Do Due Diligence, Too
Thomas Droege founded his $650,000 custom-software-development firm, Droege Computing Services, 10 years ago in Durham, N.C. "We had no need for outside capital until we were about 4 years old," he recalls. "That's when we decided to expand."
"An investor new to town liked our company's prospects so much," says Droege, "that he offered us a $100,000 line of credit without requiring an equity stake in return." Droege found the offer so tempting, he couldn't bring himself to subject it to a thorough examination. "I didn't do as much checking as I should have before I worked out an arrangement with an outside investor."
Droege's investor put money into about half a dozen other local computer companies, and that's when Droege discovered the troublesome aspects of the deal. "Our investor turned out to have a very nasty temper. He would yell and demand that people be fired, and do business in all kinds of ways I don't believe in. I watched him drive a couple of companies into the ground." Desperate to end a relationship that he believed would taint his company's reputation, Droege managed to obtain a bank credit line, secured by his house, to pay off the loan.
"That experience completely changed the way I do business," says Droege. "We've gone back to using cash flow to finance our expansion efforts, and it's proved very successful. During 1993 and 1994 the company was debt-free, and we still managed to build revenues by 20% each year."