Building a Successful Entrepreneurial Venture

Lawrence B. Evans Founder Aspen Technology, Inc. President-Elect AIChE New York November 6, 2006

Why is this topic important? Thinking about starting your own company Working currently for entrepreneurial venture Considering joining a start-up Feeling this is a good time for chemical engineers

Cleantech is a hot venture investment category Cleantech products and services:

Optimize use of natural resources Reduce ecological impact Lower costs and improve profitability

In Q2 2006 cleantech was 3rd largest venture investment category with 12.4% market share in North America
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North American Investments

Energy-related deals: 43% of total by amount; 36% of number of deals

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Copyright 2006, Cleantech Venture Network, All rights reserved

www.cleantech.com

Outline Getting started Developing the business plan Raising financing Succeeding as a growing, successful company

Case Study: AspenTech

Formed in 1981 Leading company providing software solutions to the process industries Software used for engineering, manufacturing, and supply chain management Revenues of $293 million in recent fiscal year 1200 Employees Worldwide

Annual Employee Growth

Fiscal Year Ended June 30 1400 1200 1000 800 600 400 200 0 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97
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Annual Revenue Growth

Fiscal Year Ended June 30 180 160 140 120 100 80 60 40 20 0

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96

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Stages in the Evolution of AspenTech 1976 1981 Aspen Project at MIT 1981 1986 Starting Up 1986 1991 Building the Business 1991 1994 Establishing the Record to go Public 1994 Public Offering

AspenTech Prehistory the 1960s MIT was a hotbed of activity in computer-aided design. Activity was underway in:
Mechanical Engineering Civil Engineering Electronic Circuit Design Architecture Software Engineering

Chemical Engineering was missing. Most major chemical and petroleum companies had proprietary in-house systems.
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The ASPEN Project at MIT 1976-1981

Goal: to develop a next-generation process simulator to be used by many companies ASPEN: Advanced System for Process ENgineering Funded by: the US Department of Energy (DOE) and 65 companies at $6.5 million Motivation: support development of synthetic fuels industry Acquired Monsanto FLOWTRAN program as starting point Delivered the software to DOE in 1981

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Imagine it is early 1981

The ASPEN Project is going to wind down The ASPEN software will be delivered to DOE What do I need to do to start a company to commercialize the ASPEN software? What do I need to do prior even to preparing a business plan or raising financing?

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Getting Started Develop the idea for the business Articulate a vision Recruit the founding team Establish credibility

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The Idea for AspenTech

Create a software company for computeraided chemical engineering
Like Macneal Schwendler (NASTRAN) Like Computervision Like SimSci and Chemshare

Cullinane Software had recently had a successful IPO one of the first VC-financed software companies

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The Vision for AspenTech Enable companies to try out new plants on the computer before committing to steel and concrete Create a next-generation system that could be used by many different companies in different locations

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The AspenTech Founding Team

In 1981 eight key staff members from the ASPEN Project at MIT formed AspenTech, including: Larry Evans CEO Joe Boston VP Technology Herb Britt VP Development Paul Gallier VP Sales. All were full-time, except Evans on leave from MIT.
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Credibility for AspenTech Positive factors:

MIT reputation 65 companies on Aspen Project advisory committee Sam Bodman as friend and advisor

Negative factors:
No business experience Chemical industry considered stodgy
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Lessons Learned: Getting Started It is often easier to develop somebody elses idea. Have a simple vision and concept. Peer companies are important. The founding team doesnt have to be perfect. You need to have credibility.
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Imagine now it is mid 1981

The ASPEN Project at MIT will run out of money and shut down in October I have the concept and vision for the company Eight members of the founding team are committed to join they will need to be paid What do I need to do to make the company a reality? What do I need to do before we can open our doors for business?

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Raising Financing and Starting Up Develop a business plan

Specific market Value proposition to customers Plan for commercialization Financial projections

Identify funding sources Sell the plan and close on financing Recruit a strong Board and Advisors Open the doors for business
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Market for AspenTech Software Target market was engineers in the process industries
Horizontal market Sized by number of chemical engineers

Selling to the VP of Engineering In practice it turned out that our best market was the chemical industry

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Value Proposition for AspenTech Offered subscription for $50K per year to get continually updated software Economic justification
Less than cost of one software developer Increased productivity of engineers

Ultimately we discovered the value was in making better engineering decisions

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AspenTech Commercialization Plan Initially, we supported the public version of Aspen. We created a commercial software product within a year with improved capabilities. We used user groups to suggest enhancements. Producing reliable software on schedule proved to be very difficult.
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AspenTech Financial Projections Revenues were driven by number of customers and amount of annual fee. Expenses were driven by number of people required to develop. Our projections ultimately proved to be pretty good just took a year longer than expected.

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AspenTech Funding Sources Traditional VC firms werent interested

Process industries were unexciting Would not fund a part-time entrepreneur

We raised about $1 million

Founding employees Individual angel investors State funded venture organization

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AspenTech Board and Advisors We assembled a strong Board Only two founders were on the Board Sam Bodman agreed to serve as advisor One Board member had strong industrial business experience

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AspenTech Open for Business In October 1981, we began operations. We obtained a nonexclusive license from MIT for the ASPEN software. Rented space from MIT adjacent to the campus Obtained computer time on the MIT time sharing computer while purchasing a new VAX We began calling on companies who had participated in the ASPEN project.
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Lessons Learned: Financing Be flexible in finding funding sources Initial market ideas change Vertical markets are very important Our business model evolved from subscription to software licensing Senior founders needed to sell

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Imagine now it is 1982 AspenTech is up and running We are working on the first commercial release of ASPEN PLUS We have signed up our first commercial customers to subscribe to ASPEN PLUS What do we need to make the company succeed and grow?
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AspenTech Succeeding and Growing Add people and resources Manage the stages of growth Raise additional financing Deal with challenges

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Succeeding and Growing We added additional key members to the management team 1981-82:
Ken Morse Sales and Marketing Mary Dean Finance Betsy Walkerman General Counsel.

We developed the first new commercial release of ASPEN PLUS in 1983. We delivered new releases annually. We developed strong links with customers through user groups.
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Succeeding and Growing (continued)

We became profitable in 1983. We sold two major licenses in China in 1983. We established operations in Europe in 1984. We raised $2.6 million in venture capital from Advent International in 1986. We acquired Prosys Technology, Ltd. In the UK in 1991. We went public in 1994.

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Critical Success Factors at Each Stage of Growth

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Success Factors for Starting Up

Get founders to leave jobs and join start-up. Attract investment from angel investors. Develop the initial technology and products. Get customers to buy the early products. Form a strong outside Board who will give good, critical advice.

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Success Factors for Building the Business Engage a supportive venture financing organization. Develop a culture of strong financial performance. Build global sales and support organization. Raise enough capital.

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Raise Enough Capital Decide how much working capital you need. If you dont have enough, you have to bet the company on every major order. Our rule of thumb was working capital equals 40% of annual revenues.

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Growing Profits are Crucial Growing profits are the measure of successful business management. The difference between a company that is making money vs. losing money is the difference between night and day. A track record of profit growth is essential to going public.

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A Culture of Profit Growth Doesnt Come Naturally

In the early phases companies are run at breakeven. There is a tendency to focus on revenue growth rather than profit growth. There is no shortage of investments needed. You have to decide to budget for the profit first, then decide how much you can spend. You may have to moderate the growth.
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Conclusions

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Lessons Learned
The challenges change at each stage of growth. People are the most important resource. Every company will have multiple cash crises. It is important to seek good advice. It is important to sustain a good strategy. Be prepared for change as the company grows. You will be surprised at what you can achieve.
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Application to Other Industries The AspenTech example is for a software company. Other industries will have a different business model. But the basic principles will be similar.

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Thank You!

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