Wednesday, February 26, 2014

Tonight We're Going to Party Like It's 1999

(originally published on March 27, 2011 on the Launching Tech Ventures course blog)

Are we in a new bubble, as Steve Blank recently wrote, or do current high valuations for early- and late-stage consumer Internet companies reflect sound fundamentals, as argued by Ben Horowitz?

From an academic's perspective, this is a difficult question, and I won't tackle it here. Instead, I'll share some data on the performance of Internet startups launched during in the late-1990s boom.

The table below compares the market value at the end of 2001—the trough of the valuation cycle that began in the mid-1990s—to total capital raised since inception (private and public) for all 2,121 U.S-based Internet companies that had ever got funding from VCs or public markets (see appendix below for my definitions and methods). The firms had an aggregate market value of $99 billion at the end of 2001, and they had raised $85 billion of capital. This doesn't imply an attractive return for someone who invested pro rata in all rounds, especially if you consider the time value of money and the fact that investors had to share part of the $99 billion with company founders. But it's not a wipe-out, either.

Of course, focusing on sector-level, aggregate results may mask serious problems with overinvestment in individual markets, for example, online pet supply retailing—where four rivals burned through over $500 million and all failed.  Also, it's important to note that returns from individual companies were very skewed. As the table below indicates, only 139 (7%) of the 2,121 Internet companies completed an IPO. Among these public companies, only 37 had a market value at the end of 2001 that exceed the total capital they had raised historically. A full 42% of the sector's $99 billion in yearend 2001 market value was accounted for by just five companies: Amazon, eBay, E*Trade, Yahoo!, and WebMD.

In summary, if the Internet sector had been subject to grossly excessive rates of entry and investment during the last bubble, as conventional wisdom holds, we would have expected a significant sector-level capital loss, rather than a shoulder shrug, "got-my-money-back" aggregate return. Conventional wisdom exaggerates the economic damage wrought by the late-1990s bubble. In considering the impact of valuation bubbles, it's important to separate stock market gains and losses—transfers of wealth between traders—from poor long-term returns on the capital invested directly in companies. It is also important not to conflate the high business failure rates that result from excessive rates of entry with the high failure rates we would normally expect to observe in new markets with “winners-take-most” potential and low entry barriers—like those targeted by many Internet companies. Given lottery-style payoffs, high rates of entry and failure are consistent with rational economic behavior.

As a new bubble emerges around social media startups, we should expect to see similar performance patterns.


Definitions. The table above includes all U.S.-based Internet companies that raised capital from professional investors prior to 2002. Internet companies were defined as firms that relied on the Web as their principal channel for delivering products or services to consumers or businesses. This definition excludes: 1) companies that earned most of their revenue by providing professional services, software, or hardware to Internet companies; 2) firms that provided Internet access or hosting services; and 3) the online units of established, brick-and-mortar corporations. Professional investors were defined as venture capital firms (including corporate venture funds) and institutions that purchased public securities. Firms funded exclusively by angels or by strategic investments from non-Internet companies were excluded, although strategic investments were included in estimates of total capital raised by VC-backed firms.

Valuations. Enterprise values were estimated as of December 31, 2001. Valuations for private Internet companies reflect only the market value of equity; few such firms had any debt. Enterprise values for public firms reflect the market value of their equity as of yearend 2001, plus the book value of any debt.

For active, private Internet companies that raised funds sometime during 2001, yearend 2001 equity market value was assumed to equal 98% of total capital raised historically, based on average post-round valuations for funding transactions completed during the second half of 2001. For active private firms that did not raise funds during 2001, yearend 2001 equity market value was assumed to equal 49% of total capital raised historically, based on analysis of performance for VC funds launched during 1999.

For merged firms, valuations reflect their contribution to the yearend 2001 market values of the companies that acquired them, rather than proceeds realized by the merged firms’ shareholders. 
For mergers involving two Internet companies, the acquired company’s value is included in the acquiring company’s yearend 2001 market capitalization. Capital raised by the acquired company is added to the capital raised by the acquiring firm. 

For acquisitions of Internet companies by non-Internet companies completed during 2001, yearend 2001 market value was assumed to equal announced merger transaction proceeds, which averaged 76% of total equity capital raised historically by the acquired companies. For such firms acquired prior to 2001, yearend 2001 market value was conservatively assumed to equal the total capital they raised historically.  

Source: Eisenmann, "Valuation bubbles and broadband deployment," Ch. 4 in The Broadband Explosion, edited by Austin & Bradley, HBS Press, 2005

Tuesday, February 25, 2014

No Regrets (Mostly): Reflections from HBS MBA '99 Entrepreneurs

(originally published on March 28, 2011 on the Launching Tech Ventures course blog)

MBA students who are debating whether to launch a startup upon graduation often ask me, "What are the career consequences if my business fails? What do MBAs who founded failed firms do now?  Do they regret their decision to launch a business right out of school?"

We have plenty of experience with student entrepreneurship at HBS. Over the past 15 years, an average of 3-4% of students in each class of 900 HBS MBAs have founded firms upon graduation, and another 4-5% have joined startups in non-founder roles. [author's note, 2/26/14: the comparable statistics for the HBS MBA Class of 2013 were 7% founding and 4% joining startups.]

At the dot com bubble's peak in 2000, 11% of our MBA class founded firms upon graduation. To determine whether we're in another bubble, I'll track this figure for the Class of 2011. Interest in entrepreneurship has been rising at HBS, but so far, it lags 1999/2000 levels.

To respond to my students' questions, I assembled some data on career outcomes for a sample of a dozen MBAs who founded firms upon graduation in 1999 or 2000. I also asked these alums whether they had any regrets about their decision to follow an entrepreneurial path. Most of the startups in my sample failed. A pattern of highly skewed outcomes—with just a few big winners, a modest fraction of firms that earned back their investment, and many failures—is just what we'd expect from any portfolio of VC-backed tech startups.

Specifically, in my sample, one firm is still a going concern; one was sold at a price that roughly yielded a breakeven return to early investors; two were sold at prices that returned only a small fraction of capital invested; and the rest were complete wipeouts. So, most of the alumni I contacted can comment from direct personal experience about the career consequences of startup failure.

What are these alums doing now? One is still CEO of the firm he cofounded upon graduation. Three are serial entrepreneurs who have been successful—so far—with a second startup. Three are partners in VC firms. Two are presidents of medium-sized businesses, having stepped in as professional managers to replace founders. One is at Boston Consulting Group. One is planning to launch another startup after holding a senior marketing job in a public Internet company. One is searching for a role in a new venture after a hiatus to start a family. As a group, the alums are in impressive positions. Those whose first startups failed do not seem to have suffered negative career consequences.

Do the alums regret their decisions to found firms upon graduation? Eight of nine who answered my email query said "no." Here's a sample of their comments:

  • No: There is no substitute for the sense of pride and accomplishment that comes with starting a business. 
  • No: But you need realism, an understanding of drawbacks and most importantly, to be passionately entrepreneurial. Starting a business is not for the timid. You need to be resilient, optimistic, able to deal with uncertainty, and strong-willed.
  • No: The lessons learned have applied to my subsequent businesses. Each has been less stressful, because the experience provides groundwork for doing a better job the next time.
  • No: Right after graduation is a great time to get start a business. You have amazing drive, focus and a smaller personal overhead. 
  • No: I got to participate in every aspect of my company as a true general manager. I never would have that opportunity in a large, established company.
  • No: The Internet boom was a unique moment and I could not pass up that opportunity.

One alum did voice regrets:
Yes. But I have no regrets about launching another business later. For me, it was just a matter of timing. Coming out of HBS, I had blind spots. I was an engineer undergrad, and even after HBS, a couple years with McKinsey or on Wall Street would have made a world of difference in developing structured thinking and hardcore analytics. I also needed more experience in areas like partner selection and more maturity in dealing with negotiations and employees. These blind spots introduced founder risk and reduced the likelihood of our success. The smart investment would have been to spend 2-5 years doing other stuff, getting paid while addressing blind spots.

More Advice from HBS MBA '99 Entrepreneurs

(originally published on March 28, 2011 on Launching Tech Ventures course blog)

I recently wrote some former students from the HBS MBA classes of 1999 and 2000, asking what advice they'd give to current students considering an entrepreneurial path. In a prior post, I shared their responses to the question, "Do you have any regrets about founding a firm upon graduation?" Below, I present their advice to current students.

In 2000, Rod Harl co-founded GiftwareExchange, an online B2B marketplace that connected gift stores with product suppliers. The business never gained traction, and after several career twists and turns, Rod is now President of Alene Candles, a business he and a partner purchased in 2008 that manufactures custom candles. Rod shared this advice:
Ample low-cost funding can compensate for founders’ weaknesses. In such periods I might endorse aggressively pursuing new businesses regardless of your experience or the quality of your idea. Playing musical chairs, you can make a lot of money. But outside those periods, entrepreneurship is about creating value for your customers before yourself.
HBS doesn't teach about handling failures, which represent a very large proportion of outcomes. Be aware of the personal risks associated with starting a business. Many of my classmates attached themselves so strongly to their startups that it cost them their life savings, marriages, or years of their professional lives. This should not dissuade a true entrepreneur, but it is rarely discussed. 
When Guy Miasnik co-founded AtHoc in 1999, the company provided a browser toolbar that presented alerts and updates from online content companies — akin to today's RSS. After some early pivots, AtHoc identified an attractive opportunity in emergency mass notification systems. Guy, still AtHoc's CEO, shared this advice about founding a firm:
The decision is not so much a matter of timing or financial upside. It is about the passion to create something new, to shape the world in ways you believe it should be, and to lead those around you — co-founders, investors, employees, customers, business partners, and media — to accept and adopt your vision. It is about incredibly positive thinking despite many rational negatives. It is about willingness to work extremely hard; to be relentless and persistent while still being flexible as you listen and learn.
As you go down the entrepreneurial path, you should build skills in two areas. The first is sales. Getting a customer to buy your product means you’ve learned how to gain trust, convey value, and extract commitment. The second is product management. 
As you embark on this path, don’t forget your family. Your partner’s buy-in to an entrepreneurial life style is crucial, and your family will help you keep things in perspective in good times and bad.
In 1999, Joel Silver launched, which provided incentive programs for sales reps. After Joel sold SalesDriver in 2001 to a larger marketing services firm, he served as President of Indigo Books & Music, a leading Canadian retail chain founded by other entrepreneurs in 1996. Joel offered this advice to current students:
Entrepreneurship is life changing. It is exhausting. Every decision is yours. There is no "down" time. It takes smarts and tenacity. It will test every relationship you have.
Be conservative and raise more money than you think you need. 
Know your customer cold. Customer insight — not being first with technology — will carry you to success. 
You will meet a lot of smart people who will give you advice. Take it. But don't assume anybody, despite their pedigree, knows your business better than you do. 
You will attract people who want to be part of a great team and work really hard. That is the best currency you have.
Dispense money from an eye dropper. Find the ugliest, cheapest space. Go to Goodwill for furniture. Use chipped coffee cups. You will gain investors’ respect. 
Just ship! Your first product needs to do one thing well, but it can suck in other ways. Version 2 will be good. Version 3 needs to be great

In 1999, Nikitas Koutoupes, co-founded, an online B2B marketplace for construction supplies which was absorbed through a series of mergers into Sword CTSpace. Nikitas, now a Managing Director at Insight Venture Partners, shared this advice: "Ambition and humility are not mutually exclusive. You don’t know what you don’t know, so hire well."

In 1999, Sasha Novakovich co-founded, which provided advice for consumers shopping for voice, internet access, and video services. GetConnected successfully morphed its business model from a destination site into a private label service for brick-and-mortar giants like BestBuy, then sold its technology to a rival after eight years in operation. Sasha, now planning her next move, said, "Make sure that you have the best possible founding team: people with relevant, non-overlapping skills and experiences, who you trust and respect. Make sure there is a clear reporting structure and division of responsibility. A great team can take an okay idea and turn it into something phenomenal. A weak team can kill a phenomenal opportunity."

Returning to Argentina after graduation in 1999, Alex Abad co-founded Certant, which provided website development services. The firm failed in the recession that followed, and Alex is now the founder of Advanced Organic Materials. He said, "Entrepreneurship is a long and sometimes painful process. To succeed you need to have a passion. This has been the difference between my two startups. The second company I started is a chemical manufacturing company. I am a Chemical Engineer. Now, I enjoy everything I do."

In 2000, Richard de Silva co-founded Siteburst, which hosted and distributed online video for content companies. The service failed after online video emerged more slowly than expected, and Richard is now a partner at Highland Capital. He offered the following advice to aspiring MBA entrepreneurs:  "It’s important to be honest with yourself. If you feel compelled to start a business because it seems fashionable or you have seen others having fun, you should join a young company or a fast-growing bigger company and develop functional expertise — until you feel compelled by a market need."

One former student, who asked to remain anonymous, launched a failed consumer Internet venture that was truly ten years ahead of its time: a successful variant of his idea exists today. He offered this advice to current MBAs debating whether to launch a firm upon graduation:
Recruiters like to see big names on your resume: Google, Facebook, Amazon, eBay. Getting a job at these companies is a lot easier while you are at HBS than it will be after you graduate. Today these companies are courting you. A year from now you may be explaining what you ‘learned’ from your failed startup experience. 
Back in the web 1.0 era, the goal was to raise a huge first round and spend it quickly, acquiring users via large portal deals and banner ads. In the web 2.0 era, product is marketing. Now, with low technology costs, the goal is to do a lean start-up and get breakout user traction before raising serious VC money. After all, great products sell themselves, right? Just look at foursquare and Twitter. It’s easy!
In fact, one could argue that it is harder today than it was back in 1999. Back then, you had a fighting chance to get to scale using your VC war chest. Today, you’re expected to have product pixie dust that magically spawns a million users through spontaneous virality based on your insanely great product. 
So what would I do if I were graduating this year? Taking these two points together, I would take a job at Facebook, and do my start-up on the side. At Facebook — or Twitter or Zynga or a similar company — you will learn about product management, and you will meet the developers and UX people you’ll need to know if your start-up takes off. You can build your business at night and on the weekends, and see if it gets traction. And if it doesn’t take off, so what? You work at Facebook. You’re a stud. When you are ready to move on, recruiters will be calling you, and magically you’re on the HR buy side again!
To be clear, I’m not saying don’t start your business. Life is short. I’m just saying you should think about doing it in this less risky way.
Finally, Craig Carroll co-founded eGrad, which provided on online channel for established brands to market goods and services to college graduates. After morphing eGrad's model and selling the company to a larger student marketing firm, Craig is now founder and CEO of Rezolve Group, which provides services that help families secure financial aid for college. Craig shared this advice:
As a founder, you don’t have much control over exit timing. You take on responsibilities to investors, employees, and clients. If things aren’t going well or you aren’t enjoying it, you just can’t just extricate yourself. Understand the ramifications for your personal and family life. 
There are real benefits to being entrepreneurial when you are young. It is easier to deal with the stresses while you still have energy and no children. Sure, you may be less experienced, but energy, optimism and a touch of naivety can more than make up for that.
There is no formal career path. You truly make your own destiny, but I have seen many friends struggle with the transition from a failed venture and the uncertainty of “What do I do next?” 
The best entrepreneurs have an indomitable spirit and are resilient in the face of adversity. Every new venture really is a rollercoaster of successes and setbacks that test your emotional fortitude. Aspiring entrepreneurs need to ask themselves if their personality and mental strength is really suited to this.
The HBS definition of entrepreneurship as “the pursuit of opportunities beyond resources currently controlled” is more than just a platitude. For me, it sums up perfectly what I do day-to-day. You need to be inventive, creative, opportunistic, persuasive because you rarely have enough resources. Embracing this definition helps me in my role.

Saturday, February 15, 2014

Startup Management 101: World's Longest Syllabus

I've compiled lists of blog posts, articles, and books that offer insights and practical advice about various startup functions, including product design, product management, business development, marketing, and sales. In addition, I've aggregated readings on lean startup logic and methods and key factors for success with the SaaS business model.

The catalyst for creating these lists was an MBA elective course, Launching Tech Ventures, which Flybridge Capital GP/HBS Senior Lecturer Jeff Bussgang and I co-teach. The course focuses on functional management challenges in early- and later-stage tech startups. We assign lots of readings by entrepreneurs and investors. Instead of a final exam, students complete a "learning-by-doing" project which applies one of the tools/techniques used by startup managers, for example, customer discovery interviews, A/B tests, or usability tests. The lists I've compiled contain terrific guidance for our students. Thanks to all who've contributed their insights!

Friday, January 3, 2014

Managing Startups: Best Blog Posts of 2013

Here's my compilation of 2013's best posts and books about managing startups. I assembled similar lists at the end of 201220112010 and 2009. Many thanks to all of the authors! Thanks as well to O'Rielly Media for publishing my 2012 compilation as a book -- and for joining me in donating all profits to Endeavor Global.

A special hat tip to William Mougayar, who launched this year to aggregate insights and advice from entrepreneurs and investors. In addition to the SUM website -- through which I found many posts listed below -- William publishes a terrific email newsletter that curates the week's best posts.

Apologies to authors whose work I've omitted. Please use comments below to suggest additional posts. 

Happy New Year!

Marketplace Models

2013 featured an unusually large number of insightful posts about management challenges with different tech startup business models, so I've divided those posts by model type, starting with marketplaces:
  • a16z GP/former OpenTable CEO Jeff Jordan discusses challenges confronting tech companies with a local focus and how successful "local heroes" manage to scale rapidly
  • Kleiner Perkins EiR and former senior Google and eBay exec Stephanie Tilenius looks at key factors for success with curated consumer marketplaces such as Uber and RelayRides
  • Author Sangeet Choudary also analyzes network mobilization challenges for services marketplaces, with focus on professional services.
  • MuckerLab's William Hsu looks at how marketplaces create and capture value
  • Julia Hanna explains my colleague Andrei Hagiu's research on the difference between multi-sided platforms and traditional retailers.
Models That Leverage Dominant Platforms
SaaS Models
Enterprise Software Models
  • David Barrett, founder/CEO of Expensify, examines new approaches that are disrupting sales and marketing in enterprise software
  • Upfront Ventures GP Mark Suster looks at the upside of pursuing early professional services revenue for an enterprise software company, then examines some of the risks of rely on such revenue
Online Retail Models
Other Business Model Issues
  • a16z GP and serial entrepreneur Chris Dixon discusses challenges/opportunities with tech hardware startups
  • Fred Destin asks when early monetization is important to a tech startup, using Snapchat as an example; Greylock's Josh Elman on the same issue
  • Ben Thompson (Stratechery blog), using Apple as an case study, concludes that Clay Christensen's theory of low-end disruption does not apply in consumer markets
  • Entreprenuer/investor/advisor Brian Balfour on how the emergence of new distribution channels opens ecosystem niches for new ventures
  • In "The Anatomy of an Online Ad," Sim Simeonov describes, step by step, the role of different service providers in the delivery and tracking of online ads 
Early-Stage Business Model Validation/Customer Development/Lean Startup Approaches/User-Centered Design Research
Marketing Post Product-Market Fit: Demand Generation and Optimization
PR Strategy
Sales and Sales Management
Product Design

Product Management

Business Development
Funding Issues

Founding Process
Company Culture, Organizational Structure and Other HR Issues
Recruiting: General Issues
Recruiting Engineers

There's lots of great content online about how to recruit developers, so I've given this topic its own category
Board Management
Startup Mentors
Startup Failure
Exiting By Selling Your Company
The Startup Mindset and Coping with Startup Pressures
Books for First-Time Entrepreneurs, Covering the Startup Process End-to-End
  • MIT's Bill Aulet published Disciplined Entrepreneurship, a step-by-step guide for 1st-time founders
  • Matt Blumberg published Startup CEO, a book which offers advice for 1st-time  CEOs of tech startups
Advice for MBAs and Others Aspiring to Join Tech Startups

Monday, October 14, 2013

Critique of PM101 Market Requirements Documents

Students in the Harvard Business School MBA elective course Product Management 101 (PM101) submitted Market Requirements Documents (MRDs) for their software applications last week. I thought a summary of the strengths and weaknesses of this work might be helpful not only to the students, but also to new PMs and first-time founders who lack experience evaluating market requirements.

I've described PM101 in an earlier post. In brief, we use a learning-by-doing approach to teach students who've never worked as product managers the basics of that role (course description here; syllabus here). Students specify functionality for a software application, then oversee its development and launch. This year, two-thirds of PM101 students are working on their own startup ideas; the balance are building apps that will be used only by the HBS community.

Product professionals and entrepreneurs who embrace agile development methods might dismiss the notion of writing an MRD — even a light-weight version like the one we assign — as "old school." We do bring seasoned PMs to class to explain agile's merits, but we also believe that students' understanding of agile is enhanced by experiencing waterfall techniques first-hand. Also, our students spend only one day per week on their project, which makes it impractical for them to serve as product owner on an agile team. Finally, requiring written MRDs and PRDs makes it easier for instructors and over fifty volunteer mentors from the Boston Product Management Association to provide feedback.

So, what patterns emerge from the MRDs?

  • Problem vs. Solution Focus. Students were asked to prove the existence of a critical mass of potential customers with strong unmet needs that might be satisfied through a new application or online service. In their MRDs, most students avoided premature lock-in on a single, specific solution. They followed the design discipline of first exploring customer needs in depth, thus improving the odds of generating differentiated solutions.
  • Research Methods. Only a modest fraction of the MRDs provided detailed descriptions of research methods employed. I accept blame for this, since I didn't include a research methods section in the MRD outline. But MRD authors should be aware that it is difficult for readers to assess the validity of claims about customer needs without understanding the quality of data behind those claims.
  • Customer Interviews. Most students did a good job of summarizing what they learned from one-on-one interviews with prospective users. It's more difficult to discern whether the students followed interviewing best practices described in assigned readings, since only a handful submitted interview guides/protocols along with their MRDs. Next year, we'll insist that such guides be included in a research methods appendix to the MRD.
  • Focus Groups. Only one student conducted a focus group. This research technique has well-known limitations, but focus groups can generate powerful insights with products that have strong emotional, status, or lifestyle associations. With such products, a comment from one focus group participant can trigger responses from others that might not be forthcoming in a one-on-one interview. 
  • Surveys. In class, we emphasize that: 1) surveys should be used to explore associations between prospective customers' beliefs and behaviors, and to document the prevalence of unmet needs in a population; and 2) these objectives can only met through surveys after a researcher has gained a deep understanding of customer needs through interviews, ethnography, and other qualitative methods. This message — along with a strong admonition to avoid biased (e.g., "leading the witness") survey questions — evidently hit the mark, because most of the students' surveys were reasonably well designed. However, not many surveys were systematic about including questions that measured both the strength of respondents' needs (i.e., how important is attribute X to you?) and perceptions of the degree to which existing solutions satisfy those needs. This combination of questions can be very helpful in identifying customers segments with distinct needs, and in estimating the size of those segments.
  • Mockups/Prototypes. Only a few students showed wireframes or other low-fidelity prototypes to interviewees. Many students thus forfeited opportunities to get prospective users' reactions to mockups of potential solutions and thereby gain a richer understanding of their needs. Since students had only four weeks to complete their MRDs, and since we haven't yet covered UX design basics in class, this omission is understandable — and one that we'll address next year.
  • Concierge MVPs. Again, time constraints probably made it difficult for students to conduct "concierge MVP" tests, through which small numbers of customers are served via manual, makeshift methods. Only one team conducted such a test, evaluating their idea for soliciting feedback on job candidates' practice interviews. Many other PM101 projects lend themselves to concierge MVP tests, and we've encouraged students to attempt them in coming weeks.
  • Personas and Use Cases. Students were exposed to personas in class; they made good use of them in their MRDs, especially in identifying use cases for their application.
  • Competitor Research. Not surprisingly, given MBAs' penchant for analysis, most MRDs included strong sections describing the strengths and limitations of existing solutions. With rare exceptions, however, students did not conduct usability research with rival products, missing a learning opportunity.
  • Market Size Estimation. Likewise, most students did a good job gauging the size of the potential market for their application. There was some confusion about whether this exercise should end with an estimate of the Total Addressable Market (TAM) or with a rough sales forecast reflecting projected share of the TAM. Obviously, projecting market share so early in the product development process entails lots of guesswork. But even an informed guess can provide helpful guidance on whether the envisioned product can plausibly generated enough sales to warrant further development. Only one student analyzed the magnitude of switching costs that would be incurred by customers adopting a new solution. Such analysis can significantly improve the quality of market share projections.
Students will submit their Product Requirement Documents in early December. I'll report back then on lessons from that exercise and also on what we've learned about the design and delivery of a learning-by-doing course like PM101.

Thursday, September 26, 2013

Advice for MBAs Seeking Startup Jobs

This post was originally published at LinkedIn.

Searching for a job with a startup can be frustrating and confusing for MBAs, especially when compared with the “tried-and-true” process of recruiting with big companies who visit campus. In turn, MBAs who seek employment with startups aggravate entrepreneurs by making an alarming array of mistakes. The good news: it isn’t difficult to avoid these errors.
Below, I report findings from focus groups with 26 HBS MBA alumni running venture capital-backed startups in San Francisco and New York City. My colleagues from the HBS Rock Center for Entrepreneurship and I asked the founders what current students could do to better position themselves to get jobs in their startups. It’s fair to ask whether the interview findings apply in other geographies and entrepreneurial settings. I believe that they do.
Problem: Poor First Impressions. Startups usually rely on employees’ personal networks to source candidates, rather than online job sites or campus career services offices. To improve the odds that they’ll be referred when a startup is hiring, MBAs cast a wide net, reaching out to as many people as possible who can influence recruiting decisions.
Aggressive networking is crucial with a startup job search, but you can spread yourself too thinly. Overextended, you’ll lack the time to prepare properly for initial meetings, and as a result, you may make a poor first impression. Startup CEOs complain about MBAs who ask them for information that is readily available from a Google search, such as “Can you tell me about your business model?” or “How are you funded?” Founders of consumer-facing startups will be disappointed if you’ve never used their products. They’ll be annoyed if you haven’t checked their website to determine whether positions are open in the function you’ve targeted. Finally, entrepreneurs will lose interest quickly if you aren’t up to speed on sector trends—say, if you profess interest in social networking platforms but lack an informed response to a question like, “What do you think of Facebook’s changes to Instagram’s terms of service?”
Solution: Screen Targets, Focus Your “Ask,” and Do Your Homework! You’ll have more time to prepare for initial meetings if you waste less time pursuing jobs with the wrong startups. I won’t describe approaches for screening startups here, but venture capitalists David Beisel and Jeff Bussgang and serial entrepreneur Simeon Simeonov have written great posts on that topic.
Having narrowed your target set, make sure you approach people in ways that capture their attention and demonstrate networking savvy, for example, crafting requests for introductions that are readily forwarded, as VC Charlie O’Donnell recommends. If you ask for a meeting via email, make sure that your message is short and presents a specific objective, as suggested by James Clear. Busy founders may deflect a vague request, such as “Can we have coffee to chat about careers in your space?” They are more likely to agree to meet if you say, “I understand that you are building a BD team. I’d love to be part of it.” Asking for a short meeting—say, 10 minutes—is also more likely to succeed, and short meetings can stretch into long ones if you engage your audience.
Problem: Not Understanding Startups. In positioning themselves for startup jobs, MBAs often fail to convey that they understand what’s required of startup employees. This raises doubts about whether candidates have been thoughtful about their motivations for seeking a startup job. Perhaps they are simply following the MBA herd chasing fashionable startup careers? Every hire on a small team is a high stakes event, so founders need to ensure that new employees bring:
  • Tolerance for ambiguity and for lack of structure, in particular, around roles and career paths. The founder of an early-stage startup may need to tell a candidate, “You could be in this role for two weeks or two years. We just can’t say.” Employees must be flexible and be willing to pitch in to do whatever needs to be done.
  • Independence and a “can do/will do” attitude. Early-stage startups often lack processes and routines. In contrast to business-as-usual in big corporations, nothing happens in startups unless someone makes it happen. A founder needs to surround herself with team members who can identify problems and take charge of fixing them, without requiring lots of direction.
  • Resilience and passion. Startups encounter inevitable bumps as they try to build something new in the face of severe resource constraints. Rolling with the punches is easier for employees who are passionate about a startup’s mission or about the space in which it operates.
Solution: Know Thyself and Show You “Get It.” Reflecting on your motivations and aspirations is a crucial first step for any job search, but it is especially important with startups because founders focus so much on candidates’ attitudes. Your MBA program’s career services office can coach you through a self-assessment process that helps gauge your fit with a startup career.
If you lack prior startup experience, you can still communicate that you understand startup priorities in many ways. A creative approach when initiating contact with a startup can project passion. My former student Jeanne Hwang did this by launching a clever social media campaign to get the attention of managers at Pinterest. Likewise, a candidate seeking a community manager position at Ridejoy created a boisterous video that captured her enthusiasm and qualifications.
Problem: Not Showing How You’ll Add Value. MBAs routinely fail to demonstrate how they can immediately add value in a startup. They emphasize the same generic strengths that they’d cite in an interview with a consulting firm, for example, “I’m smart, analytical, hard working, and a superb team player. Point me at any problem and I’ll deliver great results.” From a founder, this is likely to engender the response: “That’s cool, but what can you actually DO?” As one entrepreneur said, “I do value an MBAs’ analytical skills and their ability to troubleshoot strategy problems. But focusing too much of the recruiting conversation on strategy or asking for a strategy/biz dev job in a 5-10 person startup shows a lack of understanding of our most urgent priorities.”
Founders also complained that MBAs show little interest in or ability for sales roles. One entrepreneur said, “In a startup, you are selling ALL of the time: to customers, partners, prospective employees, and investors. A startup does better if more of its employees are able and willing to sell. MBAs’ classroom training encourages a dispassionate, analytical perspective. That’s not what sales is about, so MBAs need to unlearn certain attitudes to succeed in startups.”
Solution: Bring a Solution! Charlie O’Donnell suggests that you reverse engineer the requirements for the startup job you are pursuing, and then systematically address any gaps in your skills inventory. For example, business development managers are expected to have a deep understanding of ecosystem trends and participants. Blogging is one way to show that you have such knowledge. Similarly, as I’ve argued elsewhere, MBAs seeking product management jobs can significantly enhance their marketability by learning to code. Doing such work for academic credit is a perfect way to kill two birds with one stone: building job-relevant skills and perspective while completing your MBA.
Founders are in strong agreement about the best way for candidates to make a strong impression: they should propose a bold idea for improving performance —one that is germane to the position they are seeking. For a biz dev role, for example, this might entail making a case for a specific partnership, along with an assessment of pros and cons for each side and potential deal terms. A PM candidate might offer a proposal for how the startup could reorganize its site navigation, based on analysis of competitors’ products.
You may be thinking, “Isn’t my proposal likely to be off target?” Indeed, founders said that 90% of the time, such proposals had already been considered and rejected, or were fatally flawed in some way. But they maintained that receiving the pitch demonstrated that the candidate was a self-starter; showed that she could sell; gave a sense for what the candidate knew and could do; and crucially, showed how she reacted on the fly when told that her idea wouldn’t work. Did the candidate listen well, and adapt the plan in intelligent ways? Did he become too argumentative and defensive? Was he too quick to abandon his idea? Balancing bold and creative ideas with a willingness to listen demonstrates a killer combination of passion, confidence, and humility.
Problem: Unreasonable Expectations. MBAs make a couple of other mistakes when seeking startup jobs, which can attributed to flawed expectations about entrepreneurial careers and startup recruiting.
First, they worry too much about not having a full-time job by April or May as they are completing their degree. Startups can’t plan their manpower needs with precision, so they tend to commit to hiring someone at most a couple of months before that individual begins work. If a startup wants you, they typically want you NOW. That means you’ll probably spend the final weeks of your MBA program hunting for a job, while your peers who accepted corporate or consulting gigs months ago are planning summer vacations. It can be depressing to tell them, “I’m still looking for a job.” But these are the natural rhythms of the long startup recruiting season, which starts early in the school year with lots of networking to build relationships and credibility and may not end until after graduation. If you understand and accept this, you’ll feel less pressure.
Second, MBAs often expect too much seniority and have unrealistic expectations about becoming a general manager quickly—especially in later stage startups. For example, a founder in a startup with 300 employees complained about a candidate who wanted to know, “How much exposure will I get to the board?” Founders acknowledged that some degree of ego and impatience are valuable traits in employees—after all, pursuing risky opportunity when resources are scarce does require self-confidence. But the best candidates are self aware, able to modulate their egos, and always focused on how they can contribute, rather than what they can extract from a new job.