The Difficulties Facing Single Product Companies
Over the years of my banking career, I have participated in financing numerous companies that only manufactured or distributed one product. Some of them even only produced that product or service for one customer. After a few years in banking, I realized that single product companies could easily get into trouble if their product became out of vogue, obsolete, or if they were hit with a patent infringement lawsuit.
So for the past 10 years during my presentations to entrepreneurs and inventors, I have given several important pieces of advice based on my own experience.
- When you are a start-up company looking for equity investment, understand that investors don’t invest in products, they invest in companies. While you might start out with one product, you need to demonstrate to investors that your first product is only one of many to be invented/produced/distributed. Multiple products may have a similar foundation in the same technology, but they need to be different in some way that will help you diversify your risk while at the same time leveraging your proven technology.
- I once worked with a company that were software experts in designing automated systems that allowed gas pipelines to be monitored for available capacity and the financial transactions associated with those buyers and sellers of gas to be traded through their system. My client needed a $2 million dollar loan to increase its infrastructure. Everything looked perfect about getting this company’s loan approved. They had one customer at the time I first took this company to my credit committee. The customer was Enron and at the time was considered bullet proof. My loan committee chairman was a wise man who had been the CFO of numerous large companies doing business in the oil and gas industry. My loan committee at the urging of the committee chairman turned down the loan with one condition. The agreed to make the $2 million dollar loan after they acquired enough other customers so that Enron only represented 10% of their total annual sales. My customer believing the advice to be good went into the marketplace and took on enough new customers so that the total volume represented by Enron (and any other single customer) was not higher than 10% of total sales. About a year after the initial loan request, my loan committee approved it. About three months later Enron collapsed. My customer lost about $400,000 in the process, but the good news was my customer was still alive to do business another day. Had they not taken the wise advice of my loan committee chairman, they would have gone under with Enron.
- About a week ago, a company I helped finance two years ago shut their doors. They were a manufacturer of a single product that employed about 50 people in a small Central Texas town. They were the largest employer in the county. The product they manufactured was tire plugs. Tire plugs were very popular ways to plug a hole in a tire before modern high performance tires began showing up on most cars sold in the U.S. There was still a huge market for tire plugs internationally because they are a quick and inexpensive way to plug a leak in a tire. Over the last 10 years nearly all of the manufactures of tire plugs have gone out of business. They only thing that kept my client making them was that every time one of their competitors went out of business, they picked up a pretty big share of a shrinking market. When they closed their doors last week it was because domestic demand for their single product had dropped to a record level. My client was providing good benefits and pay to their workers which caused their product to be priced higher than manufacturers of other tire plugs made in Mexico. It was bound to happen that they too would be pushed out of their niche market, but it didn’t need to happen that they were forced to close their doors. They were smart people with even smarter people working for them. I am sure had they brainstormed new products using some of their existing technology; they could have created one or more new products that would have been able to replace their single revenue generating product.
The moral of my story is all companies have a risk of becoming irrelevant and obsolete. In order to guard against extinction, every company should constantly be thinking about ways to reinvent themselves when the time becomes necessary. I think this holds true for giant companies like General Motors as much as the tire plug manufacturer that has now gone the way of the dinosaur.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
You may contact Sam directly at: sam@lesliethacker.com
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EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his podcast show.
