Bill Sadleir made enough mistakes to sink several companies. He was naive, had the wrong product, and spent several million dollars with almost nothing to show for it. Most reasonable people in his situation would have read the handwriting on the wall and accepted the consequences. But not Sadleir. Against overwhelming odds, he scrambled like nobody I have ever seen.
Sadleir's steadfast refusal to surrender makes me wonder. Was he crazy, or do most people give up too soon?
B. G. P.
BY THE STANDARDS OF MOST TRADE SHOWS, THE SEMI-annual MacWorld Expo is a showcase of entrepreneurship, with more start-ups per square foot than just about any other place on earth. The organizers estimate that fewer than half of the 400-odd exhibitors have been in business more than a year -- which is not surprising when you consider that their common link is the Apple Macintosh, itself less than five years old. So if you had attended last January's MacWorld in San Francisco, and had happened upon the display of Dayna Communications Inc., you might well have supposed it was just another young high-tech start-up, long on ambition and short on experience.
Dayna does indeed look like a business that is just getting under way, and, in one sense, it is. Its product, DaynaFile, came out only a year ago. The device, which allows users to share data between Macs and IBM personal computers, has won glowing reviews in trade publications and shared Product of the Year honors with the Macintosh II at MacWorld. Monthly sales have been brisk, passing the $92,000 mark in March, far ahead of schedule. For William Sadleir, the 34-year-old founder and chairman of the small Salt Lake City company, all this is most encouraging. Then again, he's been here before.
Three years ago, Dayna had another hot product, the MacCharlie. It, too, won raves from reviewers, some of whom called it Product of the Year. The MacCharlie hit the market with a splash, and prospective customers came pouring in. But six months later, it was dead in the water, and the company was gasping for air.
Sadleir rolls his eyes when he recalls that debacle. "It's incredible how naive I was back then." It was a classic case of wishful thinking, inexperience, and bad timing. The product, which allowed users to run PC software on a Mac, seemed like a good idea when it first appeared, but it became obsolete faster than you could say squandered his $1.6 million of start-up capital. First, there was the lavish advertising campaign that ended weeks before the product was ready for shipment. The campaign generated a flood of queries, which encouraged Sadleir to go overboard on parts inventory, buying materials for 15,000 units before a single sale was closed. When the product finally did become available, he discovered that he couldn't convert the queries into sales. Meanwhile, he had run out of money to do additional advertising. In the end, Dayna sold barely a tenth of the units for which it had parts.
But perhaps Sadleir's biggest mistake was his total misreading of the market. He had thought that people would buy MacCharlie to run Lotus 1-2-3, WordPerfect, and other popular MS-DOS programs on their Macintoshes. In fact, most of those who did buy the product wanted it for an altogether different purpose, namely to transfer files between a PC and a Mac. The evidence was right there in Dayna's own customer surveys, but for months Sadleir ignored it, perhaps because he didn't want to face the implications.
Whatever the cause of his obstinacy, he remained blind to the problem even as Dayna's troubles multiplied. By the end of January 1986, its situation was desperate. Dayna had little cash and a warehouse full of parts for machines it couldn't sell. Its initial investors had lost faith, and its employees were owed back pay. Its trade debt ran upward of $6 million, much of it personally guaranteed by Sadleir. All that was needed to force the company into Chapter 11 were 3 disgruntled creditors with claims of $5,000 each, and Dayna had more than 50. Worst of all, it had the wrong product, with the wrong features, the wrong price, and the wrong positioning.
To be sure, Sadleir was hardly the first entrepreneur to get into such a pickle. Most of the others soon realize that there is a simple -- if not painless -- way to get out of it. They file for protection from creditors under the federal bankruptcy code. But for some reason, Bill Sadleir was unwilling to take that route.
"In my mind, declaring bankruptcy was like cheating," he says. "It was a walking admission of failure." Maybe his reluctance reflected the Eagle Scout in him. (He had been an Eagle Scout.) Maybe it was the Mormon missionary. (He had been that, too.) Maybe his background in government played a role. (He had been President Reagan's special assistant for appointments and scheduling from 1981 to 1983.) Or maybe he just didn't know better.
In any case, he embarked on a far more difficult and treacherous course, the goal of which was to rescue the company without going through Chapter 11. It was, in the words of an old Chinese proverb, a journey of a thousand miles, and it began with . . .
STEP 1 Deal with your creditors
SADLEIR COULD NOT DO MUCH OF ANYTHING WITH AN army of creditors beating down his door. They wouldn't let him. They were constantly telephoning or showing up in his lobby. A few of the smaller ones had already brought lawsuits against Dayna. Many of the others wanted regular updates on the company's situation, and they wouldn't accept the information from anyone except Sadleir. But every hour he spent talking wit creditors was an hour he couldn't spend working to get the company back on its feet.
One creditor was growing particularly restive, and it happened to be Dayna's largest -- a company named King Services Inc., which was owed some $1.7 million for circuit boards and keyboards it had shipped the previous summer. King's owners threatened to organize other creditors unless Sadleir met their demands. He finally gave in, agreeing to turn over to them 10% of any new money he raised, and to let King have first claim on Dayna's assets in the event of bankruptcy -- its inventory, its accounts receivable, its technology, everything. In return, King accepted a one-year, interest-bearing note for the money it was owed.
As soon as the deal was concluded, the pressure on Sadleir eased somewhat. Not only did the agreement remove King as an immediate threat, but it deprived other creditors of their leverage. They could still hound him and plead with him and threaten to push Dayna into bankruptcy, but they had no incentive to follow through. So Sadleir found that he had a little breathing room, and he immediately took advantage of it by moving on to . . .
STEP 2 Get help
SADLEIR WAS UTTERLY DRAINED BY THE PROCESS OF dealing with creditors. Beyond that, he recognized that he needed help in meeting the challenges that lay ahead. In particular, he needed someone who would complement his own skills as a salesman and pay attention to the details of the business. But where would he find such a person?
As it happened, he had to look no further than his own neighborhood. He had a friend there by the name of Brad Romney, a real-estate consultant with degrees in law and business. One day, Romney mentioned that he was looking to change careers. Seizing the opportunity, Sadleir suggested that he might find Dayna a challenge. Granted, it was a sick company, but its technology was innovative and fundamentally sound; imagine the excitement of turning Dayna around. Romney though it over and agreed to sign on for a month as a consultant. His arrival at the end of February 1986 had an immediate effect. "Brad was like a fresh general arriving at the front," says Sadleir. "Everywhere you looked in the company, tails were dragging. He was the only one who wasn't burned out."
Within two weeks, Romney had found his place: keeping the creditors at bay. He was good at it. He had a low-key, professional manner, and he was a fresh face. Creditors would show up hopping mad and loaded for bear, and he would listen to their stories and their threats. Then, in his own quiet way, he would explain the facts of life. "I basically said, 'Give us some time to tell our story, and we think we'll raise some money. Put us under and you'll get nothing -- not even a penny on the dollar" The logic was hard to refute. Resigned if not satisfied, the creditors would go away.
To Sadleir, Romney was a godsend. Romney, for his part, soon warmed to the task at hand. At month's end, he agreed to join Dayna full-time, by which point Sadleir had moved on to . . .
STEP 3 Find someone who's rich
IT DIDN'T TAKE A GENIUS TO SEE THAT THE COMPANY needed a major infusion of outside equity. Sadleir placed the figure at $2.5 million to $5 million. Even for him, those were breathtaking numbers. True, he had shown a remarkable knack for raising money in the past, putting together a $1.6-million limited partnership with local investors to launch Dayna, then getting another $1.3 million from a Los Angeles couple, Steve and Kitty Moses, who owned a ski house in Deer Valley, Utah. But now he had run out of prospects in Utah. As for venture capital, it wasn't even worth the effort. Venture capitalists, he knew, would take one look at Dayna's financial statements and send him packing.
No, what he needed were investors with imagination -- wealthy individuals who would look beyond the numbers and bet on the dream. So it came to pass that Sadleir, the former Reagan aide, found himself hobnobbing in Hollywood with the leading lights of the Democratic party, most of whom he met through Steve Moses, a party stalwart in southern California. At a fund-raiser for Gary Hart in March 1986, Sadleir struck pay dirt, meeting someone who offered to make a call. Two days later, he and Romney were sitting in the offices of Act III Communications Inc., owned by none other than Norman ("All in the Family") Lear.
Their goal was to bring in a lead investor who would put up $2.5 million. With that in mind, they made their pitch to two of Lear's key associates. The Lear people asked some questions and two weeks later flew to Salt Lake City to see the company for themselves. As the discussions dragged on over the next few weeks, Sadleir and Romney continued to scour the countryside for investors, to no avail. A feeling of desperation began to set in. Finally, in mid-April, Lear's people called to invite Sadleir back to Los Angeles, this time for a meeting with the producer himself.
The meeting got off to a rocky start. Sadleir stood up to demonstrate the MacCharlie -- and it didn't work. From there, things could only get better, and they did. Sadleir was told to call back in two days to find out Act III's decision. He was to nervous to do it himself, so he watched from across the room as Romney placed the call. Romney received the news with a stony face. Sadleir's heart sank. He could see that the answer was no. Romney hung up the phone and smiled. The answer was yes. On to . . .
STEP 4 Leverage new money every way from Sunday
FOR A COMPANY IN DAYNA'S SITUATION, $2.5 MILLION IN new capital can be a mixed blessing. As soon as word gets out, creditors begin lining up to get paid. Before you know it, the money is gone, and you are right back where you started. So rather than waiting for creditors to call, Sadleir had Romney take the initiative. "Our policy was full disclosure," says Romney. "I would explain our situation -- that we had $5 million in debt and some money coming in, but not enough. I'd say, 'We owe you the money, but we can't give you all of it. We wish we could, but we can't." In most cases, he would offer a choice: they could settle the debt then and there at about 20? on the dollar, or the creditor could accept a token payment of, say, 5% with more to follow if Dayna got rolling.
Creditors were scarcely thrilled with their options, but by the time Lear's money actually arrived at the end of May 1986, Romney had reached agreements with all the major players. After making the promised payments, and taking care of some other obligations, Dayna had about $750,000 left to work with. By then, moreover, the entire company was focusing on . . .
STEP 5 Work like crazy to get the product out the door
SADLEIR HAD BELATEDLY RECOGNIZED THE NEED FOR A new product, one geared specifically toward sharing files between Macintoshes and IBM PCs (or clones). As Macs began turning up in more and more offices, the potential market for such a device was growing. Dayna certainly seemed to be the company with the best chance of producing it, having already solved the major technical problems in creating the MacCharlie. "We thought we'd have it ready to ship by August," Sadleir says.
Chief engineer Lynn Alley and his team worked night and day to meet the deadline. As they went along, however, they realized that they needed more time to develop the kind of high-performance product they believed the market demanded. At the end of the summer, Sadleir was confronted with a tough choice: Dayna could continue to focus on developing a top-notch product; or it could bring out an interim version that would look a lot like the MacCharlie, use up many of the parts in the warehouse, and perhaps bring in some desperately needed cash. After thinking it over, he decided to bring out the interim device, called the FT100, and persuaded Act III to loan Dayna $300,000 to back a modest marketing effort. "We did it for one reason, and one reason only," he says. "We thought it would be an inexpensive way to generate sales."
In retrospect, that decision was probably a mistake. The FT100 came out in November 1986, priced at $595 (versus $1,295 for the MacCharlie), and promptly died. Dayna sold about 400 of them in eight weeks, less than a quarter of the number Sadleir had hoped for, and scarcely enough to cause a ripple in the company's sea of problems. By packaging the FT100 in surplus MacCharlie cases, says Sadleir, "we created confusion in a lot of people's minds about the difference between the two products." By the end of December, the product was in rigor mortis, and Dayna was out of money. It could not pay its 23 employees or buy the parts needed to fill the few orders that were trickling in. So Sadleir found himself at . . .
STEP 6 Scrounge, scratch, and scramble
SADLEIR REMEMBERS THE FIRST THREE MONTHS OF 1987 as the most harrowing period of his life. His nights were spent lying awake, staring at his ceiling, searching for ideas and answers. His days were spent doing whatever he could to keep the company alive.
That came down to money. Period. By January 1987, Sadleir figured that Dayna needed an additional $3 million to stay in business long enough to finish and launch the new product, but he was having trouble raising even a tenth of that amount. Since Act III had come in, he had raised a grand total of $250,000. He had followed every lead, knocked on dozens of doors, traveled far and wide -- for nothing. Meanwhile, Sadleir was using up precious cash just to get turned down. To save money on a trip to Los Angeles, he borrowed his wife's van and made the15-hour drive with Romney. There they shared a room at a Travelodge in Santa Monica. "They gave us a king-size bed," Sadleir recalls. "They thought we were gay." But they weren't gay, and they weren't happy, either, when they had to return empty-handed again.
Sadleir says that he survived from day to day simply by shutting out reality, by denying the possibility of failure. "One way or another, we just had to keep things going. I knew we would never attract investors if we closed the company down." In the interest of showing the flag, he borrowed $52,000 from Act III, which allowed him to set up a display at the January MacWorld in San Francisco. There he got a bit of good news over breakfast one morning with Frank C. Brooks Jr., a former lending officer and vice-president at Morgan Guaranty Trust Company of New York, who had his own investment firm in Greenwich, Conn. Brooks said that he would try to raise $1.5 million for Dayna. As a good-faith gesture, he agreed to put in $250,000 of his own money.
The cash kept Dayna going for several weeks, while Brooks approached his contacts. It soon became apparent, however, that he was running into the same obstacles as Sadleir. People would talk, get excited and then look at the financials. End of discussion. The problem centered around the company's valuation -- $12 million. This stuck most potential investors as a trifle high, particularly when they took into account the total debt of $6.6 million, and the fact that Dayna was still months away from shipping a viable product. The solution was to come up with a new, more realistic capital structure for the company, which meant persuading the old investors, including the original shareholders and note holders, to accept less. Romney had been in touch with them and thought they would agree to a restructuring -- but only if new money came in. So there you had it. In order to restructure, Dayna had to attract new money; in order to attract new money, Dayna had to restructure. Catch-22.
By the middle of March, even Sadleir could read the writing on the wall. Longtime employees had begun to leave. Friends were telling him to call it quits. Dayna had $35,000 in the bank, enough to meet one more payroll, and nobody, not even Act III, was willing to put up more. Sadleir had to face reality. It just wasn't fair -- to employees, to creditors, to his own family -- for him to drag this on.
So, for the first time, Sadleir gave serious thought to declaring voluntary bankruptcy, only to discover that he was too late. On Friday, March 20, Romney took him to see a friend who had recently brought his company out of Chapter 11. They quickly came to the jarring realization that, for Dayna, a declaration of bankruptcy was a one-way ticket to liquidation. King Services would immediately demand all the assets, including the technology, and anyway, the company didn't have nearly enough resources to operate, or pay attorney's fees, during a period of reorganization. "I was in a daze," Sadleir recalls. "I just couldn't get over the idea that we couldn't even afford to go bankrupt."
He went home that afternoon and told his wife the bad news: on Monday, he was going to close the company. Soon afterward, he would have to file for personal bankruptcy, since he had guaranteed so much of the debt. They would lose their house. Life would get very ugly for a while. They would have to manage. He was at . . .
STEP 7 When all else fails, think
SADLEIR DID NOT CLOSE THE BUSINESS ON MONDAY. Instead, he racked his brain for something, anything, that would allow him to hold on a little longer. And finally it came to him: Novell.
Novell Inc., located in Provo, Utah, is a leading developer and manufacturer of local area networks that allow different types of personal computers to communicate with one another. Almost a year earlier, Sadleir had met briefly at the Salt Lake City airport with one of its top executives, and they had talked about a possible alliance between their two companies. In the press of events, the meeting had totally slipped Sadleir's mind -- until now. He immediately picked up a telephone and called the executive. Two days later, Sadleir and Lynn Alley met with Novell's head of sale and marketing, who indicated that his company might indeed be ready to do some kind of licensing deal wit Dayna.
That was all Sadleir needed to hear. On the basis of Novell's interest, he convinced Brooks to put up another $100,000 to keep Dayna afloat. Then he began thinking of ways to leverage an agreement with Novell. No matter what shape it took, he figured months would go by before Dayna began to get any revenue out of it, and the company would not last that long without additional capital. Granted, he could try using the deal to bring in a major new investor, but that could take just as much time. He needed cash, and fast.
Inevitably, his thoughts went to Lear. What if Lear's company would guarantee a bank loan of, say, $2 million? That would allow Sadleir to break the logjam, restructure the company, attract new money, and finish the product. As collateral, Dayna could pledge the future stream of royalties from the Novell deal. So, on April 12, he and Romney flew to Los Angeles to make their pitch to Lear. "It is the best of times and the worst of times," Sadleir began, and went on to outline Dayna's situation -- how close it was to emerging from the woods, how desperately it needed one more helping hand.
Two days later, Act III agreed to guarantee the $2-million line of credit, on condition that the Novell deal went through. On May 29, 1987, Dayna signed the contract with Novell.
THE NOVELL DEAL DID, IN FACT, PROVE TO BE THE TURNing point. For once, everything went pretty much according to plan. With the Lear-backed loan in hand, Sadleir and Romney set about revamping the company's capital structure. Some $300,000 of the money went to early investors who -- in return -- relinquished most of their shares and canceled $2.1 million in notes. Romney also reached a final settlement with King Services, which had changed ownership and was itself in Chapter 11. In exchange for $160,000 in cash, some leftover inventory, an old trade show booth, and $690,000 of preferred stock, King agreed to relinquish its $1.2-million note and its claim on Dayna's assets. Meanwhile, Sadleir and other managers were tendering most of their shares, and the remaining investors were agreeing to revalue theirs.
The effect of all this was to deflate Dayna's valuation from $12 million to $6.3 million, and to reduce its debt by $3.5 million. The goal was to bring in new investors. Dayna finally reached that goal in February 1988, when Dillon, Read & Co. came in as a 52% shareholder with investments totaling $3.3 million.
By then, moreover, DaynaFile had been out for six months and was doing just fine. Indeed, the company is now profitable on a month-to-month basis, with monthly sales and earnings climbing to more than $600,000 and about $80,000, respectively, in April. Then there's the Novell deal, which should begin generating additional profits by fall. And who knows what lies beyond?
Inside Dayna, morale is sky-high. It's been 17 months since a payroll was missed. In that time, 12 new employees have come on board, mostly in marketing, sales, and engineering. Learning from past experience, Sadleir has farmed out the manufacturing to a subcontractor and signed various distribution deals. Life is simpler, and Sadleir is more relaxed. He even took his wife to Hawaii for a week-long vacation -- their first in two years.
But Sadleir has not forgotten what life used to be like just a year or so ago. Reflecting on those hard times, he recounts an experience from his youth, when -- as a Boy Scout of 15 -- he set out to scale Mount St. Helens. "It was incredibly frustrating," Sadleir says. "You'd spend three or four hours climbing to a false summit and, finally, when you got to the top, you'd see the real summit off in the distance. But in order to get there, you had to go back down. You'd be dead tired, but you'd have to turn around and retrace your steps, and then you'd start climbing all over again."
Such has been the story of Dayna, only this time Sadleir seems to have hit, if not the real peak, then a major plateau. "I can't describe the excitement of making more than we're spending, of not living on equity," he says. "We're much better business people today. We have a whole different appreciation of money, I think that's been the most important thing that I've learned -- how the money you save, the expenses you avoid, can impact the valuation of the company."
That is undoubtedly a valuable lesson, but was it worth the price? Was it worth the pain and suffering -- to himself and his colleagues, to their families, to employees? Was it worth the losses suffered by investors? "Yes," he says. "Without question. The shareholders who stuck with us should get a good return, and the employees who stayed have a spirit you can't match. And I think our products are going to make people's lives better. I know that sounds corny, but we believe it."
And if he had known back in 1985 what he knows now, would be do it again? How would he advise someone else who came to that particular fork in the road? "Be tenacious. Ignore the naysayers. Everybody said give up, but we didn't.
"Of course, it's easier to be tenacious when you're personally guaranteeing $5 million in loans."