South Dakota targets young entrepreneurs
BYLINE: Jamie Ziemer
Sioux Falls Business Journal
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In an effort to fuel the state's economy, South Dakota is moving to develop more young entrepreneurs who can start businesses.
While South Dakota relies on its favorable business climate to attract out-of-state companies, business and government officials also emphasize cultivating home-grown companies that are more likely to stay here.
"There's a lot of my students, younger students, interested in going back home," said Bob Tosterud, professor of economics at the University of South Dakota. "They'd rather stay here in South Dakota and go to that small-town environment, but realize there won't be an opportunity for them."
So students, encouraged by professors and business leaders, are starting their own businesses.
Take Kelly Patnoe, for instance.
Patnoe, an Augustana College senior majoring in business and elementary education, developed the idea of manufacturing a hard-sided, protective travel case for tennis rackets. Patnoe's emerging company, Flight One Corp., evolved after Patnoe, a tennis player, couldn't bring her racket as carry-on luggage onto an airplane while she was studying abroad in Rome.
"I'm hoping to be able to get it launched," Patnoe said of her company. "The idea is to use South Dakota vendors and suppliers."
The move toward launching small businesses is luring more than young people as well. Experienced workers increasingly are trying their hands at becoming entrepreneurs.
"I think there's a lot of good things happening, and we're extremely excited," said Kathleen Sheets, director of Equip, a statewide economic development organization based in Sioux Falls. "We see a lot happening."
Developing young talent
For the past 10 years, universities nationwide have been encouraging students to start a business instead of working for a corporation, said Tricia Cole, chairwoman of the Vucurevich School of Business at the University of Sioux Falls.
That has been happening in South Dakota the past five years, Cole said.
"I think it began with (Gov. Mike Rounds') 2010 Initiative as their major points," she said. "It's also something where you see a sparsely populated state with a lot of land, and you have to look to build opportunities within to keep your youth and talent in the state."
Smaller communities benefit from entrepreneurs because they create economic stability, she said.
"They want to work for themselves sometime in their career," Cole said of the students. "They expect to work for a corporation to learn more about the industry so they can step out on their own business."
Last year, USF received a $2 million donation to set up the Correa Center for Entrepreneurial Studies, which launches this fall. The donation will help the entire university take an interdisciplinary approach to entrepreneurship, Cole said.
The Correa Center will offer mentorships, internships, partnerships with current business owners, student competitions, events and conferences in entrepreneurship.
"Liberal arts is going to basically be a metaphor for entrepreneurship," Cole said. "I think this is different than many schools. It's not associated only with the business school."
USF also has offered an emphasis in entrepreneurship for business majors for at least the past five years.
Augustana, which has offered entrepreneurial classes for the past three years, plans to add an entrepreneurship emphasis for business majors this fall.
"The market was asking for the program," said Shelly Gardner, an assistant professor.
Gardner anticipates 10 percent growth every year in the program.
Augustana also holds a student competition in which the winners move on to compete in the annual Governor's Giant Vision contest, a statewide competition that's open to any new or experienced entrepreneur who has an idea for a new business.
If the student wins, Augustana will help the student with research, patent searches and other needs to start a business.
"Students don't see Sioux Falls as a small opportunity, they see Sioux Falls as the world," Gardner said. "They don't see a lot of barriers."
Age only a number
While the emphasis on entrepreneurship in South Dakota may focus on youth, experienced businesspeople are deciding to launch businesses, too.
One of the fastest growing groups of entrepreneurs is retired people who are looking to supplement their incomes, said Tosterud of USD.
When people reach ages 60 to 65, they are at their peak of intellectual contribution. At that point, entrepreneurship can be a good option for them, Tosterud said.
"They've accumulated ideas and have great networks to tap into," he said. "I think we're not taking advantage of, and exploiting, that market. I think a lot of them are in small towns."
In 2004, Tosterud and his wife started a business called His Essence LLC, which markets candles that are inspired by Bible verses.
"It's not so freakish to start and grow a business," he said. "It's becoming more and more of a viable option for young and old, particularly for South Dakota."
He noted that many entrepreneurs were bright, mid-level managers who were laid off or fired from high-tech companies and were looking for better options.
Marcia Hendrickson, director of the Enterprise Institute, said a lot of its patent searches are coming from people in their 40s and 50s.
In 2002, the Enterprise Institute launched the Independent Inventor Institute specifically to help inventors patent their work. The institute has conducted 516 patent searches since then.
The state's spirit of entrepreneurship is inspiring those who have been sitting on ideas, she said.
"They're coming into that idea with more experience," she said. "They're very willing to be coachable."
Hendrickson said that in the past, people weren't being encouraged to take an entrepreneurial route because there was a push to work for someone else.
Colette Munce was one who became an entrepreneur last fall when she purchased Spa 2000 after working in the medical field for the past 14 years.
The 38-year-old Munce said that ever since she was in beauty school, she wanted to own a salon. The timing wasn't right until now. She bought the business shortly after she started working there last August.
"I think people are a little more outgoing and have a little more college education, which can contribute to the number of younger business owners," Munce said.
Her experience as an administrative assistant and working for different managers throughout the years made her feel more comfortable going out on her own, Munce said.
Sheets said most of the entrepreneurs who come into Equip are younger. However, the organization may not see many adult entrepreneurs because they need less assistance and consulting, she said.
Challenges remain
Regardless of age, new business owners are facing perennial struggles in getting their companies off the ground.
Inadequate financing is the second most common reason that businesses fail, exceeded only be poor management, according to the U.S. Small Business Administration.
Business owners also need to make sure they have a consumer base for their products or services, Tosterud said.
"That's where education comes in," he said. "We have to do everything to increase the probability."
Nationally, half of all new businesses survive the first year. After five years, there is a 20 percent success rate, Tosterud said. However, that figure doesn't account for businesses that were bought out, merged or the business owner decided it wasn't right for them.
In South Dakota, 64 percent of the startups in 1990 were still in business two years later. The figure increased for 2003 startups to a 73 percent survival rate, according to the South Dakota Labor Market Information Center.
"Very few go into bankruptcy and losses to creditors," Tosterud said. "There aren't that many that go into bankruptcy in South Dakota."
Access to capital has become more readily available in South Dakota through small-business loan programs, other finance programs for startups and venture capitalists. Yet, there is still a challenge, especially for young entrepreneurs who don't have much experience.
Lynne Keller, executive director of the South Eastern Council of Governments, said access to capital has improved, but finding someone who will finance a venture 100 percent is out of the question.
"It's hard to meet everyone's needs," she said. "You want them to have some of their own capital. That's their own risk."
SECOG works with local banks to provide loans for small businesses that want to build, buy or renovate a building or buy machinery and equipment.
However, Keller said there's nothing worse than starting up the business and not having enough working capital.
Supporting giant visions
This year, the Giant Vision competition added a student section to help young entrepreneurs with some of the startup costs for their companies.
David Owen, president of the South Dakota Chamber of Commerce & Industry, said the organization has wanted to add the category since the contest began in 2005. Until now, the contest wasn't attracting many students. Those who had been successful in the contest were people in business for a year or two, Owen said.
This year's student competition included 16 entries, and seven were qualifiers for the competition.
The contest "was absolutely successful this year," Owen said. "We kind of finally found the way to go about this."
Owen said judges found it invigorating to see enthusiasm from the student competition. Some student ideas included a dog leash with a shock absorber, a group voice messaging system and a digital photo kiosk to create postcards.
Patnoe won the top prize, taking home $5,000. She'll use the prize money to patent her product, she said.
The Rapid City native said her interest in entrepreneurship sparked while watching her dad grow his car dealership business.
"Just growing up, my dad was an entrepreneur working hard and trying to be a successful businessperson. That has been something my family has valued," she said. "I was very influenced by the people around me."
Patnoe said winning the competition validates her business idea and also gives her another reason to stay in her home state.
"Sometimes it's difficult to stay in South Dakota to find highly competitive jobs where there's room for advancement, especially for young people," Patnoe said. "(The competition) really gets young people to look at ways to stay in South Dakota and help young people develop the economy in South Dakota."
Patnoe said she has talked with a few potential investors who are interested in helping launch her business.
"Competitions like this really help entrepreneurs give their ideas validity, and it helps just with getting your name and ideas to potential investors," she said.
Finding success
Tosterud said entrepreneurship is growing because people understand it's producing jobs. Most of the employers in South Dakota are entrepreneurs, innovators or small businesses.
In 2005, there were 2,104 new employer businesses in the state, according to the Labor Market Information Center. That figure represents a 24.3 percent increase from the previous year.
In today's global economy, people don't need to be in a specific area to become a successful entrepreneur and have the quality of life they want, said Hendrickson of the Enterprise Institute.
For many young people, the move into entrepreneurship can be rewarding, business leaders say.
That seems to have been the case for Electric Pulp, a Web-development and marketing company.
Stefan Hartwig, Michael Lehmkuhl and Jeff Nelson started the company in 1997 and incorporated in 1999.
Nelson later left, and Aaron Mentele joined the company as a partner in 2000.
The original partners gained real-life experience before launching the business, a benefit that Mentele said was key for Hartwig and Lehmkuhl, who were in their early 20s.
"Now, coming out of school, it makes sense to get a real job in a corporate environment and see how they do it and get some real experience first," he said. "You get a lot of experience working for someone else."
Mentele said launching a Web-based business takes fewer resources, but there were still some challenges.
"When I got there, it wasn't easy making the business roll," Mentele said. "Stefan had two young kids. It was a paycheck-to-paycheck thing. You had to go off the mentality, you get paid last."
The partners also had to learn aspects of running a business such as legal issues and insurance.
Electric Pulp now has 11 employees. The business is generating residual income and has the same benefits of larger organizations, Mentele said.
Three years ago, the company spun out another business called Wellstream, a personal health assessment service for employers. The service is delivered by the Wellness Councils of America, and Wellstream incorporated earlier this year.
Entrepreneurship in South Dakota
77,600 Number of small businesses in South Dakota in 2006
2,104 Number of new employer businesses in 2005, a 24.3 percent increase from the previous year
81.5 Percentage increase in business bankruptcies from 2004 to 2005
64 Percentage of businesses started in 1990 that survived two years
73 Percentage of businesses started in 2003 that survived two years
No. 1 South Dakota's ranking in 2006 for entrepreneurial friendliness by the Small Business Survival Foundation
Sources: Small Business Survival Foundation; South Dakota Department of Labor, Labor Market Information Center; U.S. Small Business Administration