@LARGE
MIT's $50,000 means big money

By Scott Kirsner, Globe Staff, 5/8/2000

There are few better ways to launch a company in Boston than to compete in the MIT $50K Entrepreneurship Competition.

Win it, and you could be like Direct Hit, the Internet search firm that took first place in 1998, and was acquired by Ask Jeeves for $506 million this year. Lose it, and you could be like Akamai Technologies, a finalist that same year. It didn't win, place, or show, but Akamai, which expedites the delivery of Web content, was worth more than $15 billion on the day it went public last November.

In addition to teaching MIT students about building a company, the event has become something of a festival of early-stage financing. This year's student teams started getting peppered with e-mails, phone calls, and term sheets from investors last month, when the 48 semifinalists were announced.

Strong Numbers, a team that aims to a create a kind of uber-Blue Book on the Web, is considering term sheets from four venture capital firms, and CyberTrak Systems, which is developing a LoJack-like system to recover stolen laptops, has received eight solicitations from investors. It's not unheard of for the $50K competition's judges - nearly half of them are moneymen - to discuss financing with entrants while the competition is underway.

Now in its 11th year, the competition has ''two goals that are somewhat conflicting,'' says lead organizer Heather Wildman, a student at MIT's Sloan School of Management. ''It seeks to create tomorrow's leading firms, and foster education about entrepreneurship.''

The student-run competition certainly does the latter, offering MIT students a yearlong series of workshops and lectures on writing business plans, marketing, managing, and financing. But could it actually become too successful as a launch pad for ''tomorrow's leading firms''?

Despite the Nasdaq's convulsions, venture capitalists and angels know that there are still plenty of newborn companies with the potential to change the world.

''It's pretty likely that at least one of these [$50K] teams is a billion-dollar company,'' says Mike Cassidy, a founder and the former chief executive of Direct Hit. ''You just don't know which one.'' (Last Friday, Cassidy left Direct Hit to focus on advising and investing in start-ups. He is on the board of Strong Numbers and is advising several other $50K teams.)

The students don't mind the fact that the $50K has established a reputation as the country's best screening mechanism for campus-generated businesses and, as a result, become a magnet for investors. This year, 206 teams entered. Last week, they were whittled down to a handful of promising finalists, and Wednesday night one winner and two runners-up will be named. (The winner gets $30,000, and each runner-up gets $10,000 - hence, $50K.)

''If investors are exploiting the competition for their gain, well, it's not necessarily bad for the participants,'' says Ravi Hariprasad, the leader of the CyberTrak team.

This is what's known as ''aligned interests.'' The teams need money if they want to turn their business plans into real companies, and the investors who participate as judges, speakers, mentors, or simply observers are always on the prowl for new investment opportunities.

Hariprasad says if they wait until the winners are announced, it's often too late. In 1998, for example, Direct Hit had already sealed a financing deal with Silicon Valley's Draper Fisher Jurvetson by the time the winners were announced.

Investors on the panel of judges don't want to be left out, either, though they're expected to avoid conflicts of interest when voting. Shishir Mehrotra, the team leader for Centrata, says he's had conversations with Hummer Winblad and OneLiberty Ventures, two venture firms represented on the panel of judges.

''The judges definitely get involved,'' Mehrotra says. ''That's what [they're] in it for. They get first peek at the ideas.''

Centrata, which hopes to enable PC users to sell unused processing capacity and storage space on their machines over the Internet, will likely skip the major financing for now, and instead take $1 million in seed money from Boston's CommonAngels and Kevin Kinsella, a West Coast investor and MIT alum.

Another aspect of being perhaps too successful as a launch pad for companies is that the $50K can catapult MIT students out of school. Part of the deal when you take investors' money is that you usually can't remain a full-time student. They want you devoted to the start-up, 24/7.

''The one problem I see with the $50K is that it tends to give university undergraduates the idea that they are good candidates to run high-tech start-ups,'' says Bob Metcalfe in an e-mail. Metcalfe, the founder of 3Com, is a longtime $50K supporter and MIT alum who hosts an annual party for the finalists. ''Leaving school to start a company is not what I would recommend.''

It's a credit to the student organizers that they've created a competition that attracts such high-quality plans and winnows them down in such an efficient way. But that has tremendous value to investors, and it's important to note that what started out as an Arthur Murray class has lately acquired some of the atmosphere of a dime-a-dance joint.

That said, dime-a-dance joints are typically much more lively than Arthur Murray studios. And if you can make it, I'd suggest trying to catch the final presentations this Wednesday evening at MIT's Kresge Auditorium (see 50k.mit.edu for more info).

Bill Weld - now a part-time venture capitalist himself, with Cambridge's Main Street Partners - is keynoting. You'll have a chance to see presentations from the finalists and be the first to find out who wins. Then watch the term sheets fly.

Scott Kirsner is a Boston writer and a contributing editor at Wired, Fast Company, and Boston Magazine.