Skyway Freight Systems Inc.'s strategy is designed to find the pivotal sales points -- the pressure points, if you will -- in a market that offers potentially huge revenues but, because it is volatile and atomized, could easily overwhelm a company with small marketing resources. Other companies, in quite different businesses, achieve much the same result through variations on Skyway's theme.
In 1976, Barry Nathanson and Steven Garfinkle agreed that the exploding high-technology industries could be a new, lucrative market for Richards Consultants Ltd., their five-year-old, New York City-based executive search firm. But where to begin?
One obvious place would have been such easily identifiable companies as IBM, Digital Equipment, or Honeywell, all growing high-tech corporations. So, says Garfinkle, they set out to learn what competitive edge they might have in attracting business from a company like Digital that was already using a search firm. "In the course of our research," he says, "we noticed the really phenomenal growth rates of start-up companies. That led us to the thought that maybe we shouldn't go after the DECs of the world but should look, instead, at the companies that might be the DECs of the next generation."
"Keep in mind," says Garfinkle, "that at this point, I didn't know what a venture capitalist was. But Barry had a neighbor who was one. We talked to him and learned that one of the ways the DECs of the world get off the ground was through this very small industry, the venture capital industry . . . [and] we learned that venture capitalists typically prefer to put their money on individuals who have done it before, people who have already developed companies or operated in high-growth modes."
Two ahas, actually. The first was the realization that Digital Equipment, IBM, and other large technology companies weren't Richards's market; they were, instead, its talent pool, supplying them with candidates who had the experience venture capitalists sought.
The second epiphany was that Richards could sell executive recruiting services to thousands of tiny, hard-to-find start-up companies by establishing relationships with only 100 or so easily identified contacts. "Instead of looking ourselves for the Ferrofluidics of the world," says Nathanson, "we could find them by going first to their venture capitalists."
Ferrofluidics Corp., one of Richards's early high-tech clients, was, in 1978, a young Nashua, N.H., company in transition, looking into penetration of new markets for its magnetic-fluid technology. Annual sales amounted to just over $1 million, and the company needed marketing talent. A Ferrofluidics director, New York venture capitalist Harvey Mallement, told the company's co-founder and chairman, Ronald Moskowitz, that he had been impressed with Richards's performance of an earlier search. Since Moskowitz had no experience with other search firms, and because his venture capitalist/director had made the suggestion, Moskowitz commissioned Richards.
This experience and others like it have validated the marketing approach Nathanson and Garfinkle formulated. Going through venture capitalists not only simplifies the identification of new prospects, it also is a powerful door-opener. In addition, since young companies frequently have more than one venture capitalist sitting on their boards, successful completion of a search undertaken on one venture capitalist's recommendation frequently impresses one or two other venture capitalists. Thus, a whole new set of doors is opened up.
The experience with Ferrofluidics also brought Nathanson and Garfinkle a significant but unanticipated benefit. They had, of course, expected their business to grow as their clients' businesses grew; and as Ferrofluidics's sales expanded to $10.8 million last year, Richards completed its seventh executive search (this one for a chief financial officer) for the company. But the two entrepreneurial headhunters also realized gains of more than 250% on the Ferrofluidics stock they had taken in 1978 as partial payment for services. Now, taking some of their fee in stock or warrants is a frequently used part of Richards's marketing and growth strategy.
Coincidentally, Ferrofluidics's own marketing strategy illustrates still another variation on the theme developed by Skyway and Richards. Among its products, Ferrofluidics makes rotary and other types of seals, which it sells to equipment manufacturers, which in turn sell their machines to end-users, semiconductor makers. Moskowitz's problem was to convince 100 equipment-makers that 2,000 end-users wanted his seal in the machines they bought. Where were the pressure points? "We decided," Moskowitz says, "that out of that field of 2,000 end-users, there are probably 10 companies that are industry leaders, the guys who play the tune that the industry dances to. Clearly IBM is one of them, but there are others -- Intel, NEC."
So Ferrofluidics capitalized on the influence of a few large end-users to persuade its OEM customers to incorporate the company's seal. Says Moskowitz: "The rationalization of the semiconductor industry -- thousands of customers -- for us was to identify the guys who are the thought leaders in the industry and sell them first."
Much the same tactic worked for Ferrofluidics in the computer industry, in which about a dozen manufacturers supply spindles to a hundred or more disk-drive makers. Ferrofluidics makes a seal that spindle makers can install before shipping their components to end-users -- but spindle makers, Moskowitz explains, don't enjoy any of the benefits of his company's seal. "For them, it adds more handling and substantial cost. So we really had to sell the disk-drive houses, who are interested in enhanced reliability and that sort of thing."
Again, the trick was to identify the few industry leaders -- IBM, Control Data, and Shugart, according to Moskowitz -- and sell them. The OEMs, and eventually the other disk-drive makers, would follow. But here, because the computer market is so volatile, identifying industry leaders actually meant finding the individual design engineers who were the innovators capable of influencing their colleagues.
"It's exactly the same approach Richards is using," says Moskowitz. "They have a market that is potentially tens of thousands of customers, none of whom knows them and most of whom they don't know. Within that there are probably a thousand venture capitalists, and within that 1,000 there are maybe 100 who are thought leaders, highly respected by all the others. If Richards targeted those, they'd have more business than they can handle. We've identified engineers and tracked them through three or four companies. It's almost as if we placed them there. This guy goes to a company, he designs us in. And the next thing you know, in six or nine months he's off to another company."