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MBA Founders Under Pressure To Make Ventures Perform

The majority of start-up companies are destined to fail. So how do business school students deal with the pressure to perform?

Wed Dec 17 2014

On weekday mornings Nitzan Yudan makes the journey into London’s Tech City with business on his mind. His start-up, FlatClub, has become a hit around Silicon Roundabout, the UK’s answer to San Francisco’s Valley, with a venture capital funding round raising $1.5 million in just three years of the company’s existence.

The business, disrupting the rentals market with cheap stays targeting students online, demands he stay connected all the time. As a start-up founder, the lines between work and life are increasingly blurred.

“I believe all entrepreneurs are a bit crazy,” says Nitzan. He’s an entrepreneurial graduate of London Business School’s MBA who launched FlatClub in 2010 after a frustrating experience finding accommodation for a summer internship with American Express.

Rising to prominence last year, the company raised financing from a group of investors that included backers at VC firms Coller Capital and InterCapital. But with new investment comes new pressures.

Nitzan is unashamedly honest about his commitment to the cause. “Work becomes life and life becomes work… The business is always there in my mind,” he says. He started the business with five flats on his website; by the end of next year there will be 50,000 properties being rented on the portal.

The tech sector is booming and entrepreneurs are becoming dab hands at information wizardry. Just a stone’s throw away from FlatClub’s offices many more start-up founders are trying to invent the future, spurred by the successes and eye-watering valuations that have become common in Silicon Valley.

But many more are struggling and while business schools trumpet their efforts to aid innovation and entrepreneurship, the reality is that most of their students are destined to fail. The hours required to run start-ups would make an investment banker wince.

“My recipe for keeping up is to take 10-15 minute power naps,” says Nazareno Ciccarello, founder of consumer goods group Functional Gums who earned an MBA at IE Business School in Spain last year.

Entrepreneurship is drawing business students from all over. At Wharton, 55 students from the MBA class of 2014 started their own businesses or are self-employed, up 50% from five years ago. Other schools post similar figures. At Rotterdam School of Management in Europe, 25% of all graduates are active entrepreneurs.

But less than half of Rotterdam’s start-ups survive and that is not uncommon at business schools and beyond. Shikhar Ghosh, a professor at Harvard Business School, estimates that up to 80% of start-ups miss their projected return on investment and up to 40% end up liquidating their assets.

“You know how much work you have put in to flip the business plan and make it a real venture,” says Nazareno. “After all the good and the bad times you have gone through, you really want to see how far you can make it. I call it ‘entrepreneurs’ curiosity’.”

The ease with which entrepreneurs can secure investment and the relatively lean nature of many start-ups means that the pace of development is quicker than ever before. For those that do secure funding, backers will want to see a return on their investment sooner rather than later, often heaping pressure onto already heavy shoulders.

For MBA students who are still paying off tuition this is even more of a problem. “It’s a massive amount on its own. You’ve got to add up accommodation costs, living expenses and most importantly the salary you sacrificed while studying,” says Basel Hammoda, the founder of Blue Ocean Consulting who graduated from Aston Business School’s MBA this year.

But many start-up founders also agree that business school gives you an air of credibility that can be fodder for investors who are willing to gamble on risky ventures.

Ashuveen Linsbichler co-founded VEVA (previously Drinqsmart) in June last year while on the cusp of graduating from the EMBA program at Cass Business School. Based in London’s tech start-up hotspot that is on Cass’ doorstep – dubbed Tech City by locals – the company operates a smartphone app for socialising in London, complimented by a web portal for promotional activity for drinks venues.

“An MBA positively affects your ability to fund, due to the potential founder and investor pool it opens up,” says Ashuveen. But she warns that entrepreneurs tend to be cash strapped for at least the first couple of years in business. “If investors are not willing [to invest] then you should strongly reconsider the strategy or concept before pouring in all of your personal savings,” she says.

This isn’t Ashuveen’s first business. She used to work for her family’s enterprises – one was sold 10 years ago and the others are still running, with plans to create a chain under a single brand. But other entrepreneurs have not enjoyed such success; many have had multiple losses and are still searching for that golden idea.

Nitzan was part of two start-ups before his flat rentals venture. One of them had 90% market share and the other went bust. “The learning I got from both of them serves me every day when taking decisions about managing FlatClub,” he says.

Business students know the risks associated with such ventures but the key is to learn from past mistakes. For many founders it is adapt or die. For Ashuveen, “pivoting” – when an entrepreneur changes strategy – came in the form of rebranding to VEVA. Her previous brand Drinqsmart felt too corporate for an app that fosters a “night out” on the town, she suggests.

“We needed a fun, vibrant and simply awesome brand that suited our product and made you think about having a good time,” she says. That, however, requires even more time. “As the start-up starts to develop, time becomes more expensive,” says Ashuveen.

The struggles of start-up life are not often widely discussed but they are crucial to inform potential entrepreneurs. Sam Altman, head of leading start-up incubator Y Combinator, recently wrote a widely read blog titled “Founder Depression” that encouraged founders to talk about their problems rather than tough them out alone.

“I spent on average more than 10 hours every day including weekends developing my business over the past six months, and still expect to continue working at the same pace, if not even faster, for another year,” says Basel, whose venture Blue Ocean Consulting provides strategic guidance and business model development in return for equity in other companies.

“It’s not uncommon that you will start doubting your business potential and sometimes you will even doubt your own abilities as a professional,” he says. But that is where business schools come into play.

“Teachers, classmates, and alumni are a great source of inspiration,” says Peter Kovari, co-founder of London-based minicab app Bounce who studied an EMBA at London Business School. “The MBA teaches a wide range of subjects that are relevant to any business,” he says.

His first venture was an internet start-up that he founded while at university. He left to start a corporate career at IBM but the venture is still chugging on. His end goal for Bounce is a healthy exit that makes a difference but he knows that there are many challenges he will need to overcome.

“The ‘start-up life’ is a constant stream of ups and downs – one day something great lifts the spirit, [the] next day something goes terribly wrong. Over time you just learn to cope with it and you worry less and less,” says Peter.

Failure is something of a default for start-ups but MBA graduates have no intention of admitting defeat.

“What you might perceive as a failure, others could view it as a huge success,” says Basel at Blue Ocean Consulting. But he adds: “Day and night I dream about success – giving myself no time to think about the possibility of failing.”