26 Mar 2001  Research & Ideas

Who Wants to Be an Entrepreneur? [Part II]

People are buzzing about two classes at HBS that showcase the School's new approach to teaching management. Hear from the instructors who lead them and alumni who took the plunge. John S. Rosenberg takes you there in this article from Harvard Magazine. Part two.

 

Kristin S. Rhyne, MBA '99, would have loved to have the problems of reconciling employee priorities and juggling financial plans. Late last May, a year after incorporating Polished, she was still struggling to open its first unit. The strain of working alone, mostly out of her apartment, and relying on $500,000 in financing provided by family members, friends, and "angel" investors, recurred in accounts of what she was trying to accomplish. "This is by far the most challenging thing I've ever done," she said. "It's emotionally challenging."

Entrepreneurs have to pick something they like to do, work hard, and not worry about the rest—success will come.
—Todd Krasnow

Rhyne's idea for meeting the "weekly beauty needs"—manicures, facials, massages—of time-pressed women made the semifinal round of the 1999 business-plan contest. In retrospect, the wave of enthusiasm for the Internet was just cresting. Rhyne's old-economy idea was the only nontechnology concept to make the semifinals. Her teammates moved on to other things, but she decided to try to build a business.

And then began her harsh encounter with the entrepreneur's basic dilemma, what Professor William A. Sahlman calls "the problem of simultaneity." If, as the business school defines it, entrepreneurship is the pursuit of a business opportunity requiring resources beyond one's control, Polished was all opportunity and no resources. Rhyne could see a large market for reliable, branded beauty services in office parks and hotels, but she focused first on the high-visibility airport market, where customers in transit needed the services she could provide—and might relish them as an alternative to waiting for delayed flights in crowded terminals. Prime locations in airports come at a premium, however; securing space depended on financing, a credible design for Polished's stores, and leasing managers' belief in Rhyne's ability to hire people and satisfy customers—neither of which was possible, of course, without a site. "Without having the team in place, and not being able to put the team in place," as she put it, Polished could not take root.

But by last December, Polished seemed closer to its initial destination. Rhyne had secured a lease at Boston's Logan Airport, begun building the first Polished center, added an operations manager and a retailing expert to her team, and started hiring staff from nail salons and department-store cosmetics counters. "It feels really good to have something you worked so hard for come to reality," she almost bubbled.

Still to come were the hurdles of seeing whether customers would materialize, and if so, whether she could attract the means to expand to Atlanta and Newark, where airport lease negotiations were again proceeding. Whatever external resources Rhyne would need to sustain her vision, her 18 months of mostly lonely, shoestring operations had equipped her with some essential inner ones. "I believe 120 percent in what I'm doing," she said, well before the Boston site took shape. "If you didn't have that, you wouldn't have the energy to get up in the morning. You really enjoy the good days, because there are a lot of bad days right now. But I'd personally prefer to have those high days rather than a lot of middle days—that's why I didn't go back to corporate America."

. . .

One of the most ambitious current experiments in "knowing" and "being known" has taken shape recently in the Brookline offices of UPromise Inc. Its idea, conceived in 1999 by chairman and CEO Michael Bronner, had all the scale anyone could ask for: to create a national customer-loyalty program (like airlines' frequent-traveler mileage points) which would pay consumers rebates on their shopping—not in free flights or discounts, but in tax-advantaged savings for their children's or relatives' college educations.

The business would require a huge technology infrastructure, to capture millions of consumers' purchases and to direct company rebates on their spending (for credit-card and telephone services, automobiles, clothing, even soft drinks) to the customers' college-savings accounts. Firms like Salomon Smith Barney that manage these new so-called "529" savings plans would invest the rebates and maintain records showing enrolled families how much they had earned toward future education expenses—one of the longest-running loyalty benefits a company could hope to offer any customer. Beyond the daunting technology, Bronner's notion also depended on persuading national partners to direct their marketing budgets toward this kind of unproven customer reward. And meeting both those challenges meant the new venture would need dozens of skilled people and lots of money.

The opportunity seemed right for Bronner, who had founded Digitas, a marketing-services firm that created customer-loyalty programs for clients such as American Express and AT&T. It also seemed a good fit for Jeffrey J. Bussgang, MBA '95, whom Bronner recruited late in 1999 to be UPromise's president and chief operating officer. Last March, almost precisely when the NASDAQ Composite Index peaked above 5,000, the company—a few months old, with a business plan and a few employees as its only assets—received $34 million in venture funding, giving it among the richest initial valuations accorded such an early-stage enterprise. Cash and vision in hand, they courted senior managers from Lycos, Disney, Merrill Lynch, and elsewhere to launch the engineering, marketing, and branding that the company would need to operate, and began calling on prospective partners whose millions of customers could be lured by college savings.

A classic example of "simultaneity," the work involved what Bussgang called "the dance of a dreamweaver": selling venture capitalists on the potential size of the market ("This is going to be huge") and promising them seasoned managers and top-tier business partners; recruiting people by assuring them of adequate financing and powerful partners; and securing partners by explaining the power of the customer reward, UPromise's financial strength, and the depth of its management. Having set this "cycle of spiraling expectations in motion," Bussgang said, "When you get back home, after flying coach and staying in the Holiday Inn, you sweat like hell" to make it all come true.

By mid-year, UPromise's 70 employees sprawled across a floor of open spaces and clustered desks, their telephones sometimes resting on the carpet where furniture had not arrived. Things seemed to be moving fast even for the placid Bussgang, who said, "It's a real challenge putting together a group of people who have never worked together, and getting them to work together like eight oarsmen in a crew who have practiced on the Charles for four years." The company announced a strong board of directors and an all-star advisory board of business leaders, educators, and two former governors. It signed a letter of intent with Coca-Cola to be a lead partner offering customer rebates.

By July, however, half the initial financing had been spent, and UPromise was "burning" the rest at a rate that could exhaust it before year-end.

But even as the number of employees exceeded 100 and the launch date for UPromise services slipped from autumn into 2001, the alignment of opportunity, knowing and being known, and a group of credible employees garnered the company a second round of venture capital. That November infusion of $55 million bought 18-plus months of "runway," Bussgang said, to get beyond the "hope and buzz" stage and into real operations.

In January, AT&T joined Coca-Cola as an announced partner, and live testing of UPromise's service began. The company still confronted the formidable difficulties of putting an extremely complex business on line and enrolling consumers through its partners. But the fact that it had raised $90 million and assembled an experienced staff during a highly volatile period for such start-ups itself seemed a milestone, and a symbol of the enterprises that might be imagined and attempted in an American economy with deep reserves of risk capital and the people willing to pursue the potential rewards of using it.

. . .

Todd Krasnow, MBA '83, typified the historic Harvard Business School mid-career entrepreneur when he celebrated the opening of the first Zoots store in October 1998. But how had he—self-described as "not a clothes person"—come by his newfound obsession with missing buttons and perfectly pressed pleats?

Krasnow worked at General Foods for two years, developing fast-food products for the home kitchen. Then he joined the Jewel Companies, a food retailer, first bagging groceries at a Star Market in Cambridge, and later managing an underperforming store in Attleboro, Massachusetts. He moved on to join the launch of Staples, managing that company's West Coast operations and international joint ventures, and finally assuming responsibility for all sales and marketing. But by 1996, when an investor group asked him to run a new venture, Krasnow said, Staples "had kind of lost something for me." [Staples' head Thomas G.] Stemberg agreed to back him in exploring new businesses. Each ultimately invested $250,000 in a partnership to fund research on dry cleaning, an industry Stemberg had monitored for several years, where they were attracted by customers' very basic needs and a strong likelihood of repeat sales.

Krasnow learned that dry cleaning was an $8-billion business in the United States, divided among 34,000 owners who operated 45,000 stores. Customers chose the nearest outlet and entrusted it with their garments until poor service drove them to find another cleaner. The business, in other words, was highly fragmented and, because of repeat sales, "an annuity." In combination, those traits held the promise of building what Krasnow called "a very big company in an industry that does not have big companies."

His plan was to improve the service for "time-starved people" through such amenities as extended hours, drive-through windows, and 24-hour drop-off and pick-up using secure lockers. In the spring of 1998, Krasnow and Stemberg each invested another $1 million, and secured an additional $1.5 million from family members and friends. From the outset, Krasnow said, it was clear that the challenges would be operational, not technological or financial, and that dealing with professional investors such as venture-capital firms up front would bring about additional demands, but little in the way of immediately needed operating expertise.

From the October 1998 opening through the end of last year, Zoots mushroomed into six states, with 41 retail locations and 124 home-delivery routes served by purple Zoots vans. Krasnow and his management team oversaw nearly 1,000 employees who served 150,000 active customers. The company's sales in 2000 approached $30 million, and it planned to double revenues this year.

Krasnow sounded confident about the business at the end of 2000. Zoots had deliberately slowed its growth to focus on resolving operational problems, reducing mistakes dramatically while still sustaining more than sufficient gains in sales to satisfy investors. The delivery routes proved a blessing in disguise, given still-tight real estate and labor markets, and more of the growth planned for 2001 focused on adding routes than on opening new retail stores. Cash flow was growing, and Krasnow was confident he could arrange another round of private financing, which should suffice to carry the company through to profitability in 2002. New market opportunities were arising, such as providing dry cleaning through grocery-store chains and contracting with insurers to restore clothes permeated by smoke and soot in fires.

When one of Myra Hart's students asked Krasnow whether he would now counsel starting a business right out of school or gaining experience in a company, Krasnow said, "The laws of economics haven't changed, and the laws of competition haven't changed" just because of the Internet. "The more tools you have in your tool kit, the more chance you'll have to succeed."

"Whatever area they choose," Krasnow said of would-be entrepreneurs, "they've got to pick something they like to do, and work hard, and not worry about the rest — success will come." After a decade of learning what it takes to run a business, he said, "I'm very glad I've done this. It's terribly exciting to be writing my own job description as I go along — I feel like it's a fairy tale. It's not for everybody, but I love it."

Excerpted with permission from Harvard Magazine, March-April 2001.

Conclusion of Part Two. [ Read Part One ]

John S. Rosenberg is editor of Harvard Magazine.