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To MBA or not MBA? by Brian Rich

Click to read Brian Rich’s article in PEhub

Much has been written about the value of an MBA. I have one, I know many people with them, but should you spend two years and up to $125,000 in tuition alone to get one? It’s a tough question.

The MBA degree, in all of its varieties (two-year, one-year, EMBA, etc.), is mature at best and arguably in decline, according to a Graduate Management Admission Council report from 2011. The decision to seek the degree is harder than ever, as the cost of an MBA has significantly outpaced inflation. Salaries of analysts and associates in venture capital and private equity have increased substantially and there is a greater willingness of employers to advance those without it.

So consider: Is the MBA worth it? According to Forbes, it takes about four years for MBA graduates to get a return on their MBA investment. Forbes ranks business schools based upon the aggregate amount of money gained after five years of employment following the MBA, then calculates the number of years of payback. Payback tends to be about four years. The key assumption, based on surveys of pre- and post-MBAs, is that post-MBA pay is 50 percent higher than pre-MBA pay. So, if you earned $50,000 upon entering an MBA program, you would, on average, earn $75,000 after completion. This assumes a full-time MBA; part-time MBAs are less compelling.

While this methodology seems entirely logical, I believe it to be flawed. The notion that a post-MBA earns 50 percent more than the non-MBA counterpart, ad infinitum, is illogical. I do not believe averages apply here, but rather that it is a bifurcated decision set in which certain candidates seek MBAs. Others, meanwhile, are just not going to be materially better off with the additional degree.

How to Decide

Here are the criteria the finance-oriented analyst or associate should consider:

Motivation: What is driving you to consider an MBA? Is it career change? The need for new knowledge, skills and abilities (“KSAs”)?
Non-MBA career path: If you do not wish to switch careers, what is your likely career path in your present industry without an MBA? Is it a requisite for the job you seek (investment banking, for example)?
Reputation of school: This is the preeminent driver of which school candidates choose. There is undoubtedly a correlation of exit salary with school selectivity. The better the school—or the better the school’s reputation—the higher the salary of its graduates.

These criteria can be used to “score” whether or not an MBA makes sense. I’ll use myself as an example. I was an engineer who wanted to get into finance, venture capital in particular. I had a couple years of experience at Intel as an engineer, then a start-up that went well. However, I had no finance training whatsoever. Therefore, for me at the time, the considered criteria made the decision an easy one:

Motivation: Both career change and KSAs.
Non-MBA career path: Likely difficult to get into VC without the MBA.
Reputation of school: Accepted at Columbia Business School.

Was it worth it?

In my case, going for the MBA was the right choice. In addition to the criteria above, there are intangibles that many successful MBAs credit their time in business school for. People often talk about the benefits of the “network” of relationships garnered during and after business school and the exposure to different industries and business leaders. I have been the beneficiary of both of these, and they have been invaluable.

Here again, I think it is critically important that one chooses the right business school program for them. What do I mean by that? While it is obviously fantastic if you have been admitted to a school with a national or international reputation, it could be equally as valuable to pick a strong regional school if your intention is to live and work within that region after graduation. Similarly, if you know you intend to graduate into a specific industry, then it makes good sense to attend a school with a strong reputation in that industry.

While it was clear-cut and an easy choice for me, this is not the case for many MBA candidates and the decision is becoming increasingly difficult. There are a few factors causing the MBA to be less popular. First, universities are their own worst enemies in that the cost of attendance continues to rise faster than inflation. This increases the payback period. Second, analyst and associate pay has also risen faster than inflation, therefore making the opportunity cost greater—consider your two years out of the workforce at minimum, lost wages, missed promotions, etc. Finally, I believe it is more widely accepted within private equity and venture capital to advance without an MBA. This is not universal; however, there are those who believe (as we at Catalyst do) that our business is an apprenticeship learned over time.

Getting an MBA involves many personal and professional sacrifices, but also yields great potential. An MBA candidate’s decision can be made easier with these criteria as a guide.

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