Instead of another boring lecture, last week my students at UC-Berkeley got quite a treat: a lively discussion with TechCrunch founder Mike Arrington. I once described Mike as a cross between Oprah Winfrey and Howard Stern; so I was ready for a little controversy. But he ended up lighting such a big fire, that I’ve been bombarded with questions from students about their education and careers. The questions aren’t just coming from Berkeley; after the discussion was posted on TechCrunch, students at Duke asked me to discuss this at a keynote I am giving at their entrepreneurship symposium on Wednesday; and students at other schools, from as far as India and Singapore, have asked for advice.  So I’ll just respond here in the hope of quenching this fire.

At the UC-Berkeley Distinguished Innovator Lecture Series, this week, Mike and I discussed a variety of topics.  We agreed on most subjects—except on the importance of education (and dearth of women in tech—which is a battle I’ll fight another day). When I brought up my TechCrunch post on the importance of MBA degrees, Arrington questioned why students needed to get any degree or go to college at all.  He talked up the success of tech CEOs who had dropped out of college—Zuckerberg, Gates, and “countless high-profile entrepreneurs including Larry and Sergey” (Mike: Larry and Sergey both have undergraduate degrees and were completing PhD’s). Despite being interrupted by Berkeley professor Ikhlaq Sidhu (who I was afraid would come on stage and strangle Mike before he could finish his sentence), Arrington said that he didn’t learn much from college; gaining admittance to a Berkeley or Harvard is the only certification a student needs; dropping out from college doesn’t carry a stigma anymore; so “the best thing in the world is to go to Harvard for a year and drop out because everyone knows you were smart enough to get in”.

Arrington told students that the kind of person who wants to increase his chances of success by getting a masters degree isn’t an entrepreneur; older entrepreneurs have no chance of raising money (so they’re a lost cause); success means building a billion dollar business and making a lot of money—it’s not good enough to build a good lifestyle business that pays the bills and brings you happiness. So they should “ready-fire-aim” and go for the big prize rather than thinking small.

Here is the problem with Arrington’s logic: students may come up with great ideas and start a company, but they aren’t going to be able make it big unless they have the educational foundation. Maybe Zuckerberg lucked out by being at the right place at the right time, but he wasn’t born with the knowledge of how to grow a business. To build a business, you need to understand subjects like finance, marketing, intellectual property and corporate law. Until you have been in the business world for a while, you don’t know how to negotiate contracts, deal with people, manage and nurture employees, and sell to customers. Most importantly, if students don’t learn the importance of finishing what they start, they will never achieve success—this requires perseverance and determination.  And by dropping out of college, they won’t have the alumni networks that they need to help them later in their careers and in business.

The harsh reality is that for every Zuckerberg, there are a thousand who drop out of college and fail. Many get discouraged after their failures and move to other professions which require less skill and education. Some universities do readmit students who dropped out for a short period of time, but most students end up burning through their savings and loans from friends and relatives, and can no longer afford their education. Some give up and look for jobs in big companies, but big companies don’t generally hire people without degrees—because they want employees who have the discipline to finish what they start; who won’t jump ship and chase every rainbow.

Plus, if you look at the backgrounds of the people who actually built Facebook—the executives and employees of the company—you’ll find that they aren’t college dropouts; they are highly educated. Facebook, Microsoft, and Apple—all started by college dropouts are the most selective in hiring; they are the most fussy about degrees.

My advice to students is to get all the education they can, while they can. Complete at least a bachelors and get a masters degree if you can. The degree doesn’t have to be from an elite college like Harvard or Stanford; any education will carry you far. As this chart shows (based on an analysis of the backgrounds of the founders of 652 successful technology companies), there is a huge difference in the size and revenue of companies founded by people with college degrees. But there is only a small difference between those with ivy-league degrees and the average (which includes all startups).

After you graduate, you should gain some practical work experience and learn the realities of the business world before making the plunge into entrepreneurship. Work for a big company for a few years; learn about how the corporate world works; get good at people management, project planning, and teamwork. Then join a startup—which will probably fail as most startups do. But you get to fail on someone else’s dime and learn all the valuable lessons.

In his talk, Mike Arrington said that he got little from his education.  He also said that he wished he had gotten an MBA instead of a law degree.  But what Mike didn’t seem to acknowledge was that he needed the law degree to become a lawyer; when he was a lawyer, he gained an in-depth knowledge about the tech world and its problems —which led to his startups; and this education gave him the knowledge to take on unethical companies and question unethical practices—all of which have helped make TechCrunch the world’s leading tech blog. Does anyone think that Mike would have been able to build TechCrunch if he was a college dropout?

In our discussion, Mike joked that instead of doing the law degree, he wishes he had learned to play the guitar in junior high—“maybe he would have become a rock star”. I have no idea if Mike has any musical talent, but a smaller proportion of guitarists become rock stars than techies who become CEOs.

Editor’s note: Guest writer Vivek Wadhwa  is an entrepreneur turned academic. He is a Visiting Scholar at the School of Information at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. You can follow him on Twitter at @vwadhwaand find his research at www.wadhwa.com.

One of the challenges of raising capital is being in tune with both private and public market dynamics. If the public markets are frothy and money is easy, then private capital is probably cheap and equity is easily raised. If you’ve just had the worst recession since the Great Depression, then the climate is obviously different. Credit is tight, lending standards are onerous, and investors have the upper hand. For investors willing to shoulder risk, they require very favorable terms. Those who are more risk averse may only want to purchase notes and invest in debt that is secured. After all, they can earn strong rates of return and stay relatively liquid with security.

As I’ve mentioned in previous posts, you’ve got to give something to get something. If you sell equity in your company then you are essentially borrowing money and in return paying with equity in your company. If you sell debt in your company then you are essentially borrowing money and in return paying with interest.

Sometimes entrepreneurs are out of touch with markets and it shows. Other times they just don’t realize that in order to raise capital you must demonstrate to an investor that you will do everything you can to ensure success and that investors receive a return.

Every entrepreneur I meet claims that he/she is 100% confident in the success of his company and that it will not fail. One easy way to determine whether an entrepreneur is committed to his enterprise is to offer debt that is personally secured by the entrepreneur. If you are so sure that this startup capital will generate returns, are you willing to secure it with personal assets?

The best answer you can receive from an entrepreneur is – "Yes. But I want you to know that I have already put all of my assets into the company and have nothing left." This is the entrepreneur that will do whatever it takes.

When the answer you receive is "No", then the obvious response is "How can you be so confident in your company and expect to return capital to investors if you are not willing to take a secured loan?"

Granted, this scenario is more appropriate for a cash-flowing startup that is looking for expansion capital than for an early stage venture. But the point is that debt is more expensive than equity – how bad do you want capital? Would you rather keep spinning your wheels with your current capital structure or pay for capital to accelerate the development of your business?

When Preetam Mukherjee started Marcellus.tv in March 2007, his company was one of the very few players in the professional online video hosting space. He believed he was building a killer product that would become a blockbuster and would compete handily with the one established player in the space, Brightcove. To ensure that he wouldn’t tip off any potential competitors, he went into “stealth mode”.  Secrecy was the key to success. He would not even tell his close friends what he was building until his product was complete (after all, who can you trust these days?). Then he would send Mike Arrington an email, get a TechCrunch feature and watch fame and fortune beat a path to his door.

But as happens to nearly all secretive startups like Marcellus, the blockbuster never materialized, and the attention never came. When Marcellus did come out of stealth in September 2008, there were many online video platforms available, most of which had better features than Marcellus. Preetam got his TechCrunch mention and experienced a huge spike in traffic for a few days. But when the dust settled, he found himself back in obscurity. Moreover, it was like having a really bad hangover—his product didn’t entirely meet customer needs and no one seemed to care.

As I’ll tell you later, Preetam’s story does have a happier ending, but that’s not how it is for most startups. That’s the problem with stealth. Startup guru, Eric Reis says one or two of every 10 companies he meets have what he calls a “stealth-disease”. They are too afraid to show something imperfect to the world or are afraid that a competitor will steal their idea. And they think that when they launch their product will make front-page news and grant them blockbuster success. Wasn’t it Ralph Waldo Emerson who wrote, “Build a better mousetrap and the world will beat a path to your door”?

Well, Emerson was wrong. The harsh reality is that even if you did build a better mousetrap, no one would find you. To be known, you have to have a great story and tell it to the right people. And to build a great product, you need to get all the feedback you can from potential customers, marketing experts, venture capitalists, lawyers and accountants.

When you’re starting up, you usually have a great idea and think you know what your customers need. But your customers don’t even know what they need—they know what they don’t like and think they know what they want—but they don’t know what they need. Customers will ultimately buy only those things they really need – no matter how good your product or sales pitch.

Learning what a customer needs is an iterative process.  You try something, get feedback.  Both you and your customer learn more and you try again. You keep doing this until you have something which is so compelling that the customer will pay money to have it—that’s when you know you have a killer product. But you can’t get feedback if you’re in stealth. You only have yourself to talk to.

Most entrepreneurs say they are in stealth because they are worried about competitors stealing their ideas. This can be a risk if you have such a simple idea that just by hearing it, someone can replicate it. If this is the case, then you do have a lot to worry about. But even in this case, what will ultimately make the difference between success and failure isn’t your idea but your ability to execute and dominate your market very fast. You need a superb management team including top notch marketing and sales staff, great industry connections, and deep-pocked investors. You aren’t going to get any of these things by staying locked up in your basement.

If you’re competing with the big guys and are worried about them stealing your ideas, it’s the same story—it boils down to execution. As Eric Reis says, “If a startup can’t innovate faster than a much larger competitor, stealth isn’t going to make the difference —they’re toast”.  It may also be that fear of big companies is overblown: those who have worked for one know that it’s incredibly hard to get a manager at a big company to do something new, even if your goal is to give your ideas away.

What about the big PR moment? This is also not so simple. To get beyond a TechCrunch launch feature, you need to build a relationship with journalists and analysts. They need to speak to your customers and learn what they think of you. They want to see detailed market analysis and to gain a deep understanding of why this market is important. Beyond press mentions, PR is about relationships. If you want to get quoted, you need to be an easy source—be accessible, willing to give information on background, and don’t expect to be quoted.

There is no linear ROI in PR, which can be hard for techies to understand. It’s all about relationships and patience. Once you are mentioned in one publication, then it becomes much easier to leverage that into other coverage because you have a stamp of approval. But make no mistake, PR is a never ending process. One TechCrunch article may be a good beginning but it is never sufficient to ensure the success of a company. So all that time you spend in stealth not talking to journalists is time your competition has to build a strong relationship with the media while you sit around admiring yourself in the mirror.

In a few rare instances, stealth may make some sense. Celebrity involvement is one example pointed out to me by Mike Butorin, founder of Projec.to and Song.ly. If Ashton Kutcher is launching a company, then operating in public may actually distract the engineers from their jobs to the point that nothing gets done due to the media circus that ensues. Another good reason to be in stealth is if a company is built around a technology or idea that it hopes to patent but has not yet filed. In that case, stealth protects the intellectual property and the future of the company by raising high barriers to entry in the future. But these types of examples represent the tiny minority of startups. Most startups use ideas that others have had and will live or die based on how well they execute on those ideas.

So how did things turn out for Marcellus.tv and Preetam? They managed to recover from stealth-disease but only barely. After launch, Marcellus.tv spent a year in a closed beta, performing rapid-fire iteration based on regular feedback from early customers. Marcellus launched out of beta as a white-label video hosting and streaming service in August 2009 and was one of many in the space. But the company managed to keep prices at rock-bottom levels through smart usage of cloud computing. The sales team worked the phones and existing customers both to get feedback and leads. Word spread and the customer base grew. They expect to be profitable early next year. The company never developed a PR juggernaut but having loyal customers willing to recommend the service to others has thus far overcome that weak spot. Preetam’s parting shot to me was quite clear. “To hell with stealth,” he wrote in an email. Words to live—or die—by.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

Crunch Network: CrunchGear drool over the sexiest new gadgets and hardware.

From a business perspective, the main barrier to success in China is culture. Cultural difference between a European, Australian or American businessman and his Chinese partner can lead to problems in…

I found an anonymous blogger recently who reckons that China is a joint venture playground. Do you agree with him?

I think we're all waiting to see right now whether China's new labor law will turn the country into a joint venture mine field.

This is part of what our blogger said:

China is a playground for joint ventures and strategic alliances. The economic set-up is perfect: China mass produces quality products at very low cost – America and Europe have consumers who'll pay top-dollar for those products. In the middle are companies who can generate a great deal of revenue from facilitating the export/import and product distribution, effectively connecting the sellers with the buyers.

While he is right in his analysis, there are a couple of issues left out of the equation…

I've already mentioned China's new labor law. Twenty-nine days until many of the rules for employment change. We'll see how that effects joint ventures as China's courts and government agencies begin to interpret the new law.

There's also the changes made recently to the Catalog for the Guidance of Foreign Invested Enterprises. China Law Blog covered those changes well, and one of the changes is that China wants to put an end to the model this blogger describes – at least in its pure form. Foreign investment in China in companies that only manufacture items for export is being discouraged (Chinese for “ended,” I think). So now when you invest in a joint venture you'll have to somehow become involved in local markets, as well as exporting goods out of China, if I understand the intention of the new rules correctly.

How do you get involved in a joint venture with a Chinese company? Our blogger friend suggests contacting a match-maker firm, like JV Base…

See article.

I will admit that I am not the biggest fan of the self-promoting Guy Kawasaki, but occasionally I do find a good article by him. For those entrepreneurs who want to learn the ropes of the startup game, there is an excellent post on this topic by Guy at Always On. I have said this many times before in different ways – it is important to always set expectations low and to overdeliver. As most venture investors will tell you, it is the rare entrepreneur who does this.

Here is my favorite part of the post:

"Startups face one primary challenge: To never run out of cash. So when
projecting costs, we heeded Guy’s advice that “the three most powerful
words you can utter at a board meeting are, ‘We beat projections.’”
This convinced us to develop the worst possible financial model that
could still be used to raise money."

The most interesting aspects of this post is information provided by the entrepreneur behind Redfin. I don’t really know much about Redfin but Glenn Kelman provides rare insight into the actual numbers behind his financial models. I have spoken repeatedly many times about "metrics" – whether they be financial metrics or company metrics. Having metrics and analyzing them is essential to monitor progress and to gauge success.

For those of you that are looking for a benchmark to compare, please check out Mr. Kelman’s notes as many of them are dead on.

I had an interesting conversation with a colleague yesterday. She made the statement that "Entrepreneurs Are Selfish." I didn’t think about it much when she said it but later had some time to brood on that thought.

The context of the statement was a discussion about the importance of capital in the formation and launching of a startup. Essentially, we disagreed on the concept that it is possible to start up a company without capital. The main point of disagreement was her belief that it is difficult to find people who are willing to work for equity without immediate compensation. Those individuals who are willing to work for equity are entrepreneurial and will probably not join your enterprise because they want to own more of the enterprise. They want don’t want to share. They are selfish. They want to run the show. Thus in order to start a company and bring people along, you must have capital in order to pay them. That is the function of capital in the startup process.

While I don’t think anybody likes to be called selfish, in some ways, entrepreneurs are selfish. The concept of wanting to run the show and own a piece of the pie does resonate with me and does resonate with most entrepreneurs I know. The preference of equity over cash payment also resonates.

I’ve said previously that the strongest currency in a startup should be its equity. Everybody should be aligned to make the equity as valuable as possible. Thus individuals who value cash payment over equity in some sense are not well aligned and may detract from the true value mission of the startup. Those who are more entrepreneurial and want to share in the founder’s journey will seek stock ownership as a form of compensation.

I can’t argue that capital is necessary to bring people on board. I will submit that there are people out there such as myself and many in our network who will work and advise for equity. The entrepreneurial spirit may be somewhat selfish but it wishes to be free and wishes to take risks for ultimate reward. That reward may be financial, emotional, or intellectual. It clearly is unpredictable whether the reward will come, but the journey towards it is what excites the entrepreneurial individual.

While some may call it selfish, entrepreneurial spirit is necessary and essential to push the economic cycle and to reward those who take risk.