Enterprise:
A Snowboard Start-Up Hits Big Bumps

"Go big or go home."

This brash motto of snowboarders was applied by James Salter and Tim Pogue in the management of Ride Inc., their snowboard-equipment start-up. As a result, they almost rode the company into the ground.

Only a year ago, the co-founders of Ride were the toast of Wall Street. Snowboarding, skiing’s rebellious alter ego, was red-hot, and Ride was the only pure snowboard stock in the business. The flamboyant Mr. Pogue, 33 years old, created the initial buzz with rowdy trade-show beer busts and Ride-branded condoms distributed to investors. And the rosy projections of 30% annual market growth by Mr. Salter, also 33, helped push the Seattle company’s stock above $35 -- an increase of 1,500% (adjusted for splits) over its initial offering price of $2 a share 18 months earlier.

But Ride shares soon fell off a cliff, after an industry survey suggested the market was growing at about half the rate Mr. Salter had suggested. The company’s stock dropped 50% from its high a month earlier. Investors clamored for change, and Mr. Salter resigned as chief executive in May. Mr. Pogue, who oversaw daily operations as president, backed Ride’s board of directors’ decision to recruit a more experienced leader. But after the newcomer relegated him to a less than leading role, Mr. Pogue resigned in October.

Theirs is a textbook lesson in the consequences of growing too big too fast for inexperienced managers to handle. "They had terrific energy and ideas, but they didn’t know how to execute them," says Robert Hall, the 48-year-old former ski-industry executive who took over as Ride’s chief executive six weeks ago. Says Mr. Salter: "My mistake was not bringing in a chief operations officer much earlier in the game."

The ride to the top began in 1992, when Messrs. Pogue and Salter were approached by Roger Madison, a tanning-bed manufacturer searching for an alternate-season business. Their respective talents seemed perfectly matched. Mr. Madison, educated at Harvard’s business and law schools, offered legal and business advice, as well as office space and $250,000 in seed money. Mr. Salter, who ran a sporting-goods marketing and excess-inventory business, was an intrepid salesman with numerous distribution and manufacturing contacts. Mr. Pogue was a die-hard snowboarding fanatic who had managed the professional riding team at privately held Burton Snowboards Corp., the world’s leading brand.

Mr. Pogue knew the snowboarding market cold and recruited a high-profile team of professional snowboard riders, pumping them for design and marketing ideas. In 1993, at the ski industry’s biggest trade show, he devised a huge purple skateboard ramp as a display and dispensed beer from a keg. Curious retailers ogled his new designs, and Mr. Pogue raked in so many orders that there wasn’t enough capital on hand to deliver the goods.

Family and friends having already been tapped for $2.5 million, the trio engaged a small underwriter to take Ride public two years ago. "I had no clue what going public meant," Mr. Pogue says. "I figured it was just the prize for having made it."

Indeed, he and his fellow founders became instant millionaires. They were celebrated last year as Seattle’s "Entrepreneurs of the Year," and Mr. Pogue and his jet-black-dyed Elvis Presley coif was featured in a Fortune magazine cover story on executive style. Sporting a different hair color each week, he presided over rowdy industry drink fests and accompanied Ride’s team of professional snowboarders around the globe.

Flush with cash and a surging stock, the founders went on an acquisition binge. Mr. Salter oversaw purchases of a manufacturing plant, clothing and snowboard brands and C.A.S. Sports, his original equipment and close-out business. But while the manufacturing plant increased margins, other buys proved less helpful.

The purchase of Mr. Salter’s C.A.S. Sports, for example, undermined Ride’s strategy of limited distribution. Specialty retailers were outraged to find their competitors purchasing Ride-branded products from C.A.S. at close-out prices. "They were angry," acknowledges Mr. Pogue. "They’d buy boards from Ride, then their competitor across the street would get the same brand for one-third the price." Mr. Hall, the new chief executive, has since sold the close-out business back to Mr. Salter.

Their biggest misstep, however, was operating the acquisitions independently. "A $60 million company running four independent units is clearly inefficient," says Shelly Hale Young, a senior analyst at Hambrecht & Quist, noting that Ride at one time had four chief financial officers. Mr. Hall has since reorganized the company to eliminate the duplications.

But the worst problem concerned long-range planning: There was little. "They didn’t even have a business plan when I arrived," Mr. Hall says. Phone calls to a handful of retailers and friends served as market research, and numerous decisions were based solely on the whims of the employees and team riders. Relying on industry data that were flawed at best, "they didn’t know how big the business was, or what its potential was," Mr. Hall says.

Convinced that the Japanese market could deliver big growth, Mr. Salter pushed his distributor there to sign a large contract. But the market was becoming saturated and the distributor soon canceled orders, leaving Ride swamped with inventory and unable to meet its growth projections. "He should have been much closer to the Japanese market," Ms. Young says.

Mr. Salter disagrees. "I was very close to the Japanese market," he says. "The distributor should have had a better handle on the market . . . and should have advised our sales staff of changes."

Inexperienced at investor relations, Mr. Salter quarreled with an analyst who questioned his optimistic projections during an investor conference call. After several analysts pulled their "buy" recommendations on Ride stock, some analysts say, Mr. Salter stopped taking their calls. One of them, Chad Jacobs, specialty retail analyst at Ladenburg Thalmann Co., Inc., in New York, says, "That was a big mistake."

Mr. Salter disputes these accounts. "I didn’t stop taking their calls," he says.

At about this time, as the founders’ new-found wealth was shrinking, the partnership unraveled. "The numbers everybody wanted and the reality of what Ride could do were two different things," Mr. Pogue says. "It wasn’t about snowboarding anymore. It was about pleasing Wall Street."

By the time Mr. Hall arrived, Mr. Pogue felt relieved. "He was the first person I’d seen in a while who had a plan," he says. "And I didn’t want to be the guy who got in the way."

Ride shares closed yesterday on the Nasdaq Stock Market at $7.875, up 12 ½ cents. Mr. Madison remains chairman of the company. Mr. Salter now runs C.A.S. from his home in Toronto. And Mr. Pogue was last seen on the slopes of Jackson Hole, Wyo.

Links to Internet sites regarding this story:
Design of the Delivery Process by Club POM

Enterprise:
The Rise, Fall and Return of a Ski-Lift Entrepreneur

Over the past 25 years, the inventor’s "Yan" ski lifts were involved in accidents that caused five fatalities and more than 70 injuries -- the worst record of any ski-lift maker operating in North America. With his equipment under scrutiny by state safety officials after a fatal accident in 1995, Mr. Kunczynski’s Lift Engineering & Construction Co. filed for Chapter 11 bankruptcy protection in July.

But now, the 60-year-old entrepreneur has a new venture and a $22 million contract with Stephen Wynn, owner of Mirage Resorts Inc. in Las Vegas, to build two automated trains. Currently under construction, the trains will carry visitors between the Bellagio, Mirage and Monte Carlo hotels on an elevated track.

The story of Mr. Kunczynski’s rise, fall and rebirth shows the power a charismatic salesman can have—even in an industry highly conscious of its safety record. Personal relationships have been "just as important as the quality of the equipment" in the ski industry’s buying, says William Jensen, chief executive of Booth Creek Ski Holdings Inc., which owns 10 resorts.

Mr. Kunczynski, a former ski racer, began building relationships in the industry when he arrived from his native Poland in 1962. As an engineer for a French chair-lift maker, he helped design and build lifts at California’s Squaw Valley ski resort. He also married the daughter of the resort’s founder, who purchased some of the first lifts from Mr. Kunczynski’s company, started in 1965.

During the 1970s and early ‘80s, Lift Engineering grew fast. Sharing his visions over apres-ski meals, the well-spoken Mr. Kunczynski wooed resort owners with sleek designs drawn on cocktail napkins. "He was the first to bring aesthetics into lift design," says Henry Lunde, who purchased Yan lifts for Vermont’s Killington and Mount Snow resorts as president of S-K-I Ltd., which owned the New England resorts. "He painted them and arranged the [lift] towers with a sense of beauty. That appealed to resort owners."

So did the young immigrant’s status as one of very few U.S.-based lift suppliers and his up-by-his-bootstraps life story—an attractive quality in an industry full of zealous entrepreneurs. But perhaps most appealing was Mr. Kunczynski’s ability to rapidly transform ideas into reality. "As soon as the idea came off the napkin, it was in that afternoon’s production schedule," says Lawrence R. Smith, supervisory engineer with Colorado’s Passenger Tramway Safety Board, which oversees ski-equipment safety.

Passionate about reducing construction and maintenance costs, Mr. Kunczynski says he substituted aluminum tower parts for steel ones and swapped rubber springs for steel coils. He also replaced electric motors with locomotive engines.

But Mr. Kunczynski’s innovations raised worries among some state safety officials. Rather than prefabricating components in a factory, Mr. Kunczynski routinely sent raw steel to be welded on site in ski-area parking lots, says Colorado regulator Mr. Smith, an assertion that Mr. Kunczynski confirms. "It’s difficult to maintain and test [welding] quality in the field," Mr. Smith says.

Mr. Kunczynski acknowledges that his eagerness to see his designs realized sometimes undermined quality. "I’ve learned that you simply have to take more time for development," he says, "and more testing."

However, when Jonathan R. Carrick, who sat on Colorado’s tramway safety board in the 1980s, expressed concerns to Mr. Kunczynski and ski-resort owners about Mr. Kunczynski’s installation and welding practices between 1983 and 1985, "I was blasted by the ski industry," Mr. Carrick says.

Problems with Lift equipment soon arose. In 1985, faulty welds in a Yan lift at Colorado’s Keystone ski resort caused a malfunction that threw 49 people to the ground, resulting in two deaths and 47 serious injuries. Lift settled 11 suits involving 20 plaintiffs, including a wrongful-death suit, for about $7.5 million, says James Challat, a lawyer who represented some of the injured people. "There was an error in machining," says Mr. Kunczynski, who confirms there was a settlement.

However, with loyal customers interested in his innovations, Mr. Kunczynski raced into a new market: the detachable chairlift. European companies had pioneered the high-speed lift, whose chairs could be released from a fast-moving cable as skiers got on and off. While most makers had spent about four years developing their lifts, Mr. Kunczynski installed his first after only a year.

But his detachable lifts had problems almost from the beginning. Shortly after the first one was installed at Mammoth, "some of the chairs collided," recalls Dave McCoy, founder of California’s Mammoth Mountain resort, who notes that no one was injured. "There were a lot of quality-control problems," says Tom Trulock, mountain manager at Idaho’s Schweitzer Mountain resort, which installed a detachable Yan lift in 1990. Mr. Kunczynski notes that some resorts with detachable lifts, like Sun Valley, had no major accidents.

Indeed, Mr. Kunczynski’s chief engineer, Les Okreglak, quit during the development of the detachable lift, citing safety concerns. He is now an expert witness in continuing litigation against Lift Engineering. Without Mr. Okreglak to test Mr. Kunczynski’s ideas, "a lot of things fell through the cracks," says James Fletcher, president of engineering concern Jenlynn International Inc., who has worked closely with Lift Engineering for 15 years.

Wary of Mr. Kunczynski’s products, Mr. Carrick of the Colorado safety board lobbied to prevent Yan detachable lifts from being installed in Colorado. But few buyers balked. In all, Mr. Kunczynski sold 31 detachable lifts in the U.S. between 1987 and 1995.

In 1993, a nine-year-old boy was killed after bolts came loose and caused a collision on a detachable lift at California’s Sierra-at-Tahoe resort. Lift and Sierra-at-Tahoe settled a wrongful-death suit in 1995 for $1.9 million, with the cause of the accident in dispute. Then, in December 1995, a malfunction on a Yan detachable lift at Canada’s Whistler ski area led to an accident that resulted in two deaths and eight serious injuries. A November report by British Columbian government investigators found that portions of the lift didn’t meet industry manufacturing standards.

After the Whistler accident, safety inspections revealed problems with other Yan detachable lifts, and ski areas throughout North America began replacing them; 26 of the lifts have been replaced or retrofitted since the accident. Five more in New England are under scrutiny by safety officials. Last summer, Lift Engineering sought Chapter 11 bankruptcy-court protection in the District of Nevada.

Mr. Kunczynski says he deeply regrets accidents involving his equipment. "I have to live with that for the rest of my life and pay the debts," he says. "But I don’t believe you can point the finger only at the designer and builder. You certainly have to look at the industry that serviced my lifts."

Meanwhile, some resort owners continue to defend him. Mr. McCoy of Mammoth Mountain notes that his resort has had no injuries related to Yan lifts, and he blames accidents at other resorts on poor maintenance. "Some of the people who operate lifts today aren’t mechanically minded," he says.

Mr. Kunczynski established a separate company, YanTrak Co., in the early 1990s to build "people movers," automated trains used in some airports. He received financing from Vernon Sprock, former owner of California’s Sierra-at-Tahoe resort, and built a prototype in 1994 for Mr. McCoy at Mammoth Mountain. The prototype had various glitches, including a collision and another accident that required a public evacuation. "In any new installation, there will be glitches, and there was no risk to passengers," Mr. Kunczynski says.

In 1995, Mr. Kunczynski approached Mirage’s Mr. Wynn to build a similar train. The innovative twist: Unlike conventional movers, which are propelled by large, expensive motors, his would be propelled by small motors along a track. It was a unique and less costly solution. While Mr. Wynn had doubts about using an untried system, Mr. Kunczynski offered to build it on speculation. As a further incentive, he priced it 60% below competitors’ systems.

Mr. Wynn signed a $22 million contract in July to complete the system. To ensure its safety, he says he has "an army of people" scrutinizing the project. Though he was unaware until recently of the prototype’s glitches, Mr. Wynn says, "The fact that someone tries something new and it doesn’t work at first is perfectly natural. Yan’s not reckless. He’s enthusiastic and emotional. And so am I."

As for Mr. Kunczynski, he says he is determined to learn from his mistakes and succeed again. He has turned over financial control of YanTrak to a new chief executive and quality control to other engineers. "It isn’t easy for the king of the mountain all his life to give that much authority away," he says. "But if you don’t adapt, you die. And I’m not ready to give up yet."

Small Business (A Special Report):
Starting Out
---
A Little Help From Their Friends:
Rule No. 1: Don't make your buddy your banker.
Rule No. 2: If you ignore Rule No. 1, At least minimize the risk.

The star obtained an interest-free $300,000 loan on a handshake. But a year later, in 1990, Mr. Ergas filed suit in Dade County, Fla., claiming Mr. Johnson had reneged on his oral agreement to repay the loan within a year. In court documents, Mr. Johnson alleged he had five years to pay back the loan. The disagreement was settled out of court.

It may sound like a bad script, but as Mr. Johnson discovered, making your buddy your banker engenders real risk. Legal fees and bad-debt headaches aren't the half of it. Fallout from soured loan agreements can destroy close relationships, especially if such arrangements are treated with the informality often accorded best friends and favorite cousins.

Still, it's a risk some people are willing to take. According to the Census Bureau, nearly 10% of small-business owners say they count on friends and relatives as sources of borrowed capital.

Is your venture among them? If so, you can minimize the likelihood of alienating someone important to you. Here are suggestions from lawyers, financial experts, borrowers and lenders:

Don't expect a "deal." If you're seeking a loan from a friend or relative because you can't get one through a bank, you're already asking for a favor. And if you're angling for an interest rate substantially below market rate, your lender will be losing money on interest. That's tantamount to asking for a double favor.

In any case, below-market rates may not be as much of a deal as they seem, since they create taxable income for borrowers. Low-interest and no-interest loans offer tax write-offs for lenders. But the borrowers must pay taxes on the difference between the low rate and the market rate -- in other words, the amount they would have paid as interest.

That's what prompted Benjamin Hlavac, of St. Paul, Minn., to change the terms of the loan he received from his mother. When he was just out of college, Mr. Hlavac borrowed $60,000 to start a clothing-design consulting company. "Our accountant told us that the IRS would come after us for additional taxes if we didn't increase the interest rate," he says. So they did.

So how do you avoid tax hassles, while choosing an interest rate that benefits both borrower and lender? Pick a rate that falls at the low end of the market range, but also gives your friend more interest than a certificate of deposit would.

Write a contract. Contracts define obligations. They're especially important if relationships become strained, for any reason, before a loan is paid off. And contracts needn't stir up distrust among friends. Quite the contrary: By putting your agreement in writing, you will demonstrate your sincerity and commitment to making the deal work for both of you.

Sample loan agreements are available in business libraries and bookstores, and contracts can even be fashioned from blank bank-loan forms. But before consummating the deal, "be sure to have a lawyer review it," says Wilton Sogg, a lawyer who teaches a course on small business and the law at Cleveland State University.

"Spell out all the details, including what happens if things turn out for the worst," he says. If the business goes under, for example, the parties will already have decided whether the money will be paid back more slowly or not at all.

Be wary of joint ownership. It's common to offer part ownership in lieu of interest payments -- but doing so may entangle you and your benefactor more closely than you want. And, if the business succeeds, you may end up flogging yourself for your generosity.

If you do grant a stake to your lenders, spell out exactly how much decision-making power they will have. Failure to do so led to combative meetings between the founder of a Leadville, Colo., snowshoe maker and his investors, all of whom were friends. The founder resigned. The investors, fearing the loss of their initial investments, ended up stepping in and reorganizing the company.

The founder "had a great idea, but no business sense," says Caroline Tremblay, who plunked down several thousand dollars to help start the company. "I ended up having to invest more than I'd originally wanted just to ensure that my original investment wasn't for naught." The friendships dissolved, too.

Success also can lead to friction. You may regret sharing too much with a silent partner if the business makes a fortune. Or, because growing businesses often require large capital infusions, original investors may get angry if their stakes are diluted in the process.

In one case, family members were given a guaranteed 30% stake in a Texas software start-up, says David Gerhardt, president of the Capital Network, a Houston service that matches investors and entrepreneurs. "But when the owner needed more financing to keep the operation afloat, the new investors wanted more of a share than the owner could supply," Mr. Gerhardt says.

The owner had a choice of dissolving the company or persuading the investors to reduce their share. They grudgingly agreed to the reduction.

Think of the loan as a stopgap. Though family and friends often help get businesses off the ground, they probably won't have the resources to bankroll long-term growth. Eventually, every growing company needs to build a relationship with a bank or other lending institution. By relying solely on friends and family, you will never establish the credit history you need.

If the business is successful, you stand a good chance of getting a bank loan, even if you couldn't before. "If we grow as much this year as we did last year, we'll need more money than our relatives can come up with," says Mr. Hlavac, who recently established a credit line with a bank. "By next year, we want to completely have {all our borrowing} with the bank."

Design a payment schedule everyone can live with. An aggressive payment plan may sound good to your lender, but it can lead to late or missed payments. So devise a realistic payment schedule. Many people who lend money to a friend are doing it as a favor, and are more concerned with getting their principal back than with earning interest. They also hate to have to nag about missed payments, so pay on time -- without prompting.

On the other hand, if business is better than expected, go ahead and step up the payment schedule. You will save yourself money on interest and instill confidence in your benefactors. That way, if you need to prevail upon your pals again, they will be more inclined to help.

As Business Stagnates At Chic Ski Areas,
The Gloves Come Off
---
Resorts Use Mudslinging Ads,
While Vail Sends a Spy To
Get the Goods on Aspen

Then, the market flattened. New corporate investors demanded more profits. And now, the snowballs are flying:

Vail Associates Inc. sneaks veteran ski instructor Arvin Kasparaitis into Aspen to spy on the competition and lure away tourists. "He was dispensing coupons like a carnival crier!" says Aspen Skiing Co. senior vice president John Norton.

Wyoming's Jackson Hole resort targets the competition with an ad that reads: "RANGE -- If the next word that popped into your mind was Rover, come on up. We don't get to see that many pompous asses this far from Vail."

And Vail is rushing to open a storefront in nearby Breckenridge to hawk lift tickets, souvenirs with Vail logos and a free shuttle to the resort.

Clearly, ski rivals are hard-packing their ammunition.

"We used to have an unspoken handsoff understanding about invading each other's home resort," says Rod Hanna, a vice president at Steamboat Springs. Not any more.

Vail started placing radio and newspaper ads in Steamboat offering discounts to skiers. Firing back, Steamboat launched its own ad campaign, and installed a video camera atop its mountain to show off its snow to Denver TV viewers. Other resorts are rushing to match the move.

And Mr. Hanna is readying some new ads. "We aren't going to fire the first shot," he says. "But we're armed and ready."

This snowballing competition stems directly from the ski industry's maturing state. Baby boomers who took up the sport in droves in the 1960s and 1970s are skiing less, cutting vacations short or opting for warmer climates. While the recent snowboarding craze has kept resort attendance from plunging, lift-ticket sales have been virtually flat nationally for nearly a decade. Even powerhouse Aspen has seen attendance slip -- down 2% last season. And for the first time in recent memory, ski resorts across the country this season have held the line on lift-ticket prices, which in Vail run $48 for an all-day ticket.

The industry saw this coming in 1988, when the National Ski Areas Association commissioned McKinsey & Co. to study prospects for growth. The consultants called for a media blitz to entice 35 million nonskiers considered likely to try to the sport. But the ill-funded "Ski It to Believe It!" campaign soon ran out of gas. Resorts instead focused on squeezing more dollars from committed skiers and stealing patrons from competitors. "Resorts turned to a more guerrilla-style marketing strategy," says Michael Berry, the association's president.

Meanwhile, the industry was changing from a polite field populated by skiing enthusiasts into one dominated by corporations. "We have shareholders who demand and deserve a return on their investment," says James Felton, spokesman for Ralcorp Holdings Inc., which owns Breckenridge, Keystone and Arapahoe Basin in Colorado.

Vail Associates was taken over by Apollo Investors LP in 1992 and has since vigorously focused on the bottom line. "When there's minimal growth in the business, you've got to be as aggressive as you can," says Robert Kunkel, a Vail vice president.

Mr. Kunkel was responsible for sending Mr. Kasparaitis into competing ski resorts to gather information on group ski packages and persuade merchants to display Vail brochures and coupons. The title for the new job: "Inter-Resort Relations."

Mr. Kasparaitis says it was "a giggle."

It wasn't so amusing to Aspen's Mr. Norton, who withdrew the resort's 25-year membership in Colorado Ski Country, a cooperative trade group. "Calling Arvin `Inter-Resort Relations' is like calling a bank robber an investment counselor," he says. "How would you like it if you were enjoying a meal at a great restaurant and someone from the place across the street came to your table and asked you to eat dessert at his restaurant?"

Gordon Briner, Breckenridge's ski operations director, agrees: "The gasoline-war mentality isn't healthy for the ski industry."

To Mr. Kunkel, all is fair in love and snow wars. "There are no dotted lines across the mountain passes that say, `These are our skiers and those are yours,'" he says. "We can all flatter ourselves and think that our guests want to ski our mountain seven days in a row. But guess what? They don't."

Besides, after spending millions to develop nearby Eagle County Airport, Vail has seen other resorts piggyback on the expanding air service. "Hey, they're all in our airport," says Vail spokeswoman Patricia Peeples. "It's just good business."

Mr. Kasparaitis has invited lodge owners from competing resorts to sample Vail free, in hopes that their guests will make day trips to his town.

And Vail is rushing to get its store in Breckenridge open by Christmas. "The community as a whole doesn't like it," says Breckenridge's Mr. Briner, straining to be diplomatic. "It will have its way of responding."

Michael Madsen, a Breckenridge real-estate man who arranged to rent the space to Vail, puts it more bluntly: "We were a little worried about a rock coming through the window."

Smaller resorts can also get nasty, playing on the big guys' reputations as celebrity meccas. Copper Mountain tells skiers, "If you don't see any movie stars while skiing, relax. Every room has cable." A Telluride ad states simply: "More snow, less flakes.

Mr. Kunkel believes such potshots will prove counterproductive. The numbers appear to tell a different story. "Responses are up 20% over last year," says Jackson Hole spokeswoman Ponteir Sackrey.

Copper Mountain is similarly pleased. "We've never been compared with Aspen or Vail until now," says William DeForest, marketing vice president. He insists Copper Mountain's ads are all in fun.

As for Mr. Kasparaitis, competitors have figured out he is part of Vail's intelligence machine. But the notoriety doesn't bother him. "They already call me `007,'" he notes. "I've had three heart attacks and two heart bypasses, and I've got a pig valve in my heart. I've learned to take things calmly."