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The Path to Creating A Startup

Community Spaces Are Designed to Provide an Inspiring and Refreshing Environment

by Louise Lee

About 50 years ago, a Stanford MBA student named Philip Knight wrote a class paper pondering the question "Can Japanese Sports Shoes Do to German Sports Shoes What Japanese Cameras Did to German Cameras?" The idea described in the paper eventually became Nike Inc. His success building that company enabled Knight, who earned his MBA in 1962, to become the lead donor for the Knight Management Center that bears his name.

 

Phil Knight and Dean Emeritus Robert Joss discuss
the impact of Knight's GSB experience on the formation of Nike.

 

Today, nearly every MBA and Sloan Master's Program student studies entrepreneurship in some form. In addition to exploring ideas for new ventures through a wide variety of entrepreneurship electives, groups of students from across Stanford huddle repeatedly in teams to debate, challenge, and iterate on ideas for new products, services, and businesses. Many pursue entrepreneurial opportunities upon graduation or later in their careers. The objective of the entrepreneurial curriculum is to help students develop an entrepreneurial mindset and an understanding of the issues involved in starting and scaling new businesses. The courses combine timely case studies with experiential learning and often are delivered by a combination of faculty and practitioners with stellar track records as entrepreneurs and early stage investors.

The Knight Management Center, with dozens of small technology-equipped study rooms scattered throughout the complex, is designed and laid out to help them experiment.

"With two LCD screens on the wall and laptop displays around a conference table, we can easily share information and tie in our adjunct members via a Skype video conference," says Steffen Bartschat, Sloan '11, the leader of Team Peakbusters, one of last spring's student start-up teams. Members of his group liked that they could drop into a room virtually any time to brainstorm, perhaps spotting a passerby through the large windows for a serendipitous collaboration.

The school's MBA curriculum today incorporates interdisciplinary and team learning — two important factors for many growing businesses.

The notion of entrepreneurship springing from Stanford classrooms and labs dates back to the 1930s when Frederick Terman, a professor who later became a legendary dean of the Stanford School of Engineering and university provost, lured his former students, Bill Hewlett and Dave Packard, back from the East Coast and helped them find customers for what became Hewlett-Packard's first product, an audio-oscillator. But through the 1950s and '60s, the very idea of forming a company was an unusual notion at most academic business schools. The venture capital industry didn't exist, and the MBA credential was seen by many as a stepping stone to a career in a large corporation or at a Wall Street or consulting firm. "There weren't any heroes in entrepreneurship in those days," says Steven C. Brandt, MBA '65, who taught about entrepreneurship at the GSB from 1971 to 1992.

 

It was Frank K. Shallenberger, a 1935 Stanford mechanical engineering graduate, who began to change attitudes. In the late 1950s, the professor of industrial management at the business school started promoting the idea that big business wasn't the only career option and began teaching about managing small businesses. Shallenberger's course initially ran as a series of get-togethers at his house. When, as he told a reporter in 1969, "the beer bill became too large," he asked the school to formalize the course Small Business Management in 1960. Known around the school as "the father of small business," Shallenberger relied on case studies of small companies, such as Shalco Corp., the industrial-equipment firm he cofounded.

Fortunately for Knight, Shallenberger's small business courses studied both existing companies and new ones. When the professor gave the students an assignment of creating a business plan, Knight wrote a paper that was his epiphany. His idea was to manufacture and import sports shoes from Japan, at the time a poor country where labor was inexpensive.

The paper "became the blueprint for Nike, and it was out of that that I really had the courage and the enthusiasm to start this company that ultimately became Nike," Knight said in a 2008 interview with the school's then dean, Robert L. Joss. Of Shallenberger and his class, Knight recalled, "All those things came together; his inspiration, his own experiences with starting small companies, and the enthusiasm of the class in general contributed mightily to my really having the confidence and enthusiasm to start this whole thing."

A few years after graduation, Knight secured funding and started Blue Ribbon Sports with University of Oregon track coach Bill Bowerman to import and distribute athletic shoes under the Tiger brand from Japan. In 1972, the two created their own brand, Nike, and followed a similar business model. Through the years, Nike grew to its current size of $20.9 billion in annual revenue. After achieving that level of success, Knight made a $105 million gift in 2006 to fund the new business school home. The gift reflected his deep-seated sentiment toward the school and all he learned there. "The school, obviously, has meant so much in my life, and to be able to give back a little bit makes me feel really great," he told Joss in 2008.

As Phil Knight was changing the footwear industry, closer to Stanford, the growth in Silicon Valley and its robust entrepreneurial culture was accelerating. Startups based on high technology "came to the fore in the early '80s with companies like Sun Microsystems, Imagen, Teknowledge, Silicon Graphics, MIPS, Cisco Systems, and Intellicorp, all of which started at Stanford or were founded by people from Stanford, including several GSB alumni," says Haim Mendelson, who teaches entrepreneurship as the Kleiner Perkins Caufield & Byers Professor of Electronic Business and Commerce, and Management. In time, an increasing number of GSB alumni made an impact by funding entrepreneurial businesses as venture capitalists.

A course called New Enterprise Management was added as an elective in 1969-'70 and over time, more faculty addressed problems that were specific to startups in courses on finance, organizational behavior, and marketing. Some classes started teaching students how to write a formal business plan, which the burgeoning venture capital industry demanded as a tool to evaluate potential investments.

By the 1990s, entrepreneurship was fully enmeshed in the GSB's curriculum and culture. "Our goal in the entrepreneurship courses has always been to demystify the entrepreneurial process and help students obtain the managerial knowledge that would allow them to understand and be effective managers in small, rapidly growing companies," says Charles Holloway, the Kleiner Perkins Caufield & Byers Professor of Management, Emeritus, and a faculty director of the school's Center for Entrepreneurial Studies (CES).

Recognizing a need for more focused efforts to develop and deliver entrepreneurial curriculum and research, the CES was launched in 1996 with Holloway and H. Irving Grousbeck, MBA Class of 1980 Consulting Professor of Management, as the founding faculty directors. Through the center, the school currently offers more than 20 electives focused on entrepreneurship, of which most MBA students take at least one. The center produces 25 to 30 new entrepreneurial cases a year to keep the curriculum relevant and timely, and these cases are studied in entrepreneurship classes around the world. Beyond that, the center serves as "a thriving network node in the Silicon Valley entrepreneurship ecosystem," Mendelson says. The center actively engages with successful entrepreneurs and investors to participate in classes as case protagonists, speak at conferences and student and alumni events, judge students' business plans, and serve as mentors for teams developing business ideas through classes such as Evaluating Entrepreneurial Opportunities (often referred to as "356" by the more than 1,000 graduates who have taken the class, alluding to its course numbers S356/S366).

It was through this mentoring experience that the CES first connected with new Executive Director Sheryl O'Loughlin, who joined the school in 2011. O'Loughlin graduated from the Kellogg School of Management and was the former CEO of Clif Bar and the cofounder and CEO of Nest Collective, a mission-driven consumer products company producing healthy, organic food for children. She added her deep expertise in the industry to Team Green Earth Cafe, a student team that applied to the course with the "aim to provide sustainably sourced, nutritious, and tasty meals to help institutions improve the health of their employees and patients."

In the spirit of continuous innovation, the S356/S366 course sequence has continued to evolve through the years. Now known as Creating a Startup, the series began in the mid-1990s to formalize work that some students were pursuing as independent projects. Students' start-up ideas have covered a wide range of industries, both in the United States and internationally. Being in the heart of Silicon Valley, the multidisciplinary student teams are often at the forefront of evolving industries — from consumer internet and e-commerce in the late '90s to social networking, clean tech, and mobile opportunities today. The increasing number of students pursuing social entrepreneurship concepts through the course meant adding a section with that focus several years ago.

Regardless of what's in vogue, the basic principles of evaluating a business opportunity and developing a model for it are constant. Ideas abound, especially in Silicon Valley; turning them into viable ventures is the hard part, as students discover in Creating a Startup.

Admission to S356 is by application, and the sections balance MBAs, Sloan students, and grad students from the other schools at Stanford. The first quarter focuses on idea evaluation, business models, market research, identifying customers and evaluating their needs, iterating to achieve product-market fit, evaluating competition, and team dynamics. The format blends lectures and exercises applicable to all new ventures, as well as sessions with instructors and mentors in specific industry verticals. The curriculum is designed to help all students, including those from Stanford schools such as engineering or medicine, learn and apply business basics.

During the fall, students work through a formal process to iterate upon their ideas and form teams. They then dive into their team's start-up idea, and the amount of hands-on work increases in the winter quarter. "As an experiential course, it's learning by doing," says Mendelson, who is teaching the course in the 2011-12 academic year. The teams that proceed into the winter quarter will continue researching and forming their plans, and some may continue working on their startups in the spring quarter. Dennis Rohan, a lecturer in management who taught the course since its inception in the '90s, added, "A lot of this is understanding the process, how a product will relate to real customers, what business model you need to create value, and what team you need to be successful." As they analyze their ideas, students inevitably change strategies and otherwise shift gears, so "we teach students to morph quickly and work with a level of mental flexibility."

It's a hard road. Some teams fold if they conclude their ideas aren't as feasible as previously thought or demand isn't as big as anticipated. Dropping an idea isn't a bad outcome, instructors say, because part of learning about startups is realizing what isn't going to work and moving on.

Besides meeting regularly with a course instructor, teams work with experienced mentors including many alumni who provide industry knowledge and contacts for field research. Mentors such as San Francisco venture capitalist Maurice Gunderson, MBA '85, embrace their educational role. Gunderson says he holds in check his professional inclination to give a quick thumbs-up or thumbs-down to students' ideas. Instead, he says, he'll ask, "Have you considered …?" Then, "you go out and answer them," he says. "I don't do it for them. I can't cut the process short."

The complexities of the process are apparent. In April, five teams gathered in a sunlit 80-seat classroom in the new campus with Rohan, who devoted this meeting to team presentations and critiques. Using slides, teams presented their business plans, which were at varying stages of progress. One group wanted to assemble and distribute low-cost solar panels to households in Kenya. Another proposed a new wealth-management service. A third pitched a company that would set up student-loan pools at individual universities to be funded by alumni.

All made a strong case for their startups and showed their financial models and operational plans. The onslaught of pointed questions from fellow students and instructors, though, reflected the potholes that come with the territory. "Can you explain why your product is better and why you get better results?" one student asked of the wealth-management team. The idea of setting up student-loan pools, too, drew skepticism. "What's to stop a university from doing it itself?" another student asked.

"Classmates are quite candid," says Zachary Goldstein, MBA '11, whose team was building a customer-loyalty system for retailers. "If they see a potential challenge, they don't hesitate to tell you. It's good to be pushed; it's helped us refine our approach and our assumptions."

As of last spring, Goldstein's Team Loyalty was forging ahead. He and his colleagues had spent many weeks researching their idea, running small surveys, and interviewing retailers and customers. Late one afternoon, they huddled for an hour over the conference table in a meeting room that opens onto a covered colonnade connecting Knight buildings and landscaped outdoor meeting spaces. They prioritized their next tasks, including refining their financial model and chasing down computer science students to create back-end systems. Other students clustered at outdoor tables or walked across the street to study rooms in the Schwab Residential Center.

"We've lived in those rooms," says Jason Mayden, Sloan '11, whose team Kill the Clipboard aimed to create products that record athletes' biometric data and help them improve their performance. Unlike more traditional meeting rooms (four walls and a solid door), the Knight facilities have glass fronts that connect what's happening among the team members to the rest of the community. "Somehow, people disrupt you at the right moment," Mayden says. "It's a collaborative space. People stop by. You embrace the disruption."

Technology in the rooms facilitates communication, too. Using Steelcase Inc.'s media:scape setup, students can pull small connectors the size of a hockey puck out of the media well at the center of the conference table and hook up several laptops to side-by-side LCD screens on the wall. Presto: All can instantly see what's on each laptop's monitor, be it a spreadsheet, action plan, or an email, setting the stage for increased collaboration and sharing. "Having the screens takes away the possibility of misunderstanding and miscommunication," Mayden says. "It's a research and communication tool." Students also use the setup when they have to tie in a team member remotely via Skype.

In April, as Team Peakbusters developed a business plan to install systems to monitor home electricity consumption and automatically reduce it during peak demand, members debated partnering with other companies and scrutinized the costs of call centers. On the room's left-hand LCD screen, the laptop of Reto Baettig, MS Management Science and Engineering '11, displayed an Excel spreadsheet showing month-by-month breakdowns of grosses and nets. Other materials appeared: third-party research about call centers, a document showing issues to update, Bartschat's own calendar. Haitao Zhang, Sloan '11, updated a to-do list for all to see in real time. After the meeting officially ended, Battig and Bill Hofmann, who isn't enrolled at Stanford but participates as an adjunct team member, examined another spreadsheet on the big screen. No crouching down to peer at a laptop monitor.

For some students, the course provides the structure and support to develop an idea to the point a viable venture is clear. Bartschat wasn't planning on being an entrepreneur when he entered the Sloan program. But neck-deep in his team's business plan in mid-spring, Bartschat acknowledged that the experience of this class may have changed his thinking. "Maybe I've caught the bug."