It’s a common refrain around Silicon Valley to disparage the role of MBA’s in entrepreneurship. We still have some collective scar tissue: the idea conjures up the hordes of dot-com hopefuls that descended on VC’s and angel investors with little more than a business plan. Even today, I routinely hear MBA’s advised to remove the degree from their resume when applying to startup jobs. We also cavalierly lampoon the “suits” that get brought in to run startups after the founders are fired by callous VC’s. I used to call them “executioners” because their attempts to “execute” the standard general management playbook in the startup context of extreme uncertainty usually led to disaster.
But this anti-MBA bias harms the entrepreneurship ecosystem and limits opportunities even for startups that don’t employ a single MBA.
I spend a lot of time thinking and writing about what a theory of entrepreneurship needs to do. One of my beliefs is that such a theory should be addressed to entrepreneurs and the people who hold them accountable. It’s this latter criteria that I think tends to get overlooked in most writing about entrepreneurs.
Who holds entrepreneurs accountable? One obvious answer is startup investors: angels and venture capitalists - many of whom have MBA’s. They have the ultimate responsibility in a venture-backed company of deciding whether to fire the founders and bring in “professional management.” I believe one of the reasons that this often goes badly is that the investors have nothing more than standard general management tools for evaluating the startup’s success. For example, when a startup is making more money month after month, I often hear VC’s say something to the effect of, “well, you can’t argue with success.” I hear similar things for pre-revenue startups that are on schedule, on time, and on budget - even though they are busy building something that nobody wants. (In fact, this crisis was at the heart of Steve Blank’s original impetus to develop customer development as an alternative set of milestones to use for startups.)
I also frequently see the reverse. General management is supposed to be orderly, “strategic” and mostly calm. I have seen founders replaced because their style seemed too chaotic, even though what’s really happening is that they are operating at startup speed. Pivots are disorienting, but necessary. Except when a startup is busy “pivoting” all the time, running around in circles. That's a waste of time. How do you tell the difference? General management doesn't have a good answer. As a result, founders get removed prematurely or even entirely exiled.
And there’s a worse fate, too. Far too many venture-backed companies correctly conclude that the founders are being counter-productive during their high-growth phase. But neither they nor the founders can think of anything for them to do: the MBA’s think they should be purged and the founders think they should be in charge. It rarely occurs to either party that the founders could be busy inventing the next disruptive product, but doing so in a non-disruptive way. As a result, many of these companies get caught by surprise when their optimization activities hit a plateau and competitors who have a true portfolio approach race past them. Facebook vs. Myspace, anyone?
These dynamics harm startups at all stages, because they pressure founders to engage in “success theatre” – trying to make themselves look successful by general management standards by focusing on vanity metrics, product milestones, and whiz-bang demos. In entrepreneur circles, this is goes by the innocuous-sounding term “board management” – but it is actually a terrible waste of energy and focus.
And it’s not just investors who are having trouble. The tech press loves to celebrate when startups get acquired, and founders make lots of money. But who do you think makes those acquisition decisions? In many cases, it’s MBA’s inside large companies. Far too many of these acquisitions go nowhere. Companies are acquired for hundreds of millions only to be worth tens of millions a few years later. I know plenty of people that have nothing but disdain for the “suits” who make these decisions. These entrepreneurs are only too happy to engage in success theatre, cash out, and move on to the next venture. What happens after they leave is of little concern. If it goes badly, we all know it’s the behemoth who will get the blame.
But that’s damaging, too. The core moral tenet of capitalism is that voluntary exchange is the ultimate test of whether an economic transaction is value creating or value destroying. Fraud, deception, and dishonesty undermine this moral calculus. Vanity metrics and success theater are in a moral grey area; they are masking the fact that some of our industry’s most “successful” ventures are actually value destroying. Even worse, this breeds tremendous mistrust.
Back in my IMVU days, I met with an investment banker who wanted to help us understand the M&A landscape. When we walked him through our business model and results, he explained that our options would be limited, because the main M&A community was feeling burned by companies like ours. He explained, “the big companies have bought a bunch companies with a client download or engagement business model, like Xfire and Neopets, and haven’t seen the returns they had hoped. Therefore, if you want to sell IMVU one day, you’ll need to abandon your business model, even though it’s generating a lot of revenue per customer. You’d be better off just selling ads.” There’s a lot wrong with statement, not the least of which is that “client download” is not a business model and that he was advocating that we abandon a real business model for an unprofitable one. But I believe he was representing his clients’ honest beliefs; they were confused about how to classify startups. When they get burned by a wave of acquisitions that turn out to be value destroying, the rest of us suffer the resulting lack of liquidity that is so important to the startup ecosystem.
It’s tempting to blame the MBA’s for all these mistakes. But I think the root cause of these mistakes is the fact that most MBA’s are not adequately educated about entrepreneurship. The problem afflicts general managers who try to innovate within big companies, too. In fact, I hope longtime readers will recognize these as the exact same mistakes that afflict us as entrepreneurs when we try to hold ourselves and our teams accountable. Are we making progress? Is what I’m working on creating value? What should I work on next? These are the enduring startup questions.
That’s why I am so excited about a new course that is debuting this year at Harvard Business School.
I’ll be honest. I get a lot of raised eyebrows here in Silicon Valley when people hear that I am an Entrepreneur in Residence at Harvard Business School – and not just because I continue to be physically resident here in San Francisco. Some people here are skeptical of spending time with MBA’s. One tweet read, “well, if HBS is investing in the lean startup we know it has jumped the shark.”
I’m glad to be able to do something about the divide between entrepreneurs and MBA's. As I’ve written before, academia has an important role to play in the new startup movement that’s afoot: documenting case studies, identifying emerging new practice, and doing original research to validate or refute theories. Harvard is, in some ways, a late entrant to this project; important work has taken place at Stanford in both the business and engineering schools; Berkeley's Haas School of Businesses was the place where Steve Blank first taught customer development.
Professor Tom Eisenmann is pioneering a novel approach at HBS, with a new class called Launching Technology Ventures:
Launching Technology Ventures uses case studies to examine lean startup practices. LTV focuses on the integration of marketing and engineering functions and emphasizes implementation rather than strategy formulation issues. The course does not examine financing options or the composition of founding teams. LTV draws heavily on the ideas of Eric Ries, Steve Blank, Marty Cagan and other practitioners.The class debuts in a few weeks. I’m excited to be joining him for one of the first sessions on January 26 (for those who don’t attend HBS, I’ll also be doing a public event at the Boston Lean Startup Circle). Prof. Eisenmann has just published a series of blog posts describing the class, and they include three new resources that will benefit entrepreneurs and MBA’s everywhere:
- A comprehensive reading list of the best sources on the new entrepreneurship: books, blogs, ebooks - everything. It’s the best such compilation I’ve ever seen. It should be considered the definitive (and mandatory) reading list for anyone who wants to understand modern entrepreneurship.
- A series of new business cases documenting Lean Startup principles in a variety of companies. Many will be familiar to those who attended sllconf: IMVU, Dropbox, Aardvark. But he’s also documented cases of these principles applied in a variety of other situations. For example, for years Steve Blank and I have been saying things like, “if you’re working on a cure for cancer, these rules don’t apply.” But it turns out that this is not exactly true, as a company called Predictive Biosciences discovered. It’s a phenomenal case.
- A compilation of tools and skills. The class also requires that the students explore – and master – some specific tools and techniques that entrepreneurs use every day. You cannot learn about entrepreneurship just at the blackboard. You have to get your hands dirty. This post outlines the skills that MBA’s who want to understand entrepreneurship have to master. For example, in my work with MBA’s who want to go into software entrepreneurship, I often encourage them to learn how to program. Managing a software company without knowing how to program is just as ridiculous as a factory manager who refuses to walk the factory floor. If you don’t understand how work is done, you cannot manage it. The same logic applies across a whole host of skills, which is why this compilation is so important - and why it'll be a long term project. (I'm hoping we'll get this hosted on a wiki soon.)
And for my friends in Silicon Valley, I hope you get excited about this, too. Imagine a world where MBA’s are actually helpful and not just “suits” that get in our way. Wouldn’t that be a cool hack?