So you think an MBA arms you with the skills needed to launch a successful company?
Think again. The degree might actually make you risk averse and cripple your ability to innovate.
In a recent article for Quartz, I wrote about how MBA programs are not designed to help students become better entrepreneurs. However, when MBA graduates decide to go out on their own, I found that they have the same failure rate as non-MBAs. I talked to professors, angel investors and venture capitalists, and none sees a correlation between a startup’s success and the founders having an MBA. Collectively, they have dealt with more than 300 such companies over the last 20 years.
While there have been recent MBA startup successes like BirchBox (Harvard) and Warby Parker (Wharton), the founders of these companies were already high-achieving individuals who got into top programs and probably could have succeeded without their MBAs. In an article by Reuters, career services departments at major MBA programs reported that in 2011, nearly 5% of the graduating class started a company right after graduation. Taking just Harvard and Wharton, which each graduate 800 MBAs every year, that means about 80 startups were founded in 2011, from which only one of two have become standout companies (i.e. the BirchBoxes and Warby Parkers). The overall failure rate is about 90% for all startups. (In venture capital terms, a failure is when the startup fails to produce a positive return on investment for the fund.)
While many non-MBAs might fail at a startup because they lack marketing experience, business development expertise, the ability to manage cash flow — things that two years of business school can teach you — MBAs fail at launching successful startups for one big reason: their inability to identify innovation.
“I’m not sure it is the MBA degree that matters positively or negatively for startup success. But I do think the expectation of what that degree should bring is what creates a lot of cultural and performance problems with MBA’s and startups,” says David Stern, a prominent VC at Clearstone Ventures. One of the common concerns voiced by startups who have MBA founders is that they are book smart and detailed, but lack the ability to change and adjust quickly in a fluid market.
VCs believe that MBAs spend too much time thinking about the business, as opposed to being able to identify and build the underlying technology that will create a stand-alone company someday. And one angel investor reminded me of a famous line from Bill Gates, where he stated that he “only spends about 10% of his time thinking about the business and 90% of the time on emerging technology.”
This VC felt that founders who were “MBA heavy” spent too much time away from the innovation side of the startup market/industry, making them less likely to identify the technology that would make them break out from the competition.
The reason MBAs fail at identifying innovation is that they get committed too early to a particular “innovation” and do not know when to pivot or experiment with other models. If you look at MBA programs in detail, you’ll notice that many of the core classes teach the following philosophy: with enough data, enough analysis, and enough focus groups, you can come to the optimal solution for any problem.
While this line of thinking works well in private equity or hedge funds, where you can analyze years of data about a company and model out how the companies’ profits will be impacted by changes in the market or changes in the structure of the company, you cannot do this type of analysis when trying to innovate. When it comes to innovation, an MBA is probably the worst training you could have.
The MBA program is designed to teach people to look at prior data and patterns in order to identify future outcomes. In the real world, this just does not work when it comes to new markets or innovation.
I have seen many of my MBA friends go out and do years’ worth of research, analysis, focus groups around their “perfect idea” and execution plan. Once they’re convinced that the data supports their idea, they spend years toiling away to make the idea work. I keep telling them to pivot or experiment with other models, but they stand firm on their belief that all the research they have done confirms that they are on the right path and they just need to keep pushing forward and eventually they will succeed.
If human nature is predictive, this is not surprising. When you commit so much time and effort into something, you tend to stick with it and not change direction. We are all guilty of it. If I stand in line waiting for something, with every passing minute, I become more determined to “stick it through” just because of my sunk costs. Many home owners stayed in lose-lose situations during the financial crisis because they believed they could not let go of their home because of all the previous time and capital put into a house. No matter what the cost to their future might be, they refused to let go of the past and marched toward bankruptcy.
It’s not much different in startup land. Many MBAs and non-MBAs become so committed to a certain model that they refuse to do what is best for them at that moment in time. In fact, large companies can be called out for being even worse at this. How many times have you seen a big organization go after the same model that worked for them in the past (Microsoft, BlackBerry, Yahoo) only to fail again and again when trying to enter a new market?
Innovation is hard. Yet, it’s the only thing that will allow you to create a truly unique company that can have staying power. Looking at the past for innovation is a mistake. Yet, MBA schools and large corporations tell us to do this all the time. There are hundreds of startups that had great teams, huge funding, but could not identify the right product to build because they did not move fast enough in terms of identifying the right innovation for their particular market. Maybe they should have skipped the MBA and gotten right to work.
Originally published at www.jaybhatti.com.