LiL' Things, big problems

Why no one is winning the battle of the baby superstores

The same day LiL' Things opened its doors, Tate began a campaign of plopping his outlets right next to LiL' Things shops. Tate slashed prices, but, to the consternation of the LiL' Things team, kept reporting juicy profits. Baby Superstores' performance caused a small sensation on Wall Street--which snatched up its initial public offering of stock.

Only after LiL' Things had accelerated its expansion plans in an effort to compete with the Baby Superstores phenomenon did Tate reveal that he'd--oops--grossly misstated his profits. By then it was too late for LiL' Things. Expansion plans and murderously low prices had already pushed it onto a path that ended in failure.

"We all did our homework," says investor CeCe Smith. "Unfortunately, it didn't work out."

The first several calls to LiL' Things CEO Daryl Lansdale's Arlington office fall into a voice-mail abyss. Lansdale became CEO just a few months before the company filed for bankruptcy; when he finally responds, he admits that only three people work at headquarters now.

Less than a year ago, LiL' Things had some 50 corporate employees. Now even company chairman Steagall spends little time at headquarters. Instead, he's comfortably ensconced in his vacation home in Steamboat Springs, Colorado. About his future occupation, Steagall says only half-jokingly: "I might go skiing."

But Steagall's record, even with the failure of LiL' Things, doesn't suggest someone who'd retreat forever. The 50-year-old entrepreneur got his start in the retail business behind the counter of a Radio Shack store in Tempe, Arizona, in 1970. Radio Shack's parent company, Tandy, was a start-up then. In the late '70s and early '80s, the company grew quickly, and so did Steagall's stature within it. "I was in the right place for a young guy, standing at the right corner," he says. He moved up the corporate ladder--transferring from Salt Lake City to Seattle and finally to Arlington as corporate vice president.

By the mid-'80s, Tandy had grown enough that Steagall's employee stock amounted to a small fortune. Financially comfortable, he began looking around for more challenging opportunities. "What do you want to do when you grow up?" Steagall recalls asking himself. "The last thing on my mind was to start a company. What I really wanted to do was find another company like Tandy--just 20 years earlier."

Steagall--after hooking up with Dallas investors Phillips and Smith--instead wound up building his own start-up, BizMart. He'd called on the two investors on the advice of a Goldman Sachs banker and thought the two might know a young company that needed his retail expertise. But, he recalls, Phillips and Smith told him, "'Why would you want to be No. 2?"--meaning the manager, rather than the founder, of a concept.

CeCe Smith says she was extremely impressed with Steagall's record. He'd earned a reputation for effectively managing his divisions at Tandy during a time of explosive growth, she says.

Eager to get him on their team, Phillips and Smith promised Steagall they'd raise the capital if he could start a business.

At that time, in 1986, Phillips and Smith were relatively new at their game. A Harvard MBA, Phillips served as chairman and CEO of the publicly traded Pearle Health Services for 15 years, taking it from a small eyewear enterprise into a 1,250-store worldwide chain. In the mid-'80s, Phillips sold his company to GrandMet USA for $400 million and started a venture capital firm. Smith, a CPA, had served as CFO for Pearle and S&A Restaurants, Inc., which owns the Steak & Ale chain.

Nowadays the two have several multimillion-dollar investor funds active at any one time. They review a staggering 600 possible deals each year, choosing to fund five or six. They always invest in the retail industry--which makes them unusual among venture capitalists. Many more investors looking to supply seed money pick the high-technology industry, where returns can sometimes be sky-high. Retail start-ups are riskier and generally less profitable.

Typically, Phillips and Smith expect their start-ups either to go public or merge with other companies within 10 years.

Their firm has its share of successes--as well as a few failures. Teach & Play Smart Inc. is its other recent flop. This chain, which closed last year, targeted parents who wanted to buy educational toys for their kids. "The market for educational toys was too small," Smith says.

Smith says her firm doesn't usually scout for novel retail concepts. Rather, it chooses retail businesses that have shown some promise but perhaps haven't spread regionally or nationally. The firm usually takes its stake in the form of preferred shares and puts in $1 million or more, and one of Phillips-Smith's principals usually sits on the start-up's board.

Before BizMart, Phillips and Smith were still winning confidence from their institutional investors, typically insurance companies, banks, and university endowment funds. But with Steagall's BizMart, Phillips and Smith made a name for themselves.

Phillips and Smith's confidence in Steagall had paid off handsomely. The venture capitalists raised $22.7 million to start BizMart in 1987, paying roughly $3 a share for what became $10 stock when BizMart went public two years later.

Those kinds of returns couldn't have been far from Phillips and Smith's minds when they mulled over Steagall's concept for LiL' Things. In 1993, after OfficeMax acquired BizMart, Steagall called on the venture capitalists again. This time, he had the concept. He wanted to manage LiL' Things for a while, then step back and let someone else do the work. "I no longer had an interest in running a company," Steagall recalls.

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