Inside Harvard Business School’s Startup Machine

Harvard Business School - Ethan Baron photo

Harvard Business School – Ethan Baron photo

What are the most popular electives for those who are interested in doing a startup at Harvard? What do those courses actually teach? (Are those courses oversubscribed and difficult to get into? What types of interest are they seeing in entrepreneurship now compared to previous years?)

Eisenmann: All of our entrepreneurship electives are oversubscribed. The biggest (and oldest) one is Entrepreneurial Finance, built by Bill Sahlman over the years. The course teaches exactly what you’d expect – how to think through how much money you need, when you should raise the money, from whom you should raise the money, and under what terms should you raise the money. [You look at] what types of investors, whether they be venture capitalists, angels, etc., will be valued added. What should the term sheet look like? Fantastic course! It’s case-based, but very practical. Like a lot of our case-based courses, it has tons of guests. I would say that in Entrepreneurial Finance, they probably have guests in three quarters of the classes.

Launching Tech Ventures is about internet software mobile-based businesses taught by Jeffrey Bussgang and Jeffrey Rayport this year. I launched this course five years ago. Some 20% of last year’s class went into technology companies, including some people who launched technology startups. An awful lot of students are going off into tech companies who aren’t founders (though a lot of them aspire to do that someday). They’re going off into product management, marketing, and business development.

So we knew that we needed a class that was entrepreneurship-themed, but exposed students to the management challenges they faced if they went into one of those functions. Launching Tech Ventures cycles through the major functions of a technology company, including product, engineering, sales, marketing, business development, etc.

There is a Venture Capital and Private Equity course that teaches what you’d expect. Instead of being from the entrepreneur’s perspective, this one is from the investor’s perspective – how you organize a firm; from whom you raise money (endowments, institutional investors, pension funds, and so forth); how you manage the diligence process; and, as a partnership, figuring out the types of investments you’re going to make. It has featured an investment game over the years, a simulation where [students] play the role of investor and make decisions.

Another of the most popular electives is Founder’s Dilemmas. It has been around for several years. This one helps students understand some of the key choices that an aspiring entrepreneur would make in the early stages of launching a venture. When do I found – at what point in my life? With whom do I found? That’s predicated on a lot of research that shows how the stability varies if you have close friends or family members in there versus co-workers or complete strangers. From whom do I take money? How do we split the equity among the founding team? When you don’t have outside equity yet, who has what share of the company? And how do you make those first few crucial early hires? What kind of people do we look for? The course is case-based, but with a lot of exercises, simulations, and role plays.

And the last one I’d mention is my own pride and joy, Product Management 101. It’s all learning by doing. Students take an idea for a software application and move it from concept through design. Specify it. We give them a little money. They hire a developer, go off and get the app built and launched, and then improve it along the way. About half the students in that course are aspiring founders who are working on something they hope to keep going after school. The other half are going into big tech companies or startups in the product role.

According to your employment reports, roughly 17% of HBS graduates are entering entrepreneurship immediately after graduation (9% starting and 8% joining startups – defined as three years or younger). Do you think the interest in entrepreneurship has peaked or do you see this number growing in the coming years? (Why or why not?)

Gernon: I wouldn’t say it has peaked. I don’t think it is growing at an intense rate. We definitely have more students coming each year to HBS saying they’re interested in entrepreneurship. If you look at our Entrepreneurship Club, it has over 600 students, a third of the whole school.

Part of it is people are very interested in looking at becoming their own boss. Also, they find it very attractive as an alternative career opportunity. It’s funny, I was talking to Hayley Barna at Birchbox. I said, “Why did you start your company when you did?” She said, “Well, I was graduating in 2010 and there were no jobs. We had to.” So even though the economy is improving, we’re still seeing a bigger interest in entrepreneurship. Tom and I have this debate on what would happen if the (economic) bubble burst. I’m a big believer that you’re going to see an even bigger interest in entrepreneurship.

Harvard Business School Rock Center for Entrepreneurship - Ethan Baron photo

Harvard Business School Rock Center for Entrepreneurship – Ethan Baron photo

Eisenmann: It’s growing in ways that we think is healthy. Students are making well-informed choices. If you go back and look at the dotcom boom, the percentage founding directly out of HBS peaked in the year 2000 at 11%. And that number had jumped from 6% to 11% from 1999 to 2000. We haven’t seen that kind of spike in here, even though valuations are very high out there now. It’s been very slow, steady growth.

Millennials, as a generation, are really more interested than their predecessors in building stuff and the impact you can have. If you’re a Millennial looking to make an impact and change the world, you can go to work for a big company and have a big impact. But if you’re successful as an entrepreneur, you can really amplify your personal impact.

If there was no such thing as student debt after graduation, about what percentage of HBS students would you see starting up their own company?

Gernon: We have actually a Rock Loan Reduction program that we offer to students for founding companies. I think anyone who wants to can take advantage of that if they’re founding a company and have put in a legitimate, viable reason for getting that loan reduction. In my honest opinion, I think that if you want to start a company, you’re going to start it whether you have the HBS loans or not. It’s those who are even more determined – the ones who say, ‘I don’t care if I have these loans.’ They’re out there because this is what they want to do and a loan isn’t going to stop them.

Eisenmann: I agree with that completely. You’re allowed to pay yourself a salary once you go out and raise outside money. It’s not a big salary compared to what you could earn if you went to Goldman Sachs. But you can pay yourself and pay your rent. And you can stay in a holding pattern for whatever is due on your student loans. So what we’re really talking about here is that window between graduation and when you raise outside funding. For most teams, that’s somewhere in the range of six months to (at most) a year. Most determined entrepreneurs, as Jodi says, can scrape things together and make ends meet for six to 12 months while they figure out if they have a viable idea.