Starting Up in a Down Economy

Eighteen years earlier, Pratt was running a research and development division for a big semiconductor company. When the business posted its first loss, in 1991, Pratt's facility was shut down. Fortunately, his severance was generous: Besides the equivalent of a year's salary and benefits, his bosses transferred to him the rights to the technology he had been developing -- tiny chips for cell phones. They also let him use their office rent-free and sold him testing equipment for a bargain price of $70,000. A month later, Pratt and a colleague named Powell Seymour launched RF Micro Devices.

Even with the intellectual property and free offices, Pratt's first year in business was disastrous. The design work would cost several hundred thousand dollars at least. Dozens of acquaintances had pledged their financial support, but they all begged off when it came time to cut a check. Very quickly, the partners drained their severance and then maxed out their credit cards. "That was very preoccupying," Pratt recalls. "We had families to feed." Then the company's prototype literally went up in smoke. Pratt and Seymour were in the lab, designing a chip for a Japanese cell phone company. One minute, the chip was there, visible under the lens of their microscope. The next, it was gone. The minute structure had gotten so hot that it had simply disintegrated. The partners saw humor in the situation -- "We had this great product that would disappear at the most inopportune times," Pratt jokes -- but their client wasn't amused and withdrew its order.

In early 1992, just before their severance ran out, Pratt and Seymour landed $1.5 million in venture capital. The terms of the deal were pretty dreadful -- the partners gave up 60 percent of the company to their investors -- but they desperately needed the cash. The next four years were marked by more snafus and bad breaks, including a client that canceled a project only after RF had delivered 100,000 parts. But persistence finally paid off: The company turned a profit for the first time in 1997, the same year it went public.

In a funny way, Pratt says, the recession was a blessing. Because few companies were investing in product development at the time, RF Micro Devices could labor over its chip design without worrying about competition. And when the economy took a turn for the better, Pratt's technology was ready to go, while other semiconductor companies, having scaled back their R&D efforts, were now forced to play catch-up. "It gave us a window of opportunity," Pratt says. Today, RF boasts $1 billion in annual revenue and more than 3,200 employees worldwide.

Having struggled for many years before becoming a success, Pratt heard echoes of his own story in Kemerling's. When they were fired by a big semiconductor company, Kemerling and his partner, Dan Wrappe, indulged in self-pity for a few days before founding Triad, in a business incubator at Wake Forest University. "We thought we would go out, talk to customers, and start taking orders," Kemerling says.

The reality was a little more complicated than that. Customers told Kemerling and Wrappe that they wanted something like a chip template that could be easily tailored for each client, which would cost half as much as the standard chip and shorten the amount of time needed for customization.

Kemerling worked on a prototype that met these specs, but it was taking time, and his credit card bills were ominously high. Having been in this situation, Pratt advised Kemerling to stay focused on R&D. He agreed to join Triad's board and to help Kemerling raise money. In 2005, Triad finally perfected a customizable chip that could be produced in six months -- half the industry norm -- for half the standard price. Triad's chips are now used in a variety of products, including industrial machinery and heart monitors, and the business is on track to turn a profit by early next year. "It's very important for entrepreneurs to have a mentor," Kemerling says. "Starting a business is a lot easier when you have someone who's done it before and can walk you through the process."

-- Nadine Heintz

Case Study No. 3: Hard Lessons Learned From Clif Bar's Fast Start

Gary Erickson couldn't have cared less about the state of the economy as he drove across the Bay Bridge in September 1991. What he needed was a name for his new energy bar. The next day, he was going to a cycling industry trade show. Bike shops figured to be his main retail outlets, so this was a chance to get buzz. Without a name, he might as well stay home.

Then, as he made his way to the office of his package designer, it came to him: Clif. It was his father, Clif, who had instilled in him the love of the mountains, who started him skiing at the age of 4, who was responsible for all of his outdoor passions, from rock climbing to bike racing. It was perfect. And so Clif Bar was born.

Although he didn't know it at the time, Erickson started his business in the middle of a recession. The downturn began in July 1990, four months before it dawned on Erickson that he could make a better-tasting energy bar than PowerBar, which had the market to itself back then. By the time he shipped the first Clif Bars, in February 1992, the recession was officially over, although the hard-times mentality lingered long enough to ensure Bill Clinton's election that fall.

"The economy, stupid" may have been as much of a boon for Erickson's start-up as it was for the Clinton campaign. Erickson found, for example, that contract manufacturers were delighted to do business with him. Would that have happened if they hadn't been worried about their own sales at the time? Perhaps. It would certainly have been more difficult for him to have signed them up if the economy had been booming and they had had all the work they could handle. He could have found himself pleading with vendors to take on a start-up that might not have survived long enough to pay its bills.