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Business idea: AND1

Alumnus Seth Berger Scores Success with Basketball Apparel Company AND 1

Freedom nearly scared Seth Berger, founder of the AND 1 basketball shoe and apparel company, into looking for a job.

Berger started AND 1 in May 1993, the day after he graduated from Wharton with his MBA. One of his partners, fellow Wharton grad Tommy Austin, showed up for work a couple of weeks later, accompanied by their summer intern.

“They came in and looked at me like, ‘What are we supposed to do?'” Berger recalls. “And I realized that I had nothing planned. Up until that point in my life, there was always someone telling me what to do. When you start your own business, you don’t get any of that. It took me six months to get comfortable and realize that being an entrepreneur meant total freedom.”

After a false start, Berger, Austin and their third partner, Jay Gilbert, a childhood friend of Berger’s, used that freedom well. Within a decade, AND 1 grew to $280 million a year in sales and staked out relationships with a quarter of the players in the NBA, including such stars as Latrell Sprewell and Rafer Alston. In 2005, Berger, Austin and Gilbert sold the company to American Sporting Goods for an undisclosed amount.

At its peak, AND 1 wasn’t just a shoemaker but also a media phenomenon. Its mix tapes—videos of “streetball” stars set to hip-hop music—inspired a television show and a nationwide tour of games by top streetball players who had endorsed the company’s shoes and gear.

Not bad for a company that had bobbled the ball on its first drive to the rim.

Berger had come to Wharton thinking he might use his MBA in public policy or public finance—he worked on Capitol Hill before enrolling—but soon realized that he would have a hard time paying off his loans with a public-sector job. Investment banking seemed a sensible second choice. He didn’t love the idea of being a banker, but the field paid well, and banks recruited heavily. “My Excel skills weren’t the best,” he says. “My finance skills weren’t the best. And investment bankers do a lot of meetings, and I can’t stand meetings.”

But he was also exploring an idea for which he had far more passion: the business that would evolve into AND 1. It started while he was taking Wharton’s introductory entrepreneurship class, as a plan for a retailer called The Hoop specializing in basketball. “Basketball is who I am,” he says. “I grew up playing ball in New York City. I played high school ball. I played junior varsity at Penn when I was an undergrad (Berger earned a Wharton undergraduate degree in 1989). I played ball every day when I was in grad school.” He and Austin, another Wharton undergrad, met on the court in Penn’s gym.

In his second year in the MBA program, Berger kept hammering away at his idea for a basketball company while working on an “advanced study project,” a self-designed course in which a student works under the guidance of a professor. A retail operation, he decided, would cost too much. A database marketing business made more sense.

Still, he hedged his bets, continuing to pursue a job in banking. That was the safe choice, socially and financially. Many of his classmates would head to Wall Street, and he had those loans. He landed final-round interviews with three banks. But as the meetings approached, misgivings bubbled up. The night before he was supposed to do the last round of interviews, he and Gilbert went out for drinks, and he shared his unease.

“Jay gave me the best advice I’ve ever gotten. He said, ‘Dude, you’re 25 years old. You’ve got no wife, no kids. You’re broke, and you drive a Honda Civic. You can afford to take a chance. If you take an investment banking job, next year you’ll be thinking, ‘What if I’d started that business?’ You don’t go to Wharton to say, ‘What if?’ You go to come out and take your shot.'”

His first shot, which he took with Austin and Gilbert, who also joined AND 1, was an air ball. The three of them went to a sporting-goods trade show to pitch companies on their database of hardcore hoopsters. “They all looked at us like we’re crazy,” Berger recalls. “They said: ‘We already have consumers coming to our stores. Oh, and by the way, you’ve only got 500 names. No thanks.'”

They had failed the first and hardest test of entrepreneurship—making a sale.

But like many failures, this one gave valuable feedback. Seeing all the wares at the show, they concluded that the gear aimed at basketballers wouldn’t appeal to hardcore players like themselves. It didn’t capture the cocky hip-hop ethos of the game.

So Berger, Austin and Gilbert retreated to a nearby restaurant to regroup. What they ought to be doing, they decided, was making T-shirts and shorts. Right then, they started dreaming up the sort of trash-talking T-shirt slogans that would propel the company’s early growth. Among them:

  • “Call 911—I’m on fire”
  • “I drive by you so much I should pay you a toll”
  • “I’m the bus driver. I take everybody to school.”

Even the company’s name captures that street-savvy attitude. “AND 1” is taken from a typical player’s exclamation when he’s fouled while making a shot and signals the single free throw that he’ll be awarded as recompense.

The T-shirts led to shorts—in the long, baggy style common to today’s college and pro teams—and eventually shoes. Making shoes put AND 1 in competition with such international behemoths as Nike, Adidas and Reebok. But the founders’ love of basketball and knowledge of their fellow players gave them the confidence to plunge in. “Nike, Adidas, Reebok are great brands, but they’re all things to all people,” Berger explains. “So there was an opportunity for a basketball player to say, ‘This brand is me. This is who I am. This isn’t about soccer or baseball.’ They left that little opportunity open for us.”

Sometimes, entrepreneurship simply means forging ahead in the face of seemingly impossible odds.

Their marketing strategy wasn’t just a matter of knowing their customers. They also saw an untapped price-point in the market. “There was a niche between $60 and $80 that no one was serving,” Berger says. “Nike, Adidas and Reebok were all selling shoes for $100 and up. We felt you could make very good performance shoes for between $60 and $80 that a kid would be able to play in throughout his entire season every bit as well as the more expensive shoes. And we didn’t need a multimillion dollar TV campaign to justify the price.”

They had to pinpoint their price before their shoes surged in popularity. Their first offering cost $80 and didn’t sell well. “When we marked it down to $65, it really started moving out the door,” Berger says.

Their next breakthrough came when they decided to market their shoes via highlight videos. That began by accident, thanks to a videotape of a game, featuring several streetball stars, that was lying around the office.

“We didn’t realize we had anything till one day we were doing a video shoot with a bunch of NBA players,” Berger says. “We’d set up this room where they could watch ESPN or play video games, but they see this tape and want to watch it over and over. A kid who worked for our ad agency said, ‘We should put this to music and make it a mix tape.'”

They did and offered copies to anyone who came into the Footaction chain to try on a pair of AND 1’s shoes. By the end of the first weekend of the promotion, all 50,000 tapes were gone. “It was the fastest promotion that Footaction had ever had,” Berger says.

The mix tapes led to an AND 1-sponsored game of streetball stars in New York City, which sold out. That game led to five more and, eventually, a 60-city international tour and the television show on ESPN. “It became bigger than we ever expected it to,” he says. “Between ’01 and ’03, when our brand suffered a lull, people would argue that the mix tapes kept us alive.”

Around the same time, Berger, who, like any serious athlete, is relentlessly competitive, began to realize that AND 1 wasn’t ever going to beat Nike, which dominates the athletic-shoe market. “Nike always had between a 60 and 65 percent market share in basketball,” he explains. “We could never eat into their business.” He concluded that his company was consigned to fight with Adidas and Reebok for the distant No. 2 position. “Once I realized that, it became a lot less fun.”

What’s more, consolidation among sports-shoe retailers was cutting AND 1’s profit margin. When Berger, Gilbert and Austin had achieved their early successes, they achieved margins of 10 to 15 percent. But the now-bigger retailers were demanding better prices, and the company’s margin shrunk to the 5 to 8 percent range.

“The combination of not being able to win and the economics getting worse meant it was time to sell,” Berger says. “Our business had gone up, then it went down, and when it started going back up again, we decided to sell.”

Berger, Austin and Gilbert were able to pocket much of the proceeds from the sale because they had few outside investors while the company grew. Berger believed that AND 1 should avoid raising money from investors, if possible, because investors necessarily take equity, which is potentially the most valuable thing an entrepreneur has.

“The whole reason you start a business is for the equity. If you go raising money, you’re limiting your upside.”

“I felt that if I raised money to put money in my pocket for a more comfortable lifestyle, I was just taking money out of my pocket further down the line. The whole idea of being an entrepreneur is that you’re willing to take that risk because at some point you’ll be a volunteer, meaning, ‘I ain’t doing it unless I volunteer.'”

Berger suspects that a lot of young entrepreneurs raise money not because their company really needs it but because they’re intoxicated with the idea of hiring hotshot marketers and rolling out big ad campaigns. They want to look big before they get big. Trouble is, doing that burns through money.

“I rarely find businesses that need the cash that their owners think they do, and I see two or three business plans a week. They want to raise $2 million, $3 million, or $5 million, and I say, ‘Do you know that the product is going to sell?’ They say, ‘No.’ And I say, ‘Till you know the product’s going to sell, what are you going to market? A product’s usually its own best marketing—a good product will sell. Then if it sells, raise money so you can sell more.'”

With the sale of AND 1, Berger achieved his goal of becoming a volunteer. These days, he’s spending as much time as he can with his three young children. “Until my youngest is in school, I think I’ll stay home with my kids.” And he’s an assistant varsity basketball coach at Westtown Friends School. “That’s been a tremendous experience. I might spend the next 25 years of my life being a basketball coach.”


March 28, 2009 Posted by | Business, Entrepreneur, invention, Life, Million dollars Idea, Millionaire, Sports, Television, Uncategorized, Youtube | , | Leave a comment