Cover Story: Octane Fitness

COVER STORY :: OCTANE FITNESS

Zone training

Octane Fitness?s founders take
disciplined approach to fast growth

by Liz Wolf

IN 2001, Dennis Lee and Timothy Porth carefully weighed the risks of leaving the comfort of their corporate jobs to launch a startup called Octane Fitness, which would design, manufacture and market low-impact, elliptical cross-training machines.

There were obstacles, however, that they simply couldn?t have predicted, such as their engineer leaving just 60 days before they planned to start production in Taiwan. Also challenging were the critical yet complicated patent issues.

Finances were tight, but the duo persevered and launched Octane Fitness?s ?world headquarters? in Lee?s basement. They remortgaged their homes, pooled their resources, hired another engineer, pounded the pavement looking for investors and found a straight-talking patent attorney.

Through a lot of sweat equity, they?ve gone head to head with the big companies in fitness equipment and muscled their way into both the home fitness and health club markets.

By concentrating exclusively on ellipticals and also outsourcing functions such as manufacturing, shipping and warehousing, they?ve stuck with their core strategy and built the Brooklyn Park-based company into a $40 million international business.

They?re looking for continued growth through the introduction of new products, further penetration of their core specialty market and expansion of existing dealer relationships.

Dennis Lee, 45, and Timothy Porth, 40, have been in the fitness business for years. Lee was with ParaBody Inc. and Porth with Nordic Track before ending up together at Life Fitness, a huge exercise equipment manufacturer for health clubs.

Lee was vice president of sales, service and logistics in Life Fitness?s Ramsey office, and Porth was senior business director of cardiovascular products. They were making comfortable livings, and neither had launched a company before, but the entrepreneurial bug was biting.

Their idea was to launch a startup called Octane Fitness, which would solely focus on the design, manufacturing and marketing of elliptical cross-training machines.

Their goal was to concentrate on this one category and perfect it like no one previously had. First they would attack the home fitness category and then the commercial market. Ellipticals are the fastest-growing segment in the wholesale fitness equipment market.

?We wanted to pound away at this one category,? Porth says, ?because both at Nordic Track and Life Fitness we had been through it where you?d develop a new treadmill, and your bike is really dated by the time you?re done with the treadmill. So then you gotta design a bike and then you gotta do your elliptical. And then by the time you do that, somebody else has beaten the treadmill that you just introduced six months ago. It?s a constant battle.”

They spent weekends and evenings honing their business plan, which also called for outsourcing. Octane?s strategy was to focus on design, sales, service and product innovation and outsource everything else, including manufacturing, shipping, warehousing and public relations.

?Not only were we focused on one category, but we decided if it?s not product innovation or sales/service excellence, we will outsource it to somebody who has it as a core competency,? Lee says. ?So rather than having a safety meeting or making sure the forklift driver will be here tomorrow, it would give us the freedom to really be true to the strategy, because as the business grows we would not so tied up in those details ? which are important, but not really important to our core strategy.?

By summer 2001, they were ready to leave Life Fitness. Also prompting the timing of their decision were changes at Life Fitness following its purchase by the Brunswick Corp.

?Leadership changed,? Lee says. ?Business philosophies started changing, and we were frustrated. It was that moment in time that two things came together where you have an idea, and there?s also external motivation to jump out of the nest.?

Lee resigned in June 2001. The day that Porth planned to resign was Sept. 11, 2001.

?I knew it was really a bad situation,? Porth says. ?I resigned the next day and the economy fell apart. That?s where I said, ?Oh my goodness, what have I done?? Because that?s when we were going to start raising money.?

Lee too had a moment of doubt.

?We had an unfinished basement in our house, and my dad and I built a wall that would be the dividing line between the basement and Octane Fitness?s world headquarters,? he says.

?Actually, it was a barrier for my kids not to get through. And I remembered that although we were frustrated, there were some neat things at Life Fitness. Brunswick?s participation meant they were putting time and resources into it. We were flying around in the Brunswick jet visiting dealerships.

?You have the nice job title, a lot of people working for you, the Brunswick jet, the No. 1 brand in fitness. I remember walking downstairs into Octane Fitness?s ?world headquarters.? There?s no jet. There?s no assistant to help you.

?I also realized that neither one of us is an engineer, and that?s kind of important when you?re going to design a product,? Lee continues. ?It was a very litigious category, and we didn?t have a patent yet. We needed to manufacture somewhere, and we had no manufacturing partner. We knew we were going to go to Taiwan, but we hadn?t met with anybody yet. We had no severance. I walked downstairs thinking about all of those things.

?I?ve got five kids directly above my head running around with the TV on level 12. But hey, it was going to work.?

They remortgaged their homes and pooled their resources, and Octane was officially launched. Lee is president and CEO, and Porth is executive vice president, product development and marketing.

They hired an engineer and found a patent attorney who didn?t mince words. The attorney said it was crucial to have a patent before raising money. ?Fitness equipment is a very litigious category,? Lee says, ?and patents are this whole other world of big words that you don?t understand and guys that talk another language. I just wanted to get to the point where the attorney sat in front of me and said, ?The patent is good and you?re not infringing.' ?

?Ellipticals are the hot thing, and everybody wants to protect their turf,? says local attorney Michael Sherrill, Sherrill Law Offices, Octane?s patent attorney. ?Octane has done a fine job of perfecting their product to the comfort of the users, and they wanted to make sure they properly licensed it. There are 100 to 120 U.S. patents on elliptical machines. It?s a competitive business.?

Once a patent was in place, they focused on raising money. However, people were reluctant to invest following the economic crash of Sept. 11. It took a year to raise their first-round investment.

They also discovered startups are not for everyone.

?Dennis and I were doing investor presentations, and we saw the excitement from people,? Porth says. ?They didn?t invest right away; they wanted to go back and do some homework. But we?d come back and our engineer would say, ?Did you get the money?? We said, ?No, but they really liked it.? He didn?t see that excitement. He couldn?t stomach it.?

The engineer quit. ?My jaw must have hit the sidewalk, because I?m thinking we?re supposed to be going to Taiwan in 60 days? for production, Lee says, ?and I don?t know of any other engineer.?

However, they regrouped, found another engineer and continued pounding on investors? doors. Their first investors were the founders of ParaBody, a company that made free weight sets, where Lee previously worked.  

?It was a huge deal to get that first money in,? Porth recalls. ?They also brought the fitness industry credibility with them.?

Jerry Dettinger, formerly with ParaBody and now CEO of Andover-based Torque Fitness, was an original investor and serves on Octane?s board.

?You bet on good ideas and good people,? Dettinger says. ?I knew Tim and Dennis were intelligent, hard-working and honest and they had a good idea. The industry was ripe for the picking. No one had a product in their price range with the quality and features they were bringing. It was a home run.?

Maury Kapsner, founder of M&L Industries in Rogers, also invested. ?I didn?t know a lot about the exercise business, but I knew Dennis and his background in selling exercise equipment, and that leant credibility to his presentation.

?But I was surprised it was so successful so quickly,? he says. ?What?s key is the product has excellent design, it?s priced right, and it has been produced in a way to maximize profitability right out of the chute.?

Octane raised $1.3 million. ?Every day I would walk to my mailbox, and man, I prayed,? Lee says. ?My spiritual life during that time was really good. I remember walking across that blacktop thinking, ?Lord, please let us have a check.? And the day you get a check it was ?Yes!??

It took 15 months to bring their first product to market, and their timing was good.

 ?We went into a market that was growing and dominated by two players: Life Fitness and Precor,? Lee says. ?So if you think about market share, you got two guys that have 35 to 40 percent share and minimal other players. That?s ripe for the picking. We could go in and sneak under the radar and grab share.?

Also important was they used customers for product development and research. Even when working in the basement, they brought in specialty fitness retailers to look at their prototypes.

?They?re the best consultant you could ever have to help you design the right product. They have to sell it,? Lee says.

Octane sold its first four machines to 2nd Wind in November 2002. They borrowed a trailer, hand-delivered them and trained the salespeople. One of those ellipticals was purchased by a 2nd Wind customer within 45 minutes.

?You think you have a great product, but until customers are separating their money from their wallet, you don?t really know,? Porth says. ?This helped verify it.?

Octane impressed Dick Enrico, CEO of 2nd Wind, Octane?s largest dealership. ?They?re absolutely the envy of the fitness industry,? he says. ?They?re in the right category. They had the right timing. They?re at a very competitive price point, and they have the right product. It?s exquisite. They came along with an aesthetically pleasing product. It has curb appeal and it works. People like the feel of it.?

In the five months after Octane?s first machines were delivered, revenue was $1.8 million.

Lee and Porth emphasize that sticking to their strategy to perfect the elliptical was key in their success.

?We?re a very, very small company with very, very limited resources competing against very large companies,? Lee says. ?For us to compete meant that our focus was to take all of the resources we had and attack ?right here? ? at this very narrow spot.

?One idea may have been coming in as a full-product supplier. But we wouldn?t have drilled down deeper into the category, so features ? like our narrow pedal spacing and converging path and multi-grip handlebars ? wouldn?t be there. If we were a typical company, we would have made our first elliptical and said, ?OK, now treadmills are the biggest market out there; let?s get our treadmills out.? But we were disciplined enough to say, ?No, we?re going to stay here.? That forces you to continue to improve what you do and come up with new ideas, products and features.?

Salespeople need something unique, Porth adds. ?They want to offer something that?s better. Everything we design in a product makes the workout better.?

Avinash Malshe, marketing professor at the University of St. Thomas Opus College of Business, has not worked with Octane, but says there are benefits of concentrating on one product, especially for smaller companies with limited resources.

?It can be an advantage to have a focused strategy and really be an expert in one area,? he says. ?And if customers know your product and trust it, they will be more likely to trust your future and subsequent products, because they?ve bought into the fact that you are an expert.?

By 2004, Octane caught the attention of private equity firm Greenwich, Connecticut-based North Castle Partners, which acquires ?healthy aging and living? companies. North Castle purchased Octane in January 2005 and added significant capital.

?When we sold, the company was cash-flowing well, so it wasn?t that we needed an influx of new money,? Lee says. ?It really came down to you?re monetizing that risk that you put in the very beginning. Tim and I both have families, and they came at us with what we thought was an incredible offer.

?What was incredible about it was that it gave us the chance to take care of our families and keep equity in and continue to stay with this baby we had birthed and wanted to see grow up.?

Lee and Porth retain a minority interest and a seat on Octane?s board.

Chip Baird, North Castle founder and managing partner, says his company is very selective. ?When we heard about Dennis and Tim, they had started this little company called Octane Fitness, and they had such an impeccable reputation and relationships with people we trusted,? Baird says.

?They had a clear idea of a company that they wanted to build, and they positioned themselves well with ellipticals, which are the fastest-growing and now the largest sector of the exercise business. They had positioned themselves in the specialty channel of ellipticals; they weren?t selling to the health club market, but directly to consumers. There are some 700 specialty stores in North America, which are seeing a 30 percent-plus growth market for ellipticals.

?So you have 78 million baby boomers,? Baird adds, ?and low-impact cardio is a long-term place to be due to this aging population. Ellipticals are a high-growth product with high-growth distribution. All of this got us excited.?

North Castle?s infusion of capital allowed Octane to grow its consumer business and also focus on the commercial market. Today, they have seven home models distributed all over the world. They are in approximately 400 specialty fitness retail stores in North America and 150 to 200 outside of North America. They also have five commercial models that have been purchased by hundreds of corporate fitness centers, training centers and health clubs, including 24 Hour Fitness and Life Time Fitness.

?We go through a very robust beta-testing process and make an objective and analytical decision whether a piece of equipment goes out on our floor,? says Patrick Regan, Life Time?s director of purchasing.

?After seven months of beta testing, we found no holes in their ship. When it passes our smell test, it means something. We?ve found that our members get a great exercise experience on Octane?s equipment.?

Octane?s revenue has grown each year from 23 percent to 47 percent. Revenue in 2007 was slightly over $40 million, an increase of almost 30 percent from 2006. Growth for 2008 is targeted at 30 percent.  

Octane has 45 employees, an international subsidiary in the Netherlands, an office in the United Kingdom and recently brought someone on to head up Asia and Latin America.

Octane?s success hasn?t gone unnoticed. It has won several best-in-class awards from health and wellness magazines, including SNEWS/GearTrends, which named Octane the best supplier by specialty fitness retailers, in addition to being the top-selling elliptical for the third consecutive year.

Octane also won the Ernst & Young Entrepreneur of the Year 2007 Award in the Minnesota/Dakotas region in the ?consumer products category.?

?With Tim and Dennis, one of the things the panel of judges was attracted to was their story has true entrepreneurial flair,? says Bill Miller, a partner at Ernst & Young. ?It all started in Dennis?s basement, and the way they bootstrapped the business was attractive to the judges. They built a good team and were able to focus on one product, and the fact that they were bought by a private equity firm brought that much more credibility.?

Octane continues to work on new products and expects to soon release a brand-new category ? the ?seated elliptical.?

One question Lee and Porth say they always get is whether they would consider expanding their product line beyond ellipticals.

?We?ve considered it, but it would have to be in a way that would not detract from our ability in what we do in low-impact cardio,? Lee says. ?We don?t even necessarily feel we need to, because there?s so much growth still available to us in this category.

?Our vision for the future is all of these baby boomers are going to continue to want more variety with low-impact cardio workouts, and so what started as an elliptical has morphed into different versions and price points.?

Porth adds, ?A lot of our competitors are almost beyond ellipticals. We?re still refining this vast category. We?re not done. We?re just coming up with things. There?s still more to do.?

[contact] Chip Baird: North Castle Partners: 203.862.3201; ch**@*****************rs.com; www.northcastlepartners.com. Jerry Dettinger: Torque Fitness: 763.323.4823; jd********@***********ss.com; www.torquefitness.com. Dick Enrico, 2nd Wind: 952.544.5249;  2ndwindexercise.com. Maury Kapsner: M&L Industries: 763.428.5668; mk******@***nd.com. Dennis Lee, Octane Fitness: 763.230.6041; dl**@***********ss.com; www.octanefitness.com. Avinash Malshe: University of St. Thomas Opus College of Business; 651.962.4287; am*****@******as.edu; www.stthomas.edu. Bill Miller: Ernst & Young: 612.371.6984; wi************@**.com; www.ey.com. Timothy Porth, Octane Fitness: 763.230.6040; tp****@***********ss.com; www.octanefitness.com. Patrick Regan: Life Time Fitness: 952.947.0000; pr****@*************ss.com; www.lifetimefitness.com. Michael Sherrill, Sherrill Law Offices: 651.426.2400; mi******@******ll.com; www.sherrilllaw.com.