It shows just how much distance there is between the theory and the practice of entrepreneurship. "There was a great deal I wasn't prepared for," Ronstadt admits. "Most academics have no clue about how tough it really is to cre-ate a high-growth venture. There are a lot of things I wish I had put into that book."
Such as? Well, what follows are some chapters we might see in a future edition of Ronstadt's textbook -- "I can't stop to do it now. My investors would kill me" -- all based on his experience over the past four years. To anyone who has started a business, the lessons may sound fairly simple. But as Ronstadt is quick to explain, that doesn't mean they have come easily.
* * *
CHAPTER I
Where Money Really Comes From
You want money? At one time Professor Ronstadt would have offered a few obvious choices. Go to a bank. Or a venture capitalist. Or a rich person.
In his textbook, Ronstadt writes about squeezing money from institutional sources. In the true life of his venture, he's had trouble just getting them to return his phone calls.
Not that Ronstadt was all that naïve when he left academia to fire up a fast-growth software company. He knew what kind of money he needed -- we're talking millions of dollars -- and he knew he'd have to be creative to get it for a start-up in an industry that has lost more luster than most industries ever had in the first place. What surprised him was how informal his investor groups turned out to be.
As Ronstadt readily admits, a college professor is hardly in a position to bootstrap much beyond an expensive dinner. All told, the Ronstadts have spent about $150,000 of their own savings on their venture. Their first official investor came in September 1986, when Ronstadt's brother-in-law, Graham Fallon, invested $50,000 for an equity position now worth 14% of the company. Soon after, a cousin of Fallon's agreed to invest another $100,000 for what is now a 4% stake.
With that capital, Ronstadt hired two independent programmers to work on designing Ronstadt's Financials. Then, convinced that the product was feasible, Ronstadt began searching for several hundred thousand dollars to finish the design and convert Lord Publishing into a real company that could sell and market it. "We were tired," Rebecca says about working at home, "of worrying whether the UPS truck would hit the dog."
To get his hands on the money, Ronstadt made a dangerous move: he took advice that he often gave his own students. He opened up his address book, flipped through it, and made a list of people who were not only well heeled, but also relatively sophisticated investors. Some he had met while teaching; others lived in his neighborhood; a few were parents of his children's friends.
He wrote to about 30 of them, simply letting them know that he had an investment opportunity, should they be interested. About 10 asked for more information, so he sent them a venture summary. About half of those requested a business plan.
As it turned out, one potential investor was interested, but not for himself. Nearly 10 years earlier then-professor Ronstadt had helped him get his business off the ground. Now, he told Ronstadt, it looks like you need big bucks, so why don't I put you in touch with the folks who invested in me? Ronstadt agreed and got a surprisingly warm reception from the group, headed by Charles W. Sullivan, a Boston lawyer who had attended Babson College some 40 years earlier. "A couple of us knew about Ronstadt from our kids at Babson," Sullivan recalls. "They used his textbook."
Just after tax time in 1987 the group invested $400,000 in two stages for 16% of the company. About a year later, with the product nearly ready to go, Ronstadt figured he would need another $2 million or so for marketing -- educating the public that Ronstadt's Financials was not another spreadsheet program. To raise the money, Sullivan brought four more investors into the group. In March 1988 the eight of them agreed to invest about $1.3 million for 22% of the company. They also signed an option to put in another $1.1 million for an additional 18% of the company in November 1988. "We all wanted to see some sales and marketing develop before putting any more money in," Sullivan says. As it turned out, they were deeply disappointed.
Ronstadt now realizes how expensive and time consuming it is to raise money. He hadn't anticipated the costs of traveling to New York City, for example, to meet with potential investors. Or having various groups spend half a day traipsing through the company, distracting employees. He has had to put up with whatever requests potential investors make. "That's the way it is as soon as you stop dealing with investments coming from a personal savings account or your parents," he says. "You don't know where the money is coming from, you don't know your investors, and you don't know what might come down."
Ronstadt's Lessons on Finding Funds: 1. Go beyond appealing to obvious targets, such as wealthy people. 2. Unless your venture is in the hot industry of the moment -- which software certainly is not -- don't expect much from venture capitalists. 3. Make sure you have enough money to absorb the costs of raising more.
CHAPTER II
Customers Count, but Management Counts More
What, ultimately, drives a business? "Customers," Professor Ronstadt had often preached in the past. These days, the CEO of Lord Publishing offers a different notion. "It's the founding team, as well as the customers, that are critical," he says. "Whatever binds the members together drives the business in a certain direction."
Because he had few industry contacts, Ronstadt put too much emphasis on credentials when he began hiring. He didn't think about how important it was to build a harmonious team. In one case, he hired an executive whose personality, he could see, was going to cause problems. "The person was so good in so many other ways that I said, 'Well, we'll take the chance. This will be a high-risk, high-yield situation,' " Ronstadt recalls.
