Last February, Wayne Gianotti, president of Contract Office Group, a furniture company in San lose, Calif, heard of a Silicon Valley start-up that he concluded was developing "one hell of an invention." After consulting a venture capitalist, he approached the company, now called Palantir Corp., with an intriguing proposition. In exchange for the right to purchase future Palantir stock at the second-round financing price, Gianotti's company would completely furnish the start-up's offices, charging nothing for the first six months. Thereafter, Palantir would have the option -- but no obligation -- to buy or lease the furnishings.
Palantir declined the offer, but Gianotti gave the company six months' worth of free furniture anyway, in hopes of retaining it as a long-term customer. When Palantir later arranged venture capital financing, Contract Office Group bought into the package as a limited partner.
Palantir is only one in a long line of start-up companies that Gianotti has courted with similar deals. "We like startups," he says, "because we get to grow with them." That growth has been impressive. Contract Office Group is currently projecting gross revenues of about $60 million in fiscal 1983, up from $10 million in fiscal 1980. According to Gianotti, "most of that came through our business with start-ups."
Gianotti says that he first began targeting start-ups about two years ago. Before that, his company -- founded in 1976 -- had marketed its furniture through standard sales channels. But Gianotti knew there had to be a way to take advantage of the explosive growth of business in the Santa Clara Valley. He figured that, by hitching its wagon to some of the young stars of high technology, his company could rise along with them. And so -- with the help of venture capitalists -- he began to identify particularly promising start-ups, and then went after their business, generally offering a limited period of free furniture use in exchange for stock, stock warrants, or stock options.
So far, the strategy seems to be working. Stock earnings from the deals have helped fuel Contract Office Group's own capital expansion. These earnings generally come from sales of stock in its portfolio, which currently includes about 10 to 12 companies. "In one case, we got into a stock at a dollar a share on the first round [of financing]," says Gianotti. "The venture capitalists came in on the third round at $6 a share. They didn't want a lot of little investors involved, so they bought us out -- at $6. We did all right on that one."
More important than the stock deals, however, have been the strong relationships that Contract Office Group has developed with a large number of burgeoning enterprises, most of which need more and more office furnishings as time goes by. And the first furniture supplier they think of is Contract Office Group.
In building these relationships, Gianotti doesn't insist on a written commitment. He says he has discovered that loyalty is more binding than legal contracts. Indeed, these "handshake" agreements have proven so rewarding that Contract Office Group is pursuing start-ups at an avid pace, furnishing the offices of 5 to 10 young companies every month.
Gianotti concedes that there are pitfalls. "Some companies go under, or can't develop their product. That's happened a few times. Then we get the furniture back. Granted, there are pick-up and delivery costs and, of course, the furniture is used, but there's a good market for used furniture. It doesn't happen enough to cause real problems. On balance, we've done very well [by the deals]."
So he intends to keep on following his growth strategy, marketing furniture with the eye of a venture capitalist. "We follow [the venture capitalists'] lead," he says, "and try to keep in sync with the financial industry in general. Personal computers are in free-fall right now, so we're keeping an eye on the semiconductor and disk-drive industries."