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Tanner Montague came to town from Seattle having never owned his own music venue before. He’s a musician himself, so he has a pretty good sense of good music, but he also wandered into a crowded music scene filled with concert venues large and small.But the owner of Green Room thinks he found a void in the market. It’s lacking, he says, in places serving between 200 and 500 people, a sweet spot he thinks could be a draw for both some national acts not quite big enough yet for arena gigs and local acts looking for a launching pad.“I felt that size would do well in the city to offer more options,” he says. “My goal was to A, bring another option for national acts but then, B, have a great spot for local bands to start.”Right or wrong, something seems to be working, he says. He’s got a full calendar of concerts booked out several months. How did he, as a newcomer to the market in an industry filled with competition, get the attention of the local concertgoer?

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by Beth Ewen
May 2003

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High stakes test

High-stakes test

Carla Bainbridge was on the beach in St. Thomas in 2001 when she got the phone call. “The venture boys came in today, and those 150,000 shares of founders’ stock are not worth anything,” she recalls hearing. “So I ordered another mai tai and started making my list.”

The list had new rules about how she wanted to run the rest of her life. Worn out from three start-ups and tons of traveling, from now on she’d always be there to put her daughter on the school bus, she decided.

The big rule: Never again would she rely on outside funding. “I had a bad experience with venture capitalists. I was naïve,” she says. “I could go to a bank but I’m scared — it’s probably not even rational at this point.”

Bainbridge, who’s 39 and the president and CEO of two-year-old Predictive Profiles Inc. in Bloomington, says she never misses a morning at the bus stop. Her vow against outside funding, however, is becoming harder to keep as she looks for ways to attack a huge new market.

Predictive Profiles neared $1 million in annual revenue by selling pre-employment screening tests to companies trying to hire better sales managers and other revenue-generating people. That part of the business is “very profitable,” Bainbridge says, and up by 50 percent the first quarter of this year despite drops in corporate hiring. A surprise uptick for her company is coming from small companies, under 100 employees, who are looking for any edge in tough economic times.

The market opportunity that Bainbridge is newly targeting is massive: screening tools for front-line employees of the nation’s retailers, restaurant companies and other service firms. “Next to government it’s the largest market. There are more hourly employees than any other kind. And in the restaurant/hospitality industry, it’s 200 percent turnover. That’s so expensive,” Bainbridge says.

“That’s kind of exciting,” she soon realized about the market. “That’s a lot of money. This is it.”

Instead of raising money, Bainbridge is taking a low-cost approach to grabbing market share. First, she courted carefully selected local customers, including Buffets Inc. and Caribou Coffee Inc., and offered to develop pilot online tests, initially for free, for their employees at some of their locations. Using what she and her five employees and eight subcontractors learned, she tweaked the tools so they didn’t, for example, screen out every candidate who applied.

Next, in the first 120 days of this year, she signed up customers, deliberately in different industries, with multiple locations and began rolling out the tests. She’s also crunching the numbers to see exactly what her costs will be to expand. If those half-dozen customers take the tests to all their locations — a big if, of course — her company could balloon to $6 million in annual revenue. She’s considered and dropped the idea of hiring a large sales staff, because that takes money. Instead, she’s talking to distributors who field major sales forces and are looking for more products to add value to customers.

At least one competitor says it can’t be done on the cheap, not by anyone who’s seriously interested in growth. More than 1,000 players sell assessment tools for employee screening, says Katrina Dewar, CEO of ePredix in Minneapolis. ePredix  has spent “millions and millions and millions” on technology, in order to make its tools work with any Fortune 1000 company’s computer platform. “If you have aspirations to take up significant market share, you need significant money or significant cash flow to do that,” Dewar says.

But Bainbridge is a believer who covers a formidable talent for identifying market opportunities and courting customers under disarming words like “gol” and “wow.”

“Analysts are saying this is a big thing,” Bainbridge says, midway through a detailed discussion about her plans. “I think we’ll just go grab market share. I don’t think you have to sell the store to grow. I just don’t believe it.”

The history of Predictive Profiles can be traced to Bainbridge’s frustration over hiring salespeople. “There are certain types of people who can do well in the small, entrepreneurial companies. That kind of individual is very hard to find,” she says. “I’ve hired some great people over the years, but they wouldn’t survive. They’d be looking for the procedures manual.”

She met about 10 years ago a researcher in Canada, John Marshall, who holds a Ph.D. and had developed psychometric tools for predicting just who would thrive in fast-growth firms. She purchased the exclusive right to those tools and began a business that was profitable from the start. Candidates go online and take 30 to 40 minutes to complete an assessment, which scores them and generates a 30-page report for the hiring manager.

Then in the middle of last year she talked to Buffets Inc, the all-you-can-eat, serve-yourself restaurant company. “They said, ‘We’re familiar with tools for managers and salespeople, but can you screen people in the front lines?’ ” Bainbridge recalls. “So I said, ‘Gol, I think we can.’ ”

The first test was too tough — no one was passing it at the 12 local outlets for the pilot. So the test was tweaked, and it soon began to serve two purposes Bainbridge hadn’t thought about. It automated the application process for the employee, and it allowed the employer to mine lots of data on its employees for use in human resources purposes.

Buffets has since discontinued the pilot and will not roll it out, because managers at local restaurants say they don’t see enough value for the cost, at least now when so many applicants are available. Mike Shrader, executive vice president of human resources and training for the Twin Cities-based company, says the problem wasn’t Predictive Profiles’ test. “The instrument was good and it did what it purported to do. So I couldn’t say enough about Carla in terms of her dedication,” he says. “She’s a hard, tireless worker.”

More important than the one customer, Bainbridge began to see the possibilities in a test that costs $5 to $8 per candidate who takes it, at companies like Buffets that hired 53,000 employees last year. “I went, ‘Wow, that’s really interesting.’ I said, ‘That’s cool,’ ” Bainbridge says. And suddenly her modest employee assessment company developed a potentially big future.

The process is vintage Bainbridge. “I have a tendency to go into established businesses and say, ‘Where’s the real opportunity here?’ ” she says.

She worked in the ’80s at an environmental consulting firm whose owner was struggling, and the firm grew to $20 million before it was sold, she says. Next came a company that built a search engine back when there weren’t search engines. “We did OK but ran out of money. We did sell the technology and got out whole,” she says.

Then she went to SPS Commerce in St. Paul. Just as she did at the other firms, she says, she talked to customers to find their needs, and reported back as the company developed a software package that would help companies connect up and communicate.

At one point, retailer Sears named SPS Commerce its vendor of the year. To gain Sears as a customer, Bainbridge says she once staffed the start-up office with temporary employees so it would look more like an established concern.

“She was a take-charge, ‘do it’-oriented lady,” says Gary Anderson, now president and CEO of NetBriefings in St. Paul. He hired Bainbridge at SPS. “I think she’ll bring drive and motivation” to her new venture.

Bainbridge points out another pattern — that other people get rich off companies and she doesn’t. With SPS Commerce, where she worked until that day on the beach in 2001, she says she’s fighting. She filed a claim against the company which she believes will be settled in her favor. “I’m going to win. They’re going to owe me a lot of money,” she says.

Archie Black, CEO of SPS Commerce, says the claim, filed with the Equal Employment Opportunity Commission, will not have a large impact on the company regardless of its resolution. In late March, the company received a “no probable cause” decision from the commission, he says. “That’s a victory and supports our case,” he says.

Black was chief financial officer in 2001 when venture capitalists, led by St. Paul Venture Capital in Eden Prairie, moved out many senior managers and promoted Black to the top job. Michael Gorman of St. Paul Venture Capital, who was on the board of directors at the time, declined to comment on the Bainbridge matter, referring calls to Black.

Gorman’s involved in multiple area deals, including the backing of Xiotech, which went from zero to selling for $360 million in four years in the late 1990s. St. Paul Venture is backing Compellent Technologies, the second company launched by Xiotech founder Phil Soran and the subject of an Upsize Minnesota cover story in February.

Don Keysser, founder of Hannover Ltd. in Minneapolis and a veteran of local financing deals, isn’t familiar with the SPS Commerce situation specifically, although he questioned whether all of the founders’ shares could really be worth nothing. All shareholders need to look carefully at terms of any compensation arrangements, he says, including shares granted.

In general, Keysser continues, changes like those made at SPS Commerce aren’t surprising. “It’s not uncommon. From their perspective it’s their money,” he says about venture capitalists “They’re taking over an operation that may or may not be sound and they’re going to put their own stamp on the place.”

He says a person who goes after a venture-backed company isn’t necessarily blackballed with other VC firms. “There’s sort of a myth that once you sue you’re dead meat. I think that’s overstated,” he says. “There are certainly cases where it’s richly deserved. There are other cases where it’s a vengeance shot.” More important to an individual’s reputation, he says, is track record in building a company.

Keysser says companies can successfully grow without getting outside funding, depending on the structure and the capital needs. He also endorses the method of small companies joining a larger strategic partner. “One of the techniques in growing a business is partnering up with a big boy or big girl, where you can provide added value to them,” he says. “A strategic partnership is often a very clever way of building a company, and minimizing your own personal risk and capital.”

He adds a warning: “The danger is they want to own part of you, and not out of benevolence, so you may lose some of your independence. But it’s a balance, and it provides an entree into a market.”

Bainbridge says she’s in promising talks with Sysco, the food distributor that has more than 180 salespeople in the Midwest. Food is a commodity that Sysco sells to grocers; Sysco wants other products it can sell to the same customers to add value. Enter Predictive Profiles’ front-line employee assessment tool. In late March, talks were ongoing but no decision had been made.

Whatever the ultimate sales channel, Predictive Profiles will compete against more than 1,000 U.S. vendors who sell self-assessment tools, according to Dewar of ePredix, including many who are well ahead.

The business is so fragmented that competitors dismiss each other. Bainbridge says she’s never heard of Dewar’s company, which is based in Minneapolis and employs more than 100 people. Dewar says she’s never heard of Bainbridge’s company. Dewar also discounts Unicru Inc. as “primarily a hiring management system” that used Dewar’s company’s intellectual property before ePredix bought exclusive rights to it.

Unicru is a 14-year-old company that until recently supplied the kiosks and the pre-hiring tests for giant retailer Target’s job candidates. Minneapolis-based Target is no longer a customer, opting for an internally developed system, says Kim Beasley, public relations manager for Unicru in Beaverton, Oregon.

Unicru has focused on its products for front-line employees for half a dozen years. Beasley says employers are clamoring for it. “It’s a real pain point for them, to be honest. Turnover in retail and restaurants is 100-plus percent a year,” she says. Unicru’s tools help managers “(a) hire better in the first place, and (b) increase retention rates.”

“It gives them a lot more time to focus on the other operational functions in the restaurant instead of this churn and burn,” Beasley says.

Unicru posted a record year of $21.1 million in 2002, Beasley says. “For a while we were alone in this market,” she says, meaning tests for front-line employees — although people in the industry call them assessment tools rather than tests. “It’s been in the last couple of years that we’ve seen competition spring up. We’ve driven some attention to it as well.”

She points to a report by the Institute for Retail Excellence, which pegs the cost of hiring one person within the retail industry at $1,500 to $6,000. “It can really add up,” she says. One of Unicru’s grocery customers “had a 200 percent ROI from our products. They see it as a revenue tool for HR.”

Other players like ePredix or Predictive Profiles, neither of which Beasley says she’s never heard of, don’t concern Unicru. Rather, Unicru execs worry about “the PeopleSofts and the Oracles of the world, just because they’re so large and involved. They could throw a couple hundred engineers on it and have a solution tomorrow,” she says.

EPredix is attacking the market in a different way. Dewar built and sold a similar company in Australia before moving here, and used proceeds from the sale to start ePredix. The company became profitable after one year, in 2000, she says, and started to self-fund at that point.

In January 2000 ePredix raised subordinated debt to buy more assets, adding to the purchase of Personnel Decisions Inc. with other intellectual property. “You have to accumulate enough data with your intellectual property to cover all areas. The one-test-fits-all just doesn’t work. You cannot penetrate the market that way,” Dewar says.

“Second, you need to be serious about technology and view technology as a core competency,” Dewar says. “You have to have the capability to integrate your system with other systems used by Fortune 1000 companies.”

Dewar says cutbacks in hiring will strain smaller businesses in the field. “The barriers to entry are good, and we’ve got good cash flow, and we’re very profitable in this downturn,” she says. “So we’re just trying to increase barriers to entry all the time. Instead of scaling back on investment, we’re taking the opposite view. Let’s re-invest that money.”

Bainbridge, meanwhile, keeps chipping away at new customers, whom she meets with personally. Scott Peterson, senior vice president of human resources for Lifetime Fitness Inc. in Eden Prairie, is rolling out a one-club pilot test to all Twin Cities locations. Lifetime Fitness has 29 health clubs nationwide, with more than 6,000 employees. The clubs hire a couple thousand employees a year.

Peterson started using Predictive Profiles’ tools in its new clubs, where typically 200 to 225 employees are hired. “Because of the high volume, and because of our service offering to our customers, we thought we needed to be more systematic. And because we’re field-based, we wanted to provide the field with technology.

“Predictive Profiles for this kind of mass hiring is relatively new on the horizon, and because of that they were very easy to work with,” he says. “The other point is they were doing some work with other comparable employers, like Caribou, retail-oriented companies that stress service.

“If you have a tool that’s cost-effective and delivering, we thought let’s roll with it. Because Carla is flexible, we can make some adjustments,” Peterson says. He praises Bainbridge. “She’s very customer-oriented. She understands customer service, and that’s what we’re about. So it’s the combination of her responsiveness and being proactive.”

Besides signing up the right customers to develop the company’s tools, Bainbridge is getting a handle on costs to ramp up her company. She set financial projections for the next three years using information she had in December. “Now in March I have more information. Then, based on that, we adjust.” That will be her focus for the next couple of quarters.

That, and following her rules, including these: “Don’t let fear or other people drive my decisions.” “Be self-funded.”

“I’m going to go back to the old-fashioned notion with controlled growth and with conservative growth. And I think it can be done. I’m going to stick to that,” she says. “I do believe there’s a way to do it. And I’ll find it.”