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Open For Business


By Bruce Auster

Despite the dot-com bust—and tragic events of September 11— entrepreneurship programs are alive and well at engineering schools across the country.

During the dot-com boom, entrepreneurship centers were a hot ticket: Students at many engineering schools were taught how to turn their science projects into start ups. Then the bubble burst. Has the entrepreneurship curriculum lost its pop, too?

Hardly. Rice University was recently awarded a National Science and Engineering Center by the National Science Foundation; its specialty will be biological and environmental nanotechnology. What's unique is that as part of the new center, the NSF created a nanotech entrepreneurship program, which will be up and running by next year. Though it is not a big-ticket budget item, the entrepreneurship program is one way the NSF hopes to promote innovation. “It's not just for science's sake,” says Steve Currall, the head of the Rice Alliance for Technology and Entrepreneurship. “It brings innovation to market, it benefits society.”

In the wake of the tech market bust - and more recently, the stunning events of September 11-universities remain committed to teaching entrepreneurship, students are advancing novel technological solutions to age-old problems, and venture capitalists are putting their money on the line.

Yet the programs have changed—possibly for the better. Fewer students, for instance, are flocking to them. The Massachusetts Institute of Technology runs the best-known competition for business plans in the world; it is called the $50K, and for a dozen years it has lured would-be entrepreneurs who compete for the top prize and a chance to impress the venture capitalists who swarm the MIT campus each spring. Organizers of last year's contest were curious to see whether the collapse of the stock market dimmed interest in the $50K. So they ran the numbers. And sure enough: The higher the NASDAQ, the more entries—at the peak, there were some 200. When the NASDAQ dropped, so did the number of would-be entrepreneurs—last year there were just 135. “It has correlated perfectly the last five years,” says Michael Parduhn, a second-year MBA student at MIT who is the lead organizer of the $50K.

But the drop off in entrants could be a good thing, according to those who remain. Who's abandoned the field? The gold-rush entrepreneurs, who flocked to the tech centers at the height of the boom, fled at the bottom—and, truth be told, aren't much missed. “We lost the students who were motivated by the wrong things,” says Dr. Tina Seelig, the executive director of Stanford Technology Ventures Program, the university's entrepreneurship center. “This is a great screen for us. In boom days, we had students who were arrogant. Now we have people who are motivated by building something, not by money.” That winnowing process has meant that even though there is less money for projects, worthier ventures are getting noticed. “People have sobered up a good deal,” says Donald M. Spero, the director of the Dingman Center for Entrepreneurship at the University of Maryland's business school. “It's no longer possible to walk into a venture capitalist with a fancy idea and ask for $10 million. I think that's healthy. The old way sucked money from the real businesses.”

 

Perfect Union

The logic behind engineering schools' teaming with business schools, after all, was to foster something more profound than just a selfish drive for money. “An entrepreneurship curriculum is especially valuable to engineering students because they actually have the skills to bring a product to realization,” says Alex Liu, a master's degree student in electrical engineering at Stanford's Technology Ventures Program, or STVP. “By rounding out the world views of advanced engineering students, one creates a growing body of highly capable leaders who are able to conceptualize a product, develop it, market, and sell it.”

It is hard to judge just how important entrepreneurial education has been to the national economy—not to mention whether it has fostered innovation among engineers. Most of the studies on the economic merits of the programs were conducted during the tech boom and offer an inflated view of their contributions. Still, for a time, the numbers were impressive. BankBoston studied the impact that a single school—MIT—had on the economy. It concluded that if the companies founded by MIT graduates and faculty members were an independent country, they would rank as the 24th largest economy in the world, with sales of about $232 billion. And according to a study sponsored by the Kauffman Center for Entrepreneurial Leadership, new businesses (which the study defines as those that are two years old or less) accounted for nearly all job growth in the U.S. during late 1990s economic boom. Even the student-run $50K competition has produced, in its brief 12-year life span, an impressive roster of alumni. More than 75 teams that have entered the competition over the years have started companies. Earlier this year, organizers estimated that those firms had created some 1,100 jobs and had a market value of some $10 billion. Many of the most successful companies—including Firefly, Lexicus, and Flash Communications—are not well known because they were acquired by the likes of Microsoft and Motorola.

What sets these companies apart is their entrepreneurial flavor. Tech start ups are simply a different breed than ordinary small businesses. Two researchers at the University of Arizona tried to determine whether students who completed course work at the university's Berger Entrepreneurship Program Center followed a different path than those who studied at the Arizona's business school. The results: students from the entrepreneurship center were 25 percent more likely to be involved in a new business and 11 percent more likely to own their own business. And there was one other side benefit: The business school received 34 percent more outside funding (about $12 million) because it housed the entrepreneurship center.

The bottom line for the economy seems to be that innovative companies—typical of the sort that emerge from the business plans of entrepreneurial engineering students—create jobs. “Although they represent less than five percent of all businesses,” says Massachusetts Sen. John Kerry, the Democratic chairman of the Committee on Small Business and Entrepreneurship, “entrepreneurial companies create a substantial number of all new jobs and are responsible for developing a significant portion of technological innovation, both of which have substantial benefits for our economy.” The reason Kerry's first act as chairman of the committee was to rename it—adding the word entrepreneurship to the title—is that there does seem to be more than simple anecdotal evidence that entrepreneurial firms fuel the economy. The key seems to be combination of technological innovation and the lean, hungry nature of the start up. “It is this high productivity—along with audacious goals—that allows an entrepreneur to build a high growth company,” says Patrick Von Bargen, who is the executive director of the National Commission on Entrepreneurship.

But Kerry and others are worried that the economic downturn will curb creativity and, perhaps, job creation. “Changing economic times threaten the growth of this important sector of our economy,” Kerry argued at a September field meeting. “Important questions must now be put forth such as where will the next generation of entrepreneurs come from, where will they get their funding, and what role has and should the federal government play in encouraging entrepreneurship.”

 

 

Less-Risky Business

The downturn has raised a series of critical questions: First, fewer students may take a chance on a start up and may instead settle for work at an investment bank or consulting firm. That could mean that engineering know-how never makes it to market. According to one published report, perhaps just 10 to 15 percent of students in one entrepreneurship program plan to join a start up. And why not, when, like Alex Liu, they have alternatives. The Stanford electrical engineering grad can simply find “another job in Silicon Valley.”

Second, even if the entrepreneurial spirit still burns among students, venture capital may not be available to fund new ideas. “There's a lot of cash that most of the funds have in the bank,” says Spero of the University of Maryland. “What they're doing is looking at their own current investments and reserving a lot more of their capital for the ‘B' and ‘C' rounds. They want to protect their own investments. So they're making fewer investments in other people's deals.” Another recent development, says Spero, is one in which the dollar value assigned to up-and-coming companies has plummeted. There are not many instant millionaires anymore. And even with top-flight programs such as those in Cambridge and Palo Alto, there remains a sense that not enough students are being taught how to turn ideas into businesses. Patrick Von Bargen notes that “entrepreneurs are often frustrated that universities do not do a better job of offering good entrepreneurial education to engineers and scientists.” The problem is compounded by the fact that much of the best work is concentrated in a few high-tech cities and that universities “do not maximize their role as anchor in a community to foster entrepreneurial networks and do not equip students with skills that would allow them to remain in their communities rather than migrate to more recognized entrepreneurial communities,” according to Von Bargen.

That may be changing. There are now dozens of entrepreneurship programs, from stalwarts such as MIT and Stanford to more recent entrants such as Ball State and the Rice University. The Kaufmann Foundation, which is a major financial backer of entrepreneurial centers, lists 125 such programs across the country. (Not all the programs, of course, are tied to schools of engineering, and in the current economic climate it is fair to wonder whether it makes sense to usher a student who is not trained to offer a smart technology into the brutal marketplace.)

At the academic centers that have already established themselves, the curriculum has proved resilient despite the economic downturn. The basic premise that smart engineers need to learn how to build a business plan remains the unshakable foundation. Consider the recent experience of Melissa Hsaio-Ching Miao, who has a bachelor's degree from Stanford in industrial engineering and plans to earn her master's in management science and engineering next spring: “One of my greatest insights from this program is that a great technology will not sell itself,” she says. “An entrepreneur needs to understand financing, positioning, and marketing. Otherwise, even the most revolutionary technology will disappear into obscurity if a solid business is not built around it.”

The reverse is also proving true: Solid businesses are only being built if they are founded on revolutionary technology. “The quality of ideas being nourished remains high,” says STVP executive director Seelig. At Rice University, according to Currall, “some of the nanotech and biotech plans are as strong as ever and are great prospects,” he says. But the real appeal of tech companies now is that real innovation has real legal standing, which is critical to investors. “When I talk to VCs,” says Currall, “they have a significant appetite for companies with serious intellectual property behind them, things that can be copyrighted or patented. Let's build around that a legal means to create barriers to entry. We learned with the dot-coms that you can't protect it because nothing's patented. So we're looking for core technologies.”

Programs such as STVP or Maryland help develop and market those technologies by integrating academics with outreach to the local tech community. “Now students understand how difficult it is and that they need classroom as well as real world experience,” says Seelig. Miao cites the use of interactive case studies, traditional readings, mentoring from both a venture capitalist and a start up executive, as well as discussions with classmates. For example, one of her colleagues at the school, Alex Liu, is pursuing a plan to join a start up specializing in chips for wireless LANS. The company, Atheros Communications, got a jump-start from Stanford president John Hennessy and another professor at the school. “It is a model of the type of technology-business interaction that STVP stands for,” says Liu. The Dingman Center at Maryland runs a sophisticated incubator for local start ups, including many biotech firms that can avail themselves of the facilities' on-site wet labs and centrifuges. MBA students with the program often team with the start up scientists.

Recently, traditional course work is attempting to address the new pitfalls associated with building high-technology companies in a market that is leery of anything high-tech. So in addition to classic introductory lectures on creating a high-technology company, Stanford offers a course on strategy that looks at how to build companies in “rapidly changing, highly uncertain technology-based industries.” Other classes teach students how to prepare a business plan, how to manage people, how to raise capital, and how to prepare for an initial public offering. Case studies—such as a lengthy blow-by-blow review of how Stanford engineering graduate students Jerry Yang and David Filo solicited the first-round financing that allowed them to create the Web portal Yahoo!—offer students inside insight into how real decisions are made. And a critical part of the curriculum, of course, involves bringing established CEOs, venture capitalists, and others into the classroom.

 

Only the Best

There is little question, moreover, that the tech bust is forcing people to readjust expectations. This month's Stanford Roundtable on Entrepreneurship Education for Engineers includes presentations that would have seemed out-of-place a little more than a year ago, when no idea was so foolish that it didn't make a mint. There's “OOPS: The Ten Most Common Mistakes Made Now in Business Plans,” by Bill Joos of Garage Technology Ventures, and “Living in the Real Economy: New Rules for Entrepreneurs and Investors,” by his colleague Bill Reichert.

This new environment is forcing the students who remain committed to combining engineering know-how with business acumen to hone their skills ever more finely. Venture capitalists are demanding no less, says Maryland's Spero: “You have to demonstrate to me that at the end of step one there's a step two with the deployment of a real business with net margins or I'm not going to invest.” Recent trends suggest that the most successful plans are being formulated in the biotech field. It is not uncommon for the MIT $50K to spot hot new fields a little ahead of everyone else. In the mid-'90s, MIT foreshadowed the dot-com boom. Three years ago the top plan at the $50K was a bioinformatics company—that's the emerging field that marries biology with information technology—and, of course, it wasn't until the past year that the mainstream media caught on to that trend. Now it may be a sign of things to come that the past three winners of MIT's $50K have been connected to the biotech field.

The recent winner demonstrates how the emphasis on entrepreneurship can not only help create jobs but can also afford good technological ideas wider application. The founders of the nascent company Angstrom Medica developed a replacement for the titanium rod that is placed inside a fractured bone to help it heal. They worked in a range of fields—nanotechnology, materials sciences, and medicine—to create a new material. The new substance allows the bone to grow right through it; that offers a host of advantages over titanium, which must either be removed (requiring a second procedure) or which complicates life if it is not removed (patients can never have another MRI, for example), The winning plan was a classic model of an entrepreneurship program in action. A mixture of students from across MIT's campus helped form the plan. “It wasn't just technologists or business folks but a combination of both,” says Parduhn. And the winning team is already talking to venture capitalists about funding their new company. “They're going,” says Parduhn. “They're moving forward.”

This spring will mark the second anniversary of the market peak, when the NASDAQ topped 5,000 and all things seemed possible. But some argue that the tech collapse has been a good thing for entrepreneurship programs. Alex Liu, the Stanford engineering student, describes it as a “flight to quality.” He adds: “That is a good thing for Stanford, for Silicon Valley, and for the United States.” Miao puts it this way: “The students that are truly interested in the principles of entrepreneurship—of building a great company to last, of pursuing new opportunities, of challenging traditional boundaries of thought—will continue to embrace [entrepreneurship education] as an opportunity to pursue their visions.”

There is a related lesson: The professors, students, and even the VCs who are still toiling to bring engineering marvels to market believe that the market did not render a final verdict on the future prospects for technological innovation. “I think people are optimistic,” says STVP's executive director Seelig. “They view technology as something that doesn't die. Even as the economy goes through different cycles, there will definitely be the next wave.”

That next wave may well be led by students such as Miao. The master's degree candidate in management science and engineering has been re-evaluating her own reasons for participating in a program for budding entrepreneurs. The fickle market is just one factor she has to consider. She says that the terrorist attacks on New York and Washington on September 11 have caused her and others to take a hard look at their futures. She is now more committed to what she calls social entrepreneurship, or the application of entrepreneurial principles to the social sector. She plans to start, along with a professor, an organization called the Social Innovation Incubator. It will operate out of Stanford's school of engineering and, as she describes it, will “focus on developing technology applications for the social sector.” It will use as its model classic business incubators—of the sort she learned about at STVP. “Had I not participated in STVP, I most likely would have followed the traditional path of most business-oriented Stanford students,” says Miao. “I would have taken a position at a consulting firm or an investment banking firm.” Now she thinks she can do more.



Bruce Auster is a freelance writer based in Washington, D.C.
He can be reached by e-mail at bauster@asee.org.

 

 
 

 

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