In the beginning
Jul 14th 2009
From Economist.com
With traditional jobs difficult to come by, MBA students are increasingly looking to start their own businesses. We talk to three business-school graduates about what it takes to succeed
Aloysius Fekete, Chief Executive Officer, MaxBips
Business school can give you many of the useful attributes you need to be a successfulentrepreneur, says Aloysius Fekete, chief executive of London-based start-up MaxBips. But it can’t give you the only essential one: desire. “You just need that bug,” he explains. “That’s what drives you. Business school doesn’t necessarily give you that. But it does allow you to see the possibilities—and realise them—in a way that is more difficult without that experience.”
Taking some time away from corporate life also gave Mr Fekete the space to think clearly about what it was he wanted to achieve. “I did a two-year [MBA] programme, which was important because I needed that amount of time to re-programme myself,” he says. “[Becoming anentrepreneur] is a big step, a big risk to take. Yes there are skills you learn that are part of your toolkit. But there are also different ways of thinking.”
Indeed, risks don’t come much bigger than starting up a financial services firm in the middle of a banking crisis. But after graduating from the Schulich School of Business at York University in Canada, Mr Fekete moved to London and set up MaxBips, a website where small- and medium-size enterprises (SMEs) auction their surplus cash to banks. The bank offering the most favourable terms wins.
The financial environment has been a challenge for MaxBips. When the Bank of England dropped its base rate to 0.5%, it took the wind out of the sails of anyone looking for a decent rate of interest. Nevertheless, the company is flourishing because, like many a successful start-up, it has identified, and then plugged, a gap in the market. “Many SMEs hold their surplus cash in their current accounts, which these days earn 0% interest,” explains Mr Fekete. “The managing director of a company needs to do everything he can to maximise the efficiency of its cash management because the return on their surplus cash can make the difference between a profit- and a loss-making year.”
Furthermore, he isn’t shy over making bold claims about influence that he and his fellow entrepreneurs can bring to bear in the recession. “Frankly I think we will be the saviour of the economy,” he says. “There isn’t credit in the system to fund growth, so what will get us out of this is entrepreneurs coming in and finding new efficiencies for SMEs to do their business and finding better ways for business to run.”
Of course, a lack of credit doesn’t just affect existing SMEs. It is also an obvious barrier to starting up a business. It is therefore more vital than ever that entrepreneurs keep their costs as low as possible. The good news, says Mr Fakete, is that this is becoming easier to achieve. “There is a revolution happening in business and people are realising they can run their businesses much more cheaply. The internet is the enabler here. The internet has been around in commercial form for 10 or 15 years, but it has really yet to be integrated into how businesses function. Yes we all have computers but have we really changed the way we do things as businesses? There are so many things out there that can reduce your cost base in terms of internet technology; it is easier to run a virtual distributed workforce and a lot of services now like network support come a lot more cheaply.”
“Frankly I think we will be the saviour of the economy”
Despite coming from North America, the spiritual home of the entrepreneur, Mr Fakete says he has been surprised at how pain-free it has been to start up a business on the other side of the pond. “I’ve heard remarks that it’s not so easy to start a company in the UK, and perhaps that was the case five or ten years ago,” he says. “But my case has been a positive one. I really do get the sense that there is a growing and vibrant entrepreneurial community in London and there is a real desire to foster that. Starting a company was very easy from a red tape point-of-view.”
Despite this, he still recognises differences in culture. “From a funding point-of-view the States has a more well-developed venture-capital community. And there is also no stigma of having started a company and failed in the US—in fact it is looked upon somewhat positively; I’ve had the comment [from a venture capitalist] that he wouldn’t consider funding someone who hasn’t started at least one company and failed.” As he starts out on his first entrepreneurial venture, it is not a theory Mr Fakete is keen to test.
Ian Dailey, President and Co-Founder, Husk Insulation
Like so many MBA students, when Ian Dailey enrolled at the University of Michigan’s RossSchool of Business he knew that he wanted to start his own business at some point. He just didn’t expect it to happen so quickly.
“You will hear this from a lot of students,” he says. “The university has a high enrolment in the entrepreneurs’ club, but most take a look at the loans they have taken out [to pay for their tuition] and the uncertainty involved in setting up a business and they end up taking corporate jobs. I was in the same boat too. You may have aspirations to be an entrepreneur, but on-campus recruiting becomes such a big thing and everyone’s getting jobs left and right and you get sucked into that world of corporate presentations. But that never seemed right for me.”
Things changed for Mr Dailey after he encountered Professor Richard Laine from the university’s materials science department. He got to know the professor while serving an internship at Michigan's Office of Technology Transfer, which licenses products that have been invented within the university. On returning to the MBA programme and a class on new venture creation—essentially a business-plan writing course—he was searching around for a suitable idea for a case study. Professor Laine sprung to mind. “Since I had the relationship with the professor I approached him and he said: ‘I’ve got this thing that’s been on the back burner for a couple of years but I think it’s really promising—take a look.’”
What Professor Laine had developed was a way of converting an agricultural waste by-product, heading for landfill, into the core material for high-performance insulation panels that can be used in buildings and refrigerators. The resulting business plan was so impressive that Mr Dailey, along with four of his classmates, entered it into a university competition. They duly won, collecting $15,000 in cash in the process.
“I just try to fool myself everything will be OK. I don’t know of a better way to deal with it. But that’s what it takes to be an entrepreneur. You just have to have faith that it’s going to work out.”
Immediately Mr Dailey was faced with a dilemma: to carry on searching for a corporate job, or to make real a venture that he had only envisioned as an academic exercise. In the end, the collapse in the MBA jobs market helped cement his decision. “Anyone is going to find it more difficult to make that leap if they have got a $150,000 [job] offer from a consulting company or an investment bank,” he explains. “So in the absence of that the decision became a lot easier.”
The next problem was how to finance the start-up, which he named Husk Insulation. With venture capitalists smarting from the economic downturn, the team stumbled across a solution. With Michigan’s business-plan competition already in the bag, they packed their presentations and set about a rock-star-like tour of similar contests across America. “We said ‘OK, we’ve really got something here,’ and then we started entering into business-plan competitions all over the country. And we won at Carnegie Mellon, second place at Colorado, won a competition sponsored by Dow Chemicals and then most recently won the MIT clean energy prize competition.”
The MIT prize alone earned them $200,000. In all the team won $280,000, enough to give them all the capital they needed to start up the business. “The competitions took us from February to the middle of May, and that was my primary activity at that time—school took a back burner. But you learn so much during these competitions that it is just a fantastic educational experience in its own right. It is not a matter of doing a dog-and-pony show where you’ve got the same presentation you give over and over again—your business plan becomes a living document. We’d present it one day, get questions which frankly we didn’t have an answer to, and be up half the night re-working it to make it better.”
Since making the transition from business plan to live venture, Mr Dailey is yet to reap the personal rewards of his labour. Husk Insulation may be projecting revenue of $30m a year by 2014, but for the time being the company is absorbing every bit of spare cash. “I still don’t have money to spend on me,” he says. “It’s got to go to research, it’s got to go to travel, it’s got to go to a million other things before it’s going to go into my pocket.”
Such hardship is difficult enough at the best of times. But for an MBA graduate, there is the additional worry of servicing the debt accumulated paying for study; at Michigan tuition fees alone are over $41,000 per year. Mr Dailey remains sanguine, though. “Frankly I just try to fool myself everything will be OK. I don’t know of a better way to deal with it. I think you just have to remain flexible—you can cram down your loan payments so you’re paying just a little over interest so they don’t seem insurmountable. I tell myself in a couple of years I’ll be in better shape. But that’s what it takes to be an entrepreneur. You just have to have faith that it’s going to work out.”
Daniel Callaghan, Managing Director, MBA & Company
Daniel Callaghan says entrepreneurialism is in his blood. His family boasts a proud history of self-made men. Unlike them, though, he is the only one to have gone to business school first.
Having graduated this year with an MBA from IESE, in Spain, he saw what he believed to be a gap in the market and started MBA & Company, an internet platform that allows companies to find MBAs for short-term, freelance consultancy roles. The firm is particularly focused on small- and medium-sized enterprises, which are not only faring better than their larger counterparts in many instances (see article), but also often slip through the net of business school careers services.
But while starting a business has an obvious appeal for MBA students, as high-paying corporate jobs dry up, the rules have changed since the last great entrepreneurial era—the dotcom bubble of the early 2000s. Most notably, finance is far harder to come by. Subsequently, says Mr Callaghan, investors are only being tempted by start-ups that are cheap to get off the ground. “A high start-up base will very much damage your chances because people just don’t want to take that risk,” he says. His own finance is coming predominantly from “angel” investors—rich individuals that in many cases have been nurtured by IESE.
“You can’t learn the courage and conviction to keep pushing your business on”
The business model is particularly timely. With fewer students landing their dream roles, MBA & Co has a more talented pool of MBAs from which SMEs can draw. “Our business model does very well in a counter-cyclical market because it becomes all about cost savings and looking for a more flexible labour force, while maintaining the quality of the work [firms] produce,” says Mr Callaghan. “It is almost like labour arbitrage. Some of our students were due to start work at McKinsey or Bain in September, but had their job offers pushed back to January. So our clients are getting a guy for €40 ($56) an hour who would charge €300 [in a year’s time].”
But perhaps the most pressing question is why Mr Callaghan felt the need to go to abusiness school to become an entrepreneur, given that the other successful tycoons in his family had determinedly dodged them. What was it that IESE added that the rest of his family lacked? “It’s the technical and financial skills—the ability to have a conversation with professional investors—and the presentation and document-writing skills. These are the things that you can learn at business school. The things you can’t learn are the courage and conviction to keep pushing it on.”
