May 29 (Bloomberg BusinessWeek) -- Late one night about 15 years ago, Lee Loree noticed his wife holding a perfectly lucid conversation in her sleep. That observation started the then-stock analyst on wondering about sleep patterns, talking to engineers, and then soliciting money from angel investors to build a device to improve how we sleep.
The result is the SleepTracker, a watch-like monitor and alarm that users wear on their wrists to record their sleep patterns and awaken them at an optimal time within the window they have chosen. The alarm goes off when the lightest sleep stage is reached during that window, reducing early morning grogginess. The monitor also records sleep stages throughout the night, converting it into data that can be analyzed over time with tracking software.
Loree, 39, has sold more than 250,000 units in 35 countries but still runs his $3 million Innovative Sleep Solutions as a one-person business from his Atlanta home. I spoke to him recently about the startup process and why he deliberately keeps his company small; edited excerpts of our conversation follow.
You were working in finance in 1998, with no background as an inventor or a sleep scientist, when you came up with SleepTracker. How did you do it?
I started checking books out at the public library. I spent 20 or 30 nights sitting in a closet, watching my wife sleep, which is pretty creepy when you think about it. I had access to a lot of smart people through my networks, so I met with them and eventually found a micro-electrical engineer and a software programmer to write the code. We built a couple generations of prototypes, which I financed by withdrawing money from my retirement accounts. When we had north of $100,000 invested, people told me I was a fool—and rightly so.
I was still working at a bank at the time, and I ran out of funds. So I wrote a business plan and did a mini-roadshow, meeting with angel investors. I went with an angel who had business experience and could help me navigate the startup. He turned into a pretty good shepherd. He’s still involved with the company; we talk quarterly.
You got the product to market in 2005. What was the reaction?
We sat and stared at our website that first day and we had 38 visitors. We didn’t have any sales. The next day, a tech blog found us and they threw up a screenshot of our website. Our business went crazy. It was like a commercial where people are watching one sale, then another, then five, then 30, and everybody starts freaking out.
I had conservative projections in my business plan, with 1,000 sales expected in the first year and 5,000 in the second year. Well, we sold 5,800 pieces in the first nine months and 12,000 the next year. We were cash-flow-positive in the first month. We scrambled to support various browsers and add an international component to our shopping cart. The product blew away all expectations that I ever had.
Your product was an early innovation but now you have competitors. Does that concern you?
I believe competition is inevitable, so you use it to your advantage. More people advertising in this space, doing interviews, doing marketing—it should grow the pie, assuming you have a product that works and is fairly priced.
A lot of our competitors have gone out and raised significant amounts of money. They have employees; they have infrastructure. Meanwhile, we have this quiet little business, we haven’t had to get additional outside investment, we have built up a significant war chest, and we don’t even carry a line of credit. We run the business debt-free and it’s clipping along.
Do you think about growing into a larger organization?
We found a sweet spot: Our business grows 10 to 20 percent annually, which is real manageable, and we are where we want to be in terms of managing cash flow. We have all the infrastructure: a call center, fulfillment center, manufacturers, warehouses—but none of them work for me. My main goal with this company was flexibility with my lifestyle. I wanted to be a dad and a husband and be there to be a part of things with my family. If I had the ambition to have a bigger company, we could scale this business up and do 500,000 pieces a year, I don’t have any doubt about that.
But using contractors, rather than employees, works for me because when we’ve fulfilled that obligation, I can turn off that expense and turn it back on when I need it. They like it also because it gives them the flexibility to pursue other contracts. And I don’t have to deal with 401(k)s, or kids being sick and people being out of the office.
How did you set up distribution?
You can get the product online at places like Amazon and Costco and in a few very specific brick-and-mortar stores. There really is not a great channel in the U.S. for these types of devices. We’ve been in specialty catalogs but we’ve not found that to be particularly productive. Some of the big box retailers that used to dedicate a lot of space to CDs and video games have gotten crushed because people are streaming that stuff now. So they’re piloting different things in that dead space, but we struggle to think that’s a good plan for us. No one is going to Best Buy to pick up a sleep monitor.
In Europe, Mexico, and Asia, we have a much bigger footprint. There are limited resources in a small business and I’ve spent much of my time trying to grow international sales.
About half of your revenues now come from sales overseas. How do you manage those markets?
We sell to 30 independent distributors, some of whom I found in our first month of operations and [who] are still with us today. We get them the product, plus camera-ready art, and I do media interviews all over the world. Of 30 distributors, 20 of them I’ve never met face-to-face. Bidding jobs to people, regardless of where they live or what they look like, has worked for me from day one in this business and I believe in it.
You are still selling the same basic product you started with in 2005. Have you got any innovations in the works?
We’re on our fourth or fifth iteration at this point, but we’re kind of a one-trick pony. I recognize that for the long term, we want to have multiple legs so we have more stability, but I’m not sure how to make it a whole lot better. It’s really hard—when you have a business that makes money—to change your focus. We are working on some innovations; by the first of the year we should have a feel for their potential and timelines. But we’ve done this before and the ideas all peter out. Sometimes we’ve spent $10,000 to $40,000 before walking away. I have a proven product, so I try not to monkey too much with it at this point.