Monday, December 10, 2012

A flash from the past

The following is something I actually wrote about 21 years ago, right after my first venture crashed and burned.  I recently ran across a paper version and scanned and used OCR to get a text file. Other than correcting some obvious scan errors, and changing a few names it is exactly what I wrote then.  I hope you find it interesting.


A SHORT HISTORY OF ITS, INC.

In 1976 my dad suffered a stroke, setting in motion a chain of events that led to the founding of Integrated Tech Systems, Inc.  At 24 years of age, with no office experience at all I suddenly found myself running an electrical contracting business with six employees, $350,000 in sales, and not even a customer list. Dad held it all together by working 90 hours a week, and myself and another employee found it difficult to even catch up with both of us working 80 hours a week. So we bought a computer.

We were one of the first I believe. Apple hadn't introduced the Apple 2 yet, Radio Shack had just introduced the Model 1, and IBM would bring out the first PC in about a year. Our computer, a Southwest Technical Products, cost $12,000, for 56K of memory, 2 -8" floppy disks, a terminal, a printer, and some software. The first three months were a disaster, the software was awful, and the computer had hardware crashes at least three times a day. Then things started to come together, and as a result of the computer we finished the year with $125,000 in cash in the bank.  Not too bad for a company with $400,000 in annual sales.  I was hooked on computers.

Software was the real weak link in computers at that time, the hardware even then was capable of things we could only dream about.  After the bad experience I had with the vendor we bought our computer from I decided to try writing some software myself.  I learned Basic by rewriting all of the accounting software we had bought.  I was really excited about all the wonderful things a computer could do and I decided maybe writing software could be a pretty lucrative business.  I started a second business on the side, called Lucas Micro Systems, bought a second computer similar to the first for use at home, and started writing a commercial accounting package. A few months later IBM introduced the PC.  What a dog! It had only 8K of memory, four expansion slots and used an audio cassette for storage.  It also had an IBM logo, which was enough to prove that a lousy product with great marketing would beat a handful of great products with lousy marketing every time.  All the computer systems I had worked on were dead meat, and my software with them.

I had no intention of being a little fish in a damn big ocean full of killer whales, so what else could I do with computers?  I started looking for a smaller pond.  I found it while wiring a new greenhouse for Carl Blasig.  Carl showed me some machines he had bought from Growing Systems a few months before.  He liked the way they watered and was interested in installing them in every one of the 40 bays in his greenhouse.  His main problem was the cost, at that time the machines cost about $1800 which would require an investment of over $100,000 including labor. He asked me if I thought there would be a substantial savings if they built them themselves.  I said I would take a good look at it and find out.

I learned everything there was to know about the Growing Systems machine.  I saw lots of simple changes that would be major improvements n the way they worked.  I eventually realized though that no amount of improvement would make a simple machine like this practical for a 40 bay greenhouse.  I began developing the specifications for a machine that could handle the job.  First, it needed to be able to stop if it hit something, a greenhouse full of machines that couldn't even stop automatically would be dangerous.  Second, it should monitor other functions such as the hose which often tangled, and water pressure so the grower would be sure the crop was actually watered.  Third, it should be variable speed so the amount of water could be varied without changing all the nozzles because every crop needed a different amount of water.  Fourth, it should be able to change speed automatically by sensing some kind of marker, to accommodate the fact that warm weather crops are usually grown on the warmer fan end of the house, and cooler crops are grown on the vent end of the house.  The way greenhouses are built the machines always run from the cool zone to the warm zone and vice versa.  Fifth, all the major components should just plug in so that maintaining all those machines would be easy.  Sixth, the rail system should be very inexpensive, because so much is needed.

I concluded that all of the above was possible, using a microcomputer as the brain, but that it was financially unfeasible to put a machine in every house.  If the rail was inexpensive and the machine could be moved though, then the cost of the expensive components could be spread over many houses, and the cost per square foot would be reasonable.  I then worked up some additional specifications.  The machine must move from house to house with the hose, otherwise the cost of all the hose would be prohibitive.  The machine must connect and disconnect from the water supply automatically, otherwise there would not be enough time to do 40 bays.  The machine must move from house to house automatically, or again too much time would be wasted to get all the houses done.  Ideally the hose should not hang down below the track where it could get caught on people or carts.  I worked up a rough estimate of the parts needed and doubled it, and told Carl that I thought the machine could be built for about $6,000 excluding development cost and track.  Carl gave me a $2,000 deposit and I started designing a machine, to be delivered in about six months.

I was sitting in my office at Lucas Electric a short time later when my dad came in.  He said I wasn't doing my job, that things weren't getting done around the shop and I needed to work harder.  He was partly right, sales had tripled, our salaries had doubled, nobody was working over 50 hours a week, and I was going down to my sailboat on Wednesday afternoons.  On top of that I hated electrical work, the challenges were long gone so I quit right then and there.  My brother in law was already working in the office with me so my younger brother moved in to replace me.  Along with my dad the three of them bought my share of the business for a total of $125,000, paid out in five parts over a two year period.  Next to quitting my job this was probably one of my first major mistakes.  The two year pay out provided enough money to keep things moving, but never enough to do what needed to be done WHEN it should be done (cash flow shortage from day one).

My first step after quitting was to find another job.  This foolishness lasted all of three days. I was thirty years old, no degrees, and had been my own boss for the past six years.  Instead I went looking for shop space, and found another grower with an old leaky barn with rotting floors, and a few tools, including three milling machines, a lathe, two surface grinders, a vertical bandsaw, horizontal bandsaw, drill press, table saw, and pipe threader.  That was the good news, the bad was that none of the machinery worked, every single one was a ball of rust and broken to boot.  I hired a retired friend part time, and the two of us spent the next two months cleaning and repairing.  To provide a source of income I started taking any work I could get. I did high voltage line construction for a contractor, built truck bodies, installed greenhouse plumbing, wired a golf course sprinkler system, rebuilt machinery, and repaired welding machines for a local dealer.  I hired a part time machine shop apprentice to make parts for the watering machine for Carl Blasig, so I could work 60 hours a week to survive and be able to work on the machine myself in my spare time.

About two years after Carl gave me the deposit we delivered a working prototype, right on schedule.  It worked well , but it was completely handmade and had hundreds of parts that were machined. To build these things to sell we needed to focus on making them easy to manufacture. I thought I knew what needed to be done but by this time I was broke, and working all the time just to survive.  I had been doing work for a guy that owned a welding supply, and he became interested in what I was doing.  He seemed to have the money needed and marketing skills as well. I agreed to make him an equal partner for an investment of $100,000 with him handling the marketing and I doing the engineering.  We made a budget for everything that needed to be done and started working. We were a month from our first show and right on budget when we ran out of money again. It turned out he didn't have the $100,000 to invest, his other business was mortgaged to the hilt and he thought he could ‘trim some fat‘ to bring our project in way under budget!  He was pretty good at it too. When we bought him out it turned out the company truck was in his name personally!

 I was desperate, three years of hard work and we were going to fold a month before our first show.  I went to talk to dad and he offered to help. I had never asked before because I didn't think he wanted to help.  He never offered before because he didn't think I would want his help.  Dad helped me buy out my partner and footed the bill to finish the machine, our 2 brochures and a video tape, all of which were already begun.  We finished the machine the day before it had to be shipped to the PPGA show in Canada, it had been run in the greenhouse for one hour.  We were the hit of the show by any measure.  One person at the show remarked that the machine could do just about anything except talk.  I thought he was going to pass out when it said "Job Done". After the show we got not a single mention in any of the trade publications.  Bouldin & Lawson got a three page write up on a transplant conveyor, similar to one we were building for local growers two years earlier.  Yes, a good ole boy network does exist in the greenhouse industry.  If you aren't one of them you sure don't get any free publicity.

We came home from the show and started building a batch of 30 Grower Jrs.  I had made a decision to offer the technology we had developed for The Grower in a single house machine as well.  We even had a color brochure for it at the show, but only a prototype frame existed at that time. I figured a batch of 30 Jrs would help our cash flow and in any event we could dump them at a low price if we had to.  For six weeks after the show the phone never rang.  It was starting to look like I had made a major miscalculation. In a way I had.  I didn't know anything about the grower's seasons, and I didn't realize they would be right in the middle of the busy Poinsettia season.  Suddenly the phone did start ringing and we booked orders for one Grower, 34 Juniors, and one enormous machine we called the Super Grower, almost $250,000 in all. Our first show turned out to be the best we've ever done.  It almost put us out of business.  With three months worth of production we ended the year with $100,000 worth of product delivered and BIG cash flow problems.  Dad contributed more money and we continued on.

The Super Grower was a $70,000 white elephant that never worked as it should and we lost money on it. The Grower which we sold to Orie Van Wingerden took almost two years to complete, cost at least twice what we thought, and didn't work most of the time.  The 34 Grower Jrs had tons of problems with keyboards, motor controllers, pressure switches, keyboard cables, axles, bearings, software, you name it, if it could fail it did. Over the next two years we sold another 125 machines, and we replaced 75 bad
keyboard cables, over 100 bad keyboards, and at least 200 bad motor controllers.  Slowly but surely we worked out all the minor bugs and manufacturing problems.  At no point in time did we ever have what we really needed, a large chunk of cash to simply buy a custom made keyboard switch, and a custom made motor controller. Instead the constant stream of replacement parts sapped our strength.  But the customers loved them.

Our sales volume doubled in our second year of sales, and doubled again in the third as we introduced the Mini Grower, and we were quite sure we would double again in the fourth. We were still losing money and Dad by now had put in over $400,000. I decided to get help so I approached our friendly banker, with whom we had a sizable loan that had been guaranteed by Dad.  They told us they don't ‘get involved‘ with customers that are having problems.  It's little wonder there were so many bank failures a few years later.  A friend put me in touch with the Small Business Development Council (SBDC), a nonprofit consulting group run by the state.  They provided us with a consultant at no charge to examine our business and determine what we were doing wrong.  Their initial suspicion was that we were grossly underestimating our manufacturing costs.  The consultant came in and looked at our entire operation, and was amazed at how well organized and efficient we were.  The problem it turned out was simply cash flow.  The greenhouse industry was extremely seasonal and we were never able to accumulate enough cash to get through our peak times.  At our busiest time each year the lack of cash crippled our ability to get parts, our efficiency dropped way off, orders were delayed or lost, and we wound up with another losing year.  The consultant helped us calculate our cash needs for the coming year, Dad invested another $125,000 and we crashed into the brick wall again at full speed.

At a point in the year when things appeared to be going very well I was approached by some people at Rutgers University who were trying to raise money for a start-up company.  Rutgers had patented a gripper for picking up plugs and they wanted to commercialize it. One of the initial backers brought in an accounting professor from Farleigh Dickinson University who had a Ph.D. and about 15 years of experience in start-up companies.  By this time we were starting to have money problems again, despite all the months of careful planning we had gone through.  It had become apparent that the consultant from the SBDC had a weakness.  He did a great job of teaching us how to examine our records to determine what went wrong, but we missed two major problems in projecting where we were going.  Again in desperation I asked the FDU professor to take a look at what we were doing wrong.

The first mistake in our projections was failing to accurately project the cash needed to cover: buying parts on COD as opposed to Net 30, delays caused by manufacturing problems, customers that wanted late deliveries, some large orders from fortune 500 companies where we had to extend credit, a large overseas order requiring a large amount of non-stock materials, and delays in getting a check back on COD shipments.  Despite accurate records from the previous three years we were off nearly 100% in
our projections.  The second mistake was in not realizing that you cannot grow your way out of a cash flow problem.  Growth makes cash flow worse, extraordinary growth on the order of 100% per year creates extraordinary cash flow problems.  The professor from Farleigh Dickinson figured out how far off we were for the current year before it actually happened, just from looking at our own projections.  He also easily explained how even with less growth than we were actually experiencing we would need nearly $1 million in operating capital in about four years of time.  The brick wall had turned to reinforced concrete.

The professor suggested three possible solutions. The first solution, a rich relative was already tapped out. The second solution was to find investors, the problem being that investors want to put money into current costs not use it to pay off a ton of old debt which we were now carrying. Solution three was to license a larger company to do our manufacturing, and in effect let them carry the cash flow. I had already looked into outside investors and found little interest there, so solution three was our only hope.

We started at the top in approaching FMC, a $6 billion conglomerate, Ball Seed Company the largest in the greenhouse industry at about $150 million, Bouldin & Lawson the largest equipment manufacturer in the industry, and the Monkey Company the largest distributor in the West.  It was too small a deal for FMC, they wanted companies with a potential of at least $100 million a year and they projected we could do only about $7 million. Ball Seed wasn't interested, all their money was going into biotechnology.  Six months after closing the deal with Monkey their VP asked me why I never approached them!  Bouldin & Lawson wanted to buy us out and move me to McMinnville, Tennessee.  They were growing at nearly 40% a year already and I was very worried that adding our products to an already extensive line would mean our products would not get the effort they deserved.

Our largest customer suggested that we contact the Monkey Company.  He said that he had been dealing with them for years and that they had an excellent reputation in the industry.  We talked to other growers and other vendors in the industry and they all agreed that Joe Monkeys word was good as gold.  I did not know that Robert Monkey Jack's son had assumed the presidency and took over the day to day operations about three months before I closed the deal with JoeMonkey.  Our customer made the initial contact for us, and he suggested that we could speed things up by presenting a complete written plan that only required a yes or no to implement. At the time I did not realize the importance of this statement.

The Monkeys agreed to our plan, in which they would make us a short term loan of $100,000 to get us through the immediate cash flow crunch.  We in turn licensed them to do the manufacturing for all of our products, and made them exclusive distributors for the 13 western states, Alaska and Hawaii. The infusion of $100,000 on top of the $125,000 already committed by Dad gave us all the cash we needed to operate efficiently.  Our last four months of production during the peak season were incredible.  All the manufacturing efficiencies we had always planned for suddenly were efficient, and the labor to produce each machine was cut in half.  In the meantime I went out to Washington state to begin setting up a whole new fabrication shop from scratch.  It was a very exciting time and we were sure we had finally made it over the hump. The expectation was that within a year we would be able to easily double sales and that the new lTS department would be doing approximately $1,000,000 in sales with
about ten employees.

Getting started at the Monkey company turned out to be very difficult. The space allotted for the new shop was generally described as the South side of the building. This included an area best described as the junk yard. The plan was to move the plant maintenance man into the new department as the first new employee.  This was done without replacing him. For several weeks he did maintenance part time for 40 hours, then worked on clearing out the shop area for the rest of the week. I worked out a complete equipment layout for an area that I had been told would be the new shop.  We were then told that the company did not want to commit to using that much space for this department.  A new area was identified, which included a substantial portion of another department which we had to relocate.  The new space was some 800 square feet larger than the original area they didn’t want us to have!

An equipment list, catalogs and pricing had been worked out for all the necessary machinery several weeks before I went to Washington.  I had been in Washington for nearly three weeks and none of it had yet been ordered.  I was unable to determine whose job it was to do the ordering, it did not appear that anyone in the plant was directly responsible for purchasing capital equipment.  In frustration I got a pile of purchase orders and began filling them out for everything we needed.  I called the vendors
and told them to expect the purchase orders and mailed them out.  After that we got everything we needed.  The new shop turned out wonderful.

The employees were another story.  Several employees were moved from other departments on the recommendation of other manager s.  It appears now that they didn't have the guts or authority to fire these people and recognized the opportunity to get rid of them painlessly. Only one employee that originally worked for Monkey in fact was worth training, and he was allowed to move out of the department taking his training with him. Two additional employees from outside the company were initially hired and are still employed.  Getting rid of employees who were problems was difficult, with no employee rule book or employee performance evaluations finding just cause was tedious at best. Our intended three month startup period turned into nearly a year.

 A few key employees continued to work in New Jersey on important projects that would greatly enhance our products when production finally got rolling. With no product to sell lTS in New Jersey suffered heavy losses.  Virtually all of the first years sales were lost, and the momentum of customers buying one now and another later was interrupted.  We were determined to get back on track the following year and I hired a new salesman for the New Jersey operation which handled the Eastern two thirds of the country. We finished a new eight page color brochure, and increased our advertising back to previous levels.  In February we were notified of a price increase to take place on March 1 only a week away.  Based on the previous year’s abortive sales and production Monkeys management determined that we were losing money in a big way, and that a price increase of nearly 30% was needed.  Upon notifying all customers that had been previously quoted of the new prices we effectively cleared off approximately $500,000 in orders which customers were planning for the end of the year.  Our salesman essentially gave up as he watched two thirds of his paycheck disappear.  The Monkey Co. didn't fare any better in their part of the country.  We had easily been out selling them 3-to-1 as it was and overall the total sales came pretty much to a complete halt.

in the meantime, ITS in New Jersey finished the new Version 5 software and began delivering it to customers.  A solution to the motor controller problems was found and a low cost version of each product called ‘No Brainers' were developed to round out the product line.  Our Center-feed Hosecar was redesigned for lower cost and better performance.  Two new carts were designed and put into production to expand the types of greenhouse the products could be used in.  The frame of the Mini Grower product was redesigned for lower cost, better appearance and better operation.  And with no R&D funding from Monkey, ITS was now in debt to them for nearly $250,000.

In the meantime Monkeys marketing efforts amounted to a grand total of three magazine ads, and an article twice in their monthly newsletter.  Two attempts were made to teach flower pot salesmen how to sell robot watering systems with little success.  The ITS department manager and draftsman decided to try the old ‘Get on the phone and call the customer method’ with amazingly good results, until the price increase.  I made an unannounced trip out west to try and jar management into readjusting the pricing and succeeded in getting them to rework all the pricing.  I flew home in triumph that we finally could move forward.  No one in our New Jersey operation believed me.  They said I was the eternal optimist. A few weeks later than expected we got the new price list, and sure enough the new margins were dramatically lower.  The costs on the other hand had gone dramatically up.  We ran the new prices on a current quote for a job priced at about $6500and sure enough it had dropped by almost $20.  My salesman informed me that he was going to law school. 

On September 1, 1991 I notified the Monkey Co. of my intention to put ITS, Inc. into bankruptcy, unless Monkey agreed to write off the debt and buy the patent rights.  I think we have a deal, I read about it in theDecember issue of Grower Talks magazine.  Now if I had a contract and a job I'd be all set.

Fast forward 21 years.  The products are still on the market.

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