Your Next Rivals/Here Comes the Competition The winners of our first annual MBA business-plan contest have fresh ideas, strong management skills, and money. So watch out. They could be your new rivals.
(FORTUNE Small Business) – If you think it's not a great time to start a business, you're right. Three years after the tech market crash left the Pets.com sock puppet in the Goodwill bin, investors aren't exactly clamoring for the next big idea. "The amount of noninvested venture capital is staggering," says Randy Swangard, director of the University of Oregon's Lundquist Center for Entrepreneurship.
But with the job market stagnant and the image of corporate America suffering from a spate of scandals, some of the nation's top MBA students are fearlessly choosing entrepreneurship as their most attractive career option. While there are no hard numbers available, the sense is that the startup spirit is thriving on U.S. campuses, with students launching businesses either while still in school or immediately after graduation. "Certainly the tight job market makes entrepreneurship more of a viable alternative, and that is very significant," says Clifford Schorer, entrepreneur in residence at Columbia Business School.
But instead of trying to start the next Amazon.com, many students are following a path that Michael Dell paved when he launched Dell Computer at the University of Texas. They're creating tightly focused ventures that they can finance on their own. And we're not just talking tech startups. Students are venturing into a wide array of fields, from running an urban recording studio to marketing organic horse manure to gardeners.
So who are the most promising young entrepreneurs to emerge in an uncertain economic climate? To find out, we launched our first annual business-plan competition, the MBA Showdown. We invited winners of the business-plan contests at top MBA programs across the U.S. to face off in a contest devoted to finding the best of the best. It soon became clear that we had some tough decisions to make. Fifty-six entries arrived from 49 schools ranging from the Haas School of Business at the University of California at Berkeley to the Wharton School of the University of Pennsylvania. Both graduate and undergraduate students could enter, as long as they had first won a competition run under the auspices of their school's MBA program.
Brigham Young University's Property Solutions emerged as the first-place winner, with new software for property managers. KidSmart, a startup from the University of Georgia that designed a smoke detector for children, came in second. The third-place team, Harvard Business School's Jadoo Power Systems, develops fuel-cell batteries.
We had a difficult time choosing these three from among scores of outstanding business plans. They ran the gamut. One venture at Northwestern University's Kellogg School of Business plans to rent Segway scooters to vacationers on Caribbean islands. At the University of California at Davis, the biotech startup SialoGen is building a business around a patented technology that it hopes will stop the spread of cancer. As for the traditional technology startups that entered, they were far more focused on solving specific problems than predecessors of the past few years have been. One at Purdue, for instance, proposed a more efficient way to keep laptop computers from getting too hot. "Tech's grown up, shaved, and gotten a job," says Sam Hill, president of Helios Consulting and one of our judges.
To evaluate the entries, we relied on the expertise of our judges (see "The Judges," at the end of this story). They set up a scoring system based on the approach that many investors use to evaluate business plans (see "How We Chose the Winners"). The most difficult tasks, they said, were passing up amazing ideas not backed up by strong business plans, and evaluating extremely diverse enterprises. "It's challenging when you have to compare opening a desert café with a technology company that could have a multibillion-dollar impact but hasn't yet been to market," says judge Kay Koplovitz, the founder of USA Networks.
The eight teams that scored the highest had the chance to compete in our oral competition. Students had ten minutes to pitch their businesses by phone, the way they might to a venture capitalist. The first-prize winner won $50,000; the second, $10,000; and the third, $5,000. The prize money came from the Edison Preservation Foundation, a nonprofit dedicated to preserving Thomas Alva Edison's legacy of innovation, and from Entrex, an Internet company based in Washington, D.C., that connects private firms with potential investors and that was founded by our judge Stephen Watkins.
It won't be clear for years whether the winners we've profiled or their many talented competitors will leave a permanent mark on the entrepreneurial world. But you may wake up some-day and find one of them breathing down your neck. -- ELAINE POFELDT
FIRST PLACE Property Solutions
What it does: Makes web-based software that lets apartment managers accept rent payments and repair requests online Founder: David Bateman Date founded: August 2002 Startup capital: $160,000 in profits from Bateman's previous startup Goal: Getting acquired
David Bateman came up with the idea for his business by listening to his wife. A property manager for four off-campus complexes that house Brigham Young University students in Provo, Utah, "she would come home at night and tell me everything that was driving her nuts," says Bateman. Her chief gripe was the way residential units were managed, using antiquated paper ledgers.
Bateman--who was majoring in business administration at Brigham Young but had taken courses in web design--set out to create a computer program for her. If he could do that, he suspected he'd have the basis for a profitable company. In August 2002 he began sketching out plans for a web-based software system that would let management companies accept and automatically record online rent payments and maintenance requests. Starting his company, Property Solutions, in January 2003, he hired a trio of programmers to help him and launched his Vantage XP software by June. Bateman's idea took off almost immediately. Although other online payment systems and property-management software already existed, no one had linked the two. Within ten days of its software launch, Property Solutions had seven clients, and sales reached $100,000 in the first three months. In April 2003, Property Solutions won first prize and $25,000 in Brigham Young's business-plan competition with a team of five undergraduates, besting 96 teams made up mostly of the school's top MBA students. Bateman told avid venture capitalists to keep their cash.
An off-and-on student who attends Brigham Young part-time, Bateman, 25, had already built a successful business. Serving as a Mormon missionary in Honduras from 1997 to 1999, he quickly discovered a disadvantage to living in a developing nation: The mail service, too, was developing. Letters might take three weeks to arrive. Bateman decided to speed the process. In November 2000 he launched DearElder.com, a for-profit site on which people could communicate with Mormon missionaries overseas. Customers type letters into the site, and the letters are then routed to Third World countries, where they are printed and delivered in a day or two. Last year, DearElder.com, which is still in business, generated $250,000 in sales with a 76% profit margin.
Using $160,000 in profits from DearElder.com, Bateman developed Vantage XP. That investment is paying off. Today, Property Solutions has nearly 40 clients. The biggest is Utah-based Triton Investments, which manages some 3,000 units. Bateman says he's now in discussions with BH Management in Dallas, which has more than 30,000 units, and three similar companies.
His biggest challenge will probably be persuading tech-averse property managers to spring for his system. In a survey of 420 property-management companies, Property Solutions found that 66% used outdated DOS-based software systems or paper ledgers to manage units. But to upgrade to Vantage XP software, companies would have to pay $5,500 per apartment complex (regardless of size) and another $2,499 to set up a website. In addition, Property Solutions hosts all the web-based systems, like rent payments, on its own infrastructure, covering the costs by charging clients $1 a month for each apartment. The key will be to show clients a return on their investment almost immediately, says Blanche Evans, editor of Realty News, a Dallas-based online news service: "You have to provide the software at an attractive enough price that the customers feel that they make their costs back in improved efficiencies." That's easy, says Bateman, projecting that Vantage XP could save a company that manages 1,000 units $20,000 to $25,000 a year. The savings would come through reductions in administrative staff, quicker processing of rent payments, savings on building a website, and other efficiencies. As for another hurdle--persuading tenants to pay rent online--Bateman believes a small rent break is a good incentive. Yet his goal isn't to win over every property manager. He simply wants to attract enough customers to make the company an appealing acquisition target in four to five years. After that he says he'd like to finish school: "I've got to get that MBA sometime, don't I? -- ALAN COHEN
SECOND PLACE KidSmart
What it does: Makes smoke detectors for kids Founders: Bruce Black, Matt Ferris, Brent Routman, and Larry Stults Date founded: September 2002 Startup capital: $200,000 from friends and family Goal: Selling the firm at a profit
If you've ever triggered a smoke detector accidentally, you may find it hard to imagine that the piercing sound wouldn't wake someone during a fire. But a study at the University of Georgia shows that children often sleep right through the alarms, responding far better to a tape recording of a parent's voice telling them how to evacuate. Two graduates of the university's MBA program aim to act on that research with the KidSmart Vocal Smoke Detector, which rouses children with a recording. Given the attention it's getting, the gadget may be giving competitors some sleepless nights too.
Matt Ferris, 26, and Bruce Black, 28, were working on another business idea when Charles Hofer, the head of the university's entrepreneurship program, introduced them in September 2002 to two attorneys with an invention. Larry Stults, a trademark lawyer and father of two, had come up with the notion a few years before while lying in a hotel bed, staring at the smoke detector above him. He wondered why it couldn't tell him where to go in case of a fire so he wouldn't have to read the instructions on the door. He soon teamed up with patent attorney Brent Routman to develop a prototype, but they needed help turning it into a business. So they sought advice from Hofer, whom they knew from the days when Stults had gotten his law degree at the university and Routman had worked in the law school.
Hofer suggested they form a partnership with Ferris and Black, which turned out to be a smart move. By November the two MBAs had introduced the smoke detector to the Ace Hardware chain, where Ferris had once worked. Ace promptly sent a letter expressing interest in ordering the device once it became available. Raising $200,000 from friends and family, Ferris and Black set to work on developing a better prototype for manufacturing.
Even before they created one, they entered the smoke detector in a contest at the massive Consumer Electronics Show in Las Vegas in January, garnering an innovation award. Armed with a new prototype in March, they took second place in the national Carrot Capital Business Plan Challenge. Ferris and Black got an offer for a $750,000 equity investment but turned it down, preferring more freedom than the deal allowed. KidSmart went on in May to become global champion at the Moot Corp. business-plan contest, winning a $100,000 bridge loan, which is convertible to equity.
The prize money will no doubt come in handy. To launch their product, Ferris and Black plan to start a nationwide television ad campaign next month. They are also in discussions about selling their alarms on QVC and in catalogs like the Sharper Image, Hammacher Schlemmer, and SkyMall beginning in January and February. They plan to hire a seasoned CEO at that point to guide them.
And not a moment too soon. KidSmart is entering a tough marketplace. Its smoke detector, retailing for $79.95, is more costly than other models, which sell for as little as $7. And market leader First Alert is introducing its own voice-enhanced alarm. It has a generic voice, however, not the "familiar voice" system that KidSmart has patented.
Ferris and Black say they're confident that KidSmart will hold its own, and they're projecting $9 million in sales for 2004. "It's exciting to see that entrepreneurs can take a proven business model and put a whole new exciting twist on it that the incumbents can't even think up," says Watkins, the Entrex CEO and a judge in FSB's MBA Showdown. "Here's a pretty simple product idea, and you've got all these executives up in their ivory tower that are thinking all day and are not very innovative."
Of course, neither Ferris nor Black would mind if one of those incumbents reached down in a few years and handed them a check for the purchase of KidSmart. "Because by then you're really getting into producing millions of these things a year and just managing it," says Ferris, who sounds alarmingly uninterested. But the startup process? He and Black can't get enough of it. "It never feels like we're working," says Ferris. -- ROB TURNER
THIRD PLACE Jadoo Power Systems
What it does: Makes fuel-cell batteries for surveillance devices and broadcast cameras Founders: Lee Arikara, Larry Bawden, John Berger, Kenneth Pearson Date founded: November 2001 Startup capital: $300,000 from the founders, employees, and a private investor Goal: Going public
Blackouts. terrorism. a lingering war in a remote desert landscape. Not key elements of your average business plan--unless, like Jadoo Power Systems, you make fuel cells. This Folsom, Calif., startup designs energy-efficient cells for power equipment like weapons systems, surveillance cameras, global positioning systems, and other power-hungry machines that now rely on short-lived conventional batteries.
Fuel cells, which are basically über-batteries that run on hydrogen and oxygen, have been around for decades. But their high price and unwieldy size have kept them from the mainstream market, until now. Jadoo has devised batteries that are half the size of conventional ones, last longer, and cost only a little more. Imagine the difference between changing batteries in a surveillance camera every two to three days as opposed to once a month with an energy-efficient fuel cell.
This company is already reaping dividends. Barely two years old, it has sold its fuel cells to Boeing; government agencies like the CIA, the Secret Service, and the Bureau of Alcohol, Tobacco, and Firearms; and the U.S. Army. Earlier this year Jadoo placed in the business-plan competition at Harvard Business School, where vice president of business development Jon Berger, 30, earned his MBA this past spring.
It wasn't long ago that Jadoo--which gets its name from the Hindi word for magic--was doing business in a three-car garage next to a chicken coop outside Sacramento. Jadoo's president, Larry Bawden, 45, learned about fuel-cell technology at Aerojet, based in Sacramento, where he worked as director of fuel-cell products. In 1995, Aerojet sold off his unit, and Bawden left with a golden parachute. Embarking on an around-the-world boat trip with his wife, he got as far as Australia before some former colleagues called. They persuaded him to return to become a vice president at a fuel-cell company they were starting called PowerTek. They'd soon lined up a huge customer--the energy giant Enron--but unfortunately it was about to collapse.
Good timing is everything in business. And fortunately for Bawden and two other colleagues at PowerTek, their point person at Enron, Jon Berger, was ready for a career move. They recruited him to join them in launching Jadoo in November 2001, just as he was starting at Harvard. After helping them write a business plan, Berger asked a classmate to critique it. The student was impressed enough to invest $200,000. The co-founders and four other employees put in more than $100,000. In the meantime Berger began approaching East Coast investors.
It didn't take long for Jadoo to attract interest from some major players. Among them was Sinclair Broadcasting Group, which owns 62 local news stations in the U.S.; it was the lead investor in a $5 million round of financing last year. But Jadoo's biggest coup came after President George W. Bush touted hydrogen as an alternative to foreign oil in his State of the Union speech last January. Jadoo, which had just released its first product--a long-lasting battery for the surveillance industry--was one of 22 fuel-cell companies invited to Washington to make a presentation to the White House. The others included giants like Ford and Motorola. Afterward, Jadoo was one of only seven firms invited to give one-on-one presentations to the President. The startup got some unexpected free publicity when Bush held a TV camera using one of Jadoo's lightweight fuel cells on his shoulder as media photographers captured the moment. Jadoo plans to begin selling such batteries to the broadcast market early next year.
With word spreading around the Beltway about Jadoo's products, Bawden projects $6 million to $9 million in sales for 2004. Ultimately he plans to take the company public. "When the markets come back," he says, "we want to be the first fuel-cell company showing up in the open market in the black." Given Jadoo's success in powering through a slow economy, it seems to be on its way. -- ROB TURNER