A tiny telecom startup calls for help

Detroit (FSB Magazine) -- As the boss of a construction company that laid cable from Atlanta to Los Angeles, Kirkland Dudley had achieved a dream that remained elusive to many African Americans. He was rich. Respected. A leader in the black community.

But something, he felt, was missing. He didn't own the cable or the juice that surged through it. As a contractor he faced a predictable future of scrambling for contracts, taking orders, and digging ditches. Real success, he knew, meant owning assets.

Specifically, Dudley wanted to create the country's first black-owned telecom. Soft-spoken but intense and charismatic, he poured his frustrations and ambitions into a pitch that opened the hearts and wallets of some of the nation's wealthiest African-American investors.

After raising $10 million in 2005, Dudley found himself a bargain. In early January of 2006 he bought Winstar, a formerly highflying public company that had fallen on hard times during the telecom slump of 2000-05. Winstar was a hot stock in the late 1990s, although by then the company was burning through $1 billion a year in financing just to stay afloat. The stock plunged from a high of $65 in 2000 to 5 cents in 2001, wiping out $6 billion in shareholder value.

In 2001 Winstar sought Chapter 11 bankruptcy protection amid a flood of shareholder lawsuits. IDT (IDT), a large public telecom company based in Newark, N.J., bought Winstar for $40 million in 2001. And Dudley bought it from IDT. Dudley won't discuss the price, but industry insiders estimate that he paid between $5 million and $8 million for the company and its assets, including customers and operating licenses.

Today Dudley, 56, is the chairman and majority shareholder of GVCwinstar (GVCwinstar.net), a private company that offers telephone, video and broadband services in 18 metropolitan markets, including Atlanta, Chicago, Dallas, Los Angeles, Miami, New York City and Washington. GVCwinstar is licensed to operate in 41 states and 51 wireless markets across the U.S. The company has 150 employees, and its biggest customer is the federal government. Dudley says revenues will top $32 million in 2006.

Dudley's timing is impeccable. Telecom is hot again after a devastating five-year bust. GVCwinstar plans to focus on a lucrative, albeit controversial, market: so-called diversity contracts.

Federal agencies are required by law to award some contracts to small companies owned by women and minorities. Many state and local governments seek to do the same. And most major corporations have programs aimed at increasing the number of women and minority suppliers. Billions of contracting dollars are awarded each year under such programs. As the only black-owned telephone company in the U.S., GVCwinstar hopes to prosper in this niche.

Having sold his vision to wealthy African-American investors all over the country, Dudley is under intense pressure to succeed. "This company can be a beacon of hope to the black community, showing young people that you don't have to deal drugs or flip burgers," he says. "I have a responsibility to make this work."

So does his wife, Tedra Dudley, 38, who is also his business partner. Before joining GVCwinstar, she owned a media and communications business in Detroit. As vice chairman and chief communications officer of GVCwinstar, she oversees press and government relations, a key job given that Uncle Sam is the company's largest customer. "This is our life," Tedra says. "Seven days a week."

The Dudleys face a host of challenges. GVCwinstar is burning $1.2 million a month, partly because of high payroll expenses and partly because Dudley is locked into expensive office and equipment leases that he inherited from Winstar's former parent, IDT.

GVCwinstar needs to raise additional capital - and fast. Dudley has pitched several investment firms but hasn't yet brought home any serious money. His goal: $100 million. He needs the money to expand his skeleton management team, upgrade the antiquated switching facilities that he bought from IDT, and launch new product lines such as Wi-Fi Internet access for entire cities and even countries. (At the time of the Makeover, Dudley was bidding on a contract to provide Wi-Fi coverage in Jamaica.)

Dudley has had trouble attracting and retaining experienced management talent. Now that his industry is recovering from its slump, companies are competing fiercely for skilled telecom managers. As a high-risk startup based in blighted downtown Detroit, GVCwinstar is a tough sell to the rising stars it wants to hire.

FSB enlisted three seasoned business experts to help unsnarl GVCwinstar's tangled wires. Scott Chandler, 45, is a Denver-based telecom strategist with 20 years of experience in the industry. Virginia Clarke, 48, is a partner with Spencer Stuart in Chicago, one of the nation's top executive search firms. Frank Wydra, 67, is an organizational expert with IRI Consultants to Management in Detroit.

The trio recently converged on GVCwinstar head-quarters for a grueling day-long meeting with Dudley and other key managers. The first order of business is money. Chandler is clearly concerned about GVCwinstar's $1.2 million monthly burn rate. "Money in the bank is your lifeblood," he cautions. "What are you doing to lower your fixed costs?" GVCwinstar leases 275,000 square feet of switching facilities for $400,000 a month. Dudley says he has been pressing his landlords to lower the rent, but with limited success.

"Scare them - today," says Chandler bluntly. "Explain the company's deteriorating financial situation in very clear terms - and let them know just what they stand to lose if you fail. Ask your creditors if they want 30 percent of something or 100 percent of nothing. That should rattle their nerves and buy you some time."

The consultants are impressed that Dudley was able to raise $10 million within the black community. But he needs a lot more money now. It's time to make his case to big investment firms, which are less likely to be swayed by emotional appeals to support black enterprise.

Dudley should start by hiring an investment banking firm that specializes in telecom deals. "Those guys know who's got the money and, more important, who is ready to spend it on telecom," says Chandler, who looks the very model of a modern high-tech manager in his khakis and rolled shirtsleeves. "And keep in mind, they're like realtors. They don't get paid until the deal is done."

Chandler also urges Dudley to create an advisory board of respected business leaders who can mentor him and his management team. Less costly and easier to manage than a board of directors, an advisory board could be a source of valuable advice and contacts for Dudley, who has vaulted from managing a small construction business to running a complex corporation.

"Before, I managed every detail of my business," he says. "Now I've got to learn a new, bigger role as a visionary - and it is tough."

Chandler nods sympathetically. Advisors can be a sounding board for difficult business issues, he says, and their affiliation brings prestige to a struggling startup. "Advisors are easier to recruit than directors," he says. "A lot of people don't want the liability and the fiduciary responsibility of a director, but they want to support your efforts. An advisory board offers that opportunity."

Dudley frowns. "How many advisors do we need, and how do we pay them?" he asks. No more than eight, the consultants agree. Advisors typically receive an equity stake as an incentive to help the company succeed. "When do we need to put this board together?" Dudley presses. "Yesterday," says Chandler. "Before you start trying to raise more capital."

An even more urgent problem is that GVCwinstar currently lacks a dedicated, experienced chief financial officer. Dudley and a few junior employees have been sharing CFO duties for the past year. Few investors will even consider putting money into a company that doesn't have a strong and independent CFO, but finding the right candidate is difficult and time-consuming. "How do you get someone to give up a cushy job in corporate America and come to a startup in Detroit?" Dudley asks plaintively.

Like many entrepreneurs, Dudley usually hires job applicants who appear to share his vision. Rarely does he investigate their ability to work in a hectic startup environment. Compensation for new employees is also haphazard. "I cut deals based on how valuable the person is to me," Dudley says.

Clarke, the executive search expert, is a commanding presence in catwalk-ready couture, with a bright-red cloak swept around her shoulders. She winces visibly. "You've been riding high on a wave of good will," she says. "Folks are going to seek you out for jobs, but let me tell you quite frankly, you don't want everyone who wants you."

Organizational expert Wydra adds another sharp note of caution. "You have a vision," he says. "You bring in a guy. His vision doesn't mesh with your vision. He's out, and the next guy comes in. Pretty soon you've got a revolving door, and that is a real problem for any company."

Dudley should look beyond corporate America for talent, Wydra adds. "If you are looking for people with entrepreneurial skills, you're not going to find them in the auto industry or at any big, established company. Look for them in companies that value risk taking."

Wydra offers another tip: Don't try to recruit vice presidents or senior vice presidents. Instead, drop down a level to directors of departments. "They'll be younger, hungrier and more willing to take risks," he adds. "They'll also be more willing to conform to your culture."

Clarke gently suggests that Dudley needs to better organize his recruiting efforts. Given that GVCwinstar can't afford to compete paycheck-to-paycheck with corporate America, he can start by putting together a stock option plan. And the company desperately needs a team dedicated to recruiting high-level executives. "You don't have the time to investigate these candidates thoroughly," she says. "What are their strengths? What are their weaknesses? Will they understand and appreciate your culture?"

By now it's midday, and the room is filled with some of Dudley's key managers, all African Americans. So far the consultants have not addressed the core of Dudley's vision, which is to lead a successful black-owned telecom company. But what does that mean? Will Dudley accept money from nonblack investors? Will he maintain a diverse workforce?

"I am not trying to create a black company here," he says. "I want to create some black wealth and black ownership in the telecom industry, but I don't want to be labeled as a black-only business."

To qualify for diversity contracts, GVCwinstar must be 51 percent minority-owned. Dudley is prepared to sell as much as 49 percent of the company to Wall Street but says he will never relinquish control. He adds that GVCwinstar's workforce is diverse. Several of the company's top executives are white, including the chief operating officer and the executive vice president of strategic initiatives. (Both were traveling on business on the day of the Makeover.)

"GVCwinstar isn't seeking only black workers," he says, "but rather talent of any color." Clarke nods approvingly. "That's right," she says. "You want to be the employer of choice, attracting the best talent. You want to be colorblind."

One month after the Makeover, FSB checked in with Dudley to find out what was up with his business. He has enlisted the help of a seasoned telecom CFO, now retired, to help him find a top-shelf financial officer for GVCwinstar.

He has also assigned a team to evaluate candidates for a board of advisors. Meanwhile he has scaled down his fund-raising expectations and is focusing more attention on cutting costs. "Our first investment round will be in the range of $20 million," Dudley says. "That's doable."

FSB will keep an eye on GVCwinstar. Stay tuned for updates on its progress.

Could your business use a makeover? In general, successful Makeover candidates are profitable small companies with at least $1 million in annual gross revenues. To submit your firm for consideration, e-mail the FSB makeover editor. Please describe your business briefly, provide your most recent and projected revenues, and explain why you think your company would benefit from a Makeover.

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Could your business use a makeover? In general, successful Makeover candidates are profitable small companies with at least $1 million in annual gross revenues. To submit your firm for consideration, e-mail the FSB makeover editor here. Please describe your business briefly, provide your most recent and projected revenues, and explain why you think your company would benefit from a Makeover.