MBA startups at Stanford reach all-time high

June 1, 2012: 5:00 AM ET

A record-breaking 16% of Stanford B-school's class of 2011 chose to start their own companies at graduation, exceeding the school's 12% peak during the dot-com boom.

By John A. Byrne

(Poets&Quants) -- During the dot-com era, MBAs at many business schools rushed off campus to start all kinds of e-commerce companies. The frenzy to get in on the Internet action back then led to many well-funded, but ultimately failed, businesses. For most business schools, the years 1999 and 2000 saw record numbers of graduating MBAs start their own companies.

For the first time since then, the percentage of MBAs who are shunning traditional corporate jobs in favor of going out on their own is hitting new records once again. At Stanford's Graduate School of Business, an all-time high of 16% of the class of 2011 chose to start their own companies at graduation. The school says the percentage of MBA students who decided against traditional MBA jobs in favor of the start-up world reflects a three-fold increase from only 5% in the early 1990s and is a third higher than the 12% peak during the dot-com bubble.

More importantly, the 10-year trend data, says Pulin Sanghvi, director of Stanford's Career Management Center, suggests "a generational shift toward entrepreneurship." It's not only showing up in the placement stats that show that greater numbers of graduating MBAs are launching their own companies from scratch. It's also showing up in the number of MBAs who are anxious to work for smaller companies and startups that are, by nature, more entrepreneurial.

At Stanford, MBA entrepreneurs last year pursued a wide diversity of industries and companies. Stanford's Career Management Center found that there wasn't as nearly "as much aggregation in technology-Internet-social media as you might otherwise expect," says Sanghvi. About 30% started companies in Internet services and e-commerce, but 15% ventured into investment and financial services, and 7% each in food and beverages, retail or wholesale, and sport or sports management. Roughly 5% of the Stanford MBA entrepreneurs launched enterprises in healthcare, with another 5% in cleantech and alternative energy.

Sanghvi, who expects the class of 2012 to chose the entrepreneurial route in similar numbers, believes there is a significant difference in this generation's startup intentions. "The difference between now and the late '90s in the dot-com boom is the Internet was an emerging, poorly understood space that seemed very new and risky," says Sanghvi. "There was more of a mentality in the late '90s that 'there is a wave happening and I don't know how long that wave is going to last.' In 2012, we now have 20 years-plus of history where this part of the economy has thrived, and thrived surprisingly well, even against the recent financial crisis."

More MBA grads are gravitating to the startup world than at any time other than the dot-com boom of 2000-2001. The "generational shift" Stanford is referring to raises the prospect that many traditional MBA recruiters in consulting and finance will see a smaller percentage of the best and brightest in any graduating class. That is bound to lead to some frustration by firms that pay among the highest starting MBA salaries. But Sanghvi says they are already adapting, alternating the way they recruit MBAs at top schools.

What's behind the startup spike?

The new entrepreneurial fever is in part due to the heightened attention to tech startups like Facebook (FB) and LinkedIn (LNKD) to Twitter and Zynga (ZNGA), and the ascension of the late Steve Jobs as one of the great entrepreneurial geniuses of our time. Another underlying cause for the shift is that students seem to be more comfortable assuming the risks of starting a business from scratch.

"There is much greater knowledge and understanding on how to start and build and grow a new enterprise," says Sanghvi. "We have dedicated a significant part of our curriculum against this discipline and we now have so many alumni who have blazed a trail. The flip side is there is not as much security in the larger companies, anyway. The financial crisis led many companies to cut down their hiring and layoff large numbers of their workforces."

The swelling interest in startups by graduating MBAs is also due to the encouragement from business schools. The schools have launched business plan competitions, dangling significant cash awards to student winners so they can start their new businesses. They've increased the number of elective classes on entrepreneurship in the course catalog, and they've put startup projects into the basic MBA curriculum.

"It isn't a goal for Harvard Business School to graduate more entrepreneurs, but this will be a side benefit," says Alan MacCormack, a Harvard professor who recently oversaw the school's startup initiative, which assigned an entire class of 900 students to launch micro-businesses as part of six-person teams, with seed capital from the business school. At Harvard, he says about 8% to 10% of the class of 2012 went the entrepreneurial route.

It seems that the trend is even more pronounced at highly ranked schools. A new study by the Graduate Management Admission Council -- based on 5,366 recent or soon-to-be graduates of business schools -- found that only 5% of students plan to own or start their own business after graduation. That's roughly half the percentage at Harvard and just a third of the percentage at Stanford. The study, released on May 21, was conducted between Feb. 15 and March 18, 2012.

Of course, many students are attracted to Stanford because of its location in the heart of Silicon Valley, widely considered the epicenter of American entrepreneurship. "Despite an uncertain economy, more of our students are willing to take the risk of starting up new enterprises," adds Sanghvi.

The school says that its graduates describe the ideal business culture as one that is flat, non-hierarchical, encourages risk-taking and has a strong culture of mentorship. "Growth potential and early responsibility are increasingly priorities for students while money and job security are lower priorities," Sanghvi says. "It's part of a broader generational story that is now taking on clear dimensions."

B-schoolers holding out from traditional MBA jobs?

A greater number of students, says Sanghvi, are less eager to commit to companies during the typical fall recruiting season when the big MBA hirers come to campus. Instead, they're holding out until the spring before graduation to pursue different types of opportunities, often with smaller companies and startups. "They don't want to take themselves off the market so soon," says Sanghvi. "More students feel confident in letting some of the traditional offers go in the fall. We've been seeing this sharply at Stanford for many years. Other schools are also seeing a market shift in this direction."

To satisfy that demand, Stanford's Career Management Center held what it called "The Fewer Than 300 Event," inviting 32 companies with fewer than 300 employees to campus to meet MBA students. Sanghvi took over the main boardroom on the fourth floor of the school's Bass Center last April and brought in couches to create the event.

"Many of the companies had buzz that they might go public over the next year or two," says Sanghvi. "Eight of them were on Goldman Sachs' IPO list. A lot of the companies had no hiring positions open when they came, but after meeting our students, changed their minds."

Traditional corporate recruiters, meanwhile, are adapting their approach to students so that they are in closer alignment with shifting generational motivations, says Sanghvi. For example, some companies are offering opportunities for early responsibility and the flexibility to work on ideas and projects that appeal to the employee. Other sectors have seen shifts in interest that reflect an increased entrepreneurial spirit among graduates. In the financial sector, MBA grads are migrating to jobs in investment management, particularly private equity and venture capital, where they can play principal roles.

"It is important to recognize that as the field of opportunity available to graduating MBAs has broadened, it hasn't made the more traditional opportunities like consulting less attractive," adds Sanghvi. "It has made the traditional paths even more attractive because as the field of competition has increased, the traditional firms have put even greater emphasis on early exposure, responsibility, ownership and mentorship. Our students have very good choices in front of them."

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John A. Byrne
John A. Byrne
Contributor , Fortune

John A. Byrne is chairman and editor-in-chief of C-Change Media Inc., a digital media startup that is launching a network of websites for the global business community, including PoetsandQuants.com, a website for analysis, news, and features on prestige MBAs and the best business education in the world. Byrne was until recently executive editor and editor-in-chief of BusinessWeek.com. Byrne is the author or co-author of eight books on business, leadership, and management, including two national bestsellers.

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