Starting Up: Then And Now

The biggest difference may be that the marketplace is simply more competitive.

 

"I've been totally humbled by this deal," admits Buzz Roman.

Roman's "deal" is Aunt Julie's Kitchen Inc., a family restaurant that Roman and his partners thought would be the new wave in restaurants -- big dining rooms with full kitchens and staffs of 350 or more, offering menus that run the gamut from soups and vegetable bars to chicken, fish, and beef entrees. But after two years, there are still only three outlets, all in San Antonio, and revenues are lagging well behind projections. "We underestimated how totally different a new project would be," Roman says.

Roman had reason to feel somewhat cocky about his second start-up. After all, he and his partners had already mastered the fast-food business. In 1975, when Wendy's was a relatively unknown phenomenon with just 80 outlets nationwide, they bought the exclusive rights to franchise San Antonio. By 1984, when they had sold out, 16 stores were grossing $16 million and franchises that they had bought for $5,000 were selling for $30,000. "We felt the hamburger had peaked," Roman remembers, "and Aunt Julie's offered more growth potential."

With the proceeds from the Wendy's sale in the bank, Aunt Julie's started out with plenty of capital, which Roman now figures was a mixed blessing. "Our lack of hunger hurt us," he says. "We were able to lose money that we couldn't have lost in the earlier days."

All that restaurant experience also proved a mixed blessing. It was easier to attract and choose a staff the second time around. But organizing the staff into a smoothly running operation was another matter: it took a while before Roman realized that what worked in his old restaurants wouldn't work again. "We thought that since we'd organized 120 managers at 16 Wendy's restaurants, we could organize the staff for one Aunt Julie's overnight," he says. "But there were new disciplines to learn -- it's taken us two years to understand the philosophy of a dining room."

But mostly what Roman notices is just how much more demanding the market-place has become since the days of his first start-up. "Consumers are much more sophisticated -- they're more discerning, much less forgiving," he says. "They have higher standards for cleanliness, excellence, and price/value."

The competition has become tougher, too. The success of restaurant chains such as Wendy's and Popeyes have made franchises popular with banks. As a result, Roman says, "there's too much credit chasing too few deals. I think you're going to see a lot of failures."

How does Roman compare the climate for his second venture to the climate for his first? "It's easier to start, but it's harder to succeed."

Paul Severino had also done it before. A computer network Severino had started with $650,000 in venture capital in 1981 sold for $65 million four years later. When he started his second network, Wellfleet Communications Inc., not long after, capital was about the last thing on his mind.

"I had a track record that the venture guys could go on," Severino remembers. "But it was a lot harder to find a market niche to exploit, a niche that would let me build a long-term business. Five years ago, it was wide open: the new technologies hadn't taken hold. Now that's not true. The Digitals and the IBMs of the world are in a lot more businesses than they used to be."

Not only would it take more money this time -- $2.2 million -- but Severino would also need a larger staff of engineers than before, and finding them would turn out to be far more difficult, requiring about half of his time and energy.

"There is a significant demand for people on the leading edge of things," Severino explains, "and those people aren't as available as they once were. The salary levels they ask for are considerably higher, and there is more awareness of the meaning of equity."

Even offering higher salaries and more equity hasn't always worked. "It was important to the people that we interviewed that we had done this before," he says, "That gave us credibility. But there are a lot of people who got involved in start-up fever a few years ago, then lived through difficult times. So today the stability of a larger company looks like a haven. It's almost impossible to get people to leave a place like Digital."

Security -- the mere mention of the word gets Ed Swearingen riled. As he struggles to get his second company off the ground, he's convinced it's become the new totem of American capitalism.

Swearingen is one of the oldtimers of aviation, a Texas swashbuckler if ever there were one. Back in 1959, when he launched the first incarnation of Swearingen Aircraft Co., he had $10,000 and the notion of how to build a better small airplane. Then as now, designing, building, and certifying a new airplane was a long and expensive proposition. But Swearingen didn't have any trouble finding the money he needed.

"I didn't know anything about finance," he remembers, "but I made one call to a local businessman to sell him some stock, and we ended up creating one of the first corporate R&D partnerships. After that, anytime that I wanted to increase my capital, I just made one call. And when we did a series of private offerings, they were oversubscribed overnight."

It took him six years before he got his plane to market, but from that point on the company took off. Revenues and earnings doubled every year, so that by the time Swearingen sold the company to Fairchild Inc. in 1972, he was selling 50 airplanes a year at $400,000 apiece, for about 30% of the corporate market. Even today, the Metro can be seen on the runways of most airports.

What you won't see on runways, however, is the aluminum-alloy corporate jet that he's been trying to build since 1983. He figured it would take four years and $125 million to finance the new Swearingen Aircraft Co. and get to market a second time. But so far he's been able to raise enough money for only the first half of his development program.

"The risk-takers aren't there anymore," Swearingen complains. "In the '60s, no one had ever heard of Ed Swearingen; now, everybody knows me. I used to only have to make one call; now, I go to 15 or 20 investment bankers with no success at all."

Swearingen has read about all the venture money that is now available for start-ups. It's not very venturous, he finds. "People aren't interested in investing in a company with less than five successful years. The people today with money want to put 95% of it into stable investments, then they break the other 5% into five or six different ventures. That kind of thinking just didn't exist before."