Depression or Euphoria? Navigating the Market’s Mood Swings

by Carrie Levine

The financial field may be permanently changed by the explosive ups and downs of the tech sector, but old standards of quality and planning will still make or break new businesses, HBS professor Howard H. Stevenson said.

In his keynote address at the 2001 Boston Angel/Entrepreneur Conference, Stevenson said the recent technology sector market crash should teach future entrepreneurs to build companies to last rather than to sell, and to think about more than simply selling a product.

We're never going to go back to the slow and lazy times.
—Howard H. Stevenson

"I think now, a lot of people are saying, how do we get it right first? Before we're paying for $60 million in advertising, let's make sure we can deliver the product," he said. Stevenson (HBS MBA '65, DBA '69), who holds the School's Sarofim-Rock Chair in entrepreneurship, said a "massive sense of entitlement" has led to overblown valuations.

"It's a different world. I'm still seeing prices out there on free money valuations that make me think someone didn't read the newspapers last week," he remarked. Stevenson cited, eToys and Vitria Technology as examples of overvalued companies that later crashed to fractions of their peak value.

"I don't know what people were smoking, but it wasn't legal, I suspect," he said, adding that many overvalued companies "were in the job of selling stock rather than delivering value to the investors." The wild ride of the past few years, he said, has permanently changed the financial markets and the idea of entrepreneurship.

"I think the financial field is permanently warped, especially for smaller markets," he said.

Markets these days change as fast as seasonal styles, Stevenson said, adding that his advice to the finance industry has been that "they should move from Wall Street to Seventh Avenue and be with the rest of the fashion industry."

"We're never going back to the slow and lazy times," he said.

From Winner To Loser And Back Again

Stevenson, currently a director of Bessemer Securities Corp., Camp Dresser & McKee Inc., Landmark Communications, and the Baupost Group, Inc., said when he initially came to HBS to research and teach on the field of entrepreneurship, the idea was greeted with a certain disdain.

"Another [colleague] explained that entrepreneurship is like an onion: you peel layer after layer after layer, and in the end, there's nothing left and you cry," he joked. These days, he said, entrepreneurship means "you're either a winner or a loser. Sometimes, you're a winner and a loser within a couple of weeks."

Stevenson repeatedly hammered home the need for companies to return to stressing the basics: hiring good people, producing a good product, delivering it and supporting it. For the first time in history, he said, companies have an unprecedented amount of data at their fingertips that can be used to shape and refine their mission.

He said new companies need to look seriously at whether they are vulnerable to shifting industry standards, such as the ones that muddled the DSL (digital subscriber line) industry. Now, he said, DSL providers who set out to create industry standards are finding a lack of comapatability.

"You have to be absolutely conscious of standards. The reason Bill Gates is the richest man in the world after the Sultan of Brunei is because he captured the standards. Are we subject to the emergence of new standards?" he asked rhetorically.

Now that the financial industry is in what Stevenson called a "true credit crunch," rendering capital scarce, new companies need to look more seriously at outsourcing. "Money was so easy [that small companies] could own and employ everything they need," he said. Instead, he said companies are better off concentrating on their core business and finding reliable vendors and distributors.

And while companies need to have strong, viable business and economic models, Stevenson said, he also warned against marrying tradition at the risk of innovation.

The Mixed Blessing Of Success

"One of the interesting problems we have is success. You try to enshrine your success. You build up bureaucratic processes to make sure you do things the same way next time," he said, adding that bureaucracy is the enemy of small companies that need to change quickly.

Small companies, he said, need to be ready for "continuous, adaptive change" as they proceed towards their goals. A good CEO is constantly monitoring progress and adjusting as the situation changes, he said, adding that CEOs must ignore the temptation to be so wedded to their own idea that they ignore the fact that the idea isn't working. And executives of small companies should treasure their strengths: rapid response time and innovation.

"It's easy to be small, it's easy to be big and it's tough to be middle-sized. That combines northern hospitality and southern efficiency," he said. "You've got to go from small to big quickly, because middle is death."

Failures will come, he said, and smart executives will learn from them. "All you can do as boss is ensure good performance," he said. "Remember, every person who claims to be an officer is there to support the people who do the work."

Entrepreneurs also need to ask themselves what their needs really are, he said, as well as whether the company has a solid economic model and has people capable of formulating good strategy and seizing opportunities that present themselves. But most importantly, he said, a good CEO can follow patterns and market trends.

"You'll make all your money not on the obvious, but on the patterns that form," he told his listeners.

One question every company founder must answer honestly to himself or herself, he said, is whether the company is a good long-term investment. Entrepreneurs need to ask themselves the question, "If there is no IPO for five years, will this still be a good investment?"

Still, despite volatile markets and flailing start-ups, Stevenson described today as a "very exciting time" to be in business. "I think we will transform the world. We already have," he said.