The

Entrepreneurial

Code

Lessons from an

Ivy League Entrepreneur

Chapter Twenty-Seven

Maverock began calling around to banks across the country looking for a financial partner so they could utilize the VISA network. Basically, he wanted whichever bank they chose to be their silent partner. Johnny and his partners wanted total creative control over how they sold their program to families. After weeks of non-stop phone calls, Maverock negotiated an agreement with a small bank in the Midwest. The 3% merchant transaction fees would be split evenly, but the banking partner got to keep 100% of the interest earned on deposits. The first piece of the puzzle was solved.

While they were pleased to have a banking partner, Johnny and Abe gave Maverock a lot of grief about the revenue split. They discussed shopping the deal to other banks in the hopes of getting better economics. Maverock was adamant that he negotiated the best possible terms, so his partners ultimately trusted his judgment.

Being a successful entrepreneur was supposed to be about hitting walls and adapting quickly. Since they weren’t making as much money from the 1.5% merchant fees, they discussed charging students a one-time processing fee.  A lot of schools charged “processing fees” of $10 to $20 when students picked up their school identification cards. There were also discount cards being sold by private companies that charged $25 annual fees.

Since the “College Pack” featured an off-campus meal plan, a discount card, and huge savings on textbooks, Johnny and his partners thought it offered enough value to justify a one-time fee. They researched the college market and took comfort that $25 seemed to be a successful price point among competitors.  By offering a $25 discount card that could be used for four years, they reasoned College Card would be 75% cheaper over four years than the discount cards of other companies. 

In order to recruit the national discounts, Johnny began speaking with technology companies like IBM, travel companies such as Greyhound, hotels like the Comfort Inn, Clarion, Quality Inn, and Econo Lodge, and a host of other companies from Lens Express, to Jiffy Lube to Dollar Rent-A-Car.  Soon, their office was filled with camera-ready artwork from Fortune 500 companies.  After all, it was hard for companies to decline Johnny’s offer for free marketing.  Most companies already had canned promotions, so they just dusted them off.  Johnny pitched it as free advertisements for “friends of students” in exchange for offering some kind of promotion or discount.

During this time, Abe was on the phone constantly with printers and suppliers, organizing the logistics of the mailer. He worked out the details of how to process all of the student information. After all, they hoped to receive hundreds of thousands of return envelopes, and they needed to respond promptly to everyone with a customized information packet and College Card.  Abe recommended students submit their information on special forms by filling in corresponding circles with a #2 pencil. Then, he would be able to feed the forms through a special machine and eliminate the need for data entry, while improving the quality and speed of the data collection.

It sounded great, but unfortunately the manufacturer of the specialty equipment, did not rent its machines. In order to use the equipment, Johnny and his partners had to purchase it.  The machine cost about $20,000 and could be financed but the three partners had to personally guarantee the loan.  When they added up this capital lease, the capital leases on the Bullfrog Card equipment, the individual credit card bills that were accumulating, the borrowed deposits from the Bullfrog Card, and the mounting trade credit, the three of them were on the hook for a lot of money.

 

Copyright  2005 by Chris Cononico
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