A quarter of all startup businesses will fail within a year of inception. After five years, over half of all small businesses will have failed. In fact, research released last year by Shikhar Ghosh, a professor at Harvard Business School, concluded that three out of four startup companies don’t return investors’ capital. Why, then, does the on-campus sentiment at Brown surrounding newly formed companies seem so rosy? From Brown’s popular entrepreneurial engineering classes, new business competitions or seed funding through the University, there seems to be a zeal for creating new businesses. I believe this is nothing more than the famed “irrational exuberance” that surrounded the Internet bubble years ago.
Starting a small business doesn’t require much. To the extent you have a product or service you want to sell, you can do so without much legal work. Once you’ve sorted out your operating costs and revenue streams, the bulk of the job is done. The final step is to raise capital. You can approach family and friends, go to venture capital firms and angel investors or take out a loan. Once you’ve raised sufficient funds, you can begin selling. After all, watching “The Social Network” makes it seem like all it takes is an idea and some friends to be on your way to a $104 billion initial public offering.
But in reality, maintaining and growing a company requires much more. For a startup to succeed, you need a viable, scalable business model, careful capital budgeting, efficient cost structure, adept management, organic growth, risk management and durability. In most cases, you also rely on favorable macroeconomic trends that are out of your control. To make matters more difficult, unforeseeable circumstances such as new market entrants, forecasts that deviate from reality and inability to adapt to changing market forces inhibit a company’s success.
In short, there’s more to it than just having an idea and selling or pitching it. Starting a business requires an understanding of corporate finance, decision-making and business experience which a majority of Brown students frankly lack.
Sure, there are classes here where you learn how to read business cases, analyze the relevant issues and prescribe possible solutions. There are lectures given by alums that seem to serve as guidance for aspiring student entrepreneurs. But the reality is Brown isn’t an undergraduate business school and doesn’t have an undergraduate business degree. The resources available at Brown are no substitute for a rigorous management or finance course. If you pushed many of the starry-eyed, entrepreneurial Brown students to describe the trade-offs between financing via debt or equity, how to determine what proportion of their capital is risk-bearing or even how to thoroughly analyze and synthesize free cash flows and capital expenditures, I would guess they’d be stumped. Unless they’ve taken advanced economics courses or done serious independent studying, they haven’t been exposed to this type of quantitative finance.
But pleading ignorance will not save a company in the cold, impersonal marketplace. So instead of getting too vested in a revolutionary idea or beginning to plan the launch of your innovative right away, I propose a more refined approach. Take an accounting class to understand all three financial statements, how they link together and how to synthesize and analyze the important parts. Enroll in an introductory economics course to learn how market mechanisms operate, how to allocate resources efficiently and how different factors can influence the price and quantity of goods and services. Audit a corporate finance section and discover how to value assets, project and discount cash flows, and how businesses quantitatively make decisions. Building up your human capital and establishing requisite knowledge will decrease your chances of regressing to the “startup mean” — which is failure. If nothing else, you’ll have applicable knowledge throughout most areas in business and finance.
To be clear, I’m not discouraging the growth of new businesses or student innovation. Startups can provide employment in a struggling economy. They can alter the way we think, experience and interact. They’re also an excellent way to make a social difference, whether it’s delivering meals to students in developing nations or establishing microfinance for the impoverished.
But college is a time to compile information and hone critical thinking skills. Operating a thriving business is a complex task and should not be taken lightly by virtue of brief case studies or glorified anecdotal evidence. Before jumping into the next business idea, I caution students to temper their expectations, gather relevant skills and approach their venture carefully. Otherwise, like the dot-com boom of decades ago, their bubble will burst.
Jay Upadhyay ’15 appreciates the role entrepreneurs play and wants to see Brown students interested in starting new businesses succeed. He can be reached at jay_upadhyay@Brown.edu.
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