Case Study 6

Harvard Business School 9-383-042 Rev. September 13, 1988

Senior Research Associate Richard O. on Werssowetz, prepared this case in association with Professor Howard H. Stevenson as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 1982 by the President and Fellows of Harvard College. To order copies, call (617) 495-6117 or write the Publishing Division, Harvard Business School, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Harvard Business School.

1

Steven B. Belkin Wake up, Steven! It must be some mistake, but American Express is calling

and says it's important. It's something about your credit rating.

His wife's voice roused Steven Belkin from a fitful sleep. A cascade of problems swept through his mind as Joan handed him the telephone:

This must be about my $15,000 overdue credit card bill. Joan hasn't realized I'm in quite so deep. . .she's going to be a bit shaken by this. I can see I'd better reassure her when I get off the phone. . .but to tell the truth, if I don't find investors soon, I'm really in trouble.

It was 11:30 the night of December 5, 1973. Steven Belkin had charged many of his expenses while trying to set-up a new group travel business. Finding investors was proving much more difficult than he had anticipated and he had had to let his bill slip for a couple of months. Steven was going to have to find a new financing strategy fast to keep The Travel Group from being a one-way ticket to disaster.

Background

Steven Belkin, age 26, had lived in Grand Rapids, Michigan as a youth. There he had his earliest business experiences. When he was 12, his grandfather had given him some salvaged automatic letter openers. Steven decided to set up a raffle, with $1 tickets and the letter openers as the prize. He enjoyed selling the tickets and felt wonderful telling the purchasers who had won. Another time he sold light bulbs door-to-door. Taking the idea from a school fund-raising project, he made it a summer job for his own profit. Steven's parents were of modest means and financial pressures were a source of family discord. Steven resolved that his own excellence and success would provide family happiness.

Several people advised Steven that the way to success was to couple engineering with business school. After graduating from high school where he had been captain of his basketball and tennis teams, Steven received an industrial engineering degree from Cornell. He concentrated on obtaining good grades at Cornell and also was active in student government and other school

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

383-042 Steven B. Belkin

2

activities to improve his chances for admittance to graduate school. After graduation in 1969, Steven entered the MBA program at Harvard. Steven recalled an interview he had set up:

I tried to figure out how best to improve my odds to get in. I came down and had an interview and talked to different people. I don't know if it helped—they say it doesn't, but I don't know. I always took the attitude to absolutely give everything you have. Then if you don't make it, at least you have given all you've got.

Steven saw life as a series of plateaus. At Cornell, grades had been important to reach the next level. Having reached business school, Steven now wanted to concentrate on learning about different kinds of business and on getting to know his classmates. Steven recalled:

I felt I needed to get there faster than the usual course. It wasn't okay for me to get there in the regular process, riding someone else's wave. I needed to get ready to jump on my own wave. In order to do that, to speed up the process, I needed to have more experience and contacts than my years. You get that extra knowledge from the experiences of others. And the families and friends of your classmates are a wealth of contacts.

Steven and another student obtained the resume concession at HBS which not only helped with expenses, but also gave him a chance to meet all members of his class.

Innovative Management

During the summer between the first and second years of the MBA program, Steven decided he wanted to do consulting for small businesses. He asked friends and professors for leads, with little success. However, he did find that four graduating students were starting a new consulting company in that area which they would name Innovative Management (IM). Actually, one student had some possible business sources and had found a financial backer who would provide $50,000 for working capital. That student had asked the others to join for a salary and 5% portions of equity. Steven joined in the same fashion and the group quickly got underway. Steven described their start-up:

We would go to bankers and individual venture capitalists who had made loans or investments in companies that weren't doing as well as they had hoped. We offered to go in and analyze the situation and either suggest that they write off the situation or propose a plan to improve the company. Then we would actually go in and implement our suggestions.

The bankers and private investors we approached often didn't have the time or the ability to do this type of analysis. So they would go to the head of a company in trouble and point out that things weren't going very well, then suggest that the company employ us for the study as a condition of providing more funds. The companies would pay our fees which usually were $4,000 to $5,000.

Initially, we would approach a new source of projects and offer to do the first job at no cost. After we showed what we could do, they would usually give us additional assignments.

Our customers were companies with annual sales from $2 million to $10 million. Most were fairly new entities. Usually we could provide a needed control system, a marketing strategy—an entire business plan. Although the owners usually were under considerable pressure to let us in, they often were very stimulated by what we did. They knew they had problems and they didn't have the luxury of our

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042

3

education. After we gave our report to the financial backer, we also gave it to the company. Often we could provide our recommendations in only three or four days.

By the end of the summer, we were so successful that we began hiring additional Business School graduates. I continued to manage several others during my second year of school.

In addition to running the resume service and continuing his consulting business, Steven did a survey of interest in small business among students in the top ten business schools as his second- year project.

My purpose was to show that there was a strong interest in new ventures and starting your own company among these students even though most schools were not teaching that. The survey confirmed this and I used the data to write some articles that we used to publicize our consulting firm. For example, we had stories in the Boston Globe and the SBANE [Small Business Association of New England] paper.

People are always fascinated about people who do surveys and who have statistics. It makes you an instant expert to have a survey! It bought us new contacts and more credibility.

Looking back, Steven commented that he had done too much during the second year:

I was incredibly busy. I cut a lot of classes. But the income was tempting and I was just ready to get the second year over with. But you are always going to have work, yet you only have the second year of business school once. I missed an awful lot. I didn't realize then that the cases contained so much practical experience—I felt they were "text-booky." I just didn't absorb that they really reflected day-today problems.

During the last half of the second year, Steven explored the job market, interviewing primarily with consulting firms. Although none of the firms caught his fancy, Steven thought the process was worthwhile:

It was a terrific educational experience to be able to talk to these high-caliber people in the different companies where they were trying to sell you and tell you all about their companies. But I guess I was a bit spoiled after already having my teeth in it, giving suggestions to people and seeing them implement them the next week. The big companies seemed a little academic—nothing really compared to what I was doing.

Steven remained with Innovative Management when he graduated in June 1971. A year later, however, the company was sold and Steven decided to leave. Steven explained:

We grew from five people to 22 in that first two years. Then one of the individual venture capitalists who had given us some work wanted to buy the company. The other four founders wanted to sell, but I thought that we would lose our objectivity as an affiliated consultant. I wasn't very happy about it, so I left the firm.

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

383-042 Steven B. Belkin

4

Group Touring Associates

Having decided to leave Innovative Management, Steven Belkin reviewed his situation. Financially, he had limited resources. Steven had been earning almost twice the $12,000 typical starting salary of his class. Joan, whom he had married just after graduation, worked as a teacher for a smaller salary. Steven had received $15,000 for his interest in the consulting company but also still owed several school loans that were not yet due for payment. Their net worth was about $10,000. Steven had no special ideas for starting a different business and was not attracted to seeking a job with a larger company. It appeared to him that he should continue small business consulting on his own.

The sale of IM took place at the end of the summer of 1972. Before Steven embarked on an independent course, however, he was approached by Frank Rodgers, the original investor in Innovative Management. Rodgers had been squeezed out of that investment when the company was sold. Rodgers said he would like Steven to work for him helping other companies in which Rodgers had investments and Steven agreed.

Steven found he had a special attraction for a group travel company that was one of Rodgers' first assignments. This company, Group Touring Associates (GTA), developed tours which were sold to various groups by mail using their membership lists. GTA had been started by Robert Goode in 1966 with the backing of Rodgers and a few other private investors. Rodgers had invested $200,000 to date, the others, another $200,000.

Sales had grown to $1.8 million the past year, but GTA had yet to make a profit. Losses had been increasing from $50,000 in 1968 to over $250,000 in 1972, the most recent year. Robert Goode had convinced his investors to continue their backing by pointing to the rising sales. He contended that the front-end marketing costs of mailings and of setting up the trips would cause him to show losses as he grew. On the other hand, the unearned customer deposits made prior to the trips provided much of the cash needed for the growing operation. Rodgers agreed that some losses might have been necessary as the company got its start, but now was alarmed by the continuing deficits. Rodgers felt that the deposit cash flow was disguising more fundamental problems and wanted Steven to help the situation.

After a brief analysis of the business, Steven felt GTA had excellent potential and that it could be built profitably with better management. He accepted an offer to join the company and became GTA's executive vice president:

Looking back at my other consulting clients, there wasn't one business that I wanted to do. I had done one project for another tour operator, but they marketed through travel agents and student groups. The combination of group travel with direct mail made this very fascinating to me—this was the business for me. Okay; I needed solid experience in this one. This was a good opportunity and I could earn a piece of the action.

A year later, Steven could point with price to sales which had grown 50% and to a profit of over $150,000. Steven credited the turnaround to basic planning and well-managed execution:

There was little organization when I came: no business plan, budgets, or anything like that. What I did was to clearly define our product and focus our operational and selling efforts. All within a budget and a plan. Before, the salespeople would try to find what trips various groups might be thinking about and come back and try to put one together. I introduced the strategy of defining the trips

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042

5

with the greatest general demand, then putting the trips together and having the salespeople fill them up.

This strategy let us buy better, put together better promotional material, and better control our costs. I was very sensitive to the fact that we were in the direct mail business rather than just the group travel business. We had to provide better value for the travel dollar and promote it well by mail.

At the end of his first year as executive vice president, Steven reopened discussion about his future role in GTA with Robert Goode. He had initially accepted a salary of $22,000 with the understanding that they would renegotiate his position after Steven had proven himself. Now Steven felt he should receive a $30,000 salary and also be given 10% of the company. Robert would not agree. Steven recalled:

Robert and I went back and forth quite a bit. GTA was finally making money and I felt I deserved part ownership. Robert wouldn't go over $25,000 in salary and wanted to wait another year for the equity.

As we reached an impasse, Frank Rodgers arranged several more meetings between us. However, now that the company was profitable, Goode no longer needed more equity and Rodgers didn't have enough power to force Goode to agree to my demands. I think Robert also felt that he had run the company for six years and, now that I had gotten GTA over the hurdle, he wanted to be the boss again.

I tried very hard to reach an agreement; I wanted to stay. I felt that if I could be earning the $30,000 and have 10% of a profitable, growing company, I would be on my way to being successful. I was really running the show; I felt I was going to make money; I was fulfilling my entrepreneurial goals.

Considering An Independent Course

As Robert Goode's position hardened, Steven began to consider leaving GTA to start his own group travel packager. Looking at the industry structure made him feel this segment was a good opportunity. Potential air travelers could arrange pleasure trips directly on their own, choose ground packages offered by "tour wholesalers" such as American Express, or select complete air/ground packages such as those organized by GTA using chartered airlines. Traits of these choices are shown on the next page.

Although the group air charter industry had only developed over the last ten years after the introduction of jet air service, this mode of touring had already become a popular travel alternative. Steven felt the key attractions were lower cost, professional tour management, and the comfort and peace of mind of the sponsoring organizations' endorsements.

The lower costs were the direct result of the use of chartered aircraft—the group tour organizer guaranteed to pay for all seats and took the risk of filling the flight. Many travelers were willing to accept the fixed schedules of charters to take advantage of the lower prices. The offer of complete tour packages with professional tour guides was convenient, especially for travelers unfamiliar with the desired destination. Also, each traveler was a member of a group which sponsored the tour and could feel that his or her own representative would make sure the tour was a good trip and that the group would receive everything for which they had paid. This was particularly

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

383-042 Steven B. Belkin

6

important in 1973 because there had been some recent publicity about tours which had been stranded or given inferior accommodations or service.

Table 1 Comparison of Pleasure Travel Options

Direct Selection By Traveler

Use of "Tour Wholesaler" Charter Tours

Air Travel Via scheduled airline. Via scheduled airline Charter

Land Arrangements Individual plans and arranges directly with provider or thru retail travel agents.

Provided by tour wholesaler.

Provided by group travel wholesaler.

Flexibility Complete. Travel timing flexible. Only selected destinations and accommodations.

Fixed departure and return schedules. Only selected destinations and accommodations.

Usual Cost Highest price. Sold as service; cost often same as direct.

30% to 40% lower.

Sold By Individual carriers, hotels, etc.; retail travel agents.

Retail travel agents. Group-sponsored direct mail, some retail travel agents.

Other Limitations Must be member of "affinity group."

Steven saw these advantages as clear distinctions between group charter companies and tour wholesalers that used scheduled air carriers. The tour wholesalers also marketed primarily through retail travel agents whereas charters tours were normally sold using direct mail.

Looking at competition, Steven knew there were ten major group tour operators in the United States. GTA ranked about seventh in that list. Where GTA provided tours for about 8,000 people per year, the largest U.S. operators moved about 50,000 customers yearly. As he viewed the market, he felt there was certainly room for one more:

In the U.S., there were regulations that you had to belong to an organization to go on a group trip. These had been eliminated about six years ago in Europe. With that, some of the group tour operators did more business than some of the scheduled carriers. The largest European companies running group charters were moving over a million people per year each. These regulations were relaxing in the U.S., so I felt there would be great opportunities.

Steven received encouragement from Alan Lewis, GTA's most productive salesman. During Steven's negotiations with Robert Goode, Steven had described his growing frustration to Lewis. When Steven mentioned that he would be happy for Alan to join him if he left, Alan suggested that Steven should go out on his own whether or not Goode agreed to his demands. Alan would like to join him and was anxious to get an ownership position himself.

Steven's discussions with Goode made no further progress, so Steven resigned and left in early September 1973. Alan Lewis also resigned and the two of them began to develop The Travel Group, their own group travel business.

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042

7

The Travel Group

Steven's idea for The Travel Group (TTG) was to duplicate the strategy that had been successful for Group Touring Associates. They would start with limited tour offerings to the most popular destinations, then expand as their reputation grew. They would use five sales representatives to call on groups across the United States to develop sponsors for direct mail promotions. They would carefully control their customer service and tour operations to minimize costs and gain customer satisfaction.

The tours they would offer were complex logistical tasks with large financial commitments. Running a tour meant chartering an entire plane which would accommodate up to 200 passengers. The company would also have to commit to blocks of hotel rooms and meals and provide ground transportation and other assorted support services. Once the package was planned, promotional material had to be written, printed, and distributed. Then inquiries had to be answered and reservations made.

To run the company, Steven would be president and major shareholder. He would be responsible for raising the capital they would need, for negotiating the trip arrangements, and for setting up the internal operations. Alan Lewis would be executive vice president. He would hire and manage the sales force, cover key clients personally, and work with sponsoring groups to fill the tours. Steven described their deal:

I had planned to give five key salespeople 5% of the company each. Alan convinced me to give him the entire 25% and he would give away whatever was necessary to hire the others. Thus we became partners, but I would have a minimum of 51% ownership, Alan up to 25%, and the remainder would be for me or the investors. He ended up keeping all 25% after hiring four other excellent salespeople. Equity for our financial backers would come out of my share.

Steven and Alan immediately swung into action. Steven concentrated first on creating a business plan, while Alan began his search for salespeople and selling efforts for an initial tour he and Steven had outlined. By October 1, 1973 the business plan was finished and Steven prepared to raise $250,000:

Developing the plan was fairly straightforward. We knew the basic charter travel destinations and seasons. We planned to run one airplane a week in season during the first year, two places a week the second, and build each year. It was important to run "back to back" tours as much as possible so that the chartered plane could take one tour and return with the prior weeks's group. I added cost projections and made cash flow assumptions to give an overall financial plan.

The plan showed an accumulated deficit of $155,000 for the five months before our first tour. Then I expected profits and tour deposits to provide cash for growth. I felt I should raise $250,000 for a sale cushion to fund that deficit with room for unexpected costs, delays, or errors.

The business plan for The Travel Group is shown in Exhibit 1. Steven intended this document to be a simple, easy to follow business plan rather than a formal investment memorandum. He explained his reasoning:

Most people make business plans so complicated that people understand nothing and get scared by them. If you repeat things two or three times, then they

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

383-042 Steven B. Belkin

8

say, "Oh, yes. I understand that." They think they understand what they are investing in. If you keep giving them more and more inputs and ideas, they just can't absorb it.

When people finish reading my simple description, they understand what I have said. That does not mean they understand the business. But hey have understood what I said, so therefore they think they understand the business.

Financing Strategy

Steven and Alan had direct experience in the operational tasks confronting them. Finding the needed financing was less familiar. However, several of Steven's earlier IM consulting assignments had involved raising money for smaller companies. Steven described IM's role:

Some situations we investigated needed more equity along with the strategic and management changes we might suggest. If asked to implement our plan, we would agree to raise the money along with providing an executive vice president to bolster management and increase the company's credibility to investors. In return, we would receive part of the equity.

We tried to keep this from being threatening to the president. Rather, we worked to convince the president that we'd be adding some new skills and helping to make the company valuable. Not like we were after the president's job.

We'd approach individual venture capitalists for investments of $25,000 to $50,000 each. Our total needs were usually $100,000 to $200,000. The Rodgers family was very well connected and we had developed other contacts in the course of our projects.

Pricing was rather arbitrary. The company probably didn't have earnings and we were selling the future. There was no scientific approach. We tried to show that the investors would double their money in a three year period, then double it again to a value four times their original investment by the end of year five.

Structurally, these investments sometimes ended up as a combination of debt and equity. This might be a loan with stock warrants. If all went well, they'd get most of their money back in a year or so and keep an equity ride with the warrants. The investors were very interested in not losing—not making mistakes, and less worried about how to get their equity out. That was less well structured—something down the road.

With this limited fund-raising experience, Steven developed a financing strategy. First, he assessed the situation from an investor's point of view. TTG had a large upside. Few start-ups could show the rapid sales growth Steven had projected. There were good margins that gave an excellent profit potential and unusually attractive cash flows. The management team had strong credentials. Steven's education was a plus and both he and Alan had been successful running a similar company. They would also be using an experienced sales force. The group travel market in the United States had much less penetration than in Europe and should grow rapidly. Finally, there was little sophisticated competition in this industry so their management skills would given them an extra advantage.

To demonstrate long-term potential, Steven could also show evidence that a group tour operator could be attractive as a public stock offering. One large U.S. tour operator had gone public in 1967 at a price of $10 per share. Within two years, the price had risen as high as $93 per share. The

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042

9

shares were currently trading for about $8, but this was primarily the result of that company's poor results in diversifying into restaurants, cruise ships, and hotels.

Steven decided that this set of characteristics made TTG a good deal for institutional venture capital groups. He would attempt to raise the $250,000 in five units of $50,000. He hoped that two or three investors would subscribe to the entire total. Steven felt this was a better alternative than going to wealthy individual investors for smaller units:

I thought the larger shots would be easier. I had the right background and credentials and a good business plan. I was sophisticated enough to present it to institutional investors. I felt this was a good package to offer, that they would buy me and would buy the business plan.

As insurance, Steven would also present the plan to a few individual investors, but his main thrust would be the institutional groups.

For leads, Steven turned to the "hit" list he had been developing since he had been in business school:

I kept a notebook of people I met who might be good contacts. I'd put in notes on meetings and phone calls, addresses, correspondence. Some were filed in various institutional categories—others were just alphabetical.

I put the people I would approach in priority by relationships. I wasn't going to ask people directly to invest. Rather, I would ask for their help: "What should I do to raise money?" I didn't want to put them on the defensive—once you ask them if they'd invest they have to protect themselves. This way, they could talk to me totally straight and really give me advice. If they were interested, then they would say they'd like to look at my plan further. Either way, they'd often recommend someone else to see.

Prospects 5: Investors 0

Steven had contacts with five well-known institutional venture capital companies. He approached each, describing his idea and asking advice. Out of these five, two were interested enough to ask to consider his plan. After being initially encouraged by this interest, Steven soon began to feel that none of these firms was likely to invest. He described the problem areas he encountered:

First, I was confronted with the developing fuel crisis. There were headlines in the newspapers saying airlines were cancelling charter flights. Only needed scheduled flights would be flying. There I was telling people I was starting a new charter company just as TWA was grounding all of its charters!

I had to explain that I could buy space on regular flights if necessary, but that the charter airlines would continue to run. The charter airlines were separate airlines encouraged by the government so that additional aircraft would be available in a national emergency. They only flew charters and were not cancelling their flights. I also argued that if flights were rationed, my old relationships with the airlines and the professionalism we would be bringing in would give us preference in charter assignments.

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

383-042 Steven B. Belkin

10

I felt I was making some of the venture capital companies comfortable about the fuel problem, but I also found them reluctant to invest because there were no hard assets to "lend" against. They'd say, "There's nothing there! You aren't buying any machinery, all the money's going for working capital. There's no product line, no proprietary technology."

I believe they were thinking that if it didn't work, with hard assets they could still minimize their losses somehow and get something out of it. I got the feeling they were just more liberal bankers, which was different from the concept that I perceived venture capitalists to be.

Approaching Wealthy Individuals

Scheduling appointments and follow-up visits with the venture capital companies took most of October with some discussions continuing into November. At the same time, Steven also was calling on wealthy acquaintances in a more casual way:

I'd say, "You know I'm raising money on Wall Street, but this might be something you'd be interested in. I'd like to get your input. Do you have any suggestions?" I'd mostly ask for advice and references to other venture capitalists or investment bankers.

As it became evident that the venture capital companies were not showing great enthusiasm, Steven more seriously pursued wealthy individuals:

I primarily approached other successful business executives who either still ran their own businesses or had sold their businesses in the last few years. I thought that a $50,000 investment would be easy for them. It was a lot tougher than I thought.

By November, I was letting everyone know I was trying to start this company. I was using every contact I could to get referrals to wealthy investors.

Out of all of his contacts, Steven developed two serious leads. One investor who was also a friend indicated he might provide $20,000. The other wanted Steven to come back when he had raised most of the remainder of the offering. Steven had expected wealthy individuals to be excited by the opportunity he saw in TTG. Now he found that wealthy individuals were going to be more difficult to attract as investors than he had anticipated.

Offer of a Bank Loan

Steven's discussions with the wealthy individual who knew him did lead to an unexpected offer of debt financing. Steven explained:

I didn't think any part of my deal was bankable at all. I clearly felt that all equity money would be required. Yet the one wealthy individual who was my friend said he did think the idea had merit and that he would introduce me to his bank. He gave me a very strong personal endorsement and to my surprise, his banker said he would match every dollar of equity I raised with one dollar of debt!

Once this bank opened my eyes, I approached several downtown banks to see what they would do. They wouldn't have any part of a loan—there were no assets to lend against.

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042

11

The bank willing to give me a credit line was located outside of the main metropolitan area. They were more aggressive to compete, but they also saw TTG as a good cash flow generator and needed the deposits.

The loan offer opened welcome new possibilities to Steven. Now if he could raise as little as $125,000 in equity, the total of $250,000 would be available to him. However, the use of the debt line would greatly increase his own exposure because the bank would be lending against his personal guarantee. He was not anxious to do this himself and the idea was frightening to Joan:

I was signing a $125,000 note, but my net worth was less than $10,000. Sure. I decided it didn't make any difference—if things went bad, I couldn't pay it anyway, so why worry about it. I would be more concerned about signing a $25,000 note because I conceivably could pay that.

But they also required Joan to sign it and this was very, very stressful for her. It was overwhelming and very upsetting. We talked about it and I said it was the same way for me too. But if it's $125,000 or it's a million, it doesn't make any difference right now.

The note Steven and Joan Belkin signed was a contingent line of credit at 2% over the prime lending rate. The credit line would equal the amount of TTG's equity up to a maximum of $125,000. Steven could draw upon the line at his discretion. However, both he and Joan were very anxious not to use this credit so that they would not actually incur the personal liability of their guarantee.

Growing Pressures

Signing the credit line agreement and the slow progress in raising the needed equity were not the only sources of the pressures Steven felt building. There was also the hectic pace of beginning TTG operations.

If TTG was to run its first tour during the late winter season, the package must be put together and ready for sale by the beginning of January. To do this, Steven and Alan had been working continually to develop their first trip and get their sales effort underway since October. By October 15, they had hired a secretary who had worked with them at GTA and set up operations in Steven's apartment. By the end of October, they had added another secretary and the first additional salesman. Steven described what it was like:

We just assumed we would get the money and that we had to make it work. So we had to get the sales.

Joan was teaching, so she went off to work at 7:00 and came home about 3:30. She had been very, very helpful in putting together the business plan, but she's a very organized person and had her own work to do. When all the people were in the he apartment, that started getting to her. Not only would there be no privacy and no quiet to plan her classes and grade papers, but sometimes we'd raid the refrigerator for lunch and she'd find that what she had planned for supper had disappeared. We would often work past seven o'clock talking to the West Coast. She could go into a bedroom by herself, but in that small two-bedroom apartment, it was more of a prison than a refuge.

We rented a 10' by 20' office that had been the rental office in my apartment building November 15, so things were a bit better, but we still used my apartment. We were sharing desks and had no place to have meetings with potential backers or

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

383-042 Steven B. Belkin

12

sales contacts. I always met people at the airport. Said I was just leaving on a flight, then waited until they had gone before going back to our office.

Steve Belkin and Alan Lewis were funding the office expenses and salaries for the other employees from their own pockets. So far they had invested almost $10,000 in cash. In addition, each of them was charging every possible expense on their personal American Express credit cards. Since both of them were traveling around the United States and Europe to talk to group sales prospects, interview sales representative candidates, and set up the first tour, they had accumulated outstanding charges of about $15,000 each. They had both been heavy users of their credit cards before which gave them high credit limits. They had made no payments since September and were starting to get overdue reminder letters which emphasized they were about to lose their hard-earned credit.

As business paused for the Thanksgiving holiday, Steven wasn't quite sure how much he should be thankful. There was little progress finding equity investors and Steven's bills and responsibilities grew.

He felt he had to provide others emotional support just when he was the least sure of what he might have done to his own position:

I was having to play Mr. Completely-in-Control: "Everything is great. We're going to get our money." The only one who was really starting to worry was Alan. He was the only one I really talked to. He hadn't had much exposure to raising money. I was starting to let him know I was getting nervous and he didn't know how to read that. "What does it mean when Steve's nervous?"

I'd also gone far enough that everyone knew I was doing this. It's not like I could have a quiet failure. I'd gone to close friends and family for contacts—the ones I'd worked so hard to impress. I'd always been Mr. Successful: "Here's Steve. He went to Harvard, was captain of his tennis team and basketball team, and always got good grades. He had his own consulting firm." Now Mr. Successful was starting his own company and Mr. Successful was in trouble.

What Now?

By the first week of December, Steven knew he had only a few weeks left before TTG would start to unravel. Finding money was the key:

I felt I really had to switch gears here. I had to scrape it together. Initially I wanted to do it the business school way. Now, I had to become a street fighter. I might have to go out and beg and it would be very difficult for me to go to people and say, "I need your help."

I only had a little time. Should I put more emphasis on the venture capital route and really try to close one of those? Should I continue with the wealthy investors? Or should I go to friends and relatives and try to piece it together in fives and tens? Because I had so little time left, I really felt the main options I should consider were to find one venture capitalists for $250,000 or to go to friends for small amounts.

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042

13

In deciding on his last ditch strategy, Steven also contemplated whether he should change his offering to be more attractive. Pricing had never been explicitly discussed with the institutional venture firms. When talking to wealthy individuals, Steven was offering to sell 250,000 shares at $1 per share. He and Alan would be issued 750,000. What ways of repricing or restructuring the deal would help him to raise his equity fast?

"This is not exactly how I thought it would be," Steven thought to himself as he struggled to find a creative solution that December evening. "This is a good opportunity. Why haven't I been successful raising the money yet? I wonder if it was a mistake to resign so quickly? Well, here I am. Maybe I'll think of something tomorrow." It seemed that he had just drifted away, when the phone rang.

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

383-042 Steven B. Belkin

14

Exhibit 1 TTG Business Plan – October 1, 1973

[The entire narrative of the business plan is reproduced below. Title pages have been removed and the layout has been condensed. Only selected financial exhibits are included.]

I. THE INTRODUCTION

The Travel Group is being formed to meet the tremendous need for low cost group travel. People now have more leisure time than ever before, and they are becoming aware that group vacations are available at prices almost everyone can afford. A week in Europe or the Caribbean for $199 per person is an affordable price for most people.

The group travel industry is less than ten years old. The market penetration for this new industry has barely begun. There are unlimited groups available. Alumni organizations, professional associations, religious groups, fraternal organizations, employee associations, unions, corporations, women's clubs, etc. The Travel Group will be concentrating on "prime groups." These are organizations that are known to be extremely responsive to group travel (e.g., Shriners, medical associations, bar associations, teacher associations).

The Travel Group will provide "deluxe" group tours. The attitude of management is to send "prime groups" during "prime season." Hotel accommodations will be at deluxe hotels (e.g., Hilton, Sheraton, Hyatt), and air transportation will be via scheduled carriers (e.g., United, Braniff, American) when possible.

The Travel Group will be classified as a "back to back wholesaler" in the travel industry. The corporation will market its group tours to travel agents throughout the United States. This should comprise less than ten percent of the sales during the first two years, but eventually should produce 25 percent of the sales volume.

The primary source of sales for the Travel Group will be through direct sales. The corporation will have their own sales force, and each salesman will be assigned a different territory.

During the first year of operations, the Travel Group projects the movement of only 6,861 passengers. The four salesmen that management will offer positions currently move more than 18,000 passengers per year. Thus, the first year projection of less than seven thousand passengers is quite conservative. Management has also allowed six months before the departure of the first flight. This will provide the sales force with more than sufficient time to sell the first back to back charters to Hawaii.

Sales of $2,766,397 are projected during this first year and a profit of $169,223.

The second year of operations, 1975, should produce sales of $8,059,589 with a profit before tax of $832,636. In five years, 1978, the Travel Group should achieve a sales volume of $18,241,542 and a before tax profit of $2,150,121.

There is a tremendous positive cash flow in the group charter business. This allows for rapid expansion without additional financing. The potential of the Travel Group is open-ended, but management will expand cautiously.

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042

15

II. THE INDUSTRY

The "back to back" group charter business is in the early stages of growth. The industry is less than ten years old. The management in the industry is quite unsophisticated. Financial and management controls are lacking. The market penetration of group charters has barely begun. Few companies have creative and organized marketing programs.

The main regulatory organization in the industry is the Civil Aeronautics Board (CAB). The trend in the past two years has been for more and more "low cost group travel." The CAB is oriented toward making travel available at a cost affordable for the mass public. This is very favorable for firms like The Travel Group and, thus, governmental regulation should be beneficial to the company.

The United States is several years behind Europe in low cost vacations. In 1972 group vacation charters provided more revenue to the European airlines than the regularly scheduled flights.

In the United States, the same growth pattern is developing. In the past four years, charters on the North Atlantic have grown at the rate of 58 percent per year. In 1972 charter flights accounted for 30 percent of all passengers flown on the North Atlantic.

It is easy to understand this tremendous growth in the group charter business by simply looking at the money saved by a typical vacationer.

Assume an individual would like to travel to Hawaii for one week. He departs on a weekend, flies coach class, and all accommodations are deluxe:

Regular Rate Group Charter Rate Savings

Air Fare $510 $225 $285 Hotel 140 84 56 Dinners 56 40 16 Transfers 20 10 10 Tour Operator's Fee 0 113 -113

TOTAL COST $726 $472 +$254 **** **** *****

Thus, an individual can save 35 percent, or $254, during a one week visit to Hawaii.

III. THE COMPANY

The Travel Group will be selling deluxe "back to back" group charters. "Back to back" means that, for a set period of time, groups will be sent every week to a particular destination. The aircraft, which takes one group to the destination, will pick up the group that is ending their vacation. This allows substantial savings on air fare. There is also tremendous buying power at the hotels because rooms are utilized every week.

These cost advantages will allow The Travel Group to sell vacations to destinations all over the world at savings of 35 percent or more (see Industry section).

The Travel Group will have salesmen assigned to different territories in certain sections of the country. These salesmen will call on prime travelling groups. They will be selling deluxe packages, principally during prime season. The "sell" is usually easy because the organization has nothing to lose and much to gain. The Travel Group will pay for the mailing of a brochure describing the vacation to all the members of the organization. For each reservation the group produces, the

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

383-042 Steven B. Belkin

16

organization will be given about $15.00. Thus, if a group fills a 150-seat airplane, the organization will receive $2,250 (150 pax x $15) and will have provided vacations for their members at substantial savings.

Groups that will be approached by the sales force include Shriners, Masons, Medical Association, Bar Association, Elks, Moose, alumni associations, teacher associations, unions, employee groups, and Knights of Columbus. There is an unlimited number of groups. Management will develop a mailing list of all the prime groups in the country to provide additional direction for the sales force.

The cash flow in the business is very favorable. Deposits from passengers are often received more than ninety days in advance. Final payments from passengers are due forty-five days before departure. Payments to the airlines occur thirty days before departure, and hotel bills are not paid until thirty days after departure. Thus, the majority of receipts are in-house forty-five days in advance of departure while disbursements occur fifteen to ninety days after the initial receipts are in.

IV. THE COMPETITION

The group travel industry is in its early stages of growth. The industry is less than ten years old, and there is only a limited number of group tour operators. Sophisticated and experienced management is scarce in the industry. The few "back to back" group travel companies, which do exist, have had substantial sales growth in the past three years. In the last eighteen months, there have been several new companies started that have been running "back to back" charters. One of these companies had sales of close to $8 million during its first year and before tax profits of over $500,000.

Competition in the industry has not developed to the point of pricing of the same packages. Sales growth is achieved by contacting the proper groups and then appropriately following up these leads.

"Back to back" operators always concentrate on a few destinations. With the vast number of destinations, there is limited competition among tour operators in providing packages to the same place. For instance, one of the new tour operators is just specializing in running trips to Greece, while another has programs just to the Orient.

Currently the East Coast is the only section of the country that has become familiar, to some extent, with group charters. Amazingly sixty percent of all charter flights are out of New York. The South, Midwest, and Central States have barely been touched.

Less than five "back to back" tour operators have a national sales force. The Travel Group's national sales force will be comprised of experienced travel salesmen who are currently working in different territories throughout the United States for other tour operators.

V. THE MANAGEMENT

There are two key departments in the group charter business. One is sales, and the other is operations. By providing a well-organized business plan and by making equity available, The Travel Group has attracted some of the most qualified people in the industry.

Mr. Steven B. Belkin will be President. He will be responsible for directing the operations of the company. Mr. Belkin is thoroughly familiar with the day-to-day operations as well as the overall business planning of a "back to back" tour operator.

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042

17

He is a graduate of Cornell University and Harvard Business School. He was one of five founders of Innovative Management, a small business consulting firm in the Boston area. Some of his consulting projects included the development and implementation of a marketing program for a ski charter travel firm, running a chain of sport stores with sales of over six million dollars, and serving as president of a film school and production company. When Mr. Belkin left and sold his interest in this consulting firm, it had grown to twenty-two full-time consultants.

For more than a year, Mr. Belkin has been devoting full time to a travel group charter firm which was in severe financial difficulties. With the development and implementation of a new business plan, creation of a national sales force, and tighter management and financial controls, this firm has now been turned around. The year before Mr. Belkin's involvement, the firm had sales of approximately $1,800,000 with a loss of over $250,000. This year the company has already reported a respectable profit for the first six months and has more than doubled the previous year's sales.

The sales force that is available is comprised of some of the best salesmen in the industry. Each man has thorough familiarity and personal contacts with the prime groups in the different sections of the country.

The sales team will have a minimum of six months before the first back to back charter will start. This should provide more than sufficient time to sell the program. During the first year of operations, the sales force needs to move only 6,861 passengers. This year the four salesmen being considered moved more than 18,000 passengers. Thus, the first year programs should be sold fairly easily, and this will allow the sales team to start concentrating on the second year programs well in advance.

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

383-042 Steven B. Belkin

18

Exhibit 1 (continued)

VI. THE FINANCIALS

[Some exhibits omitted.]

A. TRIP COST ANALYSIS

Exhibit I Hawaii Exhibit II San Juan Exhibit III Ad Hoc Exhibit IV Acapulco Exhibit V Spain

B. PROFIT AND LOSS STATEMENTS 1974 AND 1975

Exhibit VI Pro-forma Profit+Loss Statement (1974 and 1975) Exhibit VII Plane+Passenger Projections (First Year 1974) Exhibit VIII Monthly Pro-forma Profit+Loss Statement (First Year 1974) Exhibit IX General and Administrative Expenses Exhibit X Plane+Passenger Projections (Second Year 1975) Exhibit XI Monthly Pro-forma Profit+Loss Statement (Second Year 1975)

C. CASH FLOW ANALYSIS

Exhibit XII Cash Flow Assumptions Exhibit XIII Monthly Cash Flow Projections (First Year 1974) Exhibit XIV Monthly Cash Flow Projections (Second Year 1975)

D. FIVE YEAR PROJECTIONS

Exhibit XV Pro-forma Profit+Loss Statements (1974–1978)

A great deal of time and effort has been devoted to the preparation of the following financial exhibits. Management will use them for budgeting as well as for projections.

The Trip Cost Analysis section clearly outlines the revenues and expenses associated with each trip on both a per passenger and per airplane basis. The air fare, hotel, meals, transfers, mailing, giveaways, and load factor are all expenses that have been determined by historical statistics and actual experience.

The Profit and Loss Statements for the first two years have been prepared on a month-to- month basis. Management has determined the number of planes and passengers that can be accommodated each month to a particular destination. During the first year of operation, no passengers are projected to be moved until June. There is a good possibility that ad hoc programs will be sold before this time, so sales and profit could be greater than projected.

The Cash Flows have been prepared for the first two years on a month-to-month basis. The cash flow assumptions are very important, and management feels the assumptions made are conservative.

The five year pro-forma profit and loss statement illustrates the potential of this new and growing business. The Travel Group hopes to have sales of over $18 million within five years and profits before tax of over $2 million.

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042

19

Exhibit 1 (continued)

Exhibit I COST ANALYSIS PER PASSENGER HAWAII

Selling Price $429+10% = $471.90

Direct Costs: Air $225 Hotel 84 Meals 40 Transfers 10 -359.00

Gross Profit Before Acquisition Costs $112.90

Acquisition Costs:

Mailing Costs 10¢ Brochure +Non-Profit Mailer (.50% return rate) $ 20.00 Giveaways ($20/res.) 20.00 Load Factor (90%) _ 20.00 _- 60.00

Gross Profit $ 52.90 ***********

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Hawaii Trip Analysis Per Plane Total Sales = $471.90 x 135 passengers = $63,706 Cost of Sales = $419.00 x 135 passengers = $56,965 Total Profit = $ 52.90 x 135 passengers = $ 7,141

Options: $10 net/passenger = $1,350/plane

Options include additional items such as bus tours which are arranged through the charter operator.

Exhibit 1 (continued)

Exhibit VI THE TRAVEL GROUP, INC. PRO-FORMA PROFIT + LOSS STATEMENT (1974 AND 1975)

1974 1975 SALES $2,766,397 $8,059,589 Cost of Sales _2,345,594 _6,870,953 Gross Profit $ 420,803 $1,188,636 General+Administrative __251,580 __356,000 Profit (before tax) $ 169,223 $ 832,636 ************ ************

e.p.s. $ .17 $ .83 Value/Share (10 multiple) $1.70 $8.33 Number of planes 44 128 Number of passengers 6,861 22,183

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042 -20-

Exhibit 1 (continued)

Exhibit VII THE TRAVEL GROUP, INC. PLANE AND PASSENGER PROJECTIONS FIRST YEAR OF OPERATION (1974)

January February March April May June July August September October November December Total

HAWAII

Passengers 750 600 750 600 600

750

600

4,650 Planes 5 4 5 4 4 5 4 31

SAN JUAN

Passengers 895

716

1,611 Planes 5 4 9

AD HOC

Passengers 150 150 150 150 600 Planes 1 1 1 1 4

TOTAL PASSENGERS 0 0 0 0 0 900 750 900 750 600 1,645 1,316 6,861

TOTAL PLANES 0 0 0 0 0 6 5 6 5 4 10 8 44

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042 -21-

Exhibit 1 (continued)

Exhibit VIII THE TRAVEL GROUP, INC. PRO-FORMA PROFIT + LOSS STATEMENT FIRST YEAR OF OPERATION (1974)

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

383-042 Steven B. Belkin

22

Exhibit 1 (continued)

Exhibit XII CASH FLOW ASSUMPTIONS

A. Receipts

1. Deposits and final payments are only received 15 days before the date of the trip (very conservative since final payments are due 45 days before departure, and deposits are often received 90 days in advance).

2. Net Operational Tour Receipts are received the week of the trip.

B. Disbursements

1. Airlines are paid 30 days in advance.

2. Hotels are paid 30 days after the trip (requires letter of credit and cash deposits).

3. Meals and transfers are paid for 30 days after the trip.

4. Acquisition costs are paid 30 days in advance.

5. Ad hoc program payments require $10,000 deposit 30 days before departure and the balance paid the week before departure.

6. General and Administrative Expenses are assumed to be paid/disbursements during the month they are expensed. (Conservative since telephone and travel and entertainment expenses are usually not disbursed until a minimum of 30 days after being expensed. These two expense categories are approximately 20% of G + A expenses.)

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042 -23-

Exhibit 1 (continued)

Exhibit XIII THE TRAVEL GROUP, INC. CASH FLOW PROJECTIONS FIRST YEAR OF OPERATION (1974)

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042 -24-

Exhibit 1 (continued)

Exhibit XIV THE TRAVEL GROUP, INC. CASH FLOW PROJECTIONS SECOND YEAR OF OPERATION (1975)

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.

Steven B. Belkin 383-042

25

Exhibit 1 (continued)

Exhibit XV THE TRAVEL GROUP, INC. PRO-FORMA PROFIT AND LOSS (1974–1978)

1974 1975 1976 1977 1978 SALES $2,766,397 $8,059,589 $12,029,894 $15,124,878 $18,241,542 Cost of Sales 2,345,594 6,870,953 10,305,490 12,910,496 15,481,421 Gross Profit 420,803 1,188,636 1,724,404 2,214,382 2,760,121 General and Administrative 251,580 356,000 480,000 540,000 610,000 Profit (before tax) $ 169,223 $ 832,636 $ 1,244,404 $ 1,674,382 $ 2,150,12

e.p.s. $ .17 $ .83 $ 1.24 $ 1.67 $ 2.15 Value/Share (10 p/e) $1.70 $8.33 $12.44 $16.74 $21.50 Number of planes 44 128 192 240 288 Number of passengers 6,861 22,183 33,275 41,595 49,915

For the exclusive use of C. ALFARO, 2023.

This document is authorized for use only by CLAUDIA ALFARO in ENT 4113- Fall 2023 taught by DILEEP RAO, Florida International University from Aug 2023 to Jan 2024.