When an opportunity to launch an exciting new product comes along, the glimmer of success can be hard for any entrepreneur to resist. So two years ago, Ron Lien, president of Robertson Aircraft Co. in Everett, Wash., decided to take the leap. His closely held company had specialized in making landing equipment and safety and fuel systems for private aircraft for more than 20 years. The new product was to be an inexpensive, lightweight airplane for flying enthusiasts.
The design work on the new plane -- a 254-pound vehicle made of Dacron and aluminum tubing -- has now been finished for more than a year. Robertson's "ultralight," says Lien, is designed for safe takeoffs and landings and solid performance in the air. But getting the new business off the ground has been a gigantic headache. Indeed, the aircraft company has recently -- and very reluctantly -- become its own stock underwriter.
The idea of entering a growing new market seemed awfully attractive back in 1982. The company's established business had been caught in an industry slump and was losing money. Ultralights, meantime, were becoming popular, and there weren't any dominant players in the business. Moreover, as Lien saw it, "there wasn't anybody who had our engineering expertise."
The company sank almost $1 million of its own resources into the development. Yet once the plane was ready for introduction in late 1983, Lien was faced with a tactical decision. How was the new product to be sold and distributed against a crowded field of competitors without spending lots of money? Unlike the markets the company was already in, this one was consumer-oriented. "We decided that we needed to do a first-class marketing program in order to have maximum impact," Lien explains. "Unless we were able to advertise and to put money into seminars and training for our customers and dealers, it was going to be tough to get anywhere."
Lien figured that it would take about $1.5 million for marketing and product support. After a series of discussions with attorneys in Los Angeles and Seattle, he settled on an interesting strategy for raising the money. Instead of trying to borrow or to sell equity in Robertson Aircraft, he decided to set up a second company and then to do a small public offering of its equity. The attorneys, together with a local underwriting firm, spent the next three months drawing up a prospectus for Robertson Ultralight Corp. in preparation for an initial public offering under the Securities & Exchange Commission's Regulation A.
Lien expected to have the money by late last spring. But just as the underwriter was about to begin selling the issue, the brokerage firm ran into legal problems with the SEC, problems that aren't uncommon for very small underwriting firms. "The regulators came in and told them that they were short on reserves,' Lien recounts. "They were ordered to suspend operations right away, and that put us -- and three or four other companies -- in a real bind." After searching in vain for another local firm to handle the deal, Lien finally went out and hired two stockbrokers. Their job is to help Robertson Ultralight sell its $1.5-million offering itself.
Although the 49-year-old chief executive officer is outwardly optimistic about the ultimate outcome, he is blunt about the ordeal. "I wouldn't recommend this financing route to anyone," he says, wearily. "We think we know quite a bit about building airplanes, but selling stock isn't our business. It's takes an awful lot of time, and we're not very good at it."
As we have noted before, the venture capital market has recently been tightening up, with the result that many companies are having to rethink their financing plans. In the process, they often discover that they need less outside equity than they thought.
Consider Syntech Systems Inc., a three-year-old telecommunications consulting firm located in San Jose, Calif. In early 1983, the company's founders, Al Corker and Gus Randall, decided that they wanted to get into the business of building hardware for improving intrafacility voice communications. During 1983, they sank $60,000 of their own cash into the design of three separate products and worked without pay to produce prototypes. In order to bring the devices to market, however, they needed outside money.
So they drew up a list of venture capitalists who might be interested in providing equity. The notion, says Corker, was to raise a total of about $750,000. They figured it would be easy to attract topflight venture investors. After all, Syntech had already done much of the hard development work: It had created actual products and booked orders to deliver complete systems (at $200,000 to $300,000 apiece) to two large corporate customers. In addition, the founders had committed their own time and money.
They soon discovered, however, that their timing was off. Several prospective investors who expressed initial interest proceeded to drag their feet when it came to making hard and fast commitments. "Some would just call to cancel appointments without any explanation, says Corker, "and others would explain they were too nervous about the future of existing portfolio companies. They didn't know if there'd be enough money to support them in the second and third rounds."
Throughout-the spring and summer of this year, the discussions with venture capitalists seemed to be stuck in the mud. Investors kept referring to uncertainties about their current portfolio companies, particularly with regard to the public equity markets. "One guy said he thought we had an immediate market of $30 million to $50 million for our systems," Corker says sardonically. "But he told us we'd just have to hold on.
Finally, Corker and Randall began to look for alternatives. Over the summer, they hammered out a plan to begin delivery on their products this December on a much leaner budget than they had originally proposed. They convinced one large customer -- a electric utility company -- to provide an initial 20% payment on its $165,000 order and to pay for the remainder in stages as the system is com pleted and shipped. And they have beer attempting to get other customers, suppliers, and commercial bankers to agree to similarly flexible terms.
Corker says that in the short-term, at least, such credit arrangements will reduce the amount of equity that Syntech requires. Instead of the $750,000 he originally sought, he now believes that the company can get by with as little as $250,000 of new equity -- and maybe even less. "It's going to take some scaling back on R&D and marketing," he notes, "and that's going to slow our growth plans down by about a year." Nevertheless, "pay-as-you-go bootstrapping," he believes, is the most sensible way to build the company under the circumstances of the current market.
By taking this approach, Corker has not given up entirely on the prospect of finding investors. "We're hoping that there will be a time when we can get a sizable equity injection," says Corker. "But we feel like we have to make the most of where we are. And that means building the company with the available resources.
"We hear a lot of entrepreneurs complain that if they had tried to raise their money earlier, things would be great," Corker says. "Well, we try not to think about that. . . . Nobody chooses their time to be born. We are where we are."
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