Pa., founded in December 1994
CONCEPT: Make an intelligent parking meter that senses the arrival and departure of cars
PROJECTIONS: 1997 sales of 2,000 to 5,000 meters, with $800,000 to $2 million in revenues; double that in 1998
COMPETITIVE ADVANTAGE: The "smart" meter automatically resets to zero when a car leaves, boosting meter revenues; its software captures key parking data
THE CHALLENGE: Selling to the local government--the slowest, most conservative, least logical market on earth
Vincent Yost, 44
FAMILY: Married, no children
PERSONAL FUNDS INVESTED: $350,000
EQUITY HELD: 62%
FORMER LIFE: Single A ballplayer in the Baltimore Orioles farm system; M.B.A., Xavier University; former head of a company selling computerized cash registers
THIS LIFE: "The worry is absolutely crushing. But I use it to drive me. Bill Gates said it--the paranoid makes the money. And I worry a lot."
Should Vincent Yost be trying to turn his breakthrough parking meter into a company? Or is his case a classic example of a great new product that should be managed as just that, instead of as the foundation for a start-up? We asked Harvard Business School professor Bill Sahlman, who is also chairman of Harvard Business School Publishing Corp., and a veteran new-venture investor himself.
Most new ventures are products, not companies. And which is Yost's? First I'd frame the question differently: If you want to maximize the reward for a good invention, how would you be better off? Would you be better off, for example, with a 10% royalty on the top line of a licensed product being pushed through an existing distribution channel by an entrenched competitor? Or would you rather own 60% of a start-up company that has to clear all the market hurdles from scratch?
That turns out to be a fascinating economic question. Imagine a successful company with a 20% profit margin (and that's quite successful). It has to plow profits back into working capital and capital assets, so you might turn a 20% operating margin into, say, a 5% cash-flow margin. Well, if I get a whole 10% of sales off the top, I promise that's a hell of a lot better than owning 60% of 5% off the bottom. If people worked out the economics, they would at least spend some time thinking about whether it might make sense to get their product into the hands of someone else who would sell it for them.
Unfortunately, most entrepreneurs are blinded by their obsession with control. It sometimes seems that 100% of founders are preoccupied with what share of the company they own. Fear of running out of capital is pitted against fear of equity dilution, and fear of dilution always wins. Yost, for instance, is worried about dropping below 51% ownership if he raises more capital. He'll discover that by not raising much capital he'll have given up real control of his destiny, anyway.
It's not clear yet whether Yost should abandon his company-building dream and think of his meter as a product. But he does need to make changes. He needs to rethink his sales pitch, and he needs either more capital to fight the fight or another company to piggyback on. In the history of entrepreneurship I don't think I've ever seen an example of somebody accurately anticipating the difficulties in the sales cycle or raising enough money to eliminate all of the barriers to commercialization. Yost isn't an exception. Look at what he's trying to do: He's asking customers to change the way they do business. He's asking them to suffer the political consequences of a more efficient but obnoxious collection system. And he's asking them to pay $400 for something they can get from somebody else for $100. (Comparing his meters and theirs is an apples-and-oranges thing, but in the political process it's going to be viewed as $400 against $100; certainly that's the way his competitors are going to pitch it.)
That's a tough sell. I think the road is hard for any product that 1) involves changing traditional behavior, 2) involves dealing with politicians and the political process, and 3) might prompt nasty articles in the press. This product is guilty on all counts. Just think, the more it succeeds, the nastier the newspapers will treat it. Nobody writes a positive article when the government increases parking-ticket revenues from $2 million to $4 million. That won't win anyone any votes.
So why not reposition the benefits the product offers? What is the customer's real problem? Yost has defined it principally as the need to get more revenues out of parking. But maybe the real problems involve holding down the city's labor budget (as these automated meters might help do) or stopping theft of meter money by the collectors (which these meters could do, since they enable cash collections to be reconciled with an electronic record of what the meters should contain). Put politicians in a position to say that those are the problems your meters are helping them solve.
And isn't it politically impossible to sell a $400 machine when the competition is at $100? So figure out how to sell it for $100, and work a back-end deal that calls for sharing the revenue increase the meter generates. Take, say, 50% of the gain over time. If the meter does what it's supposed to do, that's a good deal for both sides. And together with a restatement of the problem the meter helps solve, it's a way to make the city's buyer a hero instead of a goat. You know you're never going to be in a successful selling position if by accepting your deal, the guy puts a bull's-eye on the back of his coat.
If Yost can do all that, he'll be in a better position to know whether he just needs a lot more capital or should actually sell or license to an entrenched competitor.
How might Vincent Yost shorten the municipal sales cycle?
After emitting a fatalistic laugh, those who've been stuck in this quagmire provided both general and specific advice. "Our sales reps are taught not to find just the end users--in this case, the parking guys--but the councillors or commissioners you can lobby on behalf of your product," says Dave McNeff, vice-president of sales for Printrak International Inc., which sells automated fingerprint- ID systems. "He must sell up and down the ladder."
Don't be victimized by the formal governmental bidding process; use it to your benefit by helping a city draft its request for proposal, suggests small-business expert Scott A. Clark. Offer suggestions to help ensure that the published specifications include your key proprietary features. If possible, suggests Ray Burnett, a board member of the National Institute of Governmental Purchasing, try to turn one sale into several by encouraging municipal "piggybacking." Burnett, the former purchasing manager for Dayton and now the contract administrator for the city's convention center, explains that in Ohio a properly worded RFP can bring other interested cities under the legal umbrella of a single city's published bid.
With limited resources, how can Intelligent Devices better transform successful tests into sales?
As Tip O'Neill, the late Speaker of the House, used to say, "All politics are local." "Each town," points out Leonard Bier, legal counsel for the New Jersey Association of Parking Authorities, "has its own dynamic. You can have the best product in the world, but if the town politics are such that the board never agrees, bypass that town." Bier stresses that Yost must carefully qualify his leads to avoid "tire kickers." How? By asking the executive parking director what projects the town or city has done lately. Has it built any parking garages, bought any property? If the director says no, move on. "He's not trying to waste your time, but he is, and he will," warns Bier.
Former city purchasing agent Burnett suggests "getting another foot in the door" by making advocates of some high-profile parking consultants--who can, in effect, become auxiliary salespeople who will recommend Intelligent Devices' meters as part of their action plans.
So, does Yost have other options?
Yes, says Inc. columnist Norm Brodsky, several of whose entrepreneurial efforts have involved doing business with government buyers. Indeed, Yost "should have looked at his options more carefully right from the start. His cardinal error was that he didn't know enough about his market. A million people who sell to cities could have told him how long it takes; he shouldn't have been surprised." And it's not just bureaucratic wheel-spinning that makes Yost's product a lengthy sell; it's the amount of buyer education it requires. "Yost needed a lot more capital--to carry the business over the sales period--than he started with.
"Instead of trying to sell the meter to the end buyer himself, Yost should consider selling it to a company already selling to municipalities." (See "Is This a Company?" above.) "He'd end up getting more money, and he'd save himself a lot of time."
Yost has led the horse to water. How can he make it drink?
Try psychology. Clarence Kemper, vice-president of sales and marketing for Amano Cincinnati Inc., a manufacturer of parking-revenue-control equipment, suggests Yost restructure the terms of his on-street trials. Currently, not only does the city get to try the meters free, but it also gets to keep the increased revenues generated. Kemper thinks Yost might contractually claim the revenues generated by the trial meters so cities would act more quickly in buying them. "If you were that municipality and you were giving away that revenue every week, wouldn't you want to secure that advantage for yourself?"
"He needs to get somebody to take a risk, even if it means taking a loss to get the ball rolling," advises Frank Del Monaco, director of training and career development for the International Parking Institute. "The first question from politicians is always, Where else is this being done?" In other words, to make sales, he's got to make sales. Yost is facing a classic catch-22.
Resources: The best way to learn more about selling to the government, say insiders, is to go to the source: talk directly to the purchasers in the municipal agency you're trying to win over. What are their procedures? What must they see before considering a purchase? What politics are involved?
The second-best way to learn more is to talk with other people selling to your intended buyer, asking the same questions.
For general information, try the International City/County Management Association (777 N. Capitol St. NE, Suite 500, Washington, DC 20002-4201; 202-289-4262).
AMANO CINCINNATI, Clarence Kemper, 140 Harrison Ave., Roseland, NJ 07068; 201-403-1900; email@example.com
FRANCES BURKE, Suffolk University, Sawyer School of Management, 8 Ashburton Pl., Boston, MA 02108; 617-573-8315
RAY BURNETT, Dayton Convention Center, 22 E. Fifth St., Dayton, OH 45402; 937-443-4700
INTERNATIONAL PARKING INSTITUTE, Frank Del Monaco, 701 Kenmore Ave., Suite 200, Fredericksburg, VA 22408; firstname.lastname@example.org
INTELLIGENT DEVICES, Vincent Yost, 170 White Pine Way, Harleysville, PA 19438; 610-584-8830; fax, 610-584-8832
PRINTRAK INTERNATIONAL, David McNeff, 1250 N. Tustin Ave., Anaheim, CA 92807; 714-666-2700