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Risky Business

It’s hard to believe, but an entire economic era has come and
gone since I entered Yale in the fall of 1998. Sky-high technology
stocks sent the Nasdaq up 86 percent in 1999, its best year since
its inception 29 years ago, and created a mood of unparalleled
economic exuberance from Silicon Valley to Silicon Alley. In
the process, a new American hero was born: the 22-year-old gazillionaire
computer whiz with his own e-business startup. Across the nation,
thousands of humanities majors began to wonder whether they should
be studying Java instead of John Milton.
But as the media have recently noted with barely concealed glee,
the bubble has most certainly burst. The Nasdaq saw its worst
ever losses, 40 percent, in 2000, due primarily to the failure
of Internet stocks. Nearly 36,000 technology workers have lost
their jobs. Last January, 19 e-companies bought airtime during
the Super Bowl; this year, only four did. No one has yet dared
to breathe the word "recession," but Alan Greenspan
did admit last month that the economy was at a "standstill."
The heady dot-com era has not passed entirely, however. One legacy
is the dream of the dorm-room entrepreneur-the dream that a kid
barely out of high school could create a successful business
plan and be taken seriously by real investors with real money.
To hear them talk, Yale’s student entrepreneurs are just getting
started and are poised to lead themselves, the school, and the
entire city of New Haven to glory. But the recent failures of
several of the most publicized ventures raise the question: Have
Yalies come to the table too late to get a piece of the pie?
Ask Mike Stern. Until December 2000, he was the c.e.o. of Aquarium
Ventures, which had the recursive mission of finding and funding
other dorm-room entrepreneurs. Aquarium Ventures was, of course,
a venture itself. It was one of the first companies to be funded
by Dagim Capital, a New Haven venture capital (vc) fund started
by a Yale graduate student, Benjamin Karp, and Orthodox Rabbi
Shmully Hecht, who runs the Chai Society, a Jewish social organization
where Yalies network over schnapps. With this unusual backing
and its campus-focused business plan, Aquarium Ventures immediately
attracted attention. As its founder, Stern was profiled in a
number of slick e-business publications such as Fast Company,
Red Herring, and Business 2.0. Fortune magazine asked of Stern
and several other VC founders, "Can these Doogie Howser
VCs find and foster firms that will rate an "A" and
make a profit?" "Running a startup company is like
being a juggler with a thousand different balls in the air. You
can’t let any of them drop," Stern told UMagazine in a
typically self-assured sound bite. Heeding his own wisdom, Stern
took last fall off Yale to work on the company full-time.
According to its website,, "[Aquarium’s]
success depends on our ability to identify tomorrow’s great companies
today, and get them moving fast." Apparently, though, that
never happened. Aquarium Ventures closed up shop after ten months,
having invested in only two student companies, Goldthumb Technologies
and Broadcastbuilders.Com. "The economy slowed down,"
Stern explains, "and we were obviously having some trouble,
as everyone else was." Now back in school, Stern has a new
respect for experience. "I would tell anyone to line up
your ducks before you jump in the water . . . Before you start
up, get as much feedback from smart people as you can. God knows
we made a lot of mistakes, but none of them were new."
Failure isn’t the only thing that can hurt student entrepreneurs;
success is dangerous too. Classmates have called Joshua Newman
the "superstar of Yale entrepreneurship." He co-founded
Sharkbyte, a computer consulting firm, his freshman year. "The
firm began to grow until it hit 20 people a year and a half ago,"
Newman said, "then we were bought by a company called Quantrum
and subsumed into it. By the time the company was sold I was
the only student still left. I was in school the whole time-I
just stopped sleeping and going to the bathroom." Seth Sternberg
had a similar problem with the success of Ivy Bound, his college
consulting company. "Last year, Ivy Bound had around 40
clients. That’s 40 families, 40 sets of demands that had to be
satisfied. That’s too much work," Sternberg said. He cut
the number of prospective student-clients this year, and probably
won’t continue operating the company after graduation.
These students’ experiences in the world of business both complement
and conflict with their education in the same way as, say, the
editorship of a student newspaper does. And just as a student
newspaper brings together aspiring journalists, the Yale Entrepreneurial
Society (YES) has become the main meeting ground for student
entrepreneurs. David Pozen founded YES last year with Sean Glass,
Mark Volchek, and Miles Lasater, all entrepreneurs, and has seen
it grow to over 700 members. They run a $50,000 business plan
competition, Y50K, sponsored by corporations and judged by a
panel of investors and entrepreneurs. Yale recently agreed to
administer the Y50K prize, allowing YES to assume non-profit
status. The organization has also been given office space on
York Street to incubate fledgling student businesses.
The rapid growth of YES seems to indicate a latent demand for
business opportunities at Yale. Mark Gretens, the CEO of Elm
City Ventures, another New Haven vc firm started by Yale business
and graduate students, says, "Everybody feels that the human
capital at Yale is tremendously under-leveraged." Almost
all the student entrepreneurs I talked to invoked the examples
of MIT and Stanford, both of which have long-established business
plan competitions and resources for student entrepreneurs that
have added to their allure for programmers and other new-economy
types. Emulating this forward-looking image, Harvard announced
last year to great fanfare that it was relaxing the rules regarding
students running businesses over the University network; Yale
still occasionally enforces a policy against commercial activity
in the dorms, belying the term "dorm-room entrepreneur."
"We’re far, far behind a lot of our peers in terms of creating
an entrepreneurial environment," says Newman. "Yale
got a late start but is catching up fast."
Unfortunately, Yale has to do this catching up in a much less
favorable economic climate than that of the last few years. "It’s
too late for Yale to become another mit," says Gretens.
Sternberg recounts a harrowing popped-bubble experience: "I
had a meeting with an incubator on the day the Nasdaq dropped
500 points and then came up 500 points on the same day. I was
in my car, driving to New York, and I heard it on National Public
Radio, and I was like, ‘Oh no, I hope they’re not listening to
this.’ [The downturn] hurt a lot because all of a sudden [investors]
were like, ‘Hey, you don’t have experience really’. . . . My
sense is that there’s a kind of general discouragement. Being
an entrepreneur is not sexy anymore."
But fortunes aren’t made by the easily discouraged, and Yale
business types have managed to find a silver lining in the gathering
economic clouds. New venture capital firms started by students,
alumni, and others continue to be enthused about investing in
New Haven. Newman says, "[Since the tech downturn] we have
received fewer business plans, but of a much higher caliber."
So far, his fund’s only investment, Higher One, founded by Glass,
Lasater, and Volchek, is doing well. David Cromwell, the Lester
Crown Adjunct Professor of Entrepreneurship at the Yale School
of Management, and a member of the advisory board of yes, agrees.
"The fundamental long-term outlook still is very promising
for serious entrepreneurs . . . There are always those who are
attracted to get-rich-quick schemes. Hopefully the shakeout has
made such people look elsewhere, which is good since they probably
would not have succeeded anyway. New Haven had a slow start in
the dot-com game, and I believe that the market decline will
have almost no effect on entrepreneurship in the city."
Indeed, some observers see in the growth of student entrepreneurship
an opportunity that New Haven desperately needs. Last spring,
Joel Schiavone, a businessman with enterprises all over Connecticut
and now a candidate for mayor of New Haven, requested that YES
host him for a talk at Yale, appropriately titled "The Importance
of YES." According to the YES newsletter, he called the
organization the city’s single greatest resource for entrepreneurs,
extolling its promise for developing the city’s private sector.
Cromwell also believes that YES has "big potential"
to alter the city’s economic outlook. "New Haven is not
a large city. It will not take many new successful ventures to
make a big impact on such a small place. Five or ten new startups
a year would make a big impact, and if one out of twenty of those
should make it, say, to ipo [Initial Public Offering] stage,
it could have a very big and lasting effect. The economy around
Boston is booming, in part because of new ventures started by
recent graduates of universities in that area." Cromwell,
however, has his own reasons to be bullish on New Haven: He has
his own VC firm, Sachem Ventures, whose investors include Yale,
and which also has stakes in Higher One.
Pozen sees Yale’s location as an advantage over other Ivy League
schools because of the greater opportunity to advance the local
economy. He speaks with pride about his organization’s impact
on New Haven through a program called Community Consulting. Despite
its socially-conscious name, this consists mostly of students
interning at local startups, with a few also teaching entrepreneurship
at local charter school Amistad Academy. He adds, "The greatest
potential for us to be an engine of change for New Haven is the
[Y50K] competition. If you can create a business with 40 jobs
and millions of dollars in revenue, that’s a huge thing, not
just a nice thing." The city has begun to lend its support.
Recently, yes has held meetings with Henry Fernandez, New Haven’s
economic development administrator, to discuss the role the city
can play in promoting y50k. "There are going to be banners
down Chapel Street," says Pozen, "that say ‘YES and
The City of New Haven Present Y50K.’ The city wants to develop
a culture of entrepreneurship."
The techno-savvy argot of these clean-cut young men (they are
nearly all men), and the staggering sums of money they toss around,
lend their activities a certain gravitas. But the "culture
of entrepreneurship" notwithstanding, the true potential
of university students and recent graduates to rejuvenate New
Haven’s commercial economy has to be questioned. So far, most
of the successful student startups, at Yale and across the country,
have grown "one customer at a time" by providing a
service. Usually it’s a service that students are uniquely qualified
to provide, whether because of their cutting-edge technological
expertise (building websites) or simply their status as students
(counseling prospective Ivy Leaguers). The likelihood of any
of these companies creating a significant number of new jobs
for the broader New Haven community is, therefore, not very great.
In addition, ambitious student entrepreneurs are increasingly
finding the business-to-consumer model "too much work,"
as Sternberg said of his own company. They are attracted more
to the high-risk, high-reward world of venture capital-where
others make your money for you. Newman put the money from the
sale of his first company into yet another vc firm for student
ventures, Silicon Ivy, which now has $10 million to invest. Sternberg
is currently working on a book for other young entrepreneurs
on "how the VC ecosystem works." Students, as Stern
points out, have little to lose in vc: "People in school
have the lowest risk. The bulk of college students have loans,
but they’re not supporting families, and they don’t have years
invested in one career." This carefree position, however,
is exactly the opposite of New Haven’s. Relying on Yale-related
venture capital firms to create the kinds of jobs the city needs
is like relying on Beinecke Library to improve New Haven’s public
In the end, the legacy of the e-business revolution might look
a lot more like traditional developments in Yale’s history than
those involved would like to admit. New opportunities are being
created, but thus far they extend mostly to students who closely
resemble the average Yalie of days past-male, affluent, and well-connected.
The effects on New Haven will probably be side effects, as the
University pursues its traditional goals. Even if the timing
of Yale’s entry into the tech world had been at the crest of
the wave, it’s unlikely that New Haven would be coming along
for the ride.


Anya Kamenetz, a junior in Davenport College,
is a managing editor of

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