Categorized | Business

Have You Lost the Urge To Start Your Own Firm?

Posted on 18 November 2009

What a difference a year makes. At business schools nowadays, b-to b and b-to-c stand for “back to banking” and “back to consulting.”

With the dry-up of funding, fewer students are thinking about starting businesses, particularly dot-com ventures. At Harvard Business School, the decline in student entrepreneurs has been steep. About 40 teams entered the school’s annual business-plan contest in 2008, compared to 60 in 2007, even though the top three winners receive cash prizes.

About 12 of the b-school’s teams received venture-capital funding in 2007, compared to 33 teams in 2006. School officials aren’t sure how many of this year’s 41 entrants received VC funding, but expect the number to be low.

“We’ll probably be able to count them on one or two hands,” says Thomas Eisenmann, a Harvard Business School assistant professor.

Two Risk-Takers

The decline in entrepreneurial activity at Harvard has made rarities out of students bold enough to risk writing a plan and seeking funding for a business. Paula Pontes and Samantha Ettus, recent Harvard M.B.A. graduates, say they stuck out like sore thumbs when promoting their new business idea on campus. Called Magic Ribbon, it would sell a software-based solution aimed at improving employee retention rates by enhancing communication.

“Last year we might have been a dime-a-dozen,” says Ms. Ettus. “This year it just wasn’t the case.”

Ms. Pontes and Ms. Ettus tried to use their “novelty status” to their advantage when seeking funding for their business. Being among the few “enabled us to get a lot of attention from the venture community, as well as the people on campus,” says Ms. Ettus.

Much of the change in attitude toward starting companies has been due to the stock market’s erratic performance in 2008, says Ms. Pontes. “Business-school students in general are just more risk averse,” she says. “When the market was very high and it was very easy to get funding for any kind of idea, everyone had a business plan in their back pocket.” Adds Ms. Ettus, “Last year starting a business was the cool thing to do…this year it’s, ‘Oh, that’s risky’.”

Other Harvard students noticed a drop off in entrepreneurial activity. In 2000, if three students were sitting together at lunch, “that meant they were working on a business plan,” says James Ratcliffe, a 2001 M.B.A. graduate now with Narad Networks, a 135-employee start-up in Wesford, Mass. “It’s definitely wasn’t that sort of frenzied atmosphere.”

The class of 2002 seems to be even more risk-averse than the class of 2001, says Mr. Ratcliffe. Whereas his class gravitated toward consulting careers, new second-year students seem more interested in banking, he says.

Packed Conference

Despite the new risk-averse sentiment, industry leaders speaking at Harvard’s annual Cyberposium high-tech conference for M.B.A.s encouraged fledgling entrepreneurs not to give up their dreams. As long as their businesses solve problems and their plans make sense and show how and when cash flow will be generated, capital is still available.

Students from 30 business schools world-wide attended the event and crowded into a career fair afterwards. Technology giants with booths at the event included Yahoo Inc., Microsoft Corp., Dell Computer Corp., Inktomi Corp., Intuit Inc., RealNetworks Inc., AOL Time Warner Inc., Akamai Technologies Inc., Cisco Systems Inc. and the Extreme Blue program created by International Business Machines Corp.

Yahoo drew the largest crowds, attracting students seeking positions in business development, brand marketing, graphical user interface and administration. The big turnout at Yahoo indicates that the dot-com crash is encouraging students to find new ways to use the Internet, not desert it entirely, says Mr. Eisenmann. While launching a dot-com isn’t a popular option for M.B.A.s, neither is working for firms with 40 or fewer employees, Mr. Eisenmann adds.

New View of the Internet

Still, keynote speaker Tim Koogle, former president and chief executive officer of Yahoo, encouraged entrepreneurs to hold on to their dreams. Now that the Internet is going from “experimental and quirky” to “essential for consumers and businesses,” more opportunities exist for start-ups that focus on finding solutions, he says.

Mr. Koogle described the recent slowdown in the U.S. economy as an “economic pothole” and predicted the number of Internet users world-wide will grow from to 500 million in 2002 from 300 million in 2001 — providing more opportunities for well-conceived startups.

“The Internet is becoming essential,” says Mr. Koogle, now vice chairman and director of Yahoo. “Businesses world-wide are adopting it as their infrastructure…this is a very interesting breakpoint we’re crossing over, because this is when real value gets built.”

Funding is available for start-ups that provide solutions for businesses and consumers using the Internet for their infrastructure, says Mr. Koogle. “The capital markets are being a little more discretionary right now,” he says. “You need an idea with some promise of a decent business model that gets you to cash-flow-positive in some rational period of time. That combination is actually being rewarded for new business ideas right now.”

Ms. Ettus and Ms. Pontes agree that investors want to see solid business plans that spell out solutions to specific problems instead of broad, grandiose business plans presented by early dot-com entrepreneurs. “VC and angel investors really want to hear that you’re solving a problem,” says Ms. Ettus. “That seems to be the universal sentiment — that you’re solving a problem.”

Ultimately, the funding climate proved too tough for their idea and it’s been tabled until conditions improve. “We still believe in the product, but it looked as if there would be an enormous battle to raise funding,” says Ms. Ettus. “This isn’t to say that in two years we won’t be back.”

Different Approaches

“There’s no diminishment in interest in the New Economy…[students] know their jobs are going to involve a wired world: networked commerce, communication, content and all that jazz,” says Mr. Eisenmann.”They’re just going to be doing it in a different kind of place than the [prototypical] five kids in a garage.”

Moreover, although entrepreneurial interest has declined at Harvard, it’s still higher than in pre-Internet days, says Michael Roberts, the school’s executive director of entrepreneurial studies. “The pendulum is swinging, but it hasn’t fallen to levels of the pre-Internet bubble,” he says.

The Internet explosion was an aberration, but for students to flock to the market with business plans was rational behavior because competition was weak and starting a dot-com was easy. “Everybody was starting from scratch, and therefore, our M.B.A. students weren’t at the kind of competitive disadvantage they would be in an established industry,” says Mr. Roberts. “The kind of rush you saw, in a large measure, was a rational response to that.”

Nowadays, entrepreneurial-minded students are applying ideas to other sectors, though not in the same numbers, says Mr. Roberts. These include health-care services, wireless applications and social enterprises, such as education.

What’s more, international students are using their skills to start international businesses. “Every year more international students, working along with classmates from the U.S., focus on overseas opportunities,” says Mr. Roberts.

Trends at Other B-Schools

Other top b-schools also report declines in entrepreneurial activity. At Northwestern University’s Kellogg School of Management, fewer students are interested in starting companies because they have less access to funding, fewer opportunities and less profit opportunity, says Barry Merkin, clinical professor at the school. “Our students seem to follow society,” he says. “Fewer people are doing it.”

The Massachusetts Institute of Technology’s Sloan School of Management is an exception. Entrepreneurial activity there is alive and well, even when compared to the dot-com craze of 1999 and 2000, say school officials.

“We haven’t seen a significant drop-off,” says Kenneth P. Morse, managing director of the M.I.T. Entrepreneurship Center. At Sloan, students are encouraged to take a long-term view of their prospects. Consequently, even during the dot-com craze, Sloan students didn’t launch web sites, says Mr. Morse.

“Most of our students didn’t get caught up in the dot-com craze,” he says. “We always knew that the laws of gravity hadn’t been repealed, and we’ve always insisted that student teams needed to quantify the value proposition and have a sustainable competitive advantage.”

The school’s annual business plan competition is a good way to measure entrepreneurial interest. Called the “$50K” competition, it awards a total of $50,000 and a lot of exposure to the top three teams. This year, 135 teams entered the well-publicized derby, down from the 206 that entered in 2000. However, enrollment in entrepreneurship classes remains high, says Mr. Morse.

Sloan has a strong focus on technology, and students have been developing innovative technologies ahead of the competition, says Ms. Morse. He describes it as “serious technology” compared to what he calls dot-com b-to-b and b-to-c “BS.”

“Two years ago [our students] were thinking about optical networking, and now everyone is talking about it,” says Mr. Morse. “Three years ago [our students] were talking about the confluence of the human-genome data and the new technologies in bio-informatics and how to pull those together for new drug discovery.”

Currently, Sloan students are exploring “last mile” fiber optics and ways to provide wide-band Internet access in the home, which could solve drawbacks to DSL, says Mr. Morse.

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