Below is the transcript of the full interview I conducted with Dr. Richard Sudek, Director of Chapman University’s Leatherby Center for Entrepreneurship and Business Ethics. The center is nationally recognized as a leader in the field and Chapman has produced a number of notable entrepreneurs, including our client, Frank Delgadillo, creator of the Ambiguous and Comune action wear lines.
Excerpts from this interview appeared in Impact (formerly Caypen) magazine in both their online and print editions.
Q: Can you give us some background on the Leatherby Center and what you do here?
Sudek: I’m the Director of the Leatherby Center for Entrepreneurship and Business Ethics.
PM: What is your background?
Sudek: I had my own computer company, built starting with $250 and sold it, so I’m not your typical academic. What I’m really trying to do is change the entrepreneurial ecosystem here in OrangeCounty. The entrepreneurial ecosystem is poorly connected from my perception. We’d like Chapman to be involved in helping connect it. We’d like Chapman to be the place where entrepreneurs, inventors and investors meet and collaborate.
Most of our energy is outward facing rather inward facing.
One of the things to point out is that Chapman one of the best kept secrets here in OrangeCounty. We’re a top 50 business school. We have a Nobel prize winner in economics. Our entrepreneurship program is ranked 13th by BusinessWeek. Because I wanted to cross connect the university, we built this thing called ESUN, Entrepreneur Student University Network. Originally it was designed to be small, so we started with the local schools; Cal Tech. USC, UCLA, Loyola, Pepperdyne, UCI, Fullerton and Claremont McKenna to try to cross connect our centers which we’re starting to do.
The thing that really launched this is we created this competition called California Dreaming. And we brought in other schools such as Oklahoma, BYU, Berkeley and Hawaii, etc and created a $100,000 business plan competition that we have in April. Next year it will be a $200,000. It’s going actually be two different competitions a business plan competition and fast pitch competition. Microsemi will be the anchor sponsor, as they were last year. The idea is to get students in front of investors, not just to win cash. I brought in VCs and angels from the bay area and local VCs and angels.
One of the teams, BYU, who won the competition, got some equity funding from this in late April. So that’s the idea is to get students connected to that.
PM: So you’re trying to build the hub for this kind of activity here?
Sudek: Yes. Now this reaches outward across different states so the idea is the help students in general although focused on Chapman, OrangeCounty, Southern California, going out from there.
PM: Do you encounter territorial issues with other academic instititions?
Sudek: I haven’t run into it. We have the opportunity to create a geographic advantage. What if we could get all the entrepreneur schools in California to work together and what if you could be connected to all of the events at all of the schools? That would give us a geography advantage over other areas such as Boston. But universities typically don’t work together that way. That’s what I’m trying to do.
As an example, right now we are reviewing a case competition where we bring in local schools and do conferences to find ways to connect the students.
We have over 125 entrepreneurs in residence that are here as mentors for the students. About 10 of them have taken companies to IPOs representing diverse backgrounds.
We have free services that include Attorneys, CPA and marketing firms. There is a intern website so start ups can post their interships. We have an internal business plan competition.
The physical space is the Entrepreneurship Villiage. Up front is the K5 Accelerator.
What we’ve done is connect with a lot of groups here. Tech Coast Angels, Inventor’s Forum, which meets twice a month on campus, OC Hackers, SCORE, Tri Tech.
We also have a seminar series napkin to revenue and beyond, that are $100 to $200 sessions and discuss how to build a start up board, how to attract equity and investors, negotiate a term sheets.
We have a student incubator that currently has thirteen teams upstairs here.
PM: Separate from K5, which is run by Ray Chen and Amir Banefatami?
Sudek: We’re connected to that in that we have student teams that work with their entrepreneurs and get credit for that.
In addition, we have a fund raiser that honors an entrepreneur, we have a speaker’s series that are open to the public, we also have ‘Start Up Weekends’. The first two sold out. And we also have a Silicon Valley class where students are embedded in the culture for a week.
We’re really trying to change how entrepreneurship education is taught and we’re trying to change the experience inside and outside the classroom. So we’re different the typical entrepreneurship center because we are so outward focused. The idea is to help the community and it will help my students. The more people involved, the mentors we have, the more speakers and the more visibility we have.
PM: The banks say they have money. The angel community says they have money. Is there money to be had? Are you satisfied the deal flow that you’re seeing and the velocity of that flow?
Sudek: Yes. We’re (TCA) is going to do more than last year. We took a big hit in ’08 and we’re slowly building up. We on track to exceed what we did last year we did last year. That’s just Tech Coast Angels.
PM: How many companies does that represent?
Sudek: About fifteen new companies and there was some follow on investments. Am I satisfied with deal flow? I always to pause at that questions because I always want better deal flow. But we’re doing deals.
PM: Is it the quality of the deals you’re seeing or are investors just more cautious?
Sudek: I think it’s a little bit of everything. Better deals would attract more money and people are more cautious. But I’ve seen deals get funding really quickly.
PM: We both have bootstrapped businesses. Would something like what you’re doing here been beneficial to you when you started your business?
Sudek: It would have been huge. When I started I was a computer science major and never took a business class so I made every mistake. Learning how to build a start up board and these things absolutely. That’s what we’re trying to do through the speakers series and entrepreneur series which I consider informal education. We have an entrepreneurship degree, but plenty of entrepreneurs don’t want to do that. But they would love intense, low cost training and information. For example, Dave Berkus teaches our start up board seminar, it’s $200.
If I’m an entrepreneur, I can go to these speaking series. There are investors, inventors and other entrepreneurs mixing at these events. We also have other specific events like TCA, TCVN, OC Startup Circles. The idea is to have a lot of events on campus to get people connected.
PM: So you’ll build a larger entrepreneur community?
Sudek: Exactly.
PM: Is the feedback the thing that would have benefitted you?
Sudek: Finding mentors, how do I build a start up board?, how do I attract equity investors?, how do I negotiate a term sheet? Exposure to ideas. Had I had that, I would have had base information.
I think it’s important to step back and say we’re trying to address two pieces of the ecosystem. The first piece is fast growth, typically high tech. K5 is fast growth, high tech. Because of TCA, I’m well positioned to help those entrepreneurs using the network and the people on my board.
The next piece of the ecosystem is the small businesses who want to grow. They may not need equity investing. They are $1or 2 million and want to grow to $5 to 10 million. The Entrepreneur Organization is positioned to help those companies. EO has an incubator to help those businesses.
We have to have an sort of army of fast growth entrepreneurs and an army of small business owners that know how to scale and grow. Not scale to a hundred million , but know how grow companies. There are a grip of small companies that aren’t looking to grow, but there are lifestyle companies that want to grow and that’s where we can help.
There’s some point, if you’re over $20MM, then you can get advice and pay for it. But there is a network you might want to be involved with to help the $1 and 2 million companies
PM: Many of entrepreneurs have little or no formal education. Instead they have great desire or instincts. What elements of entrepreneurship can be taught and which cannot?
Sudek: I can’t teach anyone to be an entrepreneur. I can enable people and reduce risk. They have to have the drive, interest and the passion. I can give them tools to enhance that drive. I’m real careful to say that we can’t make students entrepreneurs by giving them the proper coaching and tools so they make less mistakes. Certainly less mistakes than I made.
PM: Does the program weed people out or if they do the work, they get through the program?
Sudek: They get through the program, but the ones that have the drive and passion bubble to the top and they engage in all the services that we have.
PM: So they know who they are?
Sudek: They know who they are. It’s clear when I see them in the classroom, it’s clear who they are. It’s clear when they come over here. They tend to separate toward ‘I’m here to get an entrepreneurship degree to ‘I’m here because I’m opening up a company. Once they bump into all of the services we provide here, they eat it up.
They’re 21 or 22 and now they’ve got access to Executives in Residence. Say they want to get their product into Best Buy and you’re 21, that’s intimidating, so we have someone that has no entrepreneur experience, but they can tell you how to get your product into Best Buy. They’ll tell you how Best Buy works.
So we enable and help those students. In a network of a 100 people, within that network there’s probably someone who can help them.
In my class, for fifteen weeks, they have to role play with me. The problem partner, the problem employee, the problem the banker, the problem vendor, the problem customer, in other words, I get them to understand the risks they’re going to take financially, socially, etc. Our approach to teaching entrepreneurship is much more practical and real world. They are going to have an idea of what they will have to give up to pursue a start up business. The idea is, after my class, I tell them we have all the resources to do it. But you need to understand that you’re going to give social time, your going to give up family time and your going to put your whole financial future at risk. You’re going to be able to work half days and as an entrepreneur you get to pick which twelve hours of the seven days a week that you work.
So when you ask if I can teach entrepreneurship, I can teach about it and I can help them self-select out.
PM: So you’re really creating and an environment where they learn who they are.
Sudek: Exactly. In fact they have to do a self assessment project in my class where they have to go through the project of deciding if entrepreneurship is for them. My course syllabus says that the course is help you decide if entrepreneurship is for you. A successful outcome of this course is for you to decide that entrepreneurship is not for you. I feel it’s my responsibility to help them understand if they should go work in a corporation.
PM: There’s not wrong with that.
Sudek: There’s nothing wrong with that at all. So I’m not everyone should be an entrepreneur, are you sure you know what you are getting into, and if you are and then we’ll help you and we won’t make you successful and we’ll reduce risk and give you a better chance at succeeding.
PM: If you look at people like Steve Jobs or Henry Ford, they were uncoachable, but they were brilliant. How headstrong can an entrepreneur be and be in one of the programs?
Sudek: My opinion is that, we don’t mind head strong but we need coachable. That sounds like a bit of a conflict. Most entrepreneurs are extremely persistent, stubborn, passionate. That can be misinterpreted as uncoachable. You almost need that mental barricade to get past all the people telling you ‘You can’t do that’. It’s an interesting tension between that and listening. And so, if you’re not listening, you’re not probably coachable and I’m not sure that we can help you because the main thing we offer is mentoring.
PM: I’ve seen a lot of people with great ideas, who understood their market was and how to do the product but they were horrible communicators. I’ve seen instances where people were shut out because they couldn’t communicate their idea. How able is the community to see past that?
Sudek: My philosophy is that there is no such thing as a complete CEO. So you build a complete CEO by the team you build around them. Many entrepreneurs are great generalists, they can sell, they have technical capability, they have other skills so they can kind of do it all. But sometimes you find an entrepreneur that is very technical and needs to be coupled with a business/sales person, not necessarily a ‘sales’ guy, but someone who has a complimentary skills set. Or visa versa.
I think if you have those generalist skills that’s an advantage. Wozinak was not good at all presenting. He couldn’t communicate. But he was coupled with the ultimate sales guy. And they were creating a whole new industry. If you have an idea that creates a new industry, you can lack some of those other skills, because the idea is so big that it’s going to work in spite of you.
I know Steve Ballmer pretty well but Steve and Bill together were a complete CEO. People in the company followed Steve. Bill was brilliant on strategy, but combined they were complete. Larry Ellison was quoted as saying that Steve and Bill should be broken up during the anti-trust stuff. He specifically understood that those together were equal to three. Although I think it’s better if I’m technically competent and can present well.
PM: What kinds of businesses are you seeing in your program?
Sudek: I have to support and encourage lifestyle to fast growth businesses.
PM: You’ve got the whole spectrum?
Sudek: Absolutely the whole spectrum.
PM: What characteristics should an entrepreneur look for in an angel investor?
Sudek: This gets into the discussion of smart money and dumb money. Sometimes we come across an entrepreneur who has a neighbor friend who’s a dentist who puts in money and unfortunately creates a wrong valuation and makes it really hard to get organized angel money. I think it’s a two way process. When you’re an entrepreneur, you’re not just looking for money, you’re looking for what that person brings you in their network and their skills set. I think it’s important for an entrepreneur think about it as a two way interview process, and understand that person’s experience, network and what they beyond the money to your company.
Now, if you go into an angel group and you have 22 people invest, no everyone is going to bring you that, but the idea is in that angel group there should be two to five that bring you a lot of value.
I think it’s understanding what you need and the sequence of what you need. So for instance, when you build a start up board, your start up board is different from month 0 to year 2 and then year 2 to year 4. The board that gets you to exit is not the board that gets you launched. Some investors may help you right now and some will be extremely helpful in two and three years when we’re trying to partner with Google or we’re trying to exit. You need a big bucket of skills and connections and don’t just focus on what you need right now.
PM: That implies that you have some sense of what you’re exit is going to be? How common is that understanding in a newly minted entrepreneur?
Sudek: If you want equity financing, it’s absolutely required. There’s no discussion about that. Don’t waste your time pitching if you do have your exit path, exit plan well articulated. That doesn’t mean we’re convinced that it’s going to go that way. We know it might change. But it gives us a flag. If you don’t have that figured out, you’re probably not a good equity funding candidate.
When I work with entrepreneurs, I often start at the end. It might change. Almost all the companies we invest in, their business plan change; we know things change. But, you have to build to optimize exit if you want equity investment. Because it’s not going to happen the way you think it will anyway, but at least if you’re thinking that way, you’ll build the company in certain ways that it will likely create better value at exit.
PM: What kind of return do you think angel investors are looking for?
Sudek: I think that is an unuseful discussion for this reason, because I don’t think that it can be articulated. Everyone wants a formula. You need to focus on this is going to grow big, it’s going to have a competitive advantage and everyone is going to want it. That means it has a potential grow very big, and it just depends on where you exit along the path. Is it a quick exit at 20 or 30 million or a finer exit at 80 million in nine years.
PM: What about the school of thought that angels should exist in the first or second VC round?
Sudek: That is often extremely suboptimal on the return side. I know of one deal where the VC offered on the order of 10 to 20 times and the final exit was 138.
PM: How many of those deals are there?
Sudek: We’ve had three IPO at Tech Coast Angels, since ’07 so that’s basically fifteen years. Band of Angels has had seven or eight so those are pretty rare. There’s two types of exits now. Quick exits and traditional exits and we certainly quick exits and those are smaller multiples at a high IRR cause you get money back in two years rather than eight or ten. So there’s not lot of those 100 plus deals, so you’re hoping some fives, some tens and a twenty or thirty.
PM: Do you think the majority angel community shares your perspective?
Sudek: I think so. I’ve been involved with the Angel Capital Association which is the association of angel groups across the company and we’ve been talking about quick exits for the last four years. My perception is that many groups understand that each deal has lower risk but is also lower exit is fine. In other words, is it a ten times but maybe quicker instead of 100 time in ten years.
PM: What are the main reasons entrepreneurs don’t make it?
Sudek: In fast growth businesses, they don’t understand competitive advantage, they don’t recognize market and competitive changes and some wait to long and miss their window to exit. Should I exit now at 14 times or wait until 50.
For lifestyle businesses, they lose sight of the competition and they don’t adjust. In fast growth, it’s hyperadjustment all of the time. Lifestyle businesses are much more geographic, I’m only concerned with people at one to five miles from my front door.
One other answer I’d have is that there tends to be a dead zone between about fifteen to twenty employees. A lot of small companies, when they get beyond twelve to fifteen employees they are able to manage the employees. Did they grow, are the able to trust and employee other managers? There are a lot of small business that are great to their span of control?
PM: Don’t you have the same issue with fast growth companies as well.
Sudek: I think it’s self assessment and self awareness and understanding the skill set and when you get to this point are you able to make this leap? I tell all my students that a start up CEO is a temporary job because few are able to scale up as a CEO and they have to get professional managers.
Dispatches From The Front 