Power Play

What are you waiting for? There's never been a better time to start a high-tech business.
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14 min read

This story appears in the June 1997 issue of Entrepreneur. Subscribe »

When 25-year-old Brad Wardell began developing software for an OS/2 computer game in 1993, nobody had ever sold any games for this operating system. At the time, software developers just didn't see any real market for them. But Wardell had an idea: a new space-based strategy game called Galactic Civilizations. He'd been hanging out in Internet newsgroups discussing his concept with fellow OS/2 users, and many couldn't wait to try their hands at it. So War-dell, convinced that OS/2 was becoming a mainstream operating system, began developing the game in hopes the market would expand.

Turns out, he was right: Today, 8 percent of the world's PCs run on IBM's OS/2 platform. What's more, Wardell's Canton, Michigan-based company, Stardock Systems Inc., expects sales of $3.5 million this year and has a strong foothold in the OS/2 software market.

Was Wardell's venture a lucky guess? Perhaps. Yet, in many ways, it's not really surprising so many small technology-based companies like Wardell's are finding seemingly sudden success. On the contrary, myriad marketplace indicators point to the fact that all systems are go for today's start-up technology companies. An alignment of the entrepreneurial planets, if you will, is making the climate riper than ever for starting or growing a high-tech business.

"There has never been a better time to start a technology-based business," says Mark Rice, assistant dean of Rensselaer Polytechnic Institute's (RPI) Lally School of Management and Technology and director of RPI's entrepreneurship center in Troy, New York. "All the necessary ingredients are becoming more abundant, and the opportunities to pursue [such a business] are becoming more plentiful."

Opportunitys Knocking

In this era of global economies, rapidly emerging industries and dramatic social change, the world is evolving at breakneck speed. As a result of this fast pace, gaping holes and discontinuities that are not being met by current products and services are emerging in the marketplace, says Rice. These gaps provide entrepreneurs with unparalleled opportunities to improve existing products or create entirely new ones.

Meanwhile, Rice says, changes in technology are occurring equally fast, with innovations making headlines seemingly every day. When you combine these two facts, "there's a greater set of opportunities to match up emerging market needs with new technologies," says Rice.

Consider the case of Craig Skevington and Mary Bayly. In his previous business, Skevington, 43, had developed an information management program for manufacturers to track production processes in real-time. With momentous changes shaping the health-care arena, though, Skevington and Bayly, who worked for Skevington as a marketing director, saw a healthy opportunity to tailor the application to this growing industry--and to build an entirely new company, which they did in January 1996.

"With so many changes going on in managed care, a lot of organizations are combining, and the information systems needed to link them together [didn't] exist," says Bayly, 39, co-owner of Flow Management Technologies Inc. in Clifton Park, New York. "We had the core technology; we just needed to adapt it for the health-care field."

Admittedly, not every entrepreneur has access to cutting-edge technology like this. Yet a shift in attitudes among today's scientists and top innovators is quickly changing all that, says Rice. With lucrative contracts drying up in recent years, government, corporate and university laboratories have changed their focus from primarily long-term research to the "transfer" of technology for commercial needs. Consequently, a host of laboratories at the forefront of high-tech research--including the Massachusetts Institute of Technology Lincoln Laboratory in Lexington, Massachusetts; Sandia National Laboratories in Albuquerque, New Mexico; and the Wisconsin Alumni Research Foundation in Madison--have active technology transfer programs, pairing entrepreneurs with the necessary technologies to build their businesses.

Government agencies such as the Small Business Administration (SBA) are also tackling this issue. The Small Business Tech-nology Transfer (STTR) program, initially a three-year pilot program started in 1993, was developed by the SBA to help nonprofit research organizations, universities and small businesses cooperatively bring technologies and products to market. The SBA estimates more than $50 million was awarded to entrepreneurs in the STTR program by the end of 1996. (Congress has extended the STTR program through September.)

These types of programs are effectively placing technology in the hands of those most capable of turning it into viable ventures: entrepreneurs. Moreover, not only is it now easier to identify which technologies can make the shift into the commercial sector, but more systems are being created to facilitate their transfer, says Chuck Rancourt, director of RPI's Office of Technology Commercialization. University programs like RPI's Rensselaer Technological Entrepreneurship Council, which brings students and faculty with technical and entrepreneurial backgrounds together to network, locate investors and learn about technology commercialization, are becoming more common.

"Programs like these are reinforcing the idea that engineers and scientists have ideas, but they require entrepreneurs to help build commercial ventures," says Rancort.

Perhaps the greatest factor contributing to the swelling opportunities for high-tech entrepreneurs is the burgeoning information technology (IT) market. Driven in large part by the swiftly expanding service sector, a whole new segment of the economy is opening to new hardware and software products. According to market research firm International Data Corp. (IDC) in Framingham, Massachusetts, the worldwide software market is expected to grow from $94 billion in 1995 to $177.4 billion by the year 2000. Furthermore, IDC projects worldwide IT spending (including hardware, software and IT services) will grow by 10 percent this year and an average of 9 percent annually throughout the decade.

"The information technology industry is just mind-boggling to the extent to which it [offers entrepreneurial] opportunity," says Rice. "There is a huge amount of attention put on the value of information and knowledge today."

It's the Internet, though, that's garnering most of the attention in IT circles these days. "The Internet has so much to do with the explosion in IT," says Rice. "We're sitting on the doorstep of a whole new information revolution because of what's going on with the Internet."

Ron Schmelzer, 21, and Dan Housman, 23, are among the entrepreneurs riding the Internet wave. In December 1994, the partners founded VirtuMall, an electronic commerce site for hosting Web sites. But when market needs shifted (as they often do in the Internet business) and companies began moving away from centralized sites to develop their own, VirtuMall had to reinvent itself by morphing into an Internet software company. Profiting from a nationwide shortage of Web programmers and customers' desire to cut costs, in April 1995, Schmelzer and Housman founded VirtuFlex, a Cambridge, Massachusetts, business that helps users build dynamic Web applications.

While the Internet provides ample opportunities for entrepreneurs like Schmelzer and Housman, owning an Internet-based business isn't always a smooth ride. "There are no standards, proven market leader or proven market direction. Nobody really knows where the Internet is going," says Schmelzer, VirtuFlex's president. "Since there's no force pushing it in a particular direction, you may spend time working on a project and by the time you're done, the market has totally shifted in another direction."

High-tech businesses also experience some additional pressures that nontechnology companies don't. "In addition to all the [typical concerns] of owning a business, a technology-based business also has the risk and uncertainty of developing new technology," says Rice. "On the other hand, [this] can give companies a competitive advantage if they can deal with the risk successfully, and it becomes a barrier to businesses trying to compete with them."

Money Matters

According to VentureOne Corp., an investment research firm in San Francisco, venture capital companies raised a record $10 billion last year. The good news for technology-based businesses is high-tech companies were among the primary recipients of this venture capital. IT companies pulled in the lion's share of those funds, with a whopping 59 percent. Businesses in the life sciences fields, which also include technology-based companies, brought in 22 percent of the funding, while nontechnology companies took in the remaining 19 percent.

Throughout the last five years, software start-ups, particularly those involved in networking, communications and the Internet, have continued to attract the largest share of venture capital funding, says Jesse Reyes, director of Venture Economics Information Services, the venture capital research and consulting division of Securities Data Co. in Newark, New Jersey. This trend is expected to continue well through the end of this year.

Interactive Learning International Corp. (ILINC), a distance-learning software company in Troy, New York, is one company benefiting from the torrent of venture capital funds making its way to high-tech businesses. (Distance-learning software allows companies and schools to offer training sessions and courses to off-site employees and students.) Last year, ILINC received $1.75 million in venture capital funding from Geocapital Partners, a Ft. Lee, New Jersey-based venture capital firm specializing in IT investment.

"Geocapital approached us and was very eager to make an investment in the distance-learning market," says Jim O'Keefe, ILINC's CEO. "They were aggressively pursuing IT placement."

Still, experts say the sobering fact for high-tech entrepreneurs who aren't in the hot industries, such as the Internet and distance learning, is this: Venture capital funding is probably out of their reach. Even though funds are more plentiful than ever, the majority of venture capital firms are looking to invest large sums of money in well-established companies with proven track records, leaving the majority of high-tech start-ups and most small companies, in effect, out of the loop.

To address this gap, a host of government, state and regional programs have emerged to foster economic development, furnish costly research and development (R&D) funding, and provide access to risk capital, says Rice. Among them is the Small Business Innovation Research (SBIR) program, which provides grants or contracts for small high-tech companies in the start-up and development stages. Each year, 10 federal departments and agencies, including the National Science Foundation, the Department of Energy and the Environmental Protection Agency, are required by the SBIR to reserve a portion of their R&D funds to award to small businesses. Approximately $900 million was given to small technology companies in the last two years.

Another bright spot for high-tech financing: More private investors, often referred to as "angels," have stepped up to the plate to back technology-based businesses in recent years. "Angel investors are really carrying the weight for early-stage investing [in technology-based companies]," says Gerald Benjamin of International Capital Resources, an investment banking and capital sourcing firm in San Francisco, and author of Finding Your Wings: How to Locate Private Investors to Fund Your Venture (John Wiley & Sons).

Rather than dealing with venture capitalists--who have a reputation for being too controlling and too interested in short-term returns--many high-tech entrepreneurs are cutting out venture capital firms in favor of capital from angels. To their advantage, angel investors typically furnish small businesses with start-up capital, a long-term vision--and a whole lot more.

"The beauty of working with angel investors is that they provide more than just money," says Benjamin. "They provide extensive expertise, contacts and knowledge of investing from an investor's perspective to help raise further money. They are also able to be more closely involved, unlike venture capital firms."

Having an angel watching over you isn't always a blessing, though. "Whenever you let investors in," warns Benjamin, "you [face] the issue of control, and for many entrepreneurs, this is a critical problem."

Meeting Of The Minds

One of the fundamental elements of a successful technology-based venture is having the ability to build what Rice calls an "entrepreneurial team." This means a staff that not only works well together but also possesses the key strengths that keep a business competitive, including tip-top technical, marketing and sales skills. Within the last five years or so, says Rice, a number of factors have evolved to help high-tech entrepreneurs pull together the expertise they need to create these teams. At the root of these changes is the entrepreneur himself.

"It has never been easier to get training and education to develop the skills, attitudes and knowledge necessary to become an entrepreneur," says Rice. "We've seen an explosion of entrepreneurship programs, and there are more ways to learn about entrepreneurship than ever before."

More than just the blossoming of first-rate entrepreneurial programs, though, there's also been a move among educational institutions to meld entrepreneurship and technology programs, says Rice. Educators are realizing that to build competitive technology-based businesses, students must have an understanding of both the technical and business sides of the venture. As a result, some schools now offer undergraduate and graduate programs with an emphasis in technology entrepreneurship. The programs link the knowledge and experience from technical disciplines, such as computer science, with business management to create a well-rounded entrepreneur.

As more educators join this trend, leading technology schools around the country are increasingly infusing entrepreneurship into their core curricula. Among them: RPI; Carnegie-Mellon University in Pittsburgh; Baylor University in Waco, Texas; University of California, Los Angeles; University of Iowa in Iowa City; University of Colorado at Boulder; and University of Texas at Austin.

"The MBA program gave me a strong foundation for understanding technology and how to base decisions about technology," says Mark Bernstein, ILINC's co-founder and executive vice president, who graduated from RPI's MBA program in 1994. "It was also very helpful in understanding the basics of raising capital, the trade-offs involved in designing technology and how to stay focused."

Technology incubator programs at many universities are also giving high-tech entrepreneurs a leg up. Established in 1986, the University of Alabama at Birmingham's (UAB) Office for the Advancement of Developing Industries houses approximately 18 technology-based companies, providing them with below-market rates on laboratory and office space, access to UAB scientific expertise, and clerical and professional staff support. Others, like the Boulder Technology Incubator's Entrepreneurial Success program, offer high-tech entrepreneurs mentors, business advisors and introductions to capital resources.

Networking is another facet of entrepreneurial education whose importance for high-tech entrepreneurs can't be overstated. In today's collegiate environment, students from separate disciplines are encouraged to interact more than ever before, says Rice. Those with technical skills are becoming more aware of career opportunities in nontechnology ventures, while business students are pairing up with technical talent to build businesses.

"There's a lot of networking with students, faculty and well-connected alumni," says Flow Management Technology's Bayly, a 1979 graduate of RPI's MBA program. "To bring that level of people into your sphere of advice and influence is just an incredible advantage to your business."

Meanwhile, world-class universities continue to pump out students with cutting-edge technical skills. This has resulted in a highly talented labor pool, says Rice, enabling entrepreneurs to hire qualified staff in almost any part of the country.

And to further round out the entrepreneurial team, high-tech consulting and incubation companies have evolved to supply technology start-ups with expertise. For instance, Interactive Minds, founded in January 1995, provides online, multimedia and interactive media companies with interim management to develop strategic planning, raise financing or fill tactical roles like directors of marketing, sales or product development.

"High-tech companies are looking for resources to augment their businesses," says Randy Haykin, president of Interactive Minds in Pleasanton, California. "With a team of people with high-tech experience who've done this before, companies won't have to waste their time."

Even so, forming an entrepreneurial team in a high-tech company isn't without its challenges. For instance, with such a sharp demand for technical talent, the problem of key personnel migrating to other high-tech start-ups can be a tough problem for entrepreneurs.

Despite a long list of hurdles, high-tech entrepreneurs can still look to the future with well-founded optimism. Thanks to a recent convergence of opportunities--namely changing market needs and the evolution of technologies to address them, ready access to capital and a larger pool of talented technical personnel to hire or partner with--the odds have swung in favor of high-tech businesses in recent years. Overall, the message from all ends of the entrepreneurial spectrum seems to be loud and clear: Seize the day.

Contact Sources

Boulder Technology Incubator, 1821 Left-hand Cir., Ste. B, Longmont, CO 80501-6740, (303) 678-8000;

Flow Management Technologies Inc., 56 Clifton Country Rd., Clifton Park, NY 12065, (518) 373-2005;

Interactive Learning International Corp., 385 Jordan Rd., Troy, NY 12180, (518) 283-8799;

Interactive Minds, 7908 Paragon Cir., Pleasonton, CA 94588, iminds@aol.com;

International Capital Resources, (415) 296-2519, (http://www.icrnet.com);

International Data Corp., 5 Speen St., Framingham, MA 01701, (508) 872-8200;

Office for the Advancement of Developing Industries, University of Alabama at Birmingham, 1075 13th St., Birmingham, AL 35205, (205) 934-2190;

Small Business Administration, (800) 8-ASK-SBA.

Stardock Systems Inc., 7977B Ronda Dr., Canton, MI 48187, (313) 453-0328;

Venture Economics Information Services, (201) 622-3100, fax: (201) 622-1421;

VentureOne Corp., (415) 357-2100, (http://www.ventureone.com);

VirtuFlex, (617) 497-8006, (http://www.virtuflex.com).

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