Kristin S. Rhyne calls launching Polished “by far the most challenging thing I’ve ever done.”

Sidebars

• “Conceiving a Curriculum,” March-April 2001
• “Beyond the Bubble,” March-April 2001

What applications might they suggest, William A. Sahlman asked his students, for “electronic ink”—particles and dyes, embedded in a surface, that could be charged to form changing texts without the bother of paper and printing? The class snapped to attention, and a swarm of ideas buzzed down from the semicircular banks of seats in Aldrich 9. Price tags (retailers wouldn’t have to re-mark them for discounted sales). Billboards. Sheet music (self-turning scores). Eyeglasses with news headlines projected inside the lens (prompting Sahlman to interject, “So, as you’re purportedly watching me…”). Newspapers with built-in refreshable video. Menus (no more regrets from the waiter that the daily special is sold out). Maps. Camouflage clothing that changes in different lighting (Sahlman again: “So if you hadn’t read the case and wanted to disappear…”). 

Clearly the students, enrolled last fall in one of three sessions of Harvard Business School’s elective “Entrepreneurial Finance” course, found the possibilities intriguing. They were having fun. But then Sahlman, who was having as much fun as anyone, had to rein it in. Asserting his pedagogical role (himself M.B.A. ’75, Ph.D. ’82, he is D’Arbeloff M.B.A. Class of 1955 professor of business administration and cochair of the school’s entrepreneurship and service management unit), he pointed out that none of these ideas was a business. Indeed, technological euphoria and the seemingly limitless potential of new ideas could be inimical to operating a real business. All fall, the news had been sobering, as the dot-com bubble deflated, paring billions—ultimately trillions—of dollars of stock-market value from the “idea” companies that had been spawned, many by Harvard M.B.A.s, and funded in a two-year orgy of enthusiasm for Internet enterprises. “At some boards of directors,” he said, driving the point home, “they institute a $50 fine for every new application you think of.”

That challenge faced E Ink Corporation, the subject of the class’s case discussion, every day. Founded in 1997 to revolutionize the mundane printing business with new display technology, the company had its eye on multibillion-dollar markets like electronic newspapers. But to realize that vision, its scientists had to get into harness with business people and apply themselves to routine tasks like perfecting their technology, learning how to manufacture it, and financing the needed investments in research, development, and marketing through a combination of product sales and venture funding.

Russell J. Wilcox ’89, M.B.A. ’95, cofounder of E Ink and now vice president and general manager, joined the discussion, explaining how the company planned to sell as an initial product a wireless network of billboards and displays. National retailers like Wal-Mart and J.C. Penney could assure uniform signage throughout their stores, and could change prices without printing and shipping paper signs—and hoping store managers posted them. He acknowledged that the scientists, who are driven by discovery, aren’t much moved by selling sneakers. But in one essential way they supported the company’s strategy of having “our eyes in the sky but our feet on the ground,” Wilcox said. “Scientists aren’t less greedy than other people”—they realized that retail displays were a first step, followed by entry into the capital-intensive, highly competitive market for flat-panel displays, in order to raise the money needed to develop the holy grail of “radio paper.” Reaching that frontier, and a potentially huge market, was perhaps $200 million of research spending in the future.

Why not try to skip the interim stages, raise the extra money (beyond the commitments already made by venture-capital funds, publishers, and others), and go for the prize, a student asked.

“How much of the company is a venture capitalist going to want for his $200 million?” Sahlman countered.

“Eighty percent?”

“You’re a tender-hearted VC,” said Sahlman, who created the entrepreneurial finance course in 1985 and began studying the subject even earlier. “The right answer is 138 percent.” 

And so emerged several lessons beyond the technicalities of finance. In 80 minutes of give-and-take among students, professor, and manager, the class touched on the tension between the romance of ideas and the reality of enterprises, the conflicting motivations of the participants in an immature business, and the staged growth and resource needs of a young enterprise. Financial acuity counts, to be sure, but as Wilcox explained and E Ink’s experience made clear, its prospects depend on a welter of fundamentally human choices.

Kristin S. Rhyne, M.B.A. ’99, would have loved to have Russ Wilcox’s problems of reconciling employee priorities and juggling financial plans. Late last May, a year after incorporating Polished, she was still struggling to open its first unit. The strain of working alone, mostly out of her apartment, and relying on $500,000 in financing provided by family members, friends, and “angel” investors, recurred in accounts of what she was trying to accomplish. “This is by far the most challenging thing I’ve ever done,” she said. “It’s emotionally challenging.” In that respect, at least, Rhyne was not alone. For every glamorous start-up seemingly flush with resources, dozens more have always proceeded more traditionally, out of sight. As one of the founders of a company studied in Sahlman’s section of the required first-year “Entrepreneurial Manager” course conceded, “It’s hard to be at Thanksgiving with a group of your investors.”

Rhyne, a 1993 Colgate graduate, worked in marketing and investment-banking jobs before applying to business school, propelled by nothing more concrete than a sense that she “ought” to go, perhaps to pursue a job in the biotechnology industry. Once enrolled, she said, her classes “opened up my eyes” to the challenges beyond finance and the capital markets: “I had never focused on operations, on how businesses really work.” And something else was in the air, as well. In the spring of 1997, just before Rhyne arrived, the business school held its first business-plan contest, offering student teams financial support and technical advice to develop proposed new ventures and present them competitively before venture-funding professionals.

A summer job had dulled Rhyne’s interest in biotechnology, and in large companies generally. Also that summer, a chance comment by her mother while the two of them waited for a flight in an airport (“Wouldn’t it be great if we could go get a manicure right now?”) had planted the seed of something different. During her second year of business school, Rhyne plunged into three entrepreneurship classes and decided to develop “the nail thing” as a paper to satisfy a course requirement.

Rhyne’s idea for meeting the “weekly beauty needs”—manicures, facials, massages—of time-pressed women made the semifinal round of the 1999 business-plan contest. In retrospect, the wave of enthusiasm for the Internet was just cresting. Other semifinalists included eBricks.com, SupplierMarket.com, Noproblemo.com, and LocalREWARDS.com. Rhyne’s old-economy idea was the only nontechnology concept to make the semifinals. Her teammates moved on to other things, but she decided to try to build a business.

And then began her harsh encounter with the entrepreneur’s basic dilemma, what Sahlman calls “the problem of simultaneity.” If, as the business school defines it, entrepreneurship is the pursuit of a business opportunity requiring resources beyond one’s control (see “Conceiving a Curriculum,” page 38), Polished was all opportunity and no resources. Rhyne could see a large market for reliable, branded beauty services in office parks and hotels, but she focused first on the high-visibility airport market, where customers in transit needed the services she could provide—and might relish them as an alternative to waiting for delayed flights in crowded terminals. Prime locations in airports come at a premium, however; securing space depended on financing, a credible design for Polished’s stores, and leasing managers’ belief in Rhyne’s ability to hire people and satisfy customers—neither of which was possible, of course, without a site. “Without having the team in place, and not being able to put the team in place,” as she put it, Polished could not take root.

Of necessity, she cobbled together a new-style “virtual company,” contracting for design services, real estate-consulting advice, expertise on the beauty business and operations—functions an established firm would maintain in-house. But prospective sites in New York, Newark, Philadelphia, and Atlanta foundered. All the while, classmates’ businesses took shape. SupplierMarket.com, the most extravagant example, was established in early 1999, attracted $48 million in venture financing, and sold in June 2000 to Ariba Inc. for stock then worth nearly $600 million. (The stock was worth about $240 million in late January.) Admitting her frustration, Rhyne confessed, “I feel that I’ve sacrificed my personal happiness for the time being to pursue this goal. It’s definitely been a long road.”

But by last December, Polished seemed closer to its initial destination. Rhyne had secured a lease at Boston’s Logan Airport, begun building the first Polished center, added an operations manager and a retailing expert to her team, and started hiring staff from nail salons and department-store cosmetics counters. “It feels really good to have something you worked so hard for come to reality,” she almost bubbled.

Still to come were the hurdles of seeing whether customers would materialize, and if so, whether she could attract the means to expand to Atlanta and Newark, where airport lease negotiations were again proceeding. Whatever external resources Rhyne would need to sustain her vision, her 18 months of mostly lonely, shoestring operations had equipped her with some essential inner ones. “I believe 120 percent in what I’m doing,” she said, well before the Boston site took shape. “If you didn’t have that, you wouldn’t have the energy to get up in the morning. You really enjoy the good days, because there are a lot of bad days right now. But I’d personally prefer to have those high days rather than a lot of middle days—that’s why I didn’t go back to corporate America.”

Twenty minutes after Sahlman’s finance students finished dissecting E Ink and one floor up in Aldrich Hall, Myra Hart’s “Starting New Ventures” class prepared to talk by speaker phone with one of the computer era’s most successful “serial entrepreneurs.” After the students reviewed a case that involved setting the price for Handspring Inc.’s first public stock offering, cofounder and CEO Donna L. Dubinsky, M.B.A. ’81, got on the telephone. Faced with accepting $20 million less than anticipated from the stock offering, she told the class, the company never hesitated. It had chosen to go public in mid 2000—after two years of existence and two quarters of selling its Visor handheld computers—to establish its staying power with customers and suppliers in its fast-growing market, and to facilitate possible acquisitions.

With that, Hart guided the conversation to broader topics pertaining to venture formation. Her first-name rapport with Dubinsky reflected more than their experience as business-school classmates. Beyond serving as M.B.A. Class of 1961 professor of management practice and co-head of the entrepreneurship and service management faculty, Hart, M.B.A. ’81, D.B.A. ’95, had direct knowledge of her course material: in 1985, she was one of the four founding officers of Staples Inc., the office-products retailer whose sales now exceed $10 billion per year.

Hart wanted her budding entrepreneurs to hear how Dubinsky’s early days at Handspring differed from the conditions she had encountered at Palm Inc., which she had joined in 1992 (following a decade in the computer and software industries), just after the company was founded to develop handheld computing devices. Like E Ink, Palm sought to create a new market based on seemingly promising technology—and its first designs didn’t work. She and her management colleagues were unknowns, and the product failures subtracted from their slight credibility. And at the time, she said, “the capital markets were totally different,” with venture financing rounds of $500,000 the norm for a company with Palm’s record and prospects. 

Handspring’s birth, in July 1998, was huge news in the high-technology industry. Dubinsky and her colleagues had made an enormous success of PalmPilot and its operating system, and that core management team now promised newer and better things in a booming business. Their credibility translated into tangible benefits for the new entity: the ability to recruit personnel and to entice suppliers (vital for companies like Handspring, which outsources its manufacturing); favorable relationships with retailers; and access to capital, in a venture-financing market that had rebounded from a feeble state after the recession in the early 1990s (only $1 billion was committed in 1991) to unprecedented strength as the decade ended (with weekly commitments exceeding $1 billion). Given that context, Dubinsky said drily, Handspring was launched with “a whole lot less ambiguity.”

In the lessened “ambiguity” of the Palm-to-Handspring story lay many of the lessons Hart hoped her second-year students would hear as their teams raced toward end-of-semester classroom presentations of their own business plans—for firms ranging from child-care services to a buyout fund focused on media properties. She began a conversation in her office in South Hall, now home to the business school’s entrepreneurship and services faculty, by describing how “Starting New Ventures” evolved from an existing course on product development. “My response was that there’s a big difference between a really great product and a company,” she said. Given the constraints of costs and the problems of marketing, to cite only two factors, “Starting new businesses is a much more complicated task.”

Hart’s new-ventures course was designed to focus on those challenges “horizontally”—across all the functions managers need to address from the original business plan through the first 18 months of an organization’s life. For companies that are “up and running,” she said, “we have 100 other courses already.” Such is the pace of business development that “Starting New Ventures” has spawned its own spin-off this year, a separate course focused on launching technology ventures. That has let Hart’s class focus more on retailing, services, and other “old economy” businesses, and has perhaps skewed its enrollment more toward international, minority, and women students, who perceive opportunities to start new businesses in underserved communities earlier in their careers than ever before.

Her course has evolved into a practicum, alternating cases with students’ business plans—the latter evolving with guidance from venture capitalists, attorneys, and business “incubators” who specialize in nurturing nascent firms for an ownership stake or fees. For those who listen, Hart and the participating managers from companies covered in case studies have leavened every technique with a broader perspective. That began early in the semester, when Hart challenged students to ask, “What is opportunity, how do I either discover it or create it, how do I evaluate it in the framework of others that might be available?” Their answers, she hoped, were not solely financial or technological, but “very personal—it depends on you and what you bring to the opportunity.”

The cases and exercises then marched through “the parameters of a well-designed, de novo business,” she said, from focus (“the difference between a good idea and a well-functioning business model”), through capability (what it takes to execute a plan and gain access to needed resources, owned or not, over time), to scalability (“These students are not small-time operators, aiming to run the best restaurant in town”) and adaptability. No one who has taken an entrepreneurship course at Harvard has evaded this last point—the problem, as Hart put it, of “how nothing ever proceeds according to plan, and how you adapt strategically and tactically.” Should a start-up survive, cases studied later in the course emphasized finance, human resources, and the processes on which “growth and scale depend” in the larger enterprise.

“My research,” said Hart, professor and entrepreneur, speaking from experience, “is all about the importance of experience. The subtle message is that here are people who did well the first time—and a lot better the second time.” For the people who established a company like Handspring, she said, the essential difference was the degree of knowledge—both “knowing,” on the part of entrepreneurs who can prepare themselves for what they face, and “being known,” by networks of other people who can supply the thousand things it takes to fuel a business.