An MBA: The founder’s recipe for failure

See Original Article @ Quartz

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.

How US Policy is Forcing 5 million Americans to Reconsider US Citizenship

Imagine if both your parents were born citizens of Canada.  Now, imagine that they moved to the USA over 30 years ago (before you were born) and became US citizens themselves.  You are born in Texas, you have never been to Canada, and don’t have any plans to visit Canada.   

You are a red blooded American who can run for President.  However, you get a letter from the Canada Revenue Department telling you that you are a tax cheat and owe Canada money.  If you don’t pay massive penalties and fines for not “paying” your fair share of Canadian taxes over the past dozen years, they will prosecute you as a criminal.  Even worse, they will get access to you bank accounts and financial data in the USA.   If that happened to you, it would make you hate Canada, would it not? Well guess what. That is really happening. Except, the country doing it is not Canada, it’s the USA!

In the past 6 months, I have seen a high level of fear, apprehension, and outright anger with regards to this US policy amongst not only US citizens living abroad, but also people looking to become US citizens someday.  Given really  short sighted and  poorly thought through decisions by congress and a overzealous IRS, I fear that some of the smartest people living in foreign countries who might have become US citizens will not opt to stay in their home country. Worse yet, many Americans living in foreign countries and in the USA might outright renounce their US citizenship thanks to current policies that are both confusing and fear inspiring.

 

A little background.   The USA is the only country on the planet that taxes your entire worldwide income, regardless of where you live.  If you’re a US citizen who has lived in Australia for 20 years, you will still have to file taxes and probably pay taxes to the good old USA every year.    Japan used to have this policy as well. But they got rid of it several years ago due to the burden it caused its citizens.   Given this US law and a recent crackdown by the IRS called the Offshore Voluntary Disclosure Initiative, many US citizens are going to be unfairly punished over the next several years.  The Offshore Voluntary Disclosure Initiative allows “tax cheats” to come clean to the IRS by September 9th 2011 or face criminal prosecution.  The original intent of this program was to get rich people with Swiss bank accounts to come clean and save the IRS the headache of catching them.

 

However, since the scope now includes everyone and anyone with any foreign ties, this is quickly going to become one big mess.  Especially since many of these people and their CPAs probably thought they were doing everything according to law.  Many of the laws that the US is using to enforce this policy have been recently created and in most cases, they were old laws that were never enforced and being interpreted by the IRS to their favor.  Like the one where anyone born with US citizen parents is a citizen and has to pay taxes, regardless of the fact that they never lived in the USA.

 

Let’s take a look at how the upcoming September 9th deadline will affect US citizens.

 

USA Citizens Living Abroad: 4 to 5 million

Any US citizen living abroad, even those who have become citizens of other countries (and technically renouncing their US citizenship) are scrambling to figure out if they are going to be on Interpol’s most wanted list.  If you read some articles like this one in the Vancouver Sun and this one in their editorial, you will see that US citizens living in Canada are really worried.  When in fact, they never tried to do anything wrong and thought they were filing all the right forms.   Even children of US citizens who were born in Canada are considered US citizens by the IRS and subject to these penalties.  Does this even make sense to anyone?   I’m all for going after real tax cheats with offshore accounts, but this is a scorched earth policy by the USA.  They will cause tremendous harm to honest Americans living in foreign countries.  I’m sure we will see the most  people renouncing their US citizenship in the next few years ever.

 

 

USA Green Card Holders and Those Looking to Move to USA

 

In the past, it was not too difficult for smart well educated people from other counties to come to the USA for college, stay here, and build a better life for themselves and contribute to the country. However now, in additional to poor immigration visa laws, the new tax laws are making people come here for the education, but then take that skillset and go back home.

 

If I am a foreign born person who moves to the US and becomes a citizen or green card holder, every asset I had in my original country is subject to US taxation.  For example, if you were born and lived in the UK for 25 years, but moved to the USA 10 years ago, you might still have some property in the UK, maybe even a bank account or two.  Now, having lived in USA for 10 years and thinking you filed all the correct tax forms, the USA tells you that you evaded taxes by not properly declaring your UK assets and that they will prosecute you as a criminal. That is exactly what is happening to thousands of foreign born US citizens.  Take a look at articles like this one by Time of India and you’ll see the gravity of the situation.

 

I have spoken with many people who have moved back to China, India, Europe, and even South America.  They all had a few common themes about their reason to leave the USA.  The top three reasons were bad economy, immigration laws, and poor tax policy with regards to people like them who might live between the US and their home country.  In several talks, people said that even with an expired Green card, the IRS could come after them.    In fact, several people I interviewed said they decided to NOT get US citizenship even though they got notices from the INS that they were eligible for it and to come and take the Naturalization Exam.  They preferred to stay on a worker visa so that they would not be forced to comply with US policy for the rest of their life they decided to live someplace else later in life.

 

I’m all for the IRS going after people who hide hundreds of millions of dollars in foreign accounts and  increase the burden on the rest of us Americans.  But in this case, they are throwing out the baby with the bath water.  The USA is still the greatest show on earth, but the cost and headache of admission is becoming high enough that many people prefer to stay home.  We are going to get more people renouncing their US citizenship and even more people who were thinking about getting citizenship, instead deciding to go elsewhere.

 

We need our government to promote policies that incentivize smart, motivated, and hungry people to want to come to America, as opposed to giving them reasons to stay at home or leave altogether.  By going after this policy with such vigor, the US will probably lose out on even bigger tax revenue that might have been generated by people who stayed US citizens and created companies and jobs.

 

 

Jay Bhatti to Councilwoman: Why did you ask Steve Jobs for Free WiFi?

Cupertino Councilwoman: Here’s Why I Asked Steve Jobs For Free Wifi

Read more: http://www.businessinsider.com/apple-spaceship-cupertino-councilwoman-2011-6#ixzz1YnTMesw7

 

 

When Steve Jobs appeared before the city of Cupertino to pitch Apple’s new HQ, one particular exchange with the city council caught our attention.

 

Councilwoman Kris Wang asked, “Do we get free wifi or something like that?”

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How Startups Should Deal With Cliff Vesting For Employees

This article was published on Business Insider, click here to see original post.

 

One of the most exciting aspects of joining a startup is getting stock options. It gives you ownership in the company and aligns incentives between management and employees. However, one part of the standard options package causes a lot of debate amongst employees and management. It’s the Cliff.

A typical options vesting package spans four years with a one year cliff. A one year cliff means that you will not get any shares vested until the first anniversary of your start date. At the one year anniversary, you will have 25% of your shares vested. After that, vesting occurs monthly. So, if I’m a startup engineer granted 4,800 shares in my options package, at the one year mark, I get 1,200 shares vested (if I quit or am fired before that date, I get zero). After the one year mark, each month I stay with the company, I get another 100 shares vested (1/48th of the options package).

 

Many startup employees hate the one year cliff. Managers and VCs like it since they think employees will work really hard to make sure that they reach the cliff date. Employees, on the other hand worry that management will let them go just before they reach the cliff. The sad thing is that I have seen this occur at startups. You have an employee who is decent, but not great. Management keeps him or her for nearly a year, but then let’s them go a month before the cliff.

Many managers see this as a way to make sure stock is only going to employees who are worth it. If you’re the employee in this situation, you’re angry. You took the risk of joining a startup and they let you go just weeks or days before the cliff. In most cases, there is not much you can do. It was written in your employment agreement and you signed it.

On the other end of the curve, I have known people who join startups early, but only stay a little over a year and then go join another startup. They call it hedging their bets.They get 25% of their shares vested in the startups they join and hope that one of the startups they worked at makes its big. One person I know worked at Facebook for only a year in 2005 and then quit soon after his cliff date. While he probably made a lot from the shares that had vested, he probably would have made more had he stayed.  But these types think like “Why put all your eggs in one basket, right!” The founders at startups get really worked up when an employee does such a thing. It makes them worry about losing other employees who might now be considering the same.

As you approach the cliff date, you notice a lot of interesting things happen. In some cases, before the cliff date, an employee will go out of their way to work harder to show their value, or stay out of sight and not cause attention to themselves. After the cliff date, management is usually looking at their employee and hoping that they are happy and not considering jumping ship. The time right before and after the cliff is interesting to say the least for a lot of startups.

At my first startup, if we let someone go due to performance before their cliff date, we gave them shares in the company equal to the months they were with us. Thus, we made it as if there was no cliff date at all.  We did this for a few reasons. First, if we let someone go but they tried their best, yet it was just not a good fit, we saw no reason not to make sure they stay aligned with the interests of the company. In fact, some of the people we let go did help us in other ways once they left. I don’t think they would have done this if we did not give them shares. Second, it sends a good message to your current employees that you’re fair in your dealings with the staff.  Furthermore, in some cases where you think the employee is not happy at being let go, you can make the shares conditional on them signing a waiver of some sort. Finally, we just thought it was the right thing to do.

One of the other things we did, and I am sure we were rare in this occasion was to give a 6 month cliff to employees who we really liked and wanted to recruit. It made them feel more comfortable joining us, and gave them the sense that we wanted them long-term. It turned out to be a good recruiting tool to ingrain trust.

In addition to employees, if the founders of a startup raise venture capital, they also go under a vesting schedule imposed by the VCs. For example, if you are two person startup, before venture financing, you each own 50% of the company. After financing, let’s say you get $1m on a $4m pre-money valuation – which means that you gave 20% to VCs, and also create an option pool of 20% for new employees; you now only own 30% of the business. However, you have to earn that 30% over 4 years. Most of the time, if the entrepreneur is experienced in negotiating, they can ask for credit on their vesting for the months they were working in the concept prior to financing, and also waive any cliff in their stock. In this example, by just raising $1m, each founder basically went from owning 50% outright, to owning less than 1% outright and having to earn the rest of it back!

I have seen the founder of one very well know startup get kicked out by the VCs with only a year of vesting under his belt. He went from owning 100% of the company when he started to being fired and only owning about 1% after dilution from other rounds of funding and the fact that he did not get through his vesting cycle.  As more people look to join startups or do startups, it’s important for both founders and employees to understand the various triggers in their stock options agreement.

One thing I do recommend to founders who do not plan to raise VC capital, is to put yourselves on a self-imposed vesting schedule. How many stories have you heard about one founder leaving early but getting the rewards of the other founders work and effort.  Only because they both signed up as equal partners from the beginning. A good recent example is Paul Allen, where in his new book he talks about how Bill Gates tried to take away his stake in the company, since Gates thought Allen was no longer worthy of those shares due to lack of time in the office (a result of illness and other interests). If each founder of a self-funded startup has to earn their equity, it can save a lot of potential issues down the road, and also give each founder the feeling that everyone is motivated to earn their equity.  In closing:

To people looking to join a startup – Remember that joining a startup is a lot about trust and relationship. You’ll have to be at the startup for some time in order to get all your shares. It’s important that you join a company that not only has great potential as a business, but one that also has a management team you can trust and get along with for the long haul.

To founders taking venture capital – Almost all VCs will ask you to go on a vesting schedule. Their biggest fear is writing you a big check and then one of the founders jumping ship early with a lot of equity. Make sure that the VCs vision of your company is aligned with your vision. If you have doubts about your VC at the honeymoon phase (when they give you capital), imagine what might occur when things are not going so well!  If you have been working on your start-up for some time before raising a round of capital, then make sure to ask for credit on the months you have already put into the business.

To Founders NOT raising venture capital – If two people are coming together to form a company and they are lucky enough to not need outside financing, it’s still important to make sure all the founders feel that everyone earned their fair share.  Put yourselves on a vesting schedule. For example, each founder would earn 1/48th of their equity in the company over a 4 year period. This makes sense to a lot of founder and helps align long-term interests.

 

 

Read more: http://www.businessinsider.com/everything-you-need-to-know-about-cliff-vesting-2011-5#ixzz1Lgt1MaW9

 

THE FUTURE OF BING: Microsoft’s Next Big Partnerships

This article was written by Jay Bhatti and published on Business Insider – Click here to view.

 

My last article regarding Bing’s partnership with Kayak resulted in several emails asking who Bing might partner with next.  It’s an interesting question and one that merits thoughtful consideration.

Let’s go back a few years, when Bing was officially launched. On May 28, 2009, Microsoft launched Bing and Steve Ballmer declared it the decision engine. In the press release, Microsoft specifically called out Travel, Shopping, Local and Health as verticals where they wanted to simplify the task for consumers.

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5 Things The Kayak Deal Tells Us About Bing

This article was written by Jay Bhatti and appeared on businessinsider.com – click here to see full version.

On Friday, Microsoft announced apartnership with Kayak to provide travel results. Jay Bhatti is a former Microsoft employee who founded the people-search engine Spock. Here’s what he sees in the deal:

1. Microsoft purchased Farecast a few years ago for more than $100 million. It’s safe to assume that it was another waste of money for Microsoft. The Farecast team combined with Microsoft’s resources could not build a compelling enough product to compete with Kayak. Heck, two years ago, Kayak complained to Microsoft that Bing’s travel product looked identical to Kayak. Looks like $100 million gets you a team that at least knows how to copy and paste.

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Darwin Ventures Appoints Jay Bhatti, Veteran Vertical Search Engine Entrepreneur, as a New General Partner and Opens an Office in New York City

SAN FRANCISCO–(BUSINESS WIRE)–Darwin Ventures, a private equity firm focused on venture capital, today announced that Jay Bhatti has joined the firm as a General Partner and Zach Heilman has joined as Lead Engineering Manager. “Expanding the Darwin Ventures team with Jay and Zach will allow us to focus on new opportunities in the burgeoning New York City business environment,” said Peter Freudenthal, managing general partner of Darwin Ventures. “We are very excited to have Jay aboard as our new partner and Zach as our lead engineering manager. We feel that their unique skill sets will allow us to expand our existing business interests in Manhattan.” “Internet search has been my core technology interest for many years, and the addition of Jay and Zach plants our flag in New York City,” said Frank Caufield, managing general partner.

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Why Did Google Breakup With My Website?

When it comes to relationships on the web, there are none as one sided as the one between Google and your website.  Google can decide at anytime to rank your site higher, lower, or remove it all together from its entire index.

Google’s rankings have helped some small e-commerce merchants grow to heights they never imagined, and in other cases, it has caused businesses to go bankrupt!

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New Beginnings

Well, after selling Spock.com and spending a year with the acquiring company, I am now ready to embark on my next venture. I moved to NYC this time. Decided that one startup in the valley was enough. Today, we got office space:)

Lets see what happens this time around.

Does the iPad deliver?

As one of the more anticipated events in the tech community, Apple’s latest invention did not disappoint. In officially unveiling the new iPad, Steve Jobs took on the Amazon Kindle and once again raised the bar for its competitors. While pundits have criticized the iPad for lacking a true identity (and they are certainly right to an extent), similar to the iPhone, the iPad should encourage further innovation and will impact multiple industries. Taking a closer look at the iPad strictly as an e-reader, it is an interesting product that has advantages and disadvantages over the Kindle.

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How Bad is Microsoft About Product Quality

Microsoft recently added Bing Local. A direct competitor to Google Local Business Listings.    However, check out the business claiming page on Bing today:

https://ssl.bing.com/listings/ListingCenter.aspx

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As a former Microsoft Product Manager, it pains me to no end to see how poor Microsoft performs on delivering quality products.

Spreadsheets won’t change the world but leaders will

Issue date: 12/3/01   – PDF | Link

This article was written by Jay Bhatti on 12/03/2001 for the Wharton School

It was still a few years before World War II. General Douglas MacArthur was a pretty popular man. Given his status, the executives at JP Morgan offered him a very high level position at the bank. One that would have made him very rich and amongst the most high-class people in New York City. His wife at the time (he later divorced her!) was constantly egging him on to take the job. She was, after all, very keen on being associated with the elite and having the best that life had to offer – in short, she was tired of living on a military salary. Yet, in a stunning move, General MacArthur turned down this golden position. When asked why, he simply said, “Bankers don’t make history.” So what happened to General MacArthur after that bad career move? He went on to lead the Pacific Fleet to victory in WWII, and, in short, made history. In October 1944 the world watched as he dramatically liberated the Philippines from Japanese control. On September 2, 1945, he presided over the Japanese surrender on board the U.S.S. Missouri, bringing an end to World War II. In the next five and a half years, as Supreme Commander of the Allied Powers in Japan, MacArthur and his staff helped a devastated Japan rebuild itself, institute a democratic government, and chart a course that has made it one of the world’s leading industrial powers. While his decision to ding JPMorgan may have been surprising at the time, one thing is clear: Douglas MacArthur fulfilled his self-imposed destiny of becoming one of history’s greatest men.

Now the point of the story is not to encourage Wharton MBAs to join the Navy, but rather to debate about what our underlying mission is as an institution. Is it to create spreadsheet monkeys and consulting goons? Or is it to help develop the future leaders of society?

I cannot count how many times I have heard the following quote “I don’t want to major in Finance, but I am at Wharton, and it would look bad if I did not have some solid NPV skills!”

If you look at the past 100 years of human history, what have been the attributes that have had the greatest impact on society? I would say that leadership, entrepreneurship, and innovation have by far been the factors that most shaped the world we live in today. Should it not make sense that we as a leading institution of higher education focus our energies on these very things? I am not suggesting that we eliminate all the finance and quant courses at Wharton. What I am suggesting is that we place a greater emphasis on those classes and programs that would best equip students to lead, innovate, and create.

For example, instead of having math camp for two weeks at pre-term, would it not be more valuable to have a week long class that discusses what is meant by Wharton leadership? Maybe we can have discussions/sessions with some of the remarkable leaders that have come from Wharton and how they impacted society?

Hey, I know this sounds fluffy, but if students can more closely align their passions with what they do with most of their time, don’t you think that they will be better leaders? I mean, if you are really passionate about public service, and instead you go and work for an I-bank, would you wake up in the morning excited about going to work? From day one at this school, the focus of the school should be to find out what each student is most passionate about and then work with the student to prepare him/her to become the best they can be in their respective field! Place a stronger emphasis on classes that discuss leadership (with the right professors!), put into place stronger programs that would make more students consider entrepreneurship, and foster a spirit of innovation and risk taking in every class. Have more joint-programs/classes with the engineering school to allow MBA students to find out what is really happening in the world of technology and science. For example, the first computer in the world was made here, but did any Wharton MBA take advantage of this? FYI, the engineering school is doing some really cool research on nanotechnology. Maybe you should pay a visit.

In my “Seminar on Leadership” classes this semester, we had the opportunity to have an hour-long chat session with Dean Harker. In this session, Dean Harker stressed the point of Wharton moving to the next level. He mentioned that since the early 1980’s, Wharton’s mission was to be #1. Having accomplished that, he said the next challenge was to change the culture of the school: to move away from the rankings, to more closely focus on becoming the best learning institution in the world, to make the alumni and students more connected with each other, and to develop leaders who represent the Wharton style of leadership. It is time for the school to go back to what it was created to do: “To help develop leaders in professional, community, and personal character.” Part of this effort requires us to place less of an emphaisis on the calculator and more on the human element of the equation. After all, you manage a calculator, but you lead people.

I am willing to bet my bottom dollar that the people who will have the most impact on this world in the next 100 years will be those that can lead with passion, take huge risks, create new enterprises, and understand that innovation is the engine that moves society. These are the attributes that the school needs to develop in its students. Let’s focus our energies on this and not as much on the quant classes (save them for the undergrads). In short, Wharton should work harder to develop 800-pound gorillas and not spreadsheet monkeys.