1

Starting an IT Company

A Recipe for Success

2

Agenda

Introduction Case Studies

Sense Corp Qore Business Group WAN Technologies/Digital Skyway eBay

Secondary Research Conclusions

3

Types of IT Startups

Software Hardware Outsourcing xSP’s Internet Services Etc.

4

Set the Stage

Only 30 percent of business start-ups survive more than five years. 48

Recent increase in VC Money for technology, but it is being concentrated in a few sectors. (Wireless networking, security software, storage)

Number of Start-Up companies over time:

1998 - 68,3121997 - 54,2391996 - 49,710 1995 - 23,942 1994 - 27,212 TOTALS - 223,415 47

Estimated that three out of four online start-ups will go “belly-up” in the

next three years. (4/2000) 49

5

What is an Entrepreneur?

Main Entry: en·tre·pre·neur   Pronunciation: "änn-tr&-p(r)&-'n&r, -'n(y)ur

Function: nounEtymology: French, from Old French, from entreprendre to undertake -- more at ENTERPRISE

Date: 1852: one who organizes, manages, and assumes the risks of a business or enterprise 43

6

“…the idea of overcoming resistance to change, getting things done and thereby profiting. Entrepreneurial activity is contingent and situational. Entrepreneurs spot business opportunities and then commit time and resources to the pursuit of those opportunities. They do so as they weigh the incremental value of successive evolutions. And entrepreneurs, therefore, earn economic rents, for they bring together factors and resources to accomplish specific projects. They organize.”6

What is an Entrepreneur?

7

What makes a successful entrepreneur?

Leadership Qualities? Management Traits? Venture Capital

Availability? Timing? Technology? Location? Human Capital? Luck? Risk Taker?

8

Norman Schwartzkopf

"Leadership is a potent combination of strategy and

character," he says. "But if you must be without one, be

without strategy." 50

9

Peter Siegel—Sense Corp

10

Siegel’s Personality

Motivated Decisive Not authoritative Trusting Optimistic Hard-working Detail-oriented 38

11

Siegel’s Background

Childhood traits Hyperactive, social, mischievous, self-motivated

B+/A- student in high school Graduated from Syracuse University with a business degree

(Logistics Management) Father is a nuclear medicine doctor Mother is a doctor’s office manager Peter did not pursue a career in the medical field like his father

because he didn’t want to work as many hours as him. With his company, he now works just as many, if not more hours

than his father ever worked!

12

Sense Corp

IT Consulting firm specializing in Data Warehousing and Business Intelligence

Peter Siegel, 31, was one of 4 founders

13

Sense Corp Profile

45 – 50 employees ~$10 million annual revenues ~100% annual growth rate from 1997

through early 2001 0% growth from mid 2001 through mid

2003 New growth has begun in the last few

months

14

Sense Corp History

Started in 1996 with 4 people 2 Andersen Consulting employees 1 Mallinkrodt employee (client of Andersen) 1 independent contractor (friend of Andersen consultant)

working at Shell Services International First main client was Shell in Houston Grew to 10 consultants just at Shell Had a sizeable team at Enron

during their fall…first consulting

firm to be asked back when SEC

demanded financial data

current technical lead on my project

15

Sense Corp’s Success Factors

Each founding partner excelled in a different area Peter -> back office capabilities Keat -> vision, business development, recruiting Brian -> execution of the vision Mike -> technical expert

Run the company conservatively Didn’t want a debt situation Conservative growth approach saved them during the economic

downturn Small size gives them flexibility that their larger competitors (big 5)

can not duplicate Can turn around proposals within days rather than weeks

Concentrate on quality of consultants rather than number of consultants

16

Recruiting Strategy

Unsuccessfully worked with a head-hunter in 1999 and 2000 Found that they cost more than they are worth

Occasionally uses HotJobs website to find qualified applicants Large time commitment to browse through hundreds of

resumes and usually only come away with a couple potential applicants

Most employees are a result of referrals from existing employees

Recruiting statement:“Looking for smart, good communicators, business-minded folks

with an affinity for technology”

17

Strategy for Acquiring Customers Relationships with past and existing clients Partnerships with software vendors:

Business Objects Cognos Ascential Ambeo Embarcadero

Growing accounts at existing clients: Charter Tyco Healthcare Enron ERCOT Bayer CropScience BCBS of Michigan Accident Fund Plains All American

18

Mark Peterson—QORE Business Solutions

19

Peterson’s Personality

Expressive/Driver Flexible Stubborn Determined Caring Responsible Moral code Leader Entrepreneurial 36

20

Peterson’s Background

Exposed to Entrepreneurial Leadership as a child

US Navy DEC

21

"Creation of processes and products, of ideas and industries, depends on people more than money, on imagination as well as initiative. Seek out creative people with the vision of things to be done. Help breathe life into new ideas and processes and products with capital - and with more than capital - with sensitive appreciation for creative drive, with support in management and manpower, with loyalty to the idea and to its initiator, the creative individual."Georges F. Doriot, President, American Research and Development

(1946-1972)

Back to the Beginnings

“Success is probably the worst problem for an entrepreneur.” 34

Ken Olsen – Digital Equipment Corporation

22

Next Steps in Peterson’s Career QORE Business

Solutions Sentry Meta Group Consulting Coeur Business Group Coeur/EVP

23

QORE Business Solutions

40 employees ~$10 million annual revenues Systems Integrator, Help Desk Outsource

and Cost Containment Consulting 2003 focus on Healthcare as a primary

vertical 44

24

QORE Business Solutions’ Success

Factors Low Risk Self Funded Partners Monsanto as key first customer Established expertise in energy market

that had a gap in expertise Good Timing—Cost Reduction and Value

Sourcing were a growing need.

25

Tim Johnson—WAN Technologies/Digital Skyway

26

Johnson’s Personality

Good work ethic Drive Genuine concern for other people—

empathy Decisive Ability to relate to others 37

27

Johnson’s Background

Entrepreneurial Family AT&T WANTEC Digital Skyway

28

WAN Technologies

100 employees ~$20 million annual revenues Wide Area Network Value Added

Reseller Cisco Gold Partner Network Management Outsourcing, IP

Telephony and Security are key focus areas 45

29

WAN Technologies’ Success Factors

Gap in telecommunications offering for CPE integration and management

Self funded Balanced Partnership—Vision, Operations,

Sales Initial Customers through AT&T and MCI

contacts Qwest became key customer

30

Digital Skyway20 employees~$10 million projected sales for 2004WiFi (Wireless Broadband) Infrastructure providerTarget Markets

Small/Rural marketHotel IndustryFranchising 46

31

Digital Skyway’s Success Factors Gap in high speed offering to rural

areas Key partnership with Primary Network Self funded Partners in Sales and Operations First to Market Franchising Model Extensive Planning

“Somebody should be aware…where are the first 12 months capital coming from?”

32

Comparison of WANTEC and Digital Skyway

IT viewed as a commodity today Overcoming barriers to success ahead of time is

crucial to eventual success Seek existing commodities of scale—become part

of an ecosystem rather than creating it yourself Find good business partners

33

“If you come from a democratic, libertarian point of view, having a corporation just cram more and more products down your throat doesn’t seem like a lot of fun.

“I wanted to do something different, to give the individual the power to be a producer as well as a consumer.” 16

Pierre Omidyar

34

Company Profile

eBay Inc. operates a marketplace in which anyone, anywhere, can buy or sell practically anything. The Company has developed a Web-based marketplace in which a community of buyers and sellers are brought together to browse, buy and sell various items.

Feedback System – Users provide rating for other users.

PayPal service - eBay enables any business or consumer with e-mail to send and receive online payments securely, conveniently and cost-effectively.24

35

Pierre Omidyar

Born: 1967, Paris (only child) Parents from Iran migrated to France and then

US Father M.D. at Johns Hopkins Mother, Linguist

First IT Project at 14; Computerized school library catalog

Attended Tufts University in mid-80’s 17

36

Omidyar (Cont)

Finished undergraduate at UC-Berkeley Internship at Innovative Data Design First paying job at Claris 1991- Founded startup Ink Development

Ink Development re-launched as eShop 1994 – Left eShop (but retained equity stake) 1996 – Microsoft buys eShop. Millionaire before

30 Joined developer relations at General Magic 18

37

Creation of AuctionWeb

Legend PEZ Story

Reality Pierre spends summer of ’95 obsessing about internet Pierre got in on 3DO IPO and found inequality & inefficiency in

market Sought to create online community with level playing field 19

PEZ angle used to get press coverage early on 20

38

AuctionWeb in Action Labor Day Weekend, 1995 – Developed

AuctionWeb.com Initially one of 3 pages on Pierre’s personal homepage

AuctionWeb was a hobby. Echo Bay Technology Group – Pierre’s sole

proprietorship for web consulting Broken Laser Pointer example 21

Free service until personal ISP become Commerical Account due to traffic Arbitrarily Charged 5% for items under $25; 2.5% for items over

$25. Checks started to appear June, 1996

Exceeds Gross Revenue of $10,000 in a month Quits General Magic to work on AuctionWeb 22

39

Enter: Jeff Skoll

February, ‘96 – Consulting for AuctionWeb August, ’96 – “Co-Founder” Stanford MBA Born in Toronto, Canada

Had job selling Amway door-to-door at 12 Hired by Knight-Ridder for internet strategy

Brought business practices to Pierre’s hobby 23

40

AuctionWeb to

June, 1997 - $5 Million in Venture Capital Funding for 21% stake

September, 1997 – Overdue upgrade to site and re-branded as eBay

Missed Opportunity for Patenting 24

January 1998 42

Exceeds 21 million bids total bids; daily average of 120,000 5 million auctions since 1995; daily average of 200,000 per day

41

User Statistics 40

0

10

20

30

40

50

60

70

80

'97 '98 '99 '00 '01 '02

Year

Reg

iste

red

Use

rs(M

illio

ns)

42

Financials – Stock Price 41

43

Stock Price vs Nasdaq 41

44

eBay Financials 41

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

EP

S

EPS Estimates

45

5 Yr Income Statement 41

Year 1998 1999 2000 2001 2002

Revenue $ 86 $ 225 $ 431 $ 749 $ 1,214

Gross Profit $ 70 $ 167 $ 336 $ 614 $ 1,000

Gross Profit Margin

81% 74% 77% 81% 82%

Net Income $ 7 $ 10 $ 48 $ 90 $ 250

Net Profit Margin 8% 4% 11% 12% 20%

46

Success Factors

Created a Community Word of Mouth

Efficiency Golden Rule in Cyberspace – Feedback ratings No Inventory = Little Cost/Risk

80% Profit Margins in early years Profitable from 1st month of operations

Personal Involvement of with “community” Discussion Boards Public email addresses for principals

Self-funded until established – very thrifty “Great eBay Flood”

47

“Productive people know there is always a choice: a choice to succeed, an option for happiness, a decision to see the unexpected as a challenge, not a crisis.” 31

48

What makes a successful entrepreneur?

Leadership Qualities? Management Traits? Venture Capital

Availability? Timing? Technology? Location? Human Capital? Luck? Risk Taker?

49

Leadership

“What helps a founder – often the person who developed a new technology application, which can be solitary work – succeed as CEO? Leadership [... and the…] Ability to resolve conflicts.”

“[In a non-scientific sample of 200 companies] fewer than 40% of founder-CEOs made it past second round of venture financing”

“It’s abnormal to have the guy from Day One who has the capacity to grow and morph” 14

50

Management Traits 7

Global Competence

Space

Managing Performance

Managing Process

Managing Stakeholders

and Environments

Managing Development

Managing Culture

Managing Vision

NonentrepreneurialEntrepreneurial

Generic Managerial Behaviors

Entrepreneurial Managerial Behaviors

Nonentrepreneurial Managerial Behaviors

51

Venture Capital Investment 3

Types Description Average of Total

Early Stage Funding 49.7%

- Seed Prove a concept 3.4%

- Startup Product development / initial marketing 8.4%

- Expansion Initial expansion of established company

37.9%

Late Stage Funding 50.3%

52

VC Investment Trend 39

0.00

20.00

40.00

60.00

80.00

100.00

120.00

Am

ou

nt

(Bil

lio

ns

)

Inv Amt (B) 2.90 2.30 3.60 3.90 4.20 7.70 11.60 15.20 21.50 55.00 106.4 41.10 21.20

Number 1471 1279 1415 1209 1239 1901 2656 3250 4203 5684 8208 4691 3028

Avg (M) 1.95 1.79 2.54 3.2 3.39 4.04 4.36 4.66 5.11 9.68 12.96 8.76 6.99

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02

53

Timing

Time is a major factor in whether or not start-ups are successful…

“There is some indication that the survival of small firms is affected by overall economic conditions when they first entered into business.” 4

“The difference between success and failure of a startup is often a matter of timing, liking selling one's dot.com shares before the market crashed.” 33

54

“Good ideas are common; the people who can implement them are rare.” 31

55

Human Capital3 Important Findings 8

Entrepreneurs with more Human Capital perform better but do not necessarily survive more frequently

Entrepreneurial skills specific to the venture…customer, supplier, product and services…are directly related to performance and survival

Survival directly related to age, family experience, or motivation driving higher levels of persistence, resulting in survival

56

Human Capital& Social Interaction 1

57

Luck“…Business is not a completely rational process. There are always factors beyond your control--some that you're aware of, some that will hit you out of the blue. Luck determines whether you succeed despite those wild cards, and you can never completely eliminate it as a factor, but you can reduce its importance…” 35

58

PassionIn order to succeed as an entrepreneur, you must have passion in what you are doing.

Entrepreneurs tend to work long hours.Entrepreneurs do not often find immediate success.

“Business ventures required sacrifices of salaries or security, willingly made because the companies were based on dreams and passion for technology.” 25

59

Planning

“The significant relationship between pre-startup activity and expansion intentions is consistent with the findings of Van Auken and Neeley (2000). They suggested that the preparation of pre-startup documentation (e.g. business plans, cash flow projections) lead to a more efficient capital structure. “ 5

“Engaging in tangible activities - signing a lease, applying for a patent, conducting a market study - prior to the registration of the business, the owner-manager effectively builds self-confidence which, in turn, helps to cultivate growth aspirations.” 5

“Successful entrepreneurs also have imagination, the ability to envision alternative scenarios. I think of it as always having a Plan B.” 31

60

Marketing

Many new entrepreneurs think success is all about developing a great product or service, but actually it's all about selling it. 51

Marketing is by far the biggest problem faced by small businesses. 4

61

Marketing

“Companies ought to establish early and frequent contacts with prospective customers to clarify understanding of customer needs and to reflect these needs in product attributes.”

“Entrepreneurial teams should include at least one founder with a strong background in sales or marketing, who will inevitably provide different information and attitudes from often-dominant technical cofounders.”

Firms with dedicated marketing personnel have a higher degree of success. 2

62

Do Not Make the IT Entrepreneur“Skills, which are most lacking, are often not technical or technological. Rather, we find that most entrepreneurs lack good marketing, financial and organizational skills.” 4

“Business performance had a negative correlation with the firm's relative dependence on the technical skills of the owner-manager.” 5

IT Skills

63

What makes a successful entrepreneur?

Leadership Qualities

Management Traits Human Capital

Luck Timing

Location Venture Capital

Availability Technology Risk Taker Passion Planning Marketing

Research Shows

64

Success Factors

•Pre-Founding•At Founding•Post Founding•Corporate Success 2

65

Compare Case Studies to Research

*A strong correlation exists between important entrepreneurial traits identified by research and those displayed by the successful entrepreneurs in our case studies.

Peter Siegel Mark Peterson Tim Johnson Pierre Omidyar

Leadership Qualities X X X

Management Traits X X X

Timing X X X X

Human Capital X X X X

Luck X X X X

Passion X X X X

Planning X X X

Marketing X X

66

Advice to Would-Be Entrepreneurs

Have Industry Knowledge Be Willing to Work Long, Hard

Hours Get Expert Help—Banker,

Lawyer, Accountant, etc. Research for Demand Keep Good Records Have Adequate Starting

Capital Be Prepared to turn over the

reigns, if successful 10

67

Advice to Would-Be Entrepreneurs

Develop a Business Plan Set Goals: sales, profits,

market share, etc. Hire good employees Watch Overhead and

Fixed Costs Continue your Education Use Employee

Participation Diversify your Product 10

68

Recipe for Success

Having a blend of these critical ingredients does not guarantee success. However, they will increase the likelihood of success for your information technology startup.

69

Bibliography1. Lechler, Thomas. “Social Interaction: A Determinant of

Entrepreneurial Team Venture Success”, Small Business Economics. Vol. 16 (2001); pp 263-268.

2. Roberts, Edward B. "The Success of High-Technology Firms: Early Technological and Marketing Influences.“ Interfaces. Vol. 22, Iss. 4 (July/August, 1992); pp. 3 – 12.

3. Rausch, Lawrence M. “Venture Capital Investment Trends in the United States and Europe”, National Science Foundation. NSF 99-303; October 16, 1998; pp 1 – 4.

4. Wu, Chunchi and Young, Allan, “Critical operating problems and survival rates in small firms: A look at small business institute clients”, Journal of Developmental Entrepreneurship, Apr 2002. Vol. 7, Iss. 1; pg. 1, 23 pgs

5. LeBrasseur, Rolland, Zanibbi, Louis, and Zinger, Terrence J, “Growth Momentum in the Early Stages of Small Business Start-ups” International Small Business Journal, Vol. 21, Iss. 3, 8/2003, p 315

6. Osborne, Alfred E., Jr., Understanding Entrepreneurship, Business Forum; Fall 1987; 12,4; ABI/INFORM Global, pg. 12 (what is an entrepreneur)

70

Bibliography7. Sadler-Smith, Eugene; Hampson, Yve; Chaston, Ian; Badger, Beryl;

Managerial behavior, entrepreneurial style, and small firm performance; Journal of Small Business Management; Jan 2003; 41,1; ABI/INFORM Global pg 47

8. Gimeno, Javier; Folta, Timothy B.; Cooper, Arnold C.; Woo, Carolyn Y.; Survival of the fittest? Entrepreneurial Human Capital and the Persistence of

9. Underperforming Firms, Administrative Science Quarterly; Dec 1997; 42,4; ABI/INFORM Global, pg 750

10. Lussier, Robert N.; Startup business advice from business owners to would-be entrepreneurs; S.A.M. Advanced Management Journal; Winter 1995; 60,1; ABI/INFORM Global pg 10

11. Keely, Robert H., Roure, Juan B.; Management, Strategy, and Industry Structure as Influences on the Success of New Firms: A Structural Model; Management Science; Oct 1990; 36, 10; ABI/INFORM Global; pg 1256 (management traitsI

12. Amit, Raphael; Glosten, Lawrence; Muller, Eitan; Does Venture Capital Foster the Most Promising Entrepreneurial Firms?; California Management Review; Spring 1990; 32, 3; ABI/INFORM Global; pg. 102

71

Bibliography13. Anonymous. “What they need to succeed.” Canadian Banker.

Toronto: Jul/Aug 1995. Vol. 102, Iss. 4; pp 24 – 25.14. Bailey, Jeff. “Small Business – Entreprise: For Investors, Founders

Are Short-Term CEOs.” Wall Street Journal. (Eastern edition). New York, NY: Oct 21, 2003; pg A.24.

15. Banks, Brian. “The silicon billionaire.” Canadian Business. Toronto: Jul 30-Aug13, 1999. Vol.72, Iss. 12; pp 26-31.

16. Cohen, Adam. The Perfect Store: Inside eBay. New York: Little, Brown and Company, June 2002; pg 7

17. Ibid, pp 15-1618. Ibid, pp 17-2119. Ibid, pp 1820. Ibid, pp 83-8421. Ibid, pp 4-5

72

Bibliography22. Ibid, pp 21-3023. Ibid, pp 30-7224. Ibid, pp 76-9125. Colkin, Eileen. “Blast from the past.” InformationWeek. Manhasset:

May 7, 2001. Iss. 836; pg 89 – 92.26. Faletra, Robert. “Now may be the best time in a decade to become

a solution provider.” CRN. Jericho: Sep 22, 2003. Iss. 1063; pp 82.

27. Grimes, Ann. “Venture Capitalists: a Bit More Willing.” Wall Street Journal (Eastern edition). New York, NY: Jul 29, 2003; pg C1.

28. Krekhovetsky, Luba. "75th Anniversary: Jeff Skoll." Canadian Business. Toronto: Feb 3, 2003. Vol. 76, Iss. 2; pg 54-56.

29. Skoll, Jeff. “New town square.” Forbes. New York: Oct 4, 1999. pg 65 – 67.

73

Bibliography30. Phillips, Bruce D., Headd, Brian. “Characteristics of Small Business

Employees and Owners.” U.S. Small Business Administration’s Office of Advocacy, Office of Economic Research. 1998.

31. Goodman, Jon P., “What Make an Entrepreneur”, Inc, 10/1994, p. 29

32. Himelstein, Linda, “All Cashed Up with No Place to Go”, Business Week, 9/29/2003, p. 107

33. Davidson, Andrew, “Rupert Howell’s 10 Steps to Start-up”, Management Today, 4/2003, pp. 58-62

34. Rifkin, Glenn and Harrar, George; The Ultimate Entrepreneur; 1988; Contemporary Books, Inc. (Ken Olson)

35. Brodsky, Norm; Improving Your Luck; Inc. Magazine, Apr 199736. Mark Peterson, CEO Coeur Business Group, interviewed in person

by Tim Myers, October 10, 200337. Tim Johnson, CEO Digital Skyway, interviewed in person by Tim

Myers, October 12, 200338. Peter Siegel, CFO of Sense Corp, interviewed in person by Micah

Katcher, October 3, 2003.

74

Bibliography

39.http://www.nvca.org/ffax.html, viewed 10.16.2003 (National Venture Capital Association)

40.http://investor.ebay.com/annual.cfm, viewed 10.17.2003 (eBay Annual Reports)

41.http://bigcharts.marketwatch.com/, viewed 10.30.200342.http://pages.ebay.com/community/aboutebay/

releasespr98.html, viewed October 17, 200343.http://www.webster.com/cgi-bin/dictionary, viewed

10.18.2003 (entrepreneur definition)44.http://www.qorebusiness.com/about_why_qore.cfm

viewed 10.19.2003

75

Bibliography

45. http://www.wantec.com/about/index.htm viewed 10.19.200346. http://www.digitalskyway.com/company.shtml view 10.19.200347. http://www.venturecoach.com/resources/content_stats.htm, viewed

on 10.15.200348. http://www.score.org/entrepreneurship_career.html , viewed on

10.15.200349. http://www.drapkin.net/news/whystartupsfail.html , viewed on

10.15.200350. http://www.brainyquote.com/quotes/quotes/g/

genhnorma124399.html, viewed on 10.15.200351. http://www.entrepreneur.com/article/0,4621,304960,00.html viewed

10.28.2003