In its first five years—which, as it happens, is longer than most small-business startups survive—the Wharton Business Plan Competition has given hundreds of would-be entrepreneurs the chance to “test their ideas against the reality of the market.”
By Jon Hurdle | Illustration by Josef Gast
In the summer of 2000, then Wharton MBA student Steve Woda WG’01 paid $1,200 at an online auction for a computer—which he never received. Woda assumed he was doing business with a reputable counterparty whose presence on the auction site ensured he would receive the goods he had paid for. Instead, he became one of a growing number of victims of online auction fraud. Unlike most, though, Woda did get something out of the deal.
Painful though the experience was, it set him thinking: How could he have protected himself against losing his money in the auction process? Shouldn’t the auction house require those selling goods and services on its site to provide evidence of their honesty? And, by reducing their risk, wouldn’t such an endorsement encourage buyers to pay more?
“I started to think about how we ought to protect consumers in an online auction,” says Woda, 34. “Even though there are lots of protections that eBay says are out there, they didn’t protect me.”
The company that emerged—of which he is founder and vice president—was BondMyAuction, later renamed BuySafe, a service designed to protect online auction buyers by certifying sellers’ integrity, track record, and creditworthiness. Woda’s second year at Wharton was dominated by his work to develop and refine the idea for the school’s annual Business Plan Competition; it was one of eight finalists in 2001.
The competition was launched in Fall 1998 to complement Wharton’s entrepreneurial courses. It aims to encourage students from all of Penn’s schools and other entrants to take advantage of the array of business expertise at the University and in the wider Philadelphia community, as well as to facilitate their access to start-up capital. The program also draws on mentorship from business advisers and experienced entrepreneurs.
The odds against any new business succeeding are steep. According to the U.S. Commerce Department, of every 10 small businesses launched, only two are still around after five years. Participants in the competition have not done noticeably better. Only a few entrants have actually become full-fledged companies. But the school doesn’t gauge the program’s success by the number of startups that emerge from the competition, says Peter Winicov, associate director of communications for Wharton Entrepreneurial Programs. “The idea is not so much to launch successful businesses but to create a learning environment for the entrants. A lot of them just want to have the experience, and the competition is a great way to test their ideas against the realities of the market.”
The process begins in November each year. In the first, non-competitive, phase, each team—which must include at least one Penn student, but is otherwise open to all—submits its business concept (in 1,200 words or less) for review by experienced business people and entrepreneurs. Interested individuals can also participate in seminars on generating good business ideas, recognizing opportunities, and the early stages of putting together a business plan. Next, in a maximum of 2,000 words, each team submits a refined version of its idea, addressing issues such as competitive strengths, barriers to entry, and financial projections. From these, the judges select 25 semi-finalists, as well as providing written responses to all the entries. The group of 25 present full business plans, which typically run 30-50 pages and are likely to represent 80-100 hours’ work—in addition to entrants’ regular academic work. Eight finalists are then chosen to present their plans before a panel of judges at the annual “Venture Fair,” competing for cash prizes—and to convince venture capitalists on the panel and in the audience that their ideas are worth backing.
Last year there were 62 judges in phase one, another 68 in phase two, and 25 more sitting in judgment over phase three, from companies including venture capitalists, media firms, and biotechnology enterprises. In addition, 30 mentors were available for consultations throughout the competition.
Last year’s Venture Fair was held in April in Huntsman Hall, where the seven judges grilled teams on everything from their financial projections to marketing plans to assumptions about the demand for their products.
Presentation skills, judges and entrants agree, are a crucial requirement for success in the competition. “You’ve got to communicate your ideas in a way that makes sense to the venture capitalists,” says John Henry Fox Jr. GEE’91 WG’01, whose software company, Designware, took second prize in 2001. “You might have the best idea in the world, but if you can’t communicate it, you won’t get anywhere.”
The judges are quick to call teams on any inconsistencies or verbal sleight-of-hand. At least two of the final eight last year were asked why financial figures presented at the Venture Fair differed from those published in their written plans.
One of last year’s “great eight” was Air in Motion, a plan to sell franchises for wind farms built on land whose owners might wish to augment their income from farming or other activities. The company would generate revenue from the franchises amid growing demand for clean energy and by selling the resulting “carbon credits” to other energy producers with plants whose emissions exceed air-pollution standards.
Air in Motion looked hard to beat. It was an idea that would cash in on a global surge in wind-energy capacity, had the audacity to carve a niche for independent entrepreneurs selling power to utilities, and contained more than a whiff of idealism. The trouble was, as a former competition judge noted privately after the presentation, Air in Motion seemed to have ignored the possibility that future owners might not want enormous wind turbines on their properties, however enthusiastic the present ones might be, thus jeopardizing the project’s long-term prospects. This drawback would be apparent to any venture capitalist. Whether his reasoning was correct wasn’t stated—but Air in Motion won nothing in the final of the competition.
The idea that did take the $20,000 top prize was PAWS Pet Health Insurance, an underwriting manager offering accident and illness coverage to U.S. pet owners. The judges apparently accepted the company’s argument that demand for its services would be driven by technical advances in veterinary medicine, such as chemotherapy and the use of pacemakers; by an increasing demand for near-human levels of veterinary care; and by demographic trends showing a sharp rise in the number of households for which pets are surrogate children.
The idea was sparked by the serious illness of a cat named Bodey, which cost its owners—team members Chris Ashton WG’03 and Natasha Ashton WG’03—$5,000 in veterinary fees. With fellow team members Alex Krooglik WG’03 and Laura Bennett WG’03, they used the experience to launch a business to serve the 99 percent of U.S. pet owners who have no health insurance for their animals. That contrasts with the Ashtons’ home country of Britain, where pet health insurance is more common.
An elated Laura Bennett said that winning the award vindicated their hard work and self-belief but was something of a surprise because their concept didn’t seem to match the backgrounds of the judges, which were in technology and biotechnology. The victory was an extra boost for a business that was going to be launched regardless of the results of the competition, she added.
“They have identified an underserved and growing market that has enormous potential, and they had superb research,” according to judge David Piaquad, vice president for business development at Johnson & Johnson—who added, however, that picking the winner was very difficult because of the high standards of all eight finalists. The first runner-up, winning $10,000, was Biogenomix, a drug-development company focusing on advanced therapeutic treatments for vascular, inflammatory, and infectious diseases.
The same determination to make it work, no matter what, was expressed by Kevin O’Handley WG’03, leader of Ferrosolutions, a company that has designed a device to generate energy from the vibrations in a local environment, such as a ship. It was nice to have made it to the final eight—in fact, his team won $5,000 as second runner-up—but he insists that the business plan was going ahead, anyway. He was similarly undeterred by the difficulty of finding capital in the current bear market. “Good ideas always find funding,” he said. “A lot of venture capitalists are still sitting on a lot of money.”
One past entrant that has made the transition from concept to company is Coolsource Technologies, a Philadelphia-based educational software company, which, a year after winning the education track of the competition, is now a going concern with nine paying clients, five employees, and a total of $1.1 million in funding.
Coolsource designs learning programs for students in third through eighth grades that identify individual learning requirements much more quickly than a teacher normally does, says CEO J. Christopher Pienkowski WEv’03. “If you’ve got a class of 30 students it may take until November [from the start of the school year in September] to evaluate each student and adapt to their learning needs,” he says. “But with our software you can conduct that assessment within the first week.”
The software is in use at nine schools in the Philadelphia area and 20 others have agreed to use it. Why the name? “If you want kids to use it, it’s got to be cool,” Pienkowski says.
The fee of $3 per student per month is not likely to make Coolsource employees rich any time soon. “It’s more the social good” that motivates his team, Pienkowski says. In taking its business to market, Coolsource has also benefited from being accepted into Wharton’s Venture Initiation Program, which provides support such as legal, accounting, and administrative services for startup companies. While not yet profitable, the company is at least generating revenue.
Pienkowski’s passion for his project is the most important requirement for success in the competition, says a 2002 competition judge, Dr. Mitchell Blutt C’78 M’82 WG’87, executive partner at the private equity fund J.P. Morgan Partners and a Penn trustee. “Focus on a business idea that you have great passion about,” he advises. Beyond that, be clear on your competitive advantage, have a large-enough market, and a strong management team with appropriate backgrounds. Seek outside input on your business plan, rehearse its presentation, and avoid all technical jargon.
The rigorous prescriptions for those brave enough to start a business are more important than ever in light of the stock-market slump of recent years, the anemic rate of economic growth, and the low level of business confidence, Blutt adds. “The marketplace for startups in the last couple of years has been abysmal,” he says. “There have been very few initial public offerings, and in that environment, venture capitalists are much more skittish.” Such an environment is a “meaningful dissuader” for some startups, but others “will go for it anyway,” Blutt says. “If there’s no proper financing they will bootstrap it together” using funds begged or borrowed from friends, relatives, and savings accounts.
Take Sergei Rodionov WG’03, a 30-year-old Russian who, besides his Wharton MBA, boasts a bachelor’s degree in economics and a master’s in applied mathematics. His Internet-based medical technology company Axibase was also one of 2002’s finalists. Axibase offers technology that allows manufacturers of diagnostic imaging scanners to service their equipment over the Internet.
Being in the competition was not central to Rodionov’s plans—like the other competitors, he declares his determination to launch his company in any case—but it provided valuable guidance on putting together a viable business plan. “Our financing section was pretty weak—there was a lot of red ink in the strategy,” he says. The competition “helped us to get a realistic balance sheet and to understand that the judges were realistic” in their views of what would succeed.
Judges and mentors also helped with presentation skills, and Wharton alumni opened doors at a corporate level that would have otherwise been inaccessible, Rodionov says. “Alumni connections really helped a lot. We’d be asking, ‘Can you guys get us into this company at the right level?’”
Preparation for the Business Plan Competition became the main event in Rodionov’s time at Wharton, at some expense to his academic work. “A couple of classes were hurt by being in the competition,” Rodionov says. “I would pay less attention to my homework. I didn’t really care about grades that much; all I really cared about was meeting my professional expectations.”
In the spring of this year, the company had yet to find paying clients but had raised $1.1 million (“Enough to keep running for a couple of years”) and had two employees in addition to Rodionov. He expects to be generating revenue by the fourth quarter of this year.
For some entrepreneurs, however, success in the competition hasn’t been enough to overcome the dour financial climate. NovaEx.com, an Internet-based platform for buyers and sellers of nutritional products, was runner-up in 2000 but stumbled when a backer withdrew a promise of funding after the Nasdaq plunged that April.
“The president of the company told me, ‘The money is in the bank, and we’ll pay you $2 million tomorrow,’” recalls Adam Zong, CEO of the now-defunct startup. “The next day the Nasdaq crashed, and I knew something was wrong when the guy refused to get on the phone with me. I knew the deal was off.”
Undeterred, Zong raised some $250,000 from friends, family, and his own savings, and worked hard to publicize his idea. He attended seven trade shows in 2000, visited a venture-capitalist conference, and was interviewed on Radio Wall Street. But by 2001, he was running out of money and was forced to wind up the venture.
Zong, now senior manager of new business development at Pfizer Inc., is candid about his mistakes. They include hiring two experienced industry insiders in a bid to gain credibility with potential funders, but at a salary that the fledgling company couldn’t afford without a revenue stream. Zong was unable to persuade them to take equity in the company instead of a portion of their salaries. With hindsight, Zong also now believes he should have started charging clients to use a limited version of his product, so that he would have some revenue, rather than waiting until it was fully developed before drawing revenue from it. “Maybe I was too ambitious to include all the services on the online platform,” he says. “Maybe I should have started small.”
But the slumping stock market and accompanying withdrawal of venture capital also contributed to his failure. “The euphoric attitude is gone and it’s going to be an uphill battle,” he says. “A lot of companies lost a lot of shareholder value, and had that not happened, it would have been easier to raise money.”
Some entrepreneurs do find creative ways to keep their fledgling businesses alive despite the lack of funding. Steve Woda of BuySafe, for example, is developing his business plan within The Rutherfoord Companies, an insurance broker, which has provided insurance brokerage support, corporate infrastructure, and industry expertise in return for an unspecified but “significant” share of the business. It would have been “downright impossible” to have set up BuySafe any other way in light of the shortage of capital, says Woda.
Woda’s Internet-based product represents a waning trend in the competition. The early years saw a focus on Web-based entries, reflecting the dotcom mania, while last year’s final eight included only one Internet-related product and no e-commerce entries.
Another change is that the number of teams has fallen while the total number of entrants has risen sharply. Last year’s phase two, the first competitive stage, drew 81 teams, down from 114 in 2002. But there were 403 total participants, compared to 288 in 2002. Only about half of 2003’s competitors were Wharton students, while 12 percent came from Penn’s other schools, representing disciplines from engineering to education to music. The rest of the participants came from outside the University, signaling the desire to expose the competition to the world outside Wharton.
“The teams should feel that they can get external resources because that’s what they would do in the real world,” says Nicole Righini, associate director for Wharton Entrepreneurial Programs and the principal administrator for the event. The emphasis on creating viable enterprises, rather than on conducting an academic exercise, is heightened by the fact that the average age of a Wharton MBA student is 29, and most have come to the school with at least five years’ work experience.
The diversity of the people involved helps distinguish the Wharton competition from other such events, says Mitchell Blutt. “Wharton thrives on multidisciplinary activity and the competition attracts business plans and ideas that reflect that, such as bio-technology with an engineering element,” he says. “I suspect you’d see less of that at Harvard,” whose business school runs its own competition.
The Wharton Business Plan Competition, like Wharton’s Entrepreneurial Programs overall, attracts students who are energized by a belief in their project and in their own destiny as entrepreneurs, Righini says. “They are a different kind of student; they tend to think of new ways of doing things, and if they don’t make it this time, they’ll be back to try again next year.” The current scarcity of financing, she adds, “will just make them work harder than ever to make sure their project is viable.”
Jon Hurdle is a freelance writer who has written for many business publications.