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Saturday, February 04, 2012
Feature: November 2008
Young Money
Entrepreneurs under 30 make ago of it
Story by Christine Stanley
It’s the second Saturday of the month, a crowded if festive time to be on the streets of Midtown. Art enthusiasts and martini connoisseurs alike amble in search of Sacramento’s next best thing and jostle one another for a seat at the shop determined to be the area’s best sweet spot: Ginger Elizabeth Chocolates, an 11-month-old chocolate boutique that met annual projections in just three-and-a-half months and sold more than 70,000 chocolates in the year’s first half.
The shop’s owner, Ginger Elizabeth Hahn, hopes business will still be this good when she turns 30 a couple of years from now. And she isn’t alone.
The U.S. is unusual among developed countries in that it has a higher business startup rate among 18- to 24-year-olds than its 35- to 44-year-olds, according to a 2006 study by the Global Entrepreneurship Monitor.
The so-called millennials, those born roughly between 1980 and 2000, are setting professional goals higher than any other generation, due in some part to being the first group to grow up surrounded by digital media and globalism.
“This generation believes they can be anything they want to be. Young women especially have really been given the skills to launch and fly, and there has been a huge shift in risk-taking capabilities,” says Tammy Hughes, president of Claire Raines Associates and generationsatwork.com.
But while these enthusiastic risk takers might be willing to throw themselves into the business fire, the reality of the burn is often hard to take. Young people who haven’t paid their dues cope with reputations and stereotypes afforded to them by the business world. Due to limited life and work experience, young entrepreneurs — particularly those under 30 — are often rebuffed by older colleagues or business contacts.
What’s more, due to a lack of resources, the absence of substantive credit history, sufficient collateral or guarantees to secure loans or lines of credit, young people are often seen as risky investments.
Twenty-seven-year-old Hahn can speak to the frustrations firsthand. A graduate of the Culinary Institute of America in Hyde Park, N.Y., she had her sights set on establishing a chocolate boutique in midtown and the background to make it happen. But the chasm between concept and service counter was vast.
At age 24 she launched her first business, Couture Chocolates by Ginger Elizabeth, with a little more than tenacity, a wholesale health permit and a $2,000 credit card.
“With that $2,000, I bought QuickBooks, bowls and spatulas, and made everything by hand for two years,” she says. “Two years went by, and I was making chocolate part time on top of my full job, but on the part time I made $70,000. I thought, ‘You know what, business is really just common sense. Of course, there is the legal stuff, but I can do this.’”
And she did. Hahn ended up with a $275,000 loan from Bank of Sacramento and California Capital and a swatch of prime real estate on L Street. She says it was an arduous process with a steep learning curve, “but I brought them samples and then they really wanted to help me.”
Across the Capital Region, entrepreneurs under 30 are sprouting business concepts with the potential to make millions. What they’re coming to understand is that in order to make millions, you often need millions, says Shawna Brown. Barely out of graduate school, Brown is the developer of a new NASA-backed technology.
From graduate school research at UC Davis, she improved a technology that allows a material to turn heat into electricity. Brown and her business partner, UC Davis business student Geoff Jennings, have filed a patent and formed a preseed startup called High Merit Thermoelectrics.
“As far as funding is concerned, we’re not a success story yet,” Brown says. “We’ve won some money through contests and a small [grant], but it’s been a hurdle. We’ve spoken with multiple venture capital companies, but they say if you haven’t done your hundreth interview, you still have a ways to go.”
Startup capital is a constant dilemma, says Nathan Cox, commercial loan manager at Bank of the West in Sacramento. “Investors want to know, ‘OK, this is your idea, but what is your track record?’ And then they want to know how and when they’re going to get paid and make a return,” he says. But what if you don’t have a track record? “That’s the catch-22. It’s challenging. I’m not going to sugar coat it.”
Brown’s frustration might be valid, but her situation is not the norm, according to the Monitor, which reports the average cost to start a business in the U.S. as $70,200 in 2005. That’s not exactly pocket change, but it’s not inconceivable either.
Michael Sampino, the 29-year-old owner of Sampino’s Towne Foods on the corner of F and 16th streets in Sacramento, doesn’t have anything sweet to say about the situation either. To make a buck, he started selling cherries to David Berkley Fine Wine & Specialty Foods. That venture parlayed into a wholesale produce business run out of the back of a 1979 Honda Accord.
Sampino wanted to kick his venture into high gear but couldn’t manage to land a loan. “We were turned down four times by Bank of America,” he says. A buddy loaned him $500 to get going, but business was rough as Sampino was often left waiting upward of 60 days on his own accounts receivable. Nonetheless, his fleet soon grew to five vans, two 28-foot refrigerated trucks and a garage piled floor-to-ceiling with produce.
Five years into her own venture, Brown says she wishes her ride down entrepreneur lane could move as swiftly as Sampino’s, but she’s stuck until huge financial backing rolls in — at least $1.5 million to start. That’s not to say she and Jennings have nothing to show for their efforts. Last year they won a business plan competition sponsored by CleanStart business incubator and took home $15,000.
“But how much is $15,000 really going to get you? It’s not going to provide you with an office or a product or even someone knocking on your door wanting to supplement your $15,000 with $1.5 million,” she says. “But if you use it for networking and mentoring, the $15,000 becomes secondary.”
Those social connections, Brown says, will someday lead to the development of enough prototypes to get her product out into the world, contract out the manufacturing and establish a strong client base. Eventually she’ll seek to pair up or be acquired by a larger company.
“I think I’m always going to be focused on the business side of things. Even as a kid I would sell wrapping paper and think about how I could make money,” she says. “Still, sometimes I think maybe I just want to open something fun like Ginger Elizabeth. You can start small and work your way up. She can have a $2,000 credit card — I’m asking for a million dollars. We need large funding in order to make it.”
The tough part, according to Consumer Reports, is that just 20 percent of new entrepreneurial businesses get outside funding to cover that cost. The remaining 80 percent is primarily financed through personal savings and family assistance.
Cole Fox and Will Mentesh fall into the self-propelled category. The two 24-year-old Roseville residents invested nearly $100,000 of personal savings into the development and production of three top-shelf niche vodkas bottled under the label Väd. Their cash reserves are tapped, but their patent-pending cap, which triples as a measuring cup and shot glass rimmer, is Mentesh’s claim to fame and has enticed a few investors. The element’s design and development cost $35,000 and, at 50 cents a pop to produce, has consumed a hefty portion of the duo’s budget. But it’s also their most marketable feature.
“I came up with the idea when I was drinking out of a bottle in college. I thought about calling Bacardi, but now I’m glad I didn’t,” says Mentesh, who is hopeful that if product sales take off, a path will be paved to increased investments and the development of a local distillery and tasting lounge.
Like Brown, Fox and Mentesh are up against tough odds. They’re seeking $4 million on the product side alone (the distillery is another story), and many older investors won’t entertain the thought of involving themselves in a booze business. At the same time, says Mentesh, younger investors seem keen.
“I would say that our firm has a tendency to back younger entrepreneurs in general, and that’s not something that’s changing. Young people have great ideas, and they are in a position to take risk,” says Scott Lenet, co-founder and managing director of DFJ Frontier, a venture capital firm in West Sacramento. “The person who has a family of five to feed and is used to a certain lifestyle is not going to go on a diet of ramen noodles to save their startup.”
Workplace consultant Hughes says the head-first attitude of millennials stems largely from their desire for flexibility and mobility in the workplace and to have mentally challenging work. The health of the economy and the amount of disposable income afforded to this generation has paved an avenue conducive to business and financial risk, she says. But even with the periodic find of an optimistic investor, young entrepreneurs still say they feel like they’re wading through a riptide.
“It’s scary. The heads you come up against are really quite intimidating. It’s these 50-year-old guys who have been doing this for 30 years, and here you are right out of grad school,” Brown says. “They were hitting us with questions you would have never imagined them asking. You’re kind of dumbfounded because you don’t know what the right answer is going to be. You’re dealing with people’s opinions.”
But opinions are key, and the right person’s opinion is crucial. That’s why Brown, Fox and Mentesh have spent so much time rubbing elbows. Eventually, they assume, they’ll meet the right person with the right checkbook.
“I’ve had many sleepless nights,” Mentesh says. “I have X-amount of money, and then it’s ‘Holy shit, what do I do now?’ But I guess it’s like driving at night; you just have the headlights on and assume the road will keep going.”
