List the facts of this case. Opportunity Exploration Between his first and second years at Babson, Jim applied for a summer internship through the Kauffman Program. He sent a proposal to the Spire Corporation—a publicly traded manufacturer of highly engineered solar electric equipment—about investigating the market and feasibility of solar-powered trash compactors. Jim had copied his idea to someone he knew on the board, and the same week that the HR department informed him that there were no openings, he got a call from the president of the company: Roger Little had talked with the board member I knew and said that while they weren’t interested in having me write a case study on some solar whatever-it-was, he said they’d like me to write some business plans for Spire—based on their existing opportunities and existing operations. I said sure, I’ll take it. That summer, Jim worked with the executive team to complete three business plans. When they asked him to stay on, Jim agreed to work 15 hours per week—on top of his full-time MBA classes. He mentioned that every month or so he would bring up his idea for a solar-powered trash compactor with the Spire executives, but their answer was always the same: I was trying to get them to invest in my idea or partner with me in some way, and these guys kept saying, ‘‘It’ll never work.’’ So I just kept working on them. I did the calculations to show them that with solar we could do ten compactions a day and have plenty [of electric charge] on reserve for a run of cloudy weather. Finally, they just said that they don’t get into end-user applications. Early in his second year, Jim attended a product design fair featuring young engineers from Babson’s new sister school, the Franklin W. Olin School of Engineering. He connected with Jeff Satwicz, an engineering student with extensive experience in remote vehicle testing for the Department of Defense. When Jim got involved with a project that required engineering capabilities, he knew who to call: I went up the hill to Olin to ask Jeff if he’d like to help design a folding grill for tailgating—he said sure. It’s funny, the two schools are always talking about working together like that, but it doesn’t happen until the students sit in the Caf´e together and exchange ideas. That’s how it works; the faculty wasn’t involved—and they didn’t really need to be. Although Jim didn’t stay with the grill team, the project had forged a link with an engineer with a penchant for entrepreneurship. Now certain of his trajectory, Jim incorporated the Seahorse Power Company (SPC)—a nod to his ultimate aspiration of developing power systems that could harness the enormous energy of ocean waves and currents. Understanding that sea-powered generators were a long way off, Jim began to investigate ways to serve well-capitalized ventures that were developing alternative-energy solutions. One idea was to lease abandoned oil wells in California for the purpose of collecting and selling deep-well data to geothermal energy businesses that were prospecting in the area. When Jim sought feedback, he found that even people who liked his concept invariably pointed him in a different direction: Everybody kept telling me that wind was where it’s at—and they were right; it’s the fastest growing energy source in the world. All the venture capitalists are looking at wind power. I realized, though, that if I was going to make wind plants, I’d have to raise two to five hundred million dollars—with no industry experience. Impossible. So instead, I started looking at what these [wind-plant ventures] needed. The DAQ Buoy Jim discovered that The Cape Wind Project, a company working to build a wind farm on Nantucket Sound, had erected a $2.5 million, 200-foot monitoring tower to collect wind and weather data in the targeted area. Jim felt that there was a better way: Meteorological testing is a critical first step for these wind businesses. I thought, whoa, they’ve just spent a lot of money to construct a static tower that probably won’t accurately portray the wind activity in that 25-square-mile area. And without good data, it’s going to be really hard for them to get funding. My idea was to deploy data buoys that could be moved around a site to capture a full range of data points. I spent about six months writing a business plan on my data acquisition buoy—the DAQ. I figured that to get to the prototype stage I’d need between $5 and $10 million. This would be a pretty sophisticated piece of equipment, and a lot of people worried that if a storm came up and did what storms typically do to buoys, we’d be all done. I was having a hard time getting much traction with investors. Finding the Waste Even while he was casting about for a big-concept opportunity, Jim had never lost sight of his solar compactor idea. With the spring semester upon him, he decided to see if that business would work as an EIT endeavor. Although he was sure that such a device would be feasible—even easy—to produce, he didn’t start to get excited about the project until he took a closer look at the industry: I did an independent study to examine the trash industry. I was about a week into that when I looked at the market size and realized that I had been messing around with expensive, sophisticated business models that didn’t offer close to the payback as this compactor would. U.S. companies spent $12 billion on trash receptacles in 2000, and $1.2 billion on compaction equipment in 2001. The average trash truck gets less than three miles to the gallon and costs over $100 an hour to operate. There are lots of off-grid sites3 that have high trash volumes—resorts, amusement parks, and beaches—and many are getting multiple pick-ups a day. That’s a tremendous waste of labor and energy resources. Joining him in the EIT module was first-year MBA candidate Alexander Perera. Alex had an undergraduate degree in Environmental Science from Boston University, as well as industry experience in renewable energy use and energy-efficiency measures. The pair reasoned that if a solar compactor could offer significant savings as a trash collection device, then the market could extend beyond the off-grid adopters to include retail and food establishments, city sidewalks, and hotels. Gearing Up By the time the spring semester drew to a close, they had a clear sense of the market and the nature of the opportunity—in addition to seed funding of $22,500: $10,000 from Jim’s savings, and $12,500 through the Hatchery Program at Babson College. Since solar power was widely perceived as a more expensive, more complex, and less-efficient energy source than grid-power, it was not surprising to discover that the competition—dumpster and compaction equipment manufacturers—had never introduced a system like this. Nevertheless, Jim and Alex were certain that if they could devise a reliable, solar-powered compactor that could offer end users significant cost savings, established industry players could be counted on to aggressively seek to replicate or acquire that technology. Understanding that patent protections were often only as good as the legal minds that drafted them, Jim had sought out the best. The challenge was that most of the talented patent attorneys he met with were far outside his meager budget. In May of 2003, Jim got a break when he presented his idea at an investor forum: I won $1,500 in patent services from Brown and Rudnick.4 That might not have taken me too far, but they have a very entrepreneurial mindset. They gave me a flat rate for the patent—which is not something many firms will do. I paid the $7,800 upfront, we filed a provisional patent in June, and they agreed to work with me as I continued to develop and modify the machine. Jim’s efforts had again attracted the interest of Olin engineer Jeff Satwicz, who in turn brought in Bret Richmond, a fellow student with experience in product design, welding, andfabrication. When the team conducted some reverse-engineering to see if the vision was even feasible, Jim said they were pleasantly surprised: I found a couple of kitchen trash compactors in the Want Ads and bought them both for about 125 bucks. We took them apart, and that’s when I realized how easy this was going to be… of course, nothing is ever as easy as you think it’s going to be. Pitching Without Product Figuring that it was time to conduct some hard field research, they decided to call on businesses that would be the most likely early adopters of an off-grid compactor. Alex smiled as he described an unexpected turn of events: We had a pretty simple client-targeting formula: remoteness, trash volume, financial stability, and an appreciation for the environmental cachet that could come with a product like this. Literally the first place I called was the ski resort in Vail, Colorado. Some eco-terrorists had recently burned down one of their lodges to protest their expansion on the mountain, and they were also dealing with four environmental lawsuits related to some kind of noncompliance. This guy Luke Cartin at the resort just jumped at the solar compactor concept. He said, ‘‘Oh, this is cool. We have a lodge at Blue Sky Basin that is an hour and a half round trip on a snow cat. We pick up the trash out there three or four times a week; sometimes every day. We could really use a product like that . . . . ’’ That’s when you put the phone to your chest and think, Oh my gosh … Jim added that after a couple of conference calls, they were suddenly in business without a product: I explained that we were students and that we had not actually built one of these things yet (sort of). Luke asked me to work up a quote for three machines. They had been very open about their costs for trash pick-up, and I figured that they’d be willing to pay six grand apiece. I also had a rough idea that our cost of materials would fall somewhat less than that. Luke called back and said that they didn’t have the budget for three, but they’d take one. I was actually really happy about that because I knew by then that making just one of these was going to be a real challenge. In September, SPC received a purchase order from Vail Ski Resorts. When Jim called the company to work out a payment plan with 25% upfront, Luke surprised them again: He said, ‘‘We’ll just send you a check for the full amount, minus shipping, and you get the machine here by Christmas.’’ That was great, but now we were in real trouble because we had to figure out how to build this thing quickly, from scratch—and on a tight budget. Learning by Doing The team set out to design the system and develop the engineering plans for the machine that SPC had now trademarked as the ‘‘BigBelly Solar-Powered Trash Compactor.’’ Although his Olin team was not yet versant with computer-aided design (CAD) software, Jim saw that as an opportunity: These guys were doing engineering diagrams on paper with pens and pencils—but now we were going to need professional stuff. I said that we could all learn CAD together, and if they made mistakes, great, that’s fine; we’d work through it. Concurrent to this effort was the task of crunching the numbers to design a machine that would work as promised. As they began to source out the internal components, they searched for a design, fabrication, and manufacturing subcontractor that could produce the steel cabinet on a tight schedule. Although the team had explained that SPC would be overseeing the entire process from design to assembly, quotes for the first box still ranged from $80,000 to $400,000. Jim noted that SPC had an even bigger problem to deal with: On top of the price, the lead times that they were giving me were not going to cut it; I had to get this thing to Colorado for the ski season! So, we decided to build it ourselves. I went to a local fabricator trade show, and discovered that although they all have internal engineering groups, some were willing to take a loss on the research and development side in order to get the manufacturing contract. We chose Boston Engineering since they are very interested in developing a relationship with Olin engineers. They gave me a hard quote of $2,400 for the engineering assistance and $2,400 for the cabinet. By this time, we had sourced all the components we needed, and we began working with their engineer to size everything up. Bob Treiber, the president, was great. He made us do the work ourselves out at his facility in Hudson (Massachusetts), but he also mentored us, and his firm did a ton of work pro bono. Fulfillment and Feedback As the Christmas season deadline came and went, the days grew longer. By late January 2004, Jim was working through both of the shifts they had set up: from four in the morning to nearly eleven at night. In February, they fired up the device, tested it for three hours, and shipped it off to Colorado (see Exhibit 3.2). Jim met the device at their shipping dock, helped unwrap it, met the staff, and put a few finishing touches on the machine. Although it worked, even at zero degree temperatures, it had never been tested in the field. Jim left after a few days, and for two weeks, he endured a deafening silence. Jim wrestled with how he could check in with SPC’s first customer without betraying his acute inventor’s angst about whether the machine was still working, and if it was, what Vail thought about it. Finally, when he could stand it no longer, he placed the call under the guise of soliciting satisfied-customer feedback. The news from Vail nearly stopped his heart: They said that they had dropped the machine off a forklift and it fell on its face. Oh man, I thought; if it had fallen on its back, that would have been okay, but this was bad—real bad. And then Luke tells me that it was a bit scratched—but it worked fine. He told me how happy they were that we had made it so robust. When I asked how heavy the bags were that they were pulling out of the thing, he said, ‘‘I don’t know; we haven’t emptied it yet.’’ I was astounded. As it turned out, the Vail crew discovered that the single collection bag was indeed too heavy—a two-bin system would be more user-friendly. The resort also suggested that the inside cart be on wheels, that the access door be in the back, and that there be some sort of wireless notification when the compactor was full. As the SPC team got to work incorporating these ideas into their next generation of ‘‘SunPack’’ compactors, they were also engineering a second product that they hoped would expand their market reach to include manufacturers of standard compaction dumpsters. The ‘‘SunPack Hippo’’ would be a solar generator designed to replace the 220-volt AC-power units that were used to run industrial compactors. The waste-hauling industry had estimated that among commercial customers that would benefit from compaction, between 5% and 20% were dissuaded from adopting such systems because of the set-up cost of electrical wiring. SPC planned to market the system through manufacturing and/or distribution partnerships. Protecting the Property While the interstate shipment of the BigBelly had given SPC a legal claim to the name and the technology, Jim made sure to keep his able patent attorneys apprised of new developments and modifications. SPC had applied for a provisional patent in June of 2003, and they had one year to broaden and strengthen those protections prior to the formal filing. As that date approached, the attorneys worked to craft a document that protected the inventors from infringement, without being so broad that it could be successfully challenged in court. The SPC patents covered as many aspects of Sun Pack products as possible, including energy storage, battery charging, energy-draw cycle time, sensor controls, and wireless communication. The filling also specified other off-grid power sources for trash compaction, such as foot pedals, windmills, and waterwheels. Even without these intellectual property protections, though, Jim felt that they had a good head start in an industry segment that SPC had created. Now they had to prove the business model. The Next Generation While the first machine had cost far more to build than the selling price, the unit had proven the concept and had been a conduit for useful feedback. A production run of 20 machines, however, would have to demonstrate that the business opportunity was as robust as the prototype appeared to be. That would mean cutting the cost of materials by more than 75% to around $2,500 per unit. SPC estimated that although the delivered price of $5,000 was far more expensive than the cost of a traditional trash receptacle, the system could pay for itself by trimming the ongoing cost of collection. The team had determined that developing a lease option for the BigBelly would alleviate new-buyer jitters by having SPC retain the risk of machine ownership—a move that could increase margins by 10%. Over the next five years, SPC expected to expand its potential customer pool by reducing the selling price to around $3,000—along with a corresponding drop in materials costs. With steel prices escalating, the SPC team designed their new machines with 30% fewer steel parts. They also cut the size of the solar panel and the two-week battery storage capacity in half, and replaced the expensive screw system of compaction with a simpler, cheaper, and more efficient sprocket-and-chain mechanism (see Exhibit 3.5). In order to offer an effective service response capability, the team tried to restrict their selling efforts to the New England area, although ‘‘a sale was a sale.’’ One concern that kept cropping up was that this unique device would be a tempting target for vandals. Team members explained that the solar panel on top was protected by a replaceable sheet of Lexan,5 that all mechanical parts were entirely out of reach, and that the unit had already proven to be quite solid. The general feeling, Jim noted, was that if the machine could be messed with, people would find a way: One state park ranger was worried that it would get tossed into the lake, so I assured him that the units would be very heavy. He said, ‘‘So they’ll sink really fast . . . . ’’ Jim added that the overall response had been very favorable—so much so that once again, there was a real need for speed: We have pre-sold nearly half of our next run to places like Acadia National Park in Maine, Six Flags amusement park in Massachusetts, Harbor Lights in Boston, beaches on Nantucket, and to Harvard University. Fifty percent down-payment deposits should be coming in soon, but that won’t cover what we’ll need to get this done. Projections and Funding During this ‘‘early commercialization period,’’ Jim was committed to moderating investor risk by leveraging on-campus and contractor facilities as much as possible. The company was hoping to close on an A-round of $250,000 with a pre-money valuation of $2.5 million by early summer to pay for cost-reduction engineering, sales and marketing, and working capital. The following year the company expected to raise a B-round of between $700,000 and $1 million. SPC was projecting a positive cash flow in 2006 on total revenues of just over $4.7 million. The team members felt that, if their products continued to perform well, their market penetration estimates would be highly achievable. Jim estimated that by 2008, SPC would become an attractive merger or acquisition candidate. In January of 2004, as Jim began work on drafting an SBIR6 grant proposal, his parents helped out by investing $12,500 in the venture. That same month, while attending a wind energy conference sponsored by Brown and Rudnick, Jim overheard an investor saying that he was interested in putting a recent entrepreneurial windfall to work in socially responsible ventures. Jim decided it was worth a try: I gave him my three-minute spiel on the compactor. He said that it sounded interesting, but that he was into wind power—after all, this was a wind-power conference. ‘‘Well then,’’ I said, ‘‘have I got a business plan for you!’’ That afternoon Jim sent the investor the most recent version of the data acquisition buoy business plan. That led to a three-hour meeting where the investor ended up explaining to Jim why the DAQ was such a good idea. Jim said that the investor also understood how difficult it would be to get the venture fully funded: [The investor] said, ‘‘Well, I sure wish you were doing the Data Acquisition Buoy, but I can also see why you’re not.’’ I assured him that my passion was, of course, off-shore wind, and that it was something I was planning to do in the future. So he agreed to invest $12,500 in the compactor—but only because he wanted to keep his foot in the door for what SPC was going to do later on. In February, after the folks at Vail had come back with their favorable review, Jim called on his former internship boss at the Spire Corporation. Roger Little was impressed with Jim’s progress, and his company was in for $25,000. In April, the team earned top honors in the 2004 Douglas Foundation Graduate Business Plan Competition at Babson College. The prize—$20,000 cash plus $40,000 worth of services—came with a good deal of favorable press as well. The cash, which Jim distributed evenly among the team members, was their first monetary compensation since they had begun working on the project. Although SPC could now begin to move ahead on the construction of the next 20 cabinets, Jim was still focused on the search for a rather uncommon breed of investor: This is not a venture capital deal, and selling this idea to angels can be a challenge because many are not sophisticated enough to understand what we are doing. I had one group, for example, saying that this wouldn’t work because most trash receptacles are located in alleys—out of the sun. Here we have a practical, common-sense business, but since it is a new technology, many investors are unsure of how to value it. How scalable is it? Will our patent filings hold up? Who will fix them when they break? Earlier that spring Jim had presented his case in Boston to a gathering of angels interested in socially responsible enterprises. Of the six presenters that day, SPC was the only one offering products that were designed to lower direct costs. During the networking session that followed, Jim said that one group in particular seemed eager to move ahead: They liked that Spire had invested, and they seemed satisfied with our projections. When I told them that we had a $25,000 minimum, they said not to worry—they were interested in putting in $50K now, and $200K later. In fact, they started talking about setting up funding milestones so that they could be our primary backers as we grew. They wanted me to stop fundraising, focus on the business, and depend on them for all my near-term financing needs. At this point I felt like I needed to play hardball with these guys; show them where the line was. My answer was that I wasn’t at all comfortable with that, and that I would be comfortable when I had $200K in the bank—my bank. They backed off that idea, and by the end of the meeting, they agreed to put in the $50,000; but first they said they had to do some more due diligence. Momentum By May of 2004, the Seahorse Power Company had a total of six team members.7 All SPC workers had been given an equity stake in exchange for their part-time services. The investor group expressed deep concern with this arrangement, saying that the team could walk away when the going got tough—and maybe right when SPC needed them most. Jim explained that it wasn’t a negotiable point: They wanted my people to have ‘‘skin in the game’’ because they might get cold feet and choose to get regular jobs. I told them that SPC workers are putting in 20 hours a week for free when they could be out charging consulting rates of $200 an hour. They have plenty of skin in this game, and I’m not going to ask them for cash. Besides, if we could put up the cash, we wouldn’t need investors, right? As Jim settled into his seat for the flight to New York, he thought some more about the investors’ other primary contention—his pre-money valuation was high by a million: These investors—who still haven’t given us a dime—are saying they can give me as much early-stage capital as SPC would need, but at a pre-money of $1.5 million, and dependent on us hitting our milestones. With an immediate funding gap of about $50,000, it’s tempting to move forward with these guys so we can fill current orders on time and maintain our momentum. On the other hand, I have already raised some money on the higher valuation, and maybe we can find the rest before the need becomes really critical.

Facts of the case is listed below:

Jim, as a second year student takes up internship opportunity in a solar electric company.
Jim presents his idea of a solar powered trash compactors to the company, but his ide@s are rejected as not being feasible or that the product did not fit into their product line strategy.
Post internship, Jim collaborates with another’s engineering student in designing a grill to manage tailgating.
Jim incorporates a company, Seahorse Power Company which would develop systems that harness ocean current energy. Another idea was to conduct abandoned oil wells to explore opportunities of producing geothermal energy.
These ideas were again rendered to be unfeasible. Venture capitalists were more into wind energy since it was in trend with high growth and returns.
Jim developed a data bouy to assist wind energy companies in acquiring meteorological data. But yet again, the risks were high in implementing this concept.
Jim returned to his original idea of trash compactors.
Jim joined hands with Alex and conducted market study to explore the opportunities in the compactor market. Seed fund of $22500 was made available.
Jim applied for a provisional patent for the solar powered waste compactor. Jeff and Richmond who had product design skills job Ines the team.
The concept was tested using kitchen trash compactor.
Initial business calls were made to a ski resort in Vial who were impressed with the idea and promised to order three compactors.
Purchase order was received from the ski resort for one compactor.
Contract manufacturing of the cabinet system for the compactor was placed with Boston Engineering that was within the budget.
The design and development schedule had missed the initial deadlines, but SPC were able to deliver the first compactor to the ski resort.
The product had not been tested for quality or performance before the delivery and that was a risk SPC was taking.
However, the feedback from the ski resort was good and the first customer was happy.
The feedback also revealed that there were scope for improvements in the product in terms of higher protective security and performance.
SPC incorporated these improvements in its next generation of the compactors and was now targeting assembly of 20 plus compactors.
With the prospects for patents increasing, many investors got interested in funding SPC.
All the team members who had worked in founding the company were given equal share in ownership. This had created apprehension amongst some of the potential large investors.
The investors were willing to fund $50000 to meet the immediate orders that the company had in their pipeline, but wanted to conduct due diligence for the $1.5 million funding.
Jim was happy to work with the immediate funding without changing the ownership patterns and explore other investor sources for higher amount of funds.

 
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