An audio-equipment entrepreneur learned the benefits of scaling back after his bank tightened credit.
In the July/August 2009 issue, we wrote about Kevin Semcken, the CEO of the audio-equipment business Able Planet. In January of last year, Semcken learned that his bank was no longer willing to front the cost of raw materials and manufacturing. So Able Planet was forced to find an alternate way to finance the production of its Linx Audio headphones, as well as the development of a promising new technology called Sound Fit, which allowed listening devices to fit snugly in the opening of the ear canal. Two of Able Planet's board members wanted Semcken to put Sound Fit on hold and focus on the Linx business, which they saw as a safer bet. But Semcken wanted to continue negotiating with some 30 potential Sound Fit partners. In the end, Semcken agreed to focus primarily on his established Linx products while still pursuing some talks on the more experimental Sound Fit concept. That worked: He was able to sign up Best Buy and BJ's as customers. He also entered discussions with factoring companies to obtain financing at an annual interest rate of 18 percent, about 5 percentage points higher than he had paid for bank credit.
WHAT THE EXPERTS SAID
Kristian Rauhala, CEO of San Diego–based H2O Audio, warned that just getting big-box stores did not guarantee demand for Able Planet's products. G. Michael Maddock, founding partner of consultancy Maddock Douglas, suggested rewarding the first customer to take a risk on selling the new Sound Fit gear with a cut of subsequent deals. Jack Crawford Jr., a general partner of Velocity Venture Capital, advised Able Planet to offer banks better evidence that it could repay a loan.
WHAT'S HAPPENED SINCE
Able Planet secured a factoring agreement but is in talks with three banks for a credit line with better terms. Semcken expects the banks to come around, thanks to a strong 2009 fourth quarter -- the company's first profitable quarter. That was in part thanks to promotions of midpriced headsets during the holiday shopping season. The company closed out 2009 with $5 million in sales, up from $2 million in 2008.
The company has had discussions with other audio companies to raise $10 million. With the extra funds, Semcken says, Able Planet would begin international expansion and relaunch development of the Sound Fit technology, this time targeting the hearing-aid and emergency-services industries.