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Inventing Entrepreneurs

A CEO encourages entrepreneurial spirit among his regional managers by giving them lots of latitude and 49% equity.
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It seems as if CEOs can't find enough self-motivated employees -- the kind with the entrepreneurial drive to exploit opportunities and help grow a business. What to do? Create them, says Matt Hession. Hession claims he's expanded his company by setting up managers in ventures of their own and giving them 49% of the equity. Let's see if it works. -- J.H.

What started as a celebration of growth ended up feeling like a declaration of war.

Matt Hession, worn out from five years of hard work and speedy expansion at Key Nursing Corp., decided in 1987 to whisk all of his top managers down to the Bahamas for three days. Mornings they would talk business. Afternoons were reserved for long and serious sessions of sun, a time for managers to share ideas. Theoretically, anyway. "It was awful," recalls Hession, president of the contract nursing business. "Everybody was sniping. They were hurting each other's feelings and running to me. The animosity kept building." By the time it ended, Hession had concluded that "we should not do this again."

Which is not to say Hession was unhappy about the fracas. "I expected it to happen sooner or later," he says offhandedly, sipping a beer.

Hession saw the discord as a kind of progress. The folks who co-own and manage his "affiliates," as Hession calls the separate companies he has formed to expand Key, were acting stubborn. And competitive. And independent. In short, they were behaving like a bunch of -- well, somebody has to say it -- entrepreneurs. Hession loved it. "I have a lot of respect for Matt and what he's done," says Sandy Gilbert, president of one affiliate, Key Nursing of North Carolina Inc. "But it's getting hard to say who's an affiliate of whom."

Those aren't exactly the kinds of words most founders yearn to hear. But the whole point of Hession's unusual experiment is to nurture entrepreneurial instincts, wherever they lead. "I'm not just in the nursing business anymore," says Hession, whose Thibodaux, La., company has its roots in his own experience as a professional nurse. "I'm in the business of developing entrepreneurs."

During the past five years Hession has chosen nine people and with them founded temporary medical staffing businesses like his own. To start them out, he gives each of them 49% of a separate company, puts in the $1,000 or so it takes to capitalize it, then loans them working capital at 2% above prime. Like a financial feeding tube, he steadily funnels them money -- his investments have ranged from $5,000 to $80,000 -- until they are healthy enough to obtain their own lines of credit. Apart from getting his loans repaid, Hession's hope is that most will eventually buy him out of his shares, which he has purchased for practically nothing except his time.

The results of Hession's casual experiment would please even the starchiest venture capitalist. Two of his eight affiliates have soared. One of them, Analytical Medical Enterprises Inc. (AME), has grown fast enough to earn the 75th spot on 1989's Inc. 500, which ranks the fastest-growing small private companies -- far eclipsing its parent, Key, which landed at #376 in 1987 and #476 in 1988. Adding an unexpected twist, William Borne, AME's president and chief executive, has successfully tried Hession's recipe for developing his own group of entrepreneurs. "I have some very successful grandchildren," says a doting Hession, whose $1,500 equity investment in AME has so far yielded him an astounding $240,000 or so.

But there are some dropouts in the family, too. Three Key Nursing affiliates have slowly bled to death, while one, Key Health & Management Services Inc., hemorrhaged wildly. Last June the shareholders-managers ran off to form a competitor, leaving Hession with about $50,000 in debts. Before launching another affiliate, Hession plans to "put some more legal teeth" into the arrangement.

No matter how much formality Hession introduces, his system will not work for most kinds of businesses. Opening a contract nursing company doesn't take much money (as little as $1,000, plus $10,000 to $15,000 in working capital) or market research (any hospitals in the area?), nor does it gobble overhead (most affiliate owners work out of their houses). Relatively few businesses fit that profile.

Nevertheless, what Hession has learned along the way about fostering entrepreneurship applies to every business -- now more than ever.

Think about it: how many minutes has it been since you last bemoaned the fact that you can't find employees who are self-motivated and creative? In practically any industry, it has become a cliché to note the quickening pace and breadth of competition, the product life cycles that are shortening like December days. You need employees who can act quickly, responsively, and decisively. Until now, your best plan for finding them may have been to wait for cloning technology to catch up.

And even if you had stumbled upon a tribe of entrepreneurial types living in a cave somewhere, you'd probably have scared them back inside. Few are less capable at managing entrepreneurs than other entrepreneurs. Matt Hession is no different. That's one reason why he didn't bring entrepreneurs into his own company; he set them up in ventures of their own.

By doing that, Hession has created, in effect, an old-fashioned apprenticeship program for entrepreneurs. "I've taken the same trip these affiliates are taking," notes Hession. "I know when they need a kick in the rear, when they deserve a pat on the back."

Hession's curious vantage point has led him to some surprising conclusions. Entrepreneurial employees can be found, he says -- if you learn the right traits to look for. They can be nurtured -- if you are willing to commit the emotional resources. And they can help you become more successful than you ever dreamed -- if you can resist smothering them. "The right people are out there," says Hession, 37. "If you've been through it, you are in the best position to find them and support them."

What follows are some of the principles Hession has found most important in raising his crop of entrepreneurs:

* FINDING ENTREPRENEURS

Look for Raw Material, Not Mystique

By the end of Key Nursing's second year, 1983, Matt Hession was in the intensive-care unit -- not as a patient, though he felt like he could have been, but as a constant substitute when his nurses didn't show. "I was working like a wild man," he recalls.

In return for his efforts, the company's vital signs were good, with healthy sales of roughly $400,000 and robust profits in the 10% range. And that was mostly serving hospitals within a 50-mile radius of tiny Thibodaux. What about Baton Rouge? Or Lafayette? Or -- the meanest market of all -- New Orleans? Hession was already working at least 80 hours a week, often only stopping to catch 3 hours' sleep on a rickety hospital cot. Sometimes he'd get so exhausted that he would come home at night and vomit. "He'd leave for work in the morning, and come back in about a week," remembers his wife, Carol.

How could he expect the same of anyone else? Where could he find such gluttons for punishment? What exactly did it take to succeed in this business, anyhow?

Answering the last question forced Hession to scrutinize his own experience.

He had started Key after spending three years at a similar staffing company. With no formal business training, he decided to strike out on his own. Not unlike the entrepreneurs he would later launch, Hession began with a meager $2,000 and a $20,000 line of credit, supplied by a local businessman. To keep overhead low, he worked out of his house.

Once launched, Hession found it mattered little that he was weak on accounting or couldn't analyze financials. For that, he could take classes or find others to help him. What they couldn't impart were the things he had learned while working as a nursing director.

He knew that hospitals were feeling the heat because of changes in federal reimbursement laws. Above all, hospital administrators feared having to close a profit center such as an intensive-care unit because they couldn't find nurses. Cozying up to them, Hession whispered the exact words they wanted to hear: "I can make it so you'll never have to worry about that again." Then came the capper: "I guarantee it." To set his agency apart from the competition, Hession guaranteed that a nurse would show up. The substitute was often Hession himself.

He also knew where to find the nurses. At the start of his second year, Hession landed a contract to staff an intensive-care unit at a hospital managed by Hospital Corp. of America. Eager to make the right impression, he went out and recruited the nurses immediately -- only to have them pull out 30 days before the contract began.

With his expertise, Hession knew exactly where he had the best chance of finding underpaid, ready-to-relocate nurses. He got in his tiny plane, a Cessna 172, and piloted himself to Jackson, Miss. There, he rented a room in a hotel strategically situated near three hospitals. He went to a local radio station and plunked down $2,000 on ads. He had the nurses lined up within two days.

It was that kind of determination -- "the ability to be completely and totally committed," as Hession puts it -- that kept Key alive.

And that was what he wanted in a manager; the ability to be unstoppable. That came not from being educated in business, nor even from risking money. ("If risking money was what set entrepreneurs apart, everybody in Las Vegas would be an entrepreneur," he notes.) It came from having what he calls the "basic raw material" of determination, combined with practical experience as a nursing director. "I stay away from mystique," says Hession. Forget the stereotypical entrepreneurial profile -- the charismatic, inspirational leader. He was after the basics: have they managed people? Have they shown some responsibility with money? Can they work hard?

By 1984 he had his eyes on someone who met that composite perfectly.

Hession had met William Borne while Borne was director of nursing at a small 35-bed hospital. Now, Borne was working as a Key nurse, but he was always proposing business ideas to Hession. One week it was car alarms. The next, a liquid-diet product.

One morning, Hession approached Borne in a hospital cafeteria. "Listen, Bill," he said, "I have good news. We are going to form a corporation." Borne looked somewhat puzzled. But when he heard the next sentence, his face lit up.

"And," Hession added, " you are going to run it."

* SETTING THEM UP

Give Equity and Operating Control

For a brief time, Hession had considered franchising the Key Nursing concept. Refused equity by his previous employer, he knew how important it was.

But he was equally committed to finding people who had the qualifications he wanted. And if he set up a standard franchising agreement, he would have to find people who could get their hands on some serious money. Getting started, losses from operations could easily run as high as $50,000 the first year, not to mention the working capital they would need. Add to that a franchise fee, and Hession figured he'd have to disregard anyone without access to about $100,000.

So much for emphasizing experience. How likely was it that a nursing director would have $100,000 stashed somewhere? Physicians might be interested, but, notes Hession, "they would hire somebody else to handle the franchise, and who knows who that would be." Hession was not willing to make that kind of trade-off. "I wanted to be able to look for the best qualified person possible," he says. That person, like Hession in 1982, probably didn't even have $2,000 to start the business.

Undeterred, Hession came up with a hybrid system, built around one radical notion: the prospective entrepreneurs would put up no money. Hession would loan them working capital and they would be responsible for their 49% share of debts should the company collapse. Assuming his bank would allow it -- and he had some trouble finding a bank that would loan him money against out-of-state receivables -- Hession would run an extension cord out from his own line of credit. It sounded bizarre: why entrust so much to someone who has risked nothing?

Hession believed that the entrepreneurs would earn the stock they were given through their sweat. Their measly pay consisted of a 6% commission on any sales, plus whatever money they picked up working shifts as a nurse. That forced them to empty bedpans -- as he had -- while trying to build a business. "I didn't want any spoiled brats," says Hession firmly. Later on, Hession softened up a bit and set up a salary-advancement system. If affiliate managers needed time for marketing to hospitals and nurses, and couldn't work their shifts, Hession would loan them money to live on. "In every case I used it, it has pretty much been abused," he reports. The option no longer exists.

Since he was not out to hire numbers whizzes, Hession decided to graft one aspect of franchising onto his plan. For 7% of an affiliate's sales, Hession's office, the original Key Nursing, would handle such functions as receivables, payroll, staff coordination, and financial reporting. Hession would not only save them money, but he'd buy himself more security. The fewer details his affiliate managers learned, the less equipped they would be to run off and start a competing business. Once they were ready to take over those functions, they would have built enough equity to make bolting self-destructive.

Hession's role, as described to Borne, was to stay out of the way. He would informally train Borne -- he has since worked up a formal curriculum that includes true-false tests and fill-in-the-blank quizzes -- in such areas as aging schedules and cash-flow statements.

For the first six months or so, he would look at daily financial data. After that, monthly reports would do. Borne could structure his company however he wanted, hire whomever he saw fit, make all his own decisions. "As long as somebody is not ruining my reputation or losing tons of money, I'll stay out of it," vows Hession.

In truth, the more successful affiliate entrepreneurs wouldn't have joined up otherwise. Gilbert, who runs the affiliate in North Carolina, says she would have enlisted other investors to put her into business if Hession had demanded a hands-on role. And Borne probably wouldn't have agreed to that, either. "It was in my blood that I might eventually go into business on my own someday," he says. "But this way, I was much more knowledgeable." By the end of three months, AME's revenues were up to $14,000 a month. "We took off," brags Borne.

* SUPPORTING THEM

Being There But Not Dominating

Like a good parent, Hession is not only careful about what he says, but also sensitive to any underlying message he is conveying to his affiliate entrepreneurs. "My function is not to make life easy for them," he says.

It's a delicate balance; he has to push them, without pushing them over the edge. "It's a judgment call," Hession says. "If I feel they are confused and over their heads, I want to give them knowledge." One affiliate, for instance, called him sounding very distressed. A client says it'll drop me if I can't come up with three more ICU nurses by the end of the week. What should I do? Tell them they'll have to go to another agency, Hession advises. "If you don't do anything, your client is going to be ticked off," he continues. "If you say you can produce and then you don't, it will be worse. Recommend they try somebody else, and they will respect you."

As the affiliate entrepreneurs mature, Hession offers fewer answers, even if it means the manager will suffer. Or lose money. "I'll stop them from suicide, but not from making a mistake," says Hession. "I'm trying to develop someone who is going to make good decisions, who is going to learn that when you make a decision, if you are wrong, you pay for it. There's money to be lost."

For example, Hession says that he made working-capital loans of about $75,000 to Key of North Carolina over its first year and a half. Then, in mid-1987, Gilbert signed up with a factoring company -- a temporary move, Hession figured, until she built up enough equity to approach a bank. But another year passed, and Gilbert was still borrowing against receivables. Every once in a while, Hession brought it up. Sandy, he warned, if one of your clients delays payment, or if competition slows things down, those interest points are going to kick in. Gilbert agreed -- but still no bank. Then, last fall, a major client started dragging its payments out. Hession spotted it on Gilbert's monthly statement: her interest bill had tripled. He reached for the phone. I know what you are going to say, Gilbert said when she heard his voice, and I've taken care of it. "I could have come in and said, 'Sandy, stop bullshitting around and do it,' " says Hession. "But I had to accept -- and this is the hardest thing I've had to do -- that as long as I can control my downside risk, and I am not losing everything, it's important for me not to exert control. If I do, they will resent it."

He sometimes chooses not to rescue them for their own good. Three months after starting out, Borne lost all of his business in one day, when his one hospital client dropped him. Borne called Hession, ready to quit. I don't even have enough money to go out and market, Borne complained. Hession offered him just $500, enough so he could take one week off from his own shifts. "I could have given him more money," Hession admits. "But let him feel that he's backed into a corner, and he'll do it. I know him." When a similar but more desperate situation arose with Key-Cardio Respiratory Services Inc. -- its major client had piled up debts of $16,000 -- Hession stepped in to handle it. "There's no way I could have afforded to have someone go out and collect that," says Terry Lirette, the affiliate president.

Hession wants the affiliates to succeed, but he does not want to be the reason for their success. When Borne completed his first payroll -- he insisted on doing it himself -- Hession ripped up all the checks, pasting them to a giant piece of paper. With the title "Bill's First Payroll" scrawled on top, Hession used arrows to annotate the mistakes. "After 16 hours trying to work it all out, I was real overwhelmed to get that," says Borne dryly.

It served a purpose, though. "I challenged him," says Hession. "I knew he'd do it better because he wanted to do it better than me."

* COMMITTING TO THEM

Never Give Up First

Each time he trains an affiliate manager, Hession makes a promise. "I won't give up on you," he says, "unless you give up on yourself."

Hession believes that, for the most part, anyone who makes it through all the stages -- the training, scrutiny, grueling work of attracting hospitals and nurses -- probably has what it takes. To a greater or lesser extent, of course. Hession can't produce a William Borne or a Sandy Gilbert every time. But not every organically grown entrepreneur is H. Ross Perot, either.

Since Hession's willingness to help them is unwavering, the burden is on the fledgling entrepreneurs to call it quits when they feel they can't reciprocate his commitment. It usually happens early. The woman who ran Key Health Professionals Inc., the New Orleans affiliate he launched in 1988, suggested they dissolve it after a year, during which she tallied sales of $50,000. When they counted up receipts, the company was about $5,000 in debt, so she owed him about $2,400. At Key of Mississippi Inc., it took only nine months for the would-be entrepreneur to decide she wanted out. Her bill: $3,000. Recalls Hession, "She was like a kid who comes running back from the school bus on the first day of school."

But if the prospective entrepreneur can keep motivated and stay profitable, Hession will stand steadfast. Jack Frost, who started Hession's second affiliate, "didn't kick up a lot of dust," Hession admits. Nonetheless, Frost, who managed Key Nursing of Texas Inc., built a business that had a respectable $300,000 in sales in each of its three years before he opted to quit in August 1988. "I didn't know if I was suited to run a business by myself," says Frost. "It wasn't as much fun as I'd thought it would be. In the end, I guess I found out some things about myself -- and I'm about $25,000 richer." For now, Hession is managing Frost's nurses from his office.

It was Frost's idea to quit; he tired of living amid the jackrabbits and scrub weed of south Texas, and decided he missed his Baton Rouge home. Had he chosen to go on, Hession would not have pressed him to grow any bigger any faster. "He was profitable from the second month on," says Hession. "So I had no problems with it."

Given his trusting bedside manner, it's not surprising that Hession could sense commitment where the opposite existed. It happened at Key Health & Management Services Inc., his most painful -- and costly -- affiliate experience to date. "I was saying things like, 'Hey, you are not meeting the game plan here,' " recalls Hession. "They didn't make any corrections, and I should have recognized that. They didn't show they cared. In the future, I will not accept an attitude like that."

There were two partners, one of whom Hession had known as far back as high school. Launched in June 1988, they were going to start in Lafayette, then spread out into Birmingham, Ala. The affiliate lasted barely a year, generating sales of about $250,000. But the pair was losing roughly $3,000 a month on operations, plus helping themselves to advances of as much as $6,000 a month.

Dissatisfied, Hession was on the phone with them all the time, trying to "teach them work habits": this is how many hours each of you should work this week, and here are the number of hospitals you should visit and nurses you should see. He had faith in them, right up until the morning of June 23, 1989, when their resignations arrived via certified mail. "I felt this couldn't happen with owners," he says glumly. But off they went -- very entrepreneurially, one might add -- to set up their own staffing business in Birmingham, which has since gone bankrupt, according to Hession. He claims they owe him about $50,000. "It's crushing," he says. "You place so much trust in these individuals."

Since then, Hession has decided to tighten up the system. He has stopped the salary advancements -- the two had borrowed $25,000 -- and plans to have future affiliates sign more formal contracts when they go into business. Before, he was satisfied with signed promissory notes and meeting minutes that broadly outlined their agreement. But that doesn't mean Hession will start assuming the worst of his entrepreneurial brood. "None of this is crumbling down because of what happened with the renegades," he says. "Frankly, it could happen again, and I don't know what I could do about it. But I always knew this was risky, and it always will be."

* LETTING THEM GO

Snip the Strings, and Stand Back

"What I didn't anticipate about Bill," says Hession, driving toward Borne's office, "is what an entrepreneurial maniac he would become." Of all the affiliates, Borne is the only one to have begun buying Hession out, though Gilbert says she is mulling it over.

If Borne is any indication, affiliate entrepreneurs may start using their newfound freedom to pass on what they have learned -- launching third-generation affiliates. "They see what I am doing and they say to themselves, 'Hey, what is this guy really risking?' " says Hession. "I hadn't foreseen that."

Until 1986, Borne operated AME, which that year posted $2.5 million in sales, out of his living room. It was informal, to say the least. His "office" housed a parrot that repeated "Bill's the Boss" so loudly it was hard to carry on a phone conversation. Around the same time he moved, he launched his first affiliate, AME Texas Inc.; after six months it had $1 million in volume. AME has since added 24 other offices. Borne expects sales of $13 million this fiscal year, with aftertax profits of 5%.

Originally, Borne set out to copy Hession's affiliate strategy in his regional offices. But, says Borne, "we wanted to grow faster than we could if we waited to find that rare, entrepreneurial bird." Now, his regional offices are subsidiaries, wholly owned by AME.

As AME grew -- from $2.5 million in 1986 to nearly $4 million in 1987 -- it was inevitable that Borne's ambition would lead him to confront Hession about selling out. Rationally, Hession approved of Borne distributing equity to his top managers. "But still," he recalls, "I quarreled and quarreled with myself over it."

For starters, Hession agreed to sell 24% of his shares for $72,000 -- an admirable deal, considering that stock was worth $360 just three years earlier. Then last year, having no regrets over the decision and figuring the stock had appreciated, Hession told Borne he was willing to sell another 14% of his shares.

At times, negotiations got ugly. "We were shouting at each other and slamming drinks down," recalls Hession. "It's a position I didn't want to be in." Stalled at just $5,000 apart, Borne finally suggested they go into another room and settle it like men. Hession, at his wit's end, was happy to go along. Their lawyers shrugged. When they reappeared a few minutes later, Borne was beaming. His estimable arm-wrestling skills had won out. Hession still walked away with $168,000.

The stock's impressive appreciation wasn't just a result of AME's growth. Borne had begun grooming his own set of entrepreneurs. AME's regional offices stayed subsidiaries, but as Borne saw opportunities outside staffing -- or even health care -- he knew just how he wanted to pursue them. During the winter of 1987, he suggested to Larry Miller, whom he had met through Hession, that they set up a company providing anesthetics to doctors and hospitals. He gave Miller 40% of the stock, and 30% to a physician. Miller predicts revenues of about $1 million this year, with pretax profits in the 5% range.

By far the most out-of-character affiliate in either Hession's or Borne's empire is Cajun-A-La-Carte Inc., a catering and frozen-foods company that Borne inadvertently launched in 1987. To entertain 5,000 critical-care nurses at a convention in New Orleans, he bought two used circus big-top tents and a barbecue pit, and designed a stainless-steel boiling rig. The affair went so well -- and showed such profit potential -- that Borne set it up as a separate company. Aside from catering, the $1-million business, which is run by a Borne recruit, has also expanded into frozen foods.

Borne isn't alone among Hession's entrepreneurs in practicing trickle-down entrepreneurship. Lirette, who launched Key-Cardio Respiratory Services in September 1988, recently resuscitated an idea he had for a medical supply business. Now, he splits his week between his $200,000-a-year affiliate and the new venture. He expects Key Medical Supply Inc. to see profits in early 1990. If Hession has any say in it, Gilbert may be next to spawn an affiliate. He has some ideas for her. But Gilbert, whose company now posts revenues of about $6 million, isn't exactly pleading for his guidance. "Matt gave birth to an idea at the right time," she says. "But now, we do our own thing."

Hession doesn't work shifts as a nurse anymore, but he still makes his rounds. Up to Baton Rouge to see Borne, stopping to say hello to the people at Cajun-A-La-Carte. "These are my grandchildren, though I had nothing to do with them," he says.

The affiliate system has given Hession an odd combination of freedom and responsibility. It has allowed him time to take piano lessons with his kids, perfect his piloting skills, learn to play tennis, write poems, and research other business ideas. Not to mention the money he has made. "I've shown you can be something of an amateur venture capitalist and make nice returns," he says.

More than that, the affiliate system has afforded Hession the luxury of focusing on the part of business he likes best: starting up. "I enjoy working with the affiliates much more than managing a business," he admits. So much so that Hession hopes to sell the original Key Nursing within the next couple of years -- ironically, perhaps to AME. Given Hession's preoccupations, it's not surprising that company sales have stalled at $1.5 million over the past two years. Roughly $75,000 of those revenues come from the fees affiliates pay to have Key handle their office functions. "The affiliates are where the growth is," says Hession, whose wife and father-in-law handle daily operations at the original Key Nursing. "Right now, I need the cash it generates to live on and to finance affiliates."

Hession's only frequent meetings these days are with Lirette. Lirette needs him most; after all, he is struggling with two infant-age ventures. Should we attend this trade show? What kind of deal do we strike with this salesperson? Hession offers some answers and some simple advice. Don't run up your loans before you get contracts. Don't take the rejection personally. Lirette, 49, is visibly pleased. "When things go bad sometimes the boss gets down on you," he says. "But not Matt. He always encourages."

In a year, most likely, he won't need Hession at all.




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