The Entrepreneurial Venture: A Conversation
Twenty-five years after graduation, four members of the HBS Class of '75 reflect on the enterprising spirit that has characterized both their generation and their own careers.
Today's frenzied world of dot-com mania might have been hard to predict 25 years ago, but the Class of 1975 has always had an eye for opportunity. For its time, the class had a sizable number of military officers familiar with strategic tactics and pioneering women who boldly crossed the gender line. Not surprisingly, therefore, the class has no shortage of members involved in the sort of entrepreneurial ventures that demand innovative thinking.
While many classmates started out in more traditional settings, within a decade of earning their MBAs, almost half had broken away from a rapidly changing corporate world beset by reorganization, downsizing, and recession. Of that group, the Bulletin asked four members of the class to share some of their views on sizing up and seizing opportunity. Their discussion gives insights into the last quarter century, not only in terms of entrepreneurship but also in the dynamics of the free-enterprise system itself.
In 1975, venture funding in the United States totaled about $50 million. Today, it is somewhere between $50 and $100 billion. What triggered this explosive growth?
Ed Kane: Three important events happened at the end of the 1970s. First, there were changes in ERISA (Employee Retirement Income Security Act) legislation that allowed pension funds to invest in private equity; second, the growth of the microprocessor and the semiconductor; and third, the rise of entrepreneurial activity, which drew people away from large companies and encouraged them to take risks.
Bill Sahlman: Also, when we graduated from HBS, the economy was in recession, inflation and interest rates were high, productivity growth was low, and the stock market was in the tank. It is not at all surprising that the venture capital industry was essentially dormant at the time. But with the growth of the microprocessor and of biotechnology in the late 1970s, as well as the deregulation of the airline and financial services industries, new opportunities for eager entrepreneurs were created. New companies challenged the status quo, and the old, "safe" jobs turned out to be not very safe at all, as large companies entered extended periods of malaise and restructuring.
Ed O'Lear: It's important to note why money managers decided to allocate significant assets to venture funds— performance. Companies such as Microsoft, Cisco, Oracle, Sun, Genentech, Amgen, Dell, and Compaq didn't exist in 1975! Once these managers decided to allocate a percentage to venture investments, they typically increased that percentage by investing in multiple venture funds and diversifying within the sector.
Ruth Owades: When I started Gardener's Eden in 1979, I couldn't get venture funding. There wasn't much available back then. Some ten years later, when I started Calyx & Corolla, the difference was phenomenal. And, of course, now there is even more venture capital available. Some of the difference was that I had a success under my belt, but some of it was simply that entrepreneurial companies were both more common and more successful.
Entrepreneurs often find opportunity amid upheaval. Can you give us an example from your own experience?
Owades: We had a huge problem in 1994 at Calyx & Corolla when there was a horrible blizzard the weekend of Valentine's Day. For the first time, FedEx closed due to the storm and would not be able to deliver our flowers. In the flower business, you are given credit for making a marriage work, and you're also blamed for destroying a relationship. We knew we were going to have some very disappointed customers on Valentine's Day, so we decided to offer the best customer service ever. We called every single customer and explained that our reshipment would be late. We sent a follow-up letter of apology from me and included a discount coupon on a future purchase. It was a home run with our customers. Instead of losing them, we developed immensely loyal customers.
Sahlman: I took advantage of the opportunity to avoid upheaval by pursuing the only job from which you can't get fired! Actually, my colleagues and I try to focus on great questions, which are enduring, as opposed to focusing on great answers, which may change with the passage of time. What was an opportunity in 1975 or 1980 is probably no longer an opportunity today. At the same time, the questions that lead one to identify an opportunity are the same as they have always been—for instance, who are the customers, and how do they make decisions?
O'Lear: I have been involved in microeconomic (company specific) upheaval. Prior to starting a company with two others, I worked at two high-tech companies: a privately held cardiac ultrasound imaging company and a VC-backed biotech company. Neither went bankrupt, but they do not exist today. Both underwent significant upheaval, and this helped me to become a better investor, manager, and entrepreneur.
What makes the United States such fertile ground for entrepreneurs? Can the rest of the world catch up?
Sahlman: The U.S. system is characterized by a high degree of mobility of capital and labor. Opportunity-seeking entrepreneurs are plentiful: They can gain access to human and financial capital; they can overcome barriers to entry; and they can succeed in economic, social, and political terms. I suspect that the rest of the world will shift in this direction fairly rapidly.
Owades: America is still the land of opportunity, where you don't have to be born with a silver spoon in your mouth to do well. Entrepreneurship provides a great chance to prove that. I absolutely think that the rest of the world can catch up. As a country, we should not rest on our laurels.
Kane: I believe many Americans feel a disdain for the government, and they see private enterprise as a way of fighting the system. I also think that in the United States, people are more likely to strike out on their own and are freer to move around.
O'Lear: Right now the United States has a competitive advantage; however, that advantage can narrow as the rest of the world catches up or as we become complacent. I think that as individual countries try to catch up, they will become more "American" and make very conscious and painful political and economic decisions. In many developed countries, taxes are confiscatory, and in many developing countries, there is no legal protection for intellectual property. Horatio Alger is alive and well in the United States; individual success and achievement is a value encouraged and protected by the government. In many other countries, collective mediocrity is the desired outcome. Also, in America failure is acceptable. Learning from failure can be an important element of future success. These entrepreneurial values are not necessarily present to the same degree in other countries' cultures.
Given your 25 years of experience (and the fact that you have seen recessions and market fluctuations), what is your advice to less-seasoned HBS graduates?
O'Lear: Buckle your seatbelt. If you accept the premise that the U.S. postindustrial economy reflects Darwinian capitalism, then it follows that economic contractions could be more severe since there are fewer governmental controls and safety nets than in other countries. The second quarter of this year provided a "correction" in U.S. equity markets, and a lot of dot-coms have become dot-bombs.
Kane: We actually have people in our company who have worked for ten years and have not seen an economic downturn. That concerns me. We grew up with a pretty severe recession in 1970, another in 1975, and another in 1990. For today's grads, the next recession will be their first. I say, brace for impact. Take cover.
Owades: I agree. When we graduated we were grateful just to get a job. I believe it is good to have experienced global fluctuations when you are running a business, because it makes you a smarter, more thoughtful executive.
Sahlman: In general, I find that competent people can overcome cycles, even dramatic ones, in the capital markets. I don't think even the graduates who enter an industry at precisely the wrong time end up suffering too badly: resilience and decision making on the fly are two traits we try to inculcate in students before they graduate.
Describe your version of an ideal relationship between entrepreneur and venture capitalist.
Kane: The VC has to be a good listener. Entrepreneurs are egocentric, type A personalities; they will express themselves but need to think things through. A good VC will be both a sounding board and a whipping post. He or she should open doors, make introductions, and stay engaged without being a nuisance.
Owades: No offense, but I think the best situation is not to need venture capital money! For Calyx & Corolla, the top VCs were courting me, but I realized I didn't need them. So I started the company with private financing, and later—after we'd already proved credible and viable—I took some venture funding. Things have changed with the rise of the Internet and dot-coms; VCs now take a much more proactive role in the business.
O'Lear: Since I'm both an entrepreneur and an investor, I believe it's fundamental to have a shared vision. For me as an entrepreneur, getting the "best valuation" initially is not as important as having investors who buy into the vision and have complementary skills or experiences. The "been there, seen that" experience of the VC can be invaluable. Start-ups are intense, and sometimes a VC can provide the necessary, detached sanity check.
Sahlman: Good venture capitalists are process literate: They have been through the game many times, they know where the traps are, and they know how to avoid them. They also have a strong set of relationships that they can bring to bear to help the entrepreneurial team succeed. Usually the most important role is in recruiting that team: Great venture capitalists can identify and convince great managers to sign on.
What do you find to be the most challenging aspect of your work? How do you deal with this challenge?
Owades: People. In every capacity— employees, investors, strategic partners, customers, the press. Understanding what motivates people is the most potent tool and the most challenging aspect of my work, especially in a market such as today's where good people are becoming scarcer.
O'Lear: Our biggest challenge is to identify, attract, and retain good people for our companies. We're essentially looking for the kind of people who would have wanted to sign on with Columbus for his first voyage west.
Sahlman: When I first proposed to teach a course in Entrepreneurial Finance, I was told it was the stupidest idea in the world. One tenured faculty member described the area of entrepreneurship as an intellectual onion—you peel back layer after layer, never finding a core idea, and all you do is cry. Another colleague told me that the likelihood of getting promoted would be inversely correlated with the teaching ratings I got. I have discovered that change is hard and listening to advice is problematic. Sometimes, the best advice is to do what you are passionate about and let the chips fall where they may.
From the Harvard Business School Bulletin, October 2000.