Why do Startups Fail? Gregory Shepard | Co-Founder of BOSS Capital Partners | Tie SoCal Conference

So, I'm going to start out with: I have autism. I found out when I was 35, but I knew my whole life. And because I have autism, I have the ability to see different patterns. I have savant syndrome and a few other things that allow me to see some patterns. They have paid off over time. Originally, it was a nightmare, but afterwards, it's been pretty good for me. At first, what I did is I started building businesses. I built 12 companies, sold 12 companies, 12 liquidity events, not including the investments. Then I went into politics, and I became a chairman for congressional candidates, spent a little time with Barack Obama. decided to get out of that game when the following president was elected and decided to spend the rest of my time trying to help entrepreneurs. When I was young, we were pretty poor. We lived in tents for a while. That's me in the middle there. I'm also from a foster and adopted family. We have 9 siblings of different Nationalities. My mom was a nun, and my dad was a priest. They left the church to take care of other children. I went from that to this. My story is not unusual. One of the things I learned is that four percent of people have the ability to get out from check to check living. Out of that group, ninety eight percent of them do it by starting a business, and out of that group, seventy five percent do it by starting. Sorry, the previous was a windfall, and that's starting a business. But 90% of entrepreneurs fail trying. In fact, 2.5% of entrepreneurs get into an accelerator, 2% get funded, 90% fail in the process. I noticed these patterns repeating over and over. When I started my own fund, I saw the patterns. When I did my own companies, I saw the patterns over and over, the same patterns, entrepreneurs making the same mistake over and over. And I thought that this is craziness. So when I left politics, I decided to take this on. So I'm going to explain some of the findings. I spent $500,000 and many years trying to research into the entrepreneur failure— entrepreneur failureship problem. The truth is, when I started, I was after why entrepreneurs failed. But it became more obvious to me over time how, and more importantly, when they failed. When I look at businesses as an investor, as an investment, and from the investor perspective, I always want to know things like, why you? Why now? And why this team? And why this problem? Timing is really, really important. I want you to visualize standing in front of a set of waves. And you're sitting there, you're the entrepreneur, your product is the surfboard, and the wave is the market. The last business I built, or the second to the last business I built, was sold to eBay. And I got there early. I built a company that was in the performance marketing space before Google was around. Took me 17 years. And the reason why that took me so long is I was standing in front of a wave with a surfboard waiting for the wave to catch up with me. So when is extremely important, not just how, not just why. There's a junction here. These 3 questions play in and out that weave through the tapestry that is entrepreneurship and the failures that happen from it. The first thing that you have to remember is that there is a life cycle. And this was the first thing that was missing. There's no standardization. It's fragmented. There's little pieces everywhere. So the first thing you have to realize as an entrepreneur or as an investor, there is a life cycle. It starts from I have an idea and it ends at exit. This life cycle isn't understood by most people. These different phases of the life cycle align with things like funding. They align with the failure rate, and they align with the validation that happens before and after every single round that you have. The first thing I wanted to do was I wanted to pay attention to this lifecycle. Innovation, if you're in the startup ecosystem, that's all we do. Innovation is made out of 2 parts. Value creation— this is the process of taking an idea to a product— and then value capture. And value capture is where you start to grab value, economic value, from your creation, from what you came up with out of vapor. The innovation side of this, that is value capture, is simply taking your vision, validating it, and then building a product. Now, if you're an investor listening and you're not paying attention to this, you're missing the opportunities associated with investments. Up until COVID, I had a 100% success rate. 100. Raise your hand if you've had a 100% success rate. It doesn't happen. The only thing that killed that spree was COVID. I know everybody feels the same way. Innovation. Innovation happens after that when it comes to value capture. Value is revenue. Creating revenue and capturing revenue are not the same thing. These are completely separate dynamics. The data reveals that in this time frame, which should be 3 to 5 years— I sold a business to eBay that I had built and sold in 1.5 years. And the one before that took me 17 years. I learned this. I learned it quickly. There is speed of efficiency. Efficiency comes from wisdom, and wisdom comes from experience. What I tried to do was encapsulate all of the experiences I've had building all these companies. 12, 12 companies. Just think about that. You guys have heard these speakers. 12. Okay, that's a lot of information. I wanted to relay that to investors and entrepreneurs to help them understand how this system works. Because whether you believe it or not, this is a quantum two-sided coin. Quantum means that on one side you have investors, on the other side you have entrepreneurs, and it's spinning constantly. It's a quantum environment. So you need to understand two things in this environment. I want you to visualize a GPS. How many people use a GPS to get to this hotel? Just raise your hand. What do you need to know when you use a GPS? Where you are and where you're going. That's what you need to know. As an entrepreneur, you need to know the 2 things. The GPS gives you step-by-step directions on how to get there, and if there's a diversion, It helps you. It says, hey, there's a detour. You got to go this way. So my focus has been trying to get around this disaster that is a 90% failure rate for the last 15 years. It hasn't changed. Think about that. What kind of technology existed 15 years ago compared to what's here now? Yet the failure rate has stayed The same. I couldn't take it anymore. I just couldn't take it. Here I am, a neurodivergent person, barely graduated from high school, from a poor family, foster and adopted. You know, you get the picture, right? And I sold companies that won 4 private equity awards for between transactions between $250 and $1 billion. 4 awards. I was the CTO of eBay Enterprises Marketing Solutions branch and then turned into CSO. No education, no formal education. I'm an autodidact, meaning everything I taught myself. This failure rate and these numbers that you see up here, this is unacceptable. I'm on a mission to fix that. I'm here today to help you guys understand this, to help you not have— to help you not fall through those pitfalls. It's a self-perpetuating cycle. You have these entrepreneurs that lack the education and experience, and then you have the investors on the other side who also, majority of the time, lack the education and experience. Most of the investors that I found through the study had gone to fancy schools, graduated, and then worked for a fund. 0.12% of the people in the data had actually been a founder. Just, just think about that for a second. Who's leading who? So this is a vicious circle. It's a vicious circle of entrepreneurs making mistakes and investors not realizing some of these mistakes are happening because they're at a tactical level. Investors are looking at financials, financials that started a year ago. That's like driving down the freeway looking at the rearview mirror and wondering why you're crashing into things. It's illogical from anybody's perspective. These are the reasons why they fail by percentage in order. But I'm going to go over these reasons because it's not as simple as it looks. The high-level data says 29% say they ran out of cash. So, how many people are familiar with the 5 Whys? Anybody know about the 5 Whys? Toyota, when it was fledgling back in the '70s, in the '80s, they changed how they do things, and they created what is now Lean. How many people know about Lean? That came out of Toyota, Toyota Production System, the TPS. What they did is they started trying to understand the details underneath what we see at the surface. So I went through this methodology. 29% of them say they failed because they ran out of cash. So my question was, why did they run out of cash? 23% of them said, not the right team. Well, wait a minute, back up. What do you mean by not the right team? So I'm going to go through these with you. The companies that ran out of cash ran out of cash because They were basically overvalued. They were not paying attention to the money they were spending at that time. They were using waterfall techniques inside the business, not just in the technology terminology, but waterfall techniques in the business, and not agile techniques. If you have a product, you get it out there, be reckless. People will understand. That's the economy we're in. People post things to social media that you look at and you're just like, oh, this is just ridiculous. You don't need to have a product to go to market. You need to have an idea and validate your idea before you take another step. Not the right team. This falls into advisors and also investors and also the people they hire. There's a funny meme I saw recently about an investor. There was this conversation that a founder was having with an investor, and the investor kept saying, oh, you should hire this guy, you should hire this guy. How many people have had their investor tell them, you should hire this person? It happens all the time. It's not their money, their investment money. It's usually their LP's investment money, people like me. Hiring the right people means people that have grit, that can roll up their sleeves, that can get in the grind and make it happen. These are not the fancy people that have these really dressed-up resumes on LinkedIn. These are people that are gonna get in there and get their hands dirty. These are people that are a jack of all trades. These are people that can make the hustle happen. And work until their hands bleed. These are people that have the ability to take a beating. These are people that have the ability to lose and step up and try again. 18% said pricing and cost issues. This actually was really fascinating to me because the underlying data with this had more to do with the investors pushing price than the entrepreneurs. I'm an investor, so anybody that's an investor, you're with me on this, brothers and sisters, okay? We make mistakes, and our mistakes play heavily in the failure of entrepreneurs. Their mistakes that we cause, they lose their livelihood, they lose everything that they have in the game, and for us, it's a write-off. It's not okay. Be very careful what you tell people. 17% no. It's not the right product model. You can see my typo there. That's my dyslexia playing in for your pleasure. That's supposed to say not the right product. It's not the right product. So this is what they call product market fit. This is a very mysterious one because the problem associated with this has a solution and I'm gonna give it to you right now. In my book, uh, that comes out next year, shameless plug, published by Forbes, this, this book I talk about something called a UAB, a user advisory board. You have an IAB, an industry advisory board. You have a user advisory board. The user advisory board are the people that you engage as early as humanly possible that fit your ideal customer profile. If those people fit your ideal customer profile and you engage them early in the process, and at the end of that process they buy your product, you have achieved product-market fit. You should not have to sell them. The whole process is selling them. So you want to have a very large board. You start out with like 10. You start working with these people. And then you go to 15 and so on and so forth. This is a secret that I use and it works every single time. Turn your advisors into customers. If you're getting advisors that aren't customers, what are you doing? Like how is that going to serve you? Poor marketing. Poor marketing, the underlying data behind poor marketing is people don't understand their product, plain and simple. And when I say they don't understand their product, it means that they don't understand their product from the eyes of the consumer, of their end customer. The UAB fixes that too, the User Advisory Board fixes that. The ignoring customers one just makes me, I don't even know what to say about that. If you hear a customer telling you something and you're not willing to change what you're doing, including your whole company, what they call a pivot, changing everything around what your customers are telling you, then you will fail because you're selling something to people that don't want to buy it. They want to buy something different. Listen to them. Let them tell you what the product is. Your vision is only the first step. You need to exit from your vision as quick as humanly possible and move to customers' vision. Lack of focus. There's a saying that we have as investors that entrepreneurs have the attention span of a fruit fly. That's true. So what I said before in terms of focusing on your product also applies to making sure that you're not going everywhere all the time. Make sure that you have data and decision-making behind every move. So you don't end up out there chasing fireflies. That also applies to losing focus. Those 2 data points are pretty close together, and lack of passion is a big one. It's only 9%, but it's very interesting. If you are not engaged in something you're passionate about, you're not going to take the beating. And it is a beating. You know, if you're starting out, I mean, you know, but I got to tell you something weird about it. I just keep going back. I don't get it myself. And burnout. You need to time yourself out. This burnout is not you as the entrepreneur really as necessarily if you have passion. If the lack of passion doesn't apply, because a lot of these things they overlap in Venn diagrams. But that burnout is burning out your people. It's not necessarily burning out yourself. Be careful. They are a resource. It's a battery. It uses energy. It needs time to recharge. Failure to pivot has a lot to do with the first one. This is the graph in whole that kind of shows you how it all came together. And I want to talk a little bit about this because this sort of spanned the distance. There are basically— and you can change the names— but basically there are 4 functional areas in a business: shared services, and this is including IT. I've gotten a lot of arguments with IT people about this, but it belongs in shared services. Accounting, legal, HR, anything that's shared across all functional areas. Sales and marketing, product and engineering, and service delivery. Why are they set up this way? The value drivers for a business are growth, margin, and retention. Full stop. Those valuation drivers need to line up with the functional areas so you have a number on somebody's head that goes right back to shareholders' values. Sales and marketing is growth. Product and engineering spans them all. Service delivery is retention, and shared services is margin. Line up your functional areas with the things that value your business. These typical failure areas, 38% of the time they fell into shared services, 22% of the time they fell into sales and marketing, and 31% of the time product and engineering. It's really important that you guys don't just understand the reason why and the timing, but how that relates to the functional areas that are running your business. If you're wearing all these hats, put on the hat that applies. Make sure that your numbers line up. This is what it all boils down to. Interestingly enough, I've been on a lot of panels about this. I'm going to be on one at TechCrunch. And I say no exit strategy. Almost every single scenario included no exit strategy. Almost every single one. I've had conversations with people, I say, what's your exit strategy? If I'm looking at a business, they go, oh, it's too early for that. I talk to investors, what's the exit strategy? It's too early for that. Let me ask you something. There are 2— let me just describe something. There are basically 2 reasons why people buy companies and why people make products: to make or save money. When a company buys another company, it's to make or save money. The most common one is the synergy that's associated with the like customer. So I have a customer and you have a customer. I have invested millions and millions of dollars, let's say a Salesforce or somebody like this, in acquiring my customers. Those customers all have the same persona and ICP, ideal customer profile, characteristics. If I start my business and I start acquiring customers and I go to my go-to-market and I build out from there and there and there, and I get all these customers, and I don't think about my exit strategy from the beginning, meaning I don't align my ICP up with the people that are buying my company's ICP, I'm going to spend all that money, get out to the end of the runway, and not be able to sell my business. This happened to me. They're going to sit there and say, we don't have the same customer. Why? They've already absorbed their CAC to LTV, their customer acquisition cost to lifetime value. They make money by multiplying that by selling like customers more products. Your product aligns with them. They know that their customers will buy your product. That's why it matters so much in the ICP. Think about why would you build a product without having a customer? Why would you build a business without having an acquirer? From the very beginning, makes logical sense. I'm going to run out of time up here. I wish I had more time to tell you guys more. This thing, Boss, that I built, the Business Operating Support System, it was a concept that I built as a like an operating system on your computer, and it has different apps like you have Excel and different things that you use every day. This system took me years to study. I studied the Navy SEALs. I studied the fighter pilot, first fighting with the Air Force. Fighter pilots. I studied the SWAT teams, the CIA, everything I could get my hands on to try to figure out how these people operate efficiency in agile situations under stress. If you want to learn more about me, you can go to GregoryShepard.com. That's my website. Boss Startup Science has everything about Boss on it, and we have. Worked really hard to put together a list of curriculum items to help entrepreneurs not fall into the pitfalls that everybody else fell into. So the BOSS System was built aligning the studies that I did and all the 1,200 interviews and 5— I don't even know, I think it was something like 50,000 or 150,000 articles that we read to align the reasons why they fail with an educational process. I wish I had more time. I hope that this was helpful for you. Let me know if you, uh, if you like it or you didn't like it. I'm really excited to hear everybody's input. Thank you.