With that in mind, in December 1984 Manning quit the consulting business. He set up shop in the basement of his house, living on his savings, scrounging $25,000 in seed capital from friends, and huddling with engineers to come up with a viable product. From the outset, Manning concentrated on meeting the needs of the growing number of health-care agencies and doctors who were trying to treat patients at home. Those customers' biggest concerns: how to cope with a shortage of nurses and how to gain a competitive advantage over other home-care providers, for-profit and non-profit alike. If his product could satisfy those needs, Manning figured, he could sell the system to home-care providers who would then amortize or absorb the initial cost, as they were already doing with other types of medical equipment.
Throughout the spring of 1985 Manning and two technical consultants toiled in the basement and came up with a working prototype for a system that would be cost effective and easy for patients to use without professional help. At the same time, Manning wrote up a long-term strategy for his new company and set out to pitch it to potential investors.
An early encounter with venture capitalists taught him what he now wryly calls the Rule of Halves. After a frustrating six-hour meeting on a Sunday afternoon in New York City -- a get-together he had hoped would yield $50,000 in working capital -- Manning flew home empty-handed and crestfallen. "But a few days later I decided not to take no for an answer, and I called them back. They gave me $25,000, half of what I'd asked for," he says. "When you have a totally new, untried product -- where there are no competitors to compare it with, and you're really trying to invent a market that doesn't exist yet except as a hypothesis -- venture capitalists tend to give you half of whatever you say you need." The Rule of Halves.
The venture capitalists' initial hesitation was understandable. Not only was Buddy Systems pioneering a whole new market, it was doing so in a business that demands more patience than most. Any new medical device must win approval from the Food and Drug Administration before it can be sold. With equipment such as Buddy, gaining that crucial green light could take at least a couple of years of testing, paperwork, and clinical trials, all while operating costs are mounting and before a single sale is made.
To some investors, Buddy has seemed worth the wait. In all, the company's total capitalization reached $4 million as of April 1989. In mid-1986, while Buddy was still in the R&D stage, a couple of investors forked over $100,000 each, and Buddy Systems moved out of Manning's basement and into a real office. Manning even hired a few full-time employees. But like the cash-strapped hospitals that inspired his venture, Manning ran a tight ship. The company's walls are decorated with colorful crayon art commissioned from a local class of second-graders. The furniture was bought at auction secondhand -- "which was eerie," Manning notes, "because these auctions were held at the sites of businesses that had failed, so you had these intimations of mortality" -- and employees hauled their own desks and chairs back to the office in a rented truck. To save still more nickels and dimes, employees doubled as janitors; they took turns cleaning the bathrooms and taking out the trash.
Like many infant electronics companies, Buddy Systems has kept its labor force and capital expenditures small by building its machines from parts made by outside suppliers. In Buddy's case, that is more cost-effective than it might seem. The computer consoles have thus far been manufactured in such tiny volumes -- by the dozen, not the thousand -- that the cost of producing its own basic components would be too high for Buddy Systems to bear. Although Manning wants to be able to do more manufacturing in-house as the company grows, he has concentrated up to now on doing meticulous final assembly, testing, and quality control.
"In medical products, for obvious reasons, quality is absolutely crucial," Manning says, "so we want to keep close control over that. And the biggest challenge was finding the right people to do prototypes for us. You need a component maker who's willing to do top-quality work in very small volumes and who'll be patient with you while you keep modifying and refining the design." Noting that manufacturing has rolled along with only minor glitches, Manning adds, "One thing we've learned is that it's important to diversify. If you rely too much on any one vendor, and it has a period when it's overloaded with demand, that sets you back. When it gets behind, you get behind. So it's crucial to have an alternate supplier lined up."
By late 1987 Buddy Systems computer consoles were doing well in clinical trials with the cardiology and home-care departments of Chicago's Rush Presbyterian St. Luke's Medical Center. With FDA approval just around the corner at last, Manning was getting ready to start selling Buddy to large, well-established home-care agencies and doctors' groups around the country. For the long-awaited marketing phase of his strategy, he had planned to ask his backers for a new round of financing. So on October 1, 1987, Manning once again began calling on venture capitalists, hat in hand. Then came the crash on October 19. "Overnight, investors who had been encouraging us were suddenly behaving like commercial banks," Manning says. "They wanted low risk. And they wanted to make loans, not take on equity investments."
