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Ed Roberts started the scholarly study of startups. Learn from this brilliant academic pioneer and seasoned investor in Sohu.com and HubSpot about the keys to success in founding a tech company. Along the way you will be entertained and charmed by his most engaging narrative style.
He grew up in working-class Chelsea, Massachusetts. At Chelsea High, he received preparation that would allow him to explore the academic delights offered by MIT’s curriculum.
Four MIT degrees later he was on the faculty at MIT’s Sloan School of Management studying the impact of NASA’s research on the economy. From there it was a short hop to founding the study of tech startups. He also co-founded two successful companies, including Meditech. His course on entrepreneurship incubated Beijing's Sohu.com and Boston's HubSpot. Ed Roberts was an early investor in both.
The oft-cited result that companies founded by MIT alums generate revenues equivalent to the 10th largest economy in the world is one of the products of his scholarship. He also delves into his work on the optimal composition of founding teams.
Click here to read full transcript of the episode.
Among the many topics covered in this bravura interview are:
High School in Working-Class Town of Chelsea Thoroughly Prepared Ed Roberts for Success at MIT
Sound Preparation from Chelsea High Allowed Ed Roberts to Explore the MIT Curriculum
Ed Roberts Meets Jay Forrester, Co-inventor of the Core Memory and Founder of System Dynamics
Research into Entrepreneurship Springs from NASA Project to Measure Impact of Its Technology
Ed Roberts Starts His First Company, Pugh-Roberts Associates
MIT Faculty Form Consulting Firms, MIT Grads Form Product Companies
Ed Roberts Founds Meditech
Engineers Debate the Need for a Marketing Person on the Meditech Team – Hired the Only Marketing Person They Knew
Sal Daher’s Pitch for Listeners to Give Back by Reviewing the Podcast on iTunes and Telling Others About It
The Most Significant Results from Ed Roberts’ Research
It’s Important Not to Keep Your Idea Secret but to Talk to Many People About It
Eric von Hippel & User Innovation
Ideas Are Overvalued – Person Who Has It Gets Too Much Credit – Pivots Are the Norm – Nobody Remembers All the Pivots – Example: Founders of HubSpot
Ed Roberts Invests in Founders, Not Ideas
Charles Zhang & the Founding of Sohu.com – Ed Roberts Was Surprised Charles Zhang Wanted to Return to China – Amazing Story!
“I’ve always focused on ground zero companies. I do not regard a ground zero company as a frightening and risky thing. I regard it as the place to be because that’s where the fun is, that’s where you can have impact and, to me, if you’ve passed my test, that you’re passionate, you’re dedicated, you’re trying to do something that seems worthwhile, you’re smart, you’re open. I’m going to be able to relate to you. Then, I don’t see it as a risky thing”.
Data on PhDs as Founders?
Why Are MIT Students & Alums So Likely to Invest in Startups?
30% of MIT Alumni Go to Work for a Startup – Of Those 25% Go on to Found Their Own Company – Those Companies Outperform the Market
Second Companies Outperform First Companies; Third Outperform Second – Studies of Universities as Sources of Innovation – Chuck Easley Did Similar Study at Stanford
Transcript of, "Startup Prof"
Guest: Professor Ed Roberts, Founder, Investor & Pioneering Scholar of Startups
Sal Daher: Professor Ed Roberts is MIT’s Startup Prof. Ed really began the academic study of entrepreneurship at MIT’s Slaon School decades ago and he has been both a scholar of entrepreneurship and a practitioner of entrepreneurship. Having founded a company and being involved in the founding and management of many successful startups. He’s a much sought-after advisor and board member. Ed, of course, being an MIT professor is off-the=charts brilliant but he’s also a fun person to talk to. A funny guy; a a very generous person. A really expansive personality. I guarantee you will enjoy every minute of this 89 minute episode. I couldn’t cut anything out of this because it is so much fun to listen to Ed Roberts and the tales that he has about MIT and what makes this place the most innovative university in the world. So have a listen and enjoy this wonderful relaunch of my interview with Ed Roberts.
Sal Daher: Welcome to Angel Invest Boston, conversations with Boston's most interesting angel investors and founders. I am Sal Daher and my goal for this podcast is to learn more about building successful new companies. The best way I can think of doing this is by talking to people who have done it, people such as serial founder, angel investor and scholar of tech entrepreneurship, Professor Ed Roberts. Ed, I'm so honored you could be here on our 22nd episode, welcome.
Ed Roberts: Thank you very much. I'm delighted to be here, and it seems to me that it's fun to try to address your audience.
Sal Daher: Tremendous. Well, I'm sure they'll really appreciate your wisdom, which is backed up by science. This is tremendous. Also, thanks for hosting us at MIT Sloan School. This is our first episode that's recorded outside of studio. We are at a remote location, with our remote studio, and our sound engineer is a little nervous, but I think this is going to work.
Ed Roberts: Well, if it works for you, you certainly would be welcome to come back and interview anybody else here. We'd be very happy to have you.
Ed Roberts Bio
Sal Daher: Oh, you're so kind. You're very generous. Professor Ed Roberts of MIT literally wrote the book on tech entrepreneurship. His Entrepreneurs in High Technology published in 1991 was the first such book actually based on academic research. While Professor Roberts pioneered the scholarly study of entrepreneurship, he was also involved in starting several successful companies, including Meditech, a leading producer of healthcare information systems and sohu.com, a leading Chinese Internet company. He continues to serve on the boards of these companies as well as others. He is a highly regarded angel investor and has been involved in founding two venture funds. Professor Roberts is also the founder and chair of the Trust Center for MIT Entrepreneurship. At last count, he had published more than 160 articles and 11 books. It was Professor Roberts' research that revealed the huge economic impact of MIT. He calculated that the existing companies founded by MIT alums generate enough revenue to qualify as the world's 10th largest economy.
He holds four degrees from MIT, including degrees in Electrical Engineering and Management, as well as a PhD in Economics. He is a magnanimous and engaging person, beloved by his family, students, and his countless friends, and colleagues. Once again, thanks a lot for being here.
Ed Roberts: You're very welcome. With that introduction, are we ready to stop?
Sal Daher: That's right. This is the introduction your mom would like, right?
Ed Roberts: Right.
Sal Daher: God bless her. One of the things that we like to do with this, when we talk to the highly successful people that we talk to is to try to do a service for people starting out in their career. Ed, you grew up in a working-class city of Chelsea, near Boston, where you attended a public high school. When did it dawn on you that you could actually make it at MIT?
High School in Working-class Town of Chelsea Thoroughly Prepared Ed Roberts for Success at MIT
Ed Roberts: I don't know about making it at MIT, but getting to MIT really was my aspiration. In the 6th Grade, we had an assignment to write a composition on what do you want to be when you grow up. In the 6th Grade, I wrote a composition that said, "I want to go to MIT and I want to become a civil engineer, and I wanted to build tall buildings and bridges." All that is in my 6th Grade, one-page paper. Now, I don't have another stopping point to measure until I actually got to be a senior in Chelsea High and applied to schools. I applied to MIT and to Rensselaer Polytech, those were the only schools I applied to. I got in to RPI. I never got a chance to visit RPI till I was a full professor at MIT. At that time, the Chairman of its board, who was head of R&D of General Electric was my host, so that was a different piece of my life. When I applied to MIT as a senior in high school, I said, "I wanted to become an electrical engineer."
Somehow, from 6th Grade to 12th Grade, I had evolved from civil to electrical. I think it was because there was growing understanding of things called computers, of which, of course, we had no sense. There were-
Sal Daher: Well, from 6th to 11th Grade, it's a difference of five.
Ed Roberts: Yeah.
Sal Daher: From one to six is a difference of five, of course, one to six.
Ed Roberts: Oh, I see. Well, that mental exercise is a good one.
Sal Daher: Course one to course six.
Ed Roberts: I'll try to skip. You’re conscious of that, course one to course six, that's good, so you know MIT. Anyway, I applied and I got admitted to MIT. I assumed that I would have a very difficult time because it just was scary. It turned out, fortunately, I really didn't. I attribute it not to my brilliance, but rather to the fact that at Chelsea High School, believe it or not, they had a tech course. The tech course was focused upon preparing you to go to MIT. Now, obviously, you'd go someplace else, but we got additional Science, we had less Language. The language we had requirement ... we take three years of German, because in those days, German was seen as the epitome of scientific knowledge, I wasted that piece of education, but did that.
Sal Daher: Well, the American universities were created on the German model.
Ed Roberts: Right, so it turns out that two of my high school teachers spent all of their part-time work tutoring at MIT. My high school senior Math course, we used the MIT Calculus textbook as a senior in Chelsea High. My junior year Chemistry course at Chelsea High, we used the freshman Chemistry course book that was taught at MIT. In my freshman year, much to my surprise, instead of being in panic, I actually blitzed through my freshman year. That turned out to really matter because it made me feel that I could take on other kinds of things besides being a narrow-minded nerd. In your freshman year at MIT, you have four required courses in each semester, and one elective. Because I never knew anything about Economics, I chose, as my elective course of the first semester to take Economics 101, which used Samuelson's 1st Edition book. I loved it. I thought it was fascinating. It had no relationship to anything else I knew. In my second semester, I took Economics 2, same book, just the last half of the text.
Sound Preparation from Chelsea High Allowed Ed Roberts to Explore the MIT Curriculum
By the end of my freshman year, when I had done very well at MIT, I said, "I ought to take overloads in economics and business for no particular reason other than it seemed different from the electrical engineering stuff that I was being required to take." From my sophomore year on, I overloaded every semester. I was taking as many as eight courses a semester, which was craziness, and I would have my advisors challenge the craziness of it all. All my overload was in the management school, or in the economics department. By the time I finished being an undergraduate, and I was going right ... I was rolling into graduate school as well in electrical engineering, but by the time I finished that, I had also nearly completed all the degree requirements for a second degree in management. In those days, we didn't have a big pursuit of joint degrees, or multiple degrees, but I was pretty close to having a second degree. Anyway, that's where I started, and I don't know where you want to go from there.
Sal Daher: No, actually, you covered the second question as well, which is ... Well, I wanted to know how you went from studying electrical engineering to getting your PhD in Economics, but I guess that came later, right?
Ed Roberts Meets Jay Forrester, Co-inventor of the Core Memory and Founder of System Dynamics
Ed Roberts: It came considerably ... Well, not very much later by years, but later in mental framing. What happened was, when I was a junior, taking one of my overload courses in the Sloan School, the instructor, and I don't remember whether it was a marketing course or what, the instructor said, "Hey, you guys," and I would say more than half of the class were engineering students, not management students, "You guys think you're so smart. We just hired the guy who invented the computer to come here as a professor." I leaned over and poked the kid next to me who was also from course six, electrical engineering, and I said, "Why in the world would John von Neumann want to be coming to MIT management school?" Because as far as I was concerned, von Neumann at Princeton was the one who invented the computer. Not being terribly bashful, even as a junior, I raised my hand and I asked. I said, "Who is this person who invented the computer, who's now coming here?" He said, "Jay Forrester." I poked the kid again, because we course six guys, we knew who Jay Forrester was. Jay Forrester had the patent on the magnetic memory core. Jay Forrester built the MIT Whirlwind computer. Jay Forrester was running Division Six, the systems division of Lincoln Lab.
I said, "Wow, that's interesting. Why would Forrester want to leave Lincoln Lab to come here?" Class is over, I had a break in my schedule the next hour. I said, "What the heck? Let me go find out what's going on here." I went up to the fourth floor, where the Dean's Office was, walked in, said, "My name is Ed Roberts, I'm a junior in Electrical Engineering, and I'm talking this course. I understand that Jay Forrester has just come here as a faculty member. Is there any way I could go see him?" The woman said, "Well, his office is four doors down the hall, so why don't you go try?" I said, "Okay." I walked down the hall, introduced myself to his assistant at that time, and she says, "Why do you want to see him?" I said, "Well, I'd like to understand more as to why he has come here and what he expects to do." She says, "Well, let me see if he's available." She got up, knocks on his door, walks in, closes the door behind her, comes back a minute later and says, "Professor Forrester will see you." I walked in, and Forrester said, "Well," in a deeper voice, "Well, nice to see you. What can I do for you?"
I said, "Well, I'm curious. Are you here to bring computers to management?" He said, "Well, no. I'm here more to bring systems to management." I nodded as if I understood what he meant, which I didn't have a clue." He said, "What kinds of courses are you taking over there in electrical?" I'm quickly thinking, what kind of course am I taking that a guy who says systems would respond to? I said, "Well, I'm taking switching circuits from Professor Caldwell. Jay says, "Sam Caldwell is a dear friend of mine. How are you doing in his course?" I said, "Well, I think I'm getting an A." He says, "Well, that's good. You give my best regards to Sam." Oh, great, okay. We talked for about two more minutes, and then, this interview was over. I say, "I'm in 6-A, the co-op course, and I'm at General Electric. Next year, when I'm a senior, I'm going to have to pick an assignment where I do a double assignment back to back, and I might appreciate your guidance at that point. Could I come back and see you a year from now?"
He said, "Certainly, I'd be glad to see you." Boom. A year later, I'm now looking at job potentials between ... It would be second semester, senior year, summer, that's the double assignment. GE had given me two offers possibly. One was, I join the new computer division in Tucson, Arizona, and I'm going to do circuit design. The other offer was a possibility that I could be in advanced computation in small aircraft engines in Lynn. Well, I had a girlfriend, who is my wife now. I had a lot of student activities. I really didn't want to leave the Boston area, so I wanted to build a case for them giving me this software programming job in Lynn, where I could just commute and maintain the rest of my life. I made an appointment to see Forrester and I asked him for advice on these two jobs. He said, "Either would be a fine experience." Then, he said, "But you know, we will certainly want to develop our own simulation language once we get underway, so I guess software coding experience would be helpful." I said, "Thank you very much." I immediately went back, talked to the head of the program and I said, "Jay Forrester says it's really important for me to get computer programming experience, so that I ought to get this Lynn job."
He said, "Ed, I'll talk to the GE guys, and we'll take care of you." That was it. I do that, I finish my fifth year, get my Master's degree. Near the second semester, I get a notice from Jay Forrester of offering me a job as his full-time research assistant beginning in June of 1958, when I was getting my second degree. It turned out that Jay only wanted electrical engineering students, so he hired three of us. Jack Pugh, Will Fey, and me, to become his RAs to launch system dynamics. Suddenly, I now was in the Sloan School, not as a student, well, I did that after, but I was an employee of Forrester. My employment date at MIT is June of 1958, when I took a job as a full-time research assistant for Jay Forrester. That's how I got into the Sloan School. Once I was here, I could still take two free courses every semester, as a full time RA. I finished my Master’s at Sloan in February of '60, because I really was mostly done. I just had a few more courses. From my point of view ... I got married in '59. My wife was teaching 6th Grade in Sharon, from my point of view, I was ready to leave.
I had two Master's degrees from MIT, one in electrical, with heavy emphasis on computers, and one from the Sloan School, with heavier emphasis on specific aspects of computing. I thought I should go out, get a job in industry, and I really wanted, I thought, to eventually become an engineering manager. That's what I thought. I was thinking about this while still working for Forrester, I kind of owed him till the end of the year. I figured, "I don't want to waste my time, so I might as well apply to the Economics Department," because Sloan did not have a PhD program yet. I applied to the Economics Department for admission as a PhD student.
Sal Daher: You were working for Forrester and you're getting a PhD in economics at the same time?
Ed Roberts: Well, absolutely, because I had the right to have two free courses, so why waste it?
Sal Daher: Okay, mm-hmm (affirmative).
Ed Roberts: I started taking Economics courses in the doctoral program. One day, I came home and said to my wife that this was the most astonishing day I've ever had in my life. The intellectual challenge and excitement of the seminar ... There were a dozen students, period, of the seminar, with a couple of faculty members who are full professors and leading lights in the field, Paul Samuels and Bob Solo, these guys were brilliant and leaders of economics. I would come from school being just absolutely excited. I said to my wife, "Nancy, I think that I want to become a professor, as opposed to go to industry." That was quite unusual. Everybody else who was a PhD student had come in, wanting to be a professor. I came in thinking I was going to take another semester of course work, and then, I was going to go out to industry. I was a convert while already being a doctoral student that said, "This is the career choice that I want." In a sense, my life was heavily made from that point on, and I've never had a change of mind, or a questioning of what I elected to do.
Research into Entrepreneurship Springs from NASA Project to Measure Impact of Its Technology
Sal Daher: Now, the other vital piece of finding your calling, because these first three questions are finding your calling, was ... I've heard you tell the story of a fateful phone call from NASA MIT Research Center that got you studying entrepreneurship. I think that was later on, right, when you were already a professor?
Ed Roberts: Well, I already was an assistant professor. There's a sequence. What happened was that I was doing my doctoral dissertation, which I finished in June of '62. I was very quick. I was working on that, and I was working on the dynamics of research and development, applying system dynamics to looking at large scale R&D projects between government and industry. Where did I get this? I got this from the fact that I had been a co-op student at General Electric, and I had been working in, I was working in small aircraft engines. I was working on projects to build engines for helicopters, and other things. I was observing what's happening in these large-scale projects, and they were interesting. There was nobody working in the field of managing R&D, so I decided, that's what I wanted to do my doctoral dissertation on. All right, so it turns out, therefore, I was the only person in the Sloan School, or the Economics Department, too, doing any work relating to research and development. Period. End of sentence.
Ed Roberts: Now, along comes 1961, I'm still a student, '61, NASA is born. Okay, just before the summer, I get a call from the Dean to come down and see him, to tell me that they're putting together a task force of four people from the Sloan School to spend the summer working around NASA to understand, could there be important research questions that our faculty might be interested in researching. They would like to have me a member of the task force. This is summer '61, I am 25 years old. The three others are very senior people in the school. The associate dean, a guy who's a senior lecturer, who had 20 years at McKinsey, Don Marquis, who had been head of psychology at Yale and at Michigan, those are the three, and me, I'm the punk. I'm the only person in the whole school doing work on research and development. I'm part of the team. We spent the summer traveling from one field center to the other. The end of the summer, we write a proposal that we establish a research center at MIT, which eventually gets funded in February of '62.
Sal Daher: Where does the entrepreneurship come in?
Ed Roberts: Yeah, here's where it comes in.
Sal Daher: Okay.
Ed Roberts: Here's where it comes in. The NASA Aerospace Research Center is now in its second year of existence. NASA is only three years old. Don Marquis gets a call from the director of the center, a guy named Frank Harrington, and he says, "I've got a political problem that maybe you guys can help me with." He tells Marquis, the problem is, NASA wants him to do some research, which they, of course, will pay for, that shows how government-sponsored research benefits society. He says over the phone, "There's nobody in my department that would have a clue as how to do that kind of research. I thought maybe you guys could help us out." Great, Marquis walks into my office says, "Ed, come on with me. We're going to get out and talk to this guy." We walk across the campus, we go to Dr. Harrington's office, and we hear the problem. We start to talk about it. Then, Marquis and I do a mental exercise, we go through every person in the Sloan School that we could remember, and try to imagine what kind of research that person could do, that might relate to their problem.
We strike out. We spent an hour and a half, and we can't imagine anybody in the school that would do a research project in their fields that would assist and we are apologizing-
Sal Daher: That would help NASA justify its existence to Congress?
Ed Roberts: To help the Aerospace Center justify its budget with NASA. We're putting our coats on, and we're standing there and ready to leave, and I turn to Dr. Harrington, and I say, "Can I ask you a dumb question?" He says, "Shoot, young man." I said, "Don't I understand that a lot of people leave your laboratories to set up new companies?" He said, "Oh, of course, they do." I said, "Okay, this may be silly, but don't they leave with ideas, with tools, with techniques that came from the work that they did while working in your lab?" He said, "Certainly." I said "I really don't know what I'm saying, but I think if I start to look at the people who've left your labs to set up new companies, that I can probably trace the work they're doing in their companies to what they had worked on in the laboratory. Therefore, I could show the flow of government-sponsored research in your labs out to the marketplace through the formation and growth of technically-based companies formed by your former employees. Dr. Harrington looks at me, we're standing, he looks at me and he says, "How much money do you need?" Marquis and I take our coats off, and we sit down again, and now, Marquis, this very senior guy, he's now the coach. We pick up, basically, literally, an envelope and a piece of paper, and Marquis says, "Put down a month of summer salary." Okay, for me. "Put down money for two research assistants." Great. "Put down $1,000 for computer time." We were renting mainframe computers.
Sal Daher: Yes, timeshare.
Ed Roberts: Put down $1,000 for travel. Let's figure out what MIT overhead was, which was cheap in those days. We got it all figured out, added up, and we're sitting and I turned to this guy, looked up, and say, "Dr. Harrington, it looks like for the next nine months, we will need $16,900 for this project." Okay, this is literally true.
Sal Daher: Multiplied by 10?
Ed Roberts: He says, "You've got the money. Send me a paragraph." Now we get up, we shake hands, we put our coats on, and we walk out the door." Marquis turns to me on the way out, this very senior guy, who among other things was on my doctoral committee.
Sal Daher: You still don't have your thesis yet.
Ed Roberts: Right. No, by this time ... No, this is '63, so he had been on my doctoral committee. We walk out the door, and Don turns to me and says, "Ed, that's a hell of an idea. That's really great. How are you going to do that study?" I said, "Don, I don't have a clue." He laughed. He said, "It's going to be a great piece of research anyway." I go back to my office, I sit down, I owed this guy a paragraph. Well, the first thing I had to do was come up with a title for my paragraph, so I came up with a title. The title was something like, the impact of government-sponsored research on economic growth and development via the formation of technology-based entrepreneurial firms. Period. Title like that, two more sentences and I was done. That was the birth of entrepreneurship research at MIT.
Sal Daher: It's 1963? The summer?
Ed Roberts: 1964.
Sal Daher: '64?
Ed Roberts: Fall of '64. Now, the thing that's interesting is that once I got into it, there was essentially no literature existing that related to this.
Sal Daher: I could imagine.
Ed Roberts: I still have the book in my office shelf. I found a book called The Enterprising Man by some faculty member at University of Michigan. He studied all the entrepreneurs in the State of Michigan. Average education was two years of high school. Failure rate was 80% to 90%. Typical companies was a restaurant, or a garage, or something like this. I'm reading this book and saying, "Oh my God, what have I gotten myself into?"
Sal Daher: It had nothing to do with tech entrepreneurship.
Ed Roberts: This is not what I want to study, and I'm looking, and I cannot find a literature. I'm going to have to invent, not just a literature, I'm going to have to invent a process of doing this study. I'm going to have to figure out, how do we extract information from people that I don't know. I'm going to have to figure out how do we analyze that data, all from scratch, because what was my training? My training was in large-scale computer modeling from Jay Forrester, and a PhD in the MIT Economics Department, which had no real relationship to anything that had anything to do with entrepreneurship.
Sal Daher: But here you were, inventing a field.
Ed Roberts Starts His First Company, Pugh-Roberts Associates
Ed Roberts: Here I was, there's no question about it. Here I was, inventing a field. Now, I have to say that the year before that I started my first company. The year before that-
Sal Daher: That was Pugh-Roberts Associates?
Ed Roberts: Pugh-Roberts Associates, Jack Pugh was one of the other two guys who were the first RAs for Forrester. I approached Jack and said, "I'm frustrated that system dynamics is not getting accepted by industry at the pace it ought to be, and I think we need to do something to accelerate [crosstalk 00:36:23]?
Sal Daher: Can you just briefly tell us what the basis of system dynamics?
Ed Roberts: Applying large-scale feedback systems models to everything under the sun, which was Forrester's underlying notion. I think it's basically a brilliant idea. It was great. It altered the way I approached thinking about everything under the sun, and its primary impact has been that, that it's altered the way people think about whatever it is that you experience.
Sal Daher: What system … so it's feedback?
Ed Roberts: Right.
Sal Daher: Okay.
Ed Roberts: We were doing all kinds of stuff. We were already teaching a summer course, everything else, but now-
Sal Daher: But it wasn't getting out to industry?
Ed Roberts: It was getting out to industry, but nothing was happening. I said to Jack, "Jack, if we start a consulting company together-
Sal Daher: That's Jack Pugh?
Ed Roberts: Jack Pugh.
Sal Daher: Right.
Ed Roberts: "If we start a consulting company together, we're going to be able to help industrial firms to copy our stuff and to begin applying it there, and that's what's needed. The field needs to have good real examples coming from real companies doing their own things, not just what we're saying, academically, is good stuff to do."
Sal Daher: What was the result of setting up Pugh-Roberts Associates?
Ed Roberts: Well, the first thing was, what was the result of my telling Jay Forrester that we were going to do that? Here I am, this is December of 1963, I walk into Jay's office as a second-year assistant professor, and I say, "Professor Forrester, I want to tell you that Jack Pugh and I have been talking together and we've concluded that we want to establish a system dynamics consulting company to help industry follow our work, and adopt it, and apply it to their own problems. We really believe this is an important thing for the field." Forrester looks at me from his desk and says, "Well, Ed, some people will feel you're not serious about an academic career." The conversation was over.
Sal Daher: Could you just wrap what happened with Pugh-Roberts Associates?
Ed Roberts: Pugh-Roberts? Pugh-Roberts became a very successful consulting firm. We started in 1963, in 1990, we sold it to PA Consulting. PA Consulting was a very large London-based firm of a couple of thousand people. I actually became a partner of PA for three years as part of the agreement-
Sal Daher: Part of the transition, right.
Ed Roberts: For transition and the like. We moved our whole base. We had, in '93 ... in '90, when we sold the company, we had basically 45 MIT graduates as our employees in Pugh-Roberts and we were doing both R&D consulting, technology consulting, and system dynamics consulting.
Sal Daher: It's interesting that you founded a company, it was a consulting company?
Ed Roberts: Yeah.
MIT Faculty Form Consulting Firms, MIT Grads Form Product Companies
Sal Daher: Later on, we'd like to get into Meditech, which is actually an operating company.
Ed Roberts: Sure.
Sal Daher: Those are the two types of companies that MIT grads go on to found. One is the consulting firm, which is the much more common one, and then, a less common, the technology enterprise, like Meditech.
Ed Roberts: I'd correct you a little bit. Less true that graduates form consulting firms than that faculty form consulting firms.
Sal Daher: Faculty form consulting firms.
Ed Roberts: The earlier outputs from MIT were primarily faculty consulting firms, Bolt, Beranek and Newman, EG&G, Arthur D. Little, all MIT faculty, taking their wares from MIT and bringing it to the marketplace, consulting on their stuff. In the case of EG&G, eventually getting into products, because of what they did. In the case of BB&N, belatedly and eventually becoming very significant in the Internet, in developing products, and companies, and spinoffs and the like, but that was a very typical pathway. As things evolved, graduate students and some faculty began getting into product companies from the beginning. Amar Bose, when he formed Bose Corporation, formed what first was a technology consulting firm briefly, but from the beginning, he wanted to be building product.
Sal Daher: Oh, okay, yes, yes.
Ed Roberts: He had the goal of building product from day one, because that's what he was doing in his lab. In his lab, he was building acoustic products. Then, it gradually evolved, and increasingly, the companies were being formed by the grad students and the student alumni, as opposed to by the faculty themselves, because there's just many more bodies.
Sal Daher: Right.
Ed Roberts: Even today, MIT probably has 1,100 faculty. Well, we're producing 10,000 alumni each year, so obviously, the multiplier effect, the grad students have the odds that they are the ones who are going to be doing that.
Ed Roberts Founds Meditech
Sal Daher: Right, so let's go forward to Meditech then. How did you come to found Meditech?
Ed Roberts: It's interesting. I came to found Meditech, in a way, through system dynamics. I was teaching the advanced applications course in system [dynamics]... I was in charge of all the education. Forrester gave up on education, so he turned it all over to me. I was teaching my own advanced course called applications and implementation of industrial dynamics. We would work with student project teams, half a dozen companies in the Greater Boston area, they’d go in teams, they build models and the like. At a Christmas cocktail party, I bumped into one of my old MIT classmates who was working at Mass General. He was telling me about what he did, and I said, at this party, I said, "Sounds like it would be fun to bring a bunch of students into MGH to do a project, because it sounds intriguing, what you are doing." Monday morning, I got a call from him, he says, "Ed, were you serious about bringing students into Mass General?" I said, "I was drinking, so I don't know how serious I was, but it sounded like fun." He says, "MGH is far too big and complicated. You really don't want to try to do a project here."
He said, "But, I'm very good friends with the guy who's just become the president of Beth Israel Hospital. He was chief resident in internal medicine at MGH, and he's a great guy. If you want to do a project there, I can set up a meeting for you to meet him." I said, "Yeah, really? That's interesting. Okay, let's do it." We go over and meet Mitch Rabkin, who is the six-month president of Beth Israel Hospital at that time, he lasted many, many, many years. I tell him about what system dynamics is, what kind of a project we do. He says, "Well, what would you do here?" I said, "Mitch, I don't know what we would do here. My only experience with Beth Israel Hospital is that my wife has had three children here." I said, "But I don't understand how a hospital works." He looks at me and says, "Oh, well, a bunch of MIT grad students can't hurt us that much." We start a project. I get fascinated by our class system. Now, I'm leading the group, because I decided because it's different, I'll work with this team of students, not with the ones working on the industrial projects.
I decide this was fascinating stuff. I start getting very involved in medical system dynamics, medical other stuff, because I worked with Einstein Medical School on mental health. I started doing a bunch of things. Two years later, which is 1969, I conclude that what's strange to me is that there is no dedicated computer company in the medical field, none. I say, "What a fascinating business opportunity that would be, to start a-
Sal Daher: That was when?
Ed Roberts: 1969, “To start a medical computing company."
Sal Daher: Mm-hmm (affirmative)
Ed Roberts: I begin a personal research project. My personal research project is by word of mouth, by clues, by follow-up, to talk to everybody in the Greater Boston area, who is working on stuff relating to medical computing. I don't care whether it's patient-oriented, whether it's administrative, whether it's finance, whether it's research, I'm talking to people all over Boston. Somebody says, "You want to talk to Neil Pappalardo at MGH in the lab for computer and medicine, because he is grousing off that he's going to leave the lab and start his own company, and he's unhappy there." I say, "Okay." I call him up. Neil is an MIT grad. It turns out that Neil knew me, I didn't know him. He had heard me lecture on entrepreneurship on my studies. By '69, I already had done a lot of entrepreneurship work. Pappalardo knew that, I didn't know anything about them. I go over and Neil has his sidekicks there. Curt Marble, who's an MIT guy, is his technical guy. Neil is the programmer, Curt is the hardware guy. Jerry Grossman is an MIT grad who's an MD. Jerry is the link pin between the computer center and the doctors, and the four of us are talking about stuff.
Neil says he's going to leave and he's going to set up a medical programming company. I say, "What in the world is a medical programming company?" Well, he had developed the MUMPS language. MUMPS, Massachusetts General Hospital Utility Multi-Programming System, MUMPS, which became one of the few authorized Department of Commerce legitimate languages. Neil, he says, "I'm going to go out and do MUMPS applications." I said, "Like what?" He said, "Whatever they want. I can program any kind of medical problem and I can do that with MUMPS." I say, "What a dumb idea." He says, "What do you mean it's a dumb idea? MUMPS is great." I said, "No, no, I'm not questioning whether MUMPS is great." I said, "It's a dumb idea." I said, "I've started and run a consulting company." I said, "That's all you're going to do. You're just going to basically use your head to run a company."
Sal Daher: Right.
Ed Roberts: He said, "What do you mean?" I said, "You're going to sell your head." He says, "Sell my head?" I said, "Yeah, sell your brains. You're an MIT guy."
Sal Daher: You only have one, you can only make so much money.
Ed Roberts: He says, "I can hire other guys." I said, "You sell their brains." I said, "I run a company just like that. I'm selling brains." I said, "The brains we're selling is, we're doing computer modeling and other stuff. You can sell it. You can do programming." I said, "What a lousy company that is."
Sal Daher: Yeah, not scalable. Not scalable.
Ed Roberts: "What kind of company would you start?" I said, "Well, from the projects you guys described, you got the beginning of a lab system for medical labs." He says, "No, it's only the chemistry lab." I said, "Wait a minute, you told me there's nine labs, and you told me that the differences from one lab to the other aren't big, so you got the beginning of a total laboratory system, right?" "Well, well, well, maybe, but we have to work on that." I said, "You said you got the census thing, of enrolling patients and getting their stuff?" "Yeah, yeah, but that's no big deal." I said, "You told me that this experiment of interviewing patients with the computer, to generate patient medical histories in a uniform format?" He says, "Well, yeah, but that's a crazy idea that those guys have." Anyway, he says, "What does all of that mean?" I say, "To me, it means you ought to start medical systems company." He said, "What's a systems company?" I said, "It's a company that's basically attacking the entire hospital and gradually evolving all of the products that are going to be taking into account, everything that's going on in the hospital, and integrating the data into a single overall system."
He said, "Sounds ridiculous." That was the beginning of six months of argument and negotiation. By the way, when I went home from the meeting, I put my ... I had a manila folder, I titled the manila folder Medical Systems Corp, and put my notes from the meeting in there and put it into my file drawer. We started medical information technology, MIT, four of the five co-founders were MIT alums, in December of 1969. Our first product was the automated medical patient history. Our first product that was nearly ready was the Chemical Laboratory System, which was ... it was the expansion to all of the other labs of the hospital, and we had underway, the beginnings of development of total medical information systems, on the clinical side, not the financial side. Much later, we added the financial side. Now, it's interesting, the only other companies that were in the field were working on the financial side. They were doing financial processing for billing in hospitals. We weren't interested in that. We work in the clinical side.
Engineers Debate the Need for a Marketing Person on the Meditech Team – Hired the Only Marketing Person They Knew
That was 1969, five of us co-founded the company. Four of us became directors of the company. Curt was never a director. We brought in one guy, Mort Ruderman. It's part of our fighting. We got to the point that we had it resolved, as to what we're going to do technically. I said, "Now, we need a marketing guy." They said, "What do you mean we need a marketing guy?" I said, "We need somebody who really understands the customer, and who understand how to go about selling the products that we're going to develop." Well, I said, "You guys don't know anything about that." I said, "You're here, big deal. You don't know how to identify or sell to them. We need somebody who can do that." We argue about that for a month. Then, finally, okay, in principle, it's accepted, and then, the question is, my question, "Who do you guys know who matches those specs?" They say, "Well, there's a guy from digital equipment who comes and visits us frequently to sell us stuff, boards and computers." I said, "Who's that?" "His name is Mort Ruderman." I said, "What kind of a guy is he?" And Neil says he’s an OK guy. Could you get along with him if he were one of our partners? Oh yeah, I think so. So I said do you want to talk to him? No, you talk to him. Anyway, that's where Meditech started.
You know Meditech is 48 years old now. I'm still on the Board. Neil is now Chairman, not CEO any longer. A guy named Howard Messing, who was one of our early MIT hires is now CEO and President. The company does about $500 million worth of revenues. We have 3,200 employees. It’s done its thing, it stayed absolutely loyal to what we initially set. Our only customers are hospitals and big care delivery organizations. We don't sell things to physician group practices. We deal with large organizations. At one point, it could still be true, because we focused on small to medium size hospitals, 200 to 300 bed hospitals, which is the typical community hospital, at one point, we had the largest number of hospital customers with any firm in the country. We had 30% of the total hospitals as our customers. We always avoided the big teaching hospital, because the big teaching hospital, from the beginning, was arrogant that they could take care of their own stuff and do their own thing.
Sal Daher: This is tremendous.
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Sal Daher: Coming up next, I will ask Professor Ed Roberts, who has done tremendous research in understanding the scientific basis of entrepreneurship. What it is that he considers to be really the most interesting result from all of his work. First, I wish to thank listener SaintLuar for this review, "Great podcast for both serious investors and interested laymen. Sal's great passion for the subject is evident, as he keeps it fun while skillfully curating a complete portrait of each guest." Thanks, SaintLuar. The Angel Invest Boston has outstanding guests, such as Professor Roberts, is professionally produced, has no commercials, and comes to you free. The only thing we ask in return is that you help get the word out. A convenient way to do that is to share the podcast on iTunes, or on our website, where you find some very convenient share buttons.
Take a minute to review our podcast on iTunes. Sign up at angelinvestboston.com to be notified of new episodes and upcoming free in-person events. Now, Professor Ed Roberts, what do you consider to be the most important result from your scholarship of entrepreneurship? What's the result that you're most ... that you think is the most significant?
The Most Significant Results from Ed Roberts’ Research
Ed Roberts: Well, most significant, in this case, I will interpret as being what is that that I really tried most hard to communicate to my students. I run the entrepreneurship and innovation track in the MBA program, so it's the largest track in the school, and it consists of people who think that they're dedicated to starting companies. What I most want them to understand is that if they grew up believing with this American myth of Horatio Alger, which is that individuals are heroes, and individual heroes accomplish everything, they have a lot to learn relative to starting companies. Our data are very clear. The failure rate of those who start companies alone is the highest by far among all of the companies we study. It is not the individual alone that matters, it is the individual as part of a team, along with other individuals who bring, hopefully, complimentary skills, attitudes, and the like, while bringing, again, hopefully, comparable values together. Our data say, as you go from one founder to two, you significantly improve the likelihood that you will succeed rather than fail.
As you go from two to three, it improves again. As you go from three to four, it improves again. Now, at those levels, one to two, to three, to four, my statement is a statistically significant statement. The data are clear and well-defined. If you go to five, the trend is still the same, more likelihood of success but now, unfortunately, there's not enough five founder companies in our sample for me to say it's a statistically significant finding. I believe it, but I can't prove it to my level of satisfaction. Do I really believe more is always the merrier? No, I do not. I believe that if you get beyond something like four or five, you're going from team to chaos. It's going to be a very difficult thing to manage a very large group of individuals. Now, why a team? First is just the addition of the assets of those people. More skills, more money, more experience, more capabilities. Second, is the increased likelihood of complementarity. What I know is different from what you know, and adding you and I together is not just one and one, it is something that may have some meaningful significance.
Three, by bringing multiple people together, I'm bringing multiple sources of interpersonal strength and comfort together. It's a terribly difficult thing to start and build a company. You try to do it alone, where is your back up for you? Never mind for the company. Who are you going to weep on when you're in pain and suffering? It's great if you have a supportive spouse or partner, that's wonderful, but it would also be nice if you had a supportive partner, who was a partner in the business, where you could sit and talk together, coach each other, help each other, comfort each other and the like. The more is merrier at least up to a small number, of people who could, together, be a much stronger group of people providing reinforcement to each other. The data are clear. Now, two different additions. Number one, the team is more successful if the team is co-mingling people with the technical background and people with the management background. That combination of skills turns out to be statistically significant.
Sal Daher: It makes a lot of sense, yeah.
Ed Roberts: Now, one final thing. If of the management background someone has background in sales or marketing, it's still better. At each of those points, I can say, "Okay, more people up to a given level is better. More people who come from different sets of skills base, technical, and management, is better. More people that include some degree of experience in sales and marketing is better. Every one of those three dimensions of teaming is statistically meaningful and I think critical in the founding and building of a company.
Sal Daher: If I can paraphrase, Dr. Roberts' prescription for a successful start-up team, at least three or four people from different disciplines with different backgrounds and knowledge. People with different personalities that are complimentary, somehow, and ... ?
Ed Roberts: Well, personality differences then have to really be managed.
Sal Daher: Right, right.
Ed Roberts: You got to believe in the same kinds of things because if your values are in conflict with each other, you are going to encounter situations where the value conflict can't be resolved readily.
Sal Daher: People can't get along because of it.
Ed Roberts: Because they really believe in different things and they don't share the same goals.
Sal Daher: If I can try restating it, so a team, one lonely, two better, three even better, four tremendous. Then, a mix of backgrounds. Technical founders, people with sales background, people with marketing background, and so forth, and shared values?
Ed Roberts: Right. Now, I challenge your use of the word prescription, because if a doctor gives me a prescription, I believe it's going to cure my problem. I would say, "Okay, that's a prescription that is going to help, but not cure."
Sal Daher: Cure, so this is a recipe for a very successful dish?
It’s Important Not to Keep Your Idea Secret but to Talk to Many People About It
Ed Roberts: It's a piece of a recipe, because then, you're going to do everything else right. Then, you need to have a good idea. By the way, we encourage our students to believe that ideas are dime a dozen. We try to get our students to be open with each other about the ideas that many of them believe need to be hidden in secrecy. By the way, coming from different countries, they especially have a secrecy notion about ideas as something that is terribly important to protect.
Sal Daher: Has to be preserved. Has to be preserved, and you don't agree with that? You think-
Ed Roberts: It's wrong.
Sal Daher: You should talk about it.
Ed Roberts: It's not agreeing with it, it's wrong.
Sal Daher: It's wrong.
Ed Roberts: It's incorrect.
Sal Daher: You have data to show that?
Eric von Hippel & User Innovation
Ed Roberts: We got infinite, experiential data, the experience is that in the classroom, where I've got 120 students in my class, when we do cold calling, and they've got one minute to throw out an idea, the outcome is, that they get all kinds of feedback from their classmates. Somebody else bumps into the corridor and says, "I had a similar idea to you. We ought to sit down and chat about that." Or, somebody says, "The thing you said, I know a guy who's working on a company in that area." Or, somebody says, "I tried to do the same thing you're talking about, and really, it's a problem, because here's what I ran into." Suddenly, it turns out that that sharing community is much more powerful than the single secrecy community. They begin to realize, when we put them to exercises of generating ideas, which we do, we put them through brainstorming exercises, we put them through simple exercise. Eric von Hippel, my esteemed colleague shows very large fractions of start-ups come from user innovation, namely, you yourself owned the problem. Therefore, you started a company to solve a problem you owned.
Well, boy, that's a very interesting source, so one of the things I throw out as an idea generating thing is don't tell me an answer, tell me a problem. Discuss, look at what you've done recently in work, talk about what you regarded as a significant problem or issue that you encountered in your job. I don't care what kind of job you had. I don't care if you were in banking, or if you were an engineer, or whatever it was, tell me about a problem you had. Oh, sure, they can tell you about problems they had.
Once you've identified this problem you've had and it's real, and you understand it, now, my question is, what do you think you could do about that problem? Is an answer to the problem a basis for starting a company? It may not be. It may just be some other idea, tool, technique, answer, but maybe it's something you could build a company around. That's a very useful thing to do. That's one way to generate ideas. Brainstorming is a totally different way. We try to get them to come up with ideas. Once this happens in the classroom, most of them who had come from this world of secrecy, and protection, and don't tell anybody about this wonderful thing you have, they suddenly begin to realize and said, hey, maybe the idea that they had that was so precious is not such a big deal after all, and that they've been able to come up with ideas that are different that they didn't know they had before.
Sal Daher: Right, right.
Ed Roberts: They start to appreciate that somebody else's ideas are really interesting.
Sal Daher: Well, this points to the value of the team, because the team is where you share your ideas. You can't have a team if you don't share your ideas.
Ideas Are Overvalued – Person Who Has It Gets Too Much Credit – Pivots Are the Norm – Nobody Remembers All the Pivots – Example: Founders of HubSpot
Ed Roberts: The team in starting a company is formed about similarity of interest. You start with something that is a common basis for coming together. Our Meditech team came together because we were in agreement, we wanted to create a company that was going to be based upon medical information systems, using computers to pull things together. That was enough commonality. We could then fight about how and what, and what coverage, and what approach, and the like. That's where the differences in ideas came from, once we had clarity, that we all agreed it was purposeful and interesting to try to move in a given direction. That's, I think, very common. By the way, on ideas, it is very interesting to note a piece of research, not done by me, but done by colleagues, that says, that in the allocation of founder's stock, the person who has the initial idea ends up getting more stock than her or his colleagues. Then, the next point is more interesting, that the likelihood that that idea gets used as the basis for the company is very small, that most companies pivot away from where they started with the first idea of it, and I can show you that in almost every company that I've been involved in as an investor, as a director, what have you. The number of pivots is countless and never documented thoroughly. Even to the point that the founders need to be prodded to remember. I've ran a session in which I brought in CEOs of companies, where I was a director from the beginning, and I knew them well, and worked with them well. I tried to get them in class to talk about the history of the ideas they pursued as a company. They can't remember. I said, "Well, wait a minute. Hold on, hold on, don't go jump to that point. I want you to start before that.” Example, great successful company, HubSpot. Brian Halligan and Dharmesh Shah were my students at MIT in the Sloan Fellows Program. Dharmesh Shah did his thesis with me, so I know the company. I was the first investor in the company, as an angel investor. I get Dharmesh to come to my class and Dharmesh starts with how they begin to do inbound marketing.
I said, "No, no, no, no, don't start with inbound marketing. That's not where you started your company." "Well, what do you mean, Ed?" I said, "Come on, in the summer, when you were working with Brian Halligan, what was the first company you were going to start?" "Well, I don't know. We waltz around a number of ideas." I said, "Right, and the first one you attacked seriously was?" "Well, we wanted to develop HR systems for start-up companies." I said, "Ah, I remember that discussion, and what happened to that discussion?" "Well, we worked on it for four to six weeks and we decided that was crazy, so we threw it away."
I said, "No, no." I said, "Okay, Dharmesh, what was the second idea you had?" "Well, you remember, Ed, I did my thesis on how Web 2.0 was going to change things, so I was thinking how we could acquire software from all over the place, and we decided for the second pass we were going to build software systems to cover all needs of start-ups, HR, finance, legal, everything under the sun." I said, "Right, I remember those discussions. How long did it take for you to go through that company?" "Well, we never really made it a company." I said, "I know, you invested how much time in that idea?" He says, "Well, about four weeks." I said, "Okay, and then what happened?" He said, "Then we're sitting around and we realized that we didn't really know what it is we knew and I told Brian about how, in my thesis, I figured out how you can use blogs to get other people to run into you in your blog and to start giving you information, which is what I used to do my thesis on software development companies." I said, "And?" He says, "Well, you know Brian, he's a phenomenal marketing guy. He invented the term inbound marketing."
I said, "And that became HubSpot." He says, "Yeah, yeah." I said, "Okay, fine, and how many months after the two of you decided you were starting a company, did you come to inbound marketing?" He said, "Oh, well, it was about three months." I said, "You went through two pivots in between the way." He says, "Yeah, yeah, yeah. You're right, you're right. Okay."
Sal Daher: That's an outstanding pivot story.
Ed Roberts: It's an outstanding pivot story.
Sal Daher: It really is.
Ed Roberts Invests in Founders, Not Ideas
Ed Roberts: Right, by the way, when they came to the point, finally, of inbound, they called me up because of the fact that I had told Dharmesh when he finished his thesis, that whatever he ended up deciding to do, I'd love to invest in his company. That brings us to an issue of angel investors, which I will tell you about. My first criterion of investing is the person, not the idea, because the idea, as far as I'm concerned, is highly likely to change. Not how much money can be made from it. I don't have any idea what's going to be made from it. It's the person. I invest in people. Number one, I've been in MIT my whole life. If you're not very smart, I'm not in a conversation with you to begin with, but I can be in a conversation with a very large number of smart people, so that's not very much of a filter.
Okay, so you're smart, that's an aside. I now want you to be absolutely persistent in your character. I want you to be dedicated and passionate about what you want to do. You may change your mind. I want you to be passionate at each stage of changing your mind. I want you to be open and trustworthy, because if I'm investing as an angel, I'm expecting to have a 10-year relationship with you. I'm not expecting, this is going to be rolled out and I'm going to be liquid in two to three years. I'm expecting, this is going to be eight, 10, 15 years. My longest one is 40 years. As an angel investor, not as a co-founder, Meditech is longer, I was an angel investor in Jerry Goldstein's company and that I was a board member for 40 years in that company, through IPOs and everything else.
Sal Daher: Which company is that?
Ed Roberts: The company in the end became Advanced Magnetics, which became AMAG Pharmaceuticals.
But he went through multiple IPOs and what have you. Anyway, so I'm assuming this is going to be a long term relationship. If I'm going to have a long relationship with you, then, I want you to be willing to suffer my openness and transparency, and I want you to be matching me and being willing to be open in discussion and the like. I don't want to be in a situation where I need to prod you to talk to me. I want you to feel comfortable about fessing up the issues that we can sit and discuss. To me, joint problem-solving is the kind of approach I want to see among a team, among an investor who's going to become part of a team. I think that, anyway. If the entrepreneur doesn't see an investor as part of the team, that's a big mistake.
Sal Daher: That is a mistake, yeah.
Charles Zhang & the Founding of Sohu.com – Ed Roberts Was Surprised Charles Zhang Wanted to Return to China – Amazing Story!
Ed Roberts: This is what I'm looking for. I'm looking for smarts, passion, persistence, openness, values that I would share. Then, after we get pass that, I want to know, “Okay, so what is it you want to do?” That conversation could in fact come that way. An example would be Charles Zhang, with whom I started sohu.com, the first Internet company in China. He was working as a, I would say, a tourist guide for the MIT Industrial Liaison Program, bringing Chinese visitors all around. Then, he’d come to my office frequently with Chinese visitor groups. Stuck his head in my office one day, he says, "Professor Roberts, can I talk with you?" "Sure, come on in." Sits down, I said, "What can I do for you?" He says, "I want to go home to China and start an Internet company." Now, the shock was the first part of the sentence. I want to go home to China. No other graduate students and the like, who were Chinese, were telling me that. They were coming in, "Ed, do you know any way I can get a job at the World Bank? Do you know how I could possibly get a job at the United Nations? Do you know maybe, I should go to the Kennedy School for a second degree?" Anything that would string out another two to three years of not going back to China.
We spent 20 minutes talking about, he wants to go back to China. Not talking about the Internet, talking about, "I want to go back to China." Then, he said to me something that was extraordinarily powerful. He said, "China is going to become a great nation." This is 1996. China wasn't a great nation. "China is going to become a great nation, and I want to be part of making it great." Wow, I listened to that and said, "God, let me shake this guy and let's see, does he back off?" I kept pushing him and there was no way that I could push him away from what seemed to me, to a passionate commitment of loyalty. Finally, 25 minutes later, I said, "Okay, okay, so you want to go home to China and you want to start an Internet company?" He's got a PhD for Physics a year before, from MIT. I respect Physics. I say, "Wow, okay." I figure, "Wow, he's got an invention of the Internet that's going to be dramatic." I say, "What do you know about the Internet?" He says, "I used email during my research studies." I said, "Yes?” I'm waiting for more. He just repeats it.
“I used email in my research studies.” I said, “And other thing?” “No, that’s it.” I said, “Okay, you want to go home to China, I understand. You want to start an Internet company and your knowledge base is, you used email while an MIT research student?” “Yes.” I said, “Okay, so what kind of an Internet company do you want to start?” He says, “Well, I could start a lot of different kinds of Internet companies.” I say, “Yes, of course, you could start a lot of different kinds of Internet companies. What kind do you want to start?” He’s looking at me and says, “Well, in China, a lot of students are trying to get into university and they prepare for examinations for entrance. I could create an Internet company that gives them tutoring and help in getting into college.” I said, “Yes, companies like that certainly exist in this country. I’m quite sure you could do that. Is that what you want to do?” He says, “Well, no, I really don’t know but I could do that.” I said, “Okay, what else could you do?” He says, “Something similar, a lot of people want to learn English and I could put an Internet company up in which I’m helping them to learn English.” I said, “Yes, absolutely. You certainly could create a company that is helping them teach, learn English. Do you want to do that?” “Well, I don’t really know.” I said, “Okay, so what else?” He rattles off a bunch of things he could do, and I say “Look, Charles, if you want to continue this conversation, why don’t you come back and see me in two weeks? Why don’t you, in the meantime, carefully think through the kind of company that you want to start. When we get together again, let’s start there, talking about what it is you really want to do in starting an Internet company in China.” He says, “Okay. Thank you very much, Professor Roberts,” and he leaves. Two weeks later he comes back, he’s got a torn sheet of paper from a bag, in which he had handwritten about 20 things on it, and then he scrolls, and it’s the list. It starts with language teaching ...
Sal Daher: Getting into college and so on.
Ed Roberts: And a whole bunch of other stuff. I said, “Okay, but this won’t do. What is it you want to do?” He says, “I’ve been away from China for eight years. I don’t know what’s really the right thing to do in China today. I will have to be home in China before I really know. I just know I want to start an Internet company.” Well, that began six months of discussions. Over six months, I gradually got to the point of concluding that this was probably absolutely crazy, but what the hell. As I told my wife, I said, “I’ve lost more money on stupid ideas that stockbrokers tell me, about your idiocy, so what the hell, I’m going to invest in this guy.” In the meantime, I had talked to Nick Negroponte, who was running the Media Lab. Nick was Mr. Internet at MIT. Nick had met Charles and Nick said, well, if I was going in, then he would be willing to go in, too. We met a third guy, so we each decided we would put up 75,000 bucks and we would create $225,000 of angel funding and Charles and I incorporated. The name of the company was, Internet Technologies China. That was it. Incorporated in Delaware, why? Because it was incredible that anybody was starting a company in China, nonetheless, an Internet company, so I said, “Hey, Delaware is more expensive but maybe it’ll give us credibility. Somebody will think that this is a real and honest company because we are regulated by straight rules of openness and the like.” We gave Charles 25,000 bucks deposited in the Bank of China for him to go home and to start to work, with $200,000 sitting in the First National Bank of Boston, with requiring two signatures, him and mine, because we were the co-founders of the company. We started in that way. Now, they’ve got 10,000 employees in China. This year, they did a billion and a half in revenues. They really were the first of the regular Chinese Internet companies and the like, and for the first two years, all there was Charles and me, and people that he gradually hired. We would have telephone call board discussions. We would have email, we could do email, and that was it. Everything that would come up, either would be a telephone call that we talked about or it would be an email that would present the issue and we’d sort it out. At the end of two years, basically, he was running out of money while we were negotiating an A round.
I got the two other investors to join with me in doing a supplement so as to keep the company alive for three more months while we were trying to close our A round. We closed our A round, our A round included Intel, our A round included ... not Thompson, Dow Jones.
Sal Daher: Dow Jones, wow.
Ed Roberts: Our A round included one of the biggest Hong Kong investors who actually is Boston-based, Morningside Group. Our A round included Pat McGoverns, a Beijing thing ... all based upon, in a way, relationships. I knew Pat McGovern from when we were undergraduates. He was the editor of The Tech, I was chairman of the MIT Activities Council, so he was a member of my council. I knew him from when we were undergrads and here he had a Beijing fund, they invested in it. Internet… Nick Negroponte and I knew two different very senior guys in Intel, at the strategy level of Intel, running Intel Capital. We each made our telephone calls and we each said, “You got to see this guy, Charles Zhang, who’s coming in from Beijing to the West Coast,” and Intel came in. We did our A round and now, suddenly we got a real company that has a couple of million bucks into it, and we’re going ahead in this environment. It was craziness. Eventually, we got around to starting to build, and product and the like, and we went public in the death knell of the Internet.
Sal Daher: Wow.
Ed Roberts: We were probably the last Internet company to go public before death took place. We came, finally, at $13 a share, having assumed at the beginning of our road show, that it would be around $18 to $20 a share. We went out at $13. Within a week and a half, we were at $6 a share, and by eight months later, we were at 50 cents a share.
The Internet market was dying as we were issuing it, our under ... Every underwriter in the United States wanted to be our underwriter. The midnight meeting at the printer, the night before was a what-the-hell meeting, where the senior partner of the firm said, “Damn it, we’re going.” We went. The high price for the stock was on the second day, we had gone up to $13.60.
Sal Daher: Wow, what a time to buy. There must have been a lot of buying opportunities in the market then.
Ed Roberts: At 50 cents.
Sal Daher: Yeah.
Ed Roberts: Sure. I’m sure there were some people who bought at 50 cents. I didn’t. Well, probably. My price was probably under 50 cents in terms of founder’s stock but ... so it took a long time, but again, it’s now 20 years. By the way, I have just resigned as a board member, this past month. After 20 years, I have just resigned as a board member. I am now in a two-year consulting and advisory role to the board and to Charles Zhang, who is still CEO. You go and you build a company in a totally different environment and the like. It’s not the same as doing something where you get together for coffee-
Sal Daher: No, it’s not. It’s totally different.
Ed Roberts: Next week, to sit and chat, but we did plenty of chatting, but the chatting was over the telephone and the like. All the board meeting ... After we went public, the board gradually changed to being entirely Chinese, slowly, except for me. All board meetings were conducted in English because I’m the senior member of the board. For all of these years, the Chinese respect age, the Chinese respect seniority and loyalty, they really do. They behave that way. Our board meetings were in English. Every now and then, somebody who isn’t good in English would suddenly spurt out something in Chinese and there would be a rapid two to three-minute discourse in Chinese back and forth. Then, the CFO, who came from Hong Kong, and she was very good in English, she would then say, Ed ... telephone calls all over the world, “Ed, let me explain to you what that was all about.”
She would explain to me in English what had happened, and then we say, “Okay.” Then, we go back to whatever is the next thing or another. That’s another company that turned out to be a very successful company.
Sal Daher: This is really a fascinating story. The way the company came about, the way they operated-
Ed Roberts: But understand, those stories started with 1963, with my own consulting company, 1964, with the beginning of my research. The first company that I became a board member of, that wasn’t my company, was a company called SofTech, formed by two guys out of the lab for a computer ... for electronic systems lab at MIT. Doug Ross was a hero in computer programming, came to see me because I had a company. My company was this consulting company that had no full time employees, but he didn’t know how to start a company and I must know, so he came to see me. Jack Pugh and I decided we would invest in his ... Pugh-Roberts invested $30,000 as angel investors in Doug Ross’s company two years or three years after we started. Suddenly, I’m a board member and an angel investor in somebody else’s firm. Things cumulate and, frankly, once I really had reputation, data, network, and more importantly, money, I really began to do a lot of angel investing. I came into CommonAngels from day one in the ‘80s. Five of us created Zero Stage Capital to be a seed fund investing in ground zero ... We were very clear.
“I’ve always focused on ground zero companies. I do not regard a ground zero company as a frightening and risky thing. I regard it as the place to be because that’s where the fun is, that’s where you can have impact and, to me, if you’ve passed my test, that you’re passionate, you’re dedicated, you’re trying to do something that seems worthwhile, you’re smart, you’re open. I’m going to be able to relate to you. Then, I don’t see it as a risky thing”.
I’ve always focused on ground zero companies. I do not regard a ground zero company as a frightening and risky thing. I regard it as the place to be because that’s where the fun is, that’s where you can have impact and, to me, if you’ve passed my test, that you’re passionate, you’re dedicated, you’re trying to do something that seems worthwhile, you’re smart, you’re open. I’m going to be able to relate to you. Then, I don’t see it as a risky thing. Am I going to lose money? Sure I’m going to lose money but it’s very different because if you’re a finance person, you’re evaluating risk in terms of the reality. Well, the risk is so much higher. Well, maybe they are, and if you wait until three years, you’re going to be able to invest at a much higher price and yes, it will be a lower probability that it will fail, but when it fails, it’s going to lose more money. Okay, there’s some trade-off, can somebody demonstrate? Probably they can, a good finance person. Then, it is, indeed, really riskier, from a money point of view, to invest at ground zero. Okay, it’s not how I feel.
Sal Daher: I think you may find support in statistics also. I’ve seen statistics that show early-stage companies, if you diversify sufficiently, they do quite well, but this is tremendous.
Ed Roberts: Yeah, more questions.
Data on PhDs as Founders?
Sal Daher: If I could just ask you some quick questions. For example, PhDs don’t make good founders. PhDs make good founders. Which side are you on that argument?
Ed Roberts: Let’s go back to me as a researcher. The data are clear, number one.
Sal Daher: Yes.
Ed Roberts: A much smaller fraction of PhDs become entrepreneurs. The sweet spot, by degree, is Master’s degree, okay?
Sal Daher: Okay.
Ed Roberts: The largest fraction, by degree, of those who become entrepreneurs are Master’s degree holders, that’s just becoming. Now, let’s talk about success. The same thing I just said about Master’s degrees being the most likely to start, Master’s degrees are the most likely to succeed. The probability that a PhD founder is going to form a successful company is very low. Now, the next question is, why? Okay, there’s a lot of reasons why. One, that I think is most important, is the mental outlook and the personality of someone who becomes a PhD. Mark this, I have a PhD, okay? So, self-criticism. If you have a PhD, you wanted to pursue a search for knowledge as a primary way of your life. If you have a Master’s degree in Engineering, primarily, you wanted to pursue the application of knowledge and problem-solving using knowledge as your primary way of life. Now, for no other reason than just that, there’s a much lower likelihood that somebody whose principal pursuit in life is the search for new knowledge, there’s a lower likelihood that person is going to build a successful company because that person’s motivations are not the motivations of an entrepreneur. An entrepreneur ought to be motivated to found and build something that is significant, that has great impact on something, on jobs, on revenues, on personal wealth, something, great impact. What does the PhD got?
Sal Daher: Search for knowledge.
Ed Roberts: Right, search for knowledge and maybe proving to the world that my knowledge is really wonderful. Charles Zhang is a PhD in Physics, nonetheless. He was a weird guy, as a founder. That was part of getting through this, what are you really looking for? What do you really want to do? When this guy says to me, “China is going to become great and I want to help make it great.” Wow. That’s a powerful statement. It has zero to do with, “I want to take my Physics research and turn it into something meaningful.” The Internet had zero to do with his PhD program except that he used email.
Sal Daher: Yeah, that is amazing.
Ed Roberts: I have, in the early days, when I used to show the raw data we had and what the statistics are, and to try to explain to people statistics and say, “Look, this is not a statement that, here’s what I advise. This is a statement that says, ‘Here’s what the data show.’” The most difficult problem I would have was with PhDs who would say to me, “Well, my company is pretty successful.” I say, “No, no, no. Look, I understand that, that your company being successful is an anecdote and I’m very thrilled for you that you are successful. I’m not talking about your success or failure, I’m talking about the data.”
Why Are MIT Students & Alums So Likely to Invest in Startups?
Sal Daher: One of the many findings of your study, of MIT entrepreneurship, is that one in six alumni responding to your survey had invested in new companies they did not found. In the general population of the United States, that number is in the order of one in a thousand. Would you care to speculate why MIT alums are 180 times more likely to invest in a new company than the average American?
Ed Roberts: You’re the first person that has ever raised that question with me, so I have no research that I’ve ever tried to process that would be oriented to answering your question, so all I can do is speculate. My speculation is, that over the years we have been successful in creating such an environment at MIT that increasingly, MIT students and alumni feel part of a commitment to, a belonging to the field of entrepreneurship. Consequently, I think we’ve lowered the barriers to investing behavior on the part of those that are able to do so. Of course, now, able to do so has been reduced dramatically by all of what’s going on with respect to crowdsourcing of funding, but that’s not affected MIT people more than anybody else, I don’t think.
Sal Daher: No, no.
Ed Roberts: I think it’s probably that MIT now has a much stronger image to the rest of the world, and to itself, and to its students and faculty, as a place in which entrepreneurship is part of the way of life.
Sal Daher: It’s not a strange thing? It’s a thing that your friend is doing, it’s a thing your roommate is doing, that you run into people ... It seems a normal activity.
Ed Roberts: Let me give you a piece of data which does relate, maybe, and that comes out of our 2014 study that we published in 2015, that was the second new database. Better, bigger database.
Sal Daher: I think the one in six number was from your 2014 study.
Ed Roberts: Was it?
Sal Daher: Yeah.
30% of MIT Alumni Go to Work for a Startup – Of Those 25% Go on to Found Their Own Company – Those Companies Outperform the Market
Ed Roberts: Okay. The other data in that study was a question we had never asked before. We said, “How many of you have gone to work for a startup company?” And we gave a definition. “A startup company, for this question is, a company within its first two years of existence that has fewer than 10 employees.” We had 30% of MIT alumni say they had gone to work for a startup company. That blew our minds. We had no clue that that would be the case. Second blowing of our minds, 25% of the 30% later started their own companies.
Sal Daher: Wow, so 30%-
Ed Roberts: And they performed better than the ones who had never gone through working for a start-up.
Sal Daher: That’s excellent result.
Ed Roberts: It was excellent result, right.
Sal Daher: So 30% went to work for start-ups?
Ed Roberts: Of all alumni, right.
Sal Daher: Then, 25% of them went on to found-
Ed Roberts: Companies.
Sal Daher: Start-ups?
Ed Roberts: Right.
Sal Daher: Those companies outperform the rest of the market because they had the experience of working in a start-up.
Second Companies Outperform First Companies; Third Outperform Second – Studies of Universities as Sources of Innovation – Chuck Easley Did Similar Study at Stanford
Ed Roberts: We believe, and that related ... We had done, even in the earlier data, we did learning studies, trying to figure out, can we measure there in the earlier data, we showed second companies outperform first companies, and the third companies outperform the second companies, so we had a trend line of how experience and being an entrepreneur pays off, pays off with better performance. That came out of the first research that we did that was published in 2009, on the big MIT sample. By the way, that study and that publication in 2009 is the first time anybody has ever carried out a study of all university alumni relating to issues of entrepreneurship and innovation. In a way, we created a new field again, and the new field was looking at a university as a place that was a knowledge producer where the knowledge was now being transferred via entrepreneurship to the marketplace and to the economy. We’ve had a lot of copying after that take place. My own PhD study ... student, Chuck Easley, who co-authored the 2009 thing, when he finished, he was hired by Stanford and the first-
Sal Daher: I follow his writings and so forth, yeah.
Ed Roberts: Yeah, Chuck is wonderful. His first assignment ... faculty usually don’t get assignments, his first assignment was, replicate the MIT study. We have a Stanford study called Innovation at Stanford. It copied in total detail our stuff.
Sal Daher: I’m an MIT grad and a Stanford grad so I ...
Ed Roberts: You were?
Sal Daher: Yeah. I’d like to look at that study as well.
Ed Roberts: So do I.
Sal Daher: This is extremely valuable. You are tremendously inspiring. I think there’s a lot of data that’s going to be helpful to people in their careers, in investing, in founding of startups, in investing in startups. This is tremendous.
Ed Roberts: Thank you.
Sal Daher: Professor Ed Roberts, I’m tremendously grateful for your generosity in participating and making this a really great podcast. I’m also grateful to the listeners for joining us. I’d like to invite our listeners who enjoyed this podcast, to review it on iTunes. Once again, Professor Roberts, thanks a lot.
Ed Roberts: You’re very welcome. I enjoyed being subject to your questioning and the like, and I’m thrilled to be talking to you and your smiling face in asking these questions.
Sal Daher: This, for me, is tremendous, because I’ve been curious to ask you all these questions and I’ve gotten to do that. Thanks a lot.
I’m Sal Daher. I’m Sal Daher. This is Angel Invest Boston, conversations with Boston’s most interesting angels and founders.
I'm glad you were able to join us. Our engineer is Raul Rosa. Our theme was composed by John McKusick. Our graphic design is by Katharine Woodman-Maynard. Our host is coached by Grace Daher.