Jeff Bussgang on the Rise of AI & Raising Venture Capital | The Parlor Room: Season 1, Ep. 4

The Parlor Room is an official podcast of Harvard Business School Online.

So that's kind of the billion dollar question with all of these startups, is it a good idea? Are these must have value propositions, must have products, or nice to have products? Is it a painkiller or a vitamin?

Welcome to the Parlor Room, where business concepts come to life. My name is Chris Linnane. I'm the Creative Director of Harvard Business School Online. On this episode, I'm joined by HBS Professor Jeff Busgang. Professor Buskang is an esteemed authority in the field of entrepreneurship and venture capital. He brings a wealth of experience to the table, having been a successful entrepreneur and venture capitalist himself before joining the faculty at Harvard Business School. I met Jeff while helping build his Launching Tech Ventures course for HBS Online. We talk about everything from the AI explosion in tech to innovation in the palm oil industry. So let's jump right in. Welcome to the Parlor Room. Let's talk about your course Launching Tech Ventures. That's where we'll start. That's your HBS online course, but it's also a course on campus.

Yeah, I've been teaching this class for about 14 years. It's become one of the most popular courses on campus. We have about 250 students out of the roughly 900 Harvard MBAs each year that take the course. So it has a pretty good penetration rate amongst the MBAs. And it's a course that, because of the opportunity to hone it over the years, we've really got, I think, a nice formula and a nice approach to the course at this point.

Tell us a little bit about the online version.

Yeah, the online version's really cool. It was super fun for me to be able to create it with you and your crew because it brings the magic of the protagonists and the currency of startups and innovation into the online format. And then it also creates this new layer of interactivity. So it's a lot of fun to take the magic that's worked so well in the classroom physically and translate it and really leverage the new format in the way that it's meant to be leveraged.

Who do you think would benefit the most from the online version of the course?

So the main focus for the course is for founders or aspiring founders. Those of you who are interested in vetting your startup idea, testing your idea, and understanding the playbook for finding product market fit. The whole course is focused on the that 0 to 1 journey to find product market fit. But what we found both offline and online, is that although founders benefit Tremendously from the course. It's actually pretty magical for joiners, for Those employees number three to 300, that cohort of folks who want to join a startup and who are trying to bring some of those evaluative skills and operational and tactical frameworks to the startup that they might join as a team member.

Being involved in building this really got ideas going in my head. So I'm sure anyone who takes this course would just feel the inspiration immediately.

But that's the whole point, is to inspire anyone to feel as if they have the tools and the frameworks to become a founder and to start a company or join an early stage company. You know, the magic of startup land is it doesn't have to be your idea. You can team up with someone where it's their idea, they've developed it to a certain point, and, and you can help them accelerate it and carry it forward.

So I'm going to say the word that everyone says all day long, every day, generative AI. I'm sure a thousand people in this area code said the exact same word at the same time as me. Such a big thing right now. How is that affecting your work right now?

So first, as you know, I was a computer science major, undergrad here at Harvard, and my field of study in the late 1980s was AI, if you can believe that, natural language processing and neural networks, circa 1980s. So it's a field I'm quite passionate about. And in my day job as a venture capitalist investing in early stage tech startups, we as a firm, Flybridge has been focused on AI for decades. So with this rise of generative AI and ChatGPT, it's been a Cambrian explosion. So much innovation, so much excitement. We've been leaning in as an investment firm and I've been leaning in as a faculty and course developer. The challenge, of course, in creating a course on innovation and technology startups is it has to be fresh. If you're an aspiring founder and you're learning about companies from the 1990s or early 2000s, it doesn't feel relevant. I always have to refresh the cases that I bring into the classroom, and this year we've got a number of generative AI cases.

So can we talk about one of those cases?

Well, I wrote a case on a company and I won't say their name because they haven't yet launched the feature publicly, but a company that's a mobile app that had started in the world of photos and photo sharing and memory books and has evolved to leveraging generative AI. To create synthetic or generative photos of your children in different settings. So for example, if I load up 10 photos of one of my kids into this platform, I can then generate my, my annual holiday photo in whatever setting I want automatically without having to bring my child into the studio and get them well fed and smiling and in the right state of mind, get the right outfit on them. All that can be done synthetically through software. And then I can also put them in different settings like a Star wars setting or a Top Gun setting for playful, fun photos.

Yeah. All right. I'm planning right now what I'm going to do for my three daughters for a photo every year. It's a battle. This could be something that works for me.

That's the promise that the founders hope to fulfill, which is the hassle of creating the holiday photo and writing the holiday letter you could automate.

So how do we know if this is actually a good idea?

Right, so that's kind of the billion dollar question with all of these startups. Is it a good idea and will it have an attractive business model? And that's the question. Those are the sets of questions we ask in the course, online and offline. So in this example, we apply a few frameworks that are tried and true over decades of watching technology startups succeed or fail. And one of those frameworks is a question about the quality of the value proposition to the end customer. And one of the questions we ask in the class is, are these must have value propositions, must have products, or nice to have products. Another metaphor sometimes people might use is, is it a painkiller or a vitamin? Is it really something that I must do, or is it something that's interesting and sort of novel and fun, but I'm not sure that I would do it all the time? And that leads to the second dimension that we provide as a test, which is is it a recurring daily, weekly, monthly habit or is it a one time event? And obviously the most compelling startups are must have and recurring. Larry Page, the former CEO of Google, used to refer to this as the toothbrush test. You know, is it something that you would use every day and you must use it, it becomes a habit, a part of your everyday life, in some cases, maybe even a part of the culture, like a Snapchat or a TikTok. So that's the test that this founding team has to pass and that's the discussion we have in the classroom. And in the end, you want to have a value proposition that compelling that if the product were to be Taken away from you. A large number people refer to it as the 40% test because the rule of thumb is 40% would be very disappointed. So, like Chris, what's your favorite app that you love to use?

I use Spotify a lot.

Right. So you're a creative guy, a music guy. You love listening to music. If Spotify were taken away from you, how disappointed would you be?

I would feel a little bit of a hole in my life for a little while.

It's crushing, Right? For me, Waze is an everyday app that I use to help me get home from Harvard Business School. There's always multiple ways to get home to avoid traffic. Waze is my go to. If Waze were taken away, I'd be very disappointed. So the question you have to ask yourself as a founder and this founding team has to ask themselves, if the product were to be taken away from their first thousand users, how disappointed would they be? There's another phrase that we like to use in the classroom, and I use it in the online course. It takes a page from the Airbnb founder, Brian Chesky, who said very eloquently, it's better to have 1,000 customers. Customers love you than a million customers like you. In other words, get those first thousand customers to absolutely adore what you're doing and to be addicted to your product, and then you can work on expanding your market.

I have to take full advantage of this opportunity. I have a Harvard Business School professor in front of me who's also an investor. So I'm going to pitch you some ideas that you could feel free to tell me if they're bad ideas.

Bring it on.

Okay, first idea. Do you have trouble sleeping? Do you feel lonely at night? That problem solved. Ray Romano, sleep machine. American actor and comedian Ray Romano talks you to sleep at night by saying things like, you must be tired. I bet you're tired. Or, that was a long day, you're probably tired. I'm realizing this. You shouldn't invest in this one, Jeff. You shouldn't. Let's move to another one. That one.

You're talking yourself out of this one.

I'm talking myself out of it.

By the way, the test on that one.

Yeah.

Is. Is it enduring like it's cute? Maybe you use it once, twice. Could you do it 365 days a year for 10 years?

I couldn't even get through the pitch. So I don't think it was going to work. All right, next one. Encore concert diapers. Before you say no. Live music has never been so expensive. I know. A friend of mine just bought Olivia Rodrigo tickets. Three of them. $3,500. So what does that say? First, it says he doesn't have great music taste. It also means that every song is worth $150 or so. She's going to perform at the concert. Do you want to spend time waiting in line at the restroom? Me neither. And before you say that there's a product out there like this, there probably are. I haven't done any research. What's a big differentiator is the top inch is denim. So if you drop your keys and you bend over and someone sees it, she's just wearing jeans under her jeans. Not a big deal.

That sounds like a terrible idea for so many reasons.

I was just warming up. I've got another one I think you'll like. Are you a religious leader with very little social time? Holy Roller's sermon sharing app. So hear this one out. You're a rabbi in Washington, D.C. and you deliver a great sermon on a Friday night. And a priest in Paris had plans on Saturday, but he doesn't have time to prepare for his sermon on Sunday. The rabbi, she uploaded her sermon to Holy Rollers. The priest can look at it and say, that's really good sermon. And using AI technology, he hits the catholicize button and it turns it to be appropriate for his group. He's got his social life back.

I think that's a fantastic idea.

You like that one?

I like that one. Here's why. Holy Rollers, here's why. It's a focused, targeted initial audience that you can get 1,000 or 10,000 to love. What it does seems like a high willingness to pay. Right. It's an extremely valuable service for those leaders and it's recurring and arguably must have. And I love the use of generative AI to help make their jobs more efficient and improve their lives. So that's a good one. I like that one.

Holy Rollers get your social life back.

I like it. I've got a term sheet here somewhere.

Oh, perfect. Well, I didn't. Those first two were just. They were just warming you up. It's like with the idea of you pitch two bad ideas for that one. Gold one. I. I knew the third one was well done. Thank you very much. All right, so, Jeff, I think I have a really good understanding of where bad ideas come from. But where do good startup ideas come from?

There are typically three or four methods to come up with a good startup idea. One is if you're a super user, where you have a Personal experience or a personal insight. I call it an earned secret from your own domain knowledge or previous job and you believe that's a secret or an insight that no one else has to improve. A value proposition for a target customer that looks quite a bit like you. A second is if you do a search process and a research driven, innovation driven process where you take an analytical research driven approach and investigate certain sectors, do deep customer discovery and develop ideas and insights through your research. And that's known as research driven innovation. And it's something we're doing more of here at Harvard and Stanford also has done a great deal around and we cover that in one of our cases in the course as well. The third path for the where startup ideas come from is technology driven. There are times when there's a new technology innovation and you backward think through what possible business model might arise from this new innovation. So for example, in my class we have a case on C16Bio. C16Bio is a startup that came at the intersection of a Harvard Business School student who took a class at MIT, met a PhD at MIT in the world of synthetic biology. And this student decided in partnership with this PhD to create a company focused on synthetic palm oil, applying the synthetic biology technology to a problem that she believed was a material problem for climate and a massive business opportunity.

It sounds like she has an idea and she has the technology. How is she going to turn that into a business?

Yeah, great question. And the founder's name is Shara Tikku. And so what Shara does is she thinks deeply about what the business model might look like for a synthetic palm oil company. She investigates the entire supply chain and begins to understand the different possible customers that she could serve. End customers, food companies or personal care companies, like beauty and makeup companies, because palm oil is in all of those products or earlier in the distribution chain. She could work on processing and raw materials development. And what she decides is to go to the end customer. Because once she decides on the end customer, she then has this fork, as I said, food versus personal care, and has to decide whether to pursue the larger market of food businesses like a P and G or a Unilever, or the smaller market of personal care of makeup and cosmetics. And then once she goes down that fork, she has to choose which customers in that branch to specifically target as her first handful of customers.

So how does she get there? How did she make that decision then?

Yeah, Shara really applied what I refer to as the technology lifecycle adoption curve in her way of applying those decisions. There's a great book called Crossing the Chasm written by Geoffrey Moore that talks about the technology lifecycle adoption curve and the different segments of customers that are willing to adopt new technology. In her case, a new synthetic palm oil. What you learn when you study this technology lifecycle adoption curve is that you want to target in the early days that small group of innovators that are willing to take a risk on a new product. It's not the large mainstream companies that have a lot to lose. It tends to be smaller challenger brands that are willing to take a risk risk on a startup themselves developing a new technology in a new field that has risks associated with it. And so any company, any startup, in thinking about initial customer selection, should be thinking about targeting innovators and early adopters as opposed to majority customers. It's very appealing for founders to want to chase the big market, the big customer base and the largest incumbents. But it can be very dangerous because they have a set of requirements that may be too stringent for your early product.

Using the C16 story, what are the takeaways for our listeners?

So the big takeaways for listeners, and we cover this explicitly in the course, is where do good ideas come from? Having different approaches to generating good ideas so that you can avoid the problems that you have, which is generating bad ideas.

I'm batting 333, one out of three.

Which isn't bad. Which isn't bad. I was being nice, by the way, on that third idea.

I had a feeling what was going on. Yeah, okay, go ahead.

That's okay. So anyway, so where do good ideas come from? And a methodology for repeatedly coming up with good ideas and then how to test those ideas. The big thing that we talk about in launching tech ventures is that startups are experimentation machines. You shouldn't rush to scale, you shouldn't rush to attack the big market and the big customer. You should run experiments that allow you to get to the bottom of key hypotheses that reveal the milestones that allow you to progress the business. The value proposition milestones, the go to market milestones, and the profit formula milestones. And if you do that in a sequential, systematic fashion, you can eventually iterate your way to product market fit and then be in a position to scale the business. And so the discipline of running those experiments and focusing those experiments on the right key valuation inflection points is really the essence of the course.

Great. Perfect. Are you ready for some questions?

Sure.

This first one is from Francis in Wales. In your experience, what are the most common Mistakes or pitfalls that entrepreneurs should avoid.

So the first pitfall I've seen many founders fall into is that they define too large a market and try to boil the ocean. I gave you the example of C16 bio and synthetic palm oil. That's an $80 billion market. The founder can't tackle that entire market as a three person startup out of the box. She's got to focus more narrowly on a finite customer segment and build a first product that matches the needs of that finite customer segment. So first thing is narrow the focus of your market and then make it even narrower still than you think you should just to get started. The second big mistake is when you're in the fog of war, sometimes you fall in love with your own ideas and you forget to step back and really apply the toothbrush test that I described earlier. Is it a must have value proposition and is it an everyday recurring value proposition? Sometimes people get wrapped up in their own ideas and fall in love with them such that they forget to really step back and objectively apply those tests.

All right, this one's from Arno in Spain. In your opinion, what are the most important qualities or skills that aspiring entrepreneurs should possess?

I'll pick three, just to focus on a few. One is an earned secret. I mentioned earlier this ability to have a unique insight into a market that is perhaps a non consensus insight. It's something that you know through your personal experience or perhaps through data driven research that maybe no one else realizes or appreciates. The second is the ability to do what I refer to as the Pied Piper effect. The ability to get people excited around you and follow you. That means investors, that means customers, that means early employees, that means partners. The ability to bring them along even when you haven't built anything, but convince each of those constituents to follow you. And then the final thing I would say is resilience and grit. This is a topsy turvy, difficult journey. If it were easy to go from zero to a billion, everybody would be doing it. It's really hard. And so you've got to really have tremendous passion for your idea, passion for the entrepreneurial process and a willingness to have that resilience and grit to run through walls to get to the end.

On your second point of getting people excited, how do you balance getting people excited or coming off like a snake oil salesman?

It's a great question. A phrase we often use in our business is authentic founders. Founders who authentically believe and are passionate about what they're doing and are not snake oil salespeople. So look, investors get pitched all day, every day. So assume that any investor you're pitching is a professional bull detector, which means that they immediately can sense if you do not authentically believe what you are pitching. So if you have any doubts, take a step back and iterate on your model.

All right, this one's from Ellen in San Diego. Which is typically the most challenging fundraising stage for a startup and why.

So it's a great question, Ellen, and it's maybe not the answer. You think the first stage, when you just are early on in getting friends and family money or the pre seed round together is actually not the hardest because in that round, people are investing in you, your credibility and your relationships, and many compelling founders can get over the line. And the later stages, when you have a ton of metrics and great results, well, that's obviously pretty easy because that's when you're in the growth stage and people can really evaluate and analyze what you've achieved. But it's in that in the middle zone. Call it the series a gap or the seed funding gap, where you're past the hope and buzz stage, you've got a little bit of data and a little bit of experience, and it's kind of messy. One of my friends refers to this as the messy middle. That's the hardest stage to finance. The final thought I would leave you with is that the most successful companies catch technology or innovation waves. And so it's not just the power of your idea, but it's the power of your idea in the context of a particular innovation wave. We talked earlier about generative AI, which is one of the most compelling waves, and my startup history. A few years ago, people were looking at the mobile wave. A few years before that the social media wave. So there are different moments in time where you want to catch these technology waves and build a company that takes advantage of these tailwinds and secular trends.

Jeff, thanks so much for the time doing this. Whenever I talk to you, there's a certain level of inspiration that comes from it. Ideas start coming up. Not the three I gave you. I'll have three new ones for you in the future. But this is really exciting to talk to you and thank you for the time.

Yeah, my pleasure. Super fun to be with you.

If you'd like to learn more about entrepreneurship or Professor Bus Gang, check out his HBS online course launching tech ventures@parlorroompodcast.com and don't forget to follow us on LinkedIn, Facebook, Instagram, TikTok and X for more exclusive content.

Tent.

I'm Chris Linane. Thank you for listening. If you're enjoying the parlor room, please share the show with your friends and subscribe, rate and review it wherever you get your podcasts. Thank you.