07 Feb 2011  Lessons from the Classroom

Creating the Founders’ Dilemmas Course

In HBS professor Noam Wasserman's second-year MBA course, Founders' Dilemmas, students study quandaries that virtually all entrepreneurs face when trying to realize the dream of launching a startup—from deciding when to start the company to learning how to make a graceful exit. Guest speakers discussing their experiences include All-Star pitcher-turned-entrepreneur Curt Schilling and Tom & Tom, the Nantucket Nectars guys.

 

If Noam Wasserman's entrepreneurship elective were a start-up company, investors would be delighted with its growth.

When the Harvard Business School professor first offered his Founders' Dilemmas course in 2009, a mere 42 second-year MBA students signed up. Two years later, the School is offering four sections of the course, with 68 students in each section. Some 170 more students were wait-listed.

The course's popularity is a reflection of its universal nature—it addresses quandaries that virtually all entrepreneurs will face when trying to realize the dream of starting a company, no matter how viable the dream.

"We tackle the problems that are faced by almost any founder no matter what industry they are in, no matter what country they are in, and no matter what time frame they are in-boom or bust."

"We tackle the problems that are faced by almost any founder no matter what industry they are in, no matter what country they are in, and no matter what time frame they are in—boom or bust," Wasserman says. "We help them to plan for the hidden minuses and the unexpected bumps."

Wasserman teaches two sections of the course, while Senior Lecturer Ginger Graham teaches the other two. They divide the course into four parts, the first three of which address timeless entrepreneurial dilemmas: deciding when to found a company, building the founding team, and dealing with investors. The last leg of the course highlights those rare founders who have achieved the entrepreneurial ideal of attaining financial success without having to give up the reins of the company.

When to found

About 4 to 5 percent of MBA students at HBS decide to leap into entrepreneurship immediately upon graduation, or even before graduation, according to Wasserman. But "the data suggests that somewhere between 40 and 50 percent will be founding a company within a decade of getting out of here," he says.

Part one of Founders' Dilemmas helps students to figure out whether it makes sense to wait a while before launching a start-up, taking into account issues that single-minded young dreamers might not otherwise consider—including their personal lives. Early in the course, the professor essentially plays a foil to the blindly enthusiastic entrepreneur by taking on the role of a concerned spouse: "Look at the loans you have that are coming out of business school!" "I'm still in school, and I'm not bringing in a paycheck yet!" "We have two kids! You should wait until they are out of the house!"

"Even if the market is crying out for you to solve a particular problem, if this personal side is not there, it could mean the end of that market opportunity or of a critical personal relationship," Wasserman says.

In this section of the course, students study cases that deal with both early- and late-career founders. First they consider the case of HBS student Humphrey Chen (MBA '96), who struggles with the pre-graduation decision of whether to launch a start-up with a classmate or accept a cushy offer from a top-tier consulting firm. Next, they look at Barry Nalls, who describes lessons learned from starting his own telecommunications start-up, MASERGY, after working at GTE for more than two decades; in retrospect, Nalls wishes he had taken the entrepreneurial plunge sooner.

Students also study the case of major league All-Star pitcher Curt Schilling, who, as his pitching career winds down, decides to switch gears by founding a video-game company called 38 Studios. (Data suggests that a surprisingly high percentage of founders do switch to industries much different from the one in which they have the most work experience.) Schilling visits the class to discuss how his transition from one industry to another forced him to question and adust his knowledge of how organizations work, how to motivate employees, and how to finance growth.

Building the team—finance and founders

In the second part of the course, students consider the questions they'll face after making the key choice not to run the company alone: Who should the cofounder(s) be? Is it a good idea to bring in my best friend, or is that the worst thing I could do? How are we going to split up the roles? Which one of us will become the CEO? How are we going to split the equity among us?

"Each fork in the road brings us to a bunch more cofounder dilemmas, and as you're going down each of these paths you're running into new issues," Wasserman says.

This part includes case discussions of HBS graduate Vivek Khuller (MBA '99), who persuades classmates to cofound with him the electronic-ticketing company Smartix; Genevieve Thiers, who decides to bring in her boyfriend to help her build the caregiver marketplace Sittercity—and then has to deal with the big risks introduced by that decision; and Jim Triandiflou, founder and CEO of Ockham Technologies, who worries about losing control of the company as he and his cofounder consider various financing offers. By engaging in a real-life exercise as members of a three-founder team, students also get to experience firsthand the raw emotions of negotiating equity splits with their cofounders.

Beyond the team—investors and successors

Part three of the course is about "looking to outside investors once you've gone as far as you can with spending your own money, or tapping Dad and Aunt Sally for money."

Here, students study the differences between angel investors and venture capitalists. More importantly, they consider the often soul-wrenching reality that accepting outside funding means ceding some control, not to mention the risk of getting ousted from the company entirely. "It means realizing that investors take seats on the board and looking at how this may change the dynamics of the team, including the possibility of a new CEO," Wasserman says.

They discuss the case of Wily Technology, in which the founder is asked to step down as chairman of the board before the new CEO takes over. They also consider the viewpoint of the non-founding CEO via the case of Les Trachtman, CEO of Webpiont, as the founder tries to pressure Trachtman to leave the company by threatening to resign himself. And they study the case of Blogger and Twitter cofounder Evan Williams, who struggles with the challenge of steering his second startup, Odeo, without having board support for his decisions.

Achieving the entrepreneurial ideal

"Each of these entrepreneurs has had to give up something that really matters to them—a trade-off between something that's important to them and something that's really important to them," Wasserman says. "But at the end of the course we look at founders who were able to grow something valuable and also remain CEO of it—those rare ducks."

Still, even long-term entrepreneurial success requires an eventual exit strategy, as in the case of Nantucket Nectars, founded in the late 1980s and sold to Cadbury Schweppes in 2002. Students study the issues that founders Tom Scott and Tom First had to consider when negotiating the sale.

And even the most successful entrepreneurs deal with occasional self-doubt. Students in the course also look at the case of Brian Scudamore—who dropped out of high school to start the successful junk removal company The Rubbish Boys (now 1-800-GOT-JUNK), —as he reconsiders his decision to pursue franchising as a growth option.

"We look at the founders who were able to get to that Promised Land…and how they're different from the founders we looked at in the beginning of the course," Wasserman says.

In the end, the course is about self-reflection and foresight. (Wasserman explores these ideas further in an upcoming book, Founding Dilemmas, which will be published in late 2011 or early 2012.)

"Understanding one's self is a key thing we're trying to accomplish, so students can then look back at the class and realize, 'When I'm that person, in that position, I should not be making that left-fork decision, I should be making the right-fork decision,' " Wasserman says. "It's about choices….My research has shown that teams of friends and family cofounders have a higher tendency to blow up than teams of prior coworkers, but that doesn't mean you should never found with friends and family. It means that if you have decided that this is the best way to go, there are ways to set things up to decrease the risk of a blowup."

For more information about the challenges of entrepreneurship, please see Noam Wasserman's "Founder Frustrations" blog.

Carmen Nobel is senior editor of HBS Working Knowledge.

Comments

    • Hakan Hillerstrom
    • Owner, Hakan Hillerstrom

    Very good work, this type of course should be very helpful to any entrepreneur, whereever they come from!

    For further thoughts, please see our new book " Wise Wealth, Creating it, Managing it, Preserving it". The book is published by Palgrave Macmillan and is now available from the following direct links: Amazon.co.uk and Palgrave.com. It will also be available in the USA from www.amazon.com sometime in February 2011.

    Best regards from sunny Geneva (Switzerland)

    Hakan Hillerstr?m

     
     
     
    • john edelson
    • founder & CEO, SpellingCity.com

    Very interesting. Like many entrepreneurs, I started a company since I needed a job. After three high tech VC-backed companies and three IPOs, due to the crash and divorce, I found myself with limited funds and a determination to do zero work travel.

    I designed a company and start-up around my interests, family constraints, and financial resources and focused on executing within those constraints.

    Five years in, I'm very pleased.

    John, HBS 86G http://www.spellingcity.com http://www.time4learning.com http://www.time4writing.com

     
     
     
    • Bala
    • Sathyanarayanan

    There is a general opinion that business schools teach management but not Entrepreneurship. Courses like these helps break that myth!

     
     
     
    • UCHE AMAECHI
    • CHIEF OPERATING OFFICER, EGC CONSULTING LTD

    The importance of Business Schools such as HBS to entrepreneuers cannot be overemphasised. No matter how gifted you are as a business person, you need update on various management areas to keep up, what with globalisation and ICT in relation to management. Pieces like the one on this heading enhances and refines what you already know and gives you an edge in the comity of your peers.

     
     
     
    • Henry Maigurira
    • Executive Secretary, Pachi Development Foundation

    My expectations from an MBA programme is interaction with realities of the business world as a learning process. An MBA programme that gives importance of management skills in curriculum modules of Finance, Financial Reporting, Marketing, Technology and Operations Management, Business Economy, Strategy, Negotiation and many others turning these into results which one can apply as an entrepreneur in any given context provides one with deep mental toughness of practical skills, knowledge and the right attitude in the business world. Business schools are a very good starting point for those who aim to maintain quality results of their business operations and yield sustainable results.

     
     
     
    • Srikumar Misra
    • Founder & CEO, Milk Mantra

    Just quickly scanning through this outline of the course, I could relate to several situations that hv been covered, from my journey of starting Milk Mantra - a dairy foods company in India.

    Founding a venture is as such riddled with challenges, and doing this in India in the non-services sector is fraught with dilemmas of various other kinds, not limited to finding VCs who genuinely do early stage investing.

    I look fwd to the upcoming book. Very clearly remember several useful insights gained from Noam, Felda, Josh & Paul during a VC course I did in my run up to becoming an entrepreneur.

     
     
     
    • Andrew
    • Founder & CEO, Commission Overload

    Bala that is not a myth. Almost 70% of the schools worldwide teach only management. They don't have teachers that had actually did it. All they did is study study study and after that they come in front of you and teach you about how is the economy. I really think a course like this is welcome and will help a lot of students.

     
     
     
    • Juan Aguirre
    • Professor of Family Business Management, Universiadad Latina Costa Rica

    I am teaching a course that is in a way part of what you are trying to develop from the Latin American perspective and base on our research with my students what we have found is that the four main dilemmas of the Latin Founder are : in a culture like ours the first dilemma is to accept the need to hand over the reigns, the culture is to machista, the second dilemma is what to do if you have no males in the succesion line, third how to move from a "bitcher" to a "teacher" and fourth how to make sure that the new role to be play once you hand over the reign, is not more of the same old behavior.I have some findings on the successor roles, and came be summarize that many are not sure they want the reign given the previous experiences as employees particularly the smaller the firm. Saludos and congratulations I hope you succeed I am still trying after more than 20 years to understand the founders .

     
     
     
    • Benjamin R Stockton
    • Founder, CEO, STS International, Inc

    STS International is an 18 years old technology services firm, going to $27MM revenue this year (with a continuation of our great luck). We are still run by 3 of the original founders. I'm the oldest, largest shareholder and one of the other guys is my brother. Our current ratio is about 1:1, mostly due to reinvesting earnings in growth.

    The study of entrepreneurship is very important; but few seem to study the challenges of operating a small firm. For 18 years I have financed the company via a quilt work of sources. I started with $40,000 I got from sale of my house. These days I use reinvestment of earnings, purchase order and invoice financing, a variety of credit card services, and we pay extravagant interest rates to attract private lending. I do all this intuitively, but also due to my perceived lack of options. As the company grows this year there is a point in the cash flow projection where the number exceeds any previous cash demand that we have had. My response thus far is more quilting!

    It seems that the financing and operations of a small growth firm would be of great academic and professional interest, but the lion's share of literature is concerned with large public companies. I'm in a graduate program myself, working on these issues academically as well as practically, but I would sure like to get some help in figuring out how to take this services company to the next stage of growth without exacerbating the already fragile balance sheet.

     
     
     
    • Pankaj Sahai
    • Author, Smooth Tide To Venture Capital

    Course contents are excellent. It is high time that budding entrepreneurs learnt about the realities of start-ups and beyond in their MBA course. There is a lot of hype & hoopla surrounding entrepreneurship, glamorizing the subject and underplaying the enormous risks involved in founding new businesses. I am sure that well thought-out courses such as this one would improve the success hit-rate of entrepreneurs

    Reply to Benjamin R Stockton

    It seems that your business has negligible or negative FREE CASH FLOWS i.e. cash leftover annually for the capital providers ( equity and debt providers) after meeting the the increase in working capital and capex. The reason could be that you are fee rates are heavily discounted (highly competitive marketplace?) or you input costs like salaries , training, travelling and/or you are accepting delayed payment terms from you clients to win business - the net result being that your working capital needs grow faster than your cash flow that your business is generating.

    My feel is that your business model needs a comprehensive re-look and a strategic re-focus, which will align your core needs and core strengths with the market opportunities & realities. Your comment suggests that mostly you tend to be in a fire-fighting mode, which perhaps is inhibiting you ability to think in strategic "Important but Not-Urgent" terms.

    There is an apocryphal story about an MBA who asks Confucius, the Chinese wise man, " Tell me a sure shot way of getting a raise every time salary revisions are announced". Confucius advised : " Just become the man who deserves a raise every time". The moral of this story is that you need to look inwards and develop yourself to become more effective and productive, thereby deserving a raise. In the context of growth financing, developing a strategic plan, reviewing your existing paradigms, market realities etc would enable you to become a business which deserves growth financing, of which there is plenty available for desrving candidates.

     
     
     
    • John Barnes
    • CEO/FOUNDER, BUYERPOWER

    I only wish I could have had a course like this when I was getting my MBA at wharton. This is a shock jock course that gives you a good glimpse of real problems that business starters face each and every day. good job

     
     
     
    • Leon
    • Founder, Affala Web Solutions

    I don't think entrepreneurship can be taught. I find it to be more of an internalized thought process in which you are constantly generating ideas to solve problems encountered in everyday life.

    Leon http://affala.com