The American Dream... creating a company from nothing and turning it into a multi million dollar company. That is the dream for most entrepreneurs out there. Let me tell you about a couple of guys who did just that.
This is a true story retold from the best of my recollection. Some of the numbers and time frames may not be exact, but the overall story is pretty close from what I can remember. It concerns the company that I lost $60k speculating on that you may have read about in a previous post of mine, it can be read here:
https://steemit.com/story/@jrcornel/how-i-made-usd60k-then-promptly-lost-it-all-and-ended-up-owing-taxes-i-couldn-t-pay
https://steemit.com/story/@jrcornel/how-i-made-usd60k-then-promptly-lost-it-all-and-ended-up-owing-taxes-i-couldn-t-pay-part-ii
This story all started back around 2005, several years before the big financial collapse.
Two guys from New York started a penny stock company, it didn't take much money to get this thing up and running at the time. A couple of thousand dollars and a few good connections could get you listed on an OTC stock exchange back around this time. All you needed was an idea for a company, it didn't even have to be a real company.
The idea for this particular company would be one of a soap infused sponge. This would appear to be an ordinary sponge at first glance but when you get it wet and start to scrub with it, it would suds up providing all the soap you need to do your cleaning. Making it the perfect gadget for washing your car, boat, or even your counter top. They figured they could market it as a product that combined 2 products into 1 and convince consumers that it would save them money.
On the surface this product and idea was actually a pretty good one. It is something that many people could use and it offered them a way to save some money, both good things you want in a new product.
So now that they have a product, how do they make money?
The first thing they did was issue themselves a large amount of shares in the newly created penny stock company. These shares were restricted at the time by law but there are ways around that when you have an attorney willing to write legal opinion letters for you lifting the restriction on your stock in exchange for large chunks of your stock. They also issued some to close friends and family and even to a couple stock promoters who will earn their shares for services rendered.
They would also need an accounting firm to look past some of these indiscretions in order to give their whole plan some legs. Fortunately a shady mom and pop accounting firm is exactly what they found. It appears throwing them some restricted shares in exchange for their help was enough to get them to go along as well.
At the time of all of this the stock is basically worthless as there is no trading activity in the stock yet and the price is currently sitting under a penny. It took some time to get all of the above set up, but once they did, it was time to move on to step 2.
Now to create some demand for their stock...
The first thing they did was create an infomercial touting their wonderful sponge. They figured it would make the perfect "As Seen on TV" product, and they were right. Sales started rolling in. However, selling sponges for $5 a sponge was not going to make them rich and that was not their real business anyways. Their real business would be selling shares...
The shares in their tiny stock started to get a little activity as the infomercials continued to roll. However, in order to really get their stock moving they would need to launch a full scale promotion of their stock, their product, and their company (in that order by the way). They sold a few shares in order to raise some funds to pay for this and then went to work.
First they hit the investment conferences. Promoting their stock to the investor class. Next they got the stock promoters to start doing their thing and push the heck out of the stock. Now it would be time to release some sales numbers from the infomercials. However, they can't use the real numbers because those are too small, so they add a zero or two to the end of those numbers in their press releases to really get the public excited.
Now they are starting to look like they are the next up and coming hotshot growth company with a must have product, posting massive sales increases week by week. A growth investor's dream. The stock is started to react accordingly. What was once trading for fractions of a penny has now inched it's way up into the $.03-$.05 range. That may not sound like much but it represents massive gains for all those hundreds of millions of shares that the founders got for basically nothing.
The founders sell a little bit more of their stock, this time at much higher prices then they were able to sell them for the first time. This isn't the end game though, this is still just the beginning. Now that they are well capitalized from their stock sales they decide to shoot for the stars and blow this thing up big time.
Now to really blow this thing up!
The next stop is to approach major sports franchises and major sporting events and get their company logo featured in their arenas. By this time we are approaching 2008 and arena's and sports stadiums are losing advertisers left and right so they start coming way down on their pricing of prime time spots. This is the exact setup this tiny sponge company needed to get their name in the door (or in the arena in this case).
The first couple franchises they approach are local hockey teams. Then local baseball teams. Both successes. It soon becomes a snowball effect, once one organization signs them up for an advertising spot it gets easier and easier for the next franchise to say yes. Before you know it, there are over 60 major franchises sporting the company's logo in their arenas and stadiums.
The investing public is now seeing the company's name on TV and in major sporting venues and they are starting to really eat it up. The stock is starting to really move now. The stock is sitting in the $.13-$.17 range. The founders and insiders continue to sell their stock all the way up using those funds to pay for all these new advertising spots with major sports franchises.
Now that the stock is taking off and they are well capitalized, it is time to actually grow the business. Instead of just featuring their product on infomercials, they start calling up all the major retailers and start getting their product some shelf space. Before you know it, you can buy a soap infused sponge at Walmart, Walgreen's, CVS, or at just about any major grocery store or mall. The sponges literally are being shipped everywhere.
There is just one problem. No one is really buying the sponges. At least not in the quantities the company is portraying.
They can fix that though...
They take some of the funds they have made from selling stock and they hire a couple people to drive around the nation with big shipping trucks and buy up all the sponges from all these retail locations. This strategy will show massive demand to the retailers and have them calling up for reorders and it will help keep their products in premium shelf spots.
To add to the profitability of this strategy, they will take the products they have just purchased off the shelves, repackage them and send them back out to the same stores they just bought them from. This cycle prevents them from even having to manufacture more product, they just keep reselling and re-buying their same products.
Yes you read that right, the company started going out and buying up their own product and then reselling them to create the illusion of demand... what could go wrong?
The rest of the story will be continued in Part II tomorrow...
Image Source:
http://www.snopes.com/politics/soapbox/americandream.asp
