01 Oct 2000
The Entrepreneurial Venture
Today's frenzied world of dot-com mania might have been hard to predict 25 years ago,
but the Class of 1975 has always had an eye for opportunity. For its time, the class
had a sizable number of military officers familiar with strategic tactics and
pioneering women who boldly crossed the gender line. Not surprisingly, therefore, the
class has no shortage of members involved in the sort of entrepreneurial ventures
that demand innovative thinking.
While many classmates started out in more traditional settings, within a decade of
earning their MBAs, almost half had broken away from a rapidly changing corporate
world beset by reorganization, downsizing, and recession. Of that group, the Bulletin
asked four members of the class to share some of their views on sizing up and seizing
opportunity. Their discussion gives insights into the last quarter century, not only
in terms of entrepreneurship but also in the dynamics of the free-enterprise system
In 1975, venture funding in the United States totaled about $50 million. Today, it is
somewhere between $50 and $100 billion. What triggered this explosive growth?
Ed Kane: Three important events happened at the end of the 1970s. First, there were
changes in ERISA (Employee Retirement Income Security Act) legislation that allowed
pension funds to invest in private equity; second, the growth of the microprocessor
and the semiconductor; and third, the rise of entrepreneurial activity, which drew
people away from large companies and encouraged them to take risks.
Bill Sahlman: Also, when we graduated from HBS, the economy was in recession,
inflation and interest rates were high, productivity growth was low, and the stock
market was in the tank. It is not at all surprising that the venture capital industry
was essentially dormant at the time. But with the growth of the microprocessor and of
biotechnology in the late 1970s, as well as the deregulation of the airline and
financial services industries, new opportunities for eager entrepreneurs were
created. New companies challenged the status quo, and the old, "safe" jobs turned out
to be not very safe at all, as large companies entered extended periods of malaise
Ed O'Lear: It's important to note why money managers decided to allocate significant
assets to venture funds -- performance. Companies such as Microsoft, Cisco, Oracle,
Sun, Genentech, Amgen, Dell, and Compaq didn't exist in 1975! Once these managers
decided to allocate a percentage to venture investments, they typically increased
that percentage by investing in multiple venture funds and diversifying within the
Ruth Owades: When I started Gardener's Eden in 1979, I couldn't get venture funding.
There wasn't much available back then. Some ten years later, when I started Calyx
& Corolla, the difference was phenomenal. And, of course, now there is even more
venture capital available. Some of the difference was that I had a success under my
belt, but some of it was simply that entrepreneurial companies were both more common
and more successful.
Entrepreneurs often find opportunity amid upheaval. Can you give us an example from
your own experience?
Owades: We had a huge problem in 1994 at Calyx & Corolla when there was a
horrible blizzard the weekend of Valentine's Day. For the first time, FedEx closed
due to the storm and would not be able to deliver our flowers. In the flower
business, you are given credit for making a marriage work, and you're also blamed for
destroying a relationship. We knew we were going to have some very disappointed
customers on Valentine's Day, so we decided to offer the best customer service ever.
We called every single customer and explained that our reshipment would be late. We
sent a follow-up letter of apology from me and included a discount coupon on a future
purchase. It was a home run with our customers. Instead of losing them, we developed
immensely loyal customers.
Sahlman: I took advantage of the opportunity to avoid upheaval by pursuing the only
job from which you can't get fired! Actually, my colleagues and I try to focus on
great questions, which are enduring, as opposed to focusing on great answers, which
may change with the passage of time. What was an opportunity in 1975 or 1980 is
probably no longer an opportunity today. At the same time, the questions that lead
one to identify an opportunity are the same as they have always been--for instance,
who are the customers, and how do they make decisions?
O'Lear: I have been involved in microeconomic (company specific) upheaval. Prior to
starting a company with two others, I worked at two high-tech companies: a privately
held cardiac ultrasound imaging company and a VC-backed biotech company. Neither went
bankrupt, but they do not exist today. Both underwent significant upheaval, and this
helped me to become a better investor, manager, and entrepreneur.
What makes the United States such fertile ground for entrepreneurs? Can the rest of
the world catch up?
Sahlman: The U.S. system is characterized by a high degree of mobility of capital and
labor. Opportunity-seeking entrepreneurs are plentiful: They can gain access to human
and financial capital; they can overcome barriers to entry; and they can succeed in
economic, social, and political terms. I suspect that the rest of the world will
shift in this direction fairly rapidly.
Owades: America is still the land of opportunity, where you don't have to be born
with a silver spoon in your mouth to do well. Entrepreneurship provides a great
chance to prove that. I absolutely think that the rest of the world can catch up. As
a country, we should not rest on our laurels.
Kane: I believe many Americans feel a disdain for the government, and they see
private enterprise as a way of fighting the system. I also think that in the United
States, people are more likely to strike out on their own and are freer to move
O'Lear: Right now the United States has a competitive advantage; however, that
advantage can narrow as the rest of the world catches up or as we become complacent.
I think that as individual countries try to catch up, they will become more
"American" and make very conscious and painful political and economic decisions. In
many developed countries, taxes are confiscatory, and in many developing countries,
there is no legal protection for intellectual property. Horatio Alger is alive and
well in the United States; individual success and achievement is a value encouraged
and protected by the government. In many other countries, collective mediocrity is
the desired outcome. Also, in America failure is acceptable. Learning from failure
can be an important element of future success. These entrepreneurial values are not
necessarily present to the same degree in other countries' cultures.
Given your 25 years of experience (and the fact that you have seen recessions and
market fluctuations), what is your advice to less-seasoned HBS graduates?
O'Lear: Buckle your seatbelt. If you accept the premise that the U.S. postindustrial
economy reflects Darwinian capitalism, then it follows that economic contractions
could be more severe since there are fewer governmental controls and safety nets than
in other countries. The second quarter of this year provided a "correction" in U.S.
equity markets, and a lot of dot-coms have become dot-bombs.
Kane: We actually have people in our company who have worked for ten years and have
not seen an economic downturn. That concerns me. We grew up with a pretty severe
recession in 1970, another in 1975, and another in 1990. For today's grads, the next
recession will be their first. I say, brace for impact. Take cover.
Owades: I agree. When we graduated we were grateful just to get a job. I believe it
is good to have experienced global fluctuations when you are running a business,
because it makes you a smarter, more thoughtful executive.
Sahlman: In general, I find that competent people can overcome cycles, even dramatic
ones, in the capital markets. I don't think even the graduates who enter an industry
at precisely the wrong time end up suffering too badly: resilience and
decision-making on the fly are two traits we try to inculcate in students before they
Describe your version of an ideal relationship between entrepreneur and venture
Kane: The VC has to be a good listener. Entrepreneurs are egocentric, type A
personalities; they will express themselves but need to think things through. A good
VC will be both a sounding board and a whipping post. He or she should open doors,
make introductions, and stay engaged without being a nuisance.
Owades: No offense but I think the best situation is not to need venture capital
money! For Calyx & Corolla, the top VCs were courting me, but I realized I didn't
need them. So I started the company with private financing, and later -- after we'd
already proved credible and viable -- I took some venture funding. Things have
changed with the rise of the Internet and dot-coms; VCs now take a much more
proactive role in the business.
O'Lear: Since I'm both an entrepreneur and an investor, I believe it's fundamental to
have a shared vision. For me as an entrepreneur, getting the "best valuation"
initially is not as important as having investors who buy into the vision and have
complementary skills or experiences. The "been there, seen that" experience of the VC
can be invaluable. Start-ups are intense, and sometimes a VC can provide the
necessary, detached sanity check.
Sahlman: Good venture capitalists are process literate: They have been through the
game many times, they know where the traps are, and they know how to avoid them. They
also have a strong set of relationships that they can bring to bear to help the
entrepreneurial team succeed. Usually the most important role is in recruiting that
team: Great venture capitalists can identify and convince great managers to sign on.
What do you find to be the most challenging aspect of your work? How do you deal with
Owades: People. In every capacity -- employees, investors, strategic partners,
customers, the press. Understanding what motivates people is the most potent tool and
the most challenging aspect of my work, especially in a market such as today's where
good people are becoming scarcer.
O'Lear: Our biggest challenge is to identify, attract, and retain good people for our
companies. We're essentially looking for the kind of people who would have wanted to
sign on with Columbus for his first voyage west.
Sahlman: When I first proposed to teach a course in Entrepreneurial Finance, I was
told it was the stupidest idea in the world. One tenured faculty member described the
area of entrepreneurship as an intellectual onion -- you peel back layer after layer,
never finding a core idea, and all you do is cry. Another colleague told me that the
likelihood of getting promoted would be inversely correlated with the teaching
ratings I got. I have discovered that change is hard and listening to advice is
problematic. Sometimes, the best advice is to do what you are passionate about and
let the chips fall where they may.
Class of MBA 1975, Section B
Class of MBA 1975, Section D
Class of MBA 1975, Section G
Class of MBA 1975, Section E
Class of MBA 1975, Section A
Class of MBA 1975, Section E
Class of MBA 1975, Section G