Entrepreneurship, it seems, has joined motherhood and apple pie as one of those universal goods to which no one can object. In January, President Barack Obama jumped on the bandwagon with his Startup America campaign, aimed at creating a new generation of entrepreneurs who can drive growth and create much-needed jobs. Philanthropists, too, are increasingly seeing entrepreneurship as a way to kick-start the economy. Can they succeed?
America has always been an entrepreneurial nation and remains so today. Even so, says Carl Schramm, president of the Ewing Marion Kauffman Foundation, with unemployment still lingering around 9 percent, philanthropy can and should do more to boost entrepreneurship. A 2010 Kauffman study showed that for all but seven years between 1977 and 2005, existing firms were net job destroyers, losing 1 million jobs combined per year, whereas new firms added an average of 3 million jobs. Based on those figures, Schramm wants America to look to start-ups rather than big business to get the country back to work.
The Kauffman Foundation is the largest philanthropic organization devoted to the promotion of entrepreneurship. That has been its mission since it was created in the mid-1960s by pharmaceuticals industrialist Ewing Marion Kauffman. (For more on the Kauffman Foundation, please see Philanthropy, Fall 2009.) Indeed, the Kauffman Foundation’s research and advocacy on entrepreneurship has probably helped to push the issue up the political agenda and—philanthropists take note—grab the President’s attention.
Yet if getting the U.S. economy going again through enterprise is the goal, what role should philanthropy play? One proven strategy is to use philanthropic dollars to help more people become entrepreneurs—particularly those from disadvantaged backgrounds.
Consider the Network for Teaching Entrepreneurship (NFTE). NFTE teaches young people in deprived communities how to set up and run their own businesses. The program was the brainchild of Steve Mariotti, who switched careers in the 1980s from the corporate world to teaching in the New York City public school system. Some hard knocks in the classroom taught Mariotti that the best way to reach at-risk kids was through lessons about business. Since its founding nearly a quarter-century ago, NFTE has won support from an ecumenical range of funders, including Chuck Feeney’s Atlantic Philanthropies; Kathryn W. Davis and her daughter, Diana Davis Spencer; energy entrepreneur Mary Myers Kauppila; and hedge fund manager Arthur Samberg and his wife, Rebecca. In that time, it has seen nearly 350,000 young people in the U.S. and 10 other countries complete its program.
According to the IT entrepreneur and serial venture philanthropist Mario Morino, creating a more entrepreneurial economy is a two-stage process. The first task is to widen the pool of innovators, like NFTE does. “Our job today is to inspire as many people as we can to think about what they can do with what they know.” The second task, says Marino, requires rigorous training—putting up “constructive hurdles, to prove that [potential entrepreneurs] are serious and committed.”
Today, two promising, donor-driven programs are working to do just that. They are reaching out to overlooked populations: recently wounded veterans and Detroit-based entrepreneurs. And they are offering the training, mentorship, and constructive hurdles to prepare their program participants to start and scale successful businesses.
The Value of Veterans
Martin Whitman has an eye for spotting under-valued assets. He came to Wall Street in the early 1950s as a securities analyst at Shearson Hammill, but it did not take him long to grow suspicious of over-simplified analyses that were overly focused on short-term earnings. He knew there had to be a better way. Whitman developed a habit of active, opportunistic investment, seeking out underpriced securities in companies with strong balance sheets. The founder of Third Avenue Funds, Whitman has headed his own asset management businesses since 1974. Today, Third Avenue manages more than $16 billion for individual and institutional clients. “Value investing,” he famously wrote, “entails buying what is safe and cheap.”
Little surprise, then, that he applies the same principles to his philanthropy. His value-hunting instincts kicked in when he was approached by Mike Haynie, a retired active-duty Air Force officer who now teaches entrepreneurship at Syracuse University. Whitman attended Syracuse on the G.I. Bill, graduating in 1949 with a degree in business administration. A long-time supporter of the school, he serves as an honorary trustee of Syracuse. In 2003, he made a naming gift to the business school, now known as the Whitman School of Management.
Haynie approached Whitman about funding an entrepreneurship program at Syracuse. It would be specifically geared to recently wounded veterans. Whitman had served in the Navy during the Second World War. “Having been an enlisted man, I feel for other enlisted men,” Whitman explains. He especially feels for those who have been wounded or disabled in combat. “It is so important to try and help disabled people, some of whom might have difficulty in finding jobs in certain sectors of the economy.”
But there was a value play, too. Military career counselors, Haynie pointed out, are incentivized to find jobs for veterans—but, crucially, they almost never encourage entrepreneurship. The reluctance is understandable. Small business formation is risky; failure is common. The strain of entrepreneurship, goes this line of thinking, may be too much for recently wounded combat veterans.
Haynie understood the logic, but doubted it was true for all wounded vets. Combat veterans are tough, resilient individuals, with proven leadership ability and real-world experience making critical decisions under extreme pressure. Entrepreneurship would be a natural fit for many of these vets. This, Haynie proposed, was a largely undervalued asset, just waiting for the active, opportunistic investor. Whitman agreed.
The idea took shape as the Entrepreneurship Bootcamp for Veterans with Disabilities (EBV). All participants in the EBV program are post-9/11 veterans with service-related disabilities. EBV engages not just vets with physical disabilities but also those suffering from post-traumatic stress disorder (PTSD). (“Military culture is not about talking about how you feel,” Haynie explains, “and that culture affects people struggling to deal with PTSD.”) Other than that, the only other qualification to join the program is a real passion to be an entrepreneur.
Nevertheless, Haynie points out, admission into the program is “a competitive process, not an entitlement.” About 60 percent of applicants get through that initial screening. Since the participants come from all ranks and with a wide variety of educational backgrounds—70 percent have no college degree—EBV starts with an online learning module “to get everyone on the same page.”
After that comes the “bootcamp,” a nine-day, on-campus immersion program that takes participants through all the stages of starting and growing a business. The pace is intense. Expert faculty and leaders from the business world are shuttled into the classroom. There are discussions, debates, and case studies. But for donor Richard Haydon, the program is not just about the training. Haydon makes it a point to meet with EBV participants. “The networking is equally or more important,” Haydon says. “Vets need support.”
After graduation, participants receive ongoing expert mentoring and access to pro bono legal services. The entire program is designed to help them turn their ideas into reality. So far, 350 veterans have completed EBV and created 170 business ventures. Haynie thinks this is a pretty high rate of success for the program: “Some folks are on their 22nd surgery—and have 10 more to go. The life situation gets in the way sometimes. For some, learning that being a business owner is not what they want is an important achievement.”
One of the program’s big successes is the film production company Veterans Inc. The company was established by Brian Iglesias, a combat-decorated U.S. Marine who twice deployed to Iraq. Combat veterans “have the ability to thrive in chaos,” Iglesias explained to Entrepreneur magazine. “Plans don’t survive the first contact. Once people start shooting, the plans go out the window. Things go wrong, things break, the mission changes. You’re literally planning and executing at the same time.” Not bad training, as these things go, for the aspiring entrepreneur.
What Counts is Quality, Not Quantity
While EBV has a good record helping its target beneficiary group, will it have a wider economic impact? Studies have shown that the five-year success rate of businesses started by veterans was twice the average of the population as a whole. Mike Haynie points to the 2010 best-seller Start-up Nation, by Dan Senor and Saul Singer, which attributes much of the success of Israel’s entrepreneurial economy to the networks, skills, and disciplines learned in military service.
Israel’s economic success has, however, been built around high-tech and other globally competitive industries, not sheer numbers of start-ups. There are plenty of poor countries around the world that are teeming with small-scale entrepreneurs but that lack the infrastructure and incentives to turn that energy into job and wealth creation. Indeed, a new Global Entrepreneurship and Development Index (GEDI) was launched earlier this year by two academics, Zoltan Acs of George Mason University in Virginia and Erkko Autio of Imperial College Business School in London, to move the debate about entrepreneurship from counting start-ups to strengthening the wider enabling environment.
Under the mentorship of a senior vice president at Fox Searchlight Films, Iglesias produced the company’s first project, Chosin, a documentary about the legendary Battle of the Chosin Reservoir during the Korean War. It has won a number of awards and been picked up for theatrical release. Though Veterans Inc. is a military-themed business, there is no particular pattern to the ventures created by EBV graduates, which range across security, construction, laundry, public relations, property management, and photography. EBV graduate John Raftery founded Patriot Contractors, which is bringing in nearly $3 million per year and operates in the Dallas area and El Paso, Texas. “There’s still a piece of you that is missing when you leave service,” says Raftery, a Marine who is a veteran of the 2003 Iraq invasion. “Entrepreneurship is the final piece for me in making the 100 percent transition.”
“One of the things we talk about is that the power of entrepreneurship is to be what you want to be,” adds Haynie. “Entrepreneurship is a way to follow your passion.”
“The EBV program is a cost-effective solution,” argues donor Steve Barnes, another Syracuse alum and a partner at private equity firm Bain Capital. “EBV is leveraging the [Whitman] school’s valuable resources and infrastructure, including dormitories and lecture halls—neither of which are fully used during the summer months—to offer cutting-edge training in entrepreneurship and small business management to these returning veterans.”
With the support of Whitman, Barnes, and other donors, EBV is now well established at Syracuse. The big question now is growth. Six other business schools have joined the program: Connecticut, Florida State, Louisiana State, Purdue, Texas A&M, and UCLA. The class cycle that starts in April 2011 will offer places for up to 200 participants. Another 10 schools would like to join EBV, which is being expanded to serve the families of wounded veterans.
This expansion effort is being supported by the EBV Foundation, which was created and originally funded by Ted Lachowicz, a former partner at investment firm Babcock and Brown. “I have done a lot of things in my life,” says Lachowicz, “but this is one of the most exciting and rewarding.” Like many of EBV’s donors, he is a Syracuse alum; unlike others, his father was a disabled veteran of World War II. “This is the first time since the Second World War that universities have worked in conjunction with military members and helped out free of charge,” he points out. His goal at the EBV Foundation is to make sure that while the program expands it remains free to all participants. “The vets have already earned the right to be here,” adds Haynie. “We cannot charge them.”
Jump-starting the Motor City
“I was born and raised in Detroit,” Dan Gilbert recently told InsideBusiness. “So were my father and grandfather. They had small businesses in the city. I want to be one of the people to bring [Detroit] back in a big way.” Gilbert likewise has a business in the city, although it isn’t exactly small. He is the founder and chairman of Quicken Loans, which closed $29 billion in home loan volume in 2010, making it the nation’s largest online lender and among the nation’s top five retail home lenders. As part of his efforts to revive the city, in August 2010 Gilbert moved 1,700 employees from offices in suburban Livonia to the Compuware building in downtown Detroit.
Bizdom U is on the lookout for businesses that can get to scale by using technology to tap into national or even global markets.
Another part of Gilbert’s efforts to revive Detroit involves Bizdom U. Gilbert launched the program in 2007 as a way to bring high-potential entrepreneurs back to the Motor City. “Our biggest challenge is changing the mindset in the city of Detroit,” says Bizdom U’s CEO, Ross Sanders. “Too many people want a job rather than to be an entrepreneur. We are trying to change that culture.” Sanders, who came to Bizdom U from a corporate role at Quicken Loans, explains that Gilbert was looking to “play a significant role in the transition of the city to a brain economy.”
The Bizdom U admissions process is unapologetically selective. The first step is attendance at an informational meeting, then an application, then a telephone interview, then a presentation, then a face-to-face interview, and finally a written assessment. After that there is a series of background checks, references, and references of references. Sanders says that of 200 applications received for each cycle, only 15 to 20 are admitted to Bizdom U. Each applicant needs to have the drive to be a successful entrepreneur and the imagination to come up with a transformative business idea.
Once over the entry hurdles, Bizdom U participants undergo an intensive four-month program of training and mentorship, which, Sanders says, leaves graduates “with the advanced set of skills needed to start a successful, scalable business.” To date, 50 people have completed the program, of whom 20 have launched businesses. Including ventures in the pipeline, Sanders thinks that number will rise to about 30 by the end of 2011. Yet the focus at Bizdom U is on the quality, not the quantity, of start-ups.
A key feature of the Bizdom U model is the offer of up to $100,000 of start-up capital for program graduates who successfully pitch their business plans to Gilbert and a team of his associates. Bizdom U is on the lookout for businesses that can get to scale by using technology to tap into national or even global markets. Only those that meet this test pass the investment committee. One, Launch Learning Group, is an online insurance certification training company that has been up and running for about a year—and is already extending its reach beyond Michigan to 18 other states. Another, Dermanaut, is offering a new medical records service for dermatologists—“Google Maps for the skin,” as Sanders describes it.
Even after an investment has been made, there is yet another constructive hurdle built into the process. In exchange for its initial investment, Bizdom U receives two-thirds of the equity of the company. Once that capital has been paid back through dividend distributions, however, the Bizdom U share goes down to a third. The arrangement creates an incentive for the entrepreneurs to grow their companies and start earning back that one-third share as quickly as possible.
Bizdom U’s plan is that its remaining third of equity shares in high-potential companies will yield a healthy return on investment. That return, Sanders hopes, will generate the cash to keep Bizdom U going in the future, making it, in his opinion, “the first-ever self-sustaining nonprofit supporting entrepreneurship.” He admits, however, that this break-even point is still some way off—Bizdom U will need a portfolio of mature ventures before it can start exiting some of its investments to plow the money back into the program.
So far, Dan Gilbert seems confident that the program is going to succeed. Confident enough, anyway, that he has funded Bizdom U to start up in a second location: Cleveland, Ohio. Yet even if Bizdom U can use its financing model to expand rapidly to other cities and create more high-growth businesses, can it really make a difference in cities like Detroit and Cleveland?
Programs like EBV and Bizdom U are clearly showing promising results. It is still early, however, and both will face further challenges as they expand. Entrepreneurship is an important piece of the nation’s economic recovery, but it is not the only piece. There is a danger that entrepreneurship programs like these will be seen as a panacea for all America’s economic ills, rather than one part of the solution to a much more complex problem. Motherhood and apple pie are fine and well. Philanthropists need to keep asking tough questions.
Matthew Bishop is New York bureau chief for the Economist. Michael Green is a former foundation executive. Together they are co-authors of Philanthrocapitalism and The Road from Ruin.