Too Cool For School?

Inc. Cover Story

For generations, entrepreneurs have loathed everything about the M.B.A. So why are so many now going back to get one?

Though he lacked formal busi-ness training, Dan Poston had few qualms when he and two partners founded a United States-Japan trading company called International HTC Inc., in 1986. Poston's operation, based in Los Angeles, would ship American-made chemicals to the Tokyo-based Hissan Trading Corp., which would distribute them in the Japanese industrial market. Like many entrepreneurs, Poston assumed that his industry background, connections, energy, and chutzpah would be all that he needed to build his business.

Besides, Poston was no dummy. He'd graduated from Stanford University in 1976 with a major in East Asian studies. He had earned a law degree and practiced for eight years, as a specialist in Pacific Rim commerce. During summer trips to Japan, he studied Japanese law. And as a sideline, he imported Japanese giftware and Chinese down comforters to the United States. So when the HTC opportunity arose, Poston jumped. "More than most entrepreneurs," he says, "I thought I knew everything I needed."

But it turned out he didn't. By the early 1990s, International HTC's sales had stagnated at about $6 million, and Poston had grown frustrated. "I started this expecting that we would grow into a really big deal," he says. But International HTC had ceded much of the strategic responsibility for its business--market analysis of opportunities outside Japan, for instance--to its much larger Japanese partner (and half owner), Hissan. With its bigger operations in cement and other lines, Hissan paid scant attention to the building of Poston's company.

Poston found himself ill equipped to take up Hissan's slack. He could evaluate a contract, but his computer skills, for example, were weak. Sophisticated business-application software was a mystery to him. His accounting knowledge was equally limited. "The only accounting course I took at Stanford, I dropped a third of the way through," he says. "Never in a million years, I thought, do I want to do any accounting. As it turns out, I have to use it all the time."

At least Poston knew there was a lot about running a business he didn't know, so it didn't take him long to enroll in evening courses--four of them in computers and economics at Glendale Community College and three in mathematics and statistics at UCLA. He pored over books and magazines--"everything I could get my hands on," he says, "but it wasn't changing anything for me. It wasn't giving me quantum leaps in knowledge." He learned a little here, a little there. "But nothing pulled it all together," he says. "I needed something more substantial." What Poston finally decided he needed was a master's degree in business administration.

An M.B.A. for an entrepreneur?

Forget the jokes you've heard (and maybe told) about M.B.A.'s and small companies. They may be funny, but statistically, they don't hold up. Consider this: 10 to 15 years after graduating, 40% of all Harvard Business School M.B.A.'s are running their own companies. They're probably your competitors. Or this: nearly 15% of the CEOs running the companies on last year's Inc. 500 list have M.B.A. degrees. They are definitely competing with you.

Now assume two people both have the same entrepreneurial instincts, but one of them also has a big box of management tools to use. Which entrepreneur would you invest in?

There are two almost glaringly obvious reasons why today's entrepreneurs increasingly need the tools that business schools teach. One is that small companies now compete for the same customers with large, professionally managed, and frequently multinational companies. The technology that gives small companies the same reach and service strength as large ones also gives large companies the kind of one-to-one intimacy with customers that used to come only from doing business in the neighborhood.

Second, even in markets where small companies compete only with each other, the person running the other business is increasingly likely to be an M.B.A., often a refugee from a downsized corporation. Such company builders bring sophisticated management skills to bear along with their entrepreneurial characteristics.

Consultant Michael Gerber, author of The E-Myth (Harper Business, 1986), blames a lot of today's small-company failures on what he calls "the fatal assumption" by owners--that because they understand the technical work of a business, they think they understand how to build a business based on that technical work. "A carpenter becomes a contractor, or a gardener sets up a landscaping firm, and they try to get by on their job skills," he says. "They might be fine working in the business, but they lack the tools to work on it."

Electrical engineer Hensen Mou learned that lesson after teaming up with six other engineers in 1989 to start Zeny Computer Systems, in Silicon Valley. They were good at developing products--things like a cordless infrared mouse. But they knew nothing about finance, marketing, or accounting until Mou returned to his alma mater, the University of California at Berkeley, for an M.B.A. "We were quite naive. We thought all it takes is engineering. Since then, we've realized that if we had been better at marketing and knew the right channels and how to negotiate with bigger companies, we could have grown faster and made more money," he says.