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Neato’s Happy Accident
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Business New Haven
11/27/2000
By: Tammy Rachau
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Peter Tracy's most recent project, Neato, doesn't make the most complex or technologically advanced product. But by effectively filling a fundamental need, the East Haven company has turned Tracy's ingenuity and insight into a thriving business, once again proving that necessity breeds invention. BNH talks with Tracy about the development and marketing of Neato.
Tell us first about your background. You were involved with some successful ventures before Neato.
In 1989 I started a company in Science Park [in New Haven], MicroPatent. The idea was that I would buy tapes from the patent offices every week - from the U.S. patent office, and European patent offices and the Japanese patent office. I would take that tape, and I would extract certain parts of patents, like the abstracts and the descriptions and the companies and things like that, and put them on CD-ROMs, which were brand new at that time, and sell them to companies for a subscription price. So someone like Dow, Dupont, Exxon, Texaco would subscribe to these patents on CD-ROM. They would get the CD-ROM every week or every month. They would type in 'DNA Sequencing,' for example, and up would pop all of the patents that had anything to do with DNA sequencing. In 1992 or '93 we moved from New Haven to East Haven, to our address at 250 Dodge Avenue. In 1997 I was bought out by a New York investment company, Warburg-Pincus.
During 1994 and '95 the Internet started to become available. We took all of our patents that were on CD-ROM and put them up on the Web. This was probably the earliest application of images on a Web site. We put millions of images up, and people would come in and download, for instance, 100 patents at seven pages each when they were doing a patent search.
Didn't having the patents on the Web hurt your CD-ROM business?
Well, what I really did was made a decision in 1994-95 to actually put ourselves out of business, because the question at the time was 'Why would anybody want to put these patents on the Web, because you'll ruin your CD-ROM business?' And the decision was that it was better that we should put ourselves out of business then have someone else do it. In the process of doing that we built a whole new business on the Web, and it was successful enough for this investment company to come and buy the company in 1997.
Where did the idea for Neato come from?
When the investment company bought MicroPatent, there was this one little product in the back that we had developed, which was a CD label-applicator system. What happened in 1994-95 also, at the same time the Web was coming into existence, there was a new way to make your own CDs: CD writers. So where you used to have to make a CD by sending it out to a company and having them make a master and then duplicate thousands of copies, now you could actually plug the [application] into your PC and write your own CD. That would save about two weeks of time. Plus, it would save a lot of money, because if you only have to make 20 or 30 copies of a product, you don't have to pay an enormous fee to make a master and do all that stuff that Bon Jovi does.
So this machine came along, and we started using it, and the only problem was, when we made our first CD, we discovered that there was no way to label the thing. It was blank on both sides. So we called up Sony and Toshiba and TDK and all of the big players, and said, 'What do we do? How do we label the things?' They said they didn't know. They said write on them with a Magic Marker, and we said, 'We can't write on them with a magic marker. We're MicroPatent, and we want our name on there.' They just said they couldn't help us.
So we took some pressure-sensitive paper, and we cut a circle and wrote some software, and we created our own labels, and we put them on the CD's, and they worked just fine. We called the big companies back up and said, 'What about these labels?' and they said, 'Oh, you can't do that. You're not supposed to put a label on a CD.' We didn't understand why, though, because it worked just fine.
So we wrote the software. We did about 20,000 labels for MicroPatent. People started asking where we had gotten our CDs labeled. So we started selling the labeling system out of the back room of MicroPatent. Then we set up a little company called Neato. The reason for the name was that every time we labeled one of these things with this little device that we patented, somebody would say, “Oh, neat. That's neato!” And so we called it Neato.
How did you actually launch Neato?
We were selling it out the back door of MicroPatent, and we were doing maybe $50,000 a month in business with Neato labels - blank labels, software and the applicator. We had a little kit that was called the Neato kit. When Warburg Pincus came along and bought MicroPatent, they said, 'We don't want this little piece of plastic. You can have it.' So I moved it right next door, at 250 Dodge Avenue. I think 1997 was our first full year as a separate company, and that year we did about $500,000 in business. In 1998, we did about $1.5 million. In 1999, we did about $12 million to $15 million. This year, we'll do about $25 million $30 million. All with this little piece of plastic called Neato. Now we are in 25,000 stores in the U.S. and Europe. We are in CompUSA and BestBuy and Staples and Office Max and Office Depot and Wal-Mart and K mart and all of those stores.
How is the company organized? Do you have, for instance, a marketing department?
We have three sources of revenue: In retail we have joined forces with a company called Fellowes out of Illinois, and they sell computer-accessory products. Those are the people who take our product into 25,000 stores. Then we sell OEM. We make products for companies like Hewlett-Packard. Then we have a direct business where we sell from a Web site. People go to our Web site, and they buy products, and they are automatically shipped to them out of our warehouse in Connecticut. The Web site is one part of our direct business. The other part of it is telephone service, where people can call us up and order. We do have a marketing department, and it markets on the Web and through direct mail. We also go to trade shows and things like that.
How do you think the Web and other new technologies have changed the way products are marketed?
What we have found is that basically what has been successful in our Web business - we are doing millions a year in the Web business, and it is very profitable - is the same old practices that have been going on for a hundred years. In other words, we go to trade shows, and we just tell people to come to our Web site. But they see the product at the trade show, and they tell us they don't like it green, they like it blue, they like this, they like that - so we are able to learn about what the customer wants. But it is taking place at the same old trade shows. We advertise in the journals that are niche markets, like small-business journals, and advertise to come on the Web and buy our products. Then we use a PR company out of Bethany, Mason & Madison. These are all the fundamental ways that we used to promote a business. We still do it, except now we send them to the Web site.
This is nothing more than what the Web companies are discovering today. These great brain trusts that opened up all of these Web sites have realized that you need to advertise in all of these other places to drive people to your Web site. It's not rocket science; it just stands to reason. They just thought they were going to open up a Web site, and people were going to flock to them. What they didn't realize was that you have to create this need in the customer first. You do that in the standard business ways. We have also added a couple of new things. We e-mail. We have 150,000 customers on our e-mail list. We e-mail them specials and correspond in that way. But that's about the only new thing we do that we hadn't done before the advent of the Web. So, at least for our business, the Web really hasn't changed a lot of the fundamentals.
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