CNET también está disponible en español.

Ir a español

Don't show this again

Christmas Gift Guide
Tech Industry

Students say VC keg is running dry

Undergraduate and graduate students, once seen as fearless in the VC world, are shelving their entrepreneurial dreams amid an ever-tightening funding climate.

Amit Jain is putting his dreams on hold.

"When I went to MIT, my dream was to get an MBA and start a company at the end of it," said Jain, who graduates from the Massachusetts Institute of Technology on June 8. He even had a plan with two classmates to launch a wireless network software company.

But after discouraging talks with venture capitalists, Jain and his friends decided last week to drop the business plan and snap up job offers that were on the table.

"We realized the funding climate was tight and VCs were looking for experienced people," Jain said. "It was either take the (job) offers and give it another try several years later when we have more experience, or drop everything and stick it out for six to eight months and try to build something."

This year's business school graduates--usually an enthusiastic and aggressive group of entrepreneurs--are shying away from launching their own companies amid a downturn in the technology sector. In many cases, they're giving up on their plans before approaching a single venture capitalist or angel investor.

"I used to get about 20 percent of our deal flow from grads and undergrads, but now it's less than 5 percent," said Ron Conway, founder of Angel Investors, a firm that provides capital investments to early-stage companies focused on the Internet, e-commerce and information technology markets. "It has come way down, but the chance that they'd get funding is even more remote than ever.

"We used to get a lot of them coming to us out of Stanford's business school," he said, "but when I spoke to them in February, I told them they shouldn't launch a start-up and (should) get some business experience instead."

Apparently, many students are doing just that.

Last week's MIT $50K Entrepreneurship Competition drew only 135 business plans, down from more than 200 last year. A similar competition at the University of California at Berkeley's Haas School of Business drew only 65 plans this year, down from 182 last year.

Not so fearless?
The fact that more students are becoming familiar with how venture capital groups work--as well as absorbing the economic realties around them--may be affecting students' reputations as fearless go-getters who are willing to try anything. Jain says the situation has sobered many.

"You can be fearless if you don't know what's ahead of you," Jain joked.

At the same time, the market downturn has had a predictable effect on those looking to cash in on the boom times.

"The (MIT) competition last year attracted some people who never planned to be an entrepreneur," organizer Elad Gil said. "They saw their friends starting companies and getting rich from IPOs, so they looked for an easy idea that had a strong technology background, like something online."

But many students are simply delaying their plans--not dropping them entirely, said Irving Grousbeck, a consulting professor at Stanford University's Graduate School of Business.

"They're saying they'll build a company in two, three or four years," after they graduate, Grousbeck said.

But that side trip into the corporate world will likely keep some from ever pursuing their dreams--and investors say that will affect the technology landscape of the future.

"There will be less innovation in Silicon Valley than there was three years ago, and it's a by-product of this downturn," said Conway, whose angel fund last year invested in roughly half a dozen business plans from college students.

Skittish students
Graduates and undergrads are retracting plans to launch start-ups. These entrepreneurs, often considered the most fearless, are becoming more timid in light of the downturn in venture funding. Top-tier universities report large declines in entries to business plan competitions.
Year UC Berkeley teams MIT entries
1999 75 150
2000 182 206
2001 65 135

Sources: MIT $50K Organizing Team, UC Berkeley Business Plan Competition

Daniel Weld, a venture partner with Madrona Venture Group, agrees.

"Students are on the pulse of technology, especially those at big research universities like Stanford, MIT and the University of Washington," Weld said. "Some schools require their students to use laptops, and they're connected to wireless networks on campus. This is a generation that may develop a whole new class of wireless applications.

"Or, you look at Napster," Weld said. "Few people outside college campuses understood it. But students knew what was going on much earlier."

Decline across the board
Weld, as well as Mark Gorenberg, a partner at venture firm Hummer Winblad Venture Partners, and Jonah Schnel, managing partner with ITU Ventures, say fewer students are submitting business plans to their firms.

ITU, which concentrates on funding business plans coming out of the universities, has seen a 30 percent to 40 percent decline in undergraduates submitting business plans this year. But the drop has been less severe among graduate students, Schnel said. That group of entrepreneurs has declined by 20 percent.

Last year, ITU received roughly 500 to 600 business plans. But the figures are on track to fall to 300 to 400 this year, Schnel said.

Despite the decline, Schnel surmised that traditional venture firms may be experiencing a steeper drop.

"I think our deal flow may have decreased less than other VCs, which pull in from every type of entrepreneur," he said. "Students, because they're younger, have a penchant for taking on more risk. If things don't work out, they can get a job at a larger corporation. That's harder to do if you're in your 30s and have worked at large companies like IBM."

Forging ahead
Nataliya Riabokon, a 28-year-old MBA student at Stanford, is pursuing her dream of launching a company despite the challenges.

Riabokon founded Logika Labs, which will take in projects from midsized U.S. companies and outsource the work to IT professionals in Eastern Europe. The company has a software development center in the Ukraine to handle such tasks as application management and custom software development.

"I wanted to create a company that would leverage my knowledge of that part of the world and be related to high-tech," said Riabokon, who is from the Ukraine. "We plan to get two projects under our belt before we approach venture and angel funding. I know it is difficult to get funding now, but my commitment is 100 percent and my passion will help a lot."

Investors say that kind of enthusiasm has helped college entrepreneurs in the past.

"Students coming out of business school usually show more raw enthusiasm for an idea than other entrepreneurs," Conway said. "They don't know what they don't know and have more of a can-do, show-the-world attitude. That was a major selling point to the VCs."