Monday, April 30, 2007

Another Rubber Tree Plant

In the Arizona desert, the start of something big--or anyway something that feels good on your hands.

From: Issue 115 | May 2007 | Page 42 | By: John Rosenthal
Forty minutes south of Phoenix, just past the once-sleepy town of Maricopa and the last bit of suburban sprawl, the Arizona desert gives way to thousands of acres lined with row after row of funny little shrubs. This is guayule (pronounced why-you-lay), a plant indigenous to the southwestern United States, now being cultivated in droves by a company you've never heard of in hopes of revolutionizing the rubber industry.

That company is Yulex (the name is a mash-up of "guayule" and "latex"), founded in 1997 with the intention of making guayule a household name. Or at least a competitive product. And that's the challenge here: Scientists have long known about the natural rubber contained in guayule bark, but they've never figured out how to extract it for less than the cost of importing tropical rubber (Hevea brasiliensis). The United States actually produced rubber from guayule during World War II, when imports from Southeast Asia were cut off. But once the war ended, economics prevailed, and America torched all its guayule fields.

Nobody gave guayule another thought until the AIDS crisis of the 1980s, when a surge in rubber-glove usage revealed how many people were allergic to latex (about 10% of health-care workers, according to OSHA). There are synthetic alternatives, but they're just not as stretchy as natural rubber. Guayule performs like Hevea but contains none of the proteins that cause latex allergies.

"Man has never been able to make rubber as well as Mother Nature," says Jeff Martin, Yulex's CEO. Martin is a career rubber guy, first as a scientist at Johnson & Johnson, then as a sales exec for London Rubber Co. and Safeskin Corp. In 1999, he joined Yulex, which had been formed around the work of Katrina Cornish (now Yulex's head of R&D), a U.S. Agriculture Department scientist who for 15 years led the agency's efforts to develop domestic rubber sources. Martin figured out how to double the latex yield of a guayule plant while screening out the proteins that cause latex allergies.

Since then, Yulex has been stockpiling additional patents and planting 4,000 acres of guayule throughout Arizona. The company has actually been producing guayule latex at its Maricopa facility since December 2006. The operation takes place in a Rube Goldberg-esque mousetrap of a structure that looks like a four-story oil derrick. From newly harvested plants to 55-gallon drums of liquid latex, the whole process is mostly automated; only five humans work amid the whipping desert winds and the pervasive smell of ammonia (a stabilizer and antimicrobial agent).

Seemingly, Yulex has reached its tipping point. It signed an exclusive deal in 2005 to sell its latex worldwide through Centrotrade, an international natural-rubber supplier and distributor. Now, Martin says, manufacturers are just waiting on approval from the Food and Drug Administration, which is expected by July. Assuming that happens, they will target a boutique niche: medical devices such as catheters or angioplasty balloons. In this market, guayule's nonallergenic qualities merit a premium over Hevea, while its greater elasticity and lower resistance make it a better choice than similarly priced synthetics.

Look for guayule surgical gloves, too. They don't cause hand fatigue like synthetic gloves do. The guayule gloves I tried at Yulex's test labs were incredibly soft. (I didn't feel right testing the guayule condoms, but I'm told they're just as effective at preventing STDs.)

Martin estimates the medical niche alone is worth $7 billion. "Our model is not to replace Hevea," he says. "It's to capture the share carved out by synthetics." And really, Yulex has no hope of going mass-market unless tropical rubber prices explode. If that changes (and it could: The International Rubber Study Group forecasts a 50% increase in rubber consumption by 2020), Yulex hopes to meet demand with guayule consumer goods. Utility gloves! Gaskets! Rubber bands! To make that leap, it would have to expand its guayule acreage to 400,000; supplying tire manufacturers, pretty much the holy grail of rubber, would require more like 4 million acres. (Beyond Arizona, Yulex is contracting with farmers in Australia.)

But wait, there's more. What's left from the guayule plant after rubber is extracted can be turned into adhesives, coatings, even termite-resistant particleboard. "Guayule also has a high energy content that has potential applications as a biofuel," says Colleen McMahan, a USDA research chemist. (Hey, guayule could be both a floor wax and a dessert topping.)

Standing amid the Maricopa guayule fields, I feel a profound sense of being in on the ground floor. Martin predicts that in 10 years, Yulex will be known for making a full range of guayule goods. "We're not talking about just coming out with a new product," Martin says. "This is a whole new industry."

Copyright © 2007 Mansueto Ventures LLC. All rights reserved.
Fast Company, 7 World Trade Center, New York, NY 10007-2195

Sunday, April 29, 2007

Wanna Buy a Watch?

The Greatly Improbable, Highly Enjoyable, Increasingly Profitable Life of Michael Kobold

By: Josh Dean

It is quite possible that Michael Kobold is one of those inexplicably lucky people, one for whom good things just seem to happen, the kind of guy who wins the lottery twice. Let me give you an example. One day in 2003 he's sitting at his desk at Kobold Watch, where he and three employees make and sell high-end mechanical wristwatches from a quiet industrial park in Pittsburgh. The phone rings, and Kobold answers it. The man on the line is from New York and he's gruff; he apparently owns a Kobold watch and likes it enough that he wants another one. Kobold, thinking the guy with the gruff New Yorky voice is a cop, offers the guy his standard 10 percent police discount. "Finally," Kobold will later recall, "he told me he was an actor and that he was in something called The Sopranos." Keep in mind here that Kobold does not watch TV. He could not name a single artist in the Billboard Top 20 and would be hard-pressed to recognize a film actor who isn't Tom Cruise or Mel Gibson. Pop culture references sail wildly over his head.

So Kobold says, "This Sopranos thing--is it a musical?" And the guy, who by now recognizes that, for whatever reason, this European fella on the phone honestly has no idea who he's talking to, answers back: "It's a show about a big fat guy, and I'm the big fat guy."

By now you've figured out who the man was: James Gandolfini.

Kobold hand delivered the watch to Gandolfini on set in New York City--a service he sometimes performs for celebrities and other important buyers--and the two hit it off. The first thing Kobold said was, "You're not as fat as I thought you'd be." To which Gandolfini replied, "You're not as old as I thought you'd be." Today Kobold weekends at Gandolfini's Jersey beach house, shacks up at his New York apartment, and refers to him as "one of my best friends." Gandolfini is not an easy man to reach. He loathes the media and doesn't even bother to employ a publicist to reject interview requests. But after six months of cajoling, Kobold finally managed to get him to speak to me for about a minute, by phone from the set of The Sopranos. "I saw one of the watches in a magazine and I called the number," he told me. "I just liked him. He was this odd guy."

Kobold's first call from Gandolfini has since become so much more than a good story; it was the third random but crucial encounter of Kobold's young life and a pivotal moment in the history of Kobold Watch. Because not only does Gandolfini not talk to journalists, he also doesn't endorse products. With one huge exception: He is now Kobold's most famous brand ambassador, as the official faces of the company are known. And, like all the others, he does it for free.

It's a crazy story, but the sort of thing you keep hearing when you spend time with Michael Kobold, 27, of Pittsburgh via Frankfurt. He's a handsome fellow, slim with short hair, good posture, and excellent diction. To hear him talk you'd know he wasn't American-born but you'd have a hard time placing the accent; it might put you in mind of those movie villains who sound like they come from a place where all the European borders come together. Kobold drives a 15-year-old Porsche and lives in a $700 one-bedroom apartment a short walk from the University of Pittsburgh. He is the founder and president of the company that bears his name. As for the watches that bear his name, they now start at $2,450.

I am by no means a watch collector--I own seven watches, not one of them worth more than $200--and so, before I set upon the mission to understand this man and his marque, I had never once heard mention of Kobold Watch. Practically speaking, most Americans have never heard of it either. Kobold is a microbrand, producing a maximum of 2,500 watches per year and residing in the rarified air of mechanical timepieces, a niche of the market based almost exclusively in Europe.

And yet, slowly and almost impossibly, with a number of missteps and a healthy dose of luck and circumstance, Michael Kobold has fashioned a brand that competes with esteemed names such as Omega and Tag Heuer (OTC:LVMUY). Granted, no one at either company is quivering in fear at the name Kobold, but the fact of the matter is that thousands of men willing to spend $2,000 and up (way up) on a watch--a well-studied constituency that does not waste time or money on poor quality--are buying from a quirky immigrant who sells watches from an industrial park in Pittsburgh.

I don't know why watches," Kobold says, by way of explaining of how he got here from there. "But at 12, I got my first good one, from my dad. It was the first year he didn't spend Christmas with us, so he got me a Cartier. I loved that watch. It was mechanical. It was high end. I thought this was my one watch for the rest of my life. But that got me thinking--which is the problem with me. I'm compulsive. I thought it was the perfect product. You buy one for life. I liked that it was built by a human. The robot thing freaks me out."

Young Kobold, whose father ran a powerful company called the Kobold Group and thus was not exactly around to nurture his son's hobbies, set about writing fan letters to watch gurus, saying, essentially, Teach me. Only one responded personally: the legendary Gerd Lang of Chronoswiss. This would be the first Random But Crucial Encounter. "To me, that was like a superhero calling," says Kobold. "Of all the watchmakers, I idolized him most."

It's a hard thing to get your head around, that a teenage boy would obsess over the idea that he had to learn the art of watchmaking. If this were a movie, he'd be sort of pathetic and would live in a tiny room under the stairs. But Kobold was a child of privilege who traveled between homes in Germany and Florida and studied at the best private schools.

"Mr. Lang taught me everything that I know today about design," Kobold says. The boy would drive back and forth to Munich from the family mansion outside Frankfurt whenever he got the chance, shadowing Lang and eventually becoming something of a surrogate son. Lang taught him the basics of watch design and also of running a watch company.

Eventually, Kobold set off for the U.S. to study economics at Carnegie Mellon in Pittsburgh. It was during one of the first summers back home that he had Random But Crucial Encounter No. 2. Because he was schooled in tactical driving--a skill he picked up at his father's request; Herr Kobold feared that Michael or his brother could be a kidnap target--Michael was often asked to pick up VIPs when they visited Frankfurt to lecture at the International School, his alma mater. One day, he was dispatched to pick up the famous English adventurer Sir Ranulph Fiennes, a man the Guinness Book considers "the world's greatest living explorer." It was raining and they were late, so the kid put his skills to the test. As Fiennes recalls, "The person they sent was a 19-year-old who looked smart and drove far too fast and that was Mike.…We just clicked completely." A friendship was born.

The birth of Kobold Watch, on the other hand, was essentially a byproduct of boredom. Kobold so loathed college that he needed a distraction. Lang told him to start a company, and so in 1999 he did, with $5,000 in cash, Lang's personal warrant (particularly useful with suppliers), and the confidence of the well born and likable. He began with a single watch: a simple design, black and sturdy, known as the Professional. On the advice of Jack Roseman, his college entrepreneurship professor, he placed an ad in a watch magazine, registered a URL, and put the Professional online for the price of $575, becoming, accidentally, one of the first--perhaps even the first, as he claims--Internet-based factory-direct watch companies.

Kobold ran the company from his apartment, keeping stock in a tiny safe. If he had an order when he came back from class, he would attach a strap to a watch, box it up, and dispatch it by mail. That first year he grossed $85,000.

The company has since grown exponentially in sales, but only incrementally in terms of personnel and office space. It occupies a single room adjacent to Kobold Instruments, the American office of his dad's company, from which he rents the space for $750 a month and borrows some corners of the factory for storage. There are just three full-time employees: chief operating officer Dan Scioscia, watchmaker Ed Cruz, and bookkeeper and jack-of-all-trades Bryan Satchell. Kobold also relies on a master watchmaker who works when needed and a third watchmaker who can be called into duty when things are especially nuts. (Later this year, Cruz will head to Switzerland to further his studies; eventually he will be certified as a master.) In a pinch Kobold still assembles watches, as he did until he hired his first employee in 2003. He keeps a jeweler's monocle at his desk for visitors who might expect to find someone more befitting the part of watchmaker than a guy in white sneakers and a polo shirt.

"We tell people we're a bunch of misfits cast away on like a desert island," Kobold says, standing outside, in a blacktop parking lot not far from the Pittsburgh airport. Down the hill is a bread company that lets him wander freely on the factory floor, snatching loaves intended for the shelves at Whole Foods (NASDAQ:WFMI). He has memorized the baking schedule, so that he knows what breads exit the oven at what times. (Cranberry pecan arrives Thursdays at 4 p.m.) Food is Kobold's only obvious vice. He is never far from a box of chocolates and at one point, back in college, he often ate a pound a day. Among his many plans is one to launch a line of Kobold chocolate bars.

It's incongruous to picture the maker of expensive watches commuting to work here, in a bland office that doesn't even have a receptionist, but it's core to Kobold's business philosophy. "I don't believe in hiring more, more, more people," he says. "That's the mistake a lot of companies make. They hire people and then lay them off. It's cyclical. I'm against that. Around Christmas, we just work harder."

Kobold pays himself a low-six-figure salary. Everything else goes back to the company. Because so much of the watch business is image and exposure, his ad budget is the largest line item after manufacturing costs. You can find Kobold watches in expensive titles like The Economist, Men's Vogue, and the Robb Report, magazines that get up to $50,000 per page. In 2007, Kobold will spend just over a half-million dollars on advertising.

Perhaps the smartest thing Kobold ever did was to ask his celebrity buyers for permission to list their names on the company website. His friendship with Sir Ranulph Fiennes expanded into business when the explorer agreed to leave Rolex, his longtime sponsor, and become the face of Kobold under its new slogan, "Embrace Adventure." (A roster of adventurers who wear Kobolds, including the likes of mountaineering legend Reinhold Messner, is prominently featured on the website.) Fiennes is not the company's most famous fan, however. Bill Clinton owns at least three Kobold watches and has chosen some very high-profile spots--Larry King Live, a Super Bowl halftime show, the cover of Ladies' Home Journal--in which to wear them. As an ex-President, Clinton cannot officially endorse anything, nor can his likeness be used in an ad, but you better believe it's a topic Michael Kobold loves to bring up.

But Kobold's biggest break of all circles back to Gandolfini. One day in late 2003, the actor was posing for the cover of GQ magazine in a Manhattan studio. Kobold was hanging around with his friend and started to snap a few photos with the idea that maybe one of them would work out as an ad. "Hey, Jim," he said, "look over here." Gandolfini looked over, smiled, and then, as actors often do, he improvised; he raised his middle finger to the camera. That shot would become an ad that has since run in dozens of magazines. The tag line: "James Gandolfini thinks Kobold is No. 1."

One of the first magazines to run the ad was the trade publication International Watch. Editor in chief Gary George Girdvainis was hesitant to take it at first. This is a staid old business; your typical watch ad is just a beauty shot of a timepiece on seamless. You might get a shiny luxury car in the background or maybe Pete Sampras in a blazer. To Girdvainis's surprise, he got no complaints. "People were offended, affronted, amused, whatever," he says. "They paid attention."

Another brand ambassador who turns up in ads is Prince Mongo, a wealthy real estate investor from Memphis who insists he is a 333-year-old envoy from the planet Zambonia. He dresses like a homeless person and never wears shoes. But he does wear a multithousand-dollar watch.

Once, Kobold was in the office alone when the king of a Middle Eastern country that cannot be named rang up. His Eminence had seen an ad for the Phantom--a matte black chronograph created for special ops soldiers--in the back of the DuPont Registry and sought to understand why, exactly, one would need a bezel that turned.

"Do you cook?" Kobold recalls asking the king, who lives in a gilded palace and controls oil reserves that yield tens of thousands of barrels a day. "Okay, ridiculous question." He tried again. "Say you're putting money in a parking meter…Oh, right. Never mind."

The king paid $22,500 for a custom gold version of the Phantom--a good deal, at the end of the day.

"It's customer service," Kobold says. "We have a margin. I'm not going to argue with the king over $1,000."

In the hierarchy of watches, the ultra high end is made up of your Pateks and your Audemars Piguets. Chronoswiss, Jaeger-LeCoultre, IWC, and some others would fall just under the top end. Below that would be the likes of Panerai, Rolex, Omega, and little old Kobold. "Compare us to Rolex," Kobold himself says. "Don't compare us to Patek."

Michael Kobold, though, has very distinct ideas about luxury. He believes in scarcity and in micromanaged quality control. His company does very limited productions. Kobold, he says, will never produce more than 2,500 watches in a year. Rolex, by comparison, makes upward of 600,000, which isn't to say it's not a brand that commands respect. If you were to check the wrists of 100 Wall Street traders, it's a virtual certainty that Rolex would predominate. It is the only watch brand to appear on the Interbrand (NYSE:OMC) "100 Best Global Brands" list.

Kobold admires the company and its watches; he just takes issue with the numbers. That level of production "runs counter to the idea of luxury," Kobold says. "It becomes a commodity. Bigger companies overproduce and discount. We do the opposite." He will build only 250 of a new watch he's developing with British racing car legend Stirling Moss. Another new model will bear the name of Philippe Cousteau, and again, only 250 will be made. With a few exceptions, Kobold retires a watch after a limited production, which not only creates demand but protects the value of his customers' investments.

Virtually every piece of a Kobold watch is made in Europe, but Kobold is proud to base his operations, and most of his assembly, in the U.S. (He's a bit of a patriot--he's stingy about discounts except to law enforcement and military personnel, and nothing makes him happier than selling a watch to a Navy Seal or a Secret Service agent.) The few other notable American watch companies are either much smaller--the tiny Montana Watch Co. and RGM Watch are developing names--or much larger and not purely makers of mechanicals, Fossil (NASDAQ:FOSL) being the most prominent example. "There's really nothing on our level in America," Kobold says. "But my theory is that when a guy collects watches, eventually he's going to end up with one of each. So in a sense there is no competition."

That may be partly true, but it's mostly just indicative of Kobold's optimism. Certainly it's expensive to start a high-end watch company, but in crucial respects the barriers to entry are low. Most important, the movement, the beating heart of a mechanical watch, is available off the shelf. (See "Very Tightly Wound,") "Anyone with a design can make a watch," says Girdvainis, of International Watch. "You can start the project on a napkin and bring it to fruition. It's basically marketing.

"There are 200-plus watch brands at Basel alone," he says, speaking of the annual Basel watch show, the industry's preeminent showcase. "And every year they pop onto the scene and then disappear as though they never existed."

And when Kobold popped onto the scene?

"I was surprised he was still here a few years later."

Just about the only thing Michael Kobold is circumspect about is money. There seems to be a watch-business code of omerta regarding sales figures--extending even to a company that sells direct to the public, publishes its prices online, and rarely discounts. But the math is simple. If you assume (conservatively) that the average sale of a Kobold watch is worth about $2,500, and if the company sold (conservatively) about 1,500 watches in 2006, then Kobold is coming off something like a $3.75 million year.

David Bowling, the associate publisher of WatchTime magazine, likes to call Mike Kobold "Big Fish," after the Tim Burton movie in which a dying father tells his son a string of exaggerated tales. As the father spins outlandish stories, they play out onscreen in wild Technicolor fancy, so that it is never clear where reality ends and fantasy begins. Bowling, who has been observing the watch industry for nearly a decade, says he has never met anyone like Kobold. They first met, he recalls, when Gerd Lang introduced him to the then 19-year-old German at the Basel watch show. Kobold had yet to produce a watch but was not shy about announcing his intentions to do so.

Over the intervening years Bowling has come to know Kobold well, as his magazine has reviewed Kobold products and run the company's ads. (In the trade magazine world, the line between ad and edit is thin and hazy and ultimately matters little since watch people mostly just like to look at the pretty pictures anyway.) Bowling says Kobold used to pop in with a bag of watches, sometimes having sold one out on the street--and often with a fanciful tale or two about his larger-than-life endeavors. Explorer, Nazi hunter, tactical driving instructor--Bowling has heard them all. He'd say, "I'm gonna run a marathon with Ranulph Fiennes…" and Bowling would find himself thinking, "No way. This guy tells some tall tales!"

"Then I turn on the television and there's Michael, and under his talking head, the words 'International Explorer.' I thought, 'Oh, my God. This is just like Big Fish.'"

And by that he means, maybe reality never really ends at all.

"Ever since then, everything he tells me I believe."

Truth be told, it's not that simple. The reason Kobold is now known to viewers of the Outdoor Life Network as an international explorer is that, yes, he did run a marathon with Ranulph Fiennes--the 2003 New York City Marathon. It was Fiennes's seventh marathon in seven days, a remarkable feat for anyone, even the World's Greatest Explorer, but even more so for a man who had undergone double bypass surgery just three and a half months prior. Kobold was by then Fiennes's good chum--he had even helped Fiennes track down a Nazi war criminal. His primary role was as a translator of old German documents, which isn't exactly James Bond stuff, but--you know--Big Fish, right?

Anyway, Kobold ran with Fiennes as an act of camaraderie and probably also, you have to think, as a smart little bit of self-promotion. After the race, the media were clamoring for Fiennes, but he quickly returned to England, leaving Kobold to answer questions. An Outdoor Life producer called Kobold and asked if he could, in fact, stand in for Fiennes for some segments being taped. One, for instance, was about polar exploration. Kobold has never explored a pole, nor seen much of any wilderness, but when asked if he'd ever been anywhere cold or forbidding, he said he had been to Alaska. Good enough! And so Kobold imparted some frosty wisdom and was forever imprinted in television history as an international explorer. He also taped a bit about mountain gorillas. He has never seen one outside of a zoo.

The trip to Alaska? It was a cruise.

This may all sound like extraneous color, the kind of life detail that fascinates mostly magazine writers, but in fact it's entirely central to Michael Kobold's success as a watchmaker. Who Kobold is and claims to be cannot be separated from his product. Without the former, there is no latter. In the opinion of his mentor, Gerd Lang, Kobold's watches aren't really that special. This is not a knock on his watches. It simply means that they aren't any more remarkable than Tag Heuers or Omegas or any other big chunky manly watches crafted of steel, adorned with tickers and dials, and sold for four figures. They all fly high, go deep, and last long. What's remarkable is that most of these companies are gigantic concerns based on the Continent and backed by vaults of cash. Kobold is owned by a 27-year-old who lives in a $700 apartment.

Kobold, of course, doesn't agree with any of this. He'll tell you all about his special Soarway case or the fact that he uses screws where others use pins, but really, what's exceptional about a Kobold watch is the way it is marketed and sold. Companies like Rolex and Omega spend millions on celebrities and ad campaigns and end up with photos of Jim Nantz in a mock turtleneck. Kobold shoots his ads himself and pays nothing to his brand ambassadors. Because he sells mostly over the Internet or by phone (a small network of authorized retailers accounts for 15 percent of sales), nearly every dollar from sales goes to his top line.

It's possible that even Kobold doesn't necessarily think his watches are better than the competition. As long as they're equal and people want to buy them, who cares? Isn't it a reality of marketing that it's all about massaging the truth? Did clutching a Bud Light (NYSE:BUD) ever actually make a man more fun to hang with?

"Some people do think he's a con man," says Jack Roseman, who chuckles at the idea. "But there's always enough truth there that you can't deny him."

Which brings me back to Big Fish. I was talking to Gary George Girdvainis a few days after speaking with Bowling. We got onto the topic of Kobold's elaborate tales, and he said this: "I saw him on TV once commenting on gorillas. I asked him, 'What the hell were you doing talking about gorillas?' He said, 'I'm not sure. They never asked if I was a gorilla expert.'"

By the way: You know what Kobold means in German?

Mischievous little gremlin.

One summer afternoon in Pittsburgh, Kobold stands up from his couch and walks me to the door that separates his company from his father's. On the other side of the wall from Kobold Watch is a large and immaculate room where a woman in goggles is doing something noisy with a pneumatic tool. Around the room are valves and gauges and oddball steel concoctions for trucks, ships, and space shuttles. "A lot of U.S. attack subs have Kobold instruments," Kobold says. "It sounds exciting but it's quite boring. Whereas we sound boring but we're quite exciting."

"I suppose if I stuck with the family I'd be the heir to all this," he says, pointing at a dim room full of doodads and thingamajigs. "I walked away from it. My father was upset. He didn't believe you could sell anything over the Internet or that anyone would buy a Kobold watch."

The only other room in the watch company offices is a space resembling a walk-in closet. It holds a large safe, some file cabinets full of parts, a number of automatic winders running 1,000-hour tests of completed watches, and the workstation of Kobold's in-house watchmaker, Ed Cruz.

Cruz sits hunched over the workstation in a white lab coat, peering through a magnifying device and making delicate modifications to a watch that will go out to a customer later that afternoon.

"Not only assembled in America; modified in America," Kobold says happily.

He opens a drawer filled with movements for the Spirit of America, the newest of his watches. He's about to release it to commemorate the fifth anniversary of September 11. For the first few months, it will cost just over $1,000, making it by far his most inexpensive model. A number will be worn by celebrities like Gandolfini, architect Daniel Libeskind, CNN talking head Glenn Beck, and Bill Clinton before being auctioned off for charity. (Kobold would eventually raise $27,000 for the USO of Metropolitan New York.)

Kobold pulls a blue crocodile band (retail price $330) from a cheap aluminum shelving unit and attaches it to a red-faced Spirit of America. Red is an unusual color for Kobold, whose signature look is solid and masculine, but with the blue band especially, this one really pops.

"This is so sexy," he says, moving the watch around on his wrist. "So beautiful!"

Dan Scioscia summons him to take a phone call and for several minutes Kobold and a customer chat about a watch. It sounds like a discussion between old friends. There is talk of food.

Kobold hangs up and moves to a computer. He clicks on an e-mail and reads it aloud. "Nicolas Cage wants to wear a Kobold in his next movie."

He smiles impishly. "I swear, it's not normally like this."

But it sort of is, even if Cage didn't end up wearing a Kobold. (At any rate, Kiefer Sutherland wore one last season in 24, and Gary Sinise wears one in CSI: New York.) In early December, I hear from Kobold again. He is back in New York to talk some business with Gandolfini, who is busy filming the last season of The Sopranos. When the final nine episodes begin to air in April, it will bring to a close one of the most popular and critically lauded programs in television history. It is sure to be a momentous pop cultural event. Anyway, Gandolfini summoned Kobold to talk shop; he had an idea. He was going to buy watches for the entire cast and crew--400 special edition Soarway Divers in titanium (retail price $3,850) for the crew, 40 of the same watch in gold (retail price $14,500 for the women's white gold; $10,500 for the men's red gold) for the cast. Even at a discounted rate, it's well over a million dollars in watches, and an almost priceless amount of publicity.

Meanwhile, the Spirit of America continued to fly out of Ed Cruz's watch safe. The first 300 for which Kobold had movements were long gone and soon the price would rise to $2,750. Land Rover had just signed for 150 custom watches to hand out at a charity event for dealers.

Kobold is celebrating as he often does--by eating. A TV producer told me that when he took Kobold to a steakhouse, Mike ordered a second cut of meat for dessert, and after I recommended a great bakery for croissants in New York, he called to tell me he'd eaten six. But on this morning, not even huge forkfuls of huevos rancheros at a Tribeca restaurant can cover up his smirk. "This is a monumental order," he says. "On top of our regular orders"--the week before he had shipped 120 watches, mostly Spirit of Americas--"we have to deliver 600 watches by March." I tell him that this all points to blowing past his annual sales cap of 2,500 watches in, like, six months. He extends his hand for a shake. "I tell you now that I will never sell more than 2,500 watches in a year." He says he will raise prices by 8 percent in April. "If I have to, I can stop advertising or put people on a waiting list."

Soon, men with sledgehammers will arrive to quadruple his office space, and none of this is the news that excites him the most. Quite recently, Gerd Lang had asked Kobold to meet him in Los Angeles for a chat. Lang had come into possession of what Kobold says is a 15-year supply of German movements from the 1960s. Kobold is giddy. He says that he can modify them as much as he needs to; each one will be disassembled, cleaned, polished, decorated, modified, and engraved, becoming, in essence, a Kobold movement--which is important not just for prestige but for the company's future. The world's largest maker of movements, ETA, has announced that it will soon produce only for brands owned by its parent company, Swatch.

"You need a couple million to make your own movements," he says. "We just saved a couple million."

Of course, I say, this means he'll have to take "Swiss Made" off the dials--nothing Swiss will remain.

"With the Spirit of America, we said that it's modified and assembled in America--and people loved it," he says. "I did that to commemorate America's resolve in the years after September 11, and also because we're based in America. Customers absolutely loved it."

By 2008, the new Kobolds will begin to appear.

"In the next five years, if predictions are right, several watch companies will go out of business because they can't get Swiss movements anymore. The fact that we have our own movements means that we're safe."

And with that he stands up.

"Let's go get croissants."

Josh Dean is a writer who lives in New York City. He last wrote for Inc. about snowboarding mogul Jake Burton.

Copyright © 2007 Mansueto Ventures LLC. All rights reserved.
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Thinking Small: VC's are learning that tiny deals can go a long way

By: Ryan McCarthy

As venture capital deals go, it doesn't seem like much--just $6,000. But that was all Sam Altman needed to get his new business, a cell phone software maker called Loopt, off the ground.

And if the investment seems rinky-dink, the investor certainly isn't. The money came from Y Combinator, a Cambridge, Massachusetts-based venture firm founded by heavy-hitting Internet entrepreneur Paul Graham. What's Graham, who created the seminal Web application that eventually became Yahoo (NASDAQ:YHOO) Store, doing playing with such trifling sums? "It's gotten to the point now where the most important things you need to found a tech start-up are food and rent," he says.

Graham is not the only one who feels that way. A small but growing number of venture firms now provide seed-level funding--thousands rather than millions--to promising young start-ups. The approach differs from the usual venture capital model, in which investors take equity at the outset and demand board seats and input in day-to-day operations. But these smaller deals make particular sense in today's marketplace, the investors say. After all, tech firms now can be launched for peanuts. Thanks to declining costs for servers, more powerful coding languages, and the prevalence of free open-source software tools, brand-new start-ups can attract sizable audiences for next to nothing. And with the market awash in private equity, competition among investors for promising companies and concepts is more heated than ever. As a result, the number of seed-level deals increased almost 50 percent in 2006, according to PricewaterhouseCoopers, the National Venture Capital Association, and Thomson Financial (NYSE:TOC). "The days of throwing huge sums of money at an entrepreneur are gone," says Mark Heesen, president of the NVCA.

Y Combinator is a good example of the trend. Launched in 2005, the venture firm now dishes out between $10,000 and $20,000 per company to fund a three-month stay in Cambridge, where entrepreneurs spend their time perfecting their technology, meeting with mentors, and swapping ideas with peers. In exchange for the cash, Y Combinator takes a small stake in the companies it funds, usually about 6 percent. So far, two of its companies have been acquired, including Reddit, a news-aggregating site recently bought for an undisclosed sum by Condé Nast. Y Combinator is banking on a similar outcome for Sam Altman and Loopt.

Altman, now 22, founded the business in 2005 while he was a sophomore at Stanford. He was looking for a way to keep in touch with his friends on campus and got the idea to write software that would allow all of his friends with GPS-equipped cell phones to find one another. Altman heard about Y Combinator's newly launched program from a classmate and got in touch. Later that year, he got $6,000 from Y Combinator and left school. He spent the summer in Cambridge developing his product, listening to guest speakers, and learning the nuts and bolts of running a business. In return, he gave his investors an undisclosed amount of common stock in his company, which is based in Palo Alto.

For Altman, the trade has been more than worth it. Last September, Loopt launched its cell phone software exclusively with Boost Mobile, a subsidiary of Sprint Nextel (NYSE:S) with 3.8 million subscribers. Boost has since invested several million dollars in a TV advertising campaign to support the launch. Altman also plans to partner with several major cell phone carriers, which will roll out the service in 2007. The company is adding staff and recently raised $5 million in Series A financing from powerhouse VC firms like Sequoia Capital, which helped launch Google (NASDAQ:GOOG), Yahoo, and PayPal (NASDAQ:EBAY). "We have five people on our team, none of whom is over 23 and none of whom has any business experience," says Altman. "Y Combinator really understands what a company needs in its first three months."

Techstars, a Boulder, Colorado-based venture firm, launched a similar program last year, offering start-ups as much as $15,000 and a three-month stay in Boulder, in exchange for 5 percent equity. Charles River Ventures, one of the nation's oldest venture capital firms, has also created a seed-level program, albeit with a slightly different approach. The CRV QuickStart program, launched in 2006, provides tech start-ups with low-interest loans of an average of $250,000 called convertible notes. Should the borrower go on to raise venture capital, the loan can be converted into equity at a discounted rate (a maximum of 25 percent off). The deal also gives Charles River the option to participate in the Series A round. "What we've noticed is that there is often an inverse relationship between the amount of money entrepreneurs raise and the quality of their companies," says George Zachary, a partner at Charles River Ventures.

For entrepreneurs, of course, these deals are a mixed bag. On the plus side, you get to keep more control. Angel investors, for example, often ask for a 20 to 40 percent equity stake right off the bat and will want to have some control of operations. Y Combinator, QuickStart, and other seed investors take much smaller stakes. What's more, there's no haggling over valuation--a process that can take months when dealing with VCs or angels. And getting accepted to these programs can be painless. You simply submit a description of your business or a prototype and sign a contract, a potentially crucial time savings that can help get your product to the market faster. The downside? If your venture hits it big, giving away a sizable stake in your company for a few thousand dollars might seem like a bad deal.

Still, QuickStart was appealing to Mike Phillips, co-founder of Mobeus, a communications software company based in Cambridge. Lacking a prototype or any significant market research, Phillips knew his company would have a hard time attracting VCs or angels. Indeed, without a clear idea of how big his company could become, he was hesitant to talk to any investors, whom he knew would ask him to place a specific value on his company and be eager to start talking exit strategies.

Instead of entering a guessing game about the future prospects of his company, Phillips used $300,000 from QuickStart--a 6 percent loan that he was able to close in just two weeks--to build a prototype and research the market while working closely with Charles River. The relationship has worked well enough that Phillips has just closed a multimillion-dollar Series A round with Charles River and Sigma Partners. The funds will help Mobeus bring its software to the consumer market, which Phillips expects will happen this summer. The ease and relative calm with which the deal proceeded almost made him forget he was dealing with a venture capital firm. "It's just a much simpler deal," says Phillips. "In a way, this is more natural than a typical VC deal because it gives both sides a longer time to get to know each other."

Copyright © 2007 Mansueto Ventures LLC. All rights reserved.
Inc.com, 7 World Trade Center, New York, NY 10007-2195.

What's up pussy cat?

Hello Kitty, the immortal queen of kawaii, is twenty-five this year. The auspicious day is not actually until November 1 but, in true blood-from-a-stone Sanrio style, the celebrations at their Puroland theme park have already begun. Charles Spreckley pays homage to the world's most profitable pussy.

There is a shop on London's Oxford Street, shopping Mecca for the mediocre, called Top Man. It used to be a bit down market but recently was born again as a huge style emporium and voted best trendy shop, or something, by FHM magazine. Dragged there by friends on my last trip home I have to admit to being pretty impressed with the transformation. Until, that was, I ventured down to the basement floor. Directly in front of the bottom of the escalator, in a prime position obviously designed to give this product range extra kudos, was a whole section of pink and red, soft and cuddly products sticking out amongst the Milan chic like a cat with no mouth. As I reached the bottom of the escalator, scenes of Shibuya, giggling schoolgirls and glowing orange skin flashed before my eyes. Could it really be? It was. Hello Kitty had come to London.

Shocked as I was that this epitome of all things infantile could possibly have invaded no-nonsense England, albeit swinging London, Kitty's presence really should have come as no surprise. You see, Kitty is from London. Oh yes. Kitty lives in London with her parents, George and Mary White. She likes collecting hair ribbons and baking cakes. (How quaint. You see - she's really as English as a soccer fan with a broken beer bottle.) Although she's pushing twenty-five, Kitty is in the third grade. Always has been and always will be. She is primarily held back by her, let's face it, pitiful class oral participation marks, due to the fact that she has no mouth. She weighs the same as three apples. In the old days it was three Granny Smiths, but after all those cookie endorsements it's now three cooking apples.

Kitty's other main hobby is making friends. Kitty first started making friends in 1975, when she appeared on a small plastic coin purse produced by Sanrio Corporation. The purse was an instant hit and propelled Kitty-chan onto numerous other products, from T-shirts to tennis rackets, coffee beans to cameras, batteries to bandaids. To every Japanese girl growing up in the 1970s, Kitty was her bestest friend. To Sanrio, she was their most profitable creation, helping pull the company from the edge of bankruptcy to become a multi-billion yen super-corporation of cute.

Although Kitty lost her spot at the pinnacle of the make-believe mountain to Doraemon et al. during the eighties and early nineties, like all bestest friends she never completely went away. When the Kitty-boom generation from the seventies reached child-bearing age in the mid-1990s, Hello Kitty staged a comeback the likes of which would have made John Travolta weep.

It started in 1996 on the back of the keitai phenomenon when Yamaguchi Yuko, top cat at Sanrio's design department, launched a range of pink satin keitai cases aimed at high school girls. At that time pink was the nail polish and lipstick color amongst hip highschoolers, and the Kitty-chan model soon became the only keitai cover to be seen with anywhere within a kilometer of the 109 Building. An undoubtedly tickled-pink Sanrio sold 600,000 of the things in a year, meaning approximately one in four of the three million high school girls in Japan owns a pink satin Hello Kitty keitai cover.

Unlike the first boom twenty years earlier, this was a calculated move by Sanrio to infiltrate the herd instincts of fashion-fickle teenagers. "We do a huge amount of research amongst the high school girls in Shibuya and Harajuku," says Sanrio's Nakajima Seiji. "It is incredibly important for selling our products because these girls will leap on any trend, if you get the marketing right. But if you get it wrong, they'll leap off just as fast."

Once her products had appeared in schoolgirls' style bibles like Cawaii!, it became official - feline fashion was back in style. So powerful is the boom-craze mentality amongst teens in Japan that once five percent of the teen-girl market endorses a product, another 60% will almost certainly follow suit in under a month. If a product really hits the kawaii spot it can reach almost 100% market saturation within a week. Hello Kitty hair clips, Hello Kitty pencil cases and Hello Kitty bag accessories all received the blessing of the masses and became, at one time or other, the accessory of choice for a whole generation. When J-Pop star Kahara Tomomi came out as a Kittyholic, sales at Sanrio stores almost doubled within days. "Since then we have been actively searching for every niche Kitty has yet to fill," admits Sanrio's Takahashi Ko.

But unlike mini-Tetris or Tamagochi, the Hello Kitty boom has proved to have incredible staying power, even second time around. Partly this is due to Sanrio's relentless marketing of anything it can think of on which there are enough square inches to print a little pink expressionless cat. Need some ear plugs? Kitty's got some for you.

The main difference now is that this time Kitty-chan has two generations of feline-friendly females in her claws - the high school girls and their mothers, pussy-power veterans from the '70s experiencing an attack of natsukashii nostalgia. "These people don't consider Hello Kitty to be childish," says Nakajima. "She is part of their memories. Men feel the same, but with Ultraman not Kitty-chan. It's more 'eretro' than childish."

This may be so, but the merging of adult and children's cultures is a phenomenon visible all around us every day and is starkly more apparent in Japan than abroad. Note the ubiquity of cartoon characters guiding us in our daily life, telling us what to do with our gomi, warning us to be careful of those nasty closing train doors and lovingly adorning our bank books and cash cards. Where the impression that having a picture of Pekkle the Duck on your cash card somehow induces you to have confidence in your bank manager comes from is beyond me. Think of the popularity of immature women amongst Japanese men, or dour-faced salarymen unashamedly reading teen comics on their way to work. The consequence of this cross-generation culture phenomenon is that fads which come and go in other countries, if indeed they come at all, can have astonishing staying power in Japan if they possess the right je ne sais quoi. Doraemon's got it. Astroboy's got it. Anpanman... hmm, dubious. Sailor Moon will never have it. But there's only one Hello Kitty.

Sanrio has another theory to explain Hello Kitty's popularity: the fact that she has no mouth. "This is probably the biggest reason Hello Kitty has become so popular," says Nakajima. "Without the mouth it is easier to imagine Kitty-chan shares whatever feeling you have at that moment. If Kitty-chan was smiling all the time, and you'd just broken up with your boyfriend or something and were very sad, the last thing you'd want to look at was a grinning Hello Kitty. Without a mouth you can imagine she is sad with you." Anyone who thinks such a deformity might be a hindrance to success need only look at Kitty. It certainly hasn't stopped her getting a boyfriend, the strong but gentle Tippy the Bear.

Or perhaps people love her for her manifold talent. She started off in the classic Hello Kitty sitting-on-the-floor pose, a position which remained unchanged until the 1980s, when Yamaguchi created the "standing Kitty" and "Kitty playing the piano." In her twenty-five years of unreal life, Kitty has had her own TV animation series, made records, worked for UNICEF as a junior ambassador, starred in comic books, endorsed pretty much any product you'd care to think of and toured the world, making friends everywhere. Kitty ain't no lazy kitchen cat, that's for sure.

But ask her legions of fans for an answer to the what's that cat got that I don't puzzle and you'll get the same, simple insightful reply. "Because she's kawaii." Ingenious.

As teenagers and their mothers shop for the latest Kitty-chan hair curlers or the limited edition Kitty and Mimi matching novelty chopstick rests, it is Sanrio which has reaped the rewards. The Hello Kitty revival was almost single-handedly responsible for the thirteen-fold hike in Sanrio's profits in fiscal 1997 to JY15.56 billion on 40% increased sales of JY112 billion. There are some 15,000 Hello Kitty products on the market, with 500 new items released each month by Sanrio. Daihatsu even produces a special Kitty-chan car - it may not be quick, but it sure is kawaii. And there's the Hello Kitty motorcycle, for the nineties bosozoku with feelings.

But it's not just Japan that's Kitty-cat crazy. It seems nothing short of world domination will stop this feline. Forty Sanrio stores have opened in the US, and there are subsidiaries selling merchandise in Brazil, Germany, France, Italy and, it seems, Britain too. Mariah Carey is a fan; so are Courtney Love and US punk queen Exene Cervenka. A hint of irony there may be, but irony alone couldn't support forty stores between California and Cape Cod. Kawaii becoming cool stateside?

Kitty's main markets outside Japan are in Asia, where she has become somewhat of a tiger, spearheading the Japanese cultural invasion of the region with everything from Puffy to Pokemon, despite the disapproval of the older generation which still regards all things Japanese with a touch of wartime distaste. Taiwan and Hong Kong have both fallen for Kitty in a big way, and Sanrio stores have opened in Indonesia, Singapore and Thailand too. "Everything is very cute and stylish, that's why we like it," 18-year-old Hong Kong school girl Amanda Yee told Time magazine recently. "Whenever I'm sad, like whenever I do badly on a test, I buy some Hello Kitty things to feel better."

The counterfeiters of Hong Kong's street markets in Mong Kok and Temple Street have taken note. These days, if they're not pushing pirates of hit Japanese TV shows, their stalls will be chock full of Hello Kitty fakes. Last Christmas, Hong Kong police swooped on one supplier of Kitty counterfeits. It wasn't difficult to spot the fakes due to a spelling mistake. They'd missed out the "o," so their T-shirts read "Hell Kitty." Some spelling mistake - or maybe they were just being optimistic?

Hello Kitty's 25th Birthday is being celebrated at Sanrio's Puroland theme park in Tama City. Special events include: Kitty-chan dressed as an angel in "Hello Kitty's Angel Fiesta," until July 13; "The Legend of Sirus," an acrobatic performance show, until November; "A Summer Festival of Hello Kitty," July 20 until August 31.

Thursday, April 26, 2007

'Manga' meets 'keitai': a match made in Japanese technology heaven

Wednesday, April 25, 2007

'Manga' meets 'keitai': a match made in Japanese technology heaven

Staff writer
We've all been there: squashed onto a rush-hour commuter train with barely enough room to breathe, let alone open up a book to while away the journey; trying desperately to crush a book into an overstuffed backpack before a long trip; or cursing our own lack of foresight while bored at school or work with no handy distraction to relieve the tedium. But Japan's enduring love for "manga" and its knack for innovation have led to a convergence so simple as to be self-kickingly obvious: cell phone manga.

High-School Girl Yukari, the titular character from"Rocket Girl," sits on the spacecraft she was chosen to pilot due to her tiny frame. (C)2007 HOSUKE NOJIRI / MUTCHIRI MUHNIH / FUJIMI SHOBO / HAPPINET (C)2007 TWN
Falling somewhere between a traditional manga -- books that are hand-drawn in a variety of styles and covering a diverse range of subjects -- and animation, the stories offer frame-by-frame graphic novels that pan across an image, display cartoon boxes with and without the speech bubble, and emit vibrations from the phone at key moments. It's as subversive as a book but a darn sight more pocketable.

Leading the charge is Takarajima Wondernet, a subsidiary of publisher Takarajima, home to such magazines as Cutie and Smart. The company has licensed around 300 manga and painstakingly scanned every frame of the paper and ink versions, giving users an instant library to download and read anywhere. But more importantly, it has been creating its own original "keitai" (cell phone) manga along with leading manga artists. The first of these, "Rocket Girl," was launched March 22, followed April 16 by "XX." Takarajima Wondernet plans to release a new title pretty much every month until yearend, and beyond.

"Other companies use ready-made manga and transfer them into a file that makes them accessible through your cell phone," K. Kurosaki, the company's auditor, told The Japan Times. "But Takarajima works with animation companies, famous comic artists, scenario writers and directors to produce a whole new product.

"This allows us to develop the stories for theatrical release or to control the merchandise rights for the characters, and to offer the customer something unique."

Each manga is split into chapters -- 24 on average, although it depends on the story. Each chapter costs 50 yen to download, although the total for the whole manga is paid in one lump at the start. Each week, a new chapter is automatically downloaded to the user's phone, ready for reading at their leisure. The manga are available to users on all Japanese cell phone networks.

The stories themselves are a varied bunch. The Japan Times tested the thriller "XX" (pronounced "Ex Cross"), whose happenings were made all the more suspenseful by the phone revealing one frame at a time. It's up to the reader how quickly they advance through the story, just as with a book -- you can savor each frame or rush through with the click of a button. The frame first appears sans speech bubbles, a great little feature, and then one click calls up the left out text.

"We want people to read the stories at their own pace," said Toru Kenjyu, the company's president and CEO. "You can go backward to refer to some small detail in the story, or even bookmark a frame and pick up from there the next time you want to read."

The other title launched so far is "Rocket Girl," which sees Japan's first manned flight piloted by a hapless schoolgirl.

The potential is clearly massive. In Japan, graphic novels have been a major part of society since the late 1940s, and the art form has become a key export to countries both in Asia and the West. But while printed books are costly to translate and distribute, digital propagation could make manga's influence practically limitless. Takarajima Wondernet already has fledgling plans to offer its stories to mobile phone users in the United States or around Asia once it finds partners in those countries, and faces relatively low costs to do so. In addition, it will be easier to tweak the digital content to suit foreign users.

"In America, we need to make sure that parents don't object to the more sensitive material in the stories," Kenjyu said. "So we can change the stories, or make different ones for the foreign market."

Other future innovations for keitai manga include adding sound, giving users one further step of immersion into a fantasy world.

But before all that, the company needs to expand its catalog. Having 300 republished titles is all well and good, but with many of these older titles available only in black and white, with static artwork, the real allure rests with the original creations.

The initial artists include Shou Tajima, a character designer famed for his work on the cartoon segment of Quentin Tarantino's "Kill Bill Vol. 1" as well as various Japanese anime and manga. These "mangaka," or comic artists, work together with storywriters, a director and a production company -- such as Production IG, best known for its work on the 1995 smash-hit anime "Ghost In The Shell" -- to create stories exclusively for Takarajima Wondernet and its customers.

But Takarajima Wondernet is not stopping there; it plans to tap into Japan's budding mangaka and expose new talent alongside its stable of established artists. To this end, the company will hold the Mobile Comic Award 2007, a contest that invites new and established artists and storywriters to submit their creations to a panel of judges. The winner will walk away with a 5 million yen prize, and see their work downloaded onto keitai across the nation. The contest will be held on Oct. 10, with an entry deadline of July 16.

"We expect this contest to generate a lot of great ideas," Kurosaki said.

He's likely to be right. After all, new outlets can inspire renewed creativity in an artist, and this brave new digital world has the potential to open many doors for the humble manga. Who knows what the next frame will hold.

Eri Nosaka assisted with this story.