Where Great Ideas for New Businesses Come From
From: Inc. Magazine, Sept 1993 | From: Inc magazine | Sept 1993 By: Inc Staff
How four companies came into being.
Forget focus groups, market surveys, and business plans. What really count in spotting -- and capitalizing on -- great business opportunities are serendipity, ingenuity, street smarts, and fast footwork
* * *A pivotal difference between our economic system and the rest of the world's is that here, when you get an odd idea for making money and someone asks, "If it's so good, why don't you try it?" you actually can. Indeed, the roster of businesses begun more with panache than with prowess implies that the chances of any idea's succeeding ipso facto are relatively good. On a par, anyway, with such finicky enterprises as airlines, computer making, and biotechnology.
In an economy of surplus such as ours, the marketplace delivers many a surprise, even to the marketers themselves. The inventors of the Mambosok couldn't have anticipated the $3-million clothing business that would grow out of their whimsical prank -- cutting off the lower portion of a pants leg and donning it as a floppy cap. Like many other accidental entrepreneurs, the Mambosok "designers" didn't intend to go into business. They couldn't help it: the market made them do it.
In the pages that follow, you'll read about several growing companies whose markets made them do it. More often than not, they're doing it on a shoestring, too. Many of the most accidental entrepreneurs derive capital from the "eureka" factor -- the excited belief that a product or service they just thought of can actually sell. That factor was at work in the 1950s when a serendipitously burr-covered hiker recognized that if nature's fuzz stuck to clothing so tenaciously, you could make artificial fuzz that would stick with equal tenacity. Thus: Velcro.
And the eureka factor was at work in 1945, when a torsion spring fell off a workshop table and kept tumbling before a tool worker's astonished eyes. On the spot, it became the Slinky -- fabrication and business details to be worked out later. The first production run was a tentative 400 units. The toy coils sold out in less than an hour for $1 each in Gimbel's store in Philadelphia. "We knew then that we were in business," recalls Betty James, cofounder, with her husband, of Slinky-making James Industries. The problem was, neither knew anything about business -- an apparent prerequisite for serendipitous entrepreneurship. "We didn't even know how to draw up an order blank. We had no packaging, just a sheet with instructions that I'd roll up and stuff into the end. Then I'd take the invoice and run over with it to get paid so we'd have enough money for the next day."
The need to get paid dictates that even the most reluctant entrepreneur display some native business acumen (or acquire some, ASAP). A novice can be undone by hidden costs -- packaging, returns, distribution, and so on. But those bold enough to bring an out-of-the-blue product to market are often also astute enough to figure out what to do with it once it gets there. That savvy surfaced at Pacific Fabric Reels, when actress-turned-entrepreneur Remy O'Neill figured that her varied "life skills" could be just the thing to turn the ailing fabric-spool maker around.
Instant smarts served Whammo Corp. founder Richard Knerr, a gifted marketer but business tyro, when he had to come up with a pricing formula for his product, the Frisbee. His formula was inflexibly simple: retail price = 5 x cost of (manufacturing + promotion). The margins proved ample enough to finance Whammo's next project, the Hula Hoop.
Serendipitous business only seems effortless. More often, it hides a flexibility that was well demonstrated by Dorothy Noe, founder of Dorothy's Ruffled Originals, whose customers clamored not for the antiques she had for sale but for the frilly curtains that decorated her store. Not one to ignore the knock of opportunity, Noe took her best shot at appropriate pricing for the handmade draperies, exhibiting an innate arithmetical sense that expanded the new line of business into a $10-million concern within 15 years.
Business-school traditionalists would be shocked, but no accidental entrepreneur ever starts out with a business plan. For one thing, given the multiple directions such inchoate start-ups can and do take, plans lasting longer than a few days prove infeasible; therefore, less focus is often better. For another thing, these businesses can't be financed through conventional channels anyway, so who cares? To an accidental entrepreneur, the rhythm of commerce is more meaningful than the numbers of commerce. The test of success is not when sales begin meeting monthly projections, but when UPS drivers begin making daily calls -- a milestone that defies measurement by any financial ratio. The best measure of all: when there's enough money left at the end of the week for the founders to take home a bit of it.
Many whimsically started businesses share another characteristic: they take on lives of their own despite some founders' initial reluctance to go into business. That momentum is a measure of each founder's unerring sense of market -- and of his or her enviable energy level. As wacky as some enterprises may have been at the beginning, there was no stopping any of them once they got going. Each accidental entrepreneur started out meaning only to have a little fun or to accommodate a few favors or to do something better than someone else -- just for a while. But the whimsically started businesses that endure -- as Starving Students moving company has done for 20 years -- inevitably surrender their "aw shucks" origins and turn serious. Invariably, the initial (and appropriate) instinct is to channel internally generated cash straight into real marketing, spreading the product beyond the few tolerant friends and relatives who made up the initial market. Mambosok's hilarious hatmakers have gotten wise: today they field 10 sales reps across the nation.
One last distinction: however tempting it may be to other sectors of commerce, it's not in the character of most accidental entrepreneurs to take shortcuts with quality. They are natural product makers, not profit takers. A passionate love of product or process, or a concern for service usually binds the soon-to-be company builders to their fiscal destinies.
Such happened to Jim Miller, founder of bootstrapped yacht outfitter the Rigging Co. (now an Inc. 500 company). He paid for a plane trip to execute an emergency boat repair out of his own shallow pocket and soon found himself recognized as someone who cared. Explaining his unwillingness to charge what the market obviously would have borne, Miller comes up with a refrain that should be familiar to any student of accidental entrepreneurship: "I was in business but didn't know it at the time."
Oh, sure. -- Robert A. Mamis
* * *Founded on Frolic
-or-
The Making of Mambosok
For Dan Hoard and Tom Bunnell, two boyhood buddies in search of a
good time, starting a business was simple, really. All you had to do was take a
joke just a little too seriously and a little too far. How else could two
apparently sane individuals justify selling Mambosoks -- defined by Bunnell as
socks for one's head -- as a bona fide business opportunity?
Only an unbridled pursuit of fun can account for the adventure the partners began when Hoard first lopped off a pants leg and put it on his head. "What else would you do with it?" says Hoard, who did the deed in the heat of an Australian summer in 1989, while he and Bunnell were backpacking down under.
"We would sit in front of the mirror and cry laughing," remembers Bunnell. "We said, 'We have to sell this. We have to at least try.'" They came up with a name for their invention -- the Mambosok ("It sounded festive," Bunnell explains) -- and began research and development. Their rigorous R&D consisted of driving around the Pacific Northwest in a beat-up van, looking for suitable heads on which to place their sock. "We'd look at people and say, 'He could wear a Mambosok. She could wear a Mambosok,'" says Hoard. They even seeded the market a little. Bunnell passed out five Mambosoks to members of his wedding party in 1990, and they promptly did the polka in them at the reception.
With all that research under their mambo, the two decided to get serious. They contracted a manufacturer and produced the first 1,000 Mambosoks in the spring of 1991. Tom, who was tending bar to pay the bills, figured he'd sell a few to patrons. The socks were gone in two weeks, proving one of two hypotheses: either a market really did exist or drinking does impair one's judgment.
Perhaps it demonstrated both: the Seattle duo moved $200,000 worth of headsocks in the first six months and rang up sales of $1 million in year two.
The founders have never devised a business plan: "Good thing," says Hoard. "We never would have planned to be a million-dollar business." And, thankfully, their idea was utterly unfinanceable: they still hold all the equity.
Blessed in the beginning with naÏvete about the risks and rigors of the rag trade and business in general, the two buddies have since been transformed. The demands of growth have turned them into (gasp) business guys. "When the bank-account balance went under $100," says Hoard, "we said, 'OK, maybe we've got to plan a little better.'" They decided to unearth the invoices they'd stashed in the basement and learn what people meant by cash flow. And when knockoffs inevitably appeared, they were quick to defend themselves by diversifying. "We figured, What could the life span of one silly hat be, anyway?" says Bunnell. The company extended its line to more than 60 items of Mambosok-wear, including the three-foot Polar Dunce Cap, the Mambohead Shirt, and the Chubby Summer Snowboarding Shorts.
Today Mambosok fields a sales force of 10 reps, serving 1,000 accounts around the globe. The receivables and the inventory are finally computerized. And the founders expect to approach $3 million in sales in 1993. "We wanted to do something fun, something funky," says Bunnell. "It turned out to be a business." -- Anne Murphy
* * *Stagestruck
-or-
How I Won My Company in a Lawsuit
Actress Remy O'Neill led the Malibu life. She guest-starred on "The
Love Boat," partied with Robert Duvall, taught Bette Midler yoga, and played a
mean tennis game. She had enough money to invest and live off the proceeds. That
is, until 1988, when O'Neill tried to cash in some investments and found out her
stockbroker was broke. She sued him and learned that the only asset left was a
nearly bankrupt manufacturer of fabric spools, Pacific Fabric Reels, in Mira
Loma, Calif.
Well, maybe running a factory could be fun, thought O'Neill. Her IRS-agent father used to read her bedtime stories from his tax journals. (Really.) She worked her way through nursing school by keeping physicians' books, and later managed a staff of 80 in the emergency room of New York City's Maimonides Medical Center. And acting had taught her valuable presentation skills, she says. "I know what gets people's attention."
She decided to go for the broke factory. "It seemed that all these strange little life skills might work together in running a business." Plus, she figured that running a company -- any company -- was better than kissing her savings good-bye.
Winning ownership of that business took a year of negotiating and $100,000 in legal fees. In November 1989 O'Neill found herself directing a dying company in an industry she knew nothing about. Sales were $830,000, but the company had accumulated losses of more than $600,000 and faced serious negative cash flow. O'Neill also discovered that she had a real quality problem: the ends of her spools were falling off in customers' hands. "I was ashamed," she says. "I hated my spools."
Her attorney lost sleep over her career change. O'Neill lost sleep, too, working on her last film, To Die For II: Sons of Darkness, through December 1990, as she ran the factory by day, while hamming it up in front of the camera by night.
But she was determined that the experiment wouldn't fail. Figuring that numbers were numbers, no matter what the industry, she started with the financials. Streamlining production, ordering new machines, and improving the product came next. Her reel remedies worked, and she began building equity. Three years later, in 1993, Pacific Fabric Reels' sales have reached $983,000, with $246,000 in net profits.
O'Neill is thrilled that opportunity knocked and delivered a clanging factory. "One of the frustrations of acting is that you're always waiting for someone else's decision," she says. "I don't mind losing by my own hand, but I hate losing by someone else's." -- Phaedra Hise
* * *Just Say Yes
-or-
Oops, We Must Be in the Moving Business
Siblings Ethan and Abby Margalith just wanted some spending money
for the summer of 1973. Abby was 19 and waiting tables. Ethan had just finished
high school and couldn't find a summer job, so he borrowed a truck and hauled
some odds and ends to the local swap meet. He made a few bucks but earned even
more delivering some chairs for a dealer who spotted his truck. When he got the
cash, he realized, Hey, this could turn into a summer job! Soon Abby joined
in.
Their first moving truck was a 1944 weapons carrier rescued from a mud slide. The owner had told the Margaliths, "If you can dig it out, you can have it." An artist friend painted "Starving Students" and the Margalith home phone number on the side, and the siblings parked the truck in Beverly Hills at the corner of Laurel Canyon and Sunset boulevards.
"This was when movers still wore full uniforms and little hats" and had prices to match, says Abby. "We became the no-frills, low-cost mover." Abby and Ethan's fliers echoed the Age of Aquarius: "To us, you're beautiful people, not chickens ripe for plucking," read one. "Twenty-four-hour service for lease breakers!" read another. The Margaliths billed themselves as "cheap, fast, funny, reliable." They took personal checks. They didn't have a clue what they were doing.
Yet their phone rang off the hook.
College semesters came and went, and neither knew the moving industry was strictly regulated until the day, three years later, the Public Utilities Commission knocked on the door and explained that if Starving Students wanted to keep on trucking, the Margaliths needed a license. So they shut down for six months to get licensed -- and take their finals. By then, the neophyte haulers had six trucks and 15 on-call employees. They also had twice the business they could handle.
The little office survived on sheer willpower. "We didn't know how hard it would be, so we didn't say no," says Ethan. It wasn't until he reached law school that Ethan realized they'd been running a company -- and that he liked it. He graduated in 1984 but blew off the bar, deciding instead to take the moving business seriously.
Since then, Starving Students has opened in 14 locations in five states; Abby runs a separate San Diego office, and Ethan the rest. They've reached combined sales of $15 million. And in a low-margin industry, they've funded growth entirely through cash flow. Abby says, "We stuck with it because it's fun, it's exciting, and it's profitable."
-- Phaedra Hise
* * *Curtain Call
-or-
Homemaker Abducted by Alien Opportunity!
Dorothy Noe was just minding her own business -- a small antiques
dealership, to be specific -- when it happened: she was abducted by an alien
opportunity. Once a mild-mannered homemaker selling a few sideboards on the
side, Noe would find herself opening factories, launching a retail chain, and
hiring hundreds of employees as she became the willing victim of a rather frilly
idea.
It was all very innocent when it began. "I was just trying to spruce up the garage," she recalls, to serve as a showroom for her antiques. Naturally, she couldn't let the windows go bare. So Noe, being frugal as well as fastidious, designed some window dressings of her own. "I thought they would create the right mood and backdrop for the furnishings," she says.
Some backdrop. The curtains stole center stage, as Noe's customers began clamoring for them. "I told them they were nightmares to make. They required so much fabric and labor, I didn't think anyone could afford them." But customers retorted with three magic words: "I'll pay whatever." The "whatever" Noe guessed at and settled on was $45 a pair, pricey for 1975.
Noe quickly began sourcing out production. "I was not a seamstress. I didn't even like sewing," she confesses. But she knew people who did, and so she assembled a cottage industry of locals to sew curtains for the business she dubbed Dorothy's Ruffled Originals. She sold $20,000 worth of curtains in 1975, her first full year, mainly by hanging them in well-placed windows in her hometown of Wilmington, N.C. What she lacked in industry knowledge and marketing experience, she made up for with guerrilla instincts: "I got those curtains hanging in doctors' offices, restaurants, and shops all around town," she says.
In the process, Noe began to see her opportunities shifting. Her curtain sales had been brisk from the beginning, but by her second year, they'd pulled even with sales of antiques. "I could see where the long-term growth would be," recalls Noe. The antiques business was demoted to a financing vehicle for Dorothy's Ruffled Originals.
The ruffles business flourished. In 1978 Noe shipped $1 million worth of sashes, swags, and valances. "I'd be at UPS when it opened at 7 every morning to ship the orders out." When stored bolts of fabric began to bar the way to the bathroom in her house, Noe knew it was time to make those decisions about opening retail and manufacturing operations.
Now a $10-million business with eight retail shops and a direct-mail division, Dorothy's Ruffled Originals sells a full line of home-decor products, from wallpaper to table linens. Noe looks back on her beginnings as not so much haphazard as inspired: "If I had done this in a more calculated way, I don't know if I would have had the same passion and tenacity about making it happen." -- Anne Murphy
* * *The Corundum Conundrum
-or-
Chance Favors the Prepared Mine
It's fair to say that 3M -- the company that brought you Scotch
Tape and the Post-It note -- was founded on a grand mistake. The legacy lives
on: today big business's best imitation of a small company thrives on
encouraging and exploiting mistakes -- like the adhesive that seemed, well,
nonadhesive until someone pasted it onto those little yellow Post-Its.
But back in 1902 the new company seemed as right as right could be. In those days, one of the hottest markets for budding entrepreneurs was mining -- the fin de siÈcle equivalent of software. Five successful businessmen from Two Harbors, Minn., banded together to form Minnesota Mining and Manufacturing Co., in search of something said to be even more valuable than gold: corundum. The allure of the rare mineral was its supposed hardness, apparently ideal for the abrasives needed for burgeoning manufacturing industries on the East Coast.
The corundum market, figured the adventure capitalists, would explode. Little did they know that even before their miners put ax to ore, a scientist named Edward Acheson had already created an artificial abrasive -- Carborundum -- that outscored the as-yet untapped corundum.
Worse, the cost of shipping the corundum that was found exceeded its market price, and the material itself turned out to be about as abrasive as coal. The company cratered; embittered investors watched as sales sputtered and the stock price fell to two shares for one shot of cheap whiskey on the informal "barroom exchange."
At the request of the then-desperate founders, Edgar Ober, a St. Paul railroad operator and investor in the company, came up with an elegant salvage plan: instead of trying to sell processed raw materials to sandpaper makers, Minnesota Mining and Manufacturing would make and sell sandpaper itself, coating it with conventional abrasives like garnet at first and moving to corundum later. Despite the evidence, it took years for 3M to accept that its corundum quest was a mistake and that its focus should be on making sandpaper better than anyone else did. The company was not to turn a profit for more than a decade.
Yet Ober's successful exploitation of the mistake left a greater legacy than simply making 3M the world's largest maker of sandpaper. "That gave us our first and most important core competence -- knowing how to put one substance onto another," says a 3M spokeswoman. "That kind of layering technology led to Scotch Tape. Today about half of our 60,000 products have some type of layer, where one substance is adhered to another." -- Tom Ehrenfeld
B-SCHOOL BOHEMIANS
Guess what? Business schools, those most left-brained of institutions, are going right-brained. Mirroring the breakneck agility of the Fortune 500 companies they primarily serve, B-schools today are starting to roll out courses on the most dynamic business phenomenon of the 1980s: entrepreneurship. More professors are studying entrepreneurial behavior (it only sounds like an oxymoron) and coming up with some intriguing thoughts.
The "corridor principle" of Pepperdine University professor Robert Ronstadt enjoys the highest brand recognition in the emerging marketplace of entrepreneurial theories. But there's more: don't forget the "wet-feet model" of University of Southern California professor James Collins, and Loyola University professor John Ward's "coincidental adaptation" approach. And at Harvard Business School, associate professor John Kao defines the start-up process as "an entrepreneurial random walk."
Serious stuff, this. Ronstadt defines his corridor principle thus: "The act of getting into business allows people to see new corridors of business that they would not have seen if they had not gone into business." Start somewhere, anywhere, he advises students; the important thing is to start. "That learning process allows you to see opportunities you could not see before," he says.
The other theories take just as rational a look at what most people would label irrational behavior. Kao views starting a business as a process of individual growth that allows for all of life's improbabilities. "You don't always plan for what happens. And the point of inevitability is not a firmly plotted line," he says.
Some dons see crystalline patterns amid the messiness of business formation. "When you probe into so-called luck stories, you find they are not quite random," says Babson College professor Jennifer Starr. She argues that entrepreneurs stack the deck through implicit if not completely formal (drum roll, please) "luck-shaping strategies." And she distinguishes between truly random events and, er, purposeful accidents. "By doing their homework really well, paying attention to anomalies and surprises, being ready to notice patterns, and having multiple agendas, entrepreneurs increase the chance that something unpredictable will happen," concludes Starr.
-- Tom Ehrenfeld
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