TCS Daily

A Tale of Two Business Climates

By Chris Charuhas - April 30, 2003 12:00 AM

Entrepreneurship drives economic growth. Startup firms grow 20 times as fast as large, mature companies, and according to the National Commission on Entrepreneurship, fast-growth, high-risk startups create more than half of all new jobs.

So, what's the best way for a city to foster entrepreneurship and the jobs it produces?

A look at the two largest metropolitan areas in Virginia provides some clues. One of them ranked at the top in Dun & Bradstreet's 2002 rankings of "The Best Cities for Entrepreneurship." The other didn't rate at all.

The Washington, D.C., area was rated number one primarily because of the numerous start-ups in the Northern Virginia suburbs, a so-called "edge city" known as NoVa. By contrast, the Richmond metro area didn't even make the 60-metro area list. Other mid-sized Southern cities did fine - Louisville, Ky., for example, came in 33rd - but Richmond didn't rate, despite being the state capital and home to a major state university.

What are these two areas within the same state doing differently? Why is Richmond so bad and NoVa so good at spawning successful startups?

A Different Breed of Businessman

Let's compare two guys who exemplify the entrepreneurial support communities in Richmond and NoVa - Tim Draper and Jeff Osborne.

Tim Draper is from California, not Richmond, but he typifies a lot like the financiers and lawyers who lead Richmond's entrepreneurial efforts. A third-generation investment banker, he runs Draper Fisher Jurvetson, one of the biggest venture capital firms in the world. He has a blue-chip educational pedigree: Andover, Stanford, and Harvard Business School. He wears great suits, and says inspiring things like, "What we look for are heroes ... people who are going to change the world."

Jeff Osborn isn't originally from NoVa, but he's typical of entrepreneurs there who take the lead in funding and advising NoVa startups. Osborn has only a B.A. from Trinity College. In 1991 he started a company called Wilder Systems, maxed out all his credit cards to fund it, then went personally bankrupt when it tanked. He wears blue jeans to meetings, and says dispiriting things like, "If you are doing it right, starting a company is a really grinding proposition."

Who knows more about entrepreneurship?

Not Tim Draper: he lost more than $200 million betting on now-defunct dot-coms, such as Product Pop and If you invested a dollar with him in 1998, you'd have a quarter now.

It's Jeff Osborn: after his first startup went belly-up, Osborn made $10 million as one of the principals at NoVa-based UUNet. His venture firm in NoVa, Osborn Capital, turned $3 million into $100 million. If you invested a buck with him in 1998, you'd have $35 now.

Most cities, like Richmond, rely on Tim Draper types to promote entrepreneurship, while ignoring folks like Jeff Osborn. But you can't fault them too much for that. The world of business startups is unlike the world of government or that of mature companies, where prestigious diplomas and impressive resumes usually signify expertise. Startup companies are a different breed, and the only people who really understand how to help them thrive are entrepreneurs who've done it themselves.

The Toughest Job in Business

According to the U.S. Department of Commerce, 80 percent of all startups fail within five years. The U.S. Small Business Administration is even more pessimistic: it says that 80 percent of new companies fail in their first year. And Joe Adler, a startup veteran who's also a professor of entrepreneurship at Stanford, maintains that 19 out of 20 startups fail.

Yet, considering how grueling and complicated it is to start a viable company, this failure rate isn't surprising.

First, you've got to come up with a product or service that customers want, which is tougher than it seems. For instance, Philips Electronics once asked a group of people what color its new radio should be. Most said yellow. Then, when choosing one as their thank-you gift on the way out, they all passed over yellow radios to pick up silver ones. The only way to be certain customers want what you're planning to sell is to show them a working model, which can take lots of time and money to develop.

Secondly, once you've got a promising product or service, you must establish a sound company structure. Every year, thousands of entrepreneurs enter 50-50 partnerships with a friend. Intuitively, this makes sense: what could be fairer? Actually, it's a crippling structural mistake. Thousands of equal partnerships dissolve each year when one partner doesn't pull his weight, doesn't agree with the other, etc. It's so common that Frederick Beste of NEPA Venture Funds gave it a name: "The 50-50 Deathtrap."

After putting your company on a sound footing, you have to get it off the ground. This takes an understanding of several different business disciplines: marketing, accounting, management, and technology. You also have to know your industry inside and out. Each is a job in itself, and learning and doing them all simultaneously takes tremendous effort. It's no wonder that startup founders often work themselves into nervous breakdowns.

Even if you're a business polymath, you've still got to make cash-flow work. Starting a business has been called, correctly, a "race against insolvency." Can you generate enough sales to pay your bills before your venture capital/personal credit/friends-and-family financing runs out? The more people you hire to complement your skills and share the workload, the greater your risk of running out of money. But if you employ too few people, you run the risk of not getting vital things done. You can spend time raising more money, but that takes you away from making it. This cash-flow balance is tricky, and easy to get wrong.

And, finally, you have to get lucky. You can resist the temptation to buy Aeron chairs for all your employees, prove that customers like your product, prove your business model is profitable ... and still go down the tubes when a recession or dot-com implosion wipes out the funding your company needs to survive.

It takes years for entrepreneurs to learn their trade, and most fail at their first attempt. Steve Case nearly went bankrupt starting a little company called Quantum before it morphed into AOL. Bill Melton, founder of VeriFone, with revenues of $400 million a year, once offered the first customer of his first company all his worldly assets - the most valuable of which was his beat-up old Volkswagen - if the customer agreed not to sue him. And success in the past is no guarantee of success in the future: Melton founded the ill-fated online payment startup CyberCash.

Entrepreneurs Multiply Themselves Through Others

Entrepreneurship is thus a trial by fire, and people who've been through it know how to help others negotiate its dangers. Entrepreneurs who've been successful often help other entrepreneurs get that way, creating a feedback loop that increases startup activity.

A good example is Mario Morino, who started a software company in his garage during the '70s and sold it twenty years later for $2 billion. Morino used some of that money to start a nonprofit organization in NoVa to help Internet startups: the Netpreneur Exchange.

Under Morino's guidance, his support center/information clearinghouse/finishing school for entrepreneurs set up peer-to-peer online discussion groups. It brought in Guy Kawasaki, Geoffrey Moore and other famous business thinkers to speak, at no cost to its members. It archived hundreds of helpful articles and studies on marketing, management and finance. It provided funding forums where entrepreneurs could pitch investors and, more importantly, refine their pitches.

In five years, the Netpreneur Exchange grew from 40 members to more than 5,000. It helped thousands of entrepreneurs in NoVa learn their trade, including Raul Fernandez, whose NoVa-based Web development firm, Proxicom, grew to 1,000 employees and $50 million in revenues. Fernandez obtained second-round funding for his startup through Netpreneur Exchange connections, and is effusive in his praise for the organization: "It forever helped change the landscape (here)."

Fernandez sold Proxicom for $450 million and became a partner in The Capital Investors, a NoVa-based group that provides seed capital to technology startups. His partners there include the aforementioned Steve Case and Bill Melton. NoVa has several such organizations, like the eMedia Club, which consists of successful entrepreneurs financing promising startups. NoVa is also the home of several entrepreneur support groups other than the Netpreneur Exchange, such as MindShare and the YesCircle.

Richmond has nothing like the Netpreneur Exchange. It has only the Richmond Venture Forum, a collection of investment bankers and lawyers that has a reputation among Richmond's few entrepreneurs as being not very helpful. Its board includes seven lawyers and eight financiers, many of whom lost millions investing in half-baked ventures such as Value America. It sponsors education programs not for rookie entrepreneurs, but for people running million-dollar companies. Instead of the well-funded support organizations NoVa has had since 1996, Richmond just saw its first meeting of For Entrepreneurs Only, a homespun group, in 2003.

Richmond's lack of support for entrepreneurs has hurt it. At the same time NoVa spawned CapitalOne, the $6 billion credit card/data mining juggernaut, Richmond saw several of its banks relocate to Charlotte, N.C. Its most promising young company, HomeBytes, died from lack of capital. HomeBytes raised $25 million, mostly outside Richmond; spent it fairly frugally, and enabled a lot of people to sell their own houses online. With just another $10 million, it might have captured $1 billion in the $30 billion real estate brokerage market. But the Richmond financiers who could have saved it were cleaned out by then.

Other than used-car superstore CarMax, a spin-off from $10 billion electronics retailer Circuit City, Richmond hasn't spawned many star startups lately. Now the city's fastest-growing companies include a local building contractor, a couple of garden-variety systems integrators and two law firms, hardly the next CarMax.

Why that is will be explored in my next column.

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