Energy Integration Group

The San Diego Union Tribune - San Diego, Calif.
Author: Craig D. Rose - Date: Jan 5, 2000

In four years, Pentech Energy Solutions Inc. had driven revenues from zero to $28 million. The company was selling electricity and natural gas, along with pursuing related businesses in offices from Mexico City to Washington, D.C. Pentech had 100 employees. So by some conventional measures, it was a success.

In 1996, however, Pentech had a problem: Its profits were shrinking. Even worse, when then-chief executive officer Jerome Foster looked at the company's future, he saw no way to reverse the trend.

So Foster and a few others at the company did something they don't teach at entrepreneurial seminars: He disassembled the company and terminated employees. He pared Pentech down to a staff of four -- then jolted the company back into start-up mode.

It was a process Foster describes as among the most painful of his life. Yet, three years after tearing down the old, the new Pentech believes it is poised for growth as a supplier of high technology controllers for heating and cooling systems.

The company's wireless control systems can diagnose problems without the need for going rooftop to physically inspect heating, ventilating and air conditioning (HVAC) units. The company's PERC Communicator also monitors system efficiency and alerts personnel of problems.

Pentech took a big step forward late last year when the Applebee's restaurant chain put the controllers to work on 21 restaurants in the Midwest.

Ray Bond, director of facilities management for Applebee's, says the chain expects to quickly recoup its investment in PERC monitors.

"We expect a 14- to 16-month payback on the equipment," said Bond.

The savings will come from the added efficiency the monitors are expected to wring from HVAC systems, along with providing more customer comfort, said Bond.

"Energy usage is becoming more of an issue . . . Even if energy is reasonably priced today, there is money to be saved."

Ultimately, Pentech says its systems could allow a manager like Bond to remotely monitor HVAC usage, at locations across the country, from a personal computer screen in his office.

To hear Foster tell it, the difficulty of building Pentech's new business pales in comparison with the pain of tearing down the old. He had been to the homes of employees he ultimately fired, and he took personal pride in having built a company that provided so many jobs.

"It was great to tell people you had all this revenue, but we didn't have profits," said Foster, so the layoffs were inevitable.

"It was a devastating period for the company and the people. And it was very humbling for me as an individual."

Perhaps it was more difficult for the employees. One former worker said the company's problems became apparent before the layoffs -- "I saw it coming" -- and that no severance package was provided.

Pentech had been created in 1990 when five former Caterpillar Capital Company executives won financing from the big company for a start-up that would market natural gas to utilities.

Restarting the company in 1997 with a small team, Pentech had first to develop a new raison d'etre. For Foster -- who had spent much of his early career in marketing roles for General Mills and Polaroid -- it was important that the new company be more than a middleman or a reseller. And Foster -- who is an African American -- rejected positioning the company as a minority subcontractor.

"You could not build a company of any significance (going that route)," Foster said. "I concluded that you're not really a company unless you have a product."

So the founders went searching for a product idea.

A software program to coordinate hazardous waste cleanups was rejected because of concerns that dealing with government regulators might create long sales cycles.

Foster recalled hearing customers complain about the hassle of dealing with rooftop HVAC units. Pentech's engineers also knew the big units tend to operate inefficiently, cycling on for longer than needed and wasting power in the process.

Somehow, the small team was unintimidated by tackling development of an entirely new product.

"The attitude was, `We'll figure out a way to get it done,' " said Foster.

But now he concedes that product development was challenging -- and winning credibility from potential customers was even more challenging.

The four founders first self-financed their venture. Foster, who went two years without salary, also made the rounds of venture capitalists to raise more funds.

Describing his efforts as blissfully ignorant -- "I never attended a workshop on raising money" - Pentech landed $3 million from Enterprise Partners, a San Diego-based venture-capital firm.

Later, the company received $1 million more from Enterprise and $2 million from a Bay Area venture firm.

Financial backers agreed with Pentech's founders that the company was unlikely to face immediate competition from a larger rival.

"The attitude of big companies (in this market) is now, `We can't afford to invent it here,' " said John Friderichs, director of customer and technical services for Pentech -- " `but we have the money to buy it.' "

On the other hand, Pentech's founders believe they have two years to develop significant market share and make themselves an attractive acquisition target. Foster, in fact, has relinquished the duties of chief executive officer -- he retains the titles of president and chairman -- to sharpen his focus on marketing.

He hopes to reach a strategic marketing agreement with a large corporate partner, some time during the first quarter of 2000, to rapidly expand Pentech's customer base.

For Foster, meanwhile, the rebuilding of Pentech is providing a new lesson in business. He had already been schooled in hard knocks, growing up Florida during legal segregation and overcoming a stuttering problem.

So, in Pentech's first incarnation, Foster said, "I was into monument building. My dream was to have someone walk into the office in 100 years and see my picture on the wall."

That led to an excessive emphasis on boosting revenues rather than profits, said Foster.

Now he says: "I'm on the path of building wealth."

Restarting the company in 1997 with a small team, Pentech had first to develop a new raison d'etre. For [Jerome Foster] -- who had spent much of his early career in marketing roles for General Mills and Polaroid -- it was important that the new company be more than a middleman or a reseller. And Foster -- who is an African American -- rejected positioning the company as a minority subcontractor.

Parallax