fedgazette

The entrepreneurial stool

Capital is important to entrepreneurs, but other legs are important and often ignored

Ronald A. Wirtz - Editor, fedgazette

Published July 1, 2001  |  July 2001 issue

Carrot juice. Maybe not the stuff of Edison, but entrepreneur Eric Strauss of Minneapolis saw an opportunity.

He invested $20,000 of his own money to incorporate the Crazy Carrot Juice Bar in 1996 to get in on the ground floor of a retailing niche in health-oriented fruit and vegetable juice outlets. Over the next two years, Strauss sought investors to open up the first in a hoped-for chain of stores. He went to friends and family, 30 of whom scrounged up $80,000, which helped him leverage another $85,000 in government loans.

With a prototype store up and running in 1998 in a fashionable St. Paul neighborhood and sales "trending upward week in and week out," Strauss and two new partners put in another $30,000 "and began looking in earnest for larger investors interested in helping us expand the concept."

They settled on "a very well-heeled angel investor" with experience in the restaurant industry, who ultimately poured in $1.3 million that helped open three new outlets in Minneapolis and one in Naples, Fla. But others saw the same opportunity, and competition flooded the market. In the end, Strauss and others were bought out by the angel investor for a small fraction of their original investments, and each store was resold to competitors or transitioned to other uses.

"Although the experience was not financially rewarding, I certainly learned a lot and would do it again in a heartbeat," Strauss said. Showing his entrepreneurial bent, he leveraged his juice experience into a new career in business plan writing and launched EntrepreneursForHire.com "to enable start-ups and emerging companies ... to more easily connect" with other companies that can assist with business start-ups.

Such a lemons-to-lemonade mentality appears to be the rule rather than the exception among entrepreneurs. Entrepreneurship itself is a powerful elixir, but akin to a sweet-and-sour high. According to one practitioner, entrepreneurship is part inspiration, affliction and addiction. "It depends on what day of the week that you ask."

Thanks to a variety of factors—including the rapid evolution of the Internet, a global economy dominated by high-tech companies and a high-flying venture capital industry facilitating the growth of both—there appears to be renewed enthusiasm for entrepreneurship. A report by the Global Entrepreneurship Monitor (GEM) noted that the United States is "in the midst of an entrepreneurial revolution."

Most entrepreneurs still toil in relative obscurity, sometimes for little or no financial reward as ideas never get off the drafting table. But more attention is being paid to the collective impact of entrepreneurs on an economy. For example, credit for strong regional and state economies is often laid at the feet of young, fast-growing "gazelle" companies seeing 20 percent growth annually. Analyzing two years worth of data on 21 industrialized countries, the GEM report found that such entrepreneurial companies accounted for one-third to one-half of the gross domestic product variance among countries, with the United States at the head of the entrepreneurial pack.

But many, including the authors of the GEM report, also believe there is a geographical imbalance in entrepreneurship in the country, with capital and other resources concentrated in a handful of coastal regions. There is a similar perception of imbalance in the Ninth District, where most resources have pooled in the Twin Cities, though even here many fret over entrepreneurial competitiveness. But where many see market failure in such concentrations, the market for entrepreneurs appears to be playing out much as economists would predict.

At issue is the ease with which entrepreneurial ideas are turned into profitable endeavors. Depending on where an entrepreneur lives, the path can be marked with stop signs or green lights. While most associate entrepreneur-friendliness with ample venture capital, it is but one element of a larger environment that either encourages or discourages risk taking among people with ideas that have commercial possibilities. As such, venture capital appears to be more of a sign—a market byproduct, if you will—of a healthy local entrepreneurial environment, rather than the cure-all of economic malaise.

Habitat for human ideas

Once the idea bulb is lit, an entrepreneur's "first question is, 'Where do I want to do this?'" said Patrick Von Bargen, executive director of the National Commission on Entrepreneurship. Most entrepreneurs want to stay where they are currently located, he said, "but if this is a place where [entrepreneurship] doesn't happen, they say, 'Why start with my arm tied behind my back?'"

When it comes to an entrepreneurial environment, most of the attention is focused narrowly on the availability of capital. "The reason there is an overemphasis on [capital] is [because] capital is the most concrete," Von Bargen said. "You can count money ... [and] you don't have to explain yourself if you give that reason."

Capital is important to launching a new concept, said carrot-man Strauss, but "it is less important than finding an experienced management team and being able to network and bounce ideas off others operating in the same space, whether they be mentors, competitors, partners, strategic alliances or the like."

Jay Hare, partner of the technology industry group at PricewaterhouseCoopers in Minneapolis, said a good entrepreneurial environment constantly mixes three main ingredients: technology, money and entrepreneurial-minded people. "Money as a stand-alone resource is not enough," he said. "If you go into Minot [N.D.] and drop $1 million, what's going to happen? Probably not much."

"What you want to do is create a habitat, an ecosystem if you will," Von Bargen said. Along with physical infrastructure—roads, telecommunications, airports—a healthy ecosystem for entrepreneurs needs a social infrastructure, which Von Bargen described as "the existence of networks to connect entrepreneurs with each other" and with other pieces of the support structure. That support structure consists of other professionals—lawyers, accountants, real estate agents, academic researchers—who understand the difficulties of starting a new company and can problem-solve for entrepreneurs.

The support structure also extends into more basic areas like workforce preparation. A feasibility study looking at technology incubation in the Chippewa Valley in northwest Wisconsin—a region that includes Eau Claire and is noted for its comparative high-tech sophistication—found a dearth of seed and venture capital. But the report also identified a lack of technology-based, upper management professionals and an "insufficient array of science, engineering and entrepreneurial degree programs" at local universities. The report's main recommendation was to first establish an "innovation network" to link entrepreneurs with the technical and financial resources necessary for young companies to develop.

This wide net of support mechanisms is particularly absent in rural areas. "Instinctually, [rural areas] are very entrepreneurial. ... It goes back to the requirement of being self-sufficient" in out-of-the-way places, said Bruce Davis, executive director of the Northwest Regional Planning Commission, a public development agency in Spooner, Wis. But these areas usually lack a formal system or environment to take advantage of opportunities. "People might have all these ideas, but they don't know what the heck to do with them."

Culture club

Also overlooked is the role of culture on entrepreneurship. Von Bargen said entrepreneurs need a culture "that is supportive—not a place that views failure as a bad thing, but a learning experience."

"Clearly, the culture of a region has a huge impact" on entrepreneurial activity, said Greg Sandbulte, president of Northeast Ventures Corp., a for-profit equity fund in Duluth, Minn. "From our perspective, it's hardest to find the people with the vision to fund with our money. ... Capital is very much a problem for us, but it's still the people driving the plan."

Long dependent on mining companies headquartered elsewhere, entrepreneurship in Minnesota's Iron Range "is not widely regarded," Sandbulte said. Most of Northeast's $15 million in capitalization has come through public and foundation grants. As such, part of the fund's mission is social in nature, trying to incrementally increase local entrepreneurship and business ownership. To date, investments in 28 local companies have generated 650 jobs. The fund has "exited" five successful businesses now valued at $5 million, but seen "four flops" and a write-off cost of $2 million, Sandbulte said.

"We are not the answer or solution to the diversification of the economy of the region," Sandbulte said. But he added, "I think we've made some progress" toward educating people about entrepreneurship. "It is significantly less difficult today [for entrepreneurs] than it was 10 years ago."

Differing lifestyle expectations can also influence the entrepreneurial environment, as rural attitudes might not always fit urban stereotypes of an overworked, poorly nourished entrepreneur. The laid-back attitude in Montana can be a "significant obstacle" to financial success for Montana entrepreneurs, according to Cliff Grant, president of LocalFund.com, an online matchmaking service for entrepreneurs and investors located in Billings, Mont.

"I know of several entrepreneurs, myself included, who would do much better in business if they were not located in Montana. We're competing with entrepreneurs all over the country who eat, live and breathe business," Grant said. But he won't be changing his address anytime soon simply to make more money.

"You read about offices full of dedicated people who drink their daily case of Mountain Dew, have pizza delivered every day and even sleep in their office. Montanans just shake their heads and say, 'no thanks,'" Grant said. "We're willing to sacrifice a wildly successful business for a strong personal life rather than vice versa."

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