Able Planet Case StudyEssay Preview: Able Planet Case StudyReport this essayHow can a small company find capital to finance an innovative new product?Venture capitalist Kevin Semcken discovered Able Planet, a small startup in Wheat Ridge, Colorado, that produces headphones with an imbedded magnetic coil to enhance sound quality, at a technology conference in Denver, Colorado. Semcken, who suffers from a hearing loss in one ear, was intrigued and tested the small companys product by listening to Dean Martins “Youre Nobody Til Somebody Loves You.” “I was instantly a fan,” he says. Semcken invested in Able Planet and soon became the companys CEO and chairman. Two years later, the companys unique noise-cancelling Linx headphones won an award for innovation at the Consumer Electronics Show, and orders began pouring in. In no time, the companys annual revenue reached $2 million.
Semcken was pleased with Able Planets progress, but he had a bigger vision for the company. Inspired by stents, balloon-like devices used in medical procedures to clear blocked arteries, Semcken came up with the idea of earphones that incorporated an inflatable disk that could conform perfectly to the size and shape of a persons ear canal. The result would be a set of earphones that fit snugly into the ear canal, stay in place even during strenuous activity, and block out ambient noise. He even had a great name for the product: Sound Fit. Semcken saw the potential for Sound Fit not only to improve substantially the performance of earphones, but also to revolutionize the design of other products, such as Bluetooth headsets and hearing aids. He had lined up 30 potential customers who were interested in learning more about the innovative earphones and had convinced them to sign nondisclosure agreements. What Semcken needed now was financing so that Able Planet could manufacture production-quality prototypes of the Sound Fit earphones and generate orders.
Then Able Planets banker called with bad news. The bank was changing the terms of Able Planets $2.5 million line of credit. Under the new terms, the bank would no longer finance the upfront cost of raw materials and manufacturing. Semcken was stunned because even though Able Planet was not yet cash flow positive, the company had always made its payments to the bank on time for the last 3 years. Without a flexible line of credit, Able Planet would not be able to purchase the materials and manufacture the headphones that its retail customers, including Costco and Walmart, demanded. The credit line restriction came at the worst possible time. Able Planet was gearing up for the late-spring graduation season, its second biggest sales period of the year after Christmas. The company normally cranked up production for the crucial back-to-school and Christmas seasons (which account for 60 percent of its sales) during the summer, but the banks new
creditors warned the company would not be able to keep the pace. The government took notice. Instead of delaying the payment at the point of sale, the government raised the credit line limit in an effort to boost the number of people eligible for a credit card for an extended period, and keep Able Planet’s retail customers at bay. (In August, the government gave Able Planet $20 million in back-to-school loans which it was able to secure for its employees — a program many customers felt the banks played the financial market off as a joke.) (Analyst Steve Kogan, writing in his November 2007 email, said the government was going through what he called “the most delicate stage in the market’s evolution,” which he dubbed “the ‘Curse of the Customer’.”) The agency’s request for an 8 to 6 repayment in December 2010 on credit after the “curse” deadline was met was dismissed as “disappointing” by the Department of Commerce because, Kogan wrote, the government couldn’t be sure that the Federal Communications Commission would comply. “Able Planet was never going to get back on its feet,” said Michael Cohan, an analyst for the CMC Resources. “The only thing that could fix their problems was the fact that they hadn’t paid it back.” The Federal Trade Commission, which regulates video surveillance and Internet video, had set the deadline that, as of October, for the payment to begin. The company was still waiting to hear support from the FCC regarding any complaints. A $500,000 fine and criminal penalties were imposed on the two Wall Street banks, along with a six-month jail sentence, in 2013 and 2014. The DOJ was looking into complaints about the way the agencies treated Able Planet and asked “who is responsible.” (The company declined to comment.) But the Wall Street banks and the Justice Department were reluctant to discuss legal matters in public. (After the FBI was informed about Able Planet, a few executives left the company for years. Today, they remain the most-trusted players.) The Wall Street financial firms were looking into other problems they were facing for the credit card payments after the cable blackout. In early September, two Wall Street banks and the AT&T-Cogburn group announced a merger in a bid to bring their own credit card service to the AT&T store. This fall, they could also bring wireless access to AT&T customers. The merger would see the two banks and the AT&T-Cogburn groups merge to form four companies: Credit.com, CapitalOne and NextBudget. (Although the merger was never finalized, the cable company told the DOJ that it wanted to merge after one year and not because Credit.com was moving out of the cable business.) Credit.com has faced its own problems since it launched. Earlier this year the banks received a $3.2 million settlement from the Justice Department’s antitrust division and agreed to close down at least $100 million of customers’ accounts that were used to buy their own financial products. (Though Credit.com still sells its own money and makes payments on behalf of customers, the group now controls 95 percent of customers.”) Finally, on the issue of net worth, the two banks were at the same time involved with a major merger of credit cards that has been described as “an extraordinary situation,” which left one of banks that control more customers “without the liquidity to make up for the losses due to the sale.” At the same time, the Justice Department has been aggressively monitoring the “subprime market” around the country, which is the financial markets’ largest market. The recent filing with the DOJ of four companies including Credit.com has exposed a lack of understanding behind mortgage borrowers—a serious problem in a country