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.
"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.
ONE OF THE MOST AMBITIOUS current experiments in "knowing" and "being known" has taken shape recently in the Brookline offices of UPromise Inc. Its idea, conceived in 1999 by chairman and CEO Michael Bronner, had all the scale anyone could ask for: to create a national customer-loyalty program (like airlines' frequent-traveler mileage points) which would pay consumers rebates on their shopping-not in free flights or discounts, but in tax-advantaged savings for their children's or relatives' college educations.
The business would require a huge technology infrastructure, to capture millions of consumers' purchases and to direct company rebates on their spending (for credit-card and telephone services, automobiles, clothing, even soft drinks) to the customers' college-savings accounts. Firms like Salomon Smith Barney that manage these new so-called "529" savings plans would invest the rebates and maintain records showing enrolled families how much they had earned toward future education expenses-one of the longest-running loyalty benefits a company could hope to offer any customer. Beyond the daunting technology, Bronner's notion also depended on persuading national partners to direct their marketing budgets toward this kind of unproven customer reward. And meeting both those challenges meant the new venture would need dozens of skilled people and lots of money.
The opportunity seemed right for Bronner, who had founded Digitas, a marketing-services firm that created customer-loyalty programs for clients such as American Express and AT&T. It also seemed a good fit for Jeffrey J. Bussgang '91, M.B.A. '95, whom Bronner recruited late in 1999 to be UPromise's president and chief operating officer. A computer-sciences concentrator at Harvard, Bussgang worked at the Boston Consulting Group before collecting his business degree. Upon graduation, he decided against working for a venture-capital firm-"I wanted to go deep, and build and lead and create," he recently explained-and instead joined Open Market Inc., a start-up Internet-commerce software venture. Beyond the technical and marketing roles he played there, part of Bussgang's appeal to Bronner were the scars he earned in working through Open Market's near death in late 1998, when financial results faltered and most of the senior management were fired. "It was a horrible experience," Bussgang said. "It was our baby, and people were telling us the baby was ugly." Surviving a near train wreck and leading the turnaround gave Bussgang management credentials not readily found among the ranks of technically savvy but young first-generation Internet businesspeople.
And so, knowing what they knew and by whom they were known, Bronner and Bussgang began the UPromise experiment. Last March, almost precisely when the NASDAQ Composite Index peaked above 5000, the company-a few months old, with a business plan and a few employees as its only assets-received $34 million in venture funding, giving it among the richest initial valuations accorded such an early-stage enterprise. Cash and vision in hand, they courted senior managers from Lycos, Disney, Merrill Lynch, and elsewhere to launch the engineering, marketing, and branding that the company would need to operate, and began calling on prospective partners whose millions of customers could be lured by college savings.
A classic example of "simultaneity," the work involved what Bussgang called "the dance of a dreamweaver": selling venture capitalists on the potential size of the market ("This is going to be huge") and promising them seasoned managers and top-tier business partners; recruiting people by assuring them of adequate financing and powerful partners; and securing partners by explaining the power of the customer reward, UPromise's financial strength, and the depth of its management. Having set this "cycle of spiraling expectations in motion," Bussgang said, "When you get back home, after flying coach and staying in the Holiday Inn, you sweat like hell" to make it all come true.
By mid year, UPromise's 70 employees sprawled across a floor of open spaces and clustered desks, their telephones sometimes resting on the carpet where furniture had not arrived. Things seemed to be moving fast even for the placid Bussgang, who said, "It's a real challenge putting together a group of people who have never worked together, and getting them to work together like eight oarsmen in a crew who have practiced on the Charles for four years." The company released research demonstrating how little most families had saved for college expenses, and how highly they would value a rebate plan that met that need. It announced a strong board of directors (including venture-capital investors who, like Bronner and Bussgang, donated a significant share of their equity to a related foundation that would fund college preparation and scholarships for low-income families), and an all-star advisory board of business leaders, educators, and two former governors. It signed a letter of intent with Coca-Cola to be a lead partner offering customer rebates, and pursued negotiations with other marquee companies.
"It's all happening in parallel," said Bussgang, of a one-day trip when he called on a potential investor, UPromise's advertising agency, and managers of a possible commerce partner. "You never know if you're on the precipice of disaster or wild success, and that's always nervewracking. It's never as good as you think it is, and never as bad."
By July, however, half the initial financing had been spent, and UPromise was "burning" the rest at a rate that could exhaust it before year-end, according to a case Sahlman's finance class examined December 4. (The case, written by Sahlman and Michael J. Roberts, senior lecturer and executive director of entrepreneurial studies at the business school, was completed November 27-fair evidence of the speed at which the entrepreneurship pedagogy moves to keep students current.) And the external environment had become much less forgiving. The NASDAQ index had suddenly dropped one-third (en route to its largest one-year loss), and private financing became scarce.
But even as the number of employees exceeded 100 and the launch date for UPromise services slipped from autumn into 2001, the alignment of opportunity, knowing and being known, and a group of credible employees garnered the company a second round of venture capital. That November infusion of $55 million bought 18-plus months of "runway," Bussgang said, to get beyond the "hope and buzz" stage and into real operations.
In January, AT&T joined Coca-Cola as an announced partner, and live testing of UPromise's service began. The company still confronted the formidable difficulties of putting an extremely complex business on line and enrolling consumers through its partners. But the fact that it had raised $90 million and assembled an experienced staff during a highly volatile period for such start-ups itself seemed a milestone, and a symbol of the enterprises that might be imagined and attempted in an American economy with deep reserves of risk capital and the people willing to pursue the potential rewards of using it.
Here is how William Sahlman, business educator and scholar, began a paper, "Some Thoughts on Business Plans," much used-and cited-by the current crop of entrepreneurs:
[Sahlman] smiled as he was handed the business plan for Internet Wicket Ale Inc. (IWA), an interactive, on-line marketing company being formed to sell premium beers made by microbreweries over the Internet. According to the president of the company-a soon-to-graduate MBA candidate at a well-known eastern business school, a prototype Web site had already been developed.... [A]n early review had described the Web site as "way cool." Participating in the meeting were two other MBA candidates. Prior to jointly founding IWA, the three had worked in management consulting and investment banking: each, however, did have substantial experience with beer.
For all its value as a (largely unheeded) cautionary note about the Internet investment bubble, from its first sentences the paper also captured Sahlman's central approach to the phenomenon he studies and the way he teaches it. In a separate discussion, he said, "The core idea-an innovation in entrepreneurial finance-is to make prominent the role of people in making decisions." Thus an early reading for the "Entrepreneurial Finance" course, on the nature of financial contracting ("deals"), highlighted immediately the "contractual impossibility theorem: there exists no perfect deal." Even initially good deals, in other words, have collapsed as perceptions changed. (Would they have been funded so richly, or at all, if Michael Bronner and Jeff Bussgang had first approached investors about UPromise late in 2000, rather than at the beginning of the year?)
Early sessions of the course (taken by more than half the second-year M.B.A. students since 1986) introduced the human factors underlying the seeming paradoxes of venture financing. Entrepreneurs have found, for instance, that venture capitalists provide cash only in stages, rather than in an initial lump sum (E Ink's $200-million problem). In supporting inherently risky start-ups, they place a high value on the "option to abandon" funding-to terminate the experiment if it appears unpromising, and to cut their losses. This model-organizing a business so it is "scheduled to run out of capital periodically," as Sahlman has written-has naturally proven effective in concentrating entrepreneurs' energies. But they have benefited, too, because the planned plunges over the cliff have also given successful entrepreneurs opportunities to raise subsequent rounds of funding at ever-higher company valuations, preserving more ownership rewards for the founders and their fellow managers.
Applying these dynamics to all parties in deals (investors, employees, suppliers, and so on), Sahlman has concluded that the proper way to analyze any decision is to begin looking at what can go wrong, then at what can go right, and what decisions can maximize the reward-risk ratio. The answers have always had to be sought in human terms. Thus, he counseled, the way to read a business plan is from the back, where the venture's principals describe their experiences. Thus also "one of the most important lessons of entrepreneurial finance: from whom capital is raised is often more important than the terms"-because involved investors help recruit key managers, establish sales contacts, and more. ("Our VCs have given us great advice on how things should play out," UPromise's Bussgang said, "given their hundreds of experiences with different management teams and strategic redirections. They're service providers, just like advertising people or systems integrators.")
As Sahlman guided the students through the term sheets for various financings, he gave equal weight to analytical tools and human risk factors. One deal demonstrated why entrepreneurs might offer costly guarantees up front for their investors-in return for greater payoffs for the founders if their company flourished. Another was fatally flawed because it gave the initial investor little incentive to supply more money, and also discouraged others from stepping forward to join a second round of financing.
Even as he provided formulas for valuing the likely returns from deals, Sahlman reminded the class, "The short answer to most questions I'm asking this morning is, 'I have no idea.'" He explained later, "The tendency in business schools for the last 20 years has been to fall back on a false prophet of analysis"-that with sufficient industry knowledge, market data, and statistical wizardry, "The answer would somehow mysteriously pop out and the right decision would be made. That's just not the way I think the world works."
In his pedagogy, he said, "The big idea is people making decision about the world with large amounts of uncertainty. And the second big idea has to do with making experiments." In other words, he has defined the new venture as an experiment, fueled by increments of funding, the purpose of each of which is to buy the company time to collect more information on its product or services, skills, customers, and competition-and, if the results are encouraging, to proceed to the next stage of funding and operations. For a serial entrepreneur like Donna Dubinsky, much of that extra information already existed-limiting the "ambiguity." "A good experiment," Sahlman said, "is the right people with the right amount of resources doing the best they can." One imagined the venture capitalists reading the back pages of a Handspring business plan, and joining the experiment.
Because even good experiments may fail, venture enterprises have often had distinctive characteristics, Sahlman said. Rather than making large commitments to fixed facilities or rigid operating structures, for example, they have tended to weave networks of suppliers and distributors (witness Polished in its early months, Handspring's manufacturing strategy, and UPromise's reliance on partners to acquire customers and to manage their college-savings accounts). The integrated enterprise, owning all the resources it uses, has been "completely blown apart," Sahlman said, and replaced by "virtual organizations, assembled like a lot of Lego blocks."
Far from making business simpler, those flexible arrangements put a greater premium than ever on managers' skills and breadth of experience. In that light, Sahlman suggested, students seeking to run their own company right out of school might discover their need for additional learning. "Ten years from now," he said, "I think they'll all have gotten it, so I try to aim 10 years out."
TODD KRASNOW had more than his 10 years out, and in fact typified the historic Harvard Business School mid-career entrepreneur, like Donna Dubinsky, when he celebrated the opening of the first Zoots store in October 1998. But how had he-self-described as "not a clothes person"-come by his newfound obsession with missing buttons and perfectly pressed pleats?
The son of a lifelong IBM employee, Krasnow followed a different path into business. A 1979 chemistry graduate of Cornell, he worked at General Foods for two years, developing fast-food products for the home kitchen, before heading to Harvard Business School in search of the chance to make higher-level decisions in a company. Equipped with an M.B.A., in 1983, "I looked for a position that could teach me a business," Krasnow said, and set off in a decidedly different direction from most of his classmates. He joined the Jewel Companies, a food retailer, first bagging groceries at a Star Market in Cambridge, and later managing an underperforming store in Attleboro, Massachusetts. He relished it all. "Retail really is the simple details," he said recently, "blocking and tackling and paying attention to your customers. It was a wonderful experience."
It led to another wonderful experience. In late 1985, Thomas G. Stemberg '71, M.B.A. '73, also a Jewel and grocery-store veteran, set about launching Staples; in doing so, he fit the pattern of business-school alumni turning into entrepreneurs a decade or more after graduation, as perhaps half have done in the school's postwar classes. Among his first three colleagues was Myra Hart (yet another Jewel veteran), who became vice president of operations at Staples. Krasnow, who had worked for Hart, joined the group the next spring. With the exalted title of director of marketing, he dug into opening the first store, in Brighton; in his first days on the job, Krasnow said, he hung price signs on shelves, painted the company name on Staples trucks, and stuffed envelopes for a mailing to prospective customers. During the next decade, he helped to manage Staples' West Coast operations, ran its international joint ventures, and finally assumed responsibility for all sales and marketing.
But by 1996, when an investor group asked him to run a new venture, Krasnow said, Staples "had kind of lost something for me." Rather than quitting outright, he talked to Stemberg, who agreed to back him in exploring new businesses. Each ultimately invested $250,000 in a partnership to fund research on dry cleaning, an industry Stemberg had monitored for several years, where they were attracted by customers' very basic needs and a strong likelihood of repeat sales. That neither began with direct knowledge of dry-cleaning operations didn't deter them; in a business-school case about the Staples start-up, Hart described how she, Stemberg, and four associates engaged a consultant to teach them about such essentials as pencil leads and the perishability of paper-just four months before opening their first store.
Krasnow learned that dry cleaning was an $8-billion business in the United States, divided among 34,000 owners who operated 45,000 stores. Customers chose the nearest outlet and entrusted it with their garments until poor service drove them to find another cleaner. The business, in other words, was highly fragmented and, because of repeat sales, "an annuity." In combination, those traits held the promise of building what Krasnow called "a very big company in an industry that does not have big companies."
His plan was to improve the service for "time-starved people" through such amenities as extended hours, drive-through windows, and 24-hour drop-off and pick-up using secure lockers. In the spring of 1998, Krasnow and Stemberg each invested another $1 million, and secured an additional $1.5 million from family members and friends. From the outset, Krasnow said, it was clear that the challenges would be operational, not technological or financial, and that dealing with professional investors such as venture-capital firms up front would bring about additional demands, but little in the way of immediately needed operating expertise.
From the October 1998 opening through the end of last year, Zoots mushroomed into six states, with 41 retail locations and 124 home-delivery routes served by purple Zoots vans. Krasnow and his management team oversaw nearly 1,000 employees who served 150,000 active customers. The company's sales in 2000 approached $30 million, and it planned to double revenues this year.
The surprise was that this growth was slower than Krasnow initially envisioned, for reasons he never foresaw. In a conversation at the Zoots headquarters in Newton (in a nondescript building behind a tire shop, where Krasnow's windowless corner office is decorated with dry-cleaning cartoons and memorabilia), he said that making Zoots easy for customers to use "is very complicated for us." Rather than cleaning at each store, the company was designed around large central "cleaning laboratories." Shipping garments there, sorting them out for spot-cleaning, repairs, or special pressing, and reassembling orders proved to be a logistical nightmare-and an industry with mom-and-pop stores had evolved little technology to simplify the task on the scale Zoots has attempted. With chagrin, he told Hart's "Starting New Ventures" class last October, "We actually lost a wedding dress before the wedding"-and hastily bought a replacement in time.
There were external complications, too. Shortly after launching the stores, Krasnow was approached by a company that ran dry-cleaning delivery services, and Zoots acquired it, adding a whole new layer of complexity (drivers, vehicles, route planning). Customers wanted web access to their orders, forcing the company to accelerate systems development. Suitable store sites were scarcer than anticipated. That nearly became a crisis in late 1999, when Zoots completed a $38-million venture-capital financing and almost immediately learned that projections for its new Virginia market were too ambitious. Behind each of those challenges lay the daily reminders of what Krasnow called "just how operationally exacting the business is."
All that said, Krasnow sounded confident about the business at the end of 2000. Zoots had deliberately slowed its growth to focus on resolving operational problems, reducing mistakes dramatically while still sustaining more than sufficient gains in sales to satisfy investors. The delivery routes proved a blessing in disguise, given still-tight real estate and labor markets, and more of the growth planned for 2001 focused on adding routes than on opening new retail stores. Cash flow was growing, and Krasnow was confident he could arrange another round of private financing, which should suffice to carry the company through to profitability in 2002. New market opportunities were arising, such as providing dry cleaning through grocery-store chains and contracting with insurers to restore clothes permeated by smoke and soot in fires.
In personal terms, having turned away from the Staples corporate jet and the commanding headquarters overlooking the Massachusetts Turnpike, he found that "building a brand, creating customer attachment that didn't exist, and changing the landscape-that's fun." Moreover, the fun looked sustainable: "It's not as if 1,000 Harvard M.B.A.s are chasing after dry cleaning."
When one of Hart's students asked whether he would now counsel starting a business right out of school or gaining experience in a company, Krasnow said, "The laws of economics haven't changed, and the laws of competition haven't changed" just because of the Internet. "The more tools you have in your tool kit, the more chance you'll have to succeed."
Separately, comparing his career to the apparent overnight successes of dot-com millionaires, Krasnow said, "It doesn't work that way. There's a disconnect between the reality and what people think will be happening." While students entering business "want what they consider the big job, and they want to do the fun stuff right away, in this business, there isn't glamorous stuff. It's unbelievably hard work." Of his own experiences with newly-minted M.B.A.s, he said, "They're equipped with a lot of intellect and horsepower, but often have a certain misperception of what an entrepreneurial venture really entails.... As opposed to thinking about the ends they're after, and thinking they should be entrepreneurial because they like the slam-dunk rewards that presumably come with it," they need to consider the unforgiving work of serving customers and perfecting processes, "because the business needs it."
Even in an unusually successful start-up like Staples, he recalled, for the early staff, "It took 10 or 12 years before the dollar lines crossed with those of the people who were off in investment banking." Compared to the overnight wealth showered on the founders of Yahoo and eBay, he said, "There has been a gargantuan number of nonsuccesses, and not because the people involved are not smart and don't have capital and expertise."
"Whatever area they choose," Krasnow said of would-be entrepreneurs, "they've got to pick something they like to do, and work hard, and not worry about the rest-success will come." After a decade of learning what it takes to run a business, he said, "I'm very glad I've done this. It's terribly exciting to be writing my own job description as I go along-I feel like it's a fairy tale. It's not for everybody, but I love it."