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SMALL BUSINESS / JANE APPLEGATE

Entrepreneurs Discover Value of Working Model

December 01, 1989|JANE APPLEGATE

Three young entrepreneurs who gambled $250,000 on a new telephone movie guide nearly lost it all, but they learned a valuable lesson: If you need money to launch a new product or service, you'd better produce a working model to show potential investors because words alone won't persuade them.

"We were about to lose everything we had, but to attract an investor, we had to have a working system," said J. Russell Leatherman, one of the founders of MovieFone, which provides free movie theater information to callers in Los Angeles and the New York City area.

For a year and a half, Leatherman and his two partners pushed all their credit cards to the maximum limit and borrowed thousands of dollars from family and friends. Their computerized system allows anyone with a push-button phone to punch in the type of movie they want to see and learn where it's playing and what time the show starts--at no charge.

Although movie studio executives and other potential investors loved the idea, Leatherman said no one was willing to put up the cash. In July, 1988, Leatherman and his partners, Douglas Hoitenga and Robert Gukeisen were totally broke and days away from having their telephone equipment and computers repossessed.

The old saying that great minds think alike saved MovieFone. A group of New York venture capitalists had been working on a similar idea when they read about Leatherman's service in the Hollywood Reporter.

The men with the money were Andrew Jarecki, a Princeton graduate who works for the giant Mocatta Metals' merchant banking group, and Adam Slutsky of Mocatta. When Jarecki called the MovieFone number, he realized that what he was trying to do in New York had already been done.

"I knew at that point we were absolutely A-1 competitors or A-1 allies," said Jarecki, who decided to call Leatherman and figure out whether or not they could work together. "I was very blunt," said Jarecki. "I called Russ and said, 'We don't think you guys have any money.' "

Jarecki was right. He sent Leatherman and Hoitenga round-trip plane tickets to New York and talked with them in Mocatta's office in the World Trade Center until a deal was struck.

"We sat in a glass room like a fishbowl overlooking the Mocatta trading room for 16 hours," said Leatherman, who had never been to Manhattan before. He and Hoitenga made dozens of calls to their lawyers and other advisers during the grueling session.

"We had never met before, but we were partners by 11 p.m. that night," said Jarecki with a laugh. The partners agreed to a 50-50 ownership split, with Mocatta putting up the cash to pay off Leatherman's debts and help launch a full-scale advertising campaign for the MovieFone service. Earlier this week, billboards went up in Los Angeles, and bus cards are on order.

In New York and Los Angeles, theaters are handling out wallet cards with MovieFone phone's 777-FILM number with every ticket, according to Jarecki. He said so far the venture has cost about $1 million.

The service debuted quietly last January, but since May, the calls have increased to about 20,000 a week in Los Angeles and about 25,000 a week in New York.

"Our goal is to make movie-going less inconvenient," said Leatherman, whose voice is heard on the MovieFone line.

The service is geared to what the movie industry calls "avids," people in the 18- to 34-year-old age group who pay to see about 25 movies a year. In fact, movie industry research shows that only 8% of the population buys 56% of the movie tickets in America.

"Avids are the most important thing to a movie studio," said Jarecki, who serves as the company's marketing director. "They chatter about the movies and develop a great word-of-mouth promotion."

The MovieFone team hopes to make its money back by selling the instant market research collected when callers are asked to give their age, sex and other demographic information. Their computers can provide theater owners and movie studios with quick statistics to help them readjust their advertising and promotion efforts.

MovieFone is also trading out advertising and radio spots with magazines and radio stations on both coasts. Next, they plan to expand into the Chicago area. Creating a new service when there was nothing like it before has been a frustrating and exhilarating experience for the young partners.

"To succeed in something like this, you have to be really smart, inventive and find a better and cheaper way to do it," said Jarecki.

He said it is imperative to make a prototype of the product no matter what it takes, because without the product, no one else can envision it and want to back it. "Then, you have to be absolutely prepared to lay every dime on the table," said Leatherman.

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