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Twice Blessed,
Thrice Shy
Creative Capitalists
Having cashed out on two career-making innovations, Peter Tracy ponders whether there might be a third
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Business New Haven
6/9/2003
By: Melissa Nicefaro
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It all starts with a creative idea.
You persevere, you insist, you sell and you create your idea into a business. You're making a product that people need before they even know they need it.
Next thing you know, it's 15 years later. You've sold two companies for a very pretty penny and you're in a boat, drifting around Long Island Sound waiting for the next fish to bite.
Meet Peter Tracy, founder of MicroPatent and Neato.
Tracy's first company, MicroPatent, came of an idea he had while at the Science Park patent library in New Haven in the late 1980s.
"All these researchers were standing in line, waiting to use the APS [Automated Patent System]," Tracy explains.
"They had a little reply card at the side that said, 'Please tell us at the patent office what you think about this free system. People filled out these cards and I read about 100 of them. Every one of them said 'I wish I could have this in my office.'"
Bingo.
Creative capitalist Tracy saw a need and an opportunity and ran with it.
Did he look back? Sure.
Within a few years of MicroPatent's founding, Tracy was faced with a challenge. By the mid-1990s, the Internet had entered into general business use. MicroPatent had about 1,000 customers around the globe buying nicely labeled CD-ROM subscriptions, but as Tracy explains, it was time to release MicroPatent onto the Internet.
"We said, 'We're pretty good at this; let's offer our subscriptions on the Web.' But people said we couldn't do that because it would put our CD-ROM business out of business," Tracy recalls. "That was a creative step, where I said, 'We've just got to do it, because if we don't somebody else will.'"
In 1997, MicroPatent was sold to a public company called Information Science Inc. in Stamford, backed by Warburg Pincus.
When MicroPatent first got off the ground, the CD business was relatively new. A CD writer cost $5,000 and there was no cost-effective, professional way to place labels on short production runs of the discs.
Tracy had a new idea, but bringing it to fruition was not easy.
"We started printing on demand and the only problem was that all the previous CDs had a label on them that said MicroPatent. They needed to be labeled and anyone we asked said we should write on them with a magic marker. We didn't want to do that," Tracy says.
"We had customers, we were a commercial organization. We asked about putting a label on, but were told we couldn't because of how fast the CD spins and that it would throw the balance off. They really made it sound technical, like they had examined it in a laboratory."
IN fact, "they" - folks at Sony and other mass-producers of CDs - hadn't looked hard enough at the idea.
Tracy persisted.
"We learned how important precise centering of the disk was to the proper operation of the CD and that the label material and adhesive must be right. The labels took some research and testing, and after that, the templates were a cinch," Tracy describes. "The closest circular platform device to be found was a Mr. Coffee filter base."
From a coffee filter, another company was born: Neato. Obstacle overcome.
Neato, a mail order business, originally operated out of a back room at MicroPatent. The CD label company grew and Tracy found himself faced with another decision requiring creativity: finding a distributor.
Tracy says, "Finding a distributor for Neato was one of the creative things I have done. It took Neato into about 25,000-30,000 CompUSA and office supply stores around the world."
The distributor, Chicago-based Fellowes, had been in the business of selling bankers boxes and corrugated boxes for 100 years.
About three years before Fellowes bought Neato, Tracy asked if they would sell the CD labels.
"They had never been in this kind of business before - it's a consumable business because a consumer uses a label, then they go back and get more, it's not like a mouse pad, or a carpal tunnel wrist stand, where you only buy once."
"They had no idea what this little company in Connecticut was doing in the consumable business. We basically sold labels, pieces of paper that were die-cut."
Tracy had approached CompUSA with a label-making kit, but was told there was no demand for such a product.
"I told them my phone's ringing off the hook, people want this product, they want to go somewhere to buy labels," Tracy says, "The buyer said I must be crazy, that nobody was going to pay $79.95 for this piece of crap!"
Using his creative ways, Tracy did eventually get his product into CompUSA stores. The stores were ordering a handful here and there.
"It was a nightmare," Tracy recalls. "People taking the label sheets out of the packages, and we'd get it returned. We came to the conclusion that we couldn't do this, we needed a company that was in the distribution business already. That's how Fellowes came into the picture."
For the first year, Fellowes was a distributor only. Tracy told the distributor to take Neato's list prices, buy the product for 75 percent off list price and sell the product.
"That was workable for them, giving them a 25 or 30 percent margin. They were blown out of their towers in Chicago because they had never sold a consumable product before. They suddenly became aware of what the replacement business is all about and they knew the margins were substantial."
Tracy signed an exclusive distribution agreement for Neato products around the world, but kept the Web business.
"We had 150,000 customers on the Web who would buy our product. That was our ace in the hole. If something went wrong with the retail business, we'd always have the Web business," Tracy said.
Fellowes paid Tracy royalties on their sales. The royalties were so handsome, they offered to buy the business.
Tracy sold Neato's Web and retail business to Fellowes on September 7, 2001.
"When we sold MicroPatent to Warburg Pincus, we asked, 'What about Neato?' It was in the back room, doing maybe $30,000 or $40,000 a month in business, and they said they weren't in that business, they were in the patent information business, so [we could] keep it," Tracy recalls.
For the past two and a half years, Tracy has been enjoying his well-earned "retirement."
"I don't know if I could come up with another Neato or MicroPatent," Tracy says.
Business-wise, he's having a quiet spell. Personally, not so quiet.
"I'm going to fish and play rock and roll music," he says. "It's a funny world. I have a new respect for myself and I'm not sure I have the drive to work that hard and do it again," the 60-year-old explains.
"I don't know if I want to play head doctor to employees. There were many, many times when it was right on the edge of going the other way."
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