When Eric Hiller won this year’s business plan contest at the Harvard Business School, the June graduate thought he had covered everything needed to start a business.
But the Manito, Ill.-native found that even the best-laid plans, even those recognized by a top-grade school, can be thwarted by real-world challenges.
Hiller’s plan for a company selling software that quickly estimates the cost of prototype parts while they are still on the drawing board weighed in at 130 pages. But two months and 10 presentations to venture capitalists later, Hiller, founder and president of Urbana-based Feature Based Cost Systems, is beginning to see some holes.
“Investors want to see at least 10 different Fortune 500 companies seriously interested in our idea,” said Hiller. “I thought we’d only need one.”
Like Hiller, other recent local winners of undergraduate and graduate business plan competitions are finding that actually launching their businesses is significantly different from writing prize-winning plans.
Among the most frequent issues they have underestimated, say these winners from Harvard University, the University of Chicago Graduate School of Business, Northwestern University Kellogg School of Management and the University of Illinois Urbana-Champaign College of Business, are how hard it is to raise capital, how involved it is to make sales and the importance of detailed prelaunch customer feedback.
“I didn’t think it would be this hard to get funding,” said Ajay Chawan, a June graduate of Kellogg.
This year his team placed third in New York City-based Carrot Capital LLC’s Business Plan Challenge–a national competition with teams from 175 colleges and universities.
Chawan’s 30-page plan proposed a company that licenses a processing method that reduces carbohydrates from food by 40 percent. It is based on a patent-pending process formulated by Chawan’s father, a retired research and development head at Borden Foods.
“Venture capitalists want to see actual revenues before they invest,” said Chawan.
So instead of targeting venture capitalists, he is pitching his plan to private investors and food manufacturing companies, in addition to looking for government agency grants.
Larry Markoski, a U. of I. chemistry researcher, has discovered another problem, also common to Chawan’s situation.
Markoski and his wife, Julie, a U. of I. MBA-PhD candidate, won third place in the 2002 Carrot Capital business plan contest with a proposal for a company to manufacture micropower sources for use in laptops and personal digital assistants.
This power source would replace rechargeable batteries. So far, they have raised $250,000 of an estimated $5 million needed for initial funding.
Upfront cost
“If I were to do it again, I wouldn’t form a business around a product that wasn’t developed,” Markoski said. “It requires so much upfront cost. If we had something already developed, it would generate cash more quickly.”
Winning contests can be an inaccurate indicator of eventual success, warns Barry Merkin, a professor of entrepreneurship at Kellogg.
“Contest winners demonstrate excellent research,” he said. “They possess first-rate writing skills, are creative in slide preparations, and are excellent presenters.”
“But, more crucial for success, entrepreneurs need to be effective in the midst of ambiguity with little margin for error,” he said. “They need the ability to execute with too little information, too little help, too little money, too little time and too little sleep.”
“Students also tend to misjudge a powerful competitive threat: customer comfort with the status quo,” the Kellogg professor added.
“Motivating customers to change behavior is even more challenging than we expected, and we expected it to be tough,” said Jake Crampton, a 1998 U. of C. MBA graduate.
“We’re moving at roughly 25 percent to 30 percent of the speed called for in our business plan,” he said.
Crampton won the New Venture Challenge there that year for a company specializing in transporting medical tests needing laboratory analysis from doctors’ offices to the labs.
Using economies of scale, Crampton envisioned providing this service at a lower cost.
He founded the company, Elmhurst-based MedSpeed LLC, in 1999 with $600,000 in venture financing.
Hiller, the recent Harvard graduate, has discovered the same problem and calls customer inertia “a Catch-22.”
“A lot of vice presidents and chief engineers are spending their days fighting fires and trying to beat costs, which, ironically, is how our company could help them,” he said. “They’re focusing on their own companies in trouble. But it’s hard for them to break away to see us.”
Hiller reformulated his marketing strategy. He spends more time preparing visual mock-up screens and enhancing software so potential customers can see product ease and value.
He also reworked his marketing campaign, “so I’m selling a painkiller, not vitamins,” Hiller said. “That’s something with which every customer can identify. They’ve got a pain that I hate, too. Here’s what I’ve got to take that pain away.”
Sales experience
Hiller admits he didn’t learn a lot about sales in his two-year, $70,000 Harvard MBA program.
“Harvard is a great school, but it’s focused on marketing, not on sales,” he said. “The execution of a plan is all about sales. When you’ve got to keep driving forward and keep 25 parts of a business choreographed at the same time, the critical ingredient–sales–is hard to keep your finger on.”
That’s why, at the University of Chicago, professors “keep pushing and pushing business plan teams to focus on customers and sales strategies,” Steve Kaplan, a U. of C. entrepreneurship professor, said. “You’ve got to go talk to customers, live with them, find out what they’re thinking when they get up in the morning and get in the shower. You want to be that close.”
Because most students do not have that sales or business experience, they underestimate how much experienced salespeople must be paid, said U. of I. entrepreneurship adviser Michael Sandretto.
“Finding the right people to sell is crucial,” Sandretto said. “They’ve got to find out what’s an approximate salary range for an experienced sales person in an industry or what percentage of gross sales should be spent on sales and marketing.”
Successful selling strategies also depend, in part, on customer feedback–another area underemphasized in plans, contest winners say.
When John Chirapurath won the 2000 U. of C. New Venture Challenge Contest for a firm to manufacture technology infrastructure software for Web-enabled applications, he realized he needed more-detailed customer feedback to refine the plan, he said.
Later that year, Chirapurath co-founded the company, Burr Ridge-based Sarvega Inc., where he is vice president of marketing.
“We needed to test the outer limits of our system,” he said. “We wanted a good market map that went out several years, which required detailed customer feedback.”
So, he and Sarvega’s two other co-founders went back on the road for more customer interviews. “We described to customers the kind of solution we were trying to build and asked them if it would pass the `does-this-product-have-lasting-value?’ test,” Chirapurath said. “That feedback guided us on building, marketing and selling our products, thus laying a good foundation for our company.”
One of the biggest differences between planning a company and executing the plan may be what they consider success, contest winners confess.
“When I opened MedSpeed I would have anticipated more resolution by now,” Crampton said. “And, while I might be upset that we don’t have the home run, there is some success in having survived to keep fighting toward our goals. Still, we’ve waged war for four years and we’re still not sure who the winner is.”
Filling in the holes
Professors advising local undergraduate and graduate business plan contest winners implementing their plans in start-ups say the new entrepreneurs most often overlook these issues:
– Raising enough capital.
What to do: “You don’t necessarily have to spend money on equipment and employees,” said Michael Sandretto, entrepreneurship adviser at the University of Illinois at Urbana-Champaign. “Look for a company that has plants with excess capacity. Offer to give them a percentage of the company in return for making your product. I’m working with an Illinois start-up right now that did that with a China-based company.”
– Getting enough customer feedback before launch.
What to do: “An advisory board can also come in handy here to get feedback from potential customers,” said Steve Kaplan, a University of Chicago entrepreneurship professor. “Networking or other contacts will work, too. It’s not expensive, but it’s time-consuming.”
– The importance of learning how to execute a sales call and underestimated how long and how many calls are needed to make a sale.
What to do: “Find out exactly how much [salespeople] are paid in your industry,” said Sandretto, the U. of I. adviser. “Pay it or more through a combination of salary and equity.” U. of C.’s Kaplan suggested asking yourself, “Do you need a direct or indirect sales force? Who exactly will you call? What will you say? Figure out how many sales calls are needed to get one customer.”
– Hires that don’t work out.
What to do: Kaplan said, “If the person you hire is wrong, they’ll mess something up in ways you can’t imagine. Once you figure out someone is wrong for the job, get rid of them as fast as you can.” Northwestern University’s Barry Merkin, professor of entrepreneurship, said, “An `A’ plan and `A’ people usually succeeds. A `B’ plan with `A’ people may succeed. But ‘B’ people with an `A’ plan will not succeed.”
– Competition.
What to do: “Understand where they’re weak and where you’re strong. Rethink how you’re marketing your product. You may be better at one aspect than they are,” advised U. of C.’s Kaplan.
