Biz plans (final)

6/17/99

KEVIN ANDERSON

1:25 PM

Page 60

Biz plans (final)

6/17/99

1:25 PM

Page 61

I N N O V A T I O N

Do-it-yourself
Silicon Valley:
Using business
plan competitions
to spur innovation
Ansgar Dodt, Lothar Stein, and Sigurd Strack

In much of the world, the networks of entrepreneurs, venture capitalists,

and service firms needed to create flourishing concentrations of high-tech
businesses dont exist | How can they be created?

scientist or inventor working in Silicon Valley cant fail

to be aware that all of the venture capital, entrepreneurial, legal,

accounting, and other commercial resources needed to turn promising
notions into lucrative products lie close at hand. But elsewhere in the
world, scientists and inventors often dont realize that help in building
successful enterprises exists in their communities as well. As a result,
potential business innovators remain in their universities, hospitals, and
research institutes, and the engine of wealth creation is never ignited.

The authors wish to thank the leaders of the team that shaped the original ideaMaike Braun, Wolfgang
Huhn, Birgit Knig, Boris Maurer, and Eberhard Schmidtas well as the many teams that have developed it.

Ansgar Dodt is a consultant and Lothar Stein is a director in McKinseys Munich office. Sigurd Strack
is a consultant in the San Francisco office. Copyright 1999 McKinsey & Company. All rights reserved.

61

Biz plans (final)

62

6/17/99

1:25 PM

Page 62

T H E M c K I N S E Y Q U A R T E R LY 1 9 9 9 N U M B E R 3

To address this problem, McKinsey is working with regional governments

in Europe and in the United States and with private-sector entities
business associations, service providers, universities, research institutes,
and companies to coax into the open not only the Andrew Groveses
of the future but also the latent networks of advisers and financiers on
whom they depend. Business plan competitions are the catalyst. Inspired
by a visit to the Massachusetts Institute of Technology, where student-run

Some winners
Alpha Sensors, which won the Venture 98
competition in Switzerland, was founded in
September 1998 by Dr. Felix Mayer and
Dr. Moritz Lechner of the Swiss Federal
Institute of Technology. The company integrates sensors into microchips that take
measurements more precisely and cost
effectively than other technologies do.
Financed by Gottlieb Knoch, the former CEO
of Tecan and a major shareholder of Bachem,
both leading suppliers to the biochemistry
and pharmaceuticals industry, Alpha Sensors
now employs nine staff members and (in line
with its business plan) aims to get its first
products to market in the year 2000.
A team called GRiNS (Graphical Interface
to SMIL, the Structured Media Integration
Language) took one of three first prizes in
the New Venture 98 competition in the
Netherlands. The teams membersDick
Bulterman, Lynda Hardman, Jack Jansen, and
Sjoerd Mullenderall worked at the Dutch
Center for Mathematics and Computer Science
before forming a company known as Oratrix
Development in January 1999. Their authoring
and playback environment for Internet multimedia presentations is based on the new W3C
standard SMIL, for describing multimedia
presentations. Among other things, this

environment supports adaptive multimedia

presentations that tailor content to the needs
of end users when presentations are shown.
Although Oratrix received $170,000 from
the Dutch Twinning Network venture capital
fund and $270,000 from the Center for
Mathematics and Computer Science, the
company needs further capital. At present, it
employs five people and has distributed 1,200
copies of a prototype version of its software to
potential users. Within five years, the company
aims to have gross revenue of more than $50
million and as many as 30 employees.
Nanofactory Instruments, founded by
Dr. Hkan Olin and Dr. Lars Olsson, of
the Department of Experimental Physics
at Chalmers University of Technology,
Gothenburg, won first prize in the Swedish
Venture Cup 199899 West. The company
supplies the international market with scanning probe microscopes, which have become
key instruments for the microelectronics
industry as semiconductor components have
shrunk and the packing density of data
storage devices has increased. The venture
capital firm Chalmers Innovation has injected
$90,000 into Nanofactory Instruments, which
aims to have a turnover of $7 million and to
employ more than 30 people within five years.

Biz plans (final)

6/17/99

1:25 PM

Page 63

D O - I T- Y O U R S E L F S I L I C O N V A L L E Y

competitions have been held for a number of years, a McKinsey team

developed a blueprint for a competition to foster entrepreneurialism
within the broader community and to help individual start-ups get off
the ground.
Early results have been promising. The first competitions, held in Munich
and Berlin in 1996, gave birth to at least 30 new companies, which have
raised a total of more than $65 million in venture capital. Each company
employed an average of ten people in its first year of operation.
McKinsey has since sponsored further competitions in Amsterdam,
Cologne, Dallas, Gothenburg, and Zurich, among other cities. Each
has launched dozens of high-tech companies. (See boxed insert, Some
winners.) A third wave of McKinsey-sponsored contests is now reaching
India, South Africa, and a number of cities (besides Dallas) in North
America. Meanwhile, large companies such as Hoechst, Siemens, Swedish
Rail, and Volkswagen have set up their own competitions to create businesses, either internally or in related research communities. (See boxed
insert, Competitions within companies.)

Competitions within companies

Growth ranks high on the corporate agenda,
yet most companies underestimate the innovative potential of their own employees and
dont motivate them to act on their ideas,
relying instead on top-down efforts or on
help from outsiders. Business plan competitions can help companies use their in-house
talent and build momentum from the front
line, much as the Kaizen quality programs of
the 1980s and the reengineering exercises of
the 1990s did.
In 1997, Siemens set up a competitionthe
AddVenture Programin its semiconductor
business unit. All employees who wanted to
take part could do so, though on the understanding that they would continue to do their
regular work. The chance to win money and

recognition within the company and perhaps

to start a business proved sufficient: more
than 200 teams submitted proposals, and
several dozen developed into detailed business plans. Five new growth businesses have
taken off so far. Siemenss Semiconductor
Group, now named Infineon Technologies,
is one of the fastest-growing enterprises in
its industry.
Experience shows that corporate competitions not only generate ideas but also help
change a companys culture by inspiring
employees to reach far outside their daily
responsibilities. Competitions also build
skills because employees learn to go beyond
ideas and projects to think about how to
build businesses.

63

Biz plans (final)

64

6/17/99

1:25 PM

Page 64

T H E M c K I N S E Y Q U A R T E R LY 1 9 9 9 N U M B E R 3

The business plan competitions have four aims: to motivate people (mainly
researchers and developers in the academic and business communities) to
come forward with their ideas, to build their commercial skills by bringing
them together with business talent, to attract venture capital, and to identify
service providers (such as patent attorneys, headhunters, and accountants)
who are willing to support entrepreneurial activities. In addition, the organizers of each competition arrange networking events bringing participants
together with successful entrepreneurs and facilitating access to a supporting
infrastructure of inexpensive office space and local patent-licensing offices.

Getting out of the lab

The experience of Dr. Olaf Wilhelm, a physician and cancer researcher at
the Technical University of Munich, shows how a business plan competition
can promote these aims. Dr. Wilhelm, who won first prize in the 199697
Munich competition, is now the CEO of Wilex Biotechnology, the company
that emerged from his winning idea.
One day in November 1996, Dr. Wilhelm opened his mailbox and found
a flyer, sent by the organizers of the Munich competition to students and
professors at local universities and
research facilities, asking if he had
ever contemplated starting his own
The competitions help
business. Having often toyed with
researchers in the academic
that idea, Dr. Wilhelm, along with
and business communities
several hundred other people,
build their business skills
decided to attend the launch event,
arranged by university deans and
local sponsors. After hearing the testimonials of chief executives who had
not long before been working in universities, he began to think seriously
about becoming an entrepreneur.
Dr. Wilhelm left the meeting armed with a step-by-step guide to developing
a business plan, a list of reference books, and a schedule of information
sessions, lectures, and crash courses on getting businesses started. He later
attended a course about understanding value as customers see it and estimating the size of potential markets. The course persuaded him that his
idea for developing new treatments for uterine and breast cancer would
find a large market and could earn a lot of money.
Quickly realizing that he could not undertake the project alone, he recruited
a fellow researcher to test the rigor of his scientific thinking and his academic
mentor to serve as scientific adviser. Dr. Wilhelm knew that he would have
to research his target market and the potential commercialization channels

Biz plans (final)

6/17/99

1:25 PM

Page 65

D O - I T- Y O U R S E L F S I L I C O N V A L L E Y

for his idea in greater detail. He also understood that he needed someone
with business experience to show him how to do so. At a networking event
held by the competitions organizers, he met Dr. Peter Henrich, the chief executive officer of Medigene, a local biotechnology company that had received
venture capital funding a few years earlier. Impressed by Dr. Wilhelms idea,
which was related to his own field of work, and by the fledgling entrepreneurs
drive and conviction, Dr. Henrich offered to help with the business plan. He
now sits on the board of Wilex Biotechnology.
A jury of venture capitalists and entrepreneurs assessed the 140 plans submitted to the Munich competition. Many teams, failing to meet basic criteria
of competitiveness or growth potential, gave up at this stage. Others
were encouraged to start again
Twenty teams that took
perhaps to recast their business
part in the 199697 Munich
models, to reconsider their target
competition went on to
markets, or even to find basically
found new businesses
new applications for their technologies. Dr. Wilhelm, however, was
immediately invited to meet half a dozen venture capitalists. They expressed
interest in his plan but said he would have to do more work on it before they
would negotiate seriously.
Participants in the competition had six months to develop business plans.
There were three phases, with deadlines for each. Fifty teams met the
deadlines for producing the second and third versions of their plans.
Dr. Wilhelm emerged as the winner. Wilex Biotechnology, set up with
$5 million from one of the participating venture capital firms, had 15
employees and a high-profile board of directors by the spring of 1999.
Although still conducting clinical trials, it is carrying out its business plan
successfully. Nineteen other participating teams also went on to found businesses, half of which received backing from the venture capital firms represented on the jury. Together, these firms have invested more than $30 million.

A few essentials
Competitions uncover and develop their entrepreneurial talent in different ways,
depending on the extent of their networks and other forms of support. But all
successful competitions are likely to share some essential characteristics.
First, there must be enough participantsideally, at least 100to attract
venture capitalists and service providers. To encourage involvement, the
competition must be well promoted and its threshold for admission kept low,
so that even those who have never written a business plan can take part.

65

Biz plans (final)

66

6/17/99

1:25 PM

Page 66

T H E M c K I N S E Y Q U A R T E R LY 1 9 9 9 N U M B E R 3

EXHIBIT 1

Phases of business plan competitions

Timeline

Phase one

Phase two

Phase three

Two months

Two months

Two months

Business
start-ups

+ Experienced entrepreneurs

Primary
target groups

Ph.D. students
Other graduate students
Scientists, professors

Requirements

Business idea

Business plan draft

Detailed business plan

Prize money

Ten of $1,000$5,000

Ten of $2,000$10,000

Up to $100,000 for best plan

Supporting
factors

Widespread communication
and mobilization
Contact forums, networking
events
Events on entrepreneurship
and business start-up skills
Coaching by experienced
entrepreneurs

of idea and
of business and
+ Matching
+ Facilitation
entrepreneur
customer contacts
Provision of services to
entrepreneurs

Deal making with venture

capitalists

Second, competitions open to people with minimal business knowledge and

experience must be structured as learning programs: participants should
have an opportunity, as they proceed, to develop their business skills and to
have their reasoning tested. That is why they are usually asked to develop
comprehensive business plans in three phases (Exhibit 1). Phase one
requires a description of the business idea (the product or service and the
value it offers to customers) and a first-cut perspective on the market and
the competition. In phase two, participants provide an outline of their marketing and sales plans, the business systems and organizations they propose
to create, and the financial opportunities and risks posed by their ventures.
By phase three, the plans should include a description of the management
team that will run the operation as well as a financial plan. All of the
elements are then integrated into a final, comprehensive document.
Information sessions, lectures, and workshops on sales, marketing, and
finance accompany each phase. A participants handbook and other materials
describe the goals, general guidelines, and specific elements of a business plan,
with detailed examples. Along the way, participants receive coaching from
people who develop corporate businesses, corporate marketers, experienced
entrepreneurs, consultants, and venture capitalists, who also help participants
to improve their networks, to stay in the flow of ideas and technologies, and
(in the long term) to find new suppliers, customers, or partners.
Evaluation and feedback at the end of each phase, and informal conversations with coaches and venture capitalists, help teams improve and refine

Biz plans (final)

6/17/99

1:25 PM

Page 67

D O - I T- Y O U R S E L F S I L I C O N V A L L E Y

The evaluators assessment

Falk Strascheg, past chairman of the
European Venture Capital Association and
managing partner of the Technologieholding
VC Group, has served as an evaluator in several business plan competitions since 1996.
Lothar Stein interviewed him in April 1999.
Q: What were your expectations when you
were asked to take part in the first business
plan competition in Munich?
A: Not high. We saw it as an obligation that
might help build some sort of entrepreneurial
culture in Germany in the long term. Up to
then, we hadnt seen many good business
proposals coming out of universities.
Q: What results did you see?
A: We were completely surprised by both
the quantity and high quality of the ideas put

forward in the business plans. It seemed

there were a lot of very good ideas to be
found within universities and research institutes. The combination of promoting the idea
of building your own business, along with
targeted teaching, coaching, and networking,
really worked. It started what has become a
self-reinforcing wave of entrepreneurialism.
We actually got three very promising deals
out of that first competition.
Q: What has changed since then?
A: We participate regularly as evaluators in
business plan competitions across Europe.
A significant portion of our deal flow comes
from these eventsprobably about 10 to 20
percent of the deals we have done in the past
18 months. In addition, the quality of the business plans we see has improved. Business
plan know-how seems to be on the increase.

their conceptions constantly. The process not only exposes ideas that
are irremediably flawed but also salvages those that might otherwise have
been rejected outright perhaps on the basis of revenue or break-even
projections and makes it possible to turn them into sound business
propositions.
Of the 116 proposals originally submitted to the Berlin competition,
for example, 112 would have failed to generate interest had they been
presented to a venture capitalist in the normal way.1 Forty-four proposals
survived to the final round and 22 elicited serious negotiations with venture
capitalistsnegotiations that ultimately resulted in the founding of 15 new
businesses (Exhibit 2, on the next page). In several cases, the competition
1

The jury of venture capitalists felt that only four of the plans had a good potential for financing in the first
round, as opposed to 22 in the last.

67

Biz plans (final)

68

6/17/99

1:25 PM

Page 68

T H E M c K I N S E Y Q U A R T E R LY 1 9 9 9 N U M B E R 3

EXHIBIT 2

Results of the learning program, Berlin

competition
Number of teams

Total number of ideas

High-potential ideas

116

15 new
companies
founded

69
44

22
4

11

organizers managed to unite a team

that had a great business idea with
another that had outstanding business development skills (Exhibit 3).
In all of the competitions to date,
venture capitalists who acted as
evaluators have gone on to finance
at least some of the businesses proposed by participants. (See boxed
insert on the previous page, The
evaluators assessment.)

The third key to running successful

competitions is to give participants
financial incentives: although entrepreneurial fever usually takes hold at some point, they help motivate people
in the early going. The competitions held so far suggest that the prize money
must be significant perhaps equivalent to a participants annual salary. One
corporate contest offered a white-collar workers average monthly salary to
the originators of the ten best ideas in phase one of the competition and a
full years salary to the overall winner.

Phase one

Phase two

Phase three

Long-term commitment
If business plan competitions are to promote entrepreneurialism in a
community or a company, they cannot be one-off events. Since the point
is to make new ideas surface continually and to use them in developing
businesses, there is a need for committed institutional sponsors: corporate
business development departments, government agencies, universities,
or foundations. To ensure the continuation of the competition programs,
the sponsors of all ten that have
EXHIBIT 3
so far passed through the entire
Team building over time, Munich competition cycle have created foundations
or incorporated bodies to oversee
Number of teams
Phase 1
the competitions and keep them
81
Phase 2
Phase 3
blossoming. Sponsorship also
entails making financial contribu56
tions to the cost of the programs
43
35
33
infrastructure, prize money, and
22
public-relations activities. If the
13
11
6
sponsor is a government body, it is
not likely to foot the whole bill, so
Science teams1
Mixed science and
Business teams
business teams
collaboration between the public
1 Made up of students, scientists, and professors.
and private sectors is needed.

Biz plans (final)

6/17/99

1:25 PM

Page 69

D O - I T- Y O U R S E L F S I L I C O N V A L L E Y

Finally, the competitions must have their own staffs of organizers, including
a project manager the public face of the programand a support team.
Given the number and variety of organizations involved, it is essential that
the project managers be independent, professional, and capable of balancing
the interests of all the parties.
The brief but eventful history of McKinseys business plan competitions
seems to demonstrate that talent is both abundant and, in many cases, unrecognized. A competition can discover, cultivate, and test it, paying dividends
both to its patrons and to the larger community in which it is held.

69