MIT springboard sends Internet company aloft

University's business-plan contest catapults two students into entrepreneurship. For the CEO they hired, it's dÉjà vu

The old saw has it that you can't go home again, but Mike Cassidy begs to differ. While studying for a master's degree in aerospace engineering more than a decade ago, he considered home to be Massachusetts Institute of Technology. Later, while attending Harvard Business School, Cassidy won MIT's business-plan contest, now known as the MIT $50K Entrepreneurship Competition, and it catapulted him from student to CEO. Not only did he and his two partners garner the tournament's top prize, but the luster of their first-place finish also helped bring in $125,000 in additional seed capital for the software company that their business plan described.

Cassidy built that business, Stylus Innovation, into a 22-employee dynamo, and then sold it in 1996 for $13 million. Finding himself retired at age 33, Cassidy became "fidgety," he says. He yearned for an Internet start-up to run. With his education and his credentials as a seasoned CEO, he might simply have knocked on doors in Silicon Valley. Instead, he looked homeward to MIT and its business-plan competition.

Last February Cassidy logged on to MIT's Web site, where the 84 student teams competing in the MIT $50K Entrepreneurship Competition had posted descriptions of their proposed businesses. Cassidy spotted one he liked: the blueprint for Direct Hit Technologies, the brainchild of student Gary Culliss. Within days Cassidy had signed on to help launch Direct Hit and become its CEO. Cassidy strongly urged Culliss to continue competing in MIT's contest. "It's a lot easier getting your foot in the door" as a start-up, explains Cassidy, "if you can say you won" at MIT.

Not just at MIT. Every year American universities stage an estimated 50 business-plan tournaments, which are far more than academic exercises. They are, increasingly, incubators of sophisticated new companies, hatching dozens of credible start-ups each year, business-school officials say. "I have been amazed at the quality of the plans and companies coming out of these competitions," University of Chicago business professor Steve Kaplan says.

The evolution of Direct Hit, from the wisp of an idea to a full-fledged upstart backed by $1.4 million in venture capital, illustrates how a university's business-plan competition can serve as a launching pad for a new company. Two years ago Culliss was a student at Harvard Law School when, one day, he tried futilely for 15 minutes to find Harley-Davidson's Web site, using different Internet search engines. Why not, he wondered, create a search engine that responds in the order of sites' popularity, rather than by a scattershot retrieval of keywords, as most search engines do?

In the fall of 1997 he put that question to Steven Yang, then a 21-year-old computer-science student at MIT, persuading him to build a software prototype. Together, Yang and Culliss developed a business plan for Direct Hit and entered it in a warm-up round of the MIT competition. They lost.

But with Cassidy on board, the partners refashioned the plan. In May they hit the jackpot, sharing first place with another entrant and winning $30,000. At cyberspeed Direct Hit, based in the Boston suburb of Wellesley Hills, parlayed its MIT victory into a one-year licensing pact with Wired Digital, producer of the popular HotBot search engine. With a link on its Web site, HotBot enables users to access the Direct Hit service. Revenues from ads that HotBot sells and places on the Direct Hit site are split evenly between the two companies. Direct Hit is projecting revenues of $1 million this year.

Not everyone believes the Direct Hit concept is a sure bet. "Just because a site's popular doesn't mean it's any good" to people led there by Direct Hit, notes Paul Hagen of the technology-research firm Forrester Research, based in Cambridge, Mass. And some analysts question whether Direct Hit can defend its technology--applications for four patents are pending--against imitators.

The company has won over the venture-capital firm of Draper Fisher Jurvetson, based in Redwood City, Calif. Here, too, an MIT connection was critical. Mike Santullo, Cassidy's former MIT roommate and a Direct Hit board member, introduced Cassidy to Draper Fisher, which had funded Santullo's E-mail-directory service. The VC firm decided to invest $1.4 million in Direct Hit. Flush with cash, Direct Hit has returned the $30,000 prize to MIT.

Beyond the Internet
The shortest road to riches leads through cyberspace.

That credo may explain why many of the companies emerging from university business-plan competitions are Internet-related ventures. Thus, out of UCLA springs Stamp Master Inc.; from Harvard comes Chemdex; and from MIT, Arepa. They represent young entrepreneurs' attempts to exploit some Internet niche. And why not? Students naturally gravitate toward new, dynamic areas of the economy.

But if an Internet business is the start-up of choice lately, other kinds of companies still can capture a student's fancy. Some intrepid souls winning business-school tournaments are (gasp!) even going low-tech.

Invasive Plant Control, founded by a University of Oregon winner, eradicates pest plants like kudzu. Native American Botanics, launched by a blue-ribbon recipient at the University of Arizona, sells herbal supplements. AFPS, started by first-place finisher David Gamperl of DePaul University in Chicago, ships pasta sauces to customers' homes nationwide. Gamperl, inspired by his Italian American mother's culinary exploits, is eyeing the growing market for gourmet foods. "I didn't consider the Internet," he says, "because of the competition in that exploding industry."

Stardust in the winner's circle
Winning a university's business-plan tournament showers less acclaim on a student than, say, quarterbacking the football team to victory. Business-plan winners must content themselves with credibility gained, contacts made, and, occasionally, seed-capital raised. But they may wind up with something more valuable than cheers and a trophy: a company.

Ask Jeffrey Tacca. In 1996 his business plan for an Internet consulting company won Georgia Tech's tournament in Atlanta. He promptly sweet-talked one of the judges, Mary Madden, into serving on the board of his company, AtlanticWeb. Madden, the cofounder of a legal-research outfit and a member of the Society of International Business Fellows (SIBF), an Atlanta-based networking group for business executives, has impressive connections. When she recommended AtlanticWeb for a $30,000 contract to build the SIBF's intranet and Web site, Tacca had his first customer. That led to orders from five SIBF members for work worth more than $250,000. "Without the competition we might have ended up as a little mom-and-pop," says Tacca, who is projecting that AtlanticWeb's revenues will reach $3 million in 1998.

Even before teams face off in a business-plan tournament, the buzz surrounding an entry can pique investors' interest. At Harvard Business School this year, three M.B.A. candidates proposed Zefer Corp., also an Internet consulting company. The idea--to provide the ultimate in "intelligent Internet solutions"--so wowed Paul Gompers, a professor of finance at Harvard, that in June he joined Zefer's advisory board. Gompers midwifed a deal between Zefer's founders and Silicon Valley Bank, which extended a $250,000 line of credit to the company. By the time the Zefer plan won Harvard's competition, in June, the company had raised $2 million in seed equity. It eventually drew five of its nine partners from last spring's graduating class of Harvard M.B.A.'s. "When a company is starting out," says Anthony Tjan, 27, Zefer's CEO and a former consultant at McKinsey & Co., "having the Harvard network and the Harvard name is a great help."

Merely participating in a business-plan competition can yield dividends. In a competition this year at Babson College in Wellesley, Mass., four Babson students' proposal to start yet another Internet company, Highwired.Net, won first prize. By the time the team competed at the University of Texas at Austin, three weeks later, it had raised $450,000 from angel investors and other students. In the Austin contest the Highwired.Net plan won in the Internet division but lost overall. The foursome won perhaps its most significant victory when one of the judges and a colleague sallied forth to invest $50,000 apiece in the new venture.

Spawning start-ups at San Diego State
How does the business-plan competition at San Diego State University, in which about 50 of the school's 700 M.B.A. candidates participate, help some students to launch companies? To find out, staff writer Marc Ballon spoke to Alex De Noble, a professor of management and entrepreneurship at San Diego State and the director of its annual tournament.

Q: Of all the students writing business plans, how many of them go on to start companies?

A: Approximately two or three companies a year.

Q: Why so few?

A: Most students work for entrepreneurial companies for a few years before starting their own. We don't want to encourage people to start their own business immediately unless they're really ready.

Q: Do you ever put students in touch with investors?

A: When students come up with something truly exciting and promising, we'll put them in touch with an angel to help them improve the plan. Of course, if an idea excites an investor, he might invest in it himself.

Q: What business experience does your typical student have?

A: The average age of our students is 28 or 29. They're older. We're attracting a higher caliber of students. We have more students seeking us out for entrepreneurship than ever before. Many come to us with deep industry experience.

Q: What's the advantage of entering a business-plan competition, as opposed to just doing it on your own? Bill Gates dropped out of Harvard and seems to have done all right.

A: Yes, people do write business plans on their own. People do drop out of school and start phenomenal businesses. But I think more people would stand a better chance of doing something special by going through a competition that teaches students how to present a plan and exposes them to the types of questions investors will be asking. Also, there is so much opportunity for networking.

Q: The finalists in San Diego State's business-plan tournament compete in an intercollegiate showdown. How does San Diego State benefit?

A: The public-relations benefits have been enormous for us. The competition has certainly raised San Diego State's profile and helped us attract funds and better students to our entrepreneurship program.

Counting companies hatched

Among the universities that stage business-plan competitions and track the number of resulting companies are

Total yearly prize money Number of companies launched since 1996
MIT* $50,000 20
HARVARD $25,000 12

*hosts intercollegiate competition