Part 2

Catch up with the companies profiled in our Anatomy of a Start-Up Series, and here's what you discover: Plans are one thing, executing them is another

Scanning Anatomy of a Start-Up articles published in Inc. reminds me of watching the University of Notre Dame football movie Rudy. A hardworking, scrappy young man with few football skills and a ton of heart vows to make the team, don the coveted golden helmet, and get onto the field, only to be told he is a dreamer. So be it. Rudy sleeps in the groundskeeper's office and endures countless practice-team beatings but nevertheless wins the hearts of the regular players and the brief attention of his coaches. Sound familiar?

We caught up with many of the Rudys that we had profiled in our anatomies from 1996 through 1998 to see how their original plans had held up. Like Rudy, some of the companies had only brief moments in the sun. Some are still waiting for their big break. A few are very successful.

In Celebration of Golf

Founder: Roger Maxwell

Date of Inc. anatomy: July 1996

Vital signs then: The Scottsdale, Ariz., specialty golf retailer, in a 12,400-square-foot homage to the game, offered everything from Callaway clubs to a "History of Golf" chess set. Maxwell projected revenues of $3 million and profits of $300,000 for 1996.

What the experts said: Most felt Maxwell needed to fine-tune his concept and wondered how he could expand beyond a single store.

Vital signs now: Maxwell's Scottsdale store pulls in close to $5 million in annual sales. In November 1999 he opened a second store, along the grand canal at the Venetian resort complex in Las Vegas. The new outlet has more sales per square foot than the Scottsdale store and has the potential to do $8 million to $10 million in sales a year. More stores are in the works in Atlanta, Chicago, Dallas, and Houston.

What the experts say today: New York City-based retail consultant Walter F. Loeb, who four years ago suggested that growing beyond one location would be a real challenge, lauds Maxwell's Las Vegas choice. "Location, location, location," he says, "was the key word for any entrepreneurial company." He adds that as long as Maxwell opens stores in affluent areas and hires the right teams to manage the growth, he should do well.

Slanted Publications

Formerly: Smug Inc.

Founder: Shirley Halperin

Date of Inc. anatomy: May 1996

Vital signs then: The Rutgers University dropout launched her own magazine, called Smug, in February 1995 with the help of her dad. Halperin hoped to make it big with an all-music, no-fuss free magazine for East Coast clubgoers and indie-rock fans alike. With a shoestring budget and an all-volunteer staff, Halperin wanted to double her 1995 ad pages to 300 pages in 1998. And she hoped to increase revenues from $70,000 in 1995 to $900,000 for 1998.

What the experts said: Advertisers and music-industry players lauded Smug's editorial voice and innovative design. However, magazine experts warned that Smug's lack of market research could come back to haunt the fly-by-the-seat-of-its-leather-hip-huggers magazine, especially since the musical tastes of young trendsetters tended to change.

Vital signs now: In 1997, Smug upgraded from newsprint to a slicker, glossy paper and took its regional act on the road toward national distribution. Halperin also experimented with frequency, eventually deciding to publish Smug eight times a year. Her big break came in April 1999, when she set up a partnership with Canadian publisher Influence Marketing. The two companies formed Slanted Publications Inc., and in exchange for a majority stake in the company, Halperin got enough money to hire more staffers, secure a national distribution contract, and increase Smug's page count. And while revenues didn't increase as much as Halperin had predicted, they more than doubled. In 1999 the company posted ad-sales revenues of $170,000. Halperin was optimistic, planning two new publications for 2001. But the Canadian partnership didn't work out, Halperin says, and she is now seeking a buyer. In October the magazine temporarily ceased publication.

What the experts say today: "In 1996, I commented upon Ms. Halperin's passion," says Dennis F. Giza, associate publisher of Columbia Journalism Review, in New York City. "What strikes me now -- even in light of the recent, and I hope temporary, suspension -- is Ms. Halperin's savvy execution. Against great odds -- as most new magazines fail -- Ms. Halperin not only continued publication for over five years, she improved staffing, product, distribution, and revenues. Based on her past I suspect that Ms. Halperin will persevere -- either finding a partner and resuming publication or, with her continued passion and increased publishing savvy, perhaps beginning anew."


Founders: Jason and Matthew Olim

Date of Inc. anatomy: June 1996

Vital signs then: Twin twentysomething brothers launched what was -- back when they started it, in 1994 -- an anomaly: a virtual store, on the Internet. From their parents' house near Philadelphia, the Olim brothers spent about $80,000 (chump change by today's dot-com standards) to create the online storefront, which they then grew from their own rocket-fueled revenues. The company pulled in $2 million in sales in 1995 and expected to hit $12 million in 1996.

What the experts said: One praised CDnow for its ability to keep costs down, reach a global audience, and deliver a product to consumers quickly. Michael Sullivan-Trainor, then the director of Internet commerce at International Data Corp., said, "CDnow's experience to date suggests that it can go the distance." The big looming question was competition, for if CDnow could come out of nowhere and make millions, why couldn't someone else? Competitors and music-industry experts suggested that CDnow should leverage its existing popularity and diversify its product offering.

Vital signs now: The company's sales grew -- to $147 million in 1999 -- but so did its losses. (It posted losses of $119 million in 1999.) CDnow both benefited from and fell victim to the investment community's hot-then-cold treatment of Internet stocks: it went public in 1998 at $16 a share; its stock shot up and then took a nosedive. Last July CDnow was trading at about $3 a share, and German media giant Bertelsmann AG agreed to acquire the company for $117 million in cash. (Full disclosure: Gruner + Jahr, a Bertelsmann company, acquired Inc. in August.)

What the experts say today: "The outgo was bigger than the income, which is never good," says Robert Labatt, a research director for Gartner, a research and consulting company in San Jose. "They built a brand in North America and a smaller brand in Japan, but they were unable to make that brand work efficiently enough to be profitable." Labatt has high hopes for CDnow's future under Bertelsmann's worldwide and capital-rich umbrella. And as for the much-touted database of paying Internet shoppers that CDnow's proponents singled out as a strong point: Labatt thinks that although the data alone are useful, "the sale and reuse of that data is becoming more of a thorny issue, just as it has become more tactical."

Formerly: Streamline Inc.

Founder: Tim DeMello

Date of Inc. anatomy: November 1996

Vital signs then: DeMello started a Massachusetts-based service that provided home delivery of groceries and picked up and dropped off movie rentals, dry cleaning, and film. Each customer paid $30 a month for Streamline to deliver groceries weekly and stock them in a box (consisting of a freezer, a refrigerator, and a few open shelves) located in the customer's basement or garage. In contrast to services like Peapod Inc. that set up partnerships with local grocery stores, Streamline operated its own warehouse. DeMello, with $5 million in the bank, projected revenues of $1.1 million for 1996 and nearly $50 million for 1998.

What the experts said: Although one was enthusiastic about the potential for market acceptance, he warned that some customers might find the once-a-week delivery too infrequent. Another expert suggested that at-home grocery shoppers usually liked to be around when the bags arrived, so they could inspect the contents. Finally, noted a third observer, if DeMello couldn't convince a large number of shoppers in enough cities they needed his services, profits would be pint-sized.

Vital signs now: After the original Anatomy article appeared, Web shopping exploded, and Streamline decided to capitalize on the trend by adding the dot-com suffix before it went public, in June 1999. Pricing the offering at $10 a share, Streamline raised $45 million. But for the six months ending July 1, 2000, it lost $23 million, and its stock price dropped to less than $3. In September, Peapod, a Streamline competitor, acquired the ailing company's Washington, D.C., and Chicago assets for about $12 million in cash. It also agreed to assume Streamline's lease obligations in those locations. In November, Streamline announced it was discontinuing its service.

What the experts say today: "The online grocery model is very expensive to start up and maintain," says Ken Cassar, a senior analyst at Jupiter Research in New York City. Cassar notes that distributing perishables and nonperishables costs non-brick-and-mortar grocers a pretty penny. "And add to that Streamline's refrigerator-in-a-garage model, and it becomes a more daunting model," he says. Then there's the tomato problem. "People tend to be rather particular about their tomatoes and other produce items. It takes a big leap of faith to allow someone else to pick your tomatoes," Cassar says.

Switch Manufacturing

Founders: Erik Anderson, Jeff Sand, and Tony Guerrero

Date of Inc. anatomy: August 1996

Vital signs then: Anderson and Sand, industrial designers, created boots and step-in bindings for snowboarders in their spare time. Guerrero came in to head up sales. The trio teamed up with seven boot manufacturers, including skateboard-shoe star and snowboard-boot up-and-comer Vans Inc., for licensing deals that brought in $5,000 each and a $1 royalty for every pair of boots. The founders projected $9 million in sales for 1996 and $28 million for 1998.

What the experts said: Most industry moguls said that Switch faced an uphill fight that would require more capital. A couple even suggested that Switch either beef up its licensing efforts or sell part or all of the company to one of its licensees.

Vital signs now: Switch definitely caught the beginning of an upward ride in the snowboard industry, becoming one of 300 snowboard-equipment brands, Anderson says. But following the consolidation trend in the industry, in July 1998 it was acquired by Vans for $16 million in a three-year earn-out deal. At the time, Switch had $11 million in revenues and employed 32 people. Now, as a part of Vans, Switch no longer sells its own brand of boots. It also downsized to eight employees. Guerrero left for a sports-related Internet venture, and Anderson says he'll probably leave when his earn-out period comes to an end this summer.

What the experts say today: Anthony C. Warren, a partner at Strategic Technologies LLC, a small investment bank based in Princeton, N.J., that specializes in the technology sector, thinks that in selling Switch to one of its licensees, "the founders took advantage of a narrow window of opportunity which could have disappeared rapidly in an overpopulated, fashion-driven market."

Cruel World

Formerly: Career Central Corp.

CEO and cofounder: Jeffrey Hyman

Date of Inc. anatomy: December 1998

Vital signs then: Kellogg School of Management M.B.A. Hyman created a recruiting system to link up fellow M.B.A.'s with companies. Businesses on the prowl for recruits paid Career Central $2,995 for its automated matchmaking services. In the early days Hyman's placement rate wasn't stellar. (Out of 700 searches from December 1996 to August 1998, a mere 100 M.B.A.'s were placed.) The company posted 1997 revenues of $560,000 and hoped to hit $4 million in 1998.

What the experts said: One challenged Hyman's assumption that the recruiting industry hadn't changed for 100 years. Others suggested that his service was little more than a résumé retriever -- not the kind of in-depth service for which customers would pay top dollar.

Vital signs now: Hyman didn't hit his revenue projections in 1998 -- Career Central's fees that year were $2.1 million. In 1999 revenues from fees were higher, coming in at $4.4 million. While the company's revenues were growing year after year, so were its losses. According to its S-1 registration statement, the company lost $10 million in 1999. That's right: Career Central, which is now known as Cruel World Inc., wanted to go public. Although Hyman thought the company would raise $57 million last spring, the Nasdaq dove, and the company decided in May to pull back. By late fall Hyman had laid off a significant percentage of his workforce, had suspended Cruel World's Web-link affiliate program, and was leading the company into what he characterized as "a transition."

What the experts say today: "To tell you the truth, I'm amused that they managed to stick around," says Margaret Riley Dikel, author of The Riley Guide, a Web-based primer on Internet job searching. With the consolidation trend hitting well-known job sites like CareerMosaic and CareerBuilder, Riley Dikel says that in order to survive, Cruel World would have to offer a service that others don't. And even then, Cruel World could still get stomped by such headhunters' Web sites as LeadersOnline, the online Heidrick & Struggles company, because "they're long-established firms with excellent customer relationships," she says.


Founders: Dave and Dan Hanlon

Date of Inc. anatomy: November 1997

Vital signs then: The Minnesota brothers and bike fanatics set out in 1993 to challenge industry giant Harley-Davidson by relaunching the 84-year-old Excelsior-Henderson brand. In 1995 and 1996 they raised $15 million in private-equity capital, and in mid-1997 they took the company public, raising $28 million more. With the design for a motorcycle in the can, the company said it was ready for production. The Hanlons projected revenues of $5.4 million for 1998.

What the experts said: Analysts agreed that the market had room for more motorcycle players but felt that the road to production would be tough and capital-intensive.

Vital signs now: Despite rave reviews from the motorcycle industry, Excelsior-Henderson filed for bankruptcy protection in December 1999 after spending $100 million in seven years of development and only eight months of production. This past September E.H. Partners Inc., an investor group, acquired Excelsior-Henderson out of bankruptcy.

What the experts say today: "It takes about $150 million these days to field a new motorcycle of that type," says Don Brown, an independent motorcycle analyst with DJB Associates LLC, in Irvine, Calif. The Hanlons didn't help drive down costs, Brown adds, when they built their own manufacturing plant. To make matters worse, he adds, the Hanlons discounted Harley-Davidson's ability to dominate the category. "They probably overestimated the market, and they probably didn't do enough research to determine the styling and performance elements and the price point that would stand the best chance," Brown says.

Oregon Chai

Founder: Heather Howitt

Date of Inc. anatomy: September 1997

Vital signs then: Environmentalist Heather Howitt left the recycling trade in 1994 to sell chai, a milky tea that, although it had been around for centuries in India, had yet to hit the espresso set in the United States. With 1996 revenues just under $1 million, she poured every penny back into the business. The company, which is based in Portland, Oreg., became profitable in early 1997, and Howitt hoped to reach 1998 sales of $5.4 million.

What the experts said: Most beverage bigwigs were quick to cite chai's high profit margins as a plus, but one tea purist looked down his nose at Oregon Chai's liquid concentrate, which required the ditching of traditional tea bags in favor of a large carton. But those manning the barristas were thrilled with the prospect of a new specialty-tea drink that could complement their espresso offerings.

Vital signs now: Oregon Chai has surpassed Howitt's estimates, hitting $6.8 million in sales for 1998 and topping $10 million in 1999. Howitt credits the company's success in part to increased awareness of chai, thanks to the introduction of the drink at Starbucks. She's beefed up her staff, including her new sales department. "We have 29 people, which is insane," Howitt says, noting that Oregon Chai has penetrated chic cafés, natural-foods stores, and even large supermarkets like Safeway. The company was #18 on the 1999 Inc. 500 list of the fastest-growing private companies in America.

What the experts say today: "Chai is to the emerging U.S. tea market what cappuccino and latte were to the specialty-coffee market when it arose a few years ago," says Brian Keating, founder and president of Sage Group International LLC, a tea market-research company in Seattle. Back in 1996 the entire U.S. chai market amounted to only $7.5 million in sales. For 2000, Keating's group estimated that sales would be in the neighborhood of $28 million to $30 million. And at nearly $11 million in annual revenues, Oregon Chai has a huge stake in the chai business. Oregon Chai's success, Keating says, is due to the way Howitt spiced up the traditional flavor, focused the product offering, and made it easy for food servers and consumers to make the drink. "I think of them as the Gatorade of chai," says Keating.

Anne Marie Borrego is a reporter at Inc.

You can read three more updates of companies profiled in Anatomy of a Start-up.


Part 2: Anatomy Update -- Big Plans

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