Paper Chase

If all goes well for Sam Altman, he’ll be the next great college dropout entrepreneur. The onetime computer science major dropped out of Stanford to start Loopt, which lets people track their friends via cell phone to find them in the real world. The hot startup raised $5 million from New Enterprise Associates and Sequoia Capital in January, launched its product in September and announced a major partnership with Boost Mobile just last month.

Altman would have plenty of company as a successful tech entrepreneur who left school without a degree. He’d be in rarer company in the way he did it: His startup grew out of the Stanford University business plan competition—formally known as the Business Association of Stanford Entrepreneurial Students (BASES). In true sophomore fashion, Altman and his co-founder filed an incomplete application for the 2004 competition and failed to make the first round. But they got their act together and went on to win the undergraduate competition. One of the final-round judges was NEA’s Patrick Chung, who kept in touch with Altman, even helping him make business connections before they talked about funding. When Altman was ready to raise a Series A round, he turned to Chung, who introduced him to his partners at NEA in late 2005.

“We thought the whole business plan competition was stupid, and I don’t remember why we even did it,” Altman confesses. “But it turned out to be the greatest thing for us.” Besides connecting him with Chung, the competition forced Altman and his partner to refine their ideas and even brought them together with their corporate attorney.

In the last decade, business plan competitions have popped all over the place. Venture capitalists are eager to involve themselves with these pitch-fests, at least with the big-name competitions like those at Stanford and MIT. Maybe the competitions provide a return on investment, but the truth is there’s little data to prove it. None of the seven VCs interviewed for this story could point to a company he or she funded out of a business plan competition that went public or was acquired. And most of the organizers of the competitions cannot provide hard data to prove they’re worthwhile. One fact that no one can dispute is that very few public companies have emerged from the competitions in the 20 or so years that they’ve been around.

Bragging rights

There is one competition that can show VCs the money: MIT’s $100,000 Entrepreneurship Competition. In its 17 years, it has produced at least 87 companies that have pulled in $640 million in venture capital. Of that number, three have gone public—Akamai, C-Bridge Internet Solutions and NetGenesis—and 17 have been acquired for total proceeds of $2.35 billion. Just this year, two participants in the MIT competition were acquired—Harmonix was snapped up by MTV Networks in August for $175 million, and Brontes Technologies was bought by 3M for $95 million.

We thought the whole business plan competition was stupid … but it turned out to be the greatest thing for us.”

Sam Altman, Founder, Loopt

MIT is the exception in being able to quantify its results. Most universities don’t even track the performance of their business plan competitions, which is odd given that their VC boosters are so numbers driven.

For instance, the Moot Corp. competition at the University of Texas claims to be the oldest such event, having begun in 1984 (around the time Michael Dell’s little mail order computer outfit was outgrowing his UT dorm room). Moot Corp. itself has been a fabulous success. It is arguably the largest business plan competition, with preliminary rounds taking place at 17 universities around the world and whose winners meet in early May in a “Super Bowl” in Austin. But competition administrators at UT’s McCombs School of Business are hard pressed to name a single public company that has emerged from their competition. They aren’t even sure how many of the business plans churned out by Moot Corp. participants have grown into functioning companies.

That’s not to say Moot Corp. hasn’t produced any successes. The winner of the 2005 competition was smoke detector maker KidSmart Corp., which morphed into Signal One Safety. Also, two winners since 2001 have raised venture funding: Bigfoot Networks, which raised $4 million from an undisclosed venture firm in March 2006, and Alianza, which raised $6.27 million in two rounds from vSpring Capital, The University Venture Fund and an undisclosed investor in 2005 and 2006.

The University of Oregon’s Lundquist Center for Entrepreneurship recently looked at the 100 competitors who entered its New Venture Competition from 1998 to 2003, and was able to find information on just over half of them. Of that group, 60% at least incorporated their business. A 2000 semi-finalist, Novadaq, a medical imaging firm, went public on the Toronto Stock Exchange in a $21.6 million Canadian IPO. But Randal Swangard, managing director of the Lundquist Center, says he has no data on how many received funding. “It’s like chasing ghosts,” he says. “All these students just disappear out of these universities.”

In contrast, the Edward L. Kaplan New Venture Competition at the University of Chicago’s Graduate School of Business knows it has produced 30 companies in its 11 years. Of that number, 22 collectively raised more than $100 million (not all of it from VCs) between 1997 and 2005, one was acquired for $70 million and another was acquired for an undisclosed amount.

Guessing game

It’s like chasing ghosts. All these students just disappear out of these universities.”

Randal Swangard, Director, Lundquist Center for Entrepreneurship, University of Oregon

The lack of statistics doesn’t surprise Patrick Vernon, associate director of the Center for Entrepreneurial Studies at the University of North Carolina’s Kenan-Flagler School of Business. Vernon started researching the economic impact of business plan competitions and found that few know their success stories—or whether they even have any. His research stalled due to lack of data. Vernon believes the competitions are generally good for educating students on how to be entrepreneurs, but not so good at creating companies.

Vernon is not alone in that assessment. Business plan competitions “might generate a jewel in the rough, but we think it’s not very efficient,” says Cameron Lester, a general partner at Azure Capital Partners, a four-partner venture firm in San Francisco. Lester says Azure’s network of investors and entrepreneurs generates 700 to 800 worthwhile leads each year. Of that number, Azure funds just four to six.

Even VCs involved with the competitions say they aren’t high-return uses of their time. For one thing, business plans presented at a competition broadcast an idea to the world. That’s not how Google or Yahoo came about, or for that matter Sun Microsystems, the archetype of Stanford startups. Despite those smash hits, “We had little expectation that undergraduate and graduate students would have the insights needed to build good business plans and companies,” says Gary Morgenthaler, a general partner at Morgenthaler Ventures.

Still, Morgenthaler is actively involved in business plan competitions. The venture firm endowed the grand prize at Stanford in honor of David Morgenthaler (Gary’s father). The elder Morgenthaler endowed the original MIT competition as part of his passion for training entrepreneurs. His son has judged the BASES finals since 1998.

Morgenthaler even surprised himself by funding a company he judged—Voltage Security, an identity management firm that won in 2001. Still, he starts to say that the competition “is not the highest productivity use of time in terms of deal sourcing.” Then he does the math and realizes that he’s probably judged close to 100 business plans, and funding one out of 100 “is about our normal batting average for companies we take a serious look at. So it’s probably no worse than other sources of deal flow, but it isn’t a super-productive source of deals.”

Soft spot

[Business plan competitions] might generate a jewel in the rough, but we think it’s not very efficient.”

Cameron Lester, General Partner, Azure Capital Partners

So why stay involved with such competitions? It’s the soft benefits that keep Morgenthaler and others coming back. For one, being involved with high-energy students just makes them feel good. “I get more out of it than just a sense of civic duty or public good,” explains Morgenthaler. “I enjoy interacting with the students and there are novel ideas and technologies that emerge each year. It’s one day out of my year, it’s a nice change of pace and you feel like you’re doing something positive for the students.”

Venture capitalists say the competitions also help them connect with university researchers and technology transfer officials, which can lead to early access to ideas and deals. “If you want to be on the forefront of what’s going on from a technology perspective it’s good to have deep relationships at universities,” says Jean George, a partner with Advanced Technology Ventures, which sponsors competitions at Stanford, MIT, Harvard and Duke. “You can’t just take one route. These are big organizations and complex organizations and they span the globe.”

Dick Kramlich, a founding partner of NEA, considers business plan competitions a research expenditure. As such, he says their proliferation “is a great thing.” He likens it to a market test that helps entrepreneurs tune up their ideas, and says that NEA likes to see potential deals that have come through a business plan competition. He’s also not worried about having so many other VCs see the same companies. “These are not obvious hits; they have a lot of unresolved facets,” he says. Kramlich can at least point to Loopt as a fundable company that came out of NEA’s “research.”

Most VCs we spoke with look at the cash they shell out to business plan competitions as a marketing expense. BCE Capital, for example, paid approximately $35,000 to be a gold sponsor of this year’s MIT competition to raise its profile in the Northeastern United States. “We’re really trying to grow our presence in the Northeast,” says Mark Faucher, a principal at the Toronto-based early stage firm. BCE opened an office on Boston’s version of Sand Hill Road in Waltham, Mass., last year. The firm plans to look closely at the results of sponsoring the MIT competition before it considers renewing.

BCE also sponsors a competition at the University of Ontario’s Richard Ivey School of Business. But that commitment costs it a fraction of the MIT competition, and besides, three of the BCE partners went to the Ivey School (do not underestimate school spirit as a motivation for VC behavior).

Gaining stronger ties with university faculty and technology licensing offices are also reasons cited for being involved with business plan competitions. But VCs readily acknowledge that they can make those connections without the competitions.

If you’re an early stage technology VC, [business plan competitions] are an important source of deals. If you’re a late stage investor they are probably cute but not critical.”

Erik Straser, Partner, Mohr Davidow Ventures.

Fountain of youth

When pressed, VCs have trouble showing the benefits of connecting with students at the competitions. “You meet these young entrepreneurs, and even if you don’t fund them through this plan, you’ll likely run across them again in the future,” says ATV’s George. But she hasn’t actually run across one yet. Kramlich says NEA has hired at least one partner who once was a competitor in a business plan competition, but he wasn’t sure if NEA first learned of the partner through a competition.

VCs say the kinds of companies most likely to emerge from business plan competitions are consumer and consumer Internet startups, rather than more capital-intensive companies, such as semiconductor startups or, especially, biotech outfits. Exceptions in both categories exist, such as T-Ram Semiconductors, which came out of BASES, and NanoString, which won the 2004 University of Washington competition and eventually was funded by Draper Fisher Jurvetson and OVP Venture Partners.

Stanford’s BASES competition lists half a dozen VC-funded companies on its site, including T-Ram, Ingenuity, and Voltage Security. Stanford says it doesn’t know how many companies from its competition have received venture backing or went on to go public or get acquired.

But BASES co-founder Erik Straser, now a partner at Mohr Davidow Ventures in Menlo Park, says: “Look at the Nasdaq100. It’s full of college students who decided to go change the world.” He says MDV funded a company from last year’s BASES competition, though he declined to give its name because it’s in stealth mode.

Straser clearly thinks of the competition as part of the soft tissue of marketing MDV. He puts it in with a portfolio of marketing activities that keep his firm’s name in front of potential entrepreneurs and top faculty members. MDV, like many VC firms, also likes to market itself through sponsoring events like this year’s California Clean Tech Open, a business plan competition with $500,000 in prize money spread across five categories: energy efficiency, renewable energy, smart power, transportation and water management.

If you want to be on the forefront of what’s going on from a technology perspective it’s good to have deep relationships at universities. You can’t just take one route.”

Jean George, Partner, Advanced Technology Ventures

MDV sponsored Stanford’s winning entry in the transportation category. Among the dozen other VCs that sponsored the competition were ATV, Draper Fisher Jurvetson, Khosla Ventures, NEA and Venrock. Straser says the Clean Tech Open was a fun way to get the message out that MDV wants to fund clean tech entrepreneurs.

While Straser talks soft benefits first, he does think such competitions help with deal flow, especially because they aggregate a large number of potential deals and then filter them. “If you’re an early stage technology VC, this is an important source of deals,” he says. “If you’re a late stage investor, this is probably cute but not critical. If you’re a consumer Internet investor, it’s probably really important.”

Teen dream

Case in point: Chung, who specializes in consumer Internet and mobile deals for NEA. Loopt is one of three companies he has funded since joining NEA. He says business plan competitions are an “incredibly efficient place” to hunt for consumer Internet deals. Many of the consumer oriented startups aim at the youth market, which means a successful startup will be valuable to advertisers and marketers, who remain baffled by the under-25 market. “This is a large, important, affluent, highly mobile and highly social demographic,” Chung says.

Even so, Chung remembers the looks he got from NEA’s partners when he brought in Altman and his co-founders. “Bringing a group of sophomores in front of the NEA partnership was a little bit daunting for me,” he says. “It was one of my first deals, so when they walked into the room, some people looked at me, or I interpreted their looks as, ‘Who on earth are these kids?’” That went away when the presentation started, he says.

“I really like Sam Altman,” says Kramlich. But he acknowledges that finding a company like Loopt at a business plan competition “is probably a best case scenario.”

I enjoy interacting with the students and there are novel ideas and technologies that emerge each year. It’s one day out of my year, it’s a nice change of pace and you feel like you’re doing something positive for the students.”

Gary Morgenthaler, General Partner, Morgenthaler Ventures

Chung is a big fan of business plan competitions partly from personal experience. Before NEA, he worked for Zefer, a consultancy that won the 1998 Harvard Business School Business Plan Contest and pulled in $100 million in funding in a single round.

Zefer later died like so many other dot-coms. That fate, though, also befell companies run by serial entrepreneurs with excellent track records, and it is indeed the fate that most portfolio companies suffer, regardless of pedigree. VCs, then, should school themselves in the extra risk of funding untried and unseasoned entrepreneurs before plunging into business plan competitions.

They should also think about Altman. After winning the undergraduate competition at BASES, he hopped the red-eye to Boston and met with Y Combinator, which seeded his idea. Y Combinator Partner Paul Graham wrote in his blog: “Within about three minutes of meeting him, I remember thinking “Ah, so this is what Bill Gates must have been like when he was 19.”

How much is that chance worth?

Michael Fitzgerald is a freelance writer who specializes in writing about technology startups. He may be reached at Michael@MFFitzgerald.com.