The Value of Business-Plan Competitions
By Bradley T. Zimmer
Business-plan competitions such as the Duke Start-Up Challenge are an ideal venue for learning about the startup process, developing a business concept, interacting with experienced investors, and for a lucky few, getting a real chance for success. The ideal participant is not a seasoned management team with advanced plans seeking easy access to seed capital. Universities are, after all, places of education – not ATMs for early stage financing. Rather, it is tomorrow's entrepreneurs who look to these competitions as a way of learning through doing, with the bonus of a possibility at turning their idea into reality.
In response to a popular misconception, let me be clear: As a means of attracting venture capital, business plan competitions are less than ideal. These competitions were never intended as a primary path to or a substitute for venture-capital financing. Rather, they are a vehicle to inspire innovative thinking about the potential of new ideas.
SURVEYING THE FIELD.
At Duke University, we view that as a positive -- while helping build successful, sustainable enterprises is one of our competition's goals, we are equally focused on providing entrepreneurial education and developing the type of culture that fosters entrepreneurial thought.
While business-plan competitions got their start well over a decade ago, the numbers rapidly expanded during the Internet boom. Universities saw them as a chance to attract students interested in starting technology companies and simultaneously accelerate the commercialization of technology in their research labs. Some venture capitalists even got involved, turning their seed-capital investment process into formal competitions.
Today, with venture-funding channels running dry and most privately run seed-capital contests having gone the way of dot-com investments, the competitions are as relevant as ever. Presently there are over 80 held annually across the globe, the large majority hosted by universities. Awards range from $15,000 at San Diego State to Duke University's $125,000, with the median over past years of around $40,000 to $50,000.
Why a Business Plan? At the heart of these competitions, startups are judged primarily on the basis of their business plans. The plan itself consists of thoughts on paper, and no venture-capital fund would invest in a company solely on those grounds – at least not these days. Then why is the business plan so important to competitions?
In short, it forces the management team to think through all aspects of its business – strengths, weaknesses, competitors, likely customers, and so on. Just as a traveler would not begin a journey without a map, an entrepreneur who writes a business plan has documented what it takes to get to success. Certainly the business plan itself is no guarantee: A strong management team is necessary to execute it and adapt it to the market's constant change. But the business plan should indicate that success is at least a strong possibility.
Furthermore, a business plan provides competition judges and venture capitalists alike with a starting point for discussion with the management team and a means of preliminary evaluation. Though recent Small Business contributor David Gumpert's informal survey of venture capitalists (see BW Online, 4/9/03, "The Problem with Business-Plan Contests") indicated only 36% regarded a business plan as being very important in helping them decide whether or not to invest in a company, chances are almost all would find the business plan at least somewhat important. Nothing can replace a business plan's simplicity in summarizing what a company does, where it wants to go, and how it aims to get there. It remains up to the judge or investor to determine the accuracy of the plan's guidance.
Thousands of budding entrepreneurs will participate in business-plan competitions this year, but only a small handful will win and receive funding. For all the rest, the value of participating is the skill set provided as an adjunct to the traditional classroom and case-study based education. Competitors typically have a conventional business instruction -- classes on managerial effectiveness, marketing, and the like. Yet nothing can replicate the education of experience, and even failure can end up being one of the best lessons. For the researchers and scientists who participate, the competitions provide a unique incentive to think creatively about the commercial possibilities of their work. Many of them view competitions as a way to join up with those with more business savvy, legal expertise, and additional proficiencies crucial to a start-up. At Duke, half of the successful enterprises launched out of the Start-Up Challenge were ones that did not progress to the final rounds. Those management teams have consistently attributed their success to the formalization they went through in developing their business plan and presentations, as well as the critical feedback provided by the high level executives and private equity investors who serve as judges. For all who instead opted to join established companies, the skills they hone in business analysis, resource allocation and relationship building will make them more immediate and valuable employees for years to come.
Unlike a traditional business classes, university sponsored business-plan competitions award over $1 million each year in seed capital to winning start-ups -- an incentive just slightly higher than an A from the professor. Universities provide these awards in recognition that the competitions provide strategic benefits ranging from accelerated technology transfer to encouraging participation in the competitions. Perhaps most importantly, they give those startups deemed most worthy a real chance for success, letting the management teams chase their dreams.
TINY ACORNS, MIGHTY OAKS.
Hundreds of companies have been created through business-plan competitions, with thousands of jobs generated as a result. The most famous of these is digital content streamer Akamai (AKAM ), NASDAQ listed with almost $150 million in annual revenue.
For every Akamai, there are dozens more you probably haven't heard of. SunDance Genetics, a 2002 competition winner recently lauded in national magazines as a high-potential startup, is commercializing ten years of hybrid breeding research from Duke University. It's not genetic engineering, but rather a 21st century take on Gregor Mendel's experiments with peas. SunDance took their seed-capital award and put it towards demonstrating proof-of-concept, and, through testing, discovered their techniques could be commercialized, doubling agricultural crop yields in environments of limited water and fertilizer.
SunDance is not looking for venture funding, and most likely will not be trading on the public exchanges anytime soon. Rather, it is pursuing a strategy of partnering with established companies to fund and distribute their products.
Does this mean the business plan competition has failed, or that SunDance's management team of recent college graduates is less worthy for not having pursued the VCs? Just ask the millions in impoverished nations, for whom SunDance is working to produce heartier crops in conjunction with international aid organizations. The startup is able to donate its services in that capacity due to commercial success in the US agricultural industry -- all of which is possible because a few college students and researchers joined together to try their hand at a business-plan competition.
Zimmer is co-chair of Duke University's Duke Start-Up Challenge.