Start-up costs for MBA graduates pay off

The fear that starting a business will inevitably mean an enforced period of belt tightening and dining on nothing but baked bean suppers has dissuaded many high flying executives from quitting their jobs to become entrepreneurs.

Salary data from 20- and 30-something MBA graduates, however, shows the reverse is in fact true. Far from earning less, those that quit corporate careers to create a start-up quickly make up any shortfall and are in fact earning more on average than their salaried peers just three years after completing their business school studies.

In a sample of 7,800 MBA graduates from the world’s top 100 business schools that responded to the FT’s 2015 rankings research, 22 per cent had launched a start-up while studying for the qualification or shortly after completing their course.

Three years after graduation, the average annual income among these fledgling entrepreneurs was $134,000, compared with $132,000 across the entire sample.

Just 5 per cent of those who founded companies reported an annual salary of zero three years after graduation. However, even this may be an overstatement of the financial risk facing founders since this percentage includes those who chose not to reveal their income level in their survey response.

While becoming an entrepreneur is still a minority pursuit among business school students, the FT’s analysis could also be read as evidence that an MBA education will help a wannabe entrepreneur’s chances of start-up success.

Of the companies launched by those taking part in the FT survey, either during their studies or after graduation in 2011, 84 per cent were still operating a full three years later.

This is a significantly better survival rate than start-ups in general even those created in countries with the most developed start-up support infrastructures, in terms of investors, mentoring support and benign tax regimes.

In the US, for instance, barely 60 per cent of new businesses make it to their third birthday, according to the US Bureau of Labor Statistics, even though this is by most measures the world’s most entrepreneur friendly country.

Having said that, US-based MBA graduates tend to be better at building successful businesses.

Four out of the top five MBA courses for start-ups are based in the US, and these boast even better success rates than the average for the 100 business schools covered by the FT’s rankings.

Out of the class of 2011 graduating with MBAs from Babson College, which specialises in teaching entrepreneurial skills, 39 per cent started a business, and 93 per cent of those were still operating three years later.

At nearby MIT Sloan, 36 per cent of the 2011 MBA graduates started a business, with 86 per cent still operating three years later and 58 per cent of the founders deriving their main income from their company.

The FT’s findings were welcomed by business school teaching staff, who have long argued that their classroom teaching can provide a practical advantage to those who choose an entrepreneurial path.

Pedro Nueno, entrepreneurship professor at Barcelona-based Iese Business School, has been measuring start-up behaviour among his MBA students for several years and found that of those who started companies, 80 per cent were still trading five years after graduation.

The better survival rate among MBA graduates is due to their preparation for the potential dangers facing in the classroom, Prof Nueno claims.

He also believes that they have a better understanding of what positive measures need to be put in place to get ahead of competitors as a result of studying case studies of high achieving companies at business school.

“If someone is prepared they are more likely to be willing to take a lower salary or cut back to maintain cashflow,” he says. “They tend to manage better than somebody who just sees an idea and launches without too much analysis.”

Most of the start-ups launched by Iese’s MBA graduates are either solo ventures or micro businesses, employing barely a handful of people.

Only 18 per cent of the MBA graduate start-ups in Prof Nueno’s last survey of Iese alumni had grown to a size where they were employing over 100 people.

Even students who founded businesses that ended up employing just a handful of people now earn as much if not more than their peers who went to work for large corporations, Prof Nueno notes.

“I recently met a couple of graduates who started a headhunting business 16 years ago,” he recalls. “The business does not employ many people but they only need a few contracts to do very well each year and they are loving the flexibility.”

The image of entrepreneurship within business schools is clearly positive. Indepth interviews conducted with MBA students for the FT’s research found that 94 per cent of those that set up a company during their course studies felt they were encouraged to do so by realising they were acquiring skills in the classroom that had practical benefit to an entrepreneur.

The gender differences exist since 24 per cent of the men responding to the MBA survey said they had started a company compared to only 16 per cent of female graduates. However, this divide is little different to the wider world of start-ups, in which male founders are more common the female ones.

The business school itself was deemed less helpful in certain practical matters, with 30 per cent of the MBA graduates completing the FT’s survey disagreeing with the statement that their alma mater helped with the actual process of starting their venture and 60 per cent disagreeing with the statement that the school had helped with securing finance.

A significant minority also saw limited value in their alumni networks with a third disagreeing with the statement that these collections of former students helped with starting their business and 55 per cent stating that they did not help with fund raising efforts.

The success of MBA graduate founders compared with classmates in salaried roles also varied according to the business school. Start-up survival rates were significantly higher among those institutions ranked in the top five for entrepreneurship teaching.

At the top of the tree was California’s Stanford Graduate School of Business, where those MBA students that launched companies earned on average $190,506 three years after graduation compared with $170,433 for those that did not.

This may not be that surprising given that Stanford’s campus is located minutes from some of the world’s most successful tech start-ups and the venture capital firms that finance them.

Among Stanford’s entrepreneurial alumnae was Shely Aronov, who launched San Francisco-based Yamba Hummus, a premium “authentic Israeli” hummus brand, a year after completing her MBA qualification.

“Stanford knew I should be an entrepreneur before I did,” the former Israeli army commander and business development executive at National Semiconductor says.

“It was the encouragement I got during my MBA that drove to found my company and I’m the happiest I’ve ever been in a job.”

Despite the success of MBA graduates choosing to start up on their own, entrepreneurship remains a minority pursuit in the world of business education.

Of those respondents to the FT’s MBA student survey who had started a business either during their studies or after completing the course, 42 per cent said it was their main source of income three years after graduation.

This implies that just 8 per cent of the 2011 MBA graduate community now make their living from being an entrepreneur.


Letter in response to this article:

Maybe predisposition makes entrepreneurs / From Tessema Tesfachew

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