In the fall of 2000, Janice DiPietro was feeling great. After reviewing her start-up company’s numbers with its lead private-equity investor, she was eagerly anticipating a new infusion of capital in two weeks. DiPietro planned to use the funds to help the software company add company expand a new division and support the core business until it reached profitability. She estimated that the company would break even within the quarter.
Then disaster struck. In a routine conference call the following week, DiPietro was blindsided — the private-equity group announced that it had run into a problem with another investment, and would not provide any additional funding. “It was so out of the blue that the CEO and I had to put them on hold to make sure we had heard them correctly,” recalls DiPietro.
The bad news came just as the market was beginning to crumble. Unable to reach profitability or to secure enough new financing to survive, the company eventually shut down its new division and laid off its 125 employees, ultimately selling its technology for about one-tenth of its value. “To this day, I am amazed it actually happened,” says DiPietro.
This is the kind of gut-wrenchingly bad day that lingers in one’s mind, and almost every finance chief has had one. Fortunately, the crisis often yields a lesson that can help the battle-scarred navigate, or even avoid, similar detours into disaster.
DiPietro, who is now the managing partner at the Boston office of Tatum Partners, says her experience at the failed start-up remains a guiding force in her business dealings. The lesson? Regardless of a signed contract, no deal is ever done until the cash is in the bank. She has also realized the importance of documenting any worries about a company’s financing plans. “I had made the appropriate warnings about cash reserves and where we were going to be [in every board package],” she says. “I didn’t want anyone to be able to say the CFO should have put the brakes on sooner.” After the financing fell through at the start-up, DiPietro was able to point to her careful documentation when people looked to her for an explanation of the resulting cash crunch.
Like DiPietro, B.J. Rone also learned that a CFO can never be too skeptical. In 1988, Rone received a federal court notice alerting him that his employer, tape-drive maker Archive Corp., was being sued for patent infringement. The filer of the suit, competitor Cipher Data, sought an injunction that would prevent Archive from shipping its products. Rone, who had been feeling confident after helping the company clean up its accounting and boost its stock price, was jolted into action by the startling news. “Most of the patent work for our company had been done 10 years before I joined,” he says. “I’d been told it was solid, but I had never gone back and reviewed it.”
Upon receiving the notice, Rone shifted into crisis mode, temporarily delegating the top finance role to the company’s vice president of finance. Then, focused squarely on the patent-infringement case, he hired top lawyers to study the company’s intellectual property and prepare to defend it in court. He also scoured patent filings to find another company that would allow Archive to adopt its patents if necessary, identifying a company in Norway willing to make a deal. Rone’s third strategy proved the charm: “I thought, ‘Why don’t we acquire the company that’s suing us? Then we’ll own their patents and can stop suing ourselves!’” he recalls. Costa Mesa, California-based Archive made a $109 million hostile offer to take over Cipher, a deal that was ultimately completed over three months for $8.25 a share, with Archive the surviving company.