Inside Stanford B-school’s startup factory culture

March 25, 2014, 6:56 PM UTC
Stanford University

(Poets&Quants) — T.J. Duane began the Startup Garage course at Stanford University’s Graduate School of Business last September planning to build a closed online network for lawyers.

About eight weeks into the 24-week class, he and his team ditched that idea.

“We pivoted … and decided to instead build a community tool,” he says, during a recent break on campus from working on his company. His team’s startup will help graduate students find each other based on their skills and academic backgrounds.

In Startup Garage, failure is encouraged. That cycle of trying, failing, and trying again helps prepare students to pitch bullet proof ideas to angel investors, says Startup Garage instructor Stefanos Zenios, who is also a professor of operations, information, and technology at Stanford.

“Startup Garage focuses on the seed-stage of funding — getting to the point where you can stand up in front of investors and ask them for $250,000 or half a million or maybe a million,” Zenios says.

About 95% of Stanford’s Graduate School of Business’s 809 students opt to take at least one entrepreneurship class — whether it’s Startup Garage, Product Launch, or Formation of New Ventures. At the Stanford Venture Studio, students who apply to be residents are using the space to design and build companies. Others are taking advantage of services like pitch session practice, mentor matching, or peer-to-peer coaching.

While the elective courses are at the core of Stanford’s approach to entrepreneurship, another obvious edge the school has over others is its location in Silicon Valley. It’s also just miles from the biggest venture capital firms in Menlo Park, Calif. Since its founding in 1996, the Stanford’s Center for Entrepreneurial Studies (CES) has taken advantage of that proximity, hiring from Silicon Valley and creating partnerships with its leaders.

Stanford’s ties to Silicon Valley “rubs off quicker and more deeply at the school,” says Russell Siegelman, an angel investor and former partner at Kleiner Perkins Caufield & Byers, who teaches Startup Garage and other courses.

The result: Stanford tends to attract a very high percentage of prospective students who want to do their own thing and, once in Silicon Valley, the school serves up enough opportunities to push the odds in their favor. A record 18% of the 2013 Stanford MBA class chose to form a startup, up from 12% in the late 1990s. According to a Poets&Quants list of the top 100 startup companies founded by MBAs, Stanford and Harvard’s business schools together accounted for more than half of the list. (To make the list, an MBA startup had to have raised a minimum of $1.6 million.)

Harvard Business School graduates have launched 34 of the top 100 MBA-founded startups. Stanford grads weren’t far behind, with 32 startups on the list — including video streaming company Viki, satellite imaging company Skybox, mobile startup Karma Science, student loan refinancing company SoFi, and genetic testing startup Counsyl. At the top of the list is a name well-known on Stanford’s campus: Wildfire, a social media marketing company founded by a Harvard/Stanford couple in 2008. Google (GOOG) acquired WildFire in 2012 for a reported $350 million.

SoFi, No. 6 on the list, came out of Startup Garage. In 2011, Mike Cagney, Dan Macklin, James Finnigan, and Ian Brady had an idea for refinancing student loans at lower rates. They decided to ask Stanford alumni to lend money to Stanford students who were refinancing. “They raised a couple of million within a year,” Zenios says. By last September, SoFi was funding $450 million in loans to 4,500 borrowers at an average savings of $9,400 per borrower.

As faculty director of CES, Zenios also encourages collaboration between MBAs, engineers, lawyers, and medical school students. A recent “Finding Your Team” social mixer drew 250 people from different Stanford programs, who discuss what they’re working on and, if all goes well, get together to form startup teams, Zenios says.

Meantime, Startup Garage student Duane is trying to connect graduate students online, particularly MBA students, who are always searching for computer scientists to help build a product. “They’ll go over and hang out at the engineering department with a pizza,” Duane jokes.

Pivot, persevere or perish

Startup Garage is held in a bright, modern space called the CoLab, which is meant to resemble a garage; that is, if the garage were filled with white, Ikea-style furniture and many whiteboards. This past September, 100 students applied to take the course. Zenios accepted 70 students with ideas for a new product or service that addressed a customer pain point. More than 20 students are gathered today for a panel on HR issues at startups.

Many business school electives use real-world business cases to teach entrepreneurialism, and MBA grads move on to start a company two, three years later. Startup Garage, a second-year elective, asks students to build an idea for a company using, in part, the lean startup model, Eric Ries’s method of developing and rolling out products or services quickly to avoid costly failures. “You become your own case,” Zenios says.

Today’s assignment was to do a competitive analysis, defining rivals’ business models and a “unique point of differentiation” for the student’s business. With the academic quarter ending soon, teams have already built a 12-month operating plan.

Last year, Zenios revamped Startup Garage by flipping the classroom, an idea that’s gaining traction at Stanford. Instead of using precious classroom time for lectures, a flipped classroom asks students to watch recorded lectures with instructors ahead of time. Student teams watch lectures and file their assignments online so they can spend class time applying what they’ve learned.

Of 25 teams that began Startup Garage in fall, 12 are left. A few have pivoted. One team that started with an idea for a new car market ended up switching to a petsitting B&B service in Brazil. Another ditched an idea in the medical market. “They bump up against something [and discover] the economics will never work no matter what we do, but they can apply the same learning to the new space they’re exploring and move really quickly,” Zenios says.

Teams progress by interviewing potential customers, other businesses in their space, and industry experts — hitting the pavement outside of class. At the end of the first month, students identify their user, the market need, and a unique insight that makes them believe they can address a customer need in a new way.

If the first prototype brought in front of potential customers doesn’t work, it means “you don’t understand their pain point — there are five or 10 things you are not addressing,” Zenios says. The students go back and revise.

At the core of the course is constant review and feedback from the Startup Garage team of four instructors, which includes Siegelman and fellow venture capital investors Saar Gur and Richard Lin, who move from team to team during class. Gur is a general partner at Charles River Ventures. Lin, a Stanford MBA, is a former research scientist at the UCSF School of Medicine and Harvard Medical School, and a partner at Three Arch Partners.

Pairing Zenios with these three successful investors has worked well, says Startup Garage assistant director Ryann Price, who coordinates the day-to-day operations of the course. Sometimes, the teachers become investors.

Last year, Startup Garage students Tony Xu and Evan Moore were planning and testing the idea behind DoorDash, which matches local restaurants with drivers who deliver takeout in the San Jose/South Bay area.

The students spent hours during the winter quarter studying the economics of restaurant takeout, trying to figure out how many orders they needed to deliver per hour to run a profitable business. Xu and Moore went on to launch DoorDash with two other Stanford students.

In September 2013, just months after graduation, Khosla Ventures’ Keith Rabois and Charles River Ventures’s Gur led DoorDash’s $2.3 funding round.

Gur and Zenios clearly believe that entrepreneurship can be taught. “If you break it down as a process, then you can teach it,” Zenios says. “You can teach people the the different elements and it becomes less intimidating. You can teach them what to expect from every part of the process.”

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