In a soft economy, it is an understatement to say that there are easier ways to make a living than being an entrepreneur. Even in a field where uncertainty is the norm, a recent slowdown in start-up investment has made the environment for start-up businesses more challenging than ever.
But for a panel of experts convened at the Tepper School of Business, even when the sky is cloudy, that doesn’t mean it’s falling.
In a session titled “Launching and Building Entrepreneurial Ventures,” a group of five Tepper School alumni who are veteran entrepreneurs and venture capitalists explained how innovation can prosper, even in stormy weather.
As moderator Art Boni put it, “Everybody wants to be a venture capitalist,” although the rules for getting in the game are changing.
Citing a survival guide authored by Silicon Valley’s much-admired Sequoia Capital, Professor Boni, the John R. Thorne Chair of Entrepreneurship; Associate Teaching Professor of Entrepreneurship; and Director, Donald H. Jones Center for Entrepreneurship, said entrepreneurs need must-have products, established revenue models, and a thorough understanding of the market uptake and a customer’s ability to pay.
“If you ever do the math, you’ll never get out of bed,” joked panelist Doug Camplejohn, founder and CEO of Mi5 Networks and a 1988 graduate of what has since been named the Tepper School. “It’s our form of gambling.”
Ross Ahlgren, MSIA 1988, a first venture debt provider since the early 1980s, says people like him — who co-invest in risky companies with other top-tier venture capitalists — “see more deal flow now than we did before,” adding, “it’s a bit of a silver lining.”
However, terms of venture debt are toughening up, the panel warned, as are the terms of venture capitalist-based initial public offerings.
“The IPO price, if you can get it done, is roughly $500 million,” said Boni. “There are bigger expectations on the size of a company.”
Bright spots exist in clean energy and biotechnology, thanks in part to higher natural resource prices and concerns about global warming. Medical devices and software also continue to see investment.
Per Lofberg, MSIA 1973, who just retired from an arm of Merck that invests in start-ups before co-founding PharmaCapitalVentures, believes health care is one segment that represents hope and requires change.
“It’s huge, it’s important, we can’t live without it,” he says. “There’s no shortage of opportunity for innovation.”
Mike Partsch, MSIA 1998 and co-founder of AcceleMed Management, Inc., recommends that entrepreneurs look to doctors as a possible source of ideas, because they may have a fresh perspective on possible medical devices or other technology that would be useful.
Bob Wetzel, MSIA 1988, whose late-stage venture capitalist firm Augury Capital Partners invests in biotechnology and pharmaceuticals, said most funds are tied to financial services firms, and little private equity is available.
However, “There’s a whole generation of VC-backed companies that provide outsourcing services,” both for other start-ups and established firms, he said, adding that these companies are doing well.
“Currently we’re fundraising in addition to putting capital to work,” he said. “We just need to be patient.”
The need for innovation remains constant, and panelists advised discipline and a conservative approach to allocating resources. Camplejohn suggested that would-be entrepreneurs ask themselves what problems they can solve, and focus there for innovation.
On the flip side, if any idea appears on someone’s “hot list,” “Those are things you should run away from,” he said — because chances are, it’s already too late.
He advised people who are looking to break into venture capitalism to follow a passion and identify talented people to serve as role models. Personally, he said he was recruited into a start-up, where he got the bug.
“Don’t follow the money,” Camplejohn said. “Go where you’ll be exposed to the brightest people.”
Partsch agreed, suggesting that one good strategy for demonstrating entrepreneurial ability would be to take a low-level job in a venture capitalist-backed start-up and help them become profitable.
But in such a volatile environment, Ahlgren said little is certain and forecasting is imperfect: “The honest answer to a lot of this stuff is in a tornado, even a turkey can fly.”