Schwenk doesn't know when he'll pull out of Holtzman's company, although he says he "tends to tire after 15 years." Some club members envision a 5- to 7-year horizon, while others say they're in no rush. And when the time comes, the means of exit may vary from orchestrating an acquisition to taking the company public.
The breakfast-club members have never conducted a rigorous analysis of the return on their investments, but on average the group prefers deals with the look of a 20% return. Which isn't to say they always win -- they fondly refer to their losers as "the living dead." And as much as the breakfast club shuns rigid rules, there is one edict strictly enforced: no one -- not the breakfast club, not the venture capitalists, not even the founder -- shall be in a position to take control. "We don't run the risk of anyone getting wild-eyed and ruining the company," Schwenk explains.
* * *
Richard Sears couldn't disagree more. He doesn't know Schwenk -- Sears lives across the country in Lake Oswego, Ore. -- but he too is a business angel, one who insists that gaining control of a company is his only edge. Before putting his money on the line for Grandma Pfeiffer's Cakes-in-a-Jar, which is just what its name implies, he told the founder that he would be the one in charge. To him, this arrangement fit the investment. "What I offer isn't money; it's my expertise," Sears says. "The only way I can leverage my expertise is to be here every day, in the thick of it, in control."
Linda Pfeiffer, the founder of Grandma Pfeiffer's Products Inc., admits that giving way to Sears was difficult. But, she also admits, she had little choice. While she may have been in charge of the company on paper, in reality it was careering out of control. Her product, cakes baked in jars with a shelf life of almost two years, grew from zero to $250,000 in sales in two years, but costs were spiraling much faster than revenues.
"I had no partners to share my frustrations with, and I was running the business on a credit card," she remembers. "I'd been sleeping on the warehouse floor, and my marriage was crumbling."
An unlikely duo, Pfeiffer and Sears first met in February 1988 when Pfeiffer signed up for an entrepreneurship course taught by Sears. An engineer, Sears had launched several companies; his latest manufactured infrared imaging systems before he cashed out at the age of 40 for "a seven-figure sum." After traveling around the world for more than a year, Sears grew bored and decided to try his hand teaching budding entrepreneurs what he'd learned. Early on, Sears remembers noticing one student's keen understanding of her customer. "Linda didn't depend on the word of others," Sears marvels. "She spent weeks on the road meeting her customers, talking to them, and asking them questions herself."
What started as a student-teacher relationship quickly moved beyond hypothetical casebook exercises. After class Pfeiffer grilled her professor. Should she take a contract from one of the country's largest food companies? What if she couldn't meet its demands? How should she manage a new-product introduction? Sears was intrigued. Sure, selling cakes was a far cry from radar systems, but manufacturing was manufacturing, he reasoned.
Six months later Sears offered to invest about $150,000: $15,000 in equity and $75,000 in debt with a verbal agreement to kick in more after the first year. On his lawyer's advice, Sears formed another company, Grandma Pfeiffer's Inc., to acquire the assets of Pfeiffer's company, hoping to avoid any contingent liabilities. With that investment, Sears owned 80% of the company and installed himself as president. But as Sears will tell you, he didn't wake up one morning transformed into a business angel. "It's a huge personal risk to plunk down your money on someone else's dream; it's something you grow into," he explains.
Acting alone, without the benefit of a network like the breakfast club, Sears does a lot of legwork before investing. For example, he spent three months at trade shows selling Pfeiffer's cakes at the company's booth, gauging customer demand for himself before taking a stake in the company. He also advises two other entrepreneurs, but after almost a year of talking, he still hasn't put down a cent. "What makes these investments work," he says, "is a trust that only comes with time."
One look at the offices of Sears and Pfeiffer tells all you need to know about this partnership. With a high-tech white decor and clean surfaces, Sears's stylized office speaks of organization and efficiency. Just next door, Pfeiffer's office has a style she describes as more akin to a "playpen," with papers strewn everywhere and life-size color pinups of Mickey and Minnie Mouse decorating the walls. While Pfeiffer conjures up new twists on old cake recipes, alternate sales approaches, and creative marketing tactics, Sears talks of cost of goods sold, product specifications, and financing agreements.
Sears feels it's his job to yank Pfeiffer "out of the engine room and teach her how to navigate." When food giants such as Hershey's came knocking on the door with offers of large contracts, Sears urged Pfeiffer to at least go to the negotiating table, despite her mixed feelings. Before a meeting with a giant baking company, he prepped her, outlining all the likely questions, and during the meeting, the two sat side by side, taking turns answering questions.
Through all this has emerged a friendship beyond the financial partnership. "When the stress of the business broke my marriage apart, Richard and his wife were the only people who understood me, the business -- everything," Pfeiffer says.
This is not to say, however, that these two don't disagree. "Sometimes he wins; sometimes I win," Pfeiffer grins. Sears wants to do focus groups, but Pfeiffer vehemently opposes the plan, certain that it's too early. "I prefer to pop into his office with a new idea and just talk it out," she adds, "but he thinks it's time to put more communications in writing." What pulls it all together is respect. As much as Pfeiffer applauds her angel's business acumen, Sears bows to her marketing prowess.
