There’s something about an economic downturn that gets people thinking about their independence, their ambitions and their financial future.
Entrepreneurship has grown during the downturns in the U.S. economy in this roller-coaster decade. An April 2009 report by the Ewing Marion Kauffman Foundation showed that an average of 320 out of 100,000 adults launched a startup each month in 2008 as the recession began, up from 300 out of 100,000 adults in 2007. The foundation noted that the post-2000 tech bust also fueled an entrepreneurship boom as layoffs and other cutbacks increased. Yet Kauffman researchers pointed out a tempering fact in the numbers. While these startups provided employment for the owners, they were at a consistently lower salary level.
Rising interest among aspiring entrepreneurs sparks an ongoing debate. Are entrepreneurs simply born, or can they be trained in the classroom? What are the attitudes that a person needs to assume risk and adapt to change? What determines whether an entrepreneur fails or succeeds?
And the most important question of all: Should you try it?
Ask any number of experienced or fledging entrepreneurs and you’ll get a variety of answers, all of which don’t fit into neat categories. We took those questions and more to a number of Mendoza students, alumni and professors, and you’ll read those insights below.
Another trend measured by Kauffman was a concurrent rise in opportunities to learn about entrepreneurship. Kauffman reported in 2007 that entrepreneurship was "one of the fastest-growing subjects in today’s undergraduate curricula," noting that in the past three decades, formal programs including majors, minors and certificates have more than quadrupled from 104 in 1975 to more than 500 by 2006. Kauffman adds that "the development of discrete courses in entrepreneurship has been exponential."
That data alone would suggest that entrepreneurs actually can be groomed in the college setting. Laura L. Hirschfeld Hollis, the new director of the Gigot Center for Entrepreneurial Studies at Notre Dame, agrees. Crediting 2004 research at the MIT Sloan School of Management by William A. Lucas and Sarah Y. Cooper, Hollis notes that the researchers found that traits such as self-efficacy—the belief in one’s ability to accomplish tasks and succeed at life—actually improved with training. "Once you instill specific skill sets in people—risk assessment, opportunity recognition, ideation—they never go back. It’s transformative."
James Davis, the John F. O’Shaughnessy Professor in Family Business at the Mendoza College, has counseled hundreds of entrepreneurial-minded students in his strategy and entrepreneurship courses through the years. While his students desire to start businesses for many different reasons, he has identified three distinct perspectives.
Passionate about a Solution
"First, you see someone who’s impatient with coursework, traditional employment and anything else that’s getting in the way of a singular idea they’ve created," says Davis, who launched and directed the Gigot Center at Notre Dame and whose research interests include entrepreneurship, family business and strategy.
Case in point: MBA student Landon Spitalnik dreams of a day when charging his iPhone is as simple as putting it next to the window. Spitalnik moved with his wife from New York City to South Bend two years ago, ready to use the ND network to get his idea off the ground. His company, Unlimited Juice, operating now in Notre Dame’s business incubator Innovation Park, is working on a series of solar battery prototypes that can be clipped onto a cell phone or any rechargeable electronic device so it can charge without the need for an electrical outlet.
Martin Carrasco, a Ph.D. candidate in Notre Dame’s biological sciences department, launched his product as a solution to a personal problem. Carrasco is a competitive power weight lifter, and like most athletes, finds that heat exhaustion robs him of performance. His idea—to develop a product that could use the forehead as a central cooling point for the extended body—started as a series of cooking pots and hoses suspended from the kitchen ceiling and attached to a hardhat. "I have a very tolerant wife," laughs Carrasco, who is a full-time student with a young child at home.
That unwieldy prototype has morphed over the past few years into two sleek products—one a headband-based cooling element; the other, a more heavy-duty version wearable on the back. Both will be tested by the Chicago Bears this coming off-season.
"New technology is a driving force," said Carrasco. "I wasn’t thinking so much about creating a company as solving my problem."
Predisposed toward Ownership
The second kind of entrepreneur, according to Professor Davis, is a more analytical person who doesn’t believe he or she has to build a company from the ground up to create a success. These entrepreneurs may come from a family business background and be predisposed toward owning their own business.
"They don’t necessarily need to launch an original product or idea, but they can see untapped value in a business or product that’s already out there," says Davis.
MBA student Matt Jeppsen fits that mold. After working in his family’s recreational vehicle business for several years, Jeppsen moved to South Bend with his family to polish up his skills for another kind of entrepreneurship—looking for a tarnished asset to buy. He says he might go back into the RV business or pursue some direction that’s completely new.
A finance major, Jeppsen describes himself as fairly cautious. "For me, I’m not sure that I’m going to jump into [buying a business] right after school because I’m not sure the credit market is going to be quite right." So for now, he’s studying and building his network. "There are mentorship opportunities here and alumni may be looking for experienced people to pick up deals. I’m happy to wait until the time is right."
Looking for a Career Change
The third kind of entrepreneur is a more recent phenomenon, Davis says, though one that absolutely dovetails with the growth of entrepreneurship training. "We’re now seeing something we call the ‘recession entrepreneur,’ someone whose previous employment picture has changed so much that they find they have to redefine themselves for the marketplace."
Such individuals may be in a career transition, or they may be in a stable employment situation but do not see long-term opportunities for advancement in their current position or area of concentration.
Gary Clark, a longtime sales and marketing executive and U.S. Navy veteran, has returned to Notre Dame to participate in its ESTEEM program, a one-year master’s of science program that teaches the fundamentals of technology-based startups.
He’s working in partnership with David Lodge, a biology professor, to commercialize laboratory services to test water for the presence of invasive fish species. They are currently working on the Asian carp infestation problem in Lake Michigan.
Clark, age 40, entered a sales career after completing his seven-year tour in the military. "I had a successful career in sales, but I started to think about business ownership in recent years with changes in the economy," Clark said. To put himself closer to that role, he quit a fairly stable job to join a startup in late 2000. However, the company failed. "It gave me a chance to see a startup from the inside and how easy it was to fail. They had a new product that they couldn’t develop in time to get to the marketplace," he said. "That didn’t discourage me from starting my own company. It actually planted the seed."
Now, Clark is commuting back and forth from South Bend to San Antonio where his wife and young children live. "My wife is a teacher and we get some help from parents, and everyone has allowed me to chase my dream," says Clark. But he admits to one note of caution: He’s not sending for his family until the project moves solidly into independent status.
Although some of the aspiring entrepreneurs express caution, overall most entrepreneurs tend to be extraordinarily optimistic about their prospects, according to numerous academic studies. Back in the 1980s, Mendoza College Dean Carolyn Y. Woo, then a management professor at Purdue University, and colleagues surveyed 2,994 new entrepreneurs. These entrepreneurs perceived the odds of their own business succeeding as much higher than the odds they gave other firms in the same industry. For instance, 33 percent of these new entrepreneurs rated their chance of success to be 10 out of 10, compared to 11 percent for other firms like theirs. Likewise, only a small number—just 5 percent—thought their business had a less than 50 percent chance of survival, while they thought 22 percent of similar firms would fail.
The exuberance may be necessary to build fortitude, however, because the odds are certainly against new entrepreneurs. According to the latest update from the U.S. Census Bureau, 99.8 percent of new employment comes from small firms—but only half of these new firms survive five years.
Jeffrey A. Bernel (EMBA ’94) is a longtime entrepreneurship instructor at Mendoza who has bought, sold and operated manufacturing businesses for more than 30 years. He ticks off four reasons why some startup companies succeed while others fail:
Ability to change within the organization
Bernel compares businesses to living organisms. They change over time due to shifts in the economy, their markets, employees and the performance of their products. If the entrepreneur who created that enterprise can’t see those changes or bring in people to better discern them, Bernel says, the business won’t grow or evolve.
It’s one of the reasons that Bernel was driven in the early 1990s to return to school. He decided to get his Executive MBA at Mendoza "to fill in some holes in my knowledge," after which he was recruited to teach at the school. "If someone asks me what they really need to start a business, I tell them ‘a good idea,’ but I also tell them they need an MBA. Education helps you understand the challenges you’re going to meet and what you’re going to need to deal with them."
Adds Gigot Center Director Hollis: "Businesses fail for all sorts of reasons. They fail because the product isn’t what the public wants. They fail because their pricing structure is ineffective. And they fail because they can’t grow or can’t grow fast enough. Success will kill you as fast as failure … if you’ve got a great idea and there is a huge demand for it, and you haven’t planned for it and you can’t deliver the products or services that meet it."
Ability to delegate responsibility
Successful entrepreneurs must learn to delegate. Daniela Papi (ND ’00) launched PEPY Tours five years ago, offering what she calls "sustainable tourism" in Cambodia with revenues going to fund The PEPY Ride, which supports rural education and environmental initiatives.
Across both ventures, her staff has grown from one—herself—to more than 50 today, most of them Cambodian. She says local experts have taught her most of the lessons about the people and territory she wanted to serve. "You can’t just build schools. Schools don’t teach kids, people do. So we’ve shifted our function from building schools to bringing in the right people to work with kids," she explains. "If you see a hole or problem you need to fix in your operation, you really can’t do that without bringing in other people who know more than you do."
To grow her organization, Papi recently hired a number of experienced administrators from a nonprofit homeless center based in South Bend, and she’s made a sabbatical plan for herself. If she qualifies for a free scholarship in social entrepreneurship being offered by the Oxford University MBA program, she’s taking the year off to attend.
The most successful entrepreneurs mix a kind of passion with the ability to take some counsel, says Professor Davis, and expanding a venture requires utilizing others’ skill sets.
Understanding of the markets they serve
If you really want to test a business concept in a particular market, it’s important to understand that market, says entrepreneurship instructor Bernel. One of the best ways to do this is to actually work in it.
Vera and Greg Muzzillo run Proforma, a printing and promotional services company based in Independence, Ohio. Vera, a 1986 Mendoza graduate who is now on Mendoza’s Business Advisory Council, says that even if the desire to become an entrepreneur is strong, most potential business owners benefit from the opportunity to work for a company where they can see the good, bad and ugly of running a business. "Your most ‘extensive MBA’ is learning from your own experience. Because I was in banking before I went into the business, I had an opportunity to learn from a lot of other business owners’ mistakes," said Vera. "If your hunch or idea is so strong you can’t think of anything else, go for it. But I think experience working within an organization for some period of time is worthwhile for most people."
Hollis agrees that full-time employment is a significant driver of entrepreneurial thinking because people get the value of learning an industry first before they develop any ideas. "We see surveys that indicate that entrepreneurs overwhelmingly find their first idea for a company while they’re working for somebody else," she said. "Once you get familiar with an industry, whether it’s engineering, banking or consumer products, you see the niches, and you know the needs that aren’t being met."
Managing cash flow
Everybody understands that if money isn’t coming into a business, the business fails. What’s critically misunderstood is the choreography that keeps cash coming in and feeding the business as it scales up. Says Bernel, "If you can’t manage your burn rate, no matter what business you’re in, you’re going to fail."
In post-recession 2010, the valuation, capitalization and growth challenges that face all companies are even more daunting for startups, notes Mendoza Adjunct Professor Robert Moore, principal member of RAM Capital Partners, a North Carolina-based advisory firm, and a member of Notre Dame’s angel investment group, IrishAngels.
Moore (ND ’81) teaches a course that’s essentially a boot camp in startup finance. The class fills up quickly because it focuses on the real-life concepts that students bring to class. Students work in teams to analyze and determine accurate cash needs for their startups that will withstand the scrutiny of potential angels or venture capital investors, which is no easy feat. They look at term sheets from various investors and build financial models that go "deep into the drivers of revenues and expenses," says Moore. Failure to understand the very individual capital consumption needs of a business—from payroll to marketing—is where most new entrepreneurs fail.
And when trying to raise money, many entrepreneurs simply aren’t realistic. A few overshoot, but most don’t ask for enough, he adds. "Funders respect someone who knows how to build reliable financial models and can use them to monitor exactly what that business needs as it grows."
MBA student Spitalnik and his partners are in the middle of funding Unlimited Juice as the venture prepares to take its prototype into production. After two years of development, they were preparing this spring to meet with IrishAngels and other funders. "Our prototype is ready for this stage, and we’ve done a second round of family funding for a total of $100,000 seed money into the project so far," says Spitalnik.
The term "family funding" is familiar to most entrepreneurs. Raising money from family and friends has been among the most rewarding and the most stressful things Spitalnik says he’s had to do in this process. "You realize they’re investing in you, not the business. But that’s no reason to be casual. We’ve drawn up specific agreements with reporting requirements and we have added a family member to our board to oversee their interests," he says.
Why Imagination is Critical
Larry Abdo, a longtime Twin Cities businessman who teaches part time at Notre Dame and is a member of the IrishAngels, has started or invested in more than 20 businesses in the last 40 years. They’ve included upscale hotels and a few condominium projects and restaurants, but they’ve also included small but notable ventures such as Big Fat Bacon, a Minnesota State Fair fixture that sells fairgoers a huge piece of crispy bacon slathered with spices and maple sugar.
Jeff Bernel frequently invites Abdo to visit his classroom. Abdo didn’t pull any punches this spring when asked to talk about how he found capital in the midst of a recession to buy an ice-manufacturing company in Minnesota.
"Look, there’s no money around. Banks will lend you money for super-collateral, which essentially means that they will lend you $1 if you put $2 in their bank. Friends and family used to have a lot more to offer you, but they don’t have that right now, and the VCs who do have money are being very cautious," he explains. "But this is what establishes the difference between an entrepreneur and someone who simply starts a business. You have to be the one who comes up with the bizarre solution that gets around any obstacle."
Abdo, for example, has been an ice distributor for years, selling to state fairs and arenas. Recently, a regional ice-manufacturing plant came on the market. Amid a national consolidation of ice-manufacturing companies, "there are a lot of customers who are now getting lousy customer service from the bigger companies," he explains. Abdo has approached some of these disappointed customers to provide the capital that will buy the factory and secure their ice at a lower price in the marketplace. "I’ll make them shareholders and I’ll get the capital," says Abdo. "The idea is to come up with the solution that goes around the problem."
John Mackey, co-founder and CEO of Whole Foods Market, spoke at a Mendoza event in March about "conscious capitalism"—the view that it is important for business to recognize its higher purposes and the interconnectedness of its various stakeholders. And he said that it is founding entrepreneurs who first establish those purposes in a company.
"Why is it we think the singular purpose of a business is to make money? I think that’s what economists have taught us," he told the crowd. "I have known a lot of entrepreneurs and very few have ever told me they started their business to get rich. They were on fire about an idea, or they wanted to show people what they could do if they had a chance. Or maybe they wanted to make the world a better place. Or maybe they had issues with their parents."
Mackey, who started Whole Foods 30 years ago with $45,000 "because we just wanted to have a store that sold healthy food and we could earn a living doing it," cautioned that entrepreneurship is not an easy road. Like almost every startup, Mackey notes that Whole Foods never had enough money in the beginning. During its first decade, the company scraped to save money and battled with suppliers to get extended credit. And when the company began to take in venture capital and eventually went public in the 1990s, there were fewer money problems, he said, but new worries arose: how to preserve the company culture as it grew larger and the never-ending marketing challenge.
Every successful entrepreneur wrestles with the growing pains and the responsibilities of that business—the offspring of the idea they fell in love with. As weeks, months and years pass, they often reflect on what it’s meant to their own lives.
Daniela Papi majored in economics and took finance and accounting, but never saw herself starting her own tourism business. But asked if she considers herself an entrepreneur now, she doesn’t hesitate to answer. "Yes, 100 percent. It’s a personality type. I don’t consider my work a job. In fact, today I missed our daily staff meeting to do a quick orientation for a tourist group that just arrived. There’s no typical day, and I like that. I look at people who get so stressed about their jobs that they live for their 10 days of vacation to relax. For me, nearly every day is work, but I wake up eager to start."
"I don’t want to work in a system I can’t change," says Papi. "That’s why I don’t think I could work in a conventional organization ever again."