Start-Up Diaries
The forks in their roads
Our story so far…
It’s been just three months since the January issue of Inc. launched the Start-up Diaries, introducing five new businesses and their founders, and promising to report on their progress — or lack of it — in future issues. But that’s three months of start-up time. Which is to say, time when anything can happen.
Luis Espinoza, the electronics technician moonlighting as a Hispanic-foods entrepreneur, was offered a potential revenue windfall and turned it down for want of the $250,000 he would have needed to pursue it. He seems happy enough with his choice, but where does it leave his company? Meanwhile, edu.com’s Adam Kanner did get his money ($30 million in new capital, to be exact) but still can’t be sure it’s sufficient to make his E-commerce Web site for students work the way it needs to. Still looking for funding or strategic partners were Johann Verheem of Application Technologies as well as the three cofounders of 10 Minute Manicure — though the three have scored a major contract by changing their concept. Will that decision hurt them later? And as for the two Harvard students squeezing in their start-up chores between classes, they may have a surprising new deal, too. Levi’s has approached them about modeling their jeans.
For more details, read on.
In the money
COMPANY: edu.com, in Boston, creator of a Web site where college students can buy stuff cheap and where the companies selling that stuff can market to and do research on the students FOUNDER: Adam Kanner, 29 AT OUR LAST LOOK: Kanner was hunting for desperately needed capital in amounts that would dwarf the $4 million he’d already raised. The site was struggling technologically. And Kanner was sorting out his working relationship with his chief operating officer — Linda Kanner, his mother. LAST DIARY ENTRY: ” Mother Is the Necessity of Invention“
Things at edu.com have ballooned. A small, discreet sign remains affixed to the start-up’s front door, but it’s dwarfed by a back-lighted, billboard-size “monstrosity” (as CEO Adam Kanner calls it) above that loudly proclaims edu.com’s presence to workers in Boston’s financial district. The company’s staff of 60 or so people, who’d previously worked two to a desk in a spartan, 3,000-square-foot office, has swelled to 75 and moved up a flight of stairs into 24,000 square feet of carpeted nirvana, complete with Foosball tables and a built-in putting green. And the start-up’s war chest has grown to the size of a small closet, thanks to several months of vigorous fund-raising in which Kanner brought home an additional $30 million. The new capital came from a variety of sources, including the two Silicon Valley venture firms that had backed him originally and, for geographic diversity’s sake, four firms in Boston, one in New York, and one in Chicago. “We were trying to raise between $20 million and $25 million,” Kanner says, “so we’re oversubscribed.”
He’s especially excited about a $5.3-million investment from Student Advantage Inc., a large, well-established provider of student-discount cards and related services, which had loomed as a major competitor. A new partnership, in which edu.com acts as the commerce arm for Student Advantage’s community-oriented Web sites, drastically reduces Kanner’s customer-acquisition costs. (Student Advantage’s 1.5 million members are automatically sent to edu.com’s site whenever they want to buy something.) It also suggests that edu.com may find happiness covering the back end for other student-focused marketers.
As for Linda Kanner, Adam’s mother, she’s devoting less time to operations and more to her new duties as chief marketing officer. That, together with the fact that the two no longer share an office, gives mother and son some welcome space. “The more the organization grows and her role becomes defined, the less we overlap and bump into each other,” says Adam. “And the better our working and personal relationships become.” –Leigh Buchanan
Starting over
COMPANY: Inca Quality Foods, in South Bend, Ind., a distributor and “micromerchandiser” of Hispanic foods in grocery stores FOUNDER: Luis J. Espinoza, 48 AT OUR LAST LOOK: Espinoza, a moonlighter struggling to balance his ambitions for Inca with his work at a satisfying full-time job, was wondering how fast Inca should — or needed to — grow. LAST DIARY ENTRY: ” Moonlight over Indiana“
Luis Espinoza’s secretary has found another job. So have his two full-time truck drivers. Espinoza says that in early December, Kroger’s supermarket chain, which had Inca’s display cases in 20 of its stores, notified him that either he should gear up to add operations in 30 more stores in 30 days (at $4,000 a pop just for the new displays) or the chain would find another Hispanic-foods vendor. “The amount of money I needed was tremendous,” Espinoza says. “A quarter of a million dollars. I can’t come up with that amount of money.” (Even the smaller sums Espinoza located required him to put up his house as collateral, which he refused to do.) And so by the end of December the Kroger business — 60% of Inca’s revenues — was gone.
He may be down, but he’s not out. “It’s like we’re starting all over again,” he says, describing the small stores he’s continuing to serve in the South Bend area. “It took a lot of pressure off. It’s like regrouping.”
What about just giving it all up and being satisfied with his regular job at the steel-finishing plant? “I would never let my business go,” he says. “Never. I could even get to the point when springtime comes around that I wouldn’t mind getting a little cart selling ice cream in the street.” –Nancy Lyons
Dream inflation
COMPANY: 10 Minute Manicure, in Miami, a would-be chain of manicure kiosks in airports FOUNDERS: Karen Janson, 33; Vivian Jimenez, 31; and Lorraine Brennan O’Neil, 35 AT OUR LAST LOOK: The founders were closing in on their first airport contract (Dallas-Fort Worth) and were negotiating with an angel for the capital ($500,000) they needed to launch their company. LAST DIARY ENTRY: ” Three Women and a Kiosk“
In the early months of winter, the elegantly simple kiosk idea got, shall we say, a little bigger. Several hundred square feet bigger, to be exact.
When the Dallas-Fort Worth airport deal stalled, the 10 Minute Manicure founders turned to Pittsburgh. The good news was that the concession management at Pittsburgh International Airport liked their concept enough to send them lease terms by mid-January. The bad news was, there were some catches. The Pittsburgh people had just one space available, and they were thinking “hair.”
Within 24 hours, Karen Janson and Vivian Jimenez had revised their concept. Nails and hair. Instead of just manicures, the newly conceived Style Express would also offer quick, inexpensive hair services for women and men. Not that the enlarged operation would replace the goal of building manicure kiosks in other airports, the founders say. As they see it, the Pittsburgh Style Express will be kind of a showplace, a foot in the door of the airport industry. “It’s a brand extension,” says Janson. Or it will be, provided the women can come up with the $150,000 needed to launch it.
The good news was that the Pittsburgh-airport people liked their concept. The bad news was, there were some catches. They had just one space, and they were thinking not nails but hair. Within 24 hours, Janson and Jimenez had revised everything. Nails and hair. “It’s a brand extension,” says Janson.
They are, they would acknowledge, increasingly desperate for financing. By mid-January, they had reached their personal investment limit (about $35,000 among all three cofounders) and had yet to seal a deal with any angel or investor. But even as they worried about raising the bare minimum of cash, something dramatic was happening to the founders of 10 Minute Manicure. As they talked to more and more prospective investors about putting up the $500,000 they thought they needed to start, they began to understand that there wasn’t some big secret about financing a start-up that everyone knew but them. There was no one right answer.
“Some people say you have to give away 70% of your company; some people say 30%,” says Janson. “There’s no standard whatsoever.” And as they realized that not everyone knew more than they did, they gained confidence.
“The funny thing is, I think our hopes have gone up higher,” says Jimenez. “I think that we value ourselves more. Now we’re looking for more than just a $500,000 investor. We’re looking for a partner that will invest up to $5 million — one that will stick around with us and help us expand very aggressively.”
So now the founders of 10 Minute Manicure cum Style Express are talking about a rapid national launch. They’re in search of financing partners who understand the size and scope of their ambition. “If you really look at the way to do business today,” says Janson, “it’s either get brand recognition from the get-go or you’re in the wasteland.” The small kiosk concept has, again, gotten just a little bit bigger. –Karen Dillon
Model attraction
COMPANY: FÃxito Worldwide Inc., in Cambridge, Mass., a Web site for the international soccer community, which offers E-commerce, news, and a recruiting database FOUNDERS: Richard Powell, 20, and Daniel Hoffer, 22 AT OUR LAST LOOK: The two Harvard University students were searching for capital, employees, and ways to attract more visitors to www.fuxito.com. LAST DIARY ENTRY: ” The Player“
Not long ago the cofounders of FÃxito were struggling to refine their business model. Now they may very well redefine the whole concept of what a business model is. Since they appeared on our January 2000 cover, Powell and Hoffer have been approached by Levi’s about modeling jeans. “To be honest, this is really small and inconsequential for me,” says Powell, a Harvard junior who began developing the soccer-focused Web site in late 1998. “I don’t let it take priority over the other things we really need to do.” Such as? Recruiting seasoned talent, raising venture capital, and enhancing the Web site — the same challenges they faced three months ago.
But if those challenges aren’t new, the environment in which FÃxito faces them is. Since last fall FÃxito has encountered three new direct competitors, Internetsoccer .com, LiveSoccer.com, and Goalnetwork.com. “We have to make sure we’re not working too slowly,” says Powell. To boost its working capital, in January the company raised about $1.2 million, the bulk of it from three New York CityÂbased institutional investors. That represents FÃxito’s first funding from nonangel sources — and begins a pattern Powell hopes will continue as he sets out to raise as much as $12 million from venture capitalists. Hoffer predicts the valuation of FÃxito, which this year is on track to post revenues of more than $5 million (from selling soccer merchandise), will get a kick from the expected relaunch of www.fuxito.com, which included the long-awaited addition of an online store. Soon, thanks to a partnership with a virtual-reality vendor, FÃxito expects to add “really cool” features, Hoffer says. Even so, he adds, “we need some people with solid business experience to turn this into a $1-billion company.”
The key to attracting such folks? Well, it couldn’t hurt to have the company’s name on all those jeans ads. “But,” notes Powell, taking a break from studying for an econometrics exam, “being plastered over billboards everywhere won’t do anything if we’re not building more value for our users.” –Joshua Hyatt
Package deal
COMPANY: Application Technologies, in San Diego, a developer of new consumer-product packaging, including the Appli-K pouch FOUNDER: Johann Verheem, 33 AT OUR LAST LOOK: The Appli-K pouch was designed, but Verheem needed capital to develop manufacturing processes, as well as customers to build the market share that would protect him against knockoffs. LAST DIARY ENTRY: ” Plan B-Minus”
Verheem and company marketing manager Natasha King are no longer seeking to raise significant capital. While Verheem and his wife, Emmarance, were back in their native South Africa for an extended family visit over the Christmas and New Year’s holidays, he negotiated an agreement locking in a deal with a strategic partner that will develop the manufacturing processes and prototypes for the Appli-K pouch, the product he’s basing his business on.
Verheem plans to let his strategic partners fund development of the Appli-K. He realizes the pouch alone is not enough to grow the business on; he needs a whole line of products. So while he locks in the relationships he needs for the pouch, he is also starting to look for new products to bring out. –Michael Warshaw
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