The Harvard MBA says:

It’s never to ridiculous to do something you love (provided it is legal).  But I can understand your parents’ reluctance to bankroll your venture.  I don’t know what the right answer is for you, but here are some things you can think about as you make your decision.

1) Where do you have comparative advantage?

This is probably the main reason your parents are skeptical.  Basic economics argues that people (and nations) should focus their efforts where they have the greatest comparative advantage.  Having a EE degree gives you a much greater comparative advantage for certain jobs; there are far more people who could theoretically be a baker than a digital signal processing engineer.  The EE degree is also helpful for any sort corporate job, since it demonstrates your basic intelligence and capabilities.

2)  Going into business with family

When family and money mix, heartbreak is usually not far behind.  It’s great that you and your aunt get along, but who knows what will happen when you’re working together 20 hours/day, 7 days/week.  It’s also the case that your parents may be reluctant to bankroll other family members, fearing rightly that once they invest anything, they’ll be called upon for further assistance if (or rather when) things go wrong.  Finally, I don’t know what your parents relationship is with your aunt, but it’s possible that they’ve supported her ventures in the past with negative results.

3) Most new restaurants fail.

While restaurants are no more likely to fail than any other new venture, the three-year failure rate is still 59%.  That means that the most likely outcome in three years is that your cafe/bakery will have failed, and your parents (if they invested) would have lost their money.  I don’t know how rich they are, but no one likes to lose money.  More importantly, they don’t want to see their son spend the early years of his career on something that doesn’t advance it.

4) Are you sure that you love the restaurant business?

Research shows that we are terrible at predicting our own happiness.  While running a restaurant may sound fun in principle, you should do whatever you can to confirm or invalidate this believe.  Get a job at a bakery/cafe, and see how you like it.  If you have to, volunteer to work for free for a week.  You should also use the power of surrogacy.  Find someone similar to you who pursued their dream of opening a restaurant, and talk to them.  You may also want to talk to someone who pursued a conventional path.

Now all that being said, life is not about always making the most economically rational choice.  If you consider all these issues, and you still want to move forward with your plan, DO IT!

Life is short and uncertain; if you have clearly identified a calling that you love, and will make you happy, you’re already ahead of the vast majority of humanity.  Seize that opportunity and make the most of it.

The Harvard MBA says:

You’re not doomed, but it may take some time to position yourself to maximize your chances.

First of all, you do have a number of things going for you.  Even “average” for a tier-1 school is still a lot better than being “below average.”  Less than 50 people per year get a perfect GMAT score…even I didn’t (though I probably would have, if the GMAT hadn’t switched to their computerized format my year…)  But your chances aren’t going to be good unless you find a way to break out from the crowd.

Right now, you’re focused on the typical measures (GPA, GMAT, pre-b-school job) which could prove disastrous.  There are far too many qualified applicants; if you look like a “typical” applicant, you’ll get a “typical” result–a rejection letter.

Here’s where the hard work comes in.  You have to find a way to do something remarkable that will set you apart.  As I’ve noted before, business schools are in the business of building the best possible portfolio of students (or as I like to refer to them, “future alumni donors”).  Like any investor, they prefer a diversified portfolio, and will allocate some portion of their investment (acceptance letters) to “alternate asset classes.”

When I was in school for example, I had plenty of classmates who had little to no business experience, but had demonstrated leadership in other ways.  These were high-risk/high-reward investments that could individually flame out, but probably delivered a better expected value than simply admitting a few more McKinsey associates.

Demonstrate that you’re not just another typical candidate by doing something a typical candidate couldn’t do.  This may be starting a successful social enterprise in your spare time, writing a best-selling book, or becoming the next YouTube star.  But you need to start looking off the beaten track.  Staying on that track will doom your chances.

–Mike

The Harvard MBA says:

Mike, I’m sorry to hear about your job loss.  This economy has put a lot of good people out of work, and I’m sure it’s frustrating.

It’s true that attending a top business school can be a boost to your job hunt; for many MBA students, this is the main lure of business school.  Thanks to the on-campus recruiting system, world-class companies come to you.  But even top schools are affected by the recession.  In good times, essentially 100% of the class has access to 6-figure jobs, but in tough times, a significant minority will graduate without a job…and with an extra $50-100K in debt.

Given the state of the economy, it is likely that we’ll be in a recovery by the time your prospective class (class of 2012) graduates, so getting your MBA isn’t a bad bet.  Schools like HBS have plenty of financial aid, even in these tight credit times, so you’ll be able to finance your education.

But before you invest 2 years of your life, I’d encourage you to make sure that getting your MBA serves a purpose beyond boosting your job prospects.  You’ll be in a much better position to take advantage of your business school years if you have a clear idea of where you want to steer your career.

Are you happy with your past work/industry?  Are you looking to make a change?  What kind of company do you want to work for?  Or do you want to start your own company?  Answering these questions is a good first step to getting your life rolling in the right direction.

And if you’re having trouble answering these questions, there are other things that you can do to help get those answers before you commit to b-school.

Daniel Gilbert’s “Stumbling on Happiness” makes the point that we tend to be lousy at projecting what will make us happy.  The best way to predict how we’ll feel about something is to see how others feel about it.

Network and find people who are doing the things you think you might want to do and talk with them.  Heck, network in general.  In any business community, there are folks who are well-connected and helpful–usually you can find them if you ask around.  Get to know these folks; not only will you be able to learn from them, but if you develop a good relationship, they’ll be thinking of you when they run across folks that need marketing help.

So here’s your concrete action plan: This week, commit to doing the following:

1) Identify 5 possible careers/industries/positions that you think you might enjoy

2) Assemble a list of local (or otherwise accessible) folks who match those criteria, and try to get some time to speak with them.  Your goal is simply to see if their situations might be a good fit for you down the road.

I’m a pretty avid reader of “Adventures” and “Ask the Harvard MBA,” and so I was interested when I came across your recent post on the adult film industry (”Why I Love Pornography“).  I graduated from [redacted at asker’s request] this year, and currently I work for [redacted].  Since last year, I have been interested in learning more about the adult film industry, especially the financial viability of online sites (such as YouPorn, RedTube, etc).  Much of the content is similar to that on Youtube, but when videos are “made,” producers know that there will be a marginal cost (unlike home-made videos on Youtube and other content that was produced before Youtube was invented).

I have three questions:

1. If I were to eventually find employment in the financial division of an adult film company (to gain experience), would it affect my future career options?  Would typical financial firms and funds or VC firms look down upon this work experience?  Would MBA programs count it as a “strike” against me?

2. If I want to learn more about these industries, where would you recommend I turn?  I can check out the financial statements released by companies like Vivid, but is there any general industry journal/blog, etc?

3. How would you recommend I market myself to such firms?  I suppose general financial experience would be a plus, but do you think that they would look for industry-related experience (I don’t think any decent film that wants to make money would let me become an actor!)?  One idea I have is to start a blog that focuses on the adult film industry and historical platforms that they have used to market their product (magazines, DVD, video, internet, etc.).

The Harvard MBA says:

Great questions.  Hopefully HBS doesn’t decide to file a lawsuit against me for answering them!

1) Working for an adult film company isn’t necessarily a stigma; in fact, for some employers it might be seen as a bonus.  Of course, a lot depends on the nature of the work.  For example, I once hired a fellow who had worked on the website and strategy for a porn company.  To me, this was a huge plus on his resume–if anyone knows how to optimize, it’s the porn companies. I think the story would be similar for most financial firms (whose employees tend to be among the most enthusiastic consumers of porn).

Unfortunately, there are probably some outfits that would be less enthusiastic about this kind of job experience.  For example, I’m not sure how this would be viewed by the business schools, who can be a bit humorless at times.  I suspect this would also scotch your chances of working in politics.

2)  I’m not certain which blogs are the best at covering the porn industry, but the long-time leader in this industry’s trade press is Adult Video News, now abbreviated to AVN.  Here is their business site.  You might also want to attend a few of the industry’s trade shows, which are open to the public.  The major events I’m aware of are the Adult Entertainment Expo and Erotica LA.  Alas, I have never been to any of these events, so I cannot personally vouch for them.  Nonetheless, I think this Cracked article provides some good flavor, both for the events, and the business-savvy of the performers.

3) In terms of finding a job in the adult entertainment industry, I suspect that good old-fashioned networking is the key.  Get to know people who are in the industry, and they’ll be able to help you get involved.  Your idea of starting a “business of porn” blog is probably a good one.  When I looked up “porn business” in Google Blog Search, this is the only blog that appeared. If you do start this blog, let me know, and I’ll show you some link love.

As for becoming a performer, I’m afraid that it’s very difficult to break in as a male performer.  It’s simple supply and demand…the number of men who would like to be a porn star is far larger than the number of available slots.  I’ve heard that the best way to break into the industry as a man is if a female star insists that the producer cast you opposite her.  Male performers simply don’t have a lot of pull in the industry.  You might also try gay porn, though you’ll need a truly world-class physique.  I doubt Ron Jeremy would make it in gay porn.

One more thing, I’m very skeptical about the CASE METHOD learning model…how can you learn finance with it?

The Harvard MBA says:

The first thing to bear in mind is that there is no school that can teach you how to be an entrepreneur.  While many MBAs go on to start their own businesses, and the b-schools do their best to help budding entrepreneurs, most newly-minted MBAs go to work for someone else.

That being said, I would give HBS the advantage over Wharton in your case.  While Wharton is second-to-none when it comes to the teaching of finance, the fact is “finance” is almost entirely irrelevant to being an entrepreneur.

Advanced finance courses will teach you about use debt for leverage, valuing complex projects, and how to price various securities.  You’ll learn how to use the advanced functions of Excel and to run Monte Carlo simulations.  And none of this has any relevance to entrepreneurship.

As an entrepreneur, you’ll never have to price a bond offering or determine how to stage a $1 factory construction job.  You may use Excel, but if you ever do anything more than add, subtract, multiply, or divide, you’re making things way too complicated.

The time you spend on finance would be better served studying strategy and management.  HBS also has two other major advantages for entrepreneurs: Size and Influence.

Because HBS is the biggest and oldest business school, there are more HBS alumni than of any other school.  Wherever you go, you’ll find fellow alumni who are at least willing to pick up the phone when you call.  That’s very important for an entrepreneur who needs to get his foot in the door.

HBS is also the school of choice for venture capitalists.  Something like 30% of the VCs on Sand Hill Road in Silicon Valley graduated from HBS.  They’re definitely going to feel more comfortable with a fellow alum, not for any secret-society conspiracies, but simply because they’ll feel like they better understand your background and experiences.

Finally, while it may seem strange to teach finance via the case study method, I would argue that this is actually the best way to teach finance in the classroom.  Ultimately, finance isn’t about crunching numbers, it’s about using numbers to make the right decisions.  This was brought home for me in a particularly memorable way during my first session of Finance during my first year at HBS.

The first case we studied was Butler Lumber, a run down lumber yard in a rural town.  After the introduction, the professor asked the classic HBS question: “What should the company do?”

My friend, a top-flight Wall Street ace, confidently spoke up. “It looks like the company has an inefficient capital structure.  I’d recommend that they do a leveraged recapitalization to free up some cash and allow them to take advantage of the tax shield of debt.”  Little did he know he was walking into a trap.

With relish, the professor slapped a photo of the run-down lumber yard back up on the screen.  “Leveraged recap?  Back to reality, Kyle!  This is a lumber yard.”

The point is, the numbers are a tool, but judgment and business sense are paramount.  That’s why teaching finance via the case method works–it forces you to consider the non-quantitative aspects of finance.

I just stumbled across your postings and read all of the the most recent ones.  You are geared for youth it appears but I liked your energy and the fact that you actually answer a question and refrain from pontificating.

My question:  I’m an older female (late 40s) who exited Corporate America about 3 years ago to join a small financial intermediary company.  Business has all but disappeared at the small end where we are focused.  What services could we add for income AND for value to clients?  Or given the outlook for the economy through 2011 - should I be looking at a new venture?  I hold an MBA (not Ivy); Master of Tax and a CPA (inactive).

The Harvard MBA says:

These are certainly tough times for both entrepreneurs and Corporate America.  While startups have a high failure rate during recessions, a lot of corporations also go through major layoffs.  I remember one fellow who left one of my startups to join a big company because he felt he needed the extra security.  He was laid off a month later.  To some extent, you have to pick your poison.

Without knowing your exact line of business, it’s hard to say whether or not to pull the plug on your venture, but I can offer some general advice:

1) Ask yourself, “If I weren’t already in this line of business, would I choose to get into it today?”  Logically, you shouldn’t stay in any business that you wouldn’t join today if you were free.

In practice, it’s not a good idea to cut an run the first day that you’re feeling pessimistic, but many entrepreneurs identify so much with their businesses that they prefer going down with the ship to living to fight another day.

2) Evaluate your business by asking three simple questions: a) “Do I have a great product or service?” b) “Is my offering better than the competition’s for my chosen market?” c) “Do I have the ability to market and sell my product cost-efficiently?”

If the answer to any of these questions is no, take a close and objective look at the business.  You may not need to exit the business, but you may need to improve the product, focus on a better market niche, or change the way you market and sell.

3)  As my friend Eric Ries has written, if you need to make a change, pivot to your new position rather than completely abandoning your roots.

Let’s say your business had previously succeeded by selling product X to market Y.  Far better to try selling product A to market Y or product X to market B (shifting only one of the variables) than completely jumping to a new product AND market.

The good news in all of this is that you are in the prime of your career and have a great set of credentials.  Good luck!

Shoot straight with me, Chris: given this situation, what would you do? I place a high premium on my time and believe that two years spent away from helping this project become a reality is not worth the boost in security (perceived or real) that comes with a quality MBA, especially if I’m going to miss out on such a rare opportunity.

The Harvard MBA says:

I remember when I was applying to business schools.  It was 1997, and the dot com boom was in full swing.  I wondered whether I was making a mistake.

My friend Rock, a Stanford MBA, gave me some good advice.  “Chris,” he said, “Do you think it makes sense to maximize the number of years in your *before* you get your MBA, or *after* you get your MBA?”

If you intend to get your MBA, it generally makes sense to go to b-school as soon as possible (assuming you have worked enough to know what you want out of your b-school experience).

Nonetheless, general advice doesn’t always apply.  In fact, I would probably be far richer today if I had simply decided not to toss my invitation to Google’s launch party in the trash (one of the first two employees after Larry and Sergey was an old work colleague from my D. E. Shaw days) and gone to work there as a janitor.

I can’t tell you what to do without understanding more about your circumstances and the opportunity (you should feel free to reach out to me again; perhaps we can do a follow-up post).  But I can propose the following framework for thinking about the decision:

1) Lay out the probable income stream associated with going to business school.  This might look something like this:

• 2009: +$25,000 ($50,000 in income; $25,000 in school expenses)
• 2010: -$30,000 ($20,000 in income from a summer job; $50,000 in school expenses)
• 2011: +$50,000 ($75,000 in income; $25,000 in school expenses)
• 2012: +$157,500 ($150,000 in income + a 5% annual compensation increase)
• and so on.

2) Lay out the potential income streams associated with joining your friends in a medical technology venture

• 2009: +$50,000 ($50,000 in income; reflects 6 months of $100K/year income)
• 2010: +$40,000 ($40,000 in income; reflects a full year of minimal founder pay)
• 2011:
  • 60% chance the venture fails; you may then go back to having a regular job getting paid a market salary
  • 35% chance the venture raises a larger round; you are then getting paid a market salary
  • 5% chance the venture is very successful and results in a liquidity event which pays out $1 million

By laying out the scenarios, you can then do an apples to apples comparison and decide what makes economic sense for your situation.

Or, you may end up deciding to do what you really love.  Remember, all these tools of economic analysis are merely that–tools.  In the end, they cannot substitute for judgment.  It’s you’re decision–make the most of that freedom to choose!

How many of the students that graduate at HBS open their own business? You mentioned that recessions are a great time to open businesses, what kind of business do HBS students open or get into?

The Harvard MBA says:

The entrepreneurship bug bites a lot of Harvard MBAs.  It is estimated that over the course of their career, nearly half of Harvard MBAs will try to start their own business.

On a more concrete level, the school reports that 27 members of the Class of 2009 (out of 889) decided to start their own business right out of school.  That may seem low (3%), but remember, most people go to HBS to take advantage of the recruiting machine that funnels you into high-paying jobs with established companies.  It’s hard to turn down $200K/year or more in exchange for ramen and pinto beans.

Of course, I was part of the brave/foolhardy entrepreneurial group from my class, so form your own opinions here!

In terms of what kind of businesses students tend to start, there are three basic types:

1) High-tech startup

2) Low-tech startup

3) Search fund

The high-tech startup is your classic startup, often in Silicon Valley (though sometimes in Boston, New York, Seattle, or Austin).  Usually the HBS student who starts the company is the business person, and works with a technical founder he or she met in college, or at a previous employer.  For the company I started, I worked with both an old college friend, and an old high school friend, both with technical backgrounds.

Of course, in this kind of economic environment, it’s not always easy to convince investors to give untested MBAs millions of dollars, so you will probably need to show some market traction before raising serious money.

The low-tech startup is much rarer, largely because it’s much less sexy.  One of my HBS friends, for example, started a chocolate business.  On the other hand, while tech may be sexy, there are plenty of other ways to make money.  My friend’s business is doing quite well, as have other Harvard MBA-founded restaurants and even maid services (though I don’t think the Havard MBAs were doing the cleaning).

Finally, a small number of graduates opt for the search fund approach.   In this model, a graduating student raises some money from investors (usually rich guys he or she knows personally) to go out and buy an existing business to operate.  In many ways, this is like a mini-LBO, except that the transactions are much smaller, and done with equity from investors rather than a fund.

One of my classmates went this route and bought a printer cartridge refurbishing company.  As far as I know, he’s still doing well.

As for what kind of business to start during a recession, my classic advice is to focus on businesses that help people save money.  A number of my investments play off these theme, including RepairPal (when no one is buying cars, people want to save money on car repairs), and they’re doing well.

I am European and have to make a decision this week whether to do my MBA at a rather unknown, small University in California (accredited though) with a full scholarship or at a (lower) TOP100 Financial Times MBA Ranking school that I have to pay almost full. Both programs take the same time. What would you recommend me to do?

The Harvard MBA says:

As usual, the answer depends on your circumstances.  Here are the variables in play:

1) What is the relative value of the two different MBAs for your career?

For example, if you are a business owner, the delta in value is relatively small.  On the other hand, if you’re looking to get a job at a major management consulting firm, the delta in value is high, since these firms hire disproportionately from the top schools.

One way to gauge this delta is to find alumni from both schools in your chosen field, and ask them about their thoughts.  Not only will their opinions help you make a decision, simply comparing their relative achievements may provide an answer.

Geography is also important; if the lesser-known school is a big player in the area you want to live, it may be a better choice, even if the more prestigious school would provide a better platform in other geographical areas.

2) How much hardship will paying for the more expensive MBA entail?

Your financial circumstances also need to be taken into account.  In many cases, a more prestigious MBA can provide a delta of $30,000 per year or more over a lesser-known school; at that rate, you’ll make up the cost difference in a matter of years.  Don’t forget that you have to consider pre-tax dollars, unless you are able to deduct the cost of your MBA from your taxes.

On the other hand, if you already have hefty student debts from college, or don’t have enough of a cash cushion to easily afford the investment, you might want to do a little scenario planning.  Let’s say the global economy doesn’t recover by the time you graduate, and you have trouble finding a job…would adding the additional debt represent too great a risk?

3) Which school do you think you’ll enjoy more?

One final thing to bear in mind is whether or not you like the students and faculty at the school.  You’re going to spend two years of your life there; that’s a long time to spend with people you dislike.  Make sure you either spend some time there, or talk with alumni of the schools, to get the story on student life.

For example, while both schools are certainly prestigious, it is generally acknowledged that it’s a lot more fun to attend HBS than MIT’s Sloan School!

Good luck with your decision.