Training entrepreneurial engineers

As an engineer who went to business training almost the minute I took my first job, I appreciate both the value and limitation of a business education for engineering professionals. Of course, I appreciate it even more now that I’ve started a copy, made tons of mistakes, got a formal business education and now teach at a business school.

Five elite US engineering schools got really nice press Tuesday in the Financial Times for their Master’s in Engineering Management program. With a little digging, it was clear they have a website and a “consortium.”

The FT article puts the best case forward:

Joseph Helble, dean of the Thayer School, says Mem programmes are “for engineering grads who know they don’t want to spend their entire careers in design or in a lab. They want to do broader, systems-based engineering, by identifying promising new product lines. They want to create a vision for the technology in the broadest business sense.”

As someone who once thought he would teach in engineering management, I’m all in favor of having more such programs.

Many engineering students have taken my technology strategy class, but without a business core, they get glimpses of insights, not the way to build upon a firm footing in accounting, finance, marketing and organizations. So an integrated master’s degree combining technical and business topics is a great way to address this.

However, when looking at the MEM consortium, I’m not quite clear what makes these five schools different. Do they have explicit standards? Is it the shared “MEM” brand? Or are they a members-only club? For example, the list excludes two of the top engineering schools in the country: Berkeley has a top-flight interdisciplinary Management of Technology program, while MIT has its System Design and Management program, jointly run by Engineering and the Sloan School.

And then there’s the question of how much any school prepares an engineer to be an entrepreneur. Plenty of engineers became entrepreneurs without formal preparation and did quite well. (Hewlett & Packard, Bose, Jacobs & Viterbi, and the list goes on...)

I don’t think a class or a business plan competition is going to help a 23-year-old engineering student create the next HP. Interning with a young company (as I did) would help, as would working for a top-flight company in the same industry. But nothing beats going to work in Silicon Valley, Boston or one of the other regions where you are immersed entrepreneurship, venture capital, startup infrastructure and a startup culture.

Egos, ethics and "no"

Many entrepreneurs get ahead because of their brash confidence, unwillingness to settle for second best or accept limitations that have daunted their predecessors.

Is there such a thing as too much ego? Steve Jobs was legendary for his tyrannical treatment of direct reports, but also turned the company around by making swift, clear and (largely) correct decisions since his return 12 years ago.

And then there is Elon Musk, the co-founder of Tesla Motors, SpaceX, SolarCity and PayPal. Any one of those would be considered a highly visible entrepreneurial effort and (in the latter case) even a financial success. He has success I can only dream of.

However, at times he seems to have the ethics of a used car salesman. On Friday, Owen Thomas of VentureBeat enumerated various examples of when he said Musk was less than totally truthful.

I personally first noticed Musk when he called a college professor (and coworker of mine) a “douchebag” for challenging his claim to public subsidies for his electric cars. Anyone who takes taxpayer money should be open to public scrutiny — if you can’t stand the heat, get out of the kitchen. The whole incident reflected badly on Musk and his ability to handle criticism for his weaknesses or mistakes.

Some of Thomas’s allegations border on SEC violations, particularly related to his recent (and briefly underwater) Tesla IPO.

I try not to judge people I’ve not met, but sometimes there’s a clear enough picture from secondary evidence. From his exaggerations to trading in the 30-something mother of his five children, he seems to have gone through life without anyone ever saying “no.”

This is a dangerous way to be in business: yesmen will help you drive the car right off the cliff. (It is always possible that the brash public persona hides someone who’s willing to be thoughtful and analytical with trusted advisors in private, but I’ve not seen any reports either way from former lieutenants.)

However, the general pattern of the last decade reminds me of an old, old saying:

For what shall it profit a man, if he shall gain the whole world, and lose his own soul?

That’s not everyone’s guiding principle, but it’s certainly been mine. I was fortunate to work with other scrupulously honest entrepreneurs — even when they did something I didn’t agree with, they were honest about it and even reasonably predictable. I was also inspired by several role models, including Bill and Dave, and the memoir of Paul Hawken.

I realize that forced to choose between honesty and financial returns in a CEO, most VCs would go with the latter. But then I’m not too optimistic about their souls, either.

Flipping is not a business model

I’m getting ready to grade the final projects for my tech strategy MBA class. One of the projects is about a Web 2.0 company seeking a business model — a common problem.

Near the end of the presentation, one slide summarized the revenue model options:

1. keyword advertising
2. promotional services
3. freemium
4. sell the company

With the last point, I hit the roof. (Figuratively — I tried to be patient with students no matter what they say.) This is wrong, wrong, wrong!.

Sure, it’s wrong conceptually, theoretically, legally. Getting an investment is not the same as generating income.

But it’s also wrong from a business standpoint. Yes, the founders and VCs get what they want — but the founders have failed to solve the fundamental problem of their business.

Perhaps someday Google will be able to monetize the $1.7 billion they paid for YouTube; there are certainly going to be cases where the acquiring company has economies of scope (or distribution channels or negotiating leverage) to pull off business models that wouldn’t work for a stand-alone company.

But for every YouTube, there’s a MySpace (bought by Fox), Bebo (AOL), or Skype (eBay).

On the one hand, it’s hard for stand-alone tech companies to get established and compete against diversified and integrated tech giants — whether Apple, Cisco or Nokia. On the other hand, the idea that entrepreneurs should seek an exit prior to creating something of lasting value is part of the “born to flip” mentality that was briefly in vogue during the past decade.

So I think there are a few students in one MBA course at one university who are getting the message. Let’s hope that others do, too.

Ultra-bootstrapping

TiE Silicon Valley is hosting a session next week on what it calls “Ultra-bootstrapping”:

Wednesday, April 14, 2010
TiE Institute - Ultra-Bootstrapping: Building a Start-up without funding.

Event Host
Murrali Rangarajan, Director, TiE Institute

Keynote Speaker
Naeem Zafar, Berkeley-Haas Business School, founder Concordia Ventures

Panelists
AG Karunakaran, President and CEO, MulticoreWare, Inc
Murrali Rangarajan, Director, TiE Institute & Managing Director and Founder, Business Accelerator, LLC

For those who don’t know TiE, it was founded in 1992 in Silicon Valley by Indian-American entrepreneurs, but now has more of a South Asian orientation (with us Euro-Americans also welcome to participate).

The description of the event doesn’t sound very “ultra”, but just the normal definition of bootstrapping:

Learn how to manage your Business Operations tightly to run on minimum cash. Lead from the front. Build your team with the right values. This session will be ideal for professionals starting out, for entrepreneurs who are at that critical growth stage and for team members.

Still, I support anything that encourages and disseminates best practices in bootstrapping to current or prospective entrepreneurs, and hope people will attend.

I probably won’t be able to make it because I’m scheduled to be traveling on business, but I’ll look for it on the TiESV video archive.

37 years ago: Motorola’s first cellphone

A wonderful blog called “Today in History” runs a series of historic engineering firsts. (An RSS feed is of course available.)

On April 3, 1973, Motorola made the first phone call on its cell phone. The event is now remembered due to the indefatigable self-promotion of Martin Cooper, the point man for Motorola’s engineering efforts in its rivalry with AT&T. (My original dissertation topic was the development of the US mobile phone industry in the 1970s and 1980s, so this backstory is familiar territory that I captured in a book chapter.)

This example demonstrates the problem with the whole “this day in history” view of technological innovation. While AT&T began deploying mobile phones in the 1940s, Douglas Ring of AT&T invented the cellular phone idea as a way to reuse scarce radio frequencies. However, AT&T and then Motorola spent decades fighting TV broadcasters at the FCC to gain necessary spectrum.

Cooper and Motorola certainly deserve credit for envisioning the cellphone as a handset (even if brick-sized) rather than a carphone. But there were many milestones in the AT&T and Motorola demonstration systems from the 1970s until the FCC granted permission for the official launch in October 1983.

The previous blog posting also demonstrates the limitation, with April 1, 1976 remembered to be the founding day for the Apple Computer Company. The Apple I was an interesting circuit board, but the mass-produced Apple II (a complete computer with a case and keyboard) in 1977 is perhaps a more significant milestone.

The blog is inspirational to any aspiring engineer — existing or nascent entrepreneur — for summarizing major milestones in technological innovation that provide business opportunities for established firms like Motorola, startups like Apple, or even an occasional college professor like Charles Townes (inventor of the maser).

Yet another business plan defense

Nearly every entrepreneur has heard about the value of a business plan. Two new publications I found today — one in the Wall Street Journal, one in the Journal of Business Venturing — both reminded me of this topic and updated what I know about it.

This is not the first time I’ve considered the topic. Right now on my hard disk, I have about 15 articles from the business press and about two dozen academic articles. This doesn’t count books, including the four books I bought to teach business plans last year.

This semester, I am also helping one of our undergraduate honors consulting teams write three business plans in less than a month. Due to the accelerated schedule, we had to decide which part of the standard format to use from Jeffry Timmons’ wonderful abbreviated handbook.

Of course, I also blog about business plans here on this blog.

The Controversy

Ever since I met a job candidate several years who did his thesis on business plans, I have been following the debate in academia and the popular press about whether or not startups should do business plans.

Two of the more convincing arguments in favor of business plans are that business plans are a way to communicate with external constiuencies — like investors — and that it provides discipline to the authors. Arguments against focus on the inherent incompleteness (or obsolescence) of the plan and the opportunity cost of preparing one.

Academics — as they are wont to do — also argue about whether there’s a large N, well-controlled statistical study that shows benefits (or lack thereof) for firms that do business plans.

All of these arguments are applicable to potential high-growth startups in technology-based industries. If anything, the stakes are higher — a restaurant might start with a $50,000 capitalization while a photovoltaic company today needs more than $50 million.

Latest in the Business Press

Today the WSJ small business section ran an article endorsing business plans by a business plan consultant. The defense was framed in the negative — a list of “common misconceptions”:

1. Business plans aren't necessary unless you're planning to raise capital from banks or VCs.
2. Investors don't take business plans very seriously. They know that the numbers are garbage.
3. Nobody reads business plans any more. All you need is a deck of PowerPoint slides.
4. Nobody has a crystal ball that can predict your business's future. You're better off figuring things out as you go.
5. Business plans aren't necessary for a company that's already up and running. They're a distraction from running your business.

Here in Silicon Valley, I have heard entrepreneurs argue that the PPT deck is more important. My sense is that the PPT deck is what it takes to get seriously considered, but then some sort of real data — whether a Word document or a spreadsheet — is necessary to get a VC investment. (Angels seem to make their own rules).

Latest Academic Research

Also recently (in academic timescales), the top entrepreneurship journal (JBV) ran an article by a German-American team reviewing the business planning literature. Alas, as seems true for some academic journals, the paper was accepted in October 2008 but not published until January 2010. (Also regrettable is the use of an unmanageable paper title length.)
As in any good meta-analysis on a mature but disputed research stream, the conclusion is roughly: “they’re all correct because there are contingency factors that explain when business plans are and are not useful.”

For example, the authors conclude that brand new startups get less value from business plans than more established startups. The former face so many uncertainties about the unknowable that (the authors argue) that the “go obsolete” argument outweighs the value of the “planning is good” argument.

Conclusions

In my own experience — as an entrepreneur and now as a teacher — I’ve come to three conclusions:

• Every firm needs a business plan — but only selectively as time, information and needs allow. There is a huge benefit to some parts of the planning, but the specific needs will vary both by company and (as in the JBV 2010 study) the company’s age.
• Business plans must have numbers, even though they are GIGO. A back of the envelope calculation allows the entrepreneur to identify assumptions, risks, and at least an order-of-magnitude sanity check of even the simplest plan.
• Opportunity costs are relatively low for business students to write at least a simple business plan. The undergrad (or MBA) core covers all the basic skills, and thus a very rough business plan can be done by a competent business student in less than a month. (For example, we’ve had very good luck sending business students to help students from the award-winning SJSU industrial design program.)

These are not scientific findings, but these are the advice I’d give an entrepreneur or student today.

So if a nascent entrepreneur asks: “Should I write a business plan?” my answer is simple: “Yes, but…”

References

Jan Brinckmann, Dietmar Grichnik and Diana Kapsa, “Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning–performance relationship in small firms,” Journal of Business Venturing, Volume 25, Issue 1, January 2010, Pages 24-40. DOI: 10.1016/j.jbusvent.2008.10.007

Prosaic tech startups

Commoditization — or at least the business strategies of companies in mature industries — has become the norm for many tech companies. Wednesday morning, the Merc quoted Yahoo CEO Carol Bartz as accepting Yahoo’s shift away from innovation:

On the valley's perception that Yahoo is no longer a cutting-edge engineering company:
"We did lose that. . . . The comparison we get a lot, for instance, is Google. They've got a $4 billion engineering budget, and we've got a $1 billion engineering budget. We're not going to play with phones and broadband; we've got to play in our own space."

This is something that is increasingly central as I teach technology strategy to Silicon Valley engineers. Last semester, Exhibit A was the transformation of HP from innovation leader to the Fiorina-Hurd penny pinching era.

With my MBA students tonight, it was a much smaller story, that of JibJab the online greeting card company.

Two years ago, JibJab parlayed its clever political satire and ability to milk PR on the Tonight Show to create a viral hit during the Xmas 2007 season.

Since then, I’ve used JibJab with students to illustrate business models and the freemium idea. It’s a simple company to understand, unlike enterprise software, B2C/B2B social networking plays, and other more complex stories.

Today, JibJab has acquired many traits of a company in a mature industry, starting with the fad nature of its original business. The bouncing heads were novel then but now are old hat. (It also once claimed a pending patent would protect it from rivals, but now has non-exclusive rights to a third party patent.)

The company faces the challenges of any other entertainment studio of producing compelling original content on an ongoing basis. And if it’s not differentiated, its goal may be to create loyalty to the brand and the service to keep the customers it’s already won.

None of these are bad things. But it’s yet another example that success for many tech companies is less about innovation, and more about sales/marketing (ads, PR, distribution) as well as the ongoing challenge of execution.