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EMPLOYMENT OUTLOOK 2001
November 13, 2000
Volume 78, Number 46
CENEAR 78 46 p.55
ISSN 0009-2347
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For those with vision, perseverance, technical expertise, and spunk, there's no time like the present to start a business

Susan Ainsworth
C&EN Contributing Editor

The entrepreneurial spirit continues to soar in the U.S. More and more people in search of personal and financial rewards are pursuing the dream of owning their own business. New business formation reached another record level in 1998, according to the latest statistics of the U.S. Small Business Administration (SBA) . An estimated 898,000 new firms with employees opened their doors, representing a 1.5% increase over the previous record of 885,000 set in 1997.

Today, more than 21 million Americans--17% of all U.S. nonagricultural workers--are engaged in an entrepreneurial activity. And experienced business owners are not surprised. Although they caution that success comes at a high personal price and the pitfalls are many, they suggest that there has never been a better time for people to start their own companies.

Velarde: developed marketing niche [© Alexander's Fine Portrait Design]
In the chemical and pharmaceutical industries at least, changing corporate credos are driving the development of new and existing small businesses. In their quest to maximize returns and buoy stock prices, large companies aren't spending less on R&D activities but they are doing less and less in-house, thus reducing employee head counts and their associated costs. Corporate professionals--frustrated with the bureaucracy and short-term financial goals of their employers--see entrepreneurship as an attractive alternative. And with corporate job security not what it once was, the risks involved in starting a new company don't seem quite as daunting.

At the same time, corporate cutbacks are creating business opportunities for small companies interested in providing the services that leaner corporations can no longer handle internally. By farming out a variety of peripheral tasks to smaller, more agile firms, big companies save money and improve productivity. Entrepreneurs--many with years of corporate experience--are tapping into this lucrative outsourcing market with a broad array of services including custom synthesis, R&D, and marketing.

Outsourcing is more of a revolution than a trend, industry experts say. "Companies are moving away from traditional vertical structures to more horizontally integrated ones. Their success is no longer judged by their size, but by their productivity," says Randy Velarde, chief executive officer of the Plaza Group, a Houston-based company that provides marketing services to petrochemical firms that traditionally handled that function internally. It's imperative that companies focus on core competencies and outsource everything else, he adds.

And companies are doing just that. In 1997, 85% of U.S. organizations bought services once performed in-house, and 93% expect to do so this year, according to "Outsourcing: The U.S. Business Revolution," a study by Michael F. Corbett & Associates , a LaGrangeville, N.Y.-based consulting firm specializing in outsourcing. In the U.S. alone, an estimated $164 billion was spent on outsourced services in 1998, with the figure climbing to a staggering $318 billion this year. And the chemical and pharmaceutical industries are no exception.

Locating opportunities

Velarde first spotted what he calls "a very opportunistic situation" back in 1994 when Huntsman bought Texaco Chemical, where he was a product manager. Because the acquisition excluded the chemical operations residing in Texaco's refineries, "I thought it seemed like a reasonable idea to start a stand-alone company to market the chemical products that Texaco retained." After selling the idea to the initially reluctant Texaco, Velarde and three of his Texaco colleagues founded the Plaza Group .

As the Plaza Group took on the Texaco business, "we discovered that there were a lot of other petrochemical producers that could benefit from our services," he recalls. Billing itself as a full-service marketing company, in 1997 the company took its business model on the road, targeting low-cost or niche petrochemicals producers that did not maintain a sales force or might want to outsource this function for efficiency. That year, the Plaza Group's annual gross revenues increased from $2.7 million to $92 million, a more than 3,000% jump.

Today, the Plaza Group--with Velarde as the sole owner, having bought out the others--boasts sales of more than $100 million. In addition to being the exclusive marketer of chemical products for the former Texaco businesses of Equilon, Frontier, and Motiva Enterprises, it also sells many products produced by such companies as Shell Chemical, Dow Chemical, Phenolchemie, ChevronPhillips Chemical, and Aristech Chemical.Hispanic Business magazine and the Houston Hispanic Chamber of Commerce both named Velarde entrepreneur of the year in 1999 based on his company's fast growth and unique approach to chemical marketing.

New outsourcing opportunities are certainly not limited to the marketing arena. In fact, many new and established companies across the U.S. are tapping into the multi-billion-dollar market for custom chemical synthesis, which is expected to grow 5 to 10% per year over the next 10 years, according to Debra J. Saez, founder, chairman, and owner of the idiosyncratically named company, technically, Inc. of Woburn, Mass., which offers custom synthesis and R&D, pilot-scale manufacturing, and process development of specialty and fine organic chemicals.

Like many entrepreneurs, Saez spotted her idea for a new business from a corporate vantage point. After spending 15 years climbing the ranks within companies such as Occidental Petroleum, Stauffer Chemical, and DuPont, "I became completely frustrated with big chemistry, the lack of vision and creativity, and the slow pace of business," Saez says.

Customer service and turnaround time were poor both when supplying a product or buying one from a customer, especially when dealing in smaller quantities, she says. "It became very clear that there was a need in the market for a company that could do custom synthesis work and provide custom R&D services on a fast-track schedule and for a fair price."

Meltzer (above) and Saez left corporate posts to start firms to exploit the custom synthesis market.
In 1985, she founded ,technically, to fill the industrial market niche between bench-scale chemical R&D and commercial manufacturing. With sales of "under $10 million," ,technically, is small enough to be "flexible and responsive to problem-solving without sacrificing personal attention to our clients," Saez says.

A year later, in the same intellectually resource-rich city of Woburn, three chemists who had worked together for more than four years also set out to exploit the emerging contract synthesis market by starting a company called Organix . Being laid off from their jobs at a now-defunct R&D company was the "precipitating event" that put them on the entrepreneurial path, says Peter C. Meltzer, the company's president.

Although Meltzer had long dreamed of starting some sort of chemical business, the comfort of a corporate job gave him no motivation to act on that impulse. The layoffs "provided the sense of urgency that had not been there before," he says. Meltzer, along with Raj K. Razdan (now Organix's CEO) and Howard P. Sard (the company's vice president), believed that together they had the experience needed to attract even the most skeptical and reticent of potential clients.

Back then, for instance, drug companies still did all their own development work in order to preserve the confidentiality and integrity of their sensitive research. "There were contract research firms making large quantities of materials for the big pharmaceutical firms, but there were very few private companies, if any, set up to conduct small-scale research or provide quantities of custom synthesis material for these companies," Meltzer recalls.

However, the Organix founders were able to convince their prospective clients that "our services would be cost-effective and safe," thereby forging a pioneering role in the custom synthesis market. Today, the company, with sales of between $3 million and $4 million per year, carries out laboratory-scale custom synthesis and contract R&D in all areas of organic chemistry.

Selling companies on new ways of conducting business is also paying off for some firms in the increasingly crowded e-commerce arena. San Francisco-based ChemConnect is promoting its World Chemical Exchange, an online business-to-business trading exchange and information portal, which allows chemical, plastics, and industrial gases companies worldwide to streamline their business transactions. Through this neutral third-party platform, more than 11,000 members from more than 110 countries gain access to new markets, efficiently negotiate with buyers and suppliers, profit from reduced transaction costs, and obtain up-to-the-minute market information.

Since its 1995 start-up, the company has raised more than $100 million in equity funding and venture-capital investments. But with expenses still greatly outstripping sales (generated by collecting a small percentage of the total cost of each transaction), the company has yet to turn a profit. ChemConnect postponed an initial public offering earlier this year, deciding to wait until the stock market offers a better valuation on technology stocks.

"I've always wanted to do something new, something different," says Jay Hall, the company's cofounder and vice president. "It's hard to do that within the constraints of an existing business. Very few businesses really reward creative, out-of-the-box thinking."

Born into a family whose livelihood came from manufacturing chemicals, Hall says he saw ChemConnect as a vehicle for bringing together his wide variety of technical interests and experience. Prior to founding ChemConnect, Hall served as a director of Mayo Chemical, his family's Smyrna, Ga.-based business, which produced phosphonates, polyacrylates, sodium hypochlorite, and other products. Mayo was sold to Calloway Chemical, a unit of Vulcan Chemicals, in 1996. Hall developed his technical expertise in advanced communications while working as an engineer at Lucent Technologies for four years in the 1980s.

Although he hasn't spent his life aspiring to things entrepreneurial, Hall says he's "always wanted to do his own thing. I probably have a dozen [business] ideas that I'd like to explore."

But Hall is the first to admit that it takes a lot more than an innovative idea to create a successful business. "Specifically, in the chemical dot-com arena, I'd caution that the space is bloated with competitors right now," he says. "Every good idea has at least three people working on it. And if you start to get traction in any area, an incumbent competitor has the resources, partners, and infrastructure to come back at you full force. You have to have some clear, sustainable advantages."

Game plans

To lay a strong foundation for a successful business, there's no substitute for up-front planning and analysis. "If you have a good business plan and stick to it, the business will succeed," says Herbert Paaren, cofounder and vice president of Madison, Wis.-based Tetrionics, a custom manufacturer of bulk and lab-scale bioactive chemicals for large pharmaceutical and biotech companies and university labs. "We did not start out with some fabulous, earthshaking idea that attracted huge amounts of money from venture capitalists," he says. "What we are doing is basic entrepreneurship--making a profit off of a product and generating a business around it."

It's important not to get distracted, Paaren advises. "Those of us with [advanced] chemistry backgrounds can't help but see the next great idea just sitting there at the side of the bench, but it's critical that you stay focused, stay on your path." By remaining true to its mission, the company has successfully ridden the wave of demand for custom bioactive chemicals. In September, Tetrionics moved into a new $10 million, 25,000-sq-ft facility, which includes offices, analytical labs, manufacturing suites, and a pilot plant. In 2001, Paaren expects the company's revenues to total $8 million to $10 million, not including any sales generated by the pilot plant, which will come on-line in the third quarter of next year.

Hall: creative, out-of-the-box thinking
In addition to staying focused on company goals, it's crucial that entrepreneurs have a deep knowledge of the industry their new business will serve. "Smart kids coming right out of school with a bright business idea" can face more barriers than they know, Saez cautions. By the time she started ,technically, she had logged many years of experience in the chemical industry at various levels from bench chemist to scale-up chemist to R&D chemist.

"I had played all the roles, worn all the hats," she remarks. "I had balanced budgets and managed people, so at least I knew I wouldn't fail as a result of not knowing my market. I also had built up a list of good contacts in the chemical industry; these people knew my track record, knew that I was technically competent, and knew that I could do what I promised in business. That experience and the network were critical."

Aware of specific business needs, Saez started out "basically consulting and working in the laboratories of companies that needed a good organic chemist who could bring a product to commercialization or do R&D or process development work." The income she received from this business allowed her "to build up a war chest" that, combined with her personal savings, enabled her to bankroll her own laboratory and a small pilot plant.

Money management skills were also crucial to keeping the business afloat. "I kept overhead down," she says. "I kept the number of people small at first so that most of the money could be funneled back into the business to purchase equipment that I needed. It was strictly a cash-flow business. No loans. No venture-capital money."

Overspending can be one of the greatest pitfalls facing a new business. "Basically, we have kept it very close to the vest," Paaren says. "I think that is absolutely critical." When technology-based companies spend themselves into a hole, he says, they have to turn their focus to generating money rather than developing their science. "It's a double-edged sword, and you get cut both ways," he warns.

Sources of support

At the same time, business owners often must reach outside to get the funding needed to sustain growth. Saez admits that ,technically, has been undercapitalized for most of its existence. Anticipating a jump in demand for its services, Saez says the company is now actively looking for individual investors as well as investment partners who want to form strategic alliances and joint ventures with her company. "These partners," she says, "would bring in streams of income business in exchange for preferential service."

It was a partnering arrangement that gave Donna Cole the courage to leave a job trading chemicals and start her own chemical distribution business, Cole Chemical & Distributing , Houston, in 1980. At that time, several major chemical companies, including DuPont, Shell, Exxon, and Monsanto, wanted to do more business with minority- and women-owned businesses but found few that were financially viable in the Houston area. They believed Cole, despite being only 27 years old, was up to the challenge.

It seems they were right. Today, the company markets and distributes fuel, lubricants, laboratory chemicals, and resins and boasts a rail-served, 20-acre warehouse facility on the Houston Ship Channel. In July, the company won a $25 million fuel distribution contract from DaimlerChrysler that will double its 1999 sales. Under the deal, which the automaker calls "a minority supplier opportunity," Cole Chemical will purchase fuel from BP on behalf of DaimlerChrysler, receive and fulfill fuel orders, and manage the fuel transportation to 29 DaimlerChrysler facilities. BP, which has been actively mentoring Cole Chemical since 1980, is committed to increasing its volume of purchases from minority- and women-owned suppliers.

Cole is grateful for the support she received in launching her business, especially because "it was harder to come by then than it is today." Indeed, seasoned business owners agree that newcomers to the entrepreneurial game have many more resources at their disposal than they did even 10 years ago. "Today, money is a commodity, and it is more readily available," Cole says. For example, she has seen aspiring business owners establish a line of credit concurrent with the start-up of their enterprise--something that didn't happen for her until she had been in business for 12 years.

Moreover, small businesses can now look to a much broader range of organizations and programs for assistance. Tetrionics, for example, has received assistance from a number of organizations throughout its life span. In fact, one such group, the Wisconsin Alumni Research Foundation (WARF), the patenting and licensing arm of the University of Wisconsin, Madison, was instrumental in opening the entrepreneurial door for Paaren.

WARF had patented research on the metabolism and synthesis of vitamin D analogs that Paaren had done as a postdoctoral student working with professor Hector F. DeLuca. Once major drug companies, including Abbott Laboratories, began to appreciate the pharmaceutical potential of the vitamin D analogs, which are potent hormones, they licensed the patents from WARF, creating a demand for small quantities of "these rather elaborate vitamin D analogs" needed for their research, Paaren says. DeLuca approached Paaren to see if he was interested in starting a company to supply this niche.

Cole: partnering agreement gave courage
He was. Tapping another resource, Paaren linked up with Peter Johnson, a Madison-area investor and entrepreneur, to start Tetrionics in 1990.

Fortunately for Paaren, DeLuca stayed active in vitamin D discovery, and demand for Tetrionics' products remained strong. "It was pretty simple to keep the lights on by just supplying custom synthetic orders to WARF licensees. It didn't take a lot of revenue to start up the lab, and it certainly gave us a chance to get our feet on the ground."

The fledgling firm also benefited from the use of the university's research park. These parks, Paaren observes, are more prevalent around the country today than when Tetrionics started up. "The park provided a significant amount of infrastructure to help us get going," he says, even though the work he was doing was relatively benign. "Chemistry--even at its most basic levels--still requires some ventilation and some precaution," Paaren notes.

Government aid

Later, as Tetrionics expanded beyond custom manufacturing into drug discovery, it found support through grants from the federal government's Small Business Innovative Research (SBIR) program, which is run by SBA. Each year, 10 federal departments and agencies are required to reserve a portion of their R&D funds for awards to small business. SBIR has developed into a highly competitive program that encourages small businesses to explore their technological potential, funding critical start-up and development stages and later providing commercialization incentives. Tetrionics has received more than $1 million in funding from the Department of Health & Human Services for various aspects of cancer-related research.

SBIR also proved valuable to V-Labs, Covington, La., a small manufacturer of carbohydrates, polysaccharides, and glycosidic enzymes. "That program allowed us to explore some of our innovative ideas," says Sharon V. Vercellotti, president of V-Labs . The company has received three SBIR grants. Under one from the National Institutes of Health , V-Labs was able to investigate improved isolation methods for glycosaminoglycans. The company also received a grant from the National Science Foundation to study chelation properties of derivatives of the polysaccharide chitosan. One of the products developed under this grant proved to have antiviral properties, which led V-Labs to apply for and win another NIH grant for further work on the compound.

Indeed, SBA has been a critical resource for V-Labs from its inception in 1979 when Vercellotti sensed a market need for a laboratory specializing in carbohydrates. SBA's 10-year loan guarantee program enabled the company to obtain initial financing through a local bank. As collateral, Vercellotti could offer a one-year research contract with a pharmaceutical company, commitments for a number of custom syntheses, and property for a laboratory. Despite those pluses, "the bank would not have made the loan without the SBA guarantee," she says.

Business incubators are another increasingly plentiful resource for budding entrepreneurs who want to cut their risk, Vercellotti says, noting that these programs were almost nonexistent when she started V-Labs. For a fee or an equity stake in the new entity, business incubation programs provide entrepreneurs with office or lab space, expertise, networks, and tools they need to get their ventures off the ground. Currently, there are more than 900 incubation programs in the U.S., compared with only 12 in 1980, according to the National Business Incubation Association in Athens, Ohio.

Finding the right people

Even with these additional resources, budding chemical industry entrepreneurs need a base of business knowledge to keep their companies up and running. "The thing that surprised me most [about owning a business]," Meltzer says, "has been the extent to which I have had to delve into law, accounting, environmental and safety issues, patent management, and other areas way outside my formal academic training in chemistry."

For businesses large enough to afford a support staff, "it's important to surround yourself with a very good business team and all the adjunct help needed to bring your ideas to market fruition," Saez says. "One of the biggest misconceptions in technical businesses is that technical strength is all you really need in your workforce. But a good idea--even a technically brilliant one--isn't good enough" on its own, she adds.

Despite the knowledge of business that she gained from working within large chemical companies, Saez admits she was "still undertrained." Recently, for example, she has brought on board the marketing expertise of Andrew Nathanson, a chemist with an M.B.A., and hired former Polaroid executive Neil Kaufman to take over the role of president and CEO while she remains chairman and owner.

Particularly for small businesses, hiring the right people can be critical. In fact, ChemConnect's Hall says the key to the company's success has been "good hiring throughout the company, [bringing in] both technical expertise and industry expertise." Paaren, too, gives much credit to his employees. "I can't say enough good things about the wonderful people I work with. Obviously, all the people who started working here--at least in the early days--were taking a tremendous chance in their professional careers," he says. "And there's a Midwest work ethic that is a wonderful thing, especially when we have had to work 60- or 70-hour weeks. We've certainly had to put in the time to make things happen."

Pitfalls

Just as companies need to be selective in finding employees, they must be equally choosy in finding customers with whom they want to develop a relationship. Cole cautions that companies should not rely too heavily on one customer or even one industry--a trap that many fledgling companies fall into. "At one point, I had almost all my eggs in one basket with a single customer," which led to a crisis, Cole says. With only a year's notice, that key customer decided to buy its own warehouse and packaging facility "to do everything that we had been doing for them--drumming, blending, and export packaging for all of North America."

Rather than becoming discouraged, Cole learned from the experience. "So that was Business 101," she says. "It was the best thing that happened to me. It made me realize that change is inevitable and to always be prepared. We have to be aware of trends. We have to envision what will be happening in a year or two and develop a strategy to ensure that we won't be negatively impacted."

Vercellotti: small-business grants proved valuable
Following the loss of the crucial customer, for instance, Cole set out to diversify her business in terms of both the industries and geographic regions it serves. "So in 1986 we went national, and we started doing more international business. My philosophy now is to not let any one company [compose] more than 45% of our business."

Like Cole, Velarde also transformed a crisis with one of his company's few customers into a positive experience. During 1994, the Plaza Group's first year in business, "we delivered product to Huntsman that resulted in rather significant production problems," he recalls. In response, the Plaza Group immediately canvassed a team of its technical, operations, and marketing people; quickly pinpointed the problems with its product; and took full responsibility for what was occurring. And at the same time, the team helped Huntsman uncover some critical flaws in its own operation, saving Huntsman some future headaches. So well was the Plaza Group able to make amends that two years later it was named Huntsman's supplier of the year.

Customer service is crucial to success in small business, entrepreneurs say. They know that they are successful only to the extent that they are able to create and maintain profitable customer relationships. Yet in their eagerness to attract new business, start-up companies must avoid the temptation of promising more than they can deliver, which can have devastating repercussions, Meltzer says. "We've been very careful to avoid overcommitting ourselves, even at the risk of losing a particular client or project," he says. "So much rests on a deadline; if you don't meet it, you've lost credibility. The client can no longer trust you to fit into its schedule."

Paaren reinforces that point. "What separates us from the pack is that we go out of our way to try to make sure that we are either on time or ahead of schedule with delivery of orders," Paaren says. "And we have up-front firm pricing, so if we manage to goof up something, we eat the cost [of redoing the task] rather than transfer it to our clients."

Entrepreneurial temperament

Dealing with the many challenges and pitfalls of new business ownership requires a certain temperament. For one, entrepreneurs need to be comfortable with risk. Under even the best conditions, starting a new business is a leap of faith. It's important to "develop nerves of steel," Vercellotti says. "You must have confidence that on Monday morning a customer will call with a new job."

Saez admits to having been a risk-taker all her life. She was an avid whitewater canoeist for many years and was part of a car racing team. "I think that those life experiences prepared me for going out a little further on the edge in business." But Saez is also the first to say, "If you can't [afford to] lose it, don't do it. And it's not just money that's on the line. It's time away from your family and time away from leisure activities and other things in life."

Indeed, entrepreneurs concede that building a business requires hard work, long hours, and many personal sacrifices. "If you are already working 70 hours each week in a company owned by someone else, then you probably have what it takes to own your own business," Cole says.

Even after the critical start-up years, "it's pretty much all-consuming," Meltzer says. "That's not to say that you cannot have a good family life, because you can." But owning a business means that you never really get away, says the father of two children, now ages 17 and 13. "Even on vacation, I am never really out of touch with the office or with the research that is going on," he admits. "And that's because, on a day-to-day basis, I want to make sure everything is humming along. So I think it takes a lot more time and a lot more commitment than working in a larger company or one owned by someone else."

Jump to
Introduction
Demand
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Being an entrepreneur takes great patience, too. The get-rich-quick success stories in the general press have little in common with most businesses. Many business owners say they were surprised at how long it took to get their firm out of the red. "Know that it's going to cost more and take longer than you expect," ChemConnect's Hall advises.

Cole says she did not realize how long it would take to be personally rewarded in a salary. "For a long time, other people who were working for big companies were making much more money than I was," she says. "And I would have to pay my employees before I ever got a paycheck. Thank God my parents used to fill up my car for me on the weekends."

To keep a business afloat, owners need to be obstinate in reaching their goals. "There's a tenacity factor built into small business entrepreneurship," Paaren says. "If you don't feel you're tough enough to go through the hills and valleys, then maybe you shouldn't go for it. Eventually, there's a lot of competition out there, and you have to prove your worth against some people who are as good if not better than you are. You have to find a way to come out on top."


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