Chapter Twelve
CHASING THE CURVE
If I offered you twenty thousand pounds for every dot that stopped, would you really, old man, tell me to keep my money or would you calculate how many dots you could afford to spare—free of income tax, free of income tax?
—HARRY LIME, IN
THE THIRD MAN
After the strictures of the first year, the second year, the elective curriculum, was all about choice. You could take more courses or pursue independent studies supervised by a professor. During the final weeks of the previous semester, we had received a thick booklet describing the second-year courses. We were also given access to surveys of the various courses completed by previous classes of MBA students. This was like a restaurant guide, with formal descriptions of the courses supported by customer reviews. These ranged from superlative, “greatest course at HBS, hands-down,” to coruscating, “horrible professor, lame cases, total waste of time.” We could see which classes were oversubscribed, which were on the verge of being struck from the catalog. The most popular second-year courses were Advanced Competitive Strategy, Building and Sustaining a Successful Enterprise, and Entrepreneurial Finance. The courses were assigned using a computer algorithm. You ranked your choices in order of preference, one to thirty. The computer then ran through everyone’s choices, allotting you as many of your highest-ranked picks as possible. If you chose Advanced Competitive Strategy, it was unlikely you would also get Entrepreneurial Finance. But if you didn’t put one of these three as your number-one choice, you would be unlikely to get any of them at all. The challenge of picking the right courses in the right order was time-consuming and became a subject of intense discussion and rumor. Students followed one of three strategies for choosing their courses. The first was to deepen their knowledge in one specific area. If you knew you were going into private equity, you could take extra finance, tax, and corporate restructuring. Bo took a slew of courses in venture capital and health care. The second strategy was to work on your weaknesses. I had so many, it was hard to know where to begin. But I decided to load up on finance and strategy. The final path was to take the easiest courses you could on a schedule you liked. This was chosen by people returning to their old jobs or family firms. One man in our section picked courses that would allow him to commute back and forth to Los Angeles, where his wife lived, and spend just Monday, Tuesday, and Wednesday mornings in Boston.
The algorithm served me well. For the first semester of the second year, I was assigned Entrepreneurial Marketing, International Financial Management, Strategy and Technology, Coordinating and Managing Supply Chains, and Dynamic Markets. Entrepreneurial Marketing and Strategy and Technology were exactly the kind of courses I had come to HBS to study. I chose International Financial Management in order to consolidate my first-year finance and because of the professor, Mihir Desai, who had made such a positive impression all those months ago during Analytics. Coordinating and Managing Supply Chains would be taught by Zeynep, and again, I liked the dirt-under-the-fingernails quality of the subject. It felt far less antiseptic, less virtual, than many of the other aspects of business we studied. Dynamic Markets was a curious choice. It was a course for anyone thinking of joining a hedge fund after HBS. I decided to take it partly because I thought that if ever there was a time for me to learn about hedge funds, this was it, and partly because I realized I enjoyed learning the grammar of finance. A lot of it passed me by, but whatever I did grasp gave me more pleasure than the lessons, say, of marketing. As with Supply Chains, when I studied finance, I felt I was learning something concrete rather than faddish. Not that I wanted to push this too far. There was a student in old Section A, a dashing but arrogant Indian Rhodes Scholar, who liked to say that the only second-year courses worth taking were finance courses. Everything else was a waste of time. I could not agree, but I could see where he was coming from. When he graduated he took a vast salary at a glamorous new hedge fund.
Our second son was born on September 6, the day before the elective curriculum year began. We were summoned to the Brigham and Women’s Hospital in Boston at 7:00 A.M. on the due date and spent the day waiting in the maternity ward. Late in the afternoon I wandered down to the cafeteria, and when I returned to our room the midwife, who was wearing a Boston Red Sox shower cap, barked, “Put those down and come over here.” I set my coffee and sticky bun down on a counter and grabbed one of Margret’s legs. The delivery went quickly, and we named the boy Hugo.
The next morning at eight thirty I was back in class for Entrepreneurial Marketing, with Joe Lassiter. I had read the case several days earlier, but when I came to look at it again—the highlighted passages, marginalia—I could not recognize a thing. The class was packed, and Lassiter came at us like a jet of cold water, rinsing off the last of the summer and bringing us smartly back to our HBS mind-set.
“So how big should this business try to be?” he said, calling on a Vietnamese student in the back row. “Five million dollars in revenue a year, ten million a year, a hundred million a year?”
“I think they should go for five million,” said the student. He then described the product, a kind of printer that built 3-D models for engineers and designers. “I think the market is small right now, and the company does not have the resources to go beyond that.”
“Come on,” Lassiter said. “Look how cool this thing is.” He showed us a clip of the machine in action. You fed in an image and within a few minutes it spat out a three-dimensional model made of gray plastic. “Who thinks we can get to a hundred million? And how do we get there?” Several hands went up. “That’s more like it,” Lassiter said.
He pressed the more gung-ho students to describe the perfect customer for this new product, the one who would persuade all the others they had to have it. And he asked us all to write an elevator pitch, the pithy summary that could win over an investor or customer in the space of an elevator ride. The pitch had to answer these questions: What problem will this product solve? And why should I buy it from you?
Lassiter was an intriguing man. He had been an academic early in his career, then transferred to business for twenty years before coming to teach at HBS in his fifties. He had a natural enthusiasm and sympathy for the challenge of running a business, and this made his course one of the more popular on campus. It sought the answer to a distinct problem. When big organizations decide whether to launch a new product or service, they use the tools of marketing to test and refine their idea before going to market. For an entrepreneur, such tools are far too expensive and time-consuming. So how do you know an idea is a good one, and sell it to others, with limited resources? Later, the course evolved into something even more intriguing, a discussion of what it means to be an entrepreneur. What was it like to pursue an opportunity with only the very scarcest means? What did it take? We heard so often of those at the extremes, the entrepreneurs who had made it big and those who had failed dismally. But what of those who had made a life of pursuing their own ideas, winning their own customers, building their own fortunes beyond the comfortable fortresses of corporate life? It was what I had missed in Gompers’s class.
In the first year, we had defined
entrepreneurship
as “the relentless pursuitof opportunity beyond the constraints of the resources currently controlled.” We had also been told time and again that entrepreneurship was not about taking risk but about managing it. It was about spotting an opportunity, seizing it, and reaping the rewards. It was a way of managing not only a business but one’s own life. Lassiter retooled the HBS definition of entrepreneurship to suit his course. Entrepreneurial marketing, he said, was about the “relentless pursuit of the customers and partners necessary for the people leading the firm to select their business opportunities, to sell their products and services, and to obtain the future resources they desire.” It was also about how to gather the information required to make decisions and persuade others to commit to your idea before knowing it would work.
In case after case, we studied small- to medium-size companies struggling to launch a new concept or deciding which new opportunities to pursue. Our key texts were Geoffrey Moore’s books
Crossing the Chasm
and
Inside the Tornado
. The challenge Moore addresses is that many new products struggle to move from small markets of enthusiasts over into the mass market. He calls the enthusiasts “visionaries,” people who buy on promise, the first in line for the newest gizmos. The mass market comprises the “pragmatists,” those who just want the damned thing to work. Among the solutions Moore proposes is identifying those people who affect buying decisions in the mass market. If you are making fancy handbags, the way to go from selling a few to selling millions might be to persuade a Hollywood movie star to carry one. Another way would be to convince the relevant channel of your worth. If Wal-Mart decided to sell your product, you would be almost guaranteed to sell a lot of it, regardless of whether the end consumer had ever heard of you before.
But before getting into the movie star’s hand or into Wal-Mart, you need to make sure you have a product the star might want or that piques the Wal-Mart buyer’s interest. To do this you need to understand consumers, through interviews, research, even psychological testing. Then you need to develop a product that you hope will meet their demands. This might involve challenging the egos of your gifted scientific team, who left their highly regarded research posts to develop a world-changing dermatological treatment only to find that their paychecks now depended on fine-tuning a diaper rash cream, because that is what is going to sell. Also, you need to have enough cash to keep the business afloat while awaiting your first sales. Which brings us back to the key commandment of entrepreneurial finance: don’t ever run out of cash.
We studied the case of Idea Village, a company that sold products through television infomercials. Eventually they realized that to sell even more product, they needed to get onto mass market retail shelves. Their breakthrough product was an electric razor for women’s facial hair, which sold well enough on television to be picked up by Wal-Mart. Its success had allowed Idea Village to move from selling to niche audiences on late-night television to building a permanent presence in Wal-Mart.
Lassiter emphasized the importance of people and connections. It was important to hire not just a great salesman but also one with relationships with the people you want to sell to—either the visionaries who will take up your new product or the influencers who will stir the pragmatists to adopt it en masse. He displayed a picture of a herd of wildebeests. Pragmatists, he told us, find safety in numbers. They watch for what they fear. And when panicked, they stampede. The trick is to identify the pain and rouse the fears that cause the herd to stampede straight into your arms.
What was interesting about Lassiter’s course was the way it examined the interaction between entrepreneurs and the people they sell to. It recognized the difference between building a small, moderately successful venture and hitting a home run, and it asked the question, what does the entrepreneur do to make that happen? In some cases, it means hiring the salesperson who knows the right person at the big company or government department who signs the first major contract. In others it means focusing on one customer’s particular problem so effectively that all of its rivals soon come rushing to the entrepreneur’s door. In yet other cases, it means endless rounds of experimentation, years of thrifty cash management, or a rush of external events. Raising money, Lassiter observed, should never be an obstacle. “Never in recorded history,” he told us, “has the supply of capital not overwhelmed the supply of opportunity.” Toward the end of the year, Bo told me this was the single most important lesson he had learned at HBS: there is always money for a good idea.
What was also fascinating was how much Lassiter’s course left open. There were clearly things one needed to do in getting a new business going, from securing financing to proving your concept to finding the right employees, partners, and customers. But how you sequenced these was always going to be a juggling act. Can you get the money before the proof, or the customer before the money, or the partners before any of it? The only firm decision one could make in embarking on this was the decision to be an entrepreneur. And on this, Lassiter offered the following:
Entrepreneurship, he said, was more than a job. It was a way of thinking, managing, and living. In certain ways it was harder than choosing a corporate career. It would involve more financial uncertainty. But, ultimately, if it meant enough to you, it would be more than worth it. The difference between success and failure, he said, was very fine, very personal, and yet very public at the same time. Ultimately, you had to decide for yourself. These issues had come up occasionally during the course and in conversations with friends, but this was the first time I felt I was hearing them from someone who knew what he was talking about.
Lassiter said that if we still wanted to follow this path, we should pick a place where we wanted to live and try to join a “world-class tribe.” He demonstrated his point with a diagram showing all the companies that had spun off from Cascade Communications, a telecommunications equipment maker founded near Boston in the 1990s. The diagram showed eleven companies founded by people who had worked at Cascade. Several of them, notably Sycamore Networks, had been enormously successful. It was a powerful point, especially for a class full of students wondering what to do next. “It really does help to know what you’re doing,” Lassiter stressed. Constantly moving from place to place, changing careers and specialization, meant you would never develop the reputation and deep networks that helped entrepreneurial ventures take off. Having people know that you know what you are doing really matters. “You really don’t know what you’re doing until you’ve done it a couple of times,” he told us. “And then the world changes.” Even if you’ve built a reputation and developed experience, you still have to revel in uncertainty.