November 2004

Blast Off Experts

by Kathleen O'Toole

At their 25th reunion, the Class of '79 heard from four of its own entrepreneurs and about the School's Center for Entrepreneurial Studies. A third of Stanford MBA graduates eventually start a business while many others apply entrepreneurial approaches as they move up organizational ladders.

Shortly before his high school graduation, Bernard Beal tried to cut a deal with his parents: Let him use the money they had saved for his college education to buy a fast-food franchise. Eventually they caved, and by the time his classmates were beginning their post-college careers in the early seventies, he was making $26,800 a year.

"I had two motorcycles, my own apartment, and two girlfriends," the New Yorker recalled recently. "It didn't get any better than that. "But then one day I was held up and got shot, so I decided college wasn't such a bad idea."

In 1979, with a law degree and a Stanford MBA, Beal had to beg his Wall Street employer to pay him slightly more than he had made running his Jack in the Box. Life as an employee got steadily better, however, until his firm was bought out and Beal realized he would be starting over at the bottom of a new hierarchy.

He dusted off a business plan he had written in an MBA class on entrepreneurial endeavors, found 13 investors, and started M. R. Beal & Co. in 1988. For the past decade the firm has been ranked as one of the top 20 underwriters of municipal securities in the United States.

In the high-tech euphoria of the late nineties, a number of Business School graduates started companies right after or just before graduation as an expanding business press wrote stories that made some into overnight rock stars. These days, graduates tend to go to work for others, just as they did in Beal's Class of '79. A 1997 alumni/ae survey indicates, however, that Stanford is one of the most entrepreneurial of business schools: Fully one third of those responding said they eventually started a business, says Mary Burnham, staff codirector of the School's Center for Entrepreneurial Studies. At this year's milestone 25th reunion, the Class of '79 heard from four such members of their own class. Attendees also were updated on how the School's Center for Entrepreneurial Studies has vastly expanded the resources for those who want to try to start their own company.

Serendipity is often the mother of entrepreneurship, but preparation and networking are also involved, Beal and the other '79 entrepreneurs said.

Roy Whitfield, cofounder of the biotechnology company Incyte, for example, claimed he would have fled back to his native England after graduation if someone had told him he would wind up running a 10-employee company desperate to convince venture capitalists of its potential.

David Marquardt of August Capital, who has sat on the boards of two dozen startups since leaving Business School, said he happened into his career as a high-tech venture capitalist when a class speaker mentioned he was looking for a junior associate with an engineering background. "You can't discount the element of luck," he said.

Michele Klein, the founder of two venture-capital–backed semiconductor equipment companies, said she used contacts and every skill learned at the School to make her companies work. "Many people think that a startup is going to be fun because it’s ad hoc. It isn't fun, and if it is ad hoc, it won't be there very long," Klein told classmates. She emphasized the importance of developing business processes simultaneously with product prototypes because in the semiconductor industry, chipmakers are reluctant to buy equipment from—and venture capitalists are reluctant to invest in—startups until the founders can demonstrate that they have a truly enabling technology and concrete plans for delivering it. "I was able to use everything I got from being here and more in my semiconductor equipment companies, even when both were very small."

After playing Mr. Mom while his wife started a company, Whitfield said he was eager to get back into investment banking, so he took an assignment to sell the research arm of a St. Louis company. He failed so badly, he recalled, that he and a partner decided to buy the unit themselves in 1989 for $2 million. By 1997, the cofounder of Incyte was the Ernst & Young Northern California Entrepreneur of the Year for life sciences. By 2000, Incyte had become a 1,300-employee-worldwide company with a market capitalization of $8 billion.

Incyte's market value sagged, dropping to a twentieth of its peak within a couple years, he said. Asked if he got his money out at the peak, Whitfield, like the other entrepreneurs, said it is extremely difficult for an executive of a public company whose stock sales must be reported to take money out at the peak. It's also difficult to do so because company leaders believe in what they are doing.

"I'm happy with what I got out with, but my wife isn't," Whitfield joked. Klein, whose technology companies High Yield Technology and Boxer Cross were acquired by larger, public companies, said her husband, an investment banker, has advised her that "there are easier ways to make a buck than compulsive entrepreneurship." She and partner Peter Borden were happy when Applied Materials bought Boxer Cross "because the desert was getting pretty dry out there and a lot of companies didn't make it across" during the prolonged downturn. She still manages the unit, which she said feels great because "after all the hard work, our product's legacy continues. There is probably nothing an entrepreneur wants more."

Whitfield cautioned that "life science companies don’t start in garages" like the stereotypes of Hewlett-Packard and Apple suggest. Although Whitfield had a substantial ownership stake in Incyte, he said, "these companies generally start from a patent out of Stanford or something a professor has done. The [venture capitalists] from Sand Hill Road sweep in and get the rights, hiring in experienced management from the pharmaceutical or biotech industry."

Faculty who teach entrepreneurship do not define it per se as ownership of startups, professsor Garth Saloner told the class gathering. "We think of entrepreneurship as people who marshal and attract existing resources and put them together in novel ways to create new ventures."”

The ownership stake of venture capitalists in companies pursuing new technology may be one reason recent MBA students have shown more interest in starting or working for non-technical companies. "More people understand the game now, so it's harder to attract employees for venture-capital–backed companies," said Klein. "Everybody expects industry-average salaries plus stock and to take pretty much no risk at this point. On the other hand, as CEO I want the best people I can get. One of the lessons I learned from my first startup to my second is always hire the best you can and hire them early."

Today there is "lots of deal flow," said Marquardt of August Capital, a private equity firm he cofounded in 1995, "not like the peak in 1999 or 2000 but better quality. The late nineties era of free capital [was driven by] tourists, interlopers. They came and they've gone," he said. "The thing that gets me up in the morning is the opportunity to build companies with lasting value. I was involved in the very early days of Microsoft and Sun Microsystems, Adaptec and Linear Technology, all still great companies. It has been a wonderful career."

For Beal, his class project also has turned into long-lasting satisfaction. His is now the oldest continuously operating African American–owned investment bank in the country. The industry has become more volatile, more regulated, and more competitive, he said, all aspects he researched for his class project. "We grew the business to 280 people with offices around the country and in Africa. We brought it down to 35 people, now back up to 85, and we are probably going to take it to 125 people," he told his classmates at the June reunion. In short, he said, "I've had a lot of fun with the plan I developed here."

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Training for the Top

While the entrepreneurial panelists from the Class of '79 acquired some of their skills in Business School classes, not nearly as many MBA students focused on entrepreneurship then as now. Today, fully one quarter of the enrollments in second-year electives are in entrepreneurship-related courses, according to professor Garth Saloner, who traced the remarkable growth of the School's Center for Entrepreneurial Studies for the '79 class at their June reunion.

About 95 percent of Stanford MBA students take at least one entrepreneurial course, making entrepreneurship a core subject by election. Entrepreneurship classes may be the place where today's MBA students confront most directly the general manager's day-to-day conundrums, Saloner said. "A lot of the core courses tend to be functionally focused, but what happens in entrepreneurship is that you have companies of the size you can get your arms around."

The Center for Entrepreneurial Studies was created in 1996 under former Dean Michael Spence by faculty members Charles Holloway and H. Irving Grousbeck. Today, 10 tenure-line faculty teach in a curriculum of 21 courses, many alongside 12 entrepreneurial practitioner-teachers. Students are exposed to still other entrepreneurs, many of them alumni/ae, who serve as mentors or as panelists when student teams present their business plans. Students also run annual conferences on entrepreneurship and private equity investing that contribute to the entrepreneurial atmosphere. The center also helps support summer internships for some students working in cash-starved startups.

The center has produced 170 cases. When a case is presented in class, the protagonist frequently sits in the back of the room while the professor provides frameworks to help students draw lessons from it, Saloner said. "Then the person stands up, says, 'That was a nice theoretical discussion; let me tell you how it really was.' Or, 'We thought of that, but it was not practical for these reasons.'"

The model has proved "terrific for students and fabulous for us" faculty, Saloner said.