An Appetite For Risk: Investor Professors

Wharton Marketing Professor David Bell

Management consultant Peter Drucker famously said that the best way to predict the future is to create it. In an increasingly uncertain post-recession world, even the MBAs at an elite institution like Wharton have increasingly begun working for themselves: Last year, more than 7% of Wharton’s graduating MBAs founded their own companies shortly after donning their caps and gowns. If 7% doesn’t sound like much, consider the fact that the number was five times lower for 2007 graduates (see: Wharton Hits Record High In Startup MBAs).

Kartik Hosanagar, a professor of internet commerce at Wharton, estimates that each year, about a third to half of Wharton students come up with startup ideas. It wasn’t always this way, but investment banking isn’t as lucrative as it used to be, and the tech market has been doing consistently well for several years. In the past, Hosanagar would get approached by students who wanted to talk about their startup ideas once a month—but when he began getting multiple requests a week, he started announcing dates when he’d be walking home so that students would be able to sign up for slots. “I walk home almost every day with a student,” he says.

But Hosanagar doesn’t just mentor potential entrepreneurs. He’s actually invested in close to a dozen former students’ startups, making business school seem like more of a practical choice than ever.

AN APPETITE FOR RISK

Five or six years ago, Hosanagar says he would’ve been alone in that regard; putting money into startups requires an appetite for risk. But while the practice isn’t common, “I think what’s happening is at least I’m not the exception anymore,” he says.

Tom Eisenmann, Harvard Business School’s top entrepreneurship professor, has done it before. And Jim Ellis, a management lecturer at the Stanford Graduate School of Business (GSB) who has advised countless startups, notes that the practice is far from unusual there. “I think it’s pretty common for GSB—at least lecturer faculty—to invest in student companies,” he says, adding that he suspects most if not all of them have done so from time to time.

There are guidelines, of course: For example, a faculty member can’t negotiate an investment with a student who’s in his or her class. (Eisenmann also emphasized that Harvard has a strict policy against investing in current students.) Plus, the funding faculty members provide isn’t necessarily earth-shattering. “They are most often smaller amounts, and typically the round of capital is priced at a later time or by a much larger lead investor,” Ellis says.

“I WAS A LITTLE BIT NERVOUS”

Hosanagar’s colleague, Marketing Professor David Bell, is another academic who’s taken the investor route. He estimates that he’s invested in about ten former students, owing largely to the fact that he teaches classes that deal with e-commerce, startups, and tech.

Around 2008, he made his first real angel investment in Bonobos, a clothing brand that launched online (reminder—that was unusual at the time). One of his former students was the main marketing guy there, and he introduced Bell to founder Andy Dunn. “On one hand I was a little bit nervous,” Bell recalls. He didn’t totally know what he was doing. Still, he knew the industry well—he’s an expert in consumer shopping behavior—and the investment turned out to be smart: Bonobos has thus far raised $127.6 Million. Bell was even able to use the company’s data for his research, something he’s done with other companies he’s invested in since, such as Warby Parker and Diapers.com.