MBA for the Real World

Very early stage companies don’t interest venture capital funds, but entrepreneurs can now stop bemoaning this fact. A new Israeli business school trains them to go where investment angels fear to tread.

Motti Dermer is a software engineer. He created a start-up called ComItCom with two partners, and the aim of producing a product really needed for e-commerce. This is one of the many hundreds of start-ups that will most probably never be funded by venture capitalists. The difference is that Dermer knows this, and is doing something about it.

Dermer spotted a niche in e-commerce between small retailers and large suppliers. He built the prototype of an application to solve the problem, installed it in an alpha site, and has an agreement with one of Israel's largest food retailers for a beta site, but lacks the funds to realize the agreement. There are three partners and three employees working at no wages for the chance of a future pay-off. Up to this point it's a well known story, that more often than not ends with one of the partners cracking and taking up a highly demanding full time job in one of the established high technology companies desperate for talent of this kind.

Dermer, however, enrolled in ISEMI, an innovative MBA program for people like him. Since last February, when he started studying, he found out that he needed to create a viable business model for ComItCom that would place the product into the key American market. He then started working with an American in the US to create this model -- proving that he really had learned something. "I come from the technical world" he says, "and lacked the background."

ISEMI, the Israel School of Entrepreneurial Management and Innovation, actively encourages applications from people who, almost by definition, will be hard pressed to find the time to fulfill the requirements for their MBA. The small, almost virtual college, was started two years ago by Liora Katzenstein, and is an affiliate of Swinburne University in Australia -- which claims the highest success rates in the world for an innovative program that seeks to instill the skills needed to start, run, and make a success of a high growth company.

Too much has been written about the venture capital industry's reluctance to finance very early stage start-ups. People involved in the field love to call the VCs timid bureaucrats, and say that "real" venture capitalists are the kind of swashbucklers who relish the risks and passion of very early stage companies. On the other hand, most of these people do not have a huge amount of money on their hands, and the pressures that VCs confront to produce the fantastic returns their investors expect.

Market dictates venture capitalists’ attitude

The sad truth is that these many hundreds or even thousands (if one insists one believing all the figures published in the press) of start-ups are not worth investing in. Venture capitalists are in business to make as much money as they possibly can. The current rule of thumb about risks and rewards, which are reflections of conditions in the global technology and financial markets, dictate large investments in start-ups that are past the first hump or two in their lifetimes. When these conditions change they might look for smaller companies, but the chances are more likely that different kinds of venture capitalists will start specializing in the bottom end of the market. Even these, however will have a problem.

For the venture capitalist, there is often something very wrong with the tiny start-ups. It's either an unfocussed or unrealistic business model, lack of intimacy with the target market, lack of experience on the part of the entrepreneur, or something else. One could say that Bill Gates had all these shortcomings, but times have changed. People have to know much more, and, nearly without exception, all the successful start-ups of the past five years were backed by venture capital in one way or another.

Lecturers with experience

Katzenstein spotted this niche and decided to do something about it. She scoured the world for an academic framework that could provide the practical model entrepreneurs really need, while supplying that MBA tag to their resume the people they meet need too. ISEMI is in itself a start-up in that sense. The lecturers come from all over the world. Besides being smart, and having high-powered academic qualifications, these teachers must possess the vital experience of running their own business, or as Katzenstein says, they have to have "opened a company, closed a company, hired people and fired them."

Katzenstein herself has all the necessary academic qualifications, having taught at Harvard, Tel Aviv University, and the Technion. She settled on the Swinburne program because she was seeking something different -- the very specific set of skills needed to start high growth companies, unlike the skills to manage established firms that are taught in many MBA courses. She was not the first to spot the need.

Stef Wertheimer opened his Tzur University and previous programs with exactly the same premises. "Stef Wertheimer is the pioneer in the approach that one can and should teach entrepreneurship, and that the teaching has to come in the context of actually doing things and not just academic study," Katzenstein says.

IT orientation

Tzur, however, has tended to specialize in the metals and plastics industries, and ISEMI, though small, has a definite slant towards information technology. The curriculum reads like the kind of checklist a venture capitalist might make when deciding whether to invest in a firm. Both new and veteran students in the two-year program (which costs $15,000, though there are some scholarships) seem universally enthusiastic about the skills offered. "In the academic world they teach you to write 70-page business plans. No venture capitalist will read that," says Asher Ben-David who is studying at ISEMI while starting a fund for seed investment. "It's not theoretical," says Ora Aram a highly experienced accountant who thinks her work at ISEMI will enable her "to spot opportunities." "I was really impressed by the quality of the other students," says Lior Eilam a new student who wants to hone his skills for his venture in electronic commerce.

This enthusiasm is however to be expected. Dr Michael Epstein, a biochemist who has successfully managed companies, worked in the management of Ampal, and spent a few years in a real estate venture, says he has yet to find "anybody in an MBA program who did not think it was excellent."

Yet Epstein too picked this program because, after years in business, he felt his knowledge had "a few holes" because he "moved from research directly into management." He chose the ISEMI program after diligent research because he wanted to fill these holes before getting involved in a new biotech start-up.

With all of this experience Epstein knows all too well that the next stop is at the venture capitalist's door. He even knows what kind of deal he is seeking and how he has to change the originally planned positioning of his company.

Preserving entrepreneur’s share

Katzenstein's students will have skills many other entrepreneurs lack. She talks about a methodology she has created to maximize the amount of shares an entrepreneur can keep in his or her firm after venture investments. The biggest mistake, she says, is to seek investment at two stages --the very early pre-seed stage when the first $50-$100,000 goes for a lot of equity leaving the entrepreneur with a relatively small share that is subsequently diluted in further rounds of financing.

The second vulnerable point is during the first stage of scaling, when there is a product, a customer and a desperate need for money to meet a target. She says she has answers for alternative means of financing at both stages.

Even though it means they might get a weaker deal, venture capitalists would probably prefer to deal with start-ups that think this way, because this kind of knowledge comes in a package with an approach that gives the company a much higher chance of success.

The final proof of the ISEMI model will probably come when Katzenstein sets up a separate fund she plans for taking stakes in the students' companies. The profits, if any, will be her own upside, and the concept of teaching skills for profit will also change radically because of the commitment to these skills’ real worth in the real world.

Published by Israel's Business Arena on November 15, 1998

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