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No Better Time Than Now to Launch an Enterprise

9/25/2009 --

Entrepalooza 2009 offers strategies, resources, and options for aspiring startups.

ANN ARBOR, Mich. — "Despite the gloomy economic news, it's always a good time to start a company," according to veteran venture capitalist Ravi Mohan, MBA '96. "Entrepreneurship and innovation can be brought to any product category as long as you have unique customer insight and you execute relentlessly against it."

Mohan, co-founder and managing director at Silicon Valley-based Shasta Ventures, shared this insight on the 10th anniversary of the Samuel Zell and Robert H. Lurie Institute for Entrepreneurial Studies (ZLI) at Ross. He presented a keynote Sept. 18 at ZLI's annual Entrepalooza Symposium. The conference attracted some 350 students and members of the business community. Co-sponsors included the Center for Venture Capital & Private Equity Finance at Ross and the school's student-led Entrepreneur and Venture Club.

Mohan boiled his message down to the basics for aspiring startups: understanding the customer's needs better than anyone else -- and then meeting that need better than anyone else. He cited the personal financial management service Mint, the online shoe retailer Zappos, and the cleaning products company Method as three young ventures that entered incredibly competitive spaces and still delivered huge returns.

"You don't need technology to create a competitive advantage," Mohan insisted. "Competitive advantage can be created through superior customer insight, and creating products and services that meet those needs."

The experience of fellow keynoter Roger Frock, MBA '59, illustrated Mohan's statement. Frock, who is now president and CEO of Quest Management Inc., received the Ross School's 2009 Entrepreneur of the Year Award in recognition of his career achievements. In 1973, he helped FedEx founder Fred Smith execute his idea for an overnight small-package delivery company, despite a series of setbacks and shortfalls. Today, FedEx is a $33 billion enterprise.

In his book, Changing How the World Does Business: FedEx's Incredible Journey to Success, Frock chronicles the legal, financial and operational crises that confronted Smith and his FedEx team and how they overcame these roadblocks to create an entirely new business enterprise.

Frock began his business career with A.T. Kearney Management Consultants in Chicago and later took charge of the firm's transportation practice in Manhattan. After completing the concept-feasibility study for FedEx, he joined that organization as senior VP and GM in 1972, assuming management responsibility for start-up operations the following year.

"No one else believed in what we were going to do, because no one had done what we were promising," he said, reflecting on the regulatory, logistical, and financial obstacles FedEx faced on inception. "Our competitors saw it as a crazy scheme."

During FedEx's first city test in March 1973, only six packages were shipped. Smith, Frock, and their employees took the setback in stride and redoubled their efforts. Five weeks later, the company had expanded to 25 cities and counted 185 packages in the system. "That was 30 times better than our initial test," Frock observed wryly. By November 1973, the company had secured $52 million in financing, making it the largest venture-capital start-up in the country's history at that point.

An outstanding concept, exemplary and ethical leadership, a supportive company culture, and some "good fortune" carried FedEx to ever greater heights of expansion, growth, and profit. The company's pioneering success also was driven by its insistence on listening to customers, valuing employees, and planning for the future. "We had the feeling we could get this done," Frock said. "And if we couldn't, we could all go out and get good jobs."

Connecting Entrepreneurs to Resources

Entrepalooza's four concurrent morning panel discussions, led by seasoned entrepreneurs, company founders, venture investors, and business consultants, explored various aspects of launching startups, securing adequate capital, entering the realm of social entrepreneurship, and identifying local resources.

The University, the state of Michigan, and the Ann Arbor community offer entrepreneurs a wide variety of assistance -- including informal groups, established organizations, monthly events, and readily available mentors and consultants -- that can help advance business concepts from initial ideation to actual company launch, said experts on the panel "Making Connections: Local Resources for Startups."

"There's a perception that entrepreneurs are rogue, lone agents who just need money," said Kapila Viges, director of Entrepreneurship Initiatives at the Michigan Economic Development Corp. "The key to success is using resources, networking, and learning from others." Assistance, she noted, is offered through a network of 15 SmartZones and 12 Small Business & Technology Development Centers located throughout the state.

The University's Office of Technology Transfer, Business Engagement Center, and Medical Innovation Center are just a few of the organizations that can help entrepreneurs connect with the U-M resources they need to commercialize research discoveries. Amy Cell, VP of Talent Enhancement and Entrepreneurial Education at Ann Arbor SPARK, said her organization offers funding, education, and networking events for startups. Grassroots activities, such as A2 New Tech, provide opportunities for pitching new ideas and getting feedback, noted Dug Song, chief architect at Barracuda Networks.

Finding the money to launch a startup is often a daunting task for entrepreneurs. However, many overlook key sources of capital, said financiers and consultants who sat on the "Got Money? Financing Your Business" panel. "Don't think ‘VC or bust,'" advised Ned Hill, managing director of DFJ Mercury, noting that fewer than one percent of all small businesses are suitable for venture-capital funding. "Look for help from friends and family, or sell products to help fund your business." He also encouraged entrepreneurs to be "coachable" when they accept dollars from angel or venture-capital investors, who serve as "stewards of the capital."

Federal contracts and grants also are frequently overlooked sources of funding, said Lisa Kurek, managing partner at Biotechnology Business Consultants. Eleven federal agencies qualify for SBIR and STTR grants, which provide early-stage research and development funding for small technology companies. Although conventional bank loans appear to be an easy solution, Comerica Bank Vice President Tim Trapp said entrepreneurs often are unaware of banks' high expectations for loan approval. "We're usually not one of the first investors [for new ventures]," he noted. "If we are, it's because you have existing investors, and your company is up and running."

Approaching a venture-capital firm for seed or early-stage investment money "is not about a transaction. It's a relationship that you are building," advised Armando Pauker, MBA '95, general partner at Apex Venture Partners. "We see many people who are very technology-driven, but you also have to think about the market, the customers, and the business model. We're investing in a business, not in a technology."

The most common mistake entrepreneurs make in approaching VCs is walking away when they hear the word no. "The tendency often is to hang up right when you get the rejection; entrepreneurs often forget to ask, ‘Why?'" said Pauker. "The answer ‘no' is not always final. It could just mean ‘not at this time.' We might tell you to come back in three months, and that's a real thing."

And just because a venture capitalist opts not to fund your business doesn't mean it's a bad idea. "You just may not fit our profile," Pauker said.

DFJ Mercury's Hill encouraged entrepreneurs to take heart, despite the gloomy economic news of late. "The markets are up, we're seeing more people coming up for air and putting capital to work," he said. "We've seen a slight upturn in IPO activity and an uptick in M&A activity. More important, people are beginning to pay strategic premiums in some places."

Pauker also projected that mid-2010 will be a good time to go public again. "Companies are starting to feel more bullish," he said. "There's some optimism out there that 2010 will be a good year for IPOs. And that's good news."

—Claudia Capos with Deborah Holdship



For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu