Bert Twaalfhoven's lessons from 51 startups and 17 failures

Russia / December 1, 2003
1
International Executive MBA
Multinational Management Conference
St. Petersburg, December 1, 2003
Dr. Bert W.M. Twaalfhoven, MBA Harvard
Growth Plus
Brussels, Europe
Как я потерял $55.000.000 в пятидесяти одном новом проекте
Уроки семнадцати неудач
1960-2002

2
International Executive MBA
Multinational Management Conference
St. Petersburg, December 1, 2003
How I lost $55 Million with 51 StartHow I lost $55 Million with 51 Start-- UpsUps
Lessons from 17 failuresLessons from 17 failures
19601960 –– 20022002
Dr. Bert W.M. Twaalfhoven, MBA Harvard
Growth Plus
Brussels, Europe

3
• Started 51 companies in 40 years
• In 11 countries
• Focussed on 10 global niches
• Nationalities: 5 at board level
12 at management level
25 at operating level
• Works with 28 universities in 10 countries
Result: Lost $55 million in start-phase
17 failures - 34 successes
Bert Twaalfhoven's entrepreneurial
experience of failures and successes

4
51 companies were started by Bert Twaalfhoven
from 1959 to 2001 around the world
– USA
• Bobcad
• Danvers Seals
• Elbar Boston
• Elbar Hickham
• Eldim Boston
• Inmet
• Interturbine USA
• IT Air Foil
• L.A. Stators
• N.A.A.
• T.E.A.M.
• Varhyd
– Argentina
• Elbar Argentina
– Holland
• Alectro
• Almax
• Altap
• Aluminium Extruders
• Autowasserette
• Centriforce
• Coating Center Holland
• Dayton Process
• Elbar Holland
• Elbar Turbo Services
• Eldim Holland
• Blomix
• Finco
• Interturbine Fansteel
• Interturbine Holland
• Louwers
• N.A.A. Holland
• Wasserettes Holland
• Xycarb Holland
• Ramix Holland
– Belgium
• Wasserettes Belgium
– France
• Almax France
– Italy
• Almax Italy
• Temper Italia
– Switzerland
• Alectro Switzerland
• Wasserettes Switzerland
– Germany
• Alectro Germany
• Eldim Germany
• Interturbine Logistics
• ITA
• Troika
– UK
• Almax UK
• Alectro UK
• Elbar/Wood
– Ukraine
• Coating Center
• Paton
– China
• QI Tech
– Singapore
• Interturbine Singapore
• Elbar Singapore

5
Indivers Focus on Niches $
• Coordinate measuring robots 30 million 400 million
• IT Logistics 25 million 100 million
• Turbine seals 50 million 400 million
• I-beam Honeycomb 25 million 50 million
• Chemical and laser hole drilling 30 million 100 million
• Dayton cleaning process 4 million
10 million
• Epolair 3 million 10 million
• Turbine refurbishment 200 million 2 billion
• Ceramic coating 50 million 350 million
INDIVERS RESEARCH
Niches Our Target Global Market

6
17 Failures- $55 million loss
Critical Year Initiative Cause of Crises Today
‘59 Wasserettes - NL Culture Sold
‘60 Aluminium Extruders - NL Finance & Technology Sold
‘66 Almax - Italy Culture & Management Sold
‘69 Almax - France Culture Closed
‘79 Troika - Germany Culture & Market Closed
‘81 NAA - NL / U.S.A. Management Closed
‘82 Elbar - Singapore Management Closed
‘85 Elbar - U.S.A. Culture & Management Closed
‘86 PW 4000 - NL Market & Finance Renegotiated
‘86 Danvers Seals - U.S.A. Market & Finance Closed
‘88 Elbar Turbo - NL Technology Closed
‘88 Fanamation - U.S.A. Market Relocated & JV
‘90 Waterwall project Pilot vs. FullScale Closed
’92 Kemco - UK Market Closed
‘92 Spartec - UK Technology Closed
‘94 IT Airfoil - U.S.A. Quality control Renegotiated/sold
‘96 Paton - Ukraine Technology, Culture, Mgmt Closed

7
7 Cases of Failure
Time Frame
1. Wasserettes 50’s
2. Aluminium Extrusion 60’s
3. Troika Cad-Cam 70’s
4. North Atlantic Associates 80’s
5. PW 4000 - partnering with giants 1990
6. Fanamation U.S.A. - China 1994
7. Paton - Ukraine 1998

8
How it was(h)…. >1959
Case A : Wasserettes

9
Getting Taken To The Cleaners:
Wasserettes
OpportunityOpportunity
Wasserettes
- existed in US
- none in Continental Europe
Opened first Wasserettes
in Netherlands in 1959
Invested $100,000.
- Europe’s wash dirtier
- People resist rapid washing/drying
- Bleach Holland & steam Germany
Losses eventually recovered and profitability achieved
ProblemsProblems RapidRapid LossesLosses
Technology Transfer U.S.A. $100,000.$100,000.
OutcomeOutcome
INDIVERS RESEARCH
Ultimately built 350 stores in 4 countries

10
Case B: Aluminium Extruders

11
Squeezed Out:
Aluminium Extruders
OpportunityOpportunity ProblemsProblems LossesLosses
Technology transfer of
innovative Aluminium
Extrusion profiles
from North America
Partner 60% ->
Kruger Canada 1960
Cost to develop market -
quality requirements
Lack of local die suppliers
undermined competitiveness
2 years lost equity2 years lost equity
$800K$800K
OutcomeOutcome
Losses stopped by Reynolds only after 8 years
Recouped finally investment
INDIVERS RESEARCH
Company sold at end of 3 years
25 European competitors
Ran out of money
and forced to sell

12
Case C : Troika GmbH

13
OpportunityOpportunity ProblemsProblems OptionsOptions
Outcoome
Joint Venture with Delta Group
UK, technical leader 3D CAD/CAM
Target German automobile sector
Founded 1986
Long lead time contact to sales
Lack of commitment from
partner Group
- CAD/CAM strategic review
- unwilling to invest
- Delta sold in MBO
New technology for Germany
Language & cultural
Closed down after 18 months
INDIVERS wrote off investment of $ 250,000INDIVERS wrote off investment of $ 250,000..
Underwrite losses for
two more years
Orderly shut down
File for bankruptcy to
force closure and end
losses
INDIVERS RESEARCH
Caught Between Two Horses:
Troika GmbH

14
MBA Students
Case D : North Atlantic Associates

15
Out Of Control:
North Atlantic Associates
OpportunityOpportunity ProblemsProblems Rapid LossesRapid Losses
Consulting Company
Focused On Needs of
SMEs
Cost Control Through
- tightly focused studies
- use of MBA students
Management Egos
Insufficient Marketing
Poor Cost Control
Part-time MBÁ students
Founded March 1981
- Offices Boston & A’dam
- Peak 25 employees
$ 100 thousand capital
Six months = $100 KSix months = $100 K
OutcomeOutcome
Liquidated January 1982 and investment written off
INDIVERS RESEARCH
No permanent staff
Partner, after 2 more failures, achieved major financial success

16
Case E : PW4000 Engine
$10 million a piece
$3 billion development cost
$70 billion market

17
Strategic Networks Jet Engines:
a $30 Billion Industry Annually
OEM’s
P&W
GE
RR
Clients
Military
Airlines
OEM’s
Overhaul shops
INDIVERS
Repair and component
manufacturing
Partners
NIB, MIP, ABN-AMRO
LIOF, Fansteel, RR
Advisors
NIVR, NLR, NIID
VGT, NAG
Min. of Econ. Affairs
Directors
Universities
Net. Embassy Wash.
INDIVERS RESEARCH

18
Partnering With Big Brother:
PW 4000
1% of the partnership costs $30 million
Financed with banks, venture capital and government
Indivers is exclusive manufacturer for the life of the project,
50 parts, out of 25,000 parts in an engine. A 40 year program.
Total 1% share was estimated at $500 million
Partnership shares
P&W 65.5% SA 2% Samsung 2%
MTU 12.5% Indivers 1% KHI 1%
MHI 10% TSA 3% NJM 3%
INDIVERS RESEARCH

19
PW 4000 Developments
19861986
• Financed with Netherlands government and banks
• $30 million participation for 1%
19891989
• Project delayed- engine sales discounts increased.
• Not able to add extra $ 10 M for development
19911991
• Crisis - 150 airlines in financial trouble. Several went bankrupt
• We negotiated from Risk Sharing Partner to become an exclusive Manufacturing Partner
19951995
• Banks and venture capital opt to be repaid 50% rather than 100%+ by the year 2000
19971997
• Sudden Boom in aircraft and engines
INDIVERS RESEARCH
20102010
• Production terminates, spare parts continue
2029
• Last engine retired - 43 years cycle
• Engine design for large aircraft
19751975

20
Dimensions of PW 4000 Project
Exceeded Realistic Projections
Time
Size
Risk
Time
Size Risk
Then Now
INDIVERS RESEARCH
$ 20 billion $ 70 billion

21
PW 4000:
Risk Takes Many Forms
INDIVERS RESEARCH
Project Delayed
Product life substantially increased
More engines
Longer life cycle
Time:
Size: Project now includes several “growth” engines
Current project: Expected revenues increased
but first five years 40% of projections
Substantial discounts to airlines 20-100%
_
+
+
+
+
+
_
_ _

22
U.S.A.----> China
People’s Republic of China
Case F : Robots

23
Case F : Inspection Robot QI- Tech, China
Product cost: $ 150,000
Investments : $ 3 million

24
Significant Problems
• Excess Staff (130 to do the work of 60) created resistance to change
• Currency Devaluation of 30%
• Resistance to change: . Marketing
. Manufacturing
. Technology development
• Poor product quality (fit & finish) limited export opportunities
• Unnecessarily costly supplier contracts “inherited” from Chinese partner
Losses of $500,000
INDIVERS RESEARCH
• Chinese language and culture

25
At The End Of Four Years
• Profit achieved in 1998
• Performance improved significantly
• Batch production achieved
• Quality significantly improved (IBM, BMW and P&W Chinese J.V. customers now
• Management revitalized - GM 33 years
• # 1 supplier of CMMs in China 1997-1998-1999 - stop exports
• New products being introduced and proprietary software licensed to overseas
competitors
• Continuing efforts to meet the quality of the best international competitors
• Increasing emphasis on achieving long term profitability
• Bid accepted for majority control by new stock exchange company
INDIVERS RESEARCH

26
Case G : MIG
Russian Fighter Jet- Coating

27
Betting On The Future:
Interturbine Paton J.V.
A joint venture between: Interturbine (90%) & Paton Institute Ukraine(10%)
Purpose of Joint Venture
• Development & commercialization of Soviet technology:
o Ceramic coatings for military, commercial engines and industrial turbines

28
Milestones Costs
1990 Technology identified in Moscow on “MIG”aircraft $ 0.100
Dec. 1993 Signing co-operation agreement with Ukraine
June 1994 Research equipment transferred to Holland $ 1M
Research teams established in Kiev & Holland $ 1M / annum
1995 Serious technical problems with Soviet equipment
1997 Develop and buy East German equipment $ 20M
1999 Operational $ 5M
2000 Cumulative losses + major order from G.E. $ 12M
Oct. 2000 Bid accepted from Sulzer, Switzerland for coating
company and 2 others
INDIVERS RESEARCH
Betting On The Future:
Interturbine Paton J.V.
Ceramic Coatings

29
Successes and failures of Bert Twaalfhoven's businesses
depending on proximity to cluster – 7 examples
Source: Dr. Bert W. M. Twaalfhoven
Successes partly due to
proximity to cluster
Failures partly due to missing
proximity to cluster
Company
Location/In
dustry Cluster Company
Location/
Industry
Missing
Cluster
Almax Italy/ Tools Presence of tool
companies in Brescia,
Bergamo, Milan
Troika Germany/
Software
Not near software
concentration; difficulties
with technology adjustment
Interturbine Singapore/
Aerospace
Focus of government
of Singapore on
aerospace
Elbar Turbo Holland/
Power
Stations
Missing technology close to
location; should have been
in Munich/Turin/Scotland
Interturbine
Logistics
Hamburg/Lo
gistics
Proximity of Airbus,
Lufthansa repair,
Airport
Waterwall Holland/
Furnace
Missing supplier network
that was present in British
Midlands/Nothern
Italy/Southern Germany
IT Air Foil Dallas/
Turbine
Parts
Proximity of American
Airlines, General
Dynamics (F16
Manufacturer)

30
Неудачи - основа долгосрочного успеха
Failure is the Basis for Success

31
New Entrepreneurship: 4 issues
• Entrepreneur: Job creator
• Risks of Entrepreneurship
• University as cradle for starters
• Advice to would-be entrepreneurs
Academia - Students - Governments

32
Employment US versus Europe
# of companies
# of employees
per company
> 500
10 - 500
<10
14,600
1,500,000
12,000,000
12,300
1,201,000
13,420,000
employment
26 million
41 million
25 million
USA Europe
Source: EFER, Europe’s 500
20 million if “one”companies included

33
3,000
15,000
60,000
500,000
13,400,000
Major new companies which
replace 1/4 of top companies
Winning performers 20% growth
Growers /venture capital
Dynamic Entrepreneurs
Small and medium enterprises
Dynamic Entrepreneurs Create
85% of All Jobs
Source: EFER, Europe’s 500

34
Large Business Sheds Labour
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
‘00 ‘01 ‘02
Announced job cuts, cumulative since 2000
Source: Challenger, Gray & Christmas/ / Financial Times

35
Unemployment in Europe high and increasing:
Urgent action needed to support start-up
growth!!!
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
2000 2001 2002 2003
Source: OECD Standardized Unemployment Rates
Spain
France
USA
Germany
Euro Area
• Average expected rate
of unemployment of
8,6% in the Euro Area
• Lisbon agenda out of
reach

36
Phoenix- Life from Death
ObservationsObservations :
• Average life of companies: 12 years
• Average life of large companies: 25 years
• Employment at large companies reducing rapidly; was 55%, now 40% (est.)
• The “bubble” of the 90’ies has accelerated life and death
• Unemployment too high
ConclusionConclusion :
• Entrepreneurial gap
What is neededWhat is needed :
• Replenishment of death by new life: 1 million start-ups per year
• An extra 2 million new entrepreneurs in next 5 years needed on top of the
replenishment to reduce unemployment
• Dynamic entrepreneurs (3% of total) to refurbish the top. Europe’s 500?
• Risk takers
• Students and professors to pursue entrepreneurship

37
Average Experience 200 Start- Ups
including 51 of B.Twaalfhoven
Profits
Losses
B
A
Losses
B
A
A
Months 12 24 36 48 60
Losses
stopped
Losses
recouped
Bert W.M. Twaalfhoven / EFER
E-mail: B.Twaalfhoven@Indivers.nlCopyright pending
Start-capital
-80%

38
Result of Starting
Depth of risks: 80% of start capital is lost
Length of risks: 30 months of losses (A)
60 months before recovery of loss (B)
In other words:
New start-ups and new sustained growers, an issue for the
next decades

39
Questions to European policymakers:
• Who takes risks?
• Why take risk?
• Is long term risk honored?
• What can Aunt Agatha contribute (tax incentives)
• Is failure an asset?
Risk Capital

40
Most risk capital is provided by family and friends
and not by banks, venture capitalists or business
angels
Total annual start capital needed: billion $
(1 million new companies x $10.000 (3.000 per job))
5 sources:
1) Private Equity and Venture Capital* 2.7 billion $
2) IPO window : dead since 2001 0
3) Banks : only loans with interest 0
4) Business Angels : estimate is
125.000 with pool of 10 billion but only invest 1.0 billion $
5) Family and Friends : largest source 6.3 billion $
* Venture Capital lost in 1999 and 2000 15 billion starters capital in USA and Europe (Venture One Corp,
September 2002)
Source: A.D.I. Report from EVCA June 20, 2002; The Green Paper on Entrepreneurship in Europe; Global
Entrepreneurship Monitor; Dr. Bert W. M. Twaalfhoven; EFER
In addition, the GEM survey found that informal support for
start-ups was five times that of domestic venture capital
support with venture capital support declining significantly.

41
Universities, Business Schools and
Incubators* as cradle for Starters
A Comparison:
* SER Incubator report January 2002 (CERAM Sophia-Antipolis)

42
University as Cradle for Starters + Jobs
# International Faculty in Start +Spin off
University students students Innovation/E’ship Companies
U.S.A. MIT 10.200 26% 33 5.000
U.S.A. Harvard Business 2.000 30% 28 50% of alumni
School own or share business
U.S.A. Stanford 720 28% 24 Bus. Start 1/3 of alumni
U.S.A. Fordham 2
Canada Laval 37.000 5
U.K. Cambridge* 16.500 17% 8 1.250
+65 practitioners
Greece Thessalonica 90.000 1% 0
Switzerland ETH Zurich/ 13.000 30% 5 200
St. Gallen
Finland Helsinki University 13.000 3% 4 300
of Technology*
Spain IESE 325 + 400 65% 6
Belgium Leuven 26.000 9% 4 45
France Grenoble 50.000 3% 5
Belgium Ghent 23.500 5% 5
Netherlands Delft 13.000 8% 5 200 in 10 years
Netherlands Erasmus* 9.500 10% 8 25% of students
in small business
Conclusion: Shortage of 500 faculties in Entrepreneurship
* Special Master Programs at these schools offer entrepreneurship. They have a higher proportion of international students and higher ratio of professors of
entrepreneurship to students.

43
1996 Employment (000s)
Source: Bank Boston, MIT
0 100 200 300 400
Mass.
California
North East
Midwest
South West
South East
Europe
North West
Latin America
Middle East
Asia
Canada
20 40 60 80 100
Mass.
California
North East
Midwest
South West
South East
Europe
North West
Latin America
Middle East
Asia
Canada 1996 Sales ($ billions)
Technical Universities
MIT Phenomenon 1960- 1996
4,000 Active Firms Started by MIT Graduates
Total = 1.1 Million Total = $ 232 Billion
0

44
Cambridge Phenomenon
Source: The Cambridge Phenomenon Revisited, part two
Biotechnology cluster only

46
• Study abroad: He went to England, Holland and Italy (1697)
• Build a team: He took 20 noble men, 35 volunteers and 70 soldiers
• Hire international specialists such as Cornelius Cruys – architect, engineer
and admiral - and Rastrolli, the architect
• Stock market: He studied the Amsterdam stock market.
• He lived shortly incognito in Zaandam
• He brought many products from Western Europe including Dutch ships
Imitate Peter the Great

47
Advice to Russian Entrepreneurs
Study: Cases of entrepreneurship
Meet entrepreneurs + visit incubators
Work in small companies
Study failure + success
Work + study European growth companies
Identify what you do not know + who knows
Opportunity: Distinguish ideas vs. opportunity
Entry barriers to start
Business plans in detail
Negative business plans to survive
Start: Board/advisors as sounding board
Outsource risks + share them
Compensate what you do not know
Invite family + friends - angels, only if they have ample resource
Build with teams and partnerships
BE REALISTIC AND OPTIMISTIC

48
Index1. Cover sheet with Russian text
2. Cover sheet with English text
3. Bert Twaalfhoven’s entrepreneurial experience of failures and successes
4. 51 companies were started by Bert Twaalfhoven from 1959 to 2001 around the world
5. Indivers focus on nices $
6. 17 failures - $55 million loss
7. 7 cases of failure
8. Case A: wasserettes
9. Getting taken to the cleaners: wasserettes
10. Case B: aluminium extruders
11. Squeezed out: aluminium extruders
12. Case C: Troika GmbH
13. Caught between two horses: Troika GmbH
14. Case D: North Atlantic Associates
15. Out of control: North Atlantic Associates
16. Case E: PW4000 engine
17. Strategic networks jet engines: a $30 billion industry annually
18. Partnering with big brother: PW4000
19. PW4000 developments
20. Dimensions of PW4000 project exeeded realistic projections
21. PW4000: risk takes many forms
22. Case F: Robots
23. Case F: Inspection robot QI-Tech, China
24. Significant problems
25. At the end of four years
26. Case G: MIG, Russian fighter jet – coating
27. Betting on the future: Interturbine Paton J.V.
28. Betting on the future: Interturbine Paton J.V.
29. Successes and failures of Bert Twaalfhoven’s businesses depending on proximity – 7 examples
30. Chinese saying “Failure is the basis for success”
31. New Entrepreneurship : 4 issues
32. Employment US versus Europe
33. Dynamic entrepreneurs create 85% of all jobs
34. Large business sheds labour
35. Unemployment in Europe high and increasing: Urgent action needed to support start-up growth
36. Phoenix – life from death
37. Average experience 200 start-ups including 51 of B. Twaalfhoven
38. Result of starting
39. Risk capital
40. Most risk capital is provided by family and friends and not by banks, venture capitalists or business angels
41. Universities, business schools and incubators as cradle for starters
42. University as cradle for starters + jobs
43. Technical universities, MIT phenomenon 1960 – 1996
44. Cambridge phenomenon
45. Peter the Great
46. Imitate Peter the Great
47. Advice to Russian entrepreneurs
48. Index
49. Address

49
Dr. Bert W.M. Twaalfhoven
EFER
Arena Office Park 1
Marathon 9H
1213 PE HILVERSUM / THE NETHERLANDS
Researcher : Mr. K. Freeman Ph.D.
Mrs. V. Kugi, Harvard Business School
phone: +31- 35 - 642 0709
fax: +31- 35 - 642 0609
e-mail: b.twaalfhoven@efer.nl

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