The MBA And The Startup: A Worthy And Viable Path Or A March To An Approaching Bubble?

Adam Rothenberg of BoxGroup

ANGEL INVESTOR: NO EARLY STAGE CHANGE YET

Not so fast, says Adam Rothenberg, a managing partner at New York City-based boutique angel investment fund, BoxGroup. “At really early stage, we haven’t see much of a change yet,” says Rothenberg, noting BoxGroup focuses on seed investments and then will follow the company through later investment rounds. Rothenberg says the effects of a slowed market are “stage-dependent” and often take a while to hit the earliest stages.

“I think it takes time for changes in the market to reverberate down and hit the earliest stage,” Rothenberg explains. “Typically you see things start to change at the most liquid point, which is the public market and then slowly shift down.”

However, Rothenberg says he’s seeing a shift down from “pre-IPO through the alphabet.” Specifically, Rothenberg explains, investors are changing the way they view Series B and beyond investments. Rothenberg says to view the investment strategy as a pendulum that swings between growth and profitability. “The recent strategy has been to lean the pendulum closer to the growth stage, but now it’s shifting back to caring about profitability,” Rothenberg believes.

The result, Rothenberg says, is companies that have traditionally been judged on growth margin might now be judged more by profit potential. And if ventures are not showing a strong profit margin, it could become more difficult to raise funds.

PORTFOLIO COMPANIES ‘HEMORRHAGING CASH RIGHT NOW’

Despite a sizable fourth quarter drop, at $128 billion in venture investments, 2015 was reportedly the highest year in United States venture since 2000. But the frothy environment seems to be cooling, specifically with valuations, causing some VCs to predict an approaching “Hunger Games” environment for raising funds.

Ulrich has his theories on why early stage funding is quickly drying up. “The biggest venture capital firms have portfolio companies that are hemorrhaging cash right now,” explains Ulrich. “And the venture funds that are backing them have to come up with hundreds of millions of dollars, essentially, to keep these companies going. And it’s all based on the promise that one day they are going to achieve positive cash-flow. But in the interim, they have to provide that cash. So they’re raising because their portfolio companies need this cash.”

Ulrich believes the enormous Series D and E rounds being reported are creating a somewhat deceptive environment. “We’re still thinking about Uber raising how ever many billions of dollars,” Ulrich explains. “You see those things, which are the late stage venture financing at really high valuations. But there are real distortions in what’s being reported because we don’t really see the deal terms.”

THE MBA GAINS GROUND

But those who seem to be poised to withstand a potential bubble burst are MBAs. “We love investing in smart MBAs,” Rothenberg says. The MBA seems to be trending in value in a space once dominated by computer scientists and engineers. Ulrich says he’s seen a “rise of MBAs” in Silicon Valley over the past decade.

“10 years ago, you had people like Paul Graham, who founded Y-Combinator, really disparaging the MBA,” says Ulrich. “Basically saying, ‘why would you ever hire an MBA?’ And maybe that was justified. But now, the tech companies in Silicon Valley can’t get enough MBAs. There’s been essentially the rise of MBAs in Silicon Valley.”

Factors such as the importance of digital marketing and operational excellence have made the MBA highly attractive, Ulrich maintains. “The kinds of things elite MBAs learn have become increasingly appreciated in Silicon Valley,” Ulrich believes. “And that’s led to the rise in demand for MBAs. And that’s been a real sea change that I’ve watched over the last 10 years.”

And the numbers are backing it up. The most recent job reports for elite MBA programs show a significant growth in MBAs being hired by blue-chip tech companies and a decline in finance and consulting hiring.