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Raising the Roof with Floor Ads
How a low-tech startup with an oddball concept got VC funding

LendingIn December, 1996, Fred Potok was hanging out in the Acme Market in Malvern, Pa., watching customers react to the fruit of two years of entrepreneurial effort -- a six-square-foot floor decal of bugs succumbing to Raid. Repeatedly, people looked down, then grabbed the pesticide off the shelf.

"[That] gave me chills up my spine," says Potok. "Oh my God, this works!" he recalls thinking. The numbers bore out his observations. In a five-month, 20-store test, Acme's sales of Raid rose 91%. Other products with floor ads also showed impressive gains.

Potok hit on the idea as a 39-year-old salesman at his father-in-law's bus-decal business. Two things caught his eye: A 1995 Point-of-Purchase Advertising Institute study showing that most people decide to buy a brand-name product in the store; and an Atlantic City casino operator's remark that he preferred ugly carpets because, "People always look down, and we want them looking up." The floor ad was born.

He left his job in 1995 to devote himself to his company, FLOORgraphics. The idea was this: The company would lease floor rights from retailers and then sell ad space to manufacturers in four-week cycles. He would design, manufacture, install, maintain, and remove the graphics. He'd only sell space to one manufacturer per product category in each store-keeping the competition out. Three years later, FLOORgraphics Inc., has ads in 15,000 grocery, mass-merchandise, drug, and convenience stores. It expects $30 million in revenues this fiscal year, and it's profitable. And -- a rarity for a low-tech company these days -- it has venture capital. "Floor ads just make sense," Potok declares proudly.

How did Potok's decidedly unsexy concept prevail at a time when a name seems to be a prerequisite for attention and money? A clever -- and sound -- financial model, for one thing, says Josh Polan, managing director at Interlaken Capital Inc. in Greenwich, Conn., one of Potok's venture-capital investors. FLOORgraphics turns a maintenance chore into a profit center for storeowners, manufacturers, and itself. "It's our experience that when more than one party benefits, it's a lot easier to make a success of a business," says Polan, whose firm doesn't invest in high tech. "You don't have to be glamorous to make money."

Few shared Potok's vision when he started out. Not store managers, who saw floors as "sacred ground that must be kept pristine and shining -- sort of like belt buckles or shoes in the military," says Potok. Nor manufacturers, who didn't want people scuffing up their logos. Potok needed airtight responses -- and a laminate that could withstand abuse. He knew about materials from his bus-decal experience. But it was going to take testing -- and money -- to find the right formula. He got $40,000 from friends and family, and leveraged his relationships with suppliers.

He persuaded George Rebh, 43, a former co-worker and a nationally known artist to join him, taking equity instead of a salary. Potok got lucky when Linda Rosanio, who owned STAR Group, a Cherry Hills (N.J.) ad agency, called about their high school reunion. Intrigued by his concept, she swapped him space in her vast offices and the use of computer-graphics equipment for stock. "When McDonald's came to visit us, they thought we were a real company instead of five guys with $10,000 in the bank," says Richard Rebh, George's brother, a former Bain & Co. consultant, and a high-tech entrepreneur who became CEO in 1997. "We called it the Wizard of Oz concept."

On Rosanio's advice, FLOORgraphics pitched the ads as a media buy because TV, radio, magazine, and billboard advertising budgets were fatter than those for circulars and store displays. The rationale: The ads were "billboards on the floor" that "closed the loop" on national ad campaigns, not promotions for discounts.

In late 1996, Acme Markets agreed to run a five-month test of the floor ads. Potok and Rebh lured 25 manufacturers with free decals. Then they persuaded suppliers to cut prices, defer payment, and even take equity in lieu of cash. General Formulations Inc. in Sparta, Mich., which supplied photographic film for the graphics and laminate, gambled on an opportunity to expand its market. "We obviously didn't really do a thorough credit check on FLOORgraphics -- because there wasn't much to check," recalls Mike Clay, General Formulations' national sales manager.

General Formulations sold FLOORgraphics decals at cost and let the startup run up a tab of more than $200,000. The payoff? This year, sales to FLOORgraphics were close to $1 million, says Clay. SPAR Group Inc. of Tarrytown, N.Y., which installed the graphics, also deferred payments, as did attorneys and accountants.

In 1997, it looked as though a big break was ahead. Kmart Corp. started testing FLOORgraphics' concept. The co-founders badly needed capital as they awaited Kmart's decision. They had extracted $150,000 more from friends and family. "We had people who wanted to throw money at us, but we knew we had to be careful because stock is the lifeblood of a company. If you mess that up, there's no recovery," says Potok. They made the rounds of their personal contacts again in early 1998 to raise another $100,000.

Kmart signed on in April, 1998. The next month, $5 million in venture capital came through from Interlaken. With Kmart's 2,000 stores on board, FLOORgraphics was breaking even. A&P, Winn-Dixie, Grand Union, Osco Drug, ShopRite, and Food Lion signed on as well, giving the company space to sell in 8,000 stores. Advertisers included Procter & Gamble, Campbell Soup, and RC Cola. An ad for four weeks in 8,000 grocery stores costs $256,000, plus about $90,000 for production. (A 30-second, national prime-time TV spot costs $375,000 to $450,000, excluding production. A page in a high-circulation national magazine costs $125,000 to $150,000.)

The Princeton (N.J.) company has 50 employees. It has four offices in Latin America, and it plans to expand to Europe, Japan, Australia, and New Zealand. In August 1998, FLOORgraphics bought out its biggest competitor, 3M's In-Store Media Div., for several million dollars, adding another 3,500 grocery and drugstores to the roster. The VC firm of Catterton-Simon Partners III LP of Greenwich, Conn., invested $5 million in May, 1999, leaving the three co-founders with just under half the stock.

These days, Potok only shops for groceries in stores where he can step on his own ads -- so he can keep an eye on his installers. That's one way to make sure nobody walks all over your interests.

By Meg Lundstrom in New York



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