how i lost $55 million with 17 of 51 startups through my 48 years in business

Russia / December 1, 2003

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International Executive MBA Multinational Management Conference

St. Petersburg, December 1, 2003

Dr. Bert W.M. Twaalfhoven, MBA HarvardGrowth Plus

Brussels, Europe

Как я потерял $55.000.000 в пятидесяти одном новом проектеУроки семнадцати неудач

1960-2002


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International Executive MBA Multinational Management Conference

St. Petersburg, December 1, 2003

How I lost $55 Million with 51 StartHow I lost $55 Million with 51 Start-- Ups Ups Lessons from 17 failuresLessons from 17 failures

1960 1960 –– 20022002

Dr. Bert W.M. Twaalfhoven, MBA HarvardGrowth Plus

Brussels, Europe


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• Started 51 companies in 40 years

• In 11 countries

• Focussed on 10 global niches

• Nationalities: 5 at board level12 at management level25 at operating level

• Works with 28 universities in 10 countries

Result: Lost $55 million in start-phase17 failures - 34 successes

Bert Twaalfhoven's entrepreneurialexperience of failures and successes


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51 companies were started by Bert Twaalfhoven from 1959 to 2001 around the world

– USA• Bobcad• Danvers Seals• Elbar Boston• Elbar Hickham• Eldim Boston• Inmet• Interturbine USA• IT Air Foil• L.A. Stators• N.A.A.• T.E.A.M.• Varhyd

– Argentina• Elbar Argentina

– Holland• Alectro• Almax• Altap• Aluminium Extruders• Autowasserette• Centriforce• Coating Center Holland• Dayton Process• Elbar Holland

• Elbar Turbo Services• Eldim Holland• Blomix• Finco• Interturbine Fansteel• Interturbine Holland• Louwers• N.A.A. Holland• Wasserettes Holland• Xycarb Holland• Ramix Holland

– Belgium• Wasserettes Belgium

– France• Almax France

– Italy• Almax Italy• Temper Italia

– Switzerland• Alectro Switzerland• Wasserettes Switzerland

– Germany• Alectro Germany• Eldim Germany• Interturbine Logistics• ITA• Troika

– UK• Almax UK• Alectro UK• Elbar/Wood

– Ukraine• Coating Center• Paton

– China• QI Tech

– Singapore• Interturbine Singapore• Elbar Singapore


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Indivers Focus on Niches $

• Coordinate measuring robots 30 million 400 million

• IT Logistics 25 million 100 million

• Turbine seals 50 million 400 million

• I-beam Honeycomb 25 million 50 million

• Chemical and laser hole drilling 30 million 100 million

• Dayton cleaning process 4 million10 million

• Epolair 3 million 10 million

• Turbine refurbishment 200 million 2 billion

• Ceramic coating 50 million 350 million

INDIVERS RESEARCH

Niches Our Target Global Market


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17 Failures - $55 million loss

Critical Year Initiative Cause of Crises Today

‘59 Wasserettes - NL Culture Sold‘60 Aluminium Extruders - NL Finance & Technology Sold‘66 Almax - Italy Culture & Management Sold‘69 Almax - France Culture Closed‘79 Troika - Germany Culture & Market Closed‘81 NAA - NL / U.S.A. Management Closed‘82 Elbar - Singapore Management Closed‘85 Elbar - U.S.A. Culture & Management Closed‘86 PW 4000 - NL Market & Finance Renegotiated‘86 Danvers Seals - U.S.A. Market & Finance Closed‘88 Elbar Turbo - NL Technology Closed‘88 Fanamation - U.S.A. Market Relocated & JV‘90 Waterwall project Pilot vs. FullScale Closed’92 Kemco - UK Market Closed‘92 Spartec - UK Technology Closed‘94 IT Airfoil - U.S.A. Quality control Renegotiated/sold‘96 Paton - Ukraine Technology, Culture, Mgmt Closed


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7 Cases of Failure

Time Frame

1. Wasserettes 50’s

2. Aluminium Extrusion 60’s

3. Troika Cad-Cam 70’s

4. North Atlantic Associates 80’s

5. PW 4000 - partnering with giants 1990

6. Fanamation U.S.A. - China 1994

7. Paton - Ukraine 1998


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How it was(h)…. >1959

Case A : Wasserettes


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Getting Taken To The Cleaners: Wasserettes

OpportunityOpportunity

Wasserettes- existed in US- none in Continental Europe

Opened first Wasserettesin Netherlands in 1959Invested $100,000.

- Europe’s wash dirtier

- People resist rapid washing/drying

- Bleach Holland & steam Germany

Losses eventually recovered and profitability achieved

ProblemsProblems RapidRapid LossesLosses

Technology Transfer U.S.A. $100,000.$100,000.

OutcomeOutcome

INDIVERS RESEARCH

Ultimately built 350 stores in 4 countries


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Case B: Aluminium Extruders


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Squeezed Out: Aluminium Extruders

OpportunityOpportunity ProblemsProblems LossesLosses

Technology transfer ofinnovative AluminiumExtrusion profiles from North America

Partner 60% ->Kruger Canada 1960

Cost to develop market -quality requirements

Lack of local die suppliersundermined competitiveness

2 years lost equity2 years lost equity$800K$800K

OutcomeOutcome

Losses stopped by Reynolds only after 8 yearsRecouped finally investment

INDIVERS RESEARCH

Company sold at end of 3 years

25 European competitors

Ran out of money and forced to sell


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Case C : Troika GmbH


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OpportunityOpportunity ProblemsProblems OptionsOptions

Outcoome

Joint Venture with Delta GroupUK, technical leader 3D CAD/CAM

Target German automobile sector

Founded 1986

Long lead time contact to sales

Lack of commitment frompartner Group

- CAD/CAM strategic review- unwilling to invest- Delta sold in MBO

New technology for Germany Language & cultural

Closed down after 18 monthsINDIVERS wrote off investment of $ 250,000INDIVERS wrote off investment of $ 250,000..

Underwrite losses fortwo more years

Orderly shut down

File for bankruptcy toforce closure and endlosses

INDIVERS RESEARCH

Caught Between Two Horses: Troika GmbH


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MBA StudentsCase D : North Atlantic Associates


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Out Of Control: North Atlantic Associates

OpportunityOpportunity ProblemsProblems Rapid LossesRapid Losses

Consulting CompanyFocused On Needs ofSMEs

Cost Control Through- tightly focused studies- use of MBA students

Management Egos

Insufficient Marketing

Poor Cost Control

Part-time MBÁ students

Founded March 1981- Offices Boston & A’dam- Peak 25 employees$ 100 thousand capital

Six months = $100 KSix months = $100 K

OutcomeOutcome

Liquidated January 1982 and investment written off

INDIVERS RESEARCH

No permanent staff

Partner, after 2 more failures, achieved major financial success


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Case E : PW4000 Engine$10 million a piece$3 billion development cost$70 billion market


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Strategic Networks Jet Engines:a $30 Billion Industry Annually

OEM’sP&WGERR

ClientsMilitaryAirlinesOEM’s

Overhaul shops

INDIVERSRepair and component

manufacturing

PartnersNIB, MIP, ABN-AMRO

LIOF, Fansteel, RR

AdvisorsNIVR, NLR, NIID

VGT, NAGMin. of Econ. Affairs

DirectorsUniversities

Net. Embassy Wash.

INDIVERS RESEARCH


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Partnering With Big Brother: PW 4000

1% of the partnership costs $30 millionFinanced with banks, venture capital and government

Indivers is exclusive manufacturer for the life of the project, 50 parts, out of 25,000 parts in an engine. A 40 year program. Total 1% share was estimated at $500 million

Partnership sharesP&W 65.5% SA 2% Samsung 2%MTU 12.5% Indivers 1% KHI 1%MHI 10% TSA 3% NJM 3%

INDIVERS RESEARCH


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PW 4000 Developments

19861986• Financed with Netherlands government and banks• $30 million participation for 1%

19891989• Project delayed- engine sales discounts increased. • Not able to add extra $ 10 M for development

19911991• Crisis - 150 airlines in financial trouble. Several went bankrupt• We negotiated from Risk Sharing Partner to become an exclusive Manufacturing Partner

19951995• Banks and venture capital opt to be repaid 50% rather than 100%+ by the year 2000

19971997• Sudden Boom in aircraft and engines

INDIVERS RESEARCH

20102010• Production terminates, spare parts continue

2029• Last engine retired - 43 years cycle

• Engine design for large aircraft19751975


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Dimensions of PW 4000 ProjectExceeded Realistic Projections

TimeSize

RiskTime

Size Risk

Then Now

INDIVERS RESEARCH

$ 20 billion $ 70 billion


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PW 4000: Risk Takes Many Forms

INDIVERS RESEARCH

Project DelayedProduct life substantially increasedMore enginesLonger life cycle

Time:

Size: Project now includes several “growth” enginesCurrent project: Expected revenues increasedbut first five years 40% of projectionsSubstantial discounts to airlines 20-100%

_

+++

++_

_ _


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U.S.A.----> China

People’s Republic of China

Case F : Robots


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Case F : Inspection Robot QI- Tech, China

Product cost: $ 150,000Investments : $ 3 million


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Significant Problems

• Excess Staff (130 to do the work of 60) created resistance to change

• Currency Devaluation of 30%

• Resistance to change: . Marketing. Manufacturing. Technology development

• Poor product quality (fit & finish) limited export opportunities

• Unnecessarily costly supplier contracts “inherited” from Chinese partner

Losses of $500,000

INDIVERS RESEARCH

• Chinese language and culture


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At The End Of Four Years

• Profit achieved in 1998

• Performance improved significantly

• Batch production achieved

• Quality significantly improved (IBM, BMW and P&W Chinese J.V. customers now

• Management revitalized - GM 33 years

• # 1 supplier of CMMs in China 1997-1998-1999 - stop exports

• New products being introduced and proprietary software licensed to overseas

competitors

• Continuing efforts to meet the quality of the best international competitors

• Increasing emphasis on achieving long term profitability

• Bid accepted for majority control by new stock exchange company

INDIVERS RESEARCH


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Case G : MIGRussian Fighter Jet - Coating


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Betting On The Future: Interturbine Paton J.V.

A joint venture between: Interturbine (90%) & Paton Institute Ukraine(10%)

Purpose of Joint Venture

• Development & commercialization of Soviet technology:

o Ceramic coatings for military, commercial engines and industrial turbines


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Milestones Costs1990 Technology identified in Moscow on “MIG”aircraft $ 0.100

Dec. 1993 Signing co-operation agreement with UkraineJune 1994 Research equipment transferred to Holland $ 1M

Research teams established in Kiev & Holland $ 1M / annum1995 Serious technical problems with Soviet equipment1997 Develop and buy East German equipment $ 20M1999 Operational $ 5M2000 Cumulative losses + major order from G.E. $ 12M

Oct. 2000 Bid accepted from Sulzer, Switzerland for coatingcompany and 2 others

INDIVERS RESEARCH

Betting On The Future: Interturbine Paton J.V.

Ceramic Coatings


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Successes and failures of Bert Twaalfhoven's businessesdepending on proximity to cluster – 7 examples

Source: Dr. Bert W. M. Twaalfhoven

Successes partly due to proximity to cluster

Failures partly due to missingproximity to cluster

CompanyLocation/Industry Cluster Company

Location/Industry

MissingCluster

Almax Italy/ Tools Presence of toolcompanies in Brescia, Bergamo, Milan

Troika Germany/Software

Not near softwareconcentration; difficultieswith technology adjustment

Interturbine Singapore/ Aerospace

Focus of governmentof Singapore on aerospace

Elbar Turbo Holland/Power Stations

Missing technology close to location; should have beenin Munich/Turin/Scotland

InterturbineLogistics

Hamburg/Logistics

Proximity of Airbus, Lufthansa repair, Airport

Waterwall Holland/Furnace

Missing supplier networkthat was present in British Midlands/NothernItaly/Southern Germany

IT Air Foil Dallas/Turbine Parts

Proximity of American Airlines, General Dynamics (F16 Manufacturer)


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Неудачи - основа долгосрочного успеха

Failure is the Basis for Success


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New Entrepreneurship: 4 issues

• Entrepreneur: Job creator

• Risks of Entrepreneurship

• University as cradle for starters

• Advice to would-be entrepreneurs

Academia - Students - Governments


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Employment US versus Europe# of companies

# of employeesper company

> 500

10 - 500

<10

14,600

1,500,000

12,000,000

12,300

1,201,000

13,420,000

employment

26 million

41 million

25 million

USA Europe

Source: EFER, Europe’s 50020 million if “one”companies included


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3,000

15,000

60,000

500,000

13,400,000

Major new companies whichreplace 1/4 of top companies

Winning performers 20% growth

Growers /venture capital

Dynamic Entrepreneurs

Small and medium enterprises

Dynamic Entrepreneurs Create 85% of All Jobs

Source: EFER, Europe’s 500


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Large Business Sheds Labour

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

‘00 ‘01 ‘02

Announced job cuts, cumulative since 2000

Source: Challenger, Gray & Christmas/ / Financial Times


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Unemployment in Europe high and increasing: Urgent action needed to support start-upgrowth!!!

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

2000 2001 2002 2003

Source: OECD Standardized Unemployment Rates

Spain

France

USA

GermanyEuro Area

• Average expected rate of unemployment of 8,6% in the Euro Area

• Lisbon agenda out of reach


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Phoenix - Life from DeathObservationsObservations :

• Average life of companies: 12 years• Average life of large companies: 25 years• Employment at large companies reducing rapidly; was 55%, now 40% (est.)• The “bubble” of the 90’ies has accelerated life and death• Unemployment too high

ConclusionConclusion :

• Entrepreneurial gap

What is neededWhat is needed :

• Replenishment of death by new life: 1 million start-ups per year• An extra 2 million new entrepreneurs in next 5 years needed on top of the

replenishment to reduce unemployment• Dynamic entrepreneurs (3% of total) to refurbish the top. Europe’s 500?• Risk takers• Students and professors to pursue entrepreneurship


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Average Experience 200 Start- Upsincluding 51 of B.Twaalfhoven

Profits

Losses

B

A

Losses

B

A

A

Months 12 24 36 48 60Lossesstopped

Lossesrecouped

Bert W.M. Twaalfhoven / EFER E-mail: [email protected] pending

Start-capital

-80%


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Result of Starting

Depth of risks: 80% of start capital is lost

Length of risks: 30 months of losses (A)60 months before recovery of loss (B)

In other words:

New start-ups and new sustained growers, an issue for the next decades


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Questions to European policymakers:

• Who takes risks?

• Why take risk?

• Is long term risk honored?

• What can Aunt Agatha contribute (tax incentives)

• Is failure an asset?

Risk Capital


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Most risk capital is provided by family and friendsand not by banks, venture capitalists or businessangels

Total annual start capital needed: billion $(1 million new companies x $10.000 (3.000 per job))

5 sources:1) Private Equity and Venture Capital* 2.7 billion $2) IPO window : dead since 2001 0 3) Banks : only loans with interest 04) Business Angels : estimate is

125.000 with pool of 10 billion but only invest 1.0 billion $

5) Family and Friends : largest source 6.3 billion $

* Venture Capital lost in 1999 and 2000 15 billion starters capital in USA and Europe (Venture One Corp, September 2002) Source: A.D.I. Report from EVCA June 20, 2002; The Green Paper on Entrepreneurship in Europe; Global Entrepreneurship Monitor; Dr. Bert W. M. Twaalfhoven; EFER

In addition, the GEM survey found that informal support for start-ups was five times that of domestic venture capital

support with venture capital support declining significantly.


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Universities, Business Schools andIncubators* as cradle for Starters

A Comparison:

* SER Incubator report January 2002 (CERAM Sophia-Antipolis)


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University as Cradle for Starters + Jobs# International Faculty in Start +Spin off

University students students Innovation/E’ship Companies

U.S.A. MIT 10.200 26% 33 5.000

U.S.A. Harvard Business 2.000 30% 28 50% of alumniSchool own or share business

U.S.A. Stanford 720 28% 24 Bus. Start 1/3 of alumni

U.S.A. Fordham 2

Canada Laval 37.000 5

U.K. Cambridge* 16.500 17% 8 1.250+65 practitioners

Greece Thessalonica 90.000 1% 0

Switzerland ETH Zurich/ 13.000 30% 5 200St. Gallen

Finland Helsinki University 13.000 3% 4 300of Technology*

Spain IESE 325 + 400 65% 6

Belgium Leuven 26.000 9% 4 45

France Grenoble 50.000 3% 5

Belgium Ghent 23.500 5% 5

Netherlands Delft 13.000 8% 5 200 in 10 years

Netherlands Erasmus* 9.500 10% 8 25% of studentsin small business

Conclusion: Shortage of 500 faculties in Entrepreneurship* Special Master Programs at these schools offer entrepreneurship. They have a higher proportion of international students and higher ratio of professors of entrepreneurship to students.


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1996 Employment (000s)

Source: Bank Boston, MIT

0 100 200 300 400

Mass.

California

North East

Midwest

South West

South East

Europe

North West

Latin America

Middle East

Asia

Canada

20 40 60 80 100

Mass.

California

North East

Midwest

South West

South East

Europe

North West

Latin America

Middle East

Asia

Canada 1996 Sales ($ billions)

Technical UniversitiesMIT Phenomenon 1960- 1996

4,000 Active Firms Started by MIT Graduates

Total = 1.1 Million Total = $ 232 Billion

0


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Cambridge Phenomenon

Source: The Cambridge Phenomenon Revisited, part two

Biotechnology cluster only


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• Study abroad: He went to England, Holland and Italy (1697)

• Build a team: He took 20 noble men, 35 volunteers and 70 soldiers

• Hire international specialists such as Cornelius Cruys – architect, engineer and admiral - and Rastrolli, the architect

• Stock market: He studied the Amsterdam stock market.

• He lived shortly incognito in Zaandam

• He brought many products from Western Europe including Dutch ships

Imitate Peter the Great


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Advice to Russian EntrepreneursStudy: Cases of entrepreneurship

Meet entrepreneurs + visit incubatorsWork in small companiesStudy failure + successWork + study European growth companiesIdentify what you do not know + who knows

Opportunity: Distinguish ideas vs. opportunityEntry barriers to startBusiness plans in detailNegative business plans to survive

Start: Board/advisors as sounding boardOutsource risks + share themCompensate what you do not knowInvite family + friends - angels, only if they have ample resourceBuild with teams and partnerships

BE REALISTIC AND OPTIMISTIC


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Index1. Cover sheet with Russian text2. Cover sheet with English text3. Bert Twaalfhoven’s entrepreneurial experience of failures and successes4. 51 companies were started by Bert Twaalfhoven from 1959 to 2001 around the world5. Indivers focus on nices $6. 17 failures - $55 million loss7. 7 cases of failure8. Case A: wasserettes9. Getting taken to the cleaners: wasserettes

10. Case B: aluminium extruders11. Squeezed out: aluminium extruders12. Case C: Troika GmbH13. Caught between two horses: Troika GmbH14. Case D: North Atlantic Associates15. Out of control: North Atlantic Associates16. Case E: PW4000 engine17. Strategic networks jet engines: a $30 billion industry annually18. Partnering with big brother: PW400019. PW4000 developments20. Dimensions of PW4000 project exeeded realistic projections21. PW4000: risk takes many forms22. Case F: Robots23. Case F: Inspection robot QI-Tech, China24. Significant problems25. At the end of four years26. Case G: MIG, Russian fighter jet – coating27. Betting on the future: Interturbine Paton J.V.28. Betting on the future: Interturbine Paton J.V.29. Successes and failures of Bert Twaalfhoven’s businesses depending on proximity – 7 examples30. Chinese saying “Failure is the basis for success”31. New Entrepreneurship : 4 issues32. Employment US versus Europe33. Dynamic entrepreneurs create 85% of all jobs34. Large business sheds labour35. Unemployment in Europe high and increasing: Urgent action needed to support start-up growth36. Phoenix – life from death37. Average experience 200 start-ups including 51 of B. Twaalfhoven38. Result of starting39. Risk capital40. Most risk capital is provided by family and friends and not by banks, venture capitalists or business angels41. Universities, business schools and incubators as cradle for starters42. University as cradle for starters + jobs43. Technical universities, MIT phenomenon 1960 – 199644. Cambridge phenomenon45. Peter the Great46. Imitate Peter the Great47. Advice to Russian entrepreneurs48. Index49. Address


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Dr. Bert W.M. TwaalfhovenEFERArena Office Park 1Marathon 9H1213 PE HILVERSUM / THE NETHERLANDS

Researcher : Mr. K. Freeman Ph.D.Mrs. V. Kugi, Harvard Business School

phone: +31- 35 - 642 0709fax: +31- 35 - 642 0609e-mail: [email protected]

how i lost $55 million with 17 of 51 startups through my 48 years in business

Business

management level25

culture management closed86

wasserettes 50s2

target global market

mba harvardgrowth plusbrussels

turbine seals

ceramic coating

startphase17 failures