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.

Barry Merkin, a professor of entrepreneurship at the Kellogg School at Northwestern, himself got an M.B.A. (from Harvard) before launching a successful business. But, Merkin argues, "I'd do everything possible to tilt the odds in my favor. For that, you need critical knowledge, and an M.B.A. is one of the best ways I know of to get it."

OK, assume, for the sake of discussion, that you buy Merkin's argument: an M.B.A. can give even the best entrepreneur an edge. What would that edge be, exactly?

Economic Analysis. The San Francisco real estate crash of the early 1990s pushed Bruce Helmberger to get an M.B.A. His company, Helmberger Design Construction, builds and remodels houses and commercial properties. As competitors failed by the score Helmberger resolved to stick with the business but decided he had to get smarter. He enrolled part-time in the executive M.B.A. program at the University of California at Berkeley.

Two years into it, Helmberger, 40, has studied the staples--managerial accounting, finance, marketing, and organizational behavior--but it is his economic-analysis courses that have already proven invaluable. "Should I buy an apartment building in Santa Clara or in San Francisco? Given the economic currents, which building has the greater likelihood of succeeding? I've learned to synchronize my moves with the economic waves. Before, I just sailed around wondering why the waves were smashing the hell out of my boat. Now I know what I'm doing. I'd like to build this to a $20-million company, and I'm getting the skills to do it."

Marketing Savvy. When Culin Tate and two partners started Chemical Automation Technologies, in Ijamsville, Md., in 1992, they knew they'd face entrenched but complacent competitors--a nice opportunity, if they could seize it. Their company produces microprocessor-based systems for monitoring and adjusting the chlorine and pH levels in swimming pools and hot tubs.

The vice-president for marketing and sales, Tate, 25, has a B.S. in economics. Another partner is a computer engineer, and the third ran a pool-management business in the Washington, D.C., area. Together they had a nice skill set, but marketing know-how was conspicuously absent. So in 1994 Tate enrolled part-time in the M.B.A. program at the University of Maryland at College Park. "The idea," Tate says, "was that with me pursuing an M.B.A., we'd have a competitive edge to grow the company."

It was a heads-up strategy that paid early dividends, thanks to a course in information management last year. Tate took on a keenly relevant assignment: to develop a company-specific database using commercially available software. His five-student team included some programmers, and at Tate's urging the group customized a data-management system for his company. By the end of the semester, the database was up and running, and it's now Tate's primary tool for recruiting dealer-resellers. "We tailor the information we send them by zip code to help them reach new customers," he says. "I can run off a list of all the pools in that area and provide the names and phone numbers of contacts. Our approach has pulled in good dealers. We help them make more money."

With smart marketing, Chemical Automation Technologies' sales last year approached $1 million, and Tate projects higher revenues this year. "Business school eliminates the speed bumps," he says. "We would not be as far along without it."

Strategy Setting. The brothers O'Mara--Mike, 32, and Dan, 29--switched to the entrepreneurial life from corporate jobs. Both had accounting degrees, and after college Mike joined Deloitte & Touche, while Dan went with Price Waterhouse. In 1993, determined to run their own business, they pooled $50,000 and bought the Country Framer, a picture-framing shop in West Chester, Pa.

They knew accounting, obviously, but they had precious little knowledge of how to run a retail business. So just before they started, the elder O'Mara returned to Villanova, where he had done his undergraduate work, for an M.B.A. in the part-time evening program. Now nearing graduation, he credits the schooling with giving him a major competitive advantage: he and his brother can operate professionally in a mom-and-pop industry.

Not content with a single location, the brothers early on had considered franchising, but school killed that idea. "When I put pencil to paper, I realized that we don't yet have enough operational structure to franchise," Mike says. "My instructors and classmates suggested a regional chain instead."

The Country Framer added a second store last year, in Frazer, Pa., but not in a mall, where most of its competitors are. Mike learned in a marketing course that dual-income couples don't have time for malls. They prefer destination shopping, which means strip centers. That's where the O'Maras put the store, and, says Mike, "we feel well situated."

With sales this year near $500,000 and pretax margins of about 20%, the O'Maras are already generating the cash to grow. "We'd like to add one store at a time until we hone this into a science," Mike explains. "With the skills I'm learning at Villanova, we should be able to get operations tight enough that we could franchise if we decide to go that route."

Negotiating Skills.A rock-music aficionado, Gregg Latterman wanted to start his own record company. Undercapitalized, he devised a novel strategy. Knowing there were many good regional bands with local followings--groups that had produced their own CDs for their fans--Latterman decided to take his favorite cuts from those recordings and compile them under his own label, Aware Records. "I pay royalties but nothing up front for the music," he says. Among his early finds were such now-hot groups as Stir, Better Than Ezra, and Hootie and the Blowfish.

When Aware's first compilation CD came out, in 1993, Latterman quit his job as a certified public accountant with Coopers & Lybrand in Boston. "My plan was to start a company or go to business school," he says, and when his second CD came out, in 1994, he decided he could handle both. He enrolled as a full-time M.B.A. student at the Kellogg Graduate School of Management at Northwestern University, in Evanston, Ill.

Latterman, 28, says his M.B.A. training in negotiations has been especially useful. "In the music business," he says, "everything is negotiated." Early on, his inexperience in contracts led to some mistakes. "If I really wanted a song for a compilation, I'd make concessions," he says. "One band's lawyer insisted on a clause saying the CD could not be distributed by major labels. I'd been promised orally that that would not be in the contract, and by the time I saw it, it was too late--the CDs had already been produced. So I got screwed. I'm going to come out a helluva lot better from now on because I understand the process."

Aware's sales hit $100,000 in 1994, then tripled in 1995, when the company produced its third compilation plus two full-length CDs. "Business school did not enable me to run a successful company," says Latterman, who graduated in June. "But it's going to enable me to have a much more successful company in the long term."

The Big(ger) Picture. The shifting landscape in the world of graphic design, rocked by new technology, was disturbing to Margaret FitzGerald, 33, president of Metaphor Design, in Plymouth, Mich. When she started the company, in 1988, small firms like hers, which currently generates less than $1 million in annual sales, had a clean niche. They created collateral printed marketing material--brochures, logos, letterheads, annual reports, and the like.

But electronic presses made it easier for printers to do design work, and desktop publishing brought a flood of new competitors. "To survive in business," says FitzGerald, "I had to get a handle on the whole marketing process, which required a broader knowledge base."

With that objective, in the fall of 1995 FitzGerald enrolled in an evening M.B.A. program at the University of Michigan, her alma mater. A course in strategic marketing has been particularly valuable. "As a graphic designer, I usually work with information that comes in to me. What I learned from the course," she says, "was the need to jump to a higher level, to ask where the marketing research came from and to understand what information is relevant in deciding what a marketing piece should be." FitzGerald's intention is to become more of a marketing consultant to her clients. Providing a wider range of services, she says, "should differentiate my firm within this broadening spectrum."

Solutions to Current Company Problems. Not a tool, exactly, but help with real business problems is one of the benefits company owners reap when they're also in school.

In 1994 Dan Poston turned day-to-day management of International HTC over to his partners--easier said than done for most CEOs--and enrolled as a full-time M.B.A. candidate at the University of Oregon in Eugene. Yes, it was a sacrifice. First, it cost him roughly $20,000 in tuition and fees for the two-year program and another $10,000 in living expenses. Then there was the family separation. His wife, who owns a beauty shop and beauty-supply distributorship, and his daughter stayed in L.A., which necessitated frequent weekend commutes.

But the management curriculum was rich, and as Poston identified material that applied directly to International HTC, he carried those lessons back to headquarters. For instance, he helped avert a crisis at the company by using quantitative analysis he had learned in a marketing course to change its product strategy. "Previously, we looked only at our own position in the market," he explains, "never at the overall market size. Consequently, we believed some of our potential was unlimited. When we did a full market analysis, we realized that one of our main products--a chemical that cleans machinery--could not possibly grow much more than 20%. We decided we should go with something else." If he hadn't taken that particular class? "We'd have proceeded believing we had great potential," says Poston, "and in several years we'd have hit a brick wall." His newly learned skill, Poston contends, "puts us on a par with bigger exporters who do that kind of analysis all the time. And it gives us an edge over other small players because they don't do analysis at all."

Poston brought real problems the company was having into the classroom. In a course called Business, Government, and Technology, he posed a situation in which a defector from Hissan tried to persuade International HTC to sign a distribution agreement with him instead. "It sparked a lively class discussion," Poston says. "We went through the legal problems, the ethics, the marketing side, the financial challenges--the upside and the downside. The class really helped me thrash out the issues." He decided to stay with Hissan.

When he was still just thinking about getting his M.B.A., Poston says, friends tried to dissuade him. They said that at his age and in his situation, it was a bad idea--too great a sacrifice in time and money. It would be cheaper, they argued, just to buy the books. And Poston concedes that he, too, had always dismissed most of what he assumed business schools taught as more academic than real.

But one friend who had returned to school full-time for an M.B.A. made an argument that changed Poston's mind. "He learned that business is really a science, that there are ways of learning overall concepts, like strategic planning and market analysis, and that you could step back and apply them," Poston says. "I had never grasped that before."

Shortly after he got his degree, last May, Poston and his partners sold International HTC to their Japanese partner. Poston is looking to do a start-up again. The difference this time, he says, is he now has a set of skills that will help him succeed in any business.


Finding Time to Earn an M.B.A. While Running a Company

The usual route to an M.B.A. for entrepreneurs is to attend a local school part-time, taking classes nights and weekends. The advantages are twofold: you remain close to the business, and you can schedule courses to mesh with its demands.

Engineer John Roughneen, for example, is an M.B.A. student at Babson College, in Wellesley, Mass. His company, Streamware Corp., produces software for vending-machine operators, and last spring, when Streamware launched an upgrade, he decided to take no classes and give his full attention to the business. "It's a matter of allocating resources," he says.

Other students with young companies control their growth to allow a quicker completion of studies. Alex Wiederhorn runs Iver Financial, an equipment-leasing brokerage in Washington, D.C. At George Mason University, in Fairfax, Va., he's taking three courses, almost a full-time load. "School has an equal priority to my business because I need it to develop the company," he says. "I'm not growing the business as fast as I could, and I don't want to."

There's an upside to going full-time, too, of course: you're finished in two years. Eric Boelts, who runs Boelts Brothers Associates, a graphic-design firm in Tucson, opted for the full-time regimen at the University of Arizona, also in Tucson. "It meant being away from the business part of each day," he says, "but sustaining that kind of energy level for two years seemed more reasonable. Four years seemed so long."

Finally, many schools will accommodate your juggling act. When Hank Adams, a full-time student at the Kellogg School at Northwestern University, started a sports-news publication called Extreme Fans on America Online, the dean permitted him to take a leave of absence. "He asked if this opportunity would still be available after I graduated, and I said probably not," Adams says. "So he said I could take classes as they fit my schedule."


Business schools are undergoing profound transformations. "M.B.A. programs are becoming more hands-on, more practical," says Chuck Hickman, director of projects and services for the American Assembly of Collegiate Schools of Business, an accrediting group in St. Louis. He says more schools are emphasizing teamwork, team teaching, and applied learning. "There's still room for theory," Hickman adds, "but in reality a lot of business problems are cross-disciplinary, complex, and kind of messy. The clinical learning experience gives students a chance to see how various functions interact."

The University of Oregon's Lundquist College of Business--entrepreneur Dan Poston's school--has abandoned traditional courses for just-in-time learning. "It was plain that our focus should be on entrepreneurs," says dean Tim McGuire, who spearheaded the overhaul. "The entire first year is now built around developing a business plan, and we teach modules of various lengths to supply information chronologically. First you learn to scan the environment and the industry, then you move on through planning, finance, operations, marketing, and the rest. Instead of taking a full quarter of accounting, say, maybe you can get what you need--when you need it--in a four-hour module or a concentrated week. What is so sacrosanct about a course lasting a whole semester?"

Nobody tracks the number of company owners enrolled in business school, but demand for M.B.A. training has boomed in tandem with the entrepreneurial explosion. Two decades ago, 389 schools conferred M.B.A.'s, graduating 35,000 students in 1974. More than 700 schools offer the degree today, and this year's recipients are estimated at 90,000.

School administrators, aware that many potential students still have jobs or businesses, are making it easier for them. For instance, only a third of M.B.A. candidates now finish their work in two years. Part-timers usually finish in three or four years, but most schools allow students to stretch their studies over five years or more.