Our guest speaker in Midwest Entrepreneurs class yesterday was Larry Gerdes (of Atlanta-based Gerdes Huff Investments; a venture capital financing services firm).

The perspective on entrepreneurship discussed with the class by Mr. Gerdes can probably be best characterized as “more full spectrum” than any other seen or heard so far this semester. This breadth of perspective is in large part due to Mr. Gerdes’ extensive and broad experience—nearly 40 years of experience—both as an entrepreneur and working with other entrepreneurs.

Mr. Gerdes’ ongoing entrepreneurial odyssey begins in the tiny town of Walnut, IL; roughly two hours northeast of Monmouth. Gerdes grew up in Walnut on a farm. His parents were German immigrants to the United States who spoke little English in the home. He was the youngest of six siblings and the first member of his family to attend college; an “ag” (agricultural) major at the University of Illinois. There, Larry was a walk-on member of the basketball team and, against the wishes of his advisor, took an extraordinary number of business classes. After graduation from the University of Illinois, he earned an MBA (with Finance emphasis) from Indiana University. He then went to work for a bank in Peoria. And that is where his first significant exposure to entrepreneurship occurred.

While Gerdes was employed at the bank in Peoria in the mid 1970s, 1956 Monmouth College graduate Walter Huff—yes, the Huff behind the Huff Athletic Center here on the Monmouth College campus—came in looking for a $1 million loan to advance an entrepreneurial venture involving placing computers in hospitals for the purpose and collecting and automating patient information records. Gerdes arranged the loan—which was as large as the bank could possibly make—and subsequently assisted Huff in securing far larger loans from banks in Chicago and New York.

Gerdes left the bank and formally became a partner in Huff’s entrepreneurial business—HBO & Company—in the late 1970s. After moving the operations of HBO & Company to Atlanta and helping Huff expand the company into a leading medical software and related service provider, the two entrepreneurs took the firm public in 1981. As Gerdes informed the class yesterday, on the day the company went public, 30 of the firm’s 60-some employees “became millionaires” (and he and Huff found a $15 million check in their hands). Ten years later, the company was sold to medical industry giant McKesson for $12 billion. Yes, $12 billion…

Pretty good for the son of German immigrants who grew up on a farm in a tiny rural Illinois town… But there is much, much more to the ongoing entrepreneurial odyssey of Larry Gerdes.

After selling HBO & Company to McKesson, Gerdes and Walter Huff formed their current venture, Gerdes Huff Investments (GHI), in 1991. Shortly after the formation of GHI, the entrepreneurial partners made the initial investment in a venture that ultimately became Transcend Services, Inc.; a medical transcription services firm. Gerdes served as Transcend’s CEO and Chairman of the Board as he and Huff successfully grew the firm to become—yet again—an industry leader. Transcend was sold to larger industry rival Nuance for $300 million in 2012.

To summarize… Larry Gerdes’ entrepreneurial background includes partnering with Walter Huff ’56 to start, grow, and eventually sell-off two highly successful companies in the medical industry. It also includes the partners’ ongoing operations as venture capitalists (investors looking to invest funds into young entrepreneurial firms to facilitate growth and achievement of business potential). It was in this capacity—as a venture capitalist for more than 20 years—that Mr. Gerdes spoke to the Midwest Entrepreneurs class yesterday. The class was the most interactive of the semester and was essentially a question-and-answer session. Below, I recount select highlights of the fascinating “Q & A” session that transpired.

Q: Are venture capitalists aggressive like what we see on (reality TV) shows like Shark Tank?

A: Mr. Gerdes stated that he was not familiar with the show Shark Tank. The student asking the question then informed Gerdes that the show involves aspiring entrepreneurs competitively pitching their business ideas and plans to panels of famous—and very aggressive—“shark” investors (that have included Mark Cuban, comedian Jeff Foxworthy, and Kevin Harrington).

Knowing this, Gerdes explained that venture capitalism has changed significantly in the  last 5-10 years, with the type of investors found on Shark Tank coming—unfortunately in his opinion—to typify the industry. Gerdes explained that at GHI, the goal has always  been to “build companies and make dreams come true.” He stated that a typical arrangement with the entrepreneur is to take somewhere around a 20% equity stake in the firm with a view toward building it then selling off in around 5-7 years. This, according to Gerdes, was the common manner in which venture capitalism used to be practiced. However, he went on to inform the class that the “shark” type of investor portrayed on Shark Tank is the norm today. These investors, according to Gerdes, typically demand majority control of the fledgling firm and will invest only if they believe that the company can be built up and sold—for far higher amounts of money than GHI typically expects to realize—in 2-3 years. GHI, he told the class, continues to operate in the less “shark-like”/traditional manner.

Q: Did you bet on Walter Huff or his business plan?

A: Gerdes immediately responded that “it all depends on the manager’s vision and     leadership.” In other words, sound investments in entrepreneurial ventures should be based more on the person than the plan. Gerdes went on to say that, in the case of Walter Huff, he first listened to his business plan and then did an extensive search—of Peoria-area media and business contacts—into Huff’s background and experience. He found nothing but positives and was very impressed with the young entrepreneur’s vision and character; describing him as the “A-player” type of person that it takes to realize the full potential of great entrepreneurial visions.

Q: How do you know an “A-player” when you see one?

A: Mr. Gerdes referred back to what he had just stated about Walter Huff and then added that “A-players” are people that, “no matter what, always find a way to succeed” and have the rare ability to lead and truly inspire others to achieve their personal entrepreneurial vision and potential. Further, he noted—by way of a real example he has recently been involved with—that the “hardest thing” for the early-stage entrepreneur to do is to part ways with partners and employees that do not have what it takes to realize the full potential of the entrepreneurial vision. This hurdle is caused largely by the fact that the entrepreneur is usually slow to realize—but hit hard by the fact that—working with a venture capitalist means that the entrepreneur is now responsible to less emotionally involved people that know that tough decisions such as this—that entrepreneurs themselves have both never before considered and are likely to be very uncomfortable with—must be made. The point is that once the           entrepreneur brings in outside investors taking some level of equity in the business, they will be held fully and personally responsible to do whatever it takes—however initially uncomfortable—to realize the full potential of the venture. As Gerdes noted, it usually does take very long for the entrepreneur to realize and readily admit that these difficult decisions were absolutely necessary for the long-term good of the company.

Q: How many (entrepreneurial) proposals do you see each year?

A: Mr. Gerdes stated he typically sees about 2-3 proposals each week (which would thus translate to around 150 per year). Out of this, only about 20-30 entrepreneurial projects are “taken on” each year. Out of these, according to Gerdes, “maybe 1 of 7”—that means 3-5 of the projects taken on each year—eventually achieves objectives set by he and his partner Walter Huff ’56. Gerdes further stated that GHI typically realizes around a 20-25% return on investment each year.

What I personally have taken away most vividly from Larry Gerdes’ visit to Midwest Entrepreneurs class yesterday is that (1) we were very fortunate indeed to have someone with his level and breadth of entrepreneurial experience and expertise share their knowledge with us, and (2) that venture capitalism is—just as is being an entrepreneur—a highly risky undertaking. Further, what I heard yesterday underscores what I already knew about venture capitalism as a potential source of funding for entrepreneurs; it is not for everyone (and is most suitable for entrepreneurs working with very high-potential but risky ideas and ventures that, for a variety of reasons, make more traditional bank and other loans nearly impossible to secure).

In parting, I should mention that, in addition to being an entrepreneur and “traditional” venture capitalist,  Larry Gerdes also sits on the Boards of Monmouth College and the Chicago Mercantile Exchange (as well as several other companies and charities). He is also a member of the Dean’s Advisory Council for the Kelley School of Business at Indiana University.

Quite a man from quite humble Midwestern beginnings… I wonder if this is yet another story—among many we have heard in class this semester—of a strong work ethic gained via growing up in the Midwest leading, eventually, to entrepreneurial success. What do you think?

Thank you Mr. Gerdes for a wonderful and insightful learning experience!

See you all next week; Thursday to be exact (due to no class on Tuesday).

Regards,

Prof. Gabel