The Inner City 100: Creative Strategies
Having chosen to build her business far from the high-tech community, Carol Latham proved she could master the one resource that mattered most: other people
Potential investors had no shortage of reasons for turning Carol Latham down. At 50, she had never run a business, never worked in manufacturing, and never sold a dollar's worth of product. And if those factors weren't off-putting enough--and they usually were--the location of her high-tech start-up sealed the deal: Thermagon Inc. (#6) was based in Cleveland.
"I'd talk to venture people in California, and they'd say, 'You're too far away. We'd at least like to watch over our investment," Latham says, recalling her two-year struggle to raise less than $1 million, which ended in 1992. But in a classic catch-22, local investors were skittish about backing Latham, because they didn't understand her invention, a filmy material, sold in sheets, that is used to keep microprocessors from overheating. It was hardly the kind of product that rolled out of local factories. Hers was an information-age innovation, but Cleveland, she notes, "is a nuts-and-bolts manufacturing town."
To raise money, it might very well have made sense for Latham to head for Silicon Valley. But "I felt I had the best shot at launching the company in Cleveland," she explains. "I had friends and I knew people. I could survive here."
Latham couldn't have anticipated Thermagon's growth rate--from 1993 to 1997, revenues exploded by 2,662%, with the company grossing $8 million last year. Still, her instinct about what would fuel its growth was right on target. Suburban office-park entrepreneurs may have access, if not physical proximity, to a support system for start-ups. But often urban pioneers like Latham end up piecing together their own ad hoc infrastructures, cultivating contacts to build as sophisticated a network as any already in place.
A trained chemist, Latham took a scientific approach to the task. Rather than popping in at every chamber-of-commerce function in hopes of bumping shoulders with someone who might be remotely interested, Latham worked hard to identify those she could trust, building her network one person at a time. Once she was rejected by formal lenders, Latham started pitching the business plan to friends, relatives, and neighbors. She came up with--and refused to stray from--three criteria for her ideal angels. First, she wanted investors who would not seek controlling equity. Second, she wanted professionals who could add value beyond their checkbooks. Third, she targeted people who knew her socially, because she figured they'd weigh her personal integrity in deciding to invest. "It was hard for me to do," Latham says. "It's really not my style to talk to my friends about investing in something that's 100% risk. The last thing you want to do is ruin a friendship."
In addition to soliciting money from friends, she also asked them for the names of other potential angels. She soon had five investors lined up, each contributing $10,000 to $30,000. None knew anything about technology. But her angels found another reason to invest: namely, Latham. "I brought in other investors because I had faith and trust in her integrity," says Del Ingram, a retired Cleveland entrepreneur who put in $30,000. "After three companies, I've found that that's what business is all about." Accountant Dick Lancaster, a sometimes tennis partner of Latham's, put in $10,000. "She was a friend, and she needed help," he says.
Until this year Lancaster also prepared all of Thermagon's financial reports and taxes. "I got her records up to snuff," he recalls. "I started doing quarterly reports as it grew, and then monthly." He didn't charge her until around 1993.
Besides investors, Latham needed employees--a daunting challenge, given her practically nonexistent budget for salaries. But with Cleveland in the tight grip of the 1991 recession, Latham, with the help of her growing network, was able to zero in on overqualified candidates who needed jobs. "My investors sent me people who were really looking for honest jobs," she says. She even recruited her own daughter-in-law, Susan, a recent college graduate who was waitressing part-time at a Red Lobster.
"Carol wasn't paying anybody, but if she had a paying job for me later on, the arrangement would work out for both of us," says Susan, who was living off her tips at the time. Eventually, Carol paid Susan to be her assistant, and the two bombarded prospective customers with unsolicited customized product samples. (Silicon Graphics and Schlumberger Ltd. became the first two big customers to place orders, in 1992.) After Susan gave birth to Latham's first grandchild, in 1993, she still managed the company's payroll from home. Then, in a feat of intrafamilial networking, she helped recruit her husband, Jim, Carol's eldest son. "Susan kept telling Jim, 'Maybe your mother has something here," Latham recalls. "He was looking, and I was desperate but very resource limited. He decided to leave his job and join up." Jim now serves as Thermagon's operations chief, while his brother, Craig, is administrative manager, overseeing information systems and purchasing.
Over time Latham conditioned Thermagon's investors and employees to look for others who could help the business grow. When Jim came aboard, for example, he recruited Mistelina Quinones, the wife of a former coworker. Quinones, 25, then recruited other employees for the manufacturing line, including seven members of her extended family. The networking gained its own--sometimes almost inexplicable--momentum. One early employee introduced Latham to a Seattle-based investor, who in turn arranged for her to meet with Paul Schlather, a Cleveland-based partner of Arthur Andersen LLP. Early in 1996, Schlather began working with Thermagon on a pro bono basis. "You have to work with these companies at the beginning. Otherwise you're not going to be there when they grow," he explains. "We try to discern who's for real and who isn't. She struck me as somebody who was a real tenacious fighter--a tiger."
Schlather's counsel came at a crucial juncture for the company, which had posted sales of $600,000 in 1995. Latham was mulling a $2-million buyout offer. "I flew with her to the meeting, but I didn't charge her anything for my time," Schlather says. "I told him [the potential buyer] that she wanted a five-year earn-out worth about $60 million. He respectfully declined. But to this date, Thermagon has been right on the numbers we plotted out for that deal."
Since then Schlather has joined Latham's advisory board and helped her with such issues as estate planning and potential acquisitions. Though he now bills her, he sometimes gives Latham a discount on such big-ticket projects as buying a new building.
Of course, Schlather is figuring that Latham's business will yield a lucrative return for his consulting practice in the years ahead. So what if Thermagon is still situated closer to strip clubs than it is to the clubby environs of Walnut Creek or Palo Alto? "When Thermagon is a very big company, I'll be glad we were there early on," he says. His sentiments would undoubtedly be echoed by other members of Latham's ever-expanding network. "My friends are always pushing and promoting and putting in a good word for Thermagon," Latham says. "Sometimes I don't even know what they're doing behind the scenes."