Starting Your Own IT Company

Starting Your Own IT Company Inshirah Bawazeer Jennie Charoenpitaks Owais Karamat Dave Boltz

Project Plan and Presentation Outline • Provide an overview of published research on entrepreneurship focused on three areas: • Trends in Entrepreneurship • A review of the classics … especially regarding personal backgrounds of entrepreneurs: personality/experiences • Updating the classics based on changing demographics and cultural factors. • Based on this research, interview three local IT entrepreneurs to assess the applicability of the literature … especially to the field of IT • Analyze interview results and draw conclusions

Presentation Agenda • Entrepreneurship and Trends • Reviewing the Classics • Updating the Demographics • Interviews • Andrew Sobey Jr. • Sanjay Kumar • Wayne Haar • Conclusions

“Entrepreneurship is a human, creative act that builds something of value from practically nothing. It is the pursuit of opportunity regardless of the resources, or lack of resources, at hand. I t requires a vision and the passion of commitment to lead others in the pursuit of that vision. It also requires a willingness to take calculated risks.” Jeffrey A. Timmons, The Entrepreneurial Mind, as cited by Lambing and Kuehl, 2000. What is Entrepreneurship?

Entrepreneurship is flourishing • In 1955, the Fortune Magazine’s 500 list of largest industrial corporations captured America’s attention. Who had unassailable positions? • In 1955, there was one small business for every 38 persons. • By 1965: one for every 29 • By 1975: one for every 26 • By 1985: one for every 20 • By 1994: one for every 16 • 1997 saw a U.S. record 884,000 new business incorporations. • What explains the growth in the number of small U.S. businesses from 4.5 million in 1955 to 16 million in 1995? Lambing and Kuehl explain … Entrepreneurship, 2nd Ed. Lambing, Peggy and Charles Kuehl. 2000

Lambing and Kuehl: • Two factors impacted the American economy: • Competition from companies abroad increased during the 1960’s and ’70’s. • The late 1970’s began a period of deregulation. • As a result, further economic and cultural changes occurred. The largest corporations had massive layoffs & “downsized” as corporate survival was at stake. • “Any company that has more people than it needs is headed for trouble” • Fewer jobs in the post-industrial economy. Entrepreneurship, 2nd Ed. Lambing, Peggy and Charles Kuehl. 2000

The United States is not alone • The European Union has sought to simplify accounting procedures and improve the business environment for small business. • China and Russia, traditionally opposed to capitalism, have seen small enterprises emerge as an economic force in their new economies • Eastern Europe has witnessed similar growth • And in the Far East, as an example, the government of Malaysia requires commercial banks to make funds available for small business loans. Entrepreneurship, 2nd Ed. Lambing, Peggy and Charles Kuehl. 2000

New business success rates • Easton and Conant note making the transition from corporate employee to entrepreneur is not easy. Citing a study by Cooper(1982), they note 6.3MM firms were started in 1947-54: • 23% gone in six months or less • 23% more gone in one year • 29% survived 4.5 year mark. • In 1977 study of 250 new high technology firms near Palo Alto, CA … better results: • 5% failed in the first three years • 24% stopped operations within seven years • 29% stopped within ten years • But, 42% still existed after ten years. • Importantly, in 1983, only 3% of new firms were high tech. Easton, Thomas A. and Ralph W. Conant. Cutting Loose: Making the Transition from Employee to Entrepreneur

Literature Review • There is a significant history of research on entrepreneurship. • The conclusions of a major study carried out by Collins and Moore at MSU in 1964 (cited in Liles, 1974) did not portray entrepreneurs in the most positive light: • “ … we have been having difficulty deciding whether the entrepreneur is essentially a “ reject “ of our organizational society who, instead of becoming a hobo, criminal, or college professor, makes his adjustment by starting his own business; or whether he is a man who is positively attracted to succeed in it. We have, perhaps without intention, regarded him as a reject.” • “The men who travel the entrepreneurial way are, taken on balance, not remarkably likeable people.” Collins Orvis F. and David G. Moore with Darab B. Unwalla. The Enterprising Man

Literature Review • However, Liles also cites smaller-sample studies at Harvard and MIT that yielded a different view: • “Entrepreneurs were not found to be failures” • “founders had experienced a generally higher than average level of success in their previous employment” • “Several had achieved outstanding levels of achievement”

Literature Review • Using the same data as Collins and Moore, Norman Smith (1967) hypothesized 2 types of entrepreneurs: • Type I: the Craftsman-Entrepreneur. Blue collar, task oriented and valued the practical. Successful at one job and then moved on. Didn’t like big companies but didn’t identify w/unions. • Type II: Opportunistic-Entrepreneur. More often than not came from a middle class background and often had a father who was a small businessman. Typically, academically successful. Often a social leader. Career demonstrated not only technical abilities but capacity for competent administration. Key: unlike Type I, Type II’s are adaptable. Smith, Norman R. The Entrepreneur and His Firm: The Relationship Between Type of Man and Type of Company

Literature Review • Dennis Kimbro (1996) argues that a successful entrepreneur must have: • mission (being able to take charge) • vision ( the ability to inspire others to action) • passion(an intense commitment and determined perseverance) Kimbro, Dennis P. “Mission, Vision and Passion in the Entrepreneur” from Smilor and Sexton.

Literature Review • Beyond these three most important characteristics, Kimbro asserts successful entrepreneurs must also have: • a desire for independence • a sense of purpose (including the ability to set challenging yet clear goals and attain them) • tolerance for uncertainty • perseverance • self-esteem • salesmanship • self-discipline • Finally, Kimbro notes “successful entrepreneurs are ready to just plain work hard”. Kimbro, Dennis P. “Mission, Vision and Passion in the Entrepreneur” from Smilor and Sexton.

Literature Review • Peter Drucker states “Entrepreneurship, then, is a behavior rather than a personality trait”. “I have seen people of the most diverse personalities and temperaments perform well in entrepreneurial challenges. To be sure, people who need certainty are unlikely to make good entrepreneurs”. • There are, however, four requirements cited by Drucker to entrepreneurial success (ibid. 189): 1.A focus on the market. “You are creating customers” 2.Financial foresight (esp. cash flow/planning capital needs) 3.Building a top management team before necessary. 4.Finding a role for the founder as the business matures. • He notes however a difference between starting a small business and entrepreneurship. Drucker, Peter F. Innovation and Entrepreneurship: Practice and Principles. 1985.

Literature Review • Liles concludes there are three types of small firms: • “high potential venture”. It is the intention of these firms to grow rapidly in sales and profits and eventually become a large corporation. • “attractive small company”. Less intent on developing to the point where there would be a public market for its stock or appeal to venture capitalists. Rather, these firms are started to provide a good salary for the owners, often with a variety of perquisites including country club memberships, a company car and travel. • “marginal firms”. The vast majority of small businesses incl. dry cleaners or repair shops are included here. Liles, Patrick R. New Business Ventures and the Entrepreneur

Literature Review • Backgrounds, experiences and motivations aside, Liles (1974, 11-12) also discusses “precipitating events” … specific conditions that appear as major influences on decisions to start a new venture: • Job dissatisfaction: built up over time, reflecting budget cuts, no promotion or disappointing salary increases, denied staff. Key: new job vs. start-up • “the last straw”: “one of a series of disappointing incidents” • Identifying a new venture opportunity • Encouragement and support: “A wife’s reaction to the idea of starting a company is usually a major influence”

Presentation Agenda • Entrepreneurship and Trends • Reviewing the Classics • Updating the Classics: Changing Demographics and Cultural Factors • Age • Gender • Ethnic Background • Interviews • Conclusions

Age • The popular press has widely reported on the successes of young, high tech entrepreneurs like Michael Dell, Steven Jobs and Bill Gates. • On the other hand, group two noted that Wal-Mart was founded by Sam Walton in 1962 • 22 years after he graduated from the University of Missouri. • It would appear entrepreneurial opportunity exists at different stages of human life cycle …

Self-confidence increases with age

But changes in financial and personal conditions are important

Types of Female Entrepreneurs(Goffee and Scase, 1985)

Female Entrepreneurship • Throughout the 1980’s and early 1990’s the number of businesses owned by women grew by 50%. By 1996, the 8 million businesses owned by women employed 35% more people than all the Fortune 500 do worldwide. • Motivating factors include desire for more challenge and dissatisfaction with corporate life, including downsizing, but also • “Glass Ceiling” issues: low pay, limited advancement • Seeking balance between work and family responsibilities Entrepreneurship, 2nd Ed. Lambing, Peggy and Charles Kuehl. 2000

Female Entrepreneurship • Start-up funds for women averaged $15,000 compared to $36,000 for men. • One explanation: women tend to start service businesses that often require less capital. • However, many believe, women do not have equal access to capital when they need it, possibly related to networking / previous business connections. Entrepreneurship, 2nd Ed. Lambing, Peggy and Charles Kuehl. 2000

Asian-American Entrepreneurs • Asian-Americans have been very successful as entrepreneurs in the United States. • Like women this has reflected frustrations of trying to climb the corporate ladder. • David Lee, CEO, Qume Corp: “People believe … Asians make good engineers, not good managers”. • By 1990, Asian-Americans headed 300 of 800 high-tech firms in the Silicon Valley. • Korean-Americans have the highest business-ownership rate (1/10) of any ethnic or racial group in America. This compares to 1/15 for non-minorities. Entrepreneurship, 2nd Ed. Lambing, Peggy and Charles Kuehl. 2000

The Interviews • Andrew Sobey Jr., Founder and President, S & S Systems Consultants, Inc. Fenton, MO • Sanjay Kumar, Professional experience included participation in .com start-up effort in Fremont CA (1999). Currently employed as computer network specialist in St. Louis, MO. • Wayne Haar, President and CEO, Interlock Resources Inc. Clayton, MO

S & S Systems Consultants • Founded in 1990 as a provider of computer programming services. Since inception, services have expanded to include training, EDI and process mapping. • While initially founded with four employees, current business activity is centered around Founder and President: Andrew Sobey Jr.

Andrew Sobey: background • Native of Sharon, PA. Son of postal worker. As a child, every morning from his bedroom window, overlooking the Westing-house plant, Sobey saw the 8,000 people walk into work. • Holds Master’s degree in Computing Science • Employed for 17 years at Westinghouse, including 10 as IS manager. • Job dissatisfaction increased after experiencing several years of no raises/cuts. • Precipitating events: un-reimbursed mileage expense on Easter … and division close down. (during 1990 recession … he was age 40) • Spouse supportive of entrepreneurial start-up

S & S Systems Consultants: getting started • As part of “close down benefits” learned pro-forma planning, proposal writing. • From Westinghouse: 15 years of IT experience, some contacts and ‘commitment to customer service’. • First four years were “scary”. Getting finances to hire four people put “life savings on the line”. Start-up included cold-calling but ex-Westinghouse employees were important. • Realized his business was established when he needed a car and knew he could buy it. And, when he started saying “No” to some potential projects. • Personal note: Heightened spirituality because “when I needed the phone to ring, it did.”

S & S Systems clients include: • Bausch and Lomb Surgical, St. Louis, MO and Clearwater, FL • Sunbeam Corporation, Chicago,IL • Westinghouse Electric, St. Louis, MO and Asheville, NC • A variety of smaller businesses with job sites that included Alamo, TN, Athens, GA, Pittsburgh, PA, Muncie, IN, S. Boston, VA, Fayetteville, NC, Greenwich, CT, and St. Louis.

Maintaining/growing the business • Large personal satisfaction in job variety: mainframe COBOL, FORTRAN, RPG, SQL, EDI, MS Access and Crystal Reporting, ORACLE. • Planning is very short term oriented. • Paid by the hour. Company grows by increasing rates. Last month sent out five invoices (i.e. 5 different current customers incl. small manufacturing, CPA firm, church). • Vs. ideal: one major customer w/30-40 hrs/week. • Lots of travel. Ex. six month – one year project in Chicago. There: M-Th.

Sobey’s lessons learned • If you think you worked hard at a company, “you ain’t seen nothing yet”. • Be focused. • It’s difficult to stay abreast of changes in technology … VB4, VB5, VB6, VBNet. • Be a team player to get call-back’s … stay out of office politics and recognize the need to do some work without charging for it … to build good relations.

A Silicon Valley start-up … • This story begins in 1999. The .com boom is in full swing. • Two IT professionals who room together in Fremont seek to participate in the boom by linking local “angel investors” with others who have “many ideas” … many of whom are consultants or IT professionals in their native India. All parties were anxious to capitalize on the market boom and dreamed of a “high potential venture” • Key investors agree to fund development of: • a prototype model … to demonstrate the viability of the concept. Today, www.keen.com developed by others at approx. same time is similar in concept. • a B2C website … to generate revenues from day 1. Into Indian music? Try: www.saregama.com • Sanjay Kumar, and his friend Ravi, are on their way …

Technical Issues • Investors signed a one year agreement to have Exodus host their servers. • A prototype website (w/ expert advice on astrology and programming) would be able to handle 100 users at a time … higher levels of funding would be needed to develop a site capable of handling hundreds of thousands of users. • Their plan: seek capital from investment banking community • Focused on utilizing JAVA and LINUX, developers planned to use free software as much as possible. Additionally, as much development as possible would take place in India. • Programming strategy: develop websites reusing as much code as possible.

Living on the edge … • Sanjay and Ravi wore “multiple hats” … technical specialists, project managers, lead programmers. • 14-16 hrs/day … a labor of love with people they enjoyed. • The venture, then nicknamed “The Pundit Junction”, culminated in a presentation to investment bankers where break-even analyses, profit forecasts, and technical specifications were presented. • Shortly thereafter the dot.com market went bust and the investment bankers never called back.

Sanjay Kumar’s Background • Technical undergraduate degree from an Indian university. • Expertise: Networking technology. • More than background however, the 1999 culture of young adult IT professionals in the Silicon Valley was key. • Sanjay was correct in his assessment he could always get a job in IT if the start-up failed … minimal career risk. Didn’t realize however, that job would be in St. Louis, Missouri. • Start-up effort required developing different skills (quickly) in order to communicate with investors and manage the project’s overseas development. No MBA? Try www.fedex.com

Lessons Learned • Clearly, this start-up activity was late-in-the-game • “You must enjoy what you do” • No regrets.

Principal business is staff augmentation in MIS functions for clients in St. Louis region. Their 50-80 consultants respond to a broad range of client needs: • Web Development • Help line / network support • Systems development in Visual Basic, C++ • People Soft • Founded in 1989, Wayne Haar was originally an outside investor. He bought out 1 of 2 primary owners in late 1996.

Interlock Resources • Today, management team involves three primary owners: • Wayne Haar: focused on finance and administration • One technical partner, focused on client development • One partner focused on human resource issues. • Company experienced strong growth in 1997, 1998, 1999 attributable in part to Y2K ‘remediation’. • Listed #2 in the St. Louis’ “FAST 50” high growth technology firms in 1999. Revenues were $5.9MM. (St. Louis Commerce Magazine Sept. 2000, St. Louis Business Journal 9/25/2000)

Interlock Resources’ Clients • U.S. Government • Anheuser-Busch • BJC Health System • Enterprise Rent A Car • Maritz • Mastercard • Monsanto Source: www.interlockresources.com and St. Louis Commerce Magazine (Sept. 2000)

Wayne Haar, background: • Son of h.s. educated, Union Electric worker • Bachelor’s and MBA from Washington U. • 19 years of experience of planning and analysis experience in retail sector: Edison Bros., Venture. • Reported being not happy working for others. Less motivating environment for those with strong drive. • In mid-1980’s, Haar/others investigated business opportunities, incl. fast food. “None made sense”. • Precipitating event: problems of Venture led to downsizing in 1995. In response, he worked out of his home on Interlock business.

Interlock Resources: getting started • Never dreamed of being a big corporation. Objective: One of strongest staff augmentation firms in the region with upside potential to either: • Replicate in other geographic areas or, • Sell firm to others. He has previously received offers. • Personal issue: contributing factor to divorce ? • Key business start-up issue: cash. Working capital to pay consultants for first sixty days. Sources: • Family / friends • Personally put up stock certificates etc. as collateral • SBA-supported loan

Interlock Resources: growing the business • Biggest surprise: The business is more reactive than expected. “No loyalty in this business”: • Clients are unpredictable • Consultants see themselves as “hired guns” identifying with IT profession, not the firm. • Planning focus is “a few months at a time” • By late 1998, company was “really cruising”, Haar recognized “we had built something that was going to last”.

Interview Summary

Key Conclusions • The stories of the entrepreneurs interviewed are intertwined with their personal circumstances … mid-career downsizing or early career cultural factors … played a major role. • Re:background the notion entrepreneurs are ‘rejects’ is a clear misconception. • Getting started showed many consistencies: hard work, the importance of financing working capital and the requirement of needing to fill many roles. • Issues in growing the business were very dependent on the new venture’s objectives: maintaining sole proprietor, being attractive small company or developing a high potential (greatest risk/reward potential) • Universally, however, none of our interviewed entrepreneurs regrets their decision.

Starting Your Own IT Company