Ridemakerz is off to a fast start, offering kids the chance to build customized model cars, and giving parents a much-needed pit stop 

 

In 2005, Larry Andreini approached two entertainment producers about a possible television show, but their meeting didn't lead to a TV hit. Instead, the pair gave Andreini, an entrepreneur with a track record that includes founding a customer loyalty program and a telecommunications exchange, the concept that would become his next business: Ridemakerz, a do-it-yourself custom model car retailer.
At the time, the pair, Gillian MacKenzie and Jane Startz, had been hammering out an idea for a business, dubbing it Construct-A-Car. And although they thought it was a potential blockbuster, they needed help to execute a business plan, raise money, and recruit a team to translate the concept into a business. "The minute I saw it, I thought what a great idea," recalls Andreini. "My immediate reaction was that I couldn't believe someone hadn't thought of this before."
Actually, someone had. That someone was Maxine Clark, the founder and chief executive of the wildly successful Build-A-Bear Workshop (BBW), the St. Louis-based chain of customized-teddy-bear stores (see BusinessWeek.com, 6/6/05, "This Bear Doesn't Hibernate"). Since launching the first workshop in 1997, the business has expanded to 300 shops across the U.S., Canada, Asia, and Europe, with sales of $437 million. Clark had come up with a similar toy auto concept in 2002, internally called "Build-A-Car" but had put the plans away to focus on running the company, which was experiencing double-digit growth. "We had many requests from parents who wanted something different to do for boys," she says. "Boys love cars and video games."

Filling a Void in the Market

Not long after, Andreini, partner Norm Pozez, and Startz were able to set up a meeting with Clark, thanks to a connection that Pozez' father had with the Build-A-Bear founder. "I said, let's put our best brains together," Clark says. "There was nothing really at retail that was exciting for boys except for skate parks and computer games. Boys do not shop like girls. There was a real void in the market. But I had no time to really work on this until Larry and Norm came to me with their Construct-A-Car."
Following the meeting with Clark, Ridemakerz went from 0 to 60 fairly quickly. Andreini and his investors raised about $5 million in seed money—including $700,000 from Build-A-Bear—and set about figuring out how to manufacture parts for the customizable model cars.
In June, Ridemakerz opened its first store in the entertainment complex Broadway at the Beach in Myrtle Beach, S.C. On July 20 it is set to unveil its second shop at the Mall of America in Bloomington, Minn., and there are plans to open two more—in Indianapolis and Fredericksburg, Va.,—in the fall.

No Two Cars Are Alike

Although the traditional toy market is relatively flat, both the video game and car segments, normally the purview of boys, have been robust. According to a "State of the Industry" study by market researcher NPD Group in conjunction with the Toy Industry Assn., the toy industry hit $22.3 billion in sales in 2006, only a 0.3% increase from the previous year. By contrast, the overall video game segment increased 19%, to $12.5 billion, in 2006 from the previous year. Anita Frazier, a toys and video game analyst at NPD, says that among boys, the vehicle category was up about 6% from 2005 to 2006, to $1.9 billion.
Still, Ridemakerz is trying to merge the near-extinct traditional model car hobby with the interests of 21st century boys.

Success Stories July 19, 2007, 1:12PM EST

Build-A-Bear with Wheels

(page 2 of 3)

  In June, Ridemakerz opened its first store in the entertainment complex Broadway at the Beach in Myrtle Beach, S.C.

  Ridemakerz is trying to merge the near-extinct traditional model car hobby with the interests of 21st century boys.

"Model cars take weeks to build, and they are intricate and detailed, and kids want immediate gratification," says Andreini, who believed there was an untapped appetite for alternative, creative, educational toys for boys. "If we developed a product that they could develop and build quickly, they'd come into the shop."
Andreini already had a leg up, since he says car customizing was already a part of kids' vocabularies (see BusinessWeek.com, 7/13/06, "DIY Dream Cars"). "No two rides leave the shop looking the same. That's one of our biggest differences from model cars, where someone has made the choices for you. At Ridemakerz, you make all of the choices, and we think that is a very constructive thing." On a subtle level, he says, the ability to decal, color, and paint the cars is teaching boys about art. "They see it as customizing, but in a higher sense it gives kids a creative way to express themselves."

Raising the Retail Bar

NPD's Frazier says Ridemakerz is part of a growing trend in "retail entertainment" that has grown from Build-A-Bear to include other categories such as apparel and dining. "It also taps into a much broader consumer trend to add personalization and customization to any product," she writes in an e-mail. "You can see this played out in myriad ways across industries. Not all of them succeed, but it's important to note that the bar continues to be raised, and all these examples are retailers or products that are trying to stand out from the crowd and engage the consumer at a higher level." (See BusinessWeek.com, Spring, 2007, "Breaking the Mold.")
Indeed, at Ridemakerz the store experience is key. It plays up the car culture much in the way Build-A-Bear trades on cheeky references such as calling its accessories "the bear necessities." For instance, the opening doors have handles shaped like large mechanics' wrenches, while the interiors are designed to look like a body shop with kitschy, colorful touches such as floor signs that caution customers to move in a certain direction or risk "severe sneaker damage" and such product claims as "superior handling when cornering around chair legs." The company also has a "No Lemon Guarantee."
Inside, youngsters build customized model cars (which range in base price from $12 to $25) by mixing and matching a body type and style such as stock, custom, hot rod. The 10-to-12-inch cars are assembled in the RZ Pit Challenge zone, where kids build their cars in a race against the clock. After assembly, they move through an additional seven different zones where kids can choose different types of tires, colors, sounds, grille guards, spoilers, and decals.

Clicking with Customers

According to Andreini, there are 649 million possible combinations. However, accessories are extra. For instance, a radio remote control costs $25, a set of monster tires is $10, and a "Street Glow" light kit goes for $15. Many parts are interchangeable and attached through a patented magnet system. "If something breaks," says Andreini, who calls himself the ZEO, "we haven't done our job." A fully "tricked-out" ride can cost about $100.
When they're finished, kids can create a personalized license plate. Then they're given a certificate with a "Ride Identification Number" that allows them to look up their rides, on the Internet, get digitized images, and upgrade or replace parts.
One of the reasons Andreini says Ridemakerz has instantly clicked with customers is its authenticity. For instance, Ridemakerz has licensing agreements with Ford (F) and Dodge (DCX) to use several of their models such as a Ford Mustang or a Dodge Ram pickup "Ford and Dodge both saw this as great way to have kids actually experience building their own licensed car," says Andreini."If a kid is building a Ford Mustang, it creates brand awareness at a young age." Ridemakerz is currently in discussions with two non-American car manufacturers.

Education and Fun

Since its launch, the company has received interest overseas, and Andreini says they are considering opening in Canada, Britain, and Asia, where they are mulling the idea of selling country rights. (They plan to keep U.S. stores company-owned, not franchised.) They have also been approached by various media to extend the brand through video games and television shows, but Andreini says that at the moment they want to stay focused on building the core brand and are plowing revenue back into the company.
Beyond the hoopla, Andreini says Ridemakerz is as educational as it is fun. It offers kids the opportunity to create and build something, and, he says, youngsters can learn about the history of cars and even about alternative fuels on the Ridemakerz Web site. Indeed, one of the model options is a Ford Super Chief, an alternative-fuel concept car. "We are using the vehicles as a 'ride' for education," he says. "When you think of what's out there for boys, it's video games, laser tag. But what's educational and fun? I think we've found a niche."
Build-A-Bear's initial investment is now a 25% stake in Ridemakerz. That's expected to increase to 30% by early next year. (Gillian MacKenzie is now on the company's board.) In addition to a financial arrangement, Ridemakerz has an operational partnership that allows it to use the Build-A-Bear's warehousing, distribution, point-of-sale systems, and back-office systems.
"It's a perfect complement to our business," says Clark. "Build-A-Bear is about 75% girls and 25% boys, and Ridemakerz is just the opposite. It's not that girls don't like cars, but [cars] are not a passion like it is for boys. And this is an opportunity to take on the market and create another phase of playing patterns. Not everything lends itself to experiential retailing. You've got to pick those places and focus on those things, and I think we nailed it with Build-A-Bear and now with Ridemakerz. These are two large categories with no real competitors at retail."

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A New Push to Make Farming Profitable

At the forefront of a revolution in the way small farms operate is celebrity farmer Joel Salatin. His new business model and innovative techniques are catching on with farmers across the country

We have seen new business models emerge over the last decade for dozens of industries including travel, advertising, and publishing—all relying heavily on technology-based improvements in productivity and changes in distribution associated with the Internet.
Now we may be seeing the emergence of a new business model for small farms, which have lagged the transformation of other industries and continued to rely heavily on commodity pricing and middlemen distributors.
At the forefront of this revolution is the 10-employee, $700,000-a-year Polyface Farm, a 550-acre producer of beef, chickens, and pork in Virginia's Shenandoah Valley. A family farm run by its second generation owner, Joel Salatin, Polyface is thriving thanks to a combination of innovative use of technology to encourage livestock mobility, and streamlined distribution to bypass middlemen and instead sell products directly to consumers.

A New Way of Farming

Salatin's unusual techniques for making his small farm financially viable have become so popular that he offers two weekend seminars each year in which he teaches 30 farmers and wannabes all his tricks, "including dressing chickens, grazing management, handling egg layers, composting, and soil management," he says. The sessions, at $550 a person (excluding transportation and lodging), are sold out two months in advance. "You wouldn't believe how many people come here who are desperate to exit their 'Dilbert' cubicles," he says.
What these student-farmers learn is an approach to farming that is much different from what many of the 400,000 to 500,000 family farms still in existence use today (see BusinessWeek.com, 3/19/07, "Choosing the Family Farm").
On the production side, Salatin eschews the commonly used confinement techniques and grain feeding of animals in favor of keeping his cattle, chicken, and pigs grazing outdoors, within small pastures enclosed by light, high-tech, electrified fencing and portable chicken coops that are easily moved daily by one or two people to ensure the animals always have fresh grass. Chickens are fed grains as well, but only those produced by neighboring farms, and without the antibiotics typically mixed in with animal feed.

Tree Farming

"With this technology, you can feed the world," says Salatin, watching a group of 1,200 Rhode Island Red chickens grazing in a small enclosed area of pasture on a recent morning. The mobile technology, he says, allows the animals' manure systematically to fertilize the pastures, enabling Polyface Farm to have about four times as many cattle grazing its lands as on a conventional farm—and thus save on feed costs.
Salatin combines conventional and innovative approaches to lower the farm's costs, especially energy costs. The pastures, barn, and farmhouse are situated on land below a nearby pond that "feeds the farm" using 15 miles of piping, says Salatin. He also methodically harvests the 450 acres of woodlands, using the lumber to construct farm buildings.
The pasture-based feeding of the animals leads to better tasting meat and eggs than is possible with enclosed, grain-based feedlots, he argues. And the grass helps produce meat that is lower in saturated fats and higher in polyunsaturated fats than conventional meat.

Half a Steer at a Time

He credits the high quality with enabling him to build a loyal following of consumer and restaurant customers (see BusinessWeek.com, 12/20/06, "Whole Foods and the Celebrity Farmer"). His e-mail-based "metropolitan buying clubs" have grown to 900 families within a 100-mile radius, from just 200 families two years ago. Polyface Farm delivers meat eight times a year to specific drop points in the region, where members pick it up.
"The bugaboo in direct-farm-marketing is coming in from the garden and taking care of your customers," he says. "The beauty of this is it is e-mail-based and there is no middleman." In addition, the farm continues to sell to about 400 families that prefer to trek out to Polyface Farm and make their purchases directly, often buying a quarter or half a steer at a time. "These are our most militantly loyal diehards," says Salatin.

If It's Long Distance, Don't Bother Calling

The growing demand from legions of direct customers has led Polyface to lease an additional 700 acres of pasture over the last three years. Salatin says the profits from the weekend-farmer seminars as well as sales from instructional books he's written "are allowing us to make the investment without having to resort to loans," which are another bugaboo of traditional farming.
One thing Salatin won't do as part of its growth kick is to accept orders for shipping to areas outside his Virginia community (see BusinessWeek.com, 7/18/07, "Buy Local—With Town Currency"). "We want [prospective customers] to find farms in their areas and keep the money in their own community," he says. "We think there is strength in decentralization and spreading out rather than in being concentrated and centralized."
(See our slide show for more on Polyface Farm's innovative production methods.)

David Gumpert is a journalist who blogs reports regularly about the business of health and has written a number of books about small business and entrepreneurship, including Burn Your Business Plan! He writes his What Entrepreneurs Need to Know columnevery other week.

 

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Grom Gelato: Creating a Stir in New York

Partners Guido Martinetti and Frederico Grom have managed to preserve Old World flavors and traditions in their Manhattan gelato shop 

Would Americans spend $4.75 for a single scoop of premium, handmade Italian gelato? That was the question that Guido Martinetti and his partner, Frederico Grom, asked themselves a year ago when they decided to bring their popular Italian gelato chain, Grom, to New York City. As it turned out, the answer was a resounding yes.
When the first shop opened on Manhattan's Upper West Side in May, the pair tested the waters by giving out free coupons to lure customers in to try their product. "On the first day," says Martinetti, "there was a line of people 70 meters (about 229 feet) long down Broadway." The second day, paying customers without the benefit of a coupon returned in droves. And ever since Grom opened for business, lines for the artisanal gelato shop have continued to run around the block. Now Grom is planning to open two more Manhattan locations before branching out to Tokyo in the next few years.
Grom began in Turin, Italy, five years ago when the two friends—Martinetti, a former winemaker, and Grom, who had worked in Italy's financial industry—lamented the scarcity of gelato made the old-fashioned way: with premium ingredients and processed by hand. The pair decided that instead of talking about what didn't exist, they would start their own gelato company. They very quickly put together a business plan and borrowed the startup money to do so. In 2003, they opened their first shop in their native Turin. It was an immediate hit.

Ingredients from Far-Flung Places

Inspired by Slow Food, a global association and movement that seeks to preserve regional foods and small producers, Grom's founders decided at the outset to use only the finest organic ingredients and local artisanal purveyors as much as possible. For instance, the pair scoured Italy for hazelnuts that come from Langhe, peaches from Leonforte, and pistachios from Bronte.
Grom's 20 different flavors (containing about 8 to 10 grams of fat) are incredibly inventive, packed with such ingredients as washed Arabic coffee grown on the volcanic slopes of Guatemala's Antigua region, French Valrhonà chocolate, and Sfusato lemons from the Amalfi coast. Only San Bernardo mineral water from the Italian Alps is used to make Grom's sherbets. The firm's signature Crema di Grom is made with biscuits from Piedmont and pieces of dark chocolate. "Behind every ingredient is a story," says Martinetti. "I'm the guy who looks for the ingredients. Fortunately, all of our clients are curious and want to know why we make our ingredient choices."
By 2005, the pair had opened five more shops in Italy (today, there are 14 across the country). Wanting to maintain strict quality control and consistency, they purchased a small workshop in Turin and came up with a system to liquefy the gelato mixture, so that they could distribute the mix to the stores several times a week, then cream the mix into the final product in each shop. When they opened Grom in New York, they decided to maintain the same procedure. The shop receives its liquid gelato mixtures from Italy three times a week. "We ship the liquid gelato, and we make it fresh every day in the New York shop," says Martinetti. "Everything comes from Italy: the cones, the nougat, everything. Because we wanted to offer real Italian gelato."

Riding an Artisanal Wave

When Grom launched in New York this spring, the small chain had already brought with it some transatlantic buzz. During the 2006 Winter Olympics in Turin, the Today Show interviewed the founders and featured their gelato. They are something of a hit on the foodie circuit, having earned plaudits and awards from Slow Food as well as the province of Turin as "Master of Food" in 2005 and 2006. Their New York debut earned the pair much praise and ink, including plaudits from The New York Times. Martinetti considers Grom lucky that it has earned such outsize recognition. Of the $500,000 that he says they invested in opening Grom, none went toward publicity.
Indeed, Grom entered the U.S. at a time when both the organic and artisanal movements are gaining increasing currency (see BusinessWeek.com, 4/19/07, "A Growing Appetite for Specialty Foods"). And they weren't reinventing the wheel, as gelato has been around for a while. At the same time, ice cream and frozen desserts remain a huge market segment. According to the NPD Group, a market research firm based in Port Washington, N.Y., Americans spent $21.6 billion on the ice cream and frozen dessert category in 2005. "Forty percent of the U.S. population will eat ice cream at one time during the next two weeks," says Harry Balzer, a vice-president at NPD. "The thing about the category is that there are already people interested in it when something new happens [that is, there is an existing market]."
At Grom's bustling New York store, it seems like they have reinvented the category. Martinetti says that customers are extremely curious about the ingredients and the process. In fact, he says one of the biggest challenges in starting his business here was educating the store workers on the philosophy behind the gelato. The Manhattan location is spare and clean. The walls have big blown-up images of the ingredients along with information and descriptions about each of them. The kitchen in the back where they prepare the fresh gelato daily is behind large glass windows visible to customers.

Investing in the Future

Martinetti expects Grom will break even in its first year of business and expects to see a return on the initial investment in two or three years. "We've only been open for three months. We have to see how much gelato we sell in the winter," he says. "That will be important data." There is interest in rolling out more stores in the U.S., but one stumbling block is ingredient sourcing. "Our problem is that we only use a few suppliers. We only use top-quality artisanal purveyors, and they can't increase their volume 10 times for us with the same quality. It's not a financial problem for us, it is a problem of [locating] suppliers." He compares the process to cultivating vineyards for wine. "We ask farmers to plant the best varieties for us," says Martinetti.
To that end, Martinetti and Grom recently purchased 20 acres of land in Italy's Piedmont region, where they have an organic farm called Mura Murato and plan to grow six types of fruit—such as peaches, figs, melons, and strawberries—specifically for Grom's ingredients. "We will have the first melons this year," says Martinetti, "and will be at full capacity by 2009."
Now, Grom's lines can only get longer when curious ice cream eaters discover the new flavors and want to taste more.

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Rebirth of a New Orleans Coffee Tradition

Two years after Katrina damaged the franchise's 25 local stores, the brand leader of PJ's Coffee talks about the strength of the people and the brand 

Like nearly every business on the Gulf Coast, PJ's Coffee, a famed New Orleans institution, suffered serious losses following Hurricane Katrina. Founded nearly 30 years ago in the heart of the Big Easy, pre-Katrina PJ's was a chain of 42 coffeehouses located across Alabama, Florida, Louisiana, and Mississippi. As a result of the disaster, all 25 of PJ's New Orleans stores suffered damage.
Two years ago, BusinessWeek's Stacy Perman spoke to Chris Morocco, president of PJ's Coffee, in Atlanta, and Randy Hollingsworth, then PJ's vice-president of operations about the impact of Katrina on their business (see BusinessWeek.com, 9/29/05, "Grounds for Hope in New Orleans"). On the second anniversary of the disaster, Hollingsworth, now PJ's brand leader, discussed the company's road to recovery. Here's what he had to say:

An Indelible Mark

Roughly two years after the Katrina disaster, I can say without hesitation that life is less of a daily grind. In the parishes, towns, and cities that define the Gulf States, it now takes less effort to appreciate things that seem fundamental to most people in America like fresh water, consecutive days of power, or a police presence. Running a business like PJ's Coffee of New Orleans now takes fewer makeshift resources than the months immediately following the disaster.
Less is a relative term in a post-Katrina era, though, as we approach two years since it left an indelible mark on a city with the third-largest coffee port in the U.S.; one of the most recognized streets in the world, Bourbon Street; a city whose architecture is not of this country, but of this world; a city that borders the most famous or infamous river in the U.S. Even fewer families are choosing the forever disaster-related Katrina identity—I noticed it was recently reported that Katrina dropped more than 100 slots in the popularity list for newborn names.
A third of our PJ's Coffee stores (we added "of New Orleans" to the brand in 2006 to feature our proud heritage and commitment) were dramatically affected by Katrina. Damage at our franchisees' locations ranged anywhere from several thousand dollars to in excess of $200,000, just in property and store damage. That does not include loss of operating income—or individual owners whose homes were damaged or lost. Felton Jones, our longtime roaster, lost his entire home as did his roasting associate Brian Beck.

Listening to Mark Twain

In those initial days and weeks following the storm, we were persistent in trying to determine the whereabouts of our franchisees and our corporate employees, and the scope of damage at our stores and our roasting facility that rests just a stone's throw from the mighty Mississippi. Mark Twain wrote, "The Mississippi River will always have its own way; no engineering skill can persuade it to do otherwise." How perceptive he was.
Realizing there was much at stake for us as a company, much at risk for the livelihood of our franchisees both inside and outside the Gulf, and much more in jeopardy close to home, it quickly became apparent to us that the only way to get our arms around the situation was to go against traffic, against the word on the street, against trucks and tanks and armored personnel carriers, and make our way to New Orleans.
We would fly to Jackson, Miss., and make the drive to New Orleans, stopping at every exit to fill gas containers, gaining familiarity with McComb, Miss., the last-chance fueling destination before entering Louisiana. Cash was important, but gas was king back then. Water was king. Without either liquid, you didn't go very far or last very long.

Sanctuaries for Locals

While armored personnel vehicles kept us at bay initially, we found friends in the state patrol—frequenters of PJ's Coffee, who eventually helped us navigate around the despair to get us to our roasting facility located in the Faubourg Marigny, which is the next neighborhood down river from New Orleans' French Quarter. It is the backbone of our coffee business and our franchises.
Some stores in outlying areas like Hammond, Covington, and River Ridge recovered in a few days. These stores would soon become sanctuaries for locals. As we were unable to get our roasting facility back up and producing until Nov. 12, 2005, we relied heavily on an Atlanta roaster to supply our franchisees with the coffee—roasted to our PJ's Coffee profiles—that they required to survive.
While we worked to ramp up our roasting facility, we faced the challenge of physically getting coffee to the stores. We could no longer take transportation for granted. Suppliers were reluctant to truck product into the Gulf States or to export it from our roasting facility to our markets in Georgia, Florida, and New Jersey, for example. The supply chain of American invention was breaking down in both directions. We persevered like many companies, giving up efficiencies to simply get the job done. Our people slept in cars, trailers, and on air mattresses in warehouses to fill in the gaps of a supply chain that was broken for several months across the Gulf.

Lessons Learned

Last spring was the first time I was able to fly into New Orleans International Airport instead of making the three-hour, 220-mile commute from Jackson by car. I remember seeing our PJ's Coffee shop on Concourse D dark. It's one of two locations that never bounced back. Concourse D remains today much like the neighborhoods in which local businesses can't sustain themselves. Our franchisee in the Lakeview area continues to hope for the return of their neighborhood. For now, though, they can't justify reopening their store. And as a franchiser with a conscience, we can't insist they open. That's not our way. That's not the New Orleans way.
As it relates to Katrina and the related bureaucracy, what we have learned doesn't help us much. Our franchisees may have learned that business interruption insurance is important, if not vital. Yet such insurance has become either cost-prohibitive for a small business or simply unavailable. As a franchiser, we have come to learn you can't have enough liability insurance along the Gulf. We have also come to learn that liability insurance costs three times what it used to. There's not much we can do about that. It's simply the cost of doing business along the Gulf.

The Home of Good Coffee

As we approach 30 years since Phyllis Jordan founded our great coffee brand, years before specialty coffee found its way to every street corner, we are reminded that New Orleans defined the idea of specialty coffee, leveraging its New Orleans port to bring the best beans in the world to our roasting facility, then to our coffee shops, and to neighbors who wanted to enjoy a great cup of coffee.
We expect to hit 60 stores before the end of 2007, with plans to franchise more stores in 2008 than ever previously. And so for Phyllis, our franchisees, and our customers, we are back, more robust than ever, more full of hope knowing our true place is to be the neighborhood coffeehouse, that sanctuary for friends, family, public servants, students, travelers, neighbors—in the best of times and the worst of times.

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New Orleans: A Startup Laboratory

Entrepreneurs are finding fertile ground for new ventures they think will help bring the devastated city back to life 

In a fifth-floor penthouse office in the central business district, developers craft an online trading system to let companies sell their accounts receivable at a discount for cash. A few blocks away, a programmer builds a tool to send patients' medical data to doctors' smart phones in real time. On the other side of town, workers assemble a sleek modular home from aluminum framing and interlocking panels—no nails or screws required. At the end of the day, they might all head for a hip new nightclub near the waterfront.
This is not New York or Chicago, Seattle or San Francisco. This is New Orleans, two years after Hurricane Katrina, and these ventures represent a cross-section of the entrepreneurial spirit that has quietly blossomed in the city since the flood. New Orleans suffered a net loss of 2,951 employer businesses, or 30%, between the last pre-Katrina quarter and the first quarter of 2006, according to a new report from the Louisiana State University Economic Development Div. (Businesses reporting no employees were filtered out.) Over the last three quarters of 2006, however, New Orleans gained a net 968 employer companies, representing a return to about 80% of the pre-Katrina level.
A small but growing corps of young, ambitious, and passionate entrepreneurs are starting companies that could help the city's economic future. They are business owners who looked beyond New Orleans' traditional tourism, oil, and shipping industries to find fertile ground for their ideas.
"You really want to be able to invest in high-yield entrepreneurs in sectors like technology or film. Those are where you're getting your innovation," says Robin Keegan, director of economic and workforce development for the Louisiana Recovery Authority, the state agency coordinating the rebuilding. "You're also getting a level of company owner and a level of employer that really are committed to both the economic and civic purpose of the city."

Focus the energy

Justin Brownhill, a 36-year-old London native who left a managing director post at Citigroup (C) in New York to co-found the New Orleans Exchange, the online receivables market launching early next year, is one such entrepreneur. "We are trying to focus energy on not just rebuilding the infrastructure and neighborhoods of the city. We are helping to focus the energy on small business and corporate growth and the economy," Brownhill says.
Brownhill and his cohorts' push will not erase the city's problems. New Orleans still has shaky infrastructure, rampant crime, political corruption, and just 60% of its pre-storm population, according to the latest estimates. Vast areas that were flooded remain nearly abandoned. So why would anyone start a business there?
The city's new entrepreneurs see a chance to reinvent the economy, to associate the Crescent City with innovation and technology, with new ideas that will spur growth. "Right now, New Orleans has extremely great long-term potential in the sense that we're crafting a new city," says Chris Brown, who took Plaine Studios, his digital design firm, from a part-time business to a full-time venture after Katrina.

Bargain Office Space

Startups in New Orleans also enjoy lower costs than in many cities—Brownhill says the New Orleans Exchange might pay 10 times as much in New York to rent the kind of loft space his company has. He also hopes to hire local talent out of Tulane, Loyola, and the University of New Orleans—candidates he says are often driven to Atlanta, Houston, or Dallas for jobs.
Blake Killian, who left a small Internet startup to found his own online marketing firm, Killian Interactive, this summer, says Web-based companies have another advantage: Their businesses didn't suffer the same damage during Katrina that traditional companies did. "We just grabbed our laptops and headed to higher ground," Killian says.
There are signs that startup activity is on the rise. Idea Village, a New Orleans nonprofit dedicated to fostering entrepreneurship, has received 1,015 applications for grants, loans, or nonfinancial assistance since the storm. All but 2% or 3% came from existing businesses until this year, according to Tim Williamson, the group's president, but since January, 36% have been for new ventures. "In the first year, it was just people coming back. Now there's people coming in, really coming to us saying: 'We got new ideas,' " Williamson says.

Encouraging Startups

Idea Village is part of an existing infrastructure that supports entrepreneurship in the city. The group plans to launch a series of Business Innovation Centers, the first of which is set to open in the Upper Ninth Ward on Aug. 25, to bring resources to business owners in their neighborhoods. Another group, the Entrepreneurs' Organization Accelerator, was launched after Katrina to help early-stage companies grow.
"Everybody wants everybody to succeed, and I think if anything Katrina has motivated people to open it up more," says Neel Sus, an Accelerator member and Tulane grad behind a pair of startups. Sus quit his job at Northrop Grumman (NOC) last year to focus on SusCo Solutions, his business-process improvement firm. His other venture, eLYMPUS, is developing a way to send patient information to doctors' smart phones, an advance he hopes will improve care in the city's struggling hospitals.
Most of these go-getters root their companies in New Orleans because they believe it is up to entrepreneurs—not the government or Big Business—to rebuild the city. Shawn Burst, who licensed an innovative system of modular building materials from a German businessman, said he placed his firm in his native New Orleans even though his target market is Northern California. Burst, 41, has plunged $2 million into the venture, called Jeriko House, and he's building a prototype on Canal Boulevard. "Everyone's leaving. The climate has been that businesses are leaving," he says. "Maybe this will open people's eyes and make them look at what's happening down in New Orleans."

Post-Katrina Possibilities

It's too early to say what role these young companies will play in shaping the city's uncertain future. But the entrepreneurs say their ventures show that New Orleans is rising. That's what Robert LeBlanc intended when, less than four months after Katrina, he opened Republic New Orleans, a nightclub and creative center that has become a hub for newcomers and repatriates alike.
"Everybody knows that there have been a lot of problems endemic to New Orleans, and a lot of that is because it has been such an insular city for such a long time," LeBlanc says. "We wanted to do things to connect the people who are in New Orleans with the new people who were coming to New Orleans, to create those bonds and those communities."
Williamson, of Idea Village, sees the new energy in the city as the vanguard of a larger movement. "The sense of possibility is more than it was before Katrina," he says. "If you're into innovation and entrepreneurship, New Orleans is a laboratory for that right now."
See our slide show for profiles of more entrepreneurs who started businesses in New Orleans, and hear what attracted them to the city.

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From Home Kitchen to Whole Foods

BusinessWeek chats with two young entrepreneurs who aim to 'Feed' the masses quality organic granola 

Models turned business partners Jason Wright (on left) and Jason Osborn turned the granola that they made as a snack in their New York City apartment into a three-flavor organic line they named Feed Granola.
How many times have you come up with an idea that causes your friends to say: "Hey, that could be a business!" How many times have you agreed with them? But how many times have you actually gone out and transformed that idea into a real business? Well, that's exactly what former models turned business partners Jason Osborn and Jason Wright ended up doing. In 2005, the pair turned the granola that they made as a snack in their New York City apartment into a three-flavor organic line they named Feed Granola.
Now sold in eight states at stores including Whole Foods Market (WFMI) and Wegmans Food Markets, Feed Granola earned $110,000 in sales in 2006, and is projected to make $2 million over the next 12 months, according to Osborn and Wright.
Recently, BusinessWeek.com's Stacy Perman spoke with Osborn and Wright about making the leap from a home kitchen hobby to a full-time company. Edited excerpts of the conversation follow.
How did you come to turn a homemade snack into a business?
Osborn: In 2003, our modeling agency put us together and we were living as roommates in the West Village. We started making granola as a healthy snack for ourselves. We would pass it out to friends, and it kind of caught on in the neighborhood. We gave it to a local restaurant to sample, and they ended up putting it on their menu. We realized that we had something special at that point, and we talked about making it into a serious product. So we took the granola to a dietician and gave her the formula. She said we had a really healthy product here and that there was a real need in the marketplace. So we put our heads together to make it a business in 2004.
Wright: And we formed a business corporation in December of 2005.
Did either of you have any prior business experience?
Osborn: After I moved to New York, I worked for an ad agency for three years. And in college I majored in business management and advertising.
Wright: I went to the University of South Carolina and majored in hotel, restaurant, and tourism management, and minored in business. But in college they don't teach you to be an entrepreneur. When I graduated I had no idea that I would have a granola company one day. But I did want to own my own business and to work for myself. I didn't know what I wanted to do, and I got into modeling because it got me to travel. I was managing an Abercrombie & Fitch (ANF) store and that led me to modeling, which led me to New York.
How did you initially finance Feed?
Osborn: In the beginning we financed it ourselves.
Wright: We spent about $10,000 between us from 2004 to January of 2006.
Were you still making the granola in your kitchen?
Osborn: Yes, at first we were making it in our sixth floor walk-up. And we'd go around the neighborhood offering it as samples at gyms to get feedback from people who weren't our friends. That's how we hooked up with a local natural-foods store that put us on their shelves. But at that point we'd gotten too big for our kitchen, so we partnered with a meal delivery service in the city and bartered (BusinessWeek, 7/18/07) to use their kitchen space. We'd bake our granola during the night when they weren't using it and we paid for the usage in granola. That's how we paid rent on our first facility.
Wright: We did that for a year until the end of 2005, and then we outgrew that facility and moved to a cooking company in the Bronx. We trained their staff and worked with them until August of 2006.
Since you were growing, what did you do for capital?
Osborn: We approached the U.S. Small Business Administration and applied for a small-business loan. We were approved for a $75,000 loan, and the money got us to the point where we could launch the product at Natural Products Expo East, a national trade show in Baltimore. We made a plan to spend the next 10 months working on the brand and packaging in order to launch it at the trade show. We came up with the brand name and hired a designer friend of ours to execute the vision we had put down on paper.
Did you have a business plan or did this just evolve? Did you seek advice?
Osborn: In the beginning, we were just flying by the seat of our pants. Early on we sought out SCORE and spoke to them literally via e-mail. They helped us with questions about incorporating and starting a business plan. Then we created the business plan ourselves. It was really just cursory. It laid out how we'd run the business and outlined some of our market and financial milestones. We used that plan to secure our loan from the SBA.
What was the best piece of advice you received?
Osborn: Before we actually launched at the trade show, we attended a few other trade shows and we went to the educational programs and seminars that they had on how to take a product to market. We were able to ask people firsthand how they did it. They helped explain how to go to the next level from where we were. It was very helpful to attend those seminars.
Also, going to the trade shows allowed us to introduce ourselves to markets and distributors and chains. They could see that we were a viable company and became attracted to our brand.
Were there any blunders along the way?
Osborn: Yeah, of course. I think our biggest challenge was finding a facility that fit our needs. If you are constantly growing and changing, you need a manufacturer that allows you to do so. Also, I think our lack of experience allowed us to be more innovative, but I think if we had more experience we could have answered a lot of questions that came up.
Wright: When you are a small, growing company, cash flow is always a problem. Trying to balance receivables vs. payables is always a big challenge.
Many people have an idea but not everybody turns it into a business. What would you say makes that leap possible?
Osborn: In our case, we had a very good partnership. We both bring different things to the table. But I'd also say that you have to go with your instincts and vision and guts and stay true to them. Everyone has their own opinion and advice and it's always different. I say, stay focused.
What's next?
Wright: We'd like to go national by mid-to-late 2008.
Osborn: We also want to expand our product line once we've established it as a quality product. And we want to enter into brand extensions.

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The Paul Newman of Punk Rock

After Hopeless Records started bringing in cash, founder Louis Posen began spinning profits into charity and joined a new trend in "social entrepreneurship" 

Louis Posen's dream of becoming a movie director was coming to an end. The 19-year-old was studying film at California State University at Northridge in 1991 when he was diagnosed with retinitis pigmentosa, a degenerative eye disease that leads to blindness. Looking for another creative endeavor, he bought a book called How to Run an Independent Record Label and launched Hopeless Records from his garage.
Today, Hopeless is profitable, employs nine people, and will gross $5 million this year. Boosting revenues and earnings every year in an industry barraged by digital piracy and slumping sales is an accomplishment. But Posen has another hit on his hands: He figured out a way to spin a sizable chunk of the money his company generates into philanthropy. "Although we didn't really plan it," Posen says. "we're part of this whole movement of social entrepreneurship."
The notes of inspiration came seven years ago, after a compilation of the label's artists called Hopelessly Devoted to You Too sold more than 100,000 copies. Posen realized there was strength in numbers. He created another label called Sub City, a play on the word subsidy and on the punk rock subculture in which the company specializes. Then he offered his artists the option of releasing their records on Hopeless or Sub City.
If they choose Sub City, 5% of the gross goes to charity (BusinessWeek, 5/24/07). On a $14 compact disk that's about 70 cents, but those dimes add up. Posen recently celebrated what he calls a "million-dollar milestone," having given more than $1 million to charity. Half of the money comes from the artists' royalties, the other from Posen's profits.

Creative Philanthropy

Sub City also sponsors tours from which 10% of ticket sales go to various causes. The label works with more than 50 charities, including causes such as fighting blindness and music education in schools. Not every band chooses to participate. Posen figures about 3 of the 10 releases his company puts out each year are on the Sub City label. "Some artists prefer to give on their own," he says. "Some can't afford it."
Posen learned to be creative from a business standpoint early on. Punk rock isn't a huge market. His top selling album—from a band called Avenged Sevenfold—has sold 400,000 copies in the U.S. That's 100,000 shy of what's needed to qualify as a gold record. Posen generates extra revenue for his company by keeping the rights to sell a couple of merchandise designs from each of his bands, such as a T-shirt or a poster. He also takes a fee for licensing their music to television shows and movies. It's a business model many major labels (BusinessWeek, 6/28/06) are now pursuing. "Louis has the spirit of an entrepreneur and a heart of gold," says Mitchell Wolk, an executive at Warner Music Group (WMG), which helps distribute Posen's albums. "He is truly an inspiration to us all."
Marketing punk rock (BusinessWeek, 8/8/07) is difficult. The segment isn't driven by hit singles or radio airplay like most of the music business. Instead, Posen and his team must build awareness for their artists through appearances in record stores, on social networking sites such as MySpace (NWS) and PureVolume, and through relationships with other companies looking to stay in tune with youth culture such as the Hot Topic (HOTT) retail chain.

Hopeless Lifestyle

On Sept. 25, for example, Hopeless is releasing the new album from All Time Low, a pop-punk quartet from suburban Baltimore. The company has a marketing alliance with Hollister, an Abercrombie & Fitch (ANF) spin-off that will sell the CD in its stores and stream All Time Low's music on its Web site. "We call ourselves a record label but we've never looked at ourselves as being in the record business," says Posen, dressed casually in jeans and Vans sneakers. "It's a lifestyle."
Left with only the ability to see light and dark in one eye, Posen takes a cab to work most mornings. His wife picks him up at the end of the day. At the office, he uses a software program called Jaws that reads his e-mails and Excel spreadsheets aloud. With profits from the business, Posen recently bought a 5,500-square-foot warehouse in the Los Angeles suburb of Van Nuys. On a recent September morning, he was bumping into walls and furniture. "We moved in two weeks ago, and I'm still getting used to the place," he says.
Scientific studies have shown that the blind can become suburb musicians, their ears compensating for the loss of sight, à la Stevie Wonder and Ray Charles. "Not me," Posen says. "I've tried to play guitar, drums, everything." Posen has more than made up for his lack of musical ability, finding other ways to make music and give back to others at the same time. "Losing your sight is not something anyone would choose," he says. "But there are worse things that can happen to you."

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