MAKING THE GRADE!

Well stop dreaming and listen up. The reality is, most entrepreneurial ventures fail in the first two to five years. These failures usually stem from mismanagement, poor planning or lack of information. With that in mind, Monarch magazine had a crash course in entrepreneurship with Professor Steven Rogers, to learn first hand what it takes to be a successful entrepreneur.

Steven Rogers, a Harvard MBA, is an award-winning professor of entrepreneurial finance at the Kellogg Business School and is the director of the Larry and Carol Levy Institute for Entrepreneurial Practice at Northwestern University. He has received the Outstanding Professor Award for the executive program seventeen times. Before joining the Kellogg faculty, he purchased and operated two lampshade-manufacturing firms (and this purchase deal has become a widely-used Harvard Business School case study). Prior to becoming an entrepreneur, Professor Rogers worked at Bain and Company consulting firm, Cummins Engine Company and UNC Ventures, a venture capital firm. In 2005, he earned the title Chicago United's Business Leader of Color. In 2006, he was selected as one of the 100 Men Impacting Supplier Diversity. In 2008, he joined the elite Minority Business Hall of Fame. So believe us when we say this man is a business expert!

LESSON 1: THE DEFINITION OF AN ENTREPRENEUR

What are the key characteristics or traits of an entrepreneur?
Hmm, one trait is that they are risk takers. But I would like to add the caveat that they are not blind risk takers, but people who take risks with control-meaning these are folks who are, ideally, armed with a business plan and always working on their plan. These are also folks who are comfortable with ambiguity; they don’t always know what’s going to happen because nothing is carved in stone. These are people who are willing to make decisions with incomplete information; they don’t sit around saying, “I’m not going to do anything until all the information comes in.” These are also people who are innovative; they see things that other people don’t see in terms of opportunity. These people are also comfortable using other people’s money because, typically, they don’t have their own money and they don’t have enough resources. Very few people have enough resources to finance a startup. So, they are typically good with what I call “OPM,” or other people’s money. Another trait is that these are people who are leaders. The final trait I’d put out there is that these are people who are extraordinarily optimistic; they believe that something good is going to happen.

So do you think successful entrepreneurs are born or made?
That’s a great question! Some of the traits they are born with; it’s a part of their DNA. But there are other traits that can be learned. While I can’t teach you how to be a risk taker, I can teach you how to minimize your risk. So, while I believe some people are born with it, even those people need to learn and find the proper way of doing it. Others, who are not born with it, have to be taught. For example, during circumstances like now, when people are laid off, they have to learn entrepreneurial skills because they may have no other options.

I read in your bio that you consider yourself a “dealmaker” and your mother “an eccentric entrepreneur.” What are the other types of entrepreneurial styles?
Well I think there are two distinct styles. One is what is called the mom and pop entrepreneurs, also known as the lifestyle entrepreneur. And there is what is called the high-growth entrepreneur. The mom and pop entrepreneur is the person who runs the business haphazardly; he doesn’t have a business plan because he believes that passion is enough. He has passion and the willingness to go out and start a business, and that’s what my mother was. And, typically, those are people who are in pursuit of business that results in a middle-class lifestyle. The highgrowth entrepreneur is what we teach at Kellogg. This is a person who has a business plan-and she works the business plan. She uses the business plan to serve as her guide to run the company, instead of just writing the plan and putting it in the closet. She is in business with the expectation of growing that business, and growing the business exponentially with the byproduct being wealth creation. Her agenda is wealth creation for herself, for her investors, and possibly even wealth creation for some of her employees.

LESSON 2: BUSINESS AND FINANCE ADVICE

In your article, “Want to Be an Instant Entrepreneur?” you discuss how you are teaching your students that it is acceptable to work for other companies and gain experience before going it alone. Could you explain?
In the past at Kellogg, we taught students to be as well prepared as possible, to learn how to manage cash flow on someone else’s dime for two or three years. If you do that, that will increase your chances of entrepreneurial success. But over the last two years, our position has changed. We believe that MBA’s are important to the American economy; your country needs you now. We need you to create jobs. Therefore, we are encouraging our students to go out there and make a job, so we can help America put itself back on its feet.

What are some of the best industries to start a business?
I am really, really a strong advocate, for those who can, of going into real estate. You will never see another time like now in terms of depression in real estate. Even if you don’t know real estate, the basics of business can be applied. There will never be a time in America when prices for real estate will be at such low levels.

When financing a business, there are many options. In this economy, what do you suggest are some of the best ways to finance a startup or finance the purchase an existing business?
That is tough. It is extraordinarily tough. First of all, I tell people to go to the community banks for financing. Almost 65 percent of all loans to entrepreneurs come from the 5,000 community banks in America. I would also look at raising money from friends and family, if you can do that. That’s called guerrilla financing. In addition, you can go into your savings account. You may have money in a savings account that gives you a 3 percent interest rate, but we’re talking about making an investment that will get you a 40 percent return down the road.

I read where you said that valuing a company is more art than science. When determining the value of a company, how do you typically begin?
Anyone who is going to start a business needs to understand valuation. When you start a company, you have to have equity capital-which means that in exchange for money, you sell a portion of the company. The reality is that there are different valuation methodologies, including the multiple of revenue valuation model, the multiple of cash flow and discounted cash flow. Quite frankly, I can’t give you every explanation, but what I would say to people is that they should buy my book, which explains all the valuation models. They can also go online and look up valuation of startups and valuation of acquisitions.

LESSON 3: ENTREPRENEURIAL MYTHS

In your article, “Want to Be an Instant Entrepreneur?” you talk about downplaying the romanticism of entrepreneurship. What are some of the biggest misconceptions about owning your own business?
A big misconception is that all you need is passion. Passion is not enough; you have to have some skills. Another myth is that if you work hard, everything good will happen. That is not true. You have to work smart! You have to know why you’re doing what you’re doing. You can work hard for twenty-five years and sell your company for $1 million, but if you understood valuation while you were working, you would work smarter and make yourself worth more. You can’t just work hard to stay busy because, in essence, all you are doing is working at a high paying job. Another myth is that anybody can be an entrepreneur. Well, anybody can be a mom and pop entrepreneur. There is also a myth that people who don’t know finance can never learn finance. That is not true. Anyone can learn entrepreneurial finance.

A big misconception about success is that it’s solely on our smarts, ambition, hustle and hard work. But some suggest that success comes from opportunity and access. How does this affect African Americans going into business?
One our greatest problems, unfortunately, is access to capital. Even during the best of times, access to capital is a challenge for African Americans. There was a study that at one time showed 63 percent of African American business-loan applications are rejected. That is absolutely reprehensible! Part of it is that we don’t come from generations of wealth. Second is a lack of education-knowing how to put a good business plan together. Third is racism; even when we have a great plan and the proper paper work, we are still rejected at a higher rate than any other race in America. So, racism, unfortunately, still plays a role. One thing we have to do as a race is speak up. We have to tell a president, who looks like us that we need special treatment; we need something to be done to help us access more capital. Federal government programs should be instituted to provide money to African Americans. Unfortunately, the president has stated that there won’t be anything that he’ll be doing specifically for African Americans. It’s been despicable on the part of the president in terms of hearing the outcry of the black business community. There are some organizations out there that are willing to provide us with resources. Many are venture capital organizations that are members of the National Association of Investment Companies (NAIC). The NAIC consists of about fifty financial institutions that specifically invest in African American businesses. If you look at almost any company that has major acclaim in the African American community, like BET and TV-One, all those companies got money from NAIC funds. In terms of government grants, there is a new program out there that provides $35,000 of lead capital to entrepreneurs. But research shows that even though this is a part of the stimulus package, only 2 percent of the funds have gone to Black entrepreneurs. In some states, 0 percent has gone to Black entrepreneurs.

As a final thought, I would like to know, what has teaching business taught you?
Teaching business has taught me that my job as a professor of entrepreneurship is to empower my students-to empower them with comfort and the knowledge that they can be successful entrepreneurs. It has taught me that I have a responsibility to make finance as easy to learn as possible. The people I am teaching are what I call America’s heroes and she-roes, these are folks who will create jobs for others and who will go on and become the next generation of high-growth entrepreneurs.

Notes:
1. Steven Rogers, Entrepreneurial Finance-Finance and Business Strategies for the Serious Entrepreneur. 2nd ed. (New York: McGraw Hill, 2009).
2. Steven Rogers, “Want to be an Instant Entrepreneur?” BusinessWeek (October 2004).