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Stanford GSB News

 

Entrepreneur Describes the Path to Profitability

March, 2003


Sherbrooke

STANFORD GRADUATE SCHOOL OF BUSINESS—They went 18 months without a salary, made 700 presentations seeking venture backing, and admit to having moments of great doubt, but today classmates Kathy Sherbrooke and Janet Kraus can look proudly at Circles, the profitable six-year-old company they have created.

Their original idea for Circles was to create a personal services firm that would use Web technology and fax-back services to help consumers find dog walkers or house cleaners. "Today, that's just a small part of what we do," Sherbrooke told a Business School Women's Conference workshop audience in March. Circles is a concierge and relationship marketing service, used by some clients to build loyalty among their own employees and by others such as American Express to provide customer services.

Sherbrooke's favorite request handled by Circles was made by a businessman about to visit a dignitary of an African nation. The caller wanted to know what the proper gift would be, and a Circles employee dug into research. "The answer was that the perfect gift would be a flock of sheep. And we arranged to have the sheep there when he needed them," she said. Then there was the New Jersey banker whose black cat wandered off at night (the answer: night goggles that let him spot the errant feline). More routine calls ask to identify top restaurants in unfamiliar cities, to order and ship the perfect birthday present for Mom, or to book a fishing lodge in Montana in June.

The quality of service is the firm's most important asset. "People want to have confidence that you will follow through. How you treat them is the key," she said. "You can get them the right answer but deliver it the wrong way. You can not get them into the restaurant they want but they can still be thrilled with the service you provide."

The idea began when Sherbrooke and Kraus, both MBA '94, met at math camp before their first quarter at the Business School and agreed they wanted to create a partnership to found a business. At graduation they both took jobs but vowed to start their own firm in about three years. "We didn't want to get too comfortable with good salaries and routines," said Sherbrooke. "We thought the biggest risk was not taking a risk."

Before they knew what their product would be, they spent months debating what the company would feel like. "We asked: What's important to us? What are our values? What are our motivations and what are we good at?" She doesn't remember a Eureka! moment, but they did settle on a personal service business model and started creating a firm. As Circles grew, Sherbrooke and Kraus realized that their original target of selling to consumers wasn't as important as the market for selling their services to employers as a benefit to their employees. Next came firms wanting their concierge service to increase the loyalty of their best customers.

Today, Circles is a $15 million company, but the startup phase was the traditional pattern of poverty and hard work.

"Janet and I thought we could go six months without salary. It was actually 18 months. We had $30,000 in credit card debt when we finally paid ourselves $21,000 in salary." Their first backing came from "friends, family, and fools."

"We treated them like professional investors. We made it clear to all that when they wrote a check they shouldn't expect to get it back." Dressing in business attire to present formal reports, they gave their investors periodic updates. "We didn't want the next time they heard from us to be at Thanksgiving dinner," Sherbrooke recalled.

After 700 presentations, Sherbrooke and Kraus received $15 million in first-round venture funding and a message that "if we wanted to be players, we had to spend to grow." So, uncharacteristically, they spent money, including millions to build a database of information to help answer queries. "We spent $13 million in 12 months, and I'd say that half of that got us zero value. We finally said 'STOP!' and then stretched the next $1 million for eight months while we went back to our knitting." They concluded, among other things, that knowing sources for information was much more valuable than having the information itself at their fingertips.

"Particularly at the beginning," she advised would-be entrepreneurs, "seek out industry experts. They love to share with you what they've done well. We tried to identify someone who has gone through this before—who has faced a similar situation—and bounce ideas off of them. But in the end, go with your gut."