This past weekend, 10 Alaskans took a day away from their families for a meeting at Alaska Pacific University to discuss and debate the state of entrepreneurship in Alaska and the availability of investment capital to help entrepreneurial businesses accelerate growth.
The conversation continued over dinner, culminating a 12-hour day. The question was raised: Which is more important, the chicken or the egg ... the entrepreneurs or the investors? Allan Johnston from Wedbush Morgan Securities thinks it's neither. He believes that what is most important to entrepreneurship in Alaska is "the nest."
I agree with Allan.
What is most important is the support system that the entrepreneur can connect with - the mentors, advisors and service providers - that prepare the entrepreneur for an outside investment by helping mitigate the investors' risk.
Why should we care about entrepreneurship in Alaska? According to a 2004 National Governors Association study, as much as 70 percent of economic development stems from entrepreneurship. These companies don't start out with the same kind of bang that you would notice when the daily newspaper writes about a new convention center or a new air cargo terminal. The companies that I'm talking about - the relatively few that make it out of the nest and succeed - start under the radar and slowly build wealth for their shareholders. They build expertise and contacts for their employees and eventually offer assistance for other entrepreneurial efforts through both human and financial resources. These companies and the people and organizations that build the nest are true wealth builders.
Here are some examples of that nest at work:
Three years ago a student at APU led a team in the Alaska Business Plan Competition to present a business plan for the leveraged buy-out of his old employer. This student and his team won that competition. After the competition the student and his professional team knocked on doors for months looking for equity.
They needed $55,000 in equity, since they had already raised $45,000 through savings and refinancing of their homes. They also needed the ability to borrow $350,000 for a term loan secured on $700,000 of inventory and equipment. They also needed a working capital line of credit.
An Alaska angel investor did invest the $55,000 in equity in the company and together with the former student and his team guaranteed the term loan to purchase the assets of the old company and go into business. Total capitalization of the company was $250,000. The total cash invested by the equity partner was $160,000.
This company lost about $150,000 on almost $1 million in sales in its first year. In the second year they almost broke even on $2 million in sales. However, there were several strategic changes that occurred during the second year. The business model was massaged to better reflect the competitive environment and the revenue model was changed as the company better understood how customers viewed their value proposition. There were changes in management, changes in minority partners and changes in back office systems and infrastructure - all tough choices, but all necessary. Now, in their third year of operations they have a $35 million run rate with a contract back-log of more than $200 million and look to be very profitable. Stay tuned for more on this one.
Have you ever heard of an Alaska company called Immediate Care, or of its president Jerry Tanner? Immediate Care is a health care company that Tanner started with one employee, himself, in his garage. He now has 500 employees and has expanded into the Lower 48. He recently expanded into the pharmacy business.
I expect that tanner and the team that he has assembled will continue to do very well. He took the time to call the other day to say thank you to some folks who were part of the nest. The thanks was not just with words but with a scholarship, through Alaska InvestNet, that he wanted to set up for some graduate students that he had met in the graduate program in entrepreneurship at APU. The outcome is that two new scholarships are now available to anyone in this program who is also paying there own way through school without the help of their employer. The scholarship, named the Tammy and C.J. Tanner Memorial Scholarship, is also meant to honor siblings of Tanner who passed away.
In Tanner's own words: "We wanted to set-up the scholarship in recognition of my siblings that passed away a number of years ago. Both of them had high aspirations in the business world, even at a young age. Also, having come from a poor family we had to struggle to get ahead in life. We feel we wanted to give someone financial assistance to meet their goals and hope they will pass that on to someone else when they are successful."
One of the fatal flaws that I sometimes see in entrepreneurs is an unwillingness to listen to good ideas. These "my way or the highway" folks think that all that they lack is $1 million dollar (or $100,000, or $10,000; you know these folks, just fill in the amount.)
Tanner and his team is the antithesis of these types. They collaborate, listen and then execute.
Another team that is collaborating to build a nest for success is in Fairbanks. Most every Friday for the past few months people from groups like the University of Alaska Fairbanks' School of Management, UAF Office of Electronic Miniaturization, Fairbanks Economic Development Corp. and the Fairbanks North Star Borough's economic development experts have been meeting to discuss not just the need for a nest for entrepreneurs, but how they can build the best nest possible for entrepreneurs, students and investors.
I understand that most of the readers of the Alaska Journal of Commerce reside in Anchorage. I also understand that most of the entrepreneurs and students that the above mentioned team will be helping is in Fairbanks. Investments, however, don't have this geographic boundary. If all goes well in the team's attempt to better commercialize some of the excellent research that is now going on at UAF and the nest that these folks build helps propel a Fairbanks company's growth to the point that (maybe) its equity trades on a public stock exchange, then the investment will be coming from all over the place.
Is this a good thing? Not only is it good, it is essential. Alaska now ranks almost last among the 50 states in venture capital investments and in university spin-outs. We have money to get companies started, but we can access even more capital to help these companies grow.
Seasoned managers, shareholder wealth, needed assistance for other fast growing companies - this is the wealth in the nest that these people and organizations are helping to build today in Alaska. Please ask yourself how you might help.
Do you know someone else who is helping to build private sector wealth in Alaska? Please tell me about them. You can reach me by e-mail at rickw@alaskainvestnet.org
Rick Wolk is an entrepreneur and instructor of management and entrepreneurship at APU in Anchorage. He is also one of the main organizers of the 2004 Alaska Business Plan Competition, an advisor for Students in Free Enterprise at APU, and also the executive director of Alaska InvestNET.
