Good thing, too, for Ronstadt soon learned that investors can get awfully edgy. When Ronstadt's Financials hit the market in June 1988, investors expected to see the projected 200 units a month flowing out the door. Instead, Lord sold a mere dribble of 30 in June and 50 in July. Ronstadt felt like a student who had just received a bad report card. Why aren't you doing better? investors kept asking. How are you going to fix this? "You need to have a thick skin," he says.
A poker face doesn't hurt either, as he discovered last December. During a quarterly board meeting, which focused on the company's financial problems, an investor stood up and offered a novel proposal. Given that there isn't adequate capitalization, he began, and Lord might very well run out of money, why not liquidate the venture now? He looked around the room for signs of agreement. "That way," he added enthusiastically, "we can take the tax advantages in 1988." Ronstadt, watching about three years of his life pass before his eyes, was horrified. That's out of the question, he replied quietly. The investor, Ronstadt now says, "lost his long-term perspective because of some personal setbacks." Ronstadt had never really thought -- or written -- about the fact that investors' concerns may not always be in the best interests of the company. Nevertheless, "I felt terrible," he recalls. "I couldn't believe that someone was so willing to say, Let's jump ship." He also felt a burst of gratitude for his voting trust. Without it, he says, "we might not be here."
Ronstadt's Lessons on Maintaining Management Control: 1. Set up a mechanism, such as a voting trust, to separate management control from equity ownership. 2. Be prepared to deal with anxious investors; remember that their priorities are not always the same as yours.
CHAPTER V
Circumstances Beyond Your Control
"One of the mistaken impressions in my book is that entrepreneurs are doers, drivers, people who are always making things happen, making decisions," Ronstadt says. "But a lot of times you just have to sit and wait. And things happen that the most imaginative Hollywood screenwriter couldn't think of."
Not the stuff of comedy, either. Ronstadt contends that his company's misfortunes have less to do with the business than with the 30-month pre-start-up and start-up period it has endured. "The longer it lasts," Ronstadt says, "the greater the probability that uncontrollable events will happen that either mess you up or help you terrifically." In the fall of 1987, for example, a group of investors were set to invest $2 million in Lord when the stock market crashed. We'll have to wait, they told Ronstadt, we need to see how things shake out. Six months later they finally invested a smaller sum. "That wait hurt us," Ronstadt says.
Even more painful was last November's surprise. Ronstadt fully expected that the group of eight investors would exercise their option to invest another $1.1 million for 18% of the company. Granted, his sales projections had been way off, but the company had unexpectedly had to overhaul its marketing approach, selling the software directly rather than through retailers. And still, by October 1988 Lord was selling some 500 units a month, enough for retailers to begin to take note. "We were going along fine," Ronstadt says. The investors didn't think so. Sullivan, who heads the group, explains that Lord was "not selling enough units for us to make a further investment. People are not going to continue throwing money down a hole." At 500 units, Lord was selling only about half the number it needed to break even.
What Ronstadt had not thought about is that "delays in raising money cause the whole venture to slide backward." Almost immediately Ronstadt saved about $30,000 a month by cutting some ads and R&D and dropping his PR firm. Soon after, he laid off three of his four outside salespeople, slicing another $20,000 from monthly salaries and overhead.
"Operation Grassroots," Lord's marketing effort, became another casualty. Started in August, it had called for the company to spend up to $125,000 a month in marketing and sales -- $45,000 of that in advertising alone -- to reach such "influencers" as academics, reviewers, journalists, and potential customers. By mid-November, it had ground to a halt. "Suddenly, we went back to being totally finance driven," says Rebecca, who is serving as executive vice-president and vice-chairman of the board. "It was ridiculous because advertising takes three or four months to make an impression on the end user. We were just reaching that point." Sales withered from 500 to 300 units a month.
Ronstadt set about looking for some short-term capital. In March he signed a deal with a group of Canadian investors who had seen an ad for the product. It was perfect: roughly $500,000, mostly debt. But on April 14, a few days after the money had been scheduled for transfer, the investors abruptly pulled out. Ronstadt had no choice but to let go of three more employees, ask his five senior team members to take pay cuts as deep as 50%, and tighten every conceivable expense, such as overnight mail. "If we hadn't known so much about controlling funds, this might have killed us," he says.
Now he is back to waiting and hoping; it's hard to believe that only six months ago, "I thought I had raised my last funds," Ronstadt says wistfully. "You just have to wait sometimes and find out what is going to happen before you can do anything."
Ronstadt's Lessons on Facing The Unknown: 1. If your venture requires a long start-up period, expect completely unforeseen events to take over from time to time. 2. Try to insulate your venture from financial calamity by "having a little more money than you need," he says. "I've played it too close." 3. Be prepared to wait -- for investors, distributors, suppliers, and others. Unlike the folks in case studies, Ronstadt says, "most real people don't move on a dime."
CONCLUSION
Living with Fear
The fear of failure. Ronstadt's textbook doesn't mention it; he never talked about it in his courses. But now that he is living with it from day to day, he believes it deserves scrutiny. "The emotional traumas have not yet been fully understood," he says.
