HBAP | STARTUPS - Why Startups Fail - Fireside Chat with HBS Professor Tom Eisenmann & Kelly Kimball

All right. Good evening, everyone. My name is Todd Brauss. My friends call me Hottie Toddy Inilo Montoya, or Miracle Max. And for at least one person on this Zoom, I will respond to Princess Buttercup. I'm here with my co founder, Susan Schultz, and our partner, Liz Otero. And we would like to welcome everyone to HPAP Startups. So let's get started and. And have some fun. And we'll have some fun storming the castle. For those of you who are new to startups, we have a few announcements at the beginning of each meeting. We normally do some short networking breakout rooms, but today we're going to skip that, and we're going to get right into it. So first off is our mission. We're here to help foster and fortify an innovation and entrepreneur community coming out of the Harvard Business Analytics Program. Our goal is to provide our members with the tools, knowledge, leadership, and confidence necessary to grow their businesses, to create and grow their businesses from the ground up. Upcoming. Susan.

Yeah, so we've got some really cool speakers coming up. So next week is Ashley Wilson, the CEO of Persefoni AI. And she. She actually won the HBAP Pitch competition last week, so she's going to talk about that experience. And then.

Oh, Todd.

Oh, I was just gonna say we've got two HBAP Pitch competition winners here. So Susan last year and Ashley this year, so. And we need to hang out more. Sorry for interrupting. Go ahead, Susan.

That's okay. And then the week after that is Cynthia Gilbert. She is a computer scientist turned patent and IP lawyer, and she's going to be talking to us about how do you protect your ip, especially in companies with AI and tech companies? Really, really cool. And she is interested. If you all want to send her questions ahead of time, she'll get ready to answer them. And then on July 5th is our monthly social, of course. And then on July 12th is Phil Morris, who is going to be presenting the entrepreneurship of acting, and he's the actor that played Jackie Childs on Seinfeld. And then on July 26, we have even more honor, just like all the rest of these, of having Congressman Jimmy Gomez attending. And he's going to be talking to us about the complexities of. Of regulating AI. And thanks to Kelly for Jimmy and for Phil, those invites. And so all of you, please come and attend all these. These are all going to be really good.

Awesome. Thanks, Susan. Before we get started, just a couple of reminders, please. There's a lot of people on this Zoom. Stay on mute throughout the conversation. If you have any questions, we'll have some time at the end for some Q and A recordings. The session will be made public and also after we're done with the recording, please stick around for some overtime that's not recorded. We'll hang out and continue the conversation for as long as it goes. And now it is my honor to introduce tonight's speakers and special thanks to Kelly Kimball. Tonight is special. Many of you already know Kelly. He's one of our friends and a mentor. And for those of you who don't know Kelly, he's pioneered numerous business enterprises taking them from startup to to billion dollar corporations. Today, Kelly is the executive chairman at V2 where he's digitally transformed the process of automobile registration in the United States. And tonight's special guest, Tom Eisenman is the Howard H. Stephenson professor of Business Administration at Harvard Business School where he teaches entrepreneurship and studies the management of new ventures. Eisenman is the Peter O. Crisp Faculty Chair of the Harvard Innovation Labs and faculty Co Chair of the HBS Arthur Rock center for Entrepreneurship, the Harvard Ms. MBA Engineering Sciences Program and the Harvard College Technology Fellows Program. And since joining HBS faculty in 1997, he's led the Entrepreneurial Manager, an introductory course that's taught to all first year MBAs. And he's chaired the second year of the MBA program. With colleagues, he's created 15 new MBA courses covering a range of different aspects of entrepreneurship, including courses on product management, entrepreneurial sales and marketing, and marketplace design. Eisenman is the book of why Startups fail and he's co author of 130 HBS case studies. Now, without further ado, as is our tradition at HBAP startups, if we could all please briefly unmute ourselves and let's give a warm round of applause. Applause. To Professor Tom Eisenman and Kelly Kimball.

Welcome, welcome, welcome.

Good Kelly, Tom, thank you for joining.

Thank you Tom.

Thanks Todd and Tom, thank you for coming. This is a real honor for me as you know and you're such a humble guy. And so I'm going to embarrass you again because I say this every time we speak. What a fan I am. And before I met why Startups Fail, Crossing the Chasm, Diffusion of Innovation, Founders Mentality. Those are the three books that were 1, 2 and 3 on my, on my bookshelf. And when I've read your book, I thought man, this guy, what a, what a tremendous piece of work you did. And it is now my, not only the number one book and on my bookshelf, but it's also the one that I give to all of my students. It's the book that then I give to every. Every person I'm mentoring gets a copy of your book because I think it's so important. I truly think it's one of the most important books of at least the last couple of decades.

So, Kelly, thanks for that. And Todd and Susan, thanks for giving me this opportunity. I've got a lot of colleagues who've been teaching in HBAP over the years, good friends from both the business school and the engineering school, and they love the program. So it's pleasure to meet the program and.

Really looking forward to it.

All right, well, let's get into it.

Okay.

The first thing I'd want to talk to you about, Tom, is I've read so many books that focus on startup success, but you decided to take another path. How did you become interested in startup failures?

So it goes back more than 10 years.

I started to teach our required. The MBAs have a required first year course on entrepreneurship and HPAP participants know the case method really well. This is 30 sessions to teach all the basics required. Every one of the 900 MBAs takes the course and we get feedback. I was head of the course and at the end you get the feedback from the students and they said, well, that was great, but look, along the way you told us that something like 2/3 of startups fail, depends what you define as a startup and how you define failure. But it's a big number, however you slice it. And along the way you showed us 30 spectacular successes. And these entrepreneurs came in like peacocks with the feathers spread, sort of strutting around talking about their IPO and their brilliant success and surely we could learn something from failure. And I took that to heart and tried it, tried to write a case on failure. It failed miserably. It turns out MBAs are really good at being critical, sort of looking in the rear view mirror.

And if you give them enough information, they can find a whole bunch of reasons why anything is going to go wrong. And so it took a while. So that was step one. Step two was we're allowed to invest in students after they graduate. We don't want that opportunity to influence the way we grade. And I had done a little bit of that over the years and invested in a team of my students who graduated. And we'll probably, over the course of this conversation, talk a little bit about Lean Startup. And I'm sure a lot of folks on the call.

Understand what that's all about was just breaking at this point in time. This is sort of. These students were from the class of 2010. Eric Ries's book was just coming out and I was spreading that gospel as fast and as far as I could and coach these students to run minimum viable product tests to make sure that demand for their product was strong. They did that textbook perfect test.

Showed that there was demand. They launched the business, raised money, including some of my money, and failed within a year.

Despite having a perfect MVP and having validated demand for their thing. And it's one of the stories in the book and we may get to talk about the business over the way, but I could see a lot of things that had gone wrong, but I couldn't pinpoint the cause. So here I was supposed to be an expert on entrepreneurship. This is one of the most important phenomenon in my field and I'm a failure at explaining failure. So that put me on a path for many years, sort of talking to as many failed entrepreneurs as would speak to me and the investors who back them and reading everything anybody had ever written about startup failure, writing a whole bunch of case studies, launching a course, doing some statistical research. And the result a couple of years ago was, was the book that we're going to talk about. So that's the path.

And how do you define failure?

Well, that's tricky. If you go to the dictionary, it's something that falls short of expectations, which begs several questions like whose expectations and what expectations. And so.

It'S tricky. The definition I use in the book, which a lot of that we got a lot of entrepreneurs on the call, they won't like it. It's that early investors did not or never will make money. And, and so that's one definition of failure that's a pretty. I think most folks here would say, yeah, that's at least one way to think about failure. Like if the investors didn't make money, something's gone seriously wrong. But the right question you ought to all be thinking is, well, what about the entrepreneur and her goals, right? She set out to build something. She built something great, recruited a team they're proud of.

And the answer to that is a startup is about more than the entrepreneur who built the startup right? 60% of the time when you get seven, eight years out, the founder CEO is no longer the CEO, the person, the person who founded it and still a startup, but somebody else is in charge. So you can't only take the goals and priorities of the entrepreneur into account. Of course you have to. And I think that's an important lens. The other way to think about this gets tricky, is, all right, so there's some startups out there that by my definition, are very successful financially, but maybe we all wish, or a lot of us would wish, they would just disappear. They coarsen democracy, they pollute the environment, they addict our teenagers. There's a lot of bad startups out there. So I guess it's a way of saying anything as complicated as a startup is going to have complicated definitions of success and failure, and we ought to keep society on the radar. They're failed startups. One of them profiled in the book Jibo Social Robot, originally intended to help the elderly, sort of be a companion. And it's an interesting story. Failed, blew through $76 million of venture capital, but people learned a lot about what might and might not work in that application. And the next generation of social robots are being rolled out across Japan and other places, and it's working better this time. So, you know, if a failed startup puts out an idea that others can learn from, if it trains some managers and entrepreneurs along the way who go on and do great things, I think they've made a contribution. So, long answer, short answer is investors didn't make money. Long answer is it's complicated.

And are you defining startups as those who are going through the venture capital process to a sale of private equity or an ipo. Where do we stop being startups?

Yeah, so my definition of a startup, that's a tricky question too, because that would take any bootstrap business and leave it. I mean, we surely have bootstrap startups. So. So just raising money from outside investors doesn't feel like the right way to define it. I define a startup.

So first off, you have to define entrepreneurship, which is trickier than it sounds. Professors, you, you all remember back to college, we, we love to define things we can spend. I could spend the whole call just on definitions. But the definition of, I hope you ran into it in HPAP along the way somewhere that we use a lot at Harvard Business School is.

Pursuing novel opportunity before you have all the resources that you need to actually capture the opportunity. So listen to that definition. Doing something new without resources at the outset, that's a prescription for failure. And so it shouldn't be a surprise to any of us when you do something new, which by its nature is risky without resources. And by resources, I mean money, team, partnerships, all the stuff you need to get going. And so to me, a startup is, is an entrepreneur who's doing Something new who initially lacks the resources. And I define a startup as basically somebody has committed full time. So there's a lot of would be entrepreneurs out there working nights and weekends. I don't think that's a startup yet. I think somebody's got to take the plunge and commit full throttle. You know, this is the thing I'm doing. I'm going to make this work.

And so you did a ton of research, right? I mean, I've got to imagine there's a lot of data that you've been using. What, what was the most surprising thing you found?

Boy.

I mean, there were a lot of surprises. A big surprise. One of the. So the.

Goal was to look for recurring patterns. And the thought behind that was, boy, if you see this patterns, some of these patterns over and over again, maybe we can learn to anticipate them and maybe we can do a better job of trying to avoid them. And one of the early stage patterns, it's sort of to divide the patterns into those that, that afflict a startup in the first couple of years, early stage and then later stage. These are startups that have sort of made it through teething pains and you know, they're sort of more, more like adolescent growing pains as opposed to, it's not infant mortality now, it's something later. And one of the early stage patterns is a false positive. You know, we're all after Covid. We all know exactly how to think about false positives and false negatives. And it turns out that entrepreneurs are subject, as they look at their ideas to both those things. False positives and false negatives. False positive. When you think your idea is fantastic, but you read the signals wrong and you're really in trouble. False negative is kind of tragic too. You had an idea, you somehow read the signals to think ought to put the brakes on here, go do something different. And then you pick up the newspaper 18 months after that and read about how somebody just did an IPO with that thing you thought of a couple of years ago. So as an entrepreneur, you gotta guard against false positives and false negatives. False negatives are really tricky and very common. Right. Because it's often the case that the earliest adopters for whatever you've come up with are foaming at the mouth, enthusiastic about your idea. There's, there's almost always some customer that is banging on your door, really wants what you've got. And you got to love those people. As an entrepreneur, you absolutely need them to get started.

And it's very tempting to, to head in that direction, go straight after people like that, customers like that tailor your product to their needs and that can work. If so first off, if you can build a big and successful business around the early adopters only, you're in great shape, you just found them and you got a product that they love. If you need mainstream customers in larger numbers now the trick is, do they have the same needs as the early adopters? Sometimes they do, but very often they don't. Right. There's early adopters can be power users, really sophisticated customers who've got special needs. They're often able to self provision, sort of take the shoestring and bubble gum that you put out there as an entrepreneur and deal with your buggy product because they're sophisticated. The mainstream customer. This is the chasm. You mentioned crossing the chasm earlier. This is absolutely the chasm story, the difference between the first customers and the later customers. And so if you have those differences, you got a real problem as an entrepreneur you gotta figure out in an interesting example of this is Drew Houston, the founder of Dropbox. So his early adopters were really sophisticated software engineers dealing. And so the thing was launched 2009. So you have to imagine a world that hasn't had Dropbox for 14 years. But in those days people were moving things around, you know, files on USB sticks and emailing files to, to themselves to, as a way to store things. And so you have these software engineers who are collaborating with others with really big files, a lot of collaboration, multiple devices and so forth. They had very sophisticated needs and they could, they could deal with your buggy product. Those are the Dropbox early adopters. When Drew launched the business, he applied to the Y Combinator accelerator. It's fascinating to read his application, which is out there. He said, I want to build a product that's so easy to use, my mother can use it to store her recipes. And that was his vision burning bright and he stuck to it. So even though the early adopters were asking for all these sophisticated features, he knew that if he put that in the product when he got to the mainstream, it would basically be over engineered and confusing for, for the mainstream. So that's not always the right way to do it. So sometimes you build for the mainstream and just assume it will be good enough for the early adopters. Sometimes you build for the early adopters and you slowly migrate the product over to meet the needs. Sometimes you build two versions of the product. You know, it's a pro and pro and basic. So the point is, for an entrepreneur that you, you really need to do the upfront customer research to understand if the needs are the same or different. And if they are different, you need a product strategy. You get to figure out how to deal with it. So that was a big surprise. I didn't see any of that coming. How frequently that would be a cause of startup failure. Sort of heading too fast and too hard in the direction of the early adopters without thinking about whether their needs were the same as the mainstream.

I can attest to that. We existed in the. We had the drunkenness of the early innovator and early adopter market. I mean, we thought we were the greatest thing that ever entered the market. Then we hit the mainstream, and boy, so they need to be referenceable. There's so many things that you need to be to get into that market. And so we hit it like a brick wall.

Yeah. And everybody on the call, entrepreneurs or aspiring entrepreneurs. I don't think the book is read as often as it was 10 or 20 years ago, but Geoffrey Moore wrote these seminal. I think, you know, thank you, Kelly, for the second best book ever.

Ever written.

Second best. Yeah. Thank you for even putting me on the same shelf as Crossing the Chasm. But entrepreneurs listening. If you haven't read Crossing the Chasm. Put, put, put it, put it on there. It's, it's, it stands the test of time. It's a really powerful way of thinking about. Thinking about entrepreneurship. Yeah. The chasm is the chasm between the early adopters and the mainstream. Yeah.

And it almost feels, you know, when the hype cycle came out, you saw that it sort of fits perfectly over the chasm.

Yeah.

Where you just get the drunkenness of the early innovator market. The early markets, and then, boom, you hit that.

And the tragedy here is, as an entrepreneur, you think you're doing great because you get some momentum with the early adopters. And then More uses the metaphor of a chasm. Like you literally all of a sudden you're not signing people up anymore. And, like, what happened? You know, and it's basically because those mainstream customers, they actually think that some of the early adopters are crazy people. Right. You know, any. Anybody who's willing to take a risk on a buggy startup product isn't referenceable, isn't somebody I can trust. So.

All right, so. So, okay, so that's a false positive. You have like six different, you know, sort of focuses with this, with the book. False positive is. Is one of them. False start is another. Can you tell us about the false starts?

False Start is Clearly, the number one killer of early stage startups. And because there's more early stage startups than later stage startups, by definition, because so many die along the way, it's the number one killer of startups. And false Start, if you sort of think of track and field or you know, any, any kind of race where somebody jumps the gun and, you know, hoping to get an edge just by getting out a fraction of a second earlier, that's what's going on with the false start. So this is an entrepreneur who is so eager to build and sell the product they've envisioned that they skipped the upfront research to understand two things. First off, whether there's actually a strong unmet customer need that they've targeted, who's the target customer and what's the unmet need. And secondly, whether the solution for the need that they've envisioned is the best solution. And you know, we've now got, I hope you learned some of it in hbap, but it's out there. There are a lot of ways to learn about how to do this customer discovery research and how to get feedback on early prototypes before you commit to the full engineering. So by skipping that research, they dive in and I mean the odds that they've got it right, that they found the right problem and the right solution for that problem are just low. It's just hard being an entrepreneur doing something different. And so here's the trade they've made essentially this work, this upfront work. If you're in a software based business, I'm sure a lot of people on the call because of HBAP are digital in their orientation. You know, with a typical software based business you can learn a lot about potential customer needs and you can do a fair amount of getting feedback on a facsimile, a prototype of the business in a month, four weeks. And I mean you could spend longer and you probably should spend longer, but a month you're going to get 80% of the learning. And in order to not invest time in that one month, they go straight to engineering and it takes probably four months to build version one of the product, launch it, see that it's not working and figure out what to do next. And you know, not uncommon for an entrepreneur to launch with 12 months worth of cash in the bank. And if you blow through four months on a flawed first version of the product, you've used up a third of your cash. And I mean, you're not doomed, but you've really boosted your failure odds. And so it's a bad trade. In order to save four weeks.

You'Ve put four months at risk. And that's essentially the false start. It's jumping the gun. It's, it's skipping that really important upfront research to, to prove that you've got, you found a strong unmet customer need and that you got the right solution.

I think, I think anybody who reads this book, especially me, I mean, when I read that, I was. We spent, we spent six months, half a million dollars before we talked to the customer. We had to erase everything. We burned all that money and we started to start over again. So I kind of felt like as I was reading, going through all of your, your categories here, that I felt like in Pulp Fiction, I think I told you this yesterday, Pulp Fiction, when the kid came out of the bathroom and he started shooting at Samuel Jackson and John Travolta and missed with every shot. When I read your book, I felt that way, like, how did I avoid catastrophe?

Kelly, before you move on to the next one, I think it's really important for everybody to understand why the false starts are so. They're really common them. So. And it goes right to the definition of what an entrepreneur is like. An entrepreneur is somebody who makes things happen. So what could be more natural than like, the vision's burning bright. I know what I want to do. I see the problem solution pair and I'm going to get started. And so there's a couple of other insidious things. A lot of entrepreneurs are engineers. Engineers love to build things, so that couldn't be more natural. A lot of my MBAs are not technical, but they hear correctly that in order to be a successful entrepreneur, you need a great product. They have a great product. You need a great engineering team. They're great at networking because they're MBAs. They know how to do that. And so they go off and find the engineers. Once you bring them onto the team, you got to keep them busy. They're expensive in one way or the other. And you know, so you give them something to build and that something isn't well researched. So it goes right to the core of.

How an entrepreneur, the self identity of an entrepreneur. And you really gotta be careful with that. It's so tempting to say, yeah, I'm pretty sure I got the right problem and the right solution. And it feels like you're wasting time. It feels like you're back in school studying. But that research is so important.

You know, this is probably for a later part of the discussion, but you talk about the monomaniacal, you know, founder, the egos that, and they're required. I mean, let's face. I mean, if you're going to be a leader in entrepreneurship, you've got to have an ego. You've got to feel like your gut is the only thing. On the other hand, you know, you can crash that plane into ground and take a lot of people with you.

Yeah.

Which, which I actually kind of love in a founder. I mean, I need that sort of, you know, that sort of dedication that they're not going to abandon ship too early.

How do you deal with a founder like that? And how do you thread that needle? I mean, you really don't want them to be so soft as well, that they're taking advice from every single person that comes in. And, and, and, and they're able to be manipulated.

So there's some middle ground. It's the hardest thing about being an entrepreneur, for sure, is sort of finding the zone in between.

Too obstinate, so sure that you're right that you won't listen to the universe, you won't listen to anybody else, and too ambivalent, you know, so that you're blowing with the wind. Every piece of feedback you get, you sort of twist and turn and, you know, there's a zone in between where you listen, you're firm, you project the confidence that the world needs in order to back your dream, either to sign up as a team member or as an investor to come on board. And.

I, you know, I wish I could tell you I knew that it was teachable.

You know, I think a lot of us probably have a suspicion that it's just, it's inherent in people's personalities. And, you know, academics who study entrepreneurship have puzzled over these questions for decades, and I'm not sure we're any closer to the answer on what makes a great entrepreneur. But finding that balance between persistence and confidence.

But not taking it to the point of obstinance and overconfidence and as you say, sort of creating a giant crater in the landscape as a result. That's the challenge. Surrounding yourself with the right mentors. If you have a board of directors, a board that actually understands you and your strengths and weaknesses, a board that's been around that track before and sort of, you know, knows when to give you a little rope and knows when to reel you in, I think that can go a long way.

So you need a humble, monomaniacal founder.

And they're out there.

Yeah, there's such a thing. Well, that leads me to My next question, and this is around your, one of your categories in the early, early phase, bad bedfellows. If we talk about the dysfunctional partnerships, investors, the relationships that can break apart, and I've read statistics like a third of all startups fall apart because of partnerships. Because of these. So many times we find ourselves meeting somebody into the hypothetical digital bar and you find out that you've got a common kind of interest and so you start a company and it's almost like that's the way you'd marry somebody. I mean, this is just a horrible strategy. So talk about the bad bedfellows.

Talk about the. Yeah, so, so the bad, bad fellow. This goes back to the, this is the startup that really was a catalyst for, for, for a lot, for a lot of the work I ended up doing. The startup was Quincy Apparel. And we have a lot of women on the call, so they may or may not relate to the problem here. But Quincy was started by two very tall.

Recent MBA grads who went to work upon graduation, perish the thought to bcg. They broke my heart by doing that. And they needed stylish, but not too stylish, affordable, good fitting clothing. And you can't have all three, Right? You can have stylish.

And good fitting, but it costs a fortune. So, so they set out, Quincy Apparel was supposed to design.

Good fitting, stylish, affordable professional clothing for, for young professional women. And Kelly, to your point, best friends from business school, that ought to be a red flag. There's, there's some good things that come from founding with somebody who you know well, but there's a big, big danger. And the danger which the Quincy founders discovered is that they actually vowed to never let disputes over the business get in the way of their friendship. And founders are going to fight over everything all the time.

And if you suppress that conflict, because you're basically worried about the conflict spilling over into your personal relationship, this would be true with family members, with spouses and so forth. Those problems are going to fester and they're going to get worse. And Quincy went through that. They really suffered from.

These co founders not being willing to declare who's the boss.

You really do need somebody who can make the final call in a startup. And it's pretty natural if you've been working in a very, you know, just a couple of you in the same small office for months and months to talk through every decision. But as you get bigger and the thing gets more complicated, you can't do that anymore. So that was part of it. The Big part of it was neither of them had any past experience in the design or manufacturing of apparel. And so, so you asked before, what's the biggest surprise? Through the research, one of the things I learned was like you get a lot of people who will assume, if they look at entrepreneurs, that you must have domain experience, you must have deep understanding of the, of the space you're entering and you have other people who say no. You know, we've got a lot of examples of people who've been great entrepreneurs who sort of came barreling in from a completely different line of business, you know. And I guess what I realized by studying a lot of entrepreneurs, there are certain types of business where you really, really need deep prior experience. And apparel is one of them. There's just all of these steps. There's a fat, there's a pattern maker, there's a, a fabric sourcer, there's quality control. And all these things have to fit together properly. And these founders didn't know anything about this when they started and they didn't spend enough time before they took the plunge to learn about it. So they, they also didn't have any contacts in the industry, they didn't have a professional network. So they, once they realized they needed all these specialists, they reached into big apparel companies to find the fabric source or in the quality control person and so forth, put them all together and guess what? They didn't understand how to work together because you know, if you bring somebody from Ann Taylor, they're used to doing things a certain way and even worse. And a lot of folks on the call will I think appreciate this. In a very early stage startup, it's like a bunch of 6 year olds on a soccer field, sort of scrumming around the ball. Whatever problem is, whatever fire is burning hottest, everybody just dives in. So they had a situation where the fabric sourcer would say, how can I help with quality control? I don't know how to do that job and it's not my job. So they would sit on their hands. Well, colleagues were so core team.

Here's another problem and hbap, please guard against this.

We at Harvard Business School in the MBA program, you sort of, we lionize venture capital and we sort of train the MBAs whether we do it consciously or unconsciously to just assume if you're going to be an entrepreneur, the only self respectable way to be an entrepreneur is if you go raise venture capital. Well guess what, there's lots of other ways to be an entrepreneur. Lots of other ways to get the money and venture capitalists don't typically back apparel companies for good reasons. They do back direct to consumer. And this is a time frame 2013 when DTC direct to consumer. So think Warby Parker, think Bonobos, which was a male version of Quincy that actually had some pretty good momentum, you know, Casper the mattress people and so forth. So that business model was just taking off. A lot of VCs wanted to have one of those in their portfolio. So here are these two very impressive women from Harvard Business School with a pretty good idea and validation in the form of a wonderful MVP test. So they managed to raise VC not from top tier investors because those investors were smart enough to know this was not going to work. So they had second tier investors who didn't actually know that much about apparel or DTC and very importantly didn't have the money to bridge it, didn't have a big enough fund to bridge Quincy when it got in trouble. So founders who hadn't figured out who's the boss, who didn't have prior experience, who hired the wrong people, who got the wrong investors backing them. And then the last category of resource provider player if you will, in the team, the biggest capital T team is strategic partners. So in a apparel company like this, you typically will outsource manufacturing to a third party factory and those factories, guess what? When this little peanut comes in with their orders and you know Ann Taylor needs something expedited, the Quincy orders got pushed to the back of the production queue. So the partners were bad, the, the strategic partners, the factories were bad, bad, bad fellows. The, the team was and so forth. So it doesn't have to kill a company, any one of these things but when they're all going wrong, you've got a real problem. So even with a very good idea and, and the product was selling pretty well, they, it took a while to sort through the manufacturing and they were getting returns that were on par with e commerce rates. But if your promise, if your value proposition for the customer is great, fit.

On par is not good enough. So Quincy blew through the million dollars it raised and it couldn't raise more, had a shutdown. It was tragic, very painful.

That's bad, bad fellows. And yeah, I mean we could get into how you avoid it, but a lot of it's common sense.

Yeah, you talk about the venture capital there. So going into the sort of the later stage world, I can't imagine that especially if we're trained as entrepreneurs, I mean we've been conditioned to think that the end all is venture capital and the Reality of venture capital is it starts a stopwatch. I mean, you now are under a time constraint, so you need to think about hyperscale. And it's not always appropriate to every company. And you write about this, you talk about speed trap. And I will say before this that, that we've had an author here, Chris Ye from Blitzscaling.

Oh boy.

Yeah, and he'll probably be back.

That book is dangerous. Yeah.

I would love to have you two together on here to just sort of fight this out. It'd be fun to watch. But, but, but I happen to agree with you. I mean.

You call it the speed trap. Could you talk a little bit about some of the dangers and how this could be.

Yeah, so, so you use the stopwatch metaphor and, and then you said hyperscaling. And the really important thing to understand here is the VC business model. So venture capital firms invest in a bunch of things. You know, it isn't uncommon for every partner to have.

A dozen investments. And if there's six partners, you know, now you're looking at 60 firms and maybe more than that. So they've got a portfolio. And in that portfolio, 5%, you know, three of the 60 are going to yield 10 times the original investment, 50 times, you know, if they're lucky, a thousand times, you know, if you sort of can stumble your way into Facebook or something like that. And another 20% will earn somewhere between one and three times the original investment. And something like two thirds will either fail outright or will earn less than the amount of capital originally put in. And so in order to have that kind of outcome, you need to push all 60 for hyper growth. And you only invest in things you think have the potential to be a tenfold return. And as you sit on the board, the VCs get a seat on the board and eventually, you know, if you raise enough money, there's more of them than there are of you as management. And they're going to push, push, push for growth. And you're right, not every business is suited for that. And not every entrepreneur temperamentally is suited, like it's the only thing you're doing. They have 60 of them. You've only got that one. And if you have a choice between.

A surefire way to build the thing and sell it for $20 million, and at that point you own half the company. As the entrepreneur, you've just made a life change for most of people on this call, maybe not for you, Kelly. It's, it's, it's a life changing amount of money. You know, a $20 million exit for the VC is, is, you know, that's a shoulder. That's worse than a shoulder shrug. That's a disappointment for them. So, you know, really important for entrepreneurs to, to before they take those VC checks or just assume that's the only way to go, to do a lot of reflection both on is this business suited for hyper growth? And am I temperamentally? You know, is that, is that what I want to do? I want to live with the pressure that comes with that. You know, in the MBA course, we built on failure. We bring in the failed founders and they do an amazing job of, of explaining what they did, what they did right, what they did wrong, what they learned. And so many of them basically say, look, I knew intellectually what the VC business model was and that I was going to be pressured for growth. But until you've actually lived with that pressure, you can't understand what, what it's like. So, yeah, Speed Trap. Yeah.

And, you know, so now that, now you're in that, you're in that sort of, that problem, you now have to hyperscale because the investment you brought on, which means you've got to create the infrastructure in order to, to, to hyperscale, you need to hire managers, you need to create the entire infrastructure. So this is your help wanted category, by the way, when you're trying to create these organizational systems.

What could go wrong? I mean, you're building a structure now. What could go wrong?

Yeah. So let's take it at two levels. Let me come back to Speed Trap for a minute because I think it adds a little texture to an appreciation for how challenging it is to, to scale a startup. So, you know, if we go back to our early adopters, it's often the case that your first customers love what you're doing. You don't have to work very hard to sign them up. They hear about your product, they refer you to other people like them. So, you know, you get a bunch of viral growth.

But if you, if you've now signed up for the hypergrowth train, you need to keep going. The next wave of customers, almost by definition, are going to be less interested. The really interested ones found you already. So the next wave, as you move further and further away from that sweet spot, it becomes harder and harder to acquire customers. Now you have to start to market, you have to discount the product, you market harder. You may have to add features to appeal to a new segment and so forth. So your economics.

Almost by definition become tougher. The other thing that's going on is that early burst of growth you had attracts competitors. You know, think of food delivery. I mean there's a whole bunch of entrepreneurial opportunities where people just sort of jumped in really quickly. And what do competitors do? They, they drive down your price, they drive up your costs and so forth. So.

Now just as you say, if you've got, even if you're pure software, hbap, you learned about digital, so keep it, keep it pure software, it's easier. But if you've got humans doing anything, packing boxes, answering phones, whatever, now you need systems to manage those humans, you need to hire the humans and train them and so forth. So there's, and you're doing this in a startup that came from nothing, so those systems don't exist. So you got to find a new kind of person, a specialist. You. We need customer support. Like well, how have we been doing that before? Well, a founder sort of answered the emails from the people who had service problems, you know, now we need a customer support team and we need systems, information systems so they have the tools to work with, etc. Etc. And every single function you look at, marketing, finance, operations, you can have versions of this problem where you have to add these systems.

And on top of all that you start to get some cultural drift and morale drift. So the early stage startup was peopled by generalists. These are the six year olds scrumming around the soccer ball who will do anything, dive in and solve any problem. And they're good at it. They were present at the creation, they share the values of the founder. All of a sudden those early stage generalists are now teamed up with a bunch of specialists who have a different way of thinking about the world. And it's unclear who's on. What are you going to do with the generalists now? Are they going to be the boss of the specialist or is the specialist going to be the boss? So you got all sorts of old guard, new guard conflict that comes in, cultural conflict.

You get, you know, by the way, if so the old guard, if the company is still valuable, we haven't gotten in trouble yet. So that engineer next to me who was here from the start has stock options that are worth $6 million. I do exactly the same job and my options aren't worth anything yet. So how does that work? How is that fair? So you get morale problems, you get fiefdumps, right? We have a different culture in.

Marketing than we do in sales or engineering and it's the job of the entrepreneur to sort of keep all that under control. The help wanted help wanted pattern. So you can see in the speed trap, sort of when you go fast, almost, almost mechanically, hydraulically, a bunch of things start to go wrong. And pressures, some companies are just those the concept is so strong they can keep it together. Or you got, you make a bunch of smart hiring moves and you bring in people that can help you solve all these problems. But the help wanted pattern is.

One or both of two things go wrong. And sometimes there's a function that's particularly important to the startup. And the example in the book is a company called Dot and Bo. It was online delivery of home furnishings. So if you look around, wherever you're sitting, you know, all this stuff was shipped from somewhere to where you're sitting. The chairs, the lamps, the couches, the tables and so forth. And that's what Dot and Bo did. And they had, I won't get into the why they had a brilliant demand marketing formula, but they actually managed to make it through that early stage and and sustain product market fit and the thing kept growing in a healthy way. But it turns out that shipping lamps and couches and tables from California, where they were, to anywhere in the country is logistically especially if most of the stuff's coming in, you're receiving it from somewhere in Asia and you're shipping it from somewhere the West Coast. It is bloody difficult to run the warehouse and run the logistics that do that. And this company, even though the marketing was working and demand was strong, it took three tries to get the vice president of operations who could actually get that stuff under control. They bought the wrong.

Essentially there's a system that's going to manage, keep track of the inventory and the orders and so forth. They brought, they bought the wrong system and once you sort of commit to something like that, to undo it and replace it, incredibly difficult. So, you know, every time you have one of these key senior hires in a crucial function like operations for this company, like, it takes three to six months to find the person. It takes three to six months to figure out if they're doing the job right. So you're somewhere between six months and a year of trouble. And that's a lot long time to have a crucial function not working properly in a startup, you know, and in this instance, it took them three tries to get the right person. So even though in many ways the company was healthy in this core function.

It was facing these problems and it was hit by a 1, 2 punch, the second punch is sometimes, and boy, we're witnessing it with a vengeance right now. Sometimes the capital markets just shut down for startups and even healthy startups find it difficult to raise money. The babies will go out with the bath water and that's what happened to Dot and Bow. So just as they were getting the operations under control, this is 2015, the market for E commerce retail shut down and they found it brutally difficult to raise money on any kind of terms that they could deal with and eventually went bankrupt. So help wanted. You need help from the capital markets, you need help from some senior executive. And you know, the, the answer for the capital market thing is you really ought to think about keeping some money in the bank for a rainy day. It's very tempting as an entrepreneur to cut it close so you can avoid dilution and not raise more than you need to. And the solution for the executive thing is a really top rate human resource ahead. And a lot of, a lot of startups will scrimp on that. But basically the head of people stuff, the head of human resources in a scaling startup is absolutely crucial. Hire.

Yeah, I think right now we're seeing so much, so many startups that have raised significant amounts of money because it was basically cheap. The interest rates were down so low when interest rates rose. Now you're looking at valuations of companies actually go down. So we're probably going to see a whole bunch of down rounds.

Oh yeah, yeah. And SaaS again, a lot of folks on the call are probably in that world. SaaS, multiples of revenue like 15, 17 times a year and a half ago, they're probably five or eight now it's cut in half and worse.

Yeah, I know there's a lot of dry powder out there right now. So it's really. And they've got to spend it at one point. So I think you're going to probably see pent up demand for investment. But those poor companies that did so well last year with their valuations are going to get crushed.

Yeah. Depends how fast they adjust their burn rate and how much they raised when money was easy.

All right, now, okay, my favorite subject and the sixth of your six major categories, Cascading Miracles, Moonshots and Miracles. I think every entrepreneur that I know, myself included, especially if you're in tough tech or if you're in anything where you're, where you're trying to change the world, you're going for a moonshot, right? And this concept of cascading miracles, my own literally the reason we're successful today is because 2008, the world went broke and then the governor to raise money decided to mandate what we do for a living. Imagine taking that to Shark Tank before and saying, this is what has to happen.

Right.

So we are the recipient of these cascading miracles, fortunately. But so many folks start up thinking they're going to change the world, but they're relying upon outside forces that have to come together. And you use an interesting term that if you have five of these, you have about a 3% shot of actually making it. So I'd love for you to get your speech on that because that was the most fascinating.

Yeah, I don't remember if this is the math, how it works, but basically, if there's five things. So think of a mathematical equation where you multiply a bunch of things together.

If you took hbap, you'll be good at this. If any of those things is zero, the whole expression goes to zero. Right. And so even if you have 50, 50 chance of the thing, each of the individual things being.

Working, like 50% chance the regulation and the example you just use is going to go your way. 50% chance that the huge amount of capital you raise, that the capital markets won't unwind, that the investors will step up. If you put five of those in a row and multiply them together, you end up getting a vanishingly small kind of number. Sometimes it works. And so you need a cascade of miracles. That's where the name comes from. A bunch of things have to go right, and if any of them go wrong, you're in big trouble. The case study in the book is of a company called Better Place. And Better Place goes back to 2010, 2008, as electric. The only electric car on the market when they started was the Tesla Roadster, the $110,000 little sports car that they started with. And Shia Agassi, the absolutely driven, absolutely charismatic entrepreneur who built this thing, had a vision for electric vehicles being everywhere. And to do that, you needed charging stations everywhere. And so his, his plan was to deploy chargers all over the place and to have battery swapping stations. So he had designed a vehicle and he did a deal with Nissan. Nissan actually launched this vehicle where you'd pull into a station, a robot would pull out the depleted battery and pop, all in five minutes. Same amount of time it'd take you to gas up your car. And they deployed this, but they raised a billion dollars. Launched in Israel, which has got a small footprint, so you had a manageable. And Denmark, which has a small footprint and a lot of people who care about green stuff. So.

Look at the miracles you needed there you needed electric cars number one, which means you probably needed government subsidies for electric cars that actually worked. The subsidies were there. You needed not only one oem. The big car companies are called original equipment manufacturers, oem. But you needed a bunch of them because basically, to justify the deployment of all these charging stations and the robot facilities, you needed a bunch of car companies to design their electric cars to the specifications of your robots. Well, good luck telling Ford and Volvo and, you know, and Toyota and everybody else how to design a car.

It's.

It's not something. So they managed to get one partner, but they couldn't sign up anybody else. You needed the capital markets to put in a billion dollars and keep the money coming. So some of the miracles came through for Better Place. But ultimately, you also needed the concept of the swappable battery to be the right one and the technology. There was a. There was a horse race between fast charging, which, if anybody's driving a Tesla, you've probably used a fast charger, and battery swapping. And, you know, when they got started, it wasn't clear that there was a lot of worry that fast chargers were going to damage the battery. And they do. But. But folks have figured out clever ways to keep the fast chargers from doing too much damage. So Agassi made a whole bunch of bets, and he needed a cascade of miracles, and he didn't get them. And, you know, the thing here comes back to your monomaniacal Kelly founder. In order to get everybody to come along, you know, it's often the case that you need this absolutely charismatic, absolutely passionate, absolutely visionary entrepreneur. And shy was that. If you've ever seen him speak, he's just dazzling. And for several years, he had the world dazzle, you know, TED talks, you know, with millions and millions of views and so forth. And that's a tricky space, right, because sometimes you've. You've sold the vision so hard that you become emotionally attached to it and you can't move away from it. You know, that there were probably paths where Better Place could have adjusted what it was doing. So to give up on the swappable batteries, they were actually getting pretty good at deploying regular charging stations. And they actually had General Motors saying, could you be the entity that, you know, as we deploy it, electric vehicles, you know, you take care of the charging infrastructure for us. So there were pivots they could have done. But the entrepreneur in this case was so, so, so sold on his vision that he couldn't move away from it. This is where a strong board of directors as we were talking about before comes into play.

And Agassi, that was it for him, right? I mean, he didn't start up another company after that.

You know, he. I don't know. I mean, he hasn't surfaced with another one. There was a rumor he was looking at something to do with public transport, you know, sort of rethinking in. In ecologically friendly ways. So I wouldn't sell him. I was a young man and. Or at least Kelly by our standards.

And he's, he's full of. Of energy and vision. So it'll be interesting to see if he pulls another rabbit out of his hat. He'd been a successful software entrepreneur before that. Sold a business to SAP for $400 million.

And it goes to. You get these founders that are able to inspire such confidence, they're able to raise such money, and then they fail. And we talked yesterday about Adam Newman, who's one of those spectacular failures with WeWork, and yet he's able to raise another third of a billion dollars for a 16Z. Agassi didn't fail well.

And apparently Adam Newman did. I just have to assume that because he's raised more money. It's hard for me to understand that you talk about failing. Well, in your book and every entrepreneur, including myself, I think I've got three successes. I've probably got 10 that weren't successful failures in the definition. What's the difference between failing well and failing poorly? And why do we care?

Yeah, so. So to me, we, in the course, we like to use the term failing gracefully. And to me, that is, it has several components.

You.

Basically have timed the shutdown so that everybody who's owed money is paid back. Vendors, employees. Employees get a couple of weeks at least of severance, you know, maybe more. If you bought stuff from vendors, you pay the vendors. We're not talking about your equity investors. They, they knew that they were putting everything at risk. But we're talking about, you know, base basic commercial obligations you had. So you time it. And it's very tempting as an entrepreneur to run the bank balance down to zero, hoping for a miracle. Right. You know, we're going to finally get that big order and so forth. So you got to guard against that. And so many failed entrepreneurs I've spoken to said it takes longer to shut the thing down, and it costs more to shut the thing down than you ever anticipate. And there's not. There's so much advice out there for entrepreneurs. There's precious little on actually how to manage a shutdown so, you know, one of the, one of the things we tried to do with the book and with the course is put a little more of that information out there. So that's number one. Number two is just basically staying with it. It's so tempting.

You know, entrepreneurs often have a lot of opportunities and they have other ideas tempting to toss the keys on the table to the investors and say, look, this ain't working. I have other opportunities. You drive, you know, you figure out what to do with it. And that might be.

There might be some short term logic to doing that, but the long term implications, the reputational damage you've done. I talked to a lot of VCs along the way in researching the book who had examples of entrepreneurs who'd done that. And they have, they will go out of their way to name the entrepreneur and basically say they will never back the person again and will tell any other, anyone who wants to know that this person had abandoned ship essentially prematurely. So stick, stick with the thing. You know, that's part of when you sign up as founder, you're responsible for taking it all the way through to the end.

And then.

An accounting to everybody on what happened is the thing you do owe your investors an explanation. And it's so painful and it elicits a lot of shame, right? You know, there's a temptation to just sort of tortoise, like sort of pull the head into the shell or ostrich, like, you know, head in the sand and just not deal with it. But you do owe people explanations. And the most important thing is, is to failing well is to manage your own emotions. I mean, it is going to hurt like crazy. An entrepreneur and the venture, the identities are intertwined. They are one and the same, right? And this is the magic of entrepreneurship, right? This thing exists in the world because you put it there. It was your idea. You marshaled the resources, you brought the people together, so it's you. And if it fails, you failed. It's inescapable and it's going to hurt like crazy. And as humans, we're wired up. If anybody took a psychology course, there's a thing you study in Psych 101 called the Fundamental Attribution Error. And it works like this is basically, if I made a mistake, it was something out of my control. Either somebody else dropped the ball or the sun. If I dropped the ball out in the outfield, the sun got in my eyes, or somebody shouted and distracted me, it wasn't my fault. If you make the mistake, Susan, it's Probably because you weren't trying very hard or you weren't very skilled. You probably shouldn't have been out in the outfield to begin with. So we blame other people and we deflect blame from ourselves and couldn't be more natural for an entrepreneur who's failed to do that. My co founder dropped the ball, my investor pushed me in the wrong direction. The regulators did something crazy that we couldn't have seen coming. And some of that may be true, but you pick the co founder, you pick the investors, and it's your job as the entrepreneur to manage all this. So.

There, this, there's these extremes of either denying the responsibility for what happened or, you know, it actually can go to the other extreme of actually taking too much responsibility. You know, your co founder probably did lose focus, you know, and so some people unfortunately go to the other extreme and they say I was hopelessly ill suited for this role, I should never try it again, I shouldn't have been an entrepreneur, I'm not going to do it. And that might be right. But more often it's the case that, you know, look, it's complicated. Some things went wrong that were out of your control, you made some mistakes. If you learn from the mistakes, you can avoid them next time and maybe you'll get lucky and the things that you couldn't control won't whack you the next time. So the goal is to settle the emotions down so that you can see all this clearly, learn from the experience and be able to basically, when you go to do it again, which you're going to do, basically half of failed founders within five years sort of step up and do it again. So entrepreneurs are entrepreneurs. It's, it's, it's part of their identity. You need to be able to explain to people what went wrong, your responsibility, what you learned from it, what you would do differently next time. And that's a big part of failing. Well, yeah, is, is learning from it and being able to explain. And at least, you know, it's not true everywhere in the world, but a lot of parts of the world, the U.S. it's, you know, people will, if you can explain what, what went wrong and what you'll do differently, there's not great stigma attached to startup failure.

And.

We'Ve got to learn that because you're not going to. The odds are you're not going to be successful the first time or even the second time, but if you stick with it, you know, you'll get there. And how do you convince people to actually believe in you if you haven't failed. If you haven't failed.

Well.

And I think that's the key to getting people to believe in you for the second or third time. Yeah, I've got a couple of questions that, I mean, we're coming to the end of our discussion time, so maybe a couple of quick answers and then a long answer. I'm going to come out of the book for a second.

Sure.

You've got so much data, Tom. What about a, you know, can you create an app, can you create an AI model to actually determine, you know, failures or successes?

Yeah, we're going to get somebody on Jen's team to, to do the data science to, to see if a machine learning algorithm can look at, look at the patterns behind the successful ones and the, and the failed ones and basically predict. I tried it, I ran, you know, if you get to the appendix in the book, you'll see that I did a big survey and the book doesn't present the regressions, but there's a bunch of regression analysis that I've done separately. I can.

Explain statistically.

A.

Part of the variance, you know, 25% for those of you like R squares, you know, that kind of number. That means there's a whole bunch of variance that's unexplained. And this is sort of things that you could observe before, as an investor, before you write the big check, you know, could you actually. And there are other, there are other VCs out there that actually use this approach, sort of a Moneyball approach to gathering a lot of data. Part of the problem is the database you'd use to do this. There are a couple of them. Pitchbook is one that tracks all the startups on the planet and Crunchbase is another one. The real problem for doing what we're talking about here is if you look at those databases, only 10% of the startups show up as, as out of business.

And that's because these data services basically send out queries to people they know had launched and if nobody answers, they don't update the database. It's just become, it's the, the venture stays active. So you got a whole bunch of.

It's not a lovable term, but zombies. Startups that are still alive are never going to get to the point where they.

Are a big success, but they may be generating enough cash to keep going. And then there are a bunch that have died that just haven't been reported. So I've given up on the idea. It's probably. But I'm sure I'm not the last person who's going to think that you can somehow turn the machine learning crank and get some wisdom here.

And the other off book question is now you're what, 26 years now at Harvard?

That's it.

Depends if you count the degrees I got along the way. So it's longer. 26 years on the faculty.

You started when I was like a child.

Tell me. So you've been teaching there 20, a lot of years. What, what's been some of the big changes? I mean I'm. There was a statistic, I heard that like 30% or 40% off. There are 60% go to McKinsey right out of HBS.

No, no, no.

And it's never been that high.

It's bumped around between 20 and 25% over the years. It's probably closer to 20 these days than 25. So.

So 25 years ago though, how many people were actually entrepreneurs? How much, how much education did they get in entrepreneurship?

So 25 years ago would be 1998.

I was three. I was three years old.

Yep, there you go.

People were starting to get interested. I mean our business school and every other business school out there had a big run at the Internet. Boom. You know, so it peaked in the year 2000. Those of you with good memory for history will remember that the crash of the dot com bust started in March of 2000. So the MBAs who'd been in that class of 2000, they were about to graduate. You know, there've been a lot of ups and downs along the way. So when March hit that year, it wasn't clear it was nuclear winter setting in. You know, there's a lot of reason to believe that it might be a dip for a few months and then bounce back. So 11% of that class launched a venture upon graduation. And if you go to the class of 2001, just one year later it was one and a half percent. So.

Crashed in a resounding way and then it slowly crept back up. The highest number it's ever been is 14%. And that was a couple of years ago that one of the pandemic classes where it was actually pretty easy to work on a startup while you were sitting at home on Zoom.

So.

That'S a change. I would say. If you look at our MBA class, it's now about a third of the class is.

Hell bent to either be an entrepreneur or work in tech. You know, there are plenty of people that want to join startups or join bigger tech companies and those numbers Are that's probably double what it was when I. When I joined the school. You know, hopefully more than. More than double. And that's come at the expense of, like, there's actually not that many people go into investment banking these days. Private equity wasn't very big when I joined. It's now 15% of the MBAs go and do that.

So finance has always been 20 or 25%, one form of finance or the other, whatever the flavor of the decade is. And consulting has been 20, 25%. So half of them go off and do one of those things, and the other half, a good chunk of the other half are now doing tech and entrepreneurship.

Well, it's my hope that what we're doing with D Cubed and we're going to increase that. And I know Paul hires on the call here as well as running Grid and, And, you know, at least it seems it feels like Harvard's moving in that direction. Moving with higher emphasis on entrepreneurship.

Yeah. You know, and Kelly, one of the other. And I think this plays to this, one of the strengths of HBAP. If you go, when I joined.

100% of what an MBA would, almost 100% would be learning by the case method. And there's a lot to love about the case method. I love the case method. Um, it's powerful. But if you're going to be an entrepreneur, there's a world of difference between prototyping and talking about prototyping, between selling and talking about selling. So what we've introduced in the MBA program over the last 10 or 15 years that. That I think has helped us train effective entrepreneurs is a bunch of learning by doing courses. Right. So, so learn to sell by practicing, you know, sales pitches, you know, and doing it with. With actual salespeople who can come back and coach you on what you did well and what you can improve. So, you know, product management course where instead of cases, we have the students design and, you know, give them $10,000 to go to Upwork and find somebody to build the thing that you designed. Of course, all hell breaks loose, but the dog ate my homework, you know, and, you know, the other thing that happens is you design a thing and then you find out from the person you've hired on upwork that they can build about half of what you've specked for $10,000. So, hey, product manager, which half of your dream do you want to give up? It's powerful learning. So learning by doing is big, big, big deal. And we're doing a lot better at it. At HBS now. So I'm going to go back to.

The book for my final question and I want to leave a lot of room for folks to talk and I've used up a lot of that time. So a couple of things before I ask this question is when you, if you have a question, raise your hand.

And keep it, keep it brief because Tom can only be here for another, what, two hours? Tom, I appreciate that. So the, the, an announcement before we go to. We said the first 50 people who, who, who came to, to the class who came to this, this thing tonight was going to get Tom's book for free. So we, but, but startups is opening up to everybody. So if you have, if you're here, you get one of Tom, you get Tom's book, basically. So Todd is going to put a link in the, in the chat where you can actually sign up for that.

Thank you. Thank you for that.

Oh, well, thank you for coming. Tom. This is such a treat. You know, at the end of your book, you know, you write a letter to the first time founders. It was my favorite part of the book and actually I got, when I got the audiobook, I just kept listening to that over and over and over again because it was, to me it was so wonderfully touching. What advice did you give the first time founders? Because many people here are in that category.

Boy, I should have looked at that letter. I haven't, I haven't.

Let me.

I could quote it, I could quote it if you want. I've read it so many times.

No, I, the book's never in my office. It's never more than a, a quick reach away. The, the, the advice. So this first time founder and.

What I, what I basically told this is imagine a letter to an imagined first time founder. And, and the point was you're going to get a bunch of advice. There's vast amounts in, in this group you've self organized this amazing group. You're getting a bunch of advice from a bunch of guest speakers who come in and among the things you're going to hear is just do it. That's an example. Sort of great entrepreneurs make things happen. So just do it and. Yep, that's right. And if you sort of all you do is analyze, you're never going to get anywhere but stop and think. Is. Was my advice to the founder. You know, you don't have to just do it immediately. Um.

You, you can fall into a lot of these failure patterns that, that I sketch in the book by, by moving without thinking. You, you get the advice a lot as an entrepreneur to be persistent.

You know, because basically great entrepreneurs just stick to it. And you know, if you do, you'll just sheer force of will. You'll get where you're going. There may be an 11th hour miracle that rescues you if you're persistent. Yep. And you'll hear those stories. But look, some point, persistence becomes stubbornness. It becomes you not listening to the universe telling you your idea is flawed and you need to pivot to something new. So, so you need to, it goes back to that balance between, somewhere between obstinance and ambivalence. You need to find that space. And persistence isn't always the right way to go. Bring the passion is the thing you hear. You should only be an entrepreneur if you're passionate about your idea. And yep, it's a hard, hard job. So you do need to bring the passion. But on the other hand, the passion can blind you to the fact that your idea isn't working. So.

Focus. That's pretty good advice. But if you focus excessively, you actually run the risk of the false positives that we talked about before. So you got to be careful and sort of keep your peripheral vision active while you're focusing. It's a hard job. Be scrappy. Sometimes you can be so scrappy you don't hire the right vice president of operations. That was one of the reasons my entrepreneur in charge of DOT and BOW got the wrong person, because the right person wanted an extra $300,000. And that was going to offend the entrepreneur's sense of, of what's economical. So you got to make those tough calls. So.

That'S, that's the kind of advice for the first time. Founder, you know, and.

But you know, the letter closes with basically like, look, you're going to have an amazing ride. You might fail, but don't worry about it because you're going to learn along the way. And if you sort of do your best, you're going to be able to tell your children that you gave it a shot and you built something that you're proud of.

Well, okay, I'm going to finish this off by reading your words, if you don't mind.

Sure, please.

Which means I've got to get some classes.

Hold on.

And it actually comes down to my favorite paragraph out of the favorite part of your book. That's it. You finish it by saying, so, founder, I hope that after reading this book, you're ready to get off the sidelines. It'll be an amazing ride. Creating something out of Nothing to do that. Think fast and think slow and don't lose sight of why you got behind the wheel in the first place. The world needs entrepreneurs like you to create jobs and produce the kind of innovation we need to solve society's problems. Go build something great. Best wishes, Tom. Thank you.

Thank you, Kelly.

Now we can open it up to questions. I know DJ is the only one up here with his hands raised, but I saw a lot of questions come up. Okay, nevermind. Good job. You guys are asking.

Yeah, I will.

If I may.

I'm going to just start calling a few people. So when we do the Q and A, please keep your questions on point. I'm going to bring DJ up. So DJ and then we'll go to Michael.

Great. Well, thank you for the great session. As I was hearing your dialogue and exchanges, one thing if you can talk to is how now.

Tom's got a button.

We lost dj yeah. All right, well we'll, we'll come back to dj. Let's go to Michael. Let me bring him up, Tom.

Thank you professor, so much. Just so many great things. But keeping it on point. You know, I just keep coming back to this idea. I love that you mentioned about pivoting and early strategy and you know, this you just said, you know, peripheral vision. I just wondered if you could share more about that in terms of this culture of maybe people's. I don't want to use the word blaming, but they attribute something as wrong that happened. Right. It's easy to see in the rearview mirror, as you said, when you're reading a case with all the facts like oh, they should have seen that that would have been a problem or we all know we should have turned left when we should have. Just your more, more on that. I would love to, to hear your thoughts on that. Yeah. So I don't know if this Michael's going to answer the question, but I can't resist. So the first time I tried to teach startup failure with cases, I wrote the whole story start to finish including the founders reflections on what went wrong. And I thought it was a great case and a great session. We do Net promoter scores. You probably had whether hbap probably use the same thing. And it was one of the lowest rated sessions in the course. It's like, oh crap. Like come on. And.

What I learned.

When I set out to actually build an entire course on failure, I really worried that like this is just going to bum the students out like failure after failure, you know, they're going to be clinically depressed by the time we get to the end of the semester.

And we didn't have that experience, we, we actually.

We figured out how to teach a failure case and what you do, you do two things. You end the case at a point where the entrepreneur, where there's still some glimmer of hope and the entrepreneur has to figure out whether to go left or right. And so now the student faces a puzzle and that helps. So they don't have the, they don't have the rear view mirror to look into sort of the founders reflection like the brutal ending of the thing and the founders post mortem. But the second thing I learned, and this I think gets to your question a little bit, is if I bring the entrepreneur into the classroom and you may have had on HBAP the experience of talking about the case for 60 minutes and then the guest comes in for the last 20.

Somewhere in my past, my long past at Harvard Business School, I concluded that that was kind of a stupid way to teach. Like you have a CEO of an entrepreneur, a founder in the room and we're talking about things that they could shed incredible light on. So bring them into the conversation right from the start. You have to coach them so they don't take over and so they don't give the answer so that they actually, you coach them to learn to splash a little gasoline around as we're stoking fires and getting you all the disagree with each other and think hard about what's going on. And it turned out when a student meets the failed founder right up front they go like, wow, that person's impressive. And wow, look at what they're doing now. Because invariably they bounce back and they're doing something cool. And that goes a long way to dispelling this notion that this was a flawed human being who just was hopelessly inept and this thing was doomed from the start. Now the students face a puzzle because they compare themselves to that entrepreneur and they say, I'm not sure I'm as polished or as smart or as experienced as this person and if I want to be an entrepreneur and they failed, how am I possibly going to. And I better pay attention here. I'm not sure I answered your question, Michael. Can I. No, that was, honestly I was asking just for more of a, a great topic that I think deserved that response. So thank you so much.

Thank you. Thanks, Michael. I'm going to go to Andrea and then we'll go to Simon next. Let me bring Andrea up to the stage.

Andrea, thank you.

Hi. Well, thank you, Professor Tom this was a great session and thank you Kelly too for this.

The entire session was, it was like taking me back to my years as an entrepreneur with the ups and downs and, and all the experiences. I, I, I took my account to zero, then I have to make, pull it back up many times like you said, you end up in, in this. Oh my God, I need to, Is it time to leave? Is it time to stay? Is it, should I just let go? Is it my fault? Is it not my fault? So as an, as an entrepreneur, you, you know, your emotions run while and I managed to keep the company running for seven years and actually managed to create my first five people team just this past month. But it's something that, and I've also felt my first attempt to become an entrepreneur.

But everything that you just mentioned in this session, it is real, it is true and pivoting every time, every time we think we fail because we fail or we want to launch fast and then we fail or somebody launches before us and then we have to slow down or we market first and then the competition comes and puts, puts us in this fight and we had to learn how not to, not to get, not to get.

Overreacting with the competition, with the other launches first or all these things that happen around us to help us to keep on track of what we needed to do. And most importantly the customer. It has been very important to mark the differentiator to give that attention to the customer for us to keep us competitive. And as a consultant, this is something that you mentioned, I'm also a consultant and when I try to help many companies strategize and they are technology companies, they do think that they don't need a strategy because they think, oh, I do have a, I do, I have an, A, a platform, I have a technology out there. I don't really need to understand my customer, my, my, my market feed because I'm already in market, I'm already making money. I don't need you. So I've encountered these challenges with startups that are already out there and they don't think they need a strategy for, for their next stream of customers because they think they're doing well and along the way they end up failing sometimes. But.

It'S a fun world to be in and I really, really appreciate everything you said.

Yeah, thank you, Andrea. It sounds like you've learned a lot from your founder's journey. So two things you said sort of trigger different thoughts. One is you sort of mentioned the shutdown decision whether to keep going and.

We didn't spend any time on that. But boy, a thing I learned along the way with this research is a pretty large fraction of failed founders. If you ask them if they waited too long to pull the plug, to shut it down, they will say they wish they had done it sooner. And it's hard, it's, it's so hard to figure out whether, because basically, as human beings, we're wired up to be hopeful. So you hope for a miracle.

You've got to try a bunch of things that sort of came through in what you just described. You got to try. If you're struggling to pivot, that takes time to see if the pivot's working. You got to try to sell the company and you're going to get positive early signals. When you first try to do that. What competitor doesn't want to look at your company? Right. So you're going to get a bunch of expressions of interest. But, but that can be just people sort of wanting to see, like meet your employees and see how much you pay them and so forth. You got to try to raise money. That takes time. And, and so, so there's, there's just the sheer passage of time. But, but the decision to shut down often is delayed longer than it should be. The entrepreneur really needs to ask a few questions. Are you out of moves? Sometimes you just can't think of anything else to try. Are you truly, truly miserable? And I don't mean miserable this morning, but I mean miserable for the last several weeks where you just get out of bed and the thought of going in and facing that struggle just has you down. And back to the letter to the first time founder. The dream that got you going in the first place. Are you still pursuing it? Sometimes after a bunch of pivots, you end up in a very different place from the place where you started. Thanks for triggering those ideas, Andrea.

Thanks, Andrea.

All right, let's go to Saima.

Hi. Thank you, Professor Tom.

And thank you, Kelly.

I was extremely interested in the dialogue.

Around false starts and I was wondering.

In your research if you came across the breakdown in statistics for fall starts in regards to demographics, gender, age, race.

I know there's not a lot of data out there, but I was just.

Wondering your thoughts on that.

Thank you. Yeah, not that granular. The database just wasn't big enough or reliable enough to do. But I got very interested in the gender question and you had to go to the bigger data set. All of PitchBook. There's literally tens of thousands of startups profiled in Pitchbook. But As I said.

Only so many of those are seed stage and only so many of them have talked about going out of business. If you look at.

Gender profiles in terms of who fails, female founded startups are no more likely, in fact possibly less likely to fail than male founded startups. So.

It'S a tricky question and I think it's undeniable that there's gender bias in the world of venture capital that VCs are not 50 50, they're nothing like 50 50. And.

I think female founders have a harder time raising money. So you might have actually expected for those reasons because they're under resourced for the failure rates to be higher. Right. Because they're trying to, you know, again it's this levitation act. You're trying to build something out of nothing with, with inadequate funding in this case. But the conclusion I came to, I don't know if this is the right conclusion was the female founded businesses that did manage to raise venture capital because they face those barriers were unusually strong. So, so and hence more likely, you know, even despite some of the, maybe, maybe facing some headwinds.

More likely to do better just because, because you know, these are very strong entrepreneurs with really good ideas that manage to get through the, the challenges of, of raising venture capital in a male dominated business. Thank you.

Thanks Saima. Let's go to Amid.

Yeah, thank you for a great conversation. So I'm going to preface my comment by saying that my background is engineering. Engineers are typically risk averse.

But I think you know, there's a value to, to having some weight, you know, holding you back at times. And what are your thoughts about a true entrepreneur to team up with somebody who's less optimistic and, and, and a little bit more risk averse. I know that's not a, probably the good topic for this group but you know, a lot of times having somebody that, that sees things from a different perspective will give you, will give you that advantage of being able to pull the plug at, you know, at the right time or to provide some metrics that would help you not go down a rabbit hole for too far. Yeah, no, Hamid, I loved. I'm not sure I agree. I know a lot of Nishia Gassi, the.

Entrepreneur that built Better Place. We were talking about the electric car charging. He's an engineer. So there, and, and Elon Musk is an engineer. So there are some engineers out there willing to take profound breathtaking risks. So but, but I love your insight that a team, a founding team needs balance and.

That I think you see it in the best teams. You know, the, the visionary wants to push and, and the person who says, but wait, you know, are we really sure? Diversity is really, really important, you know, on, on many dimensions and that's one of the most important dimensions. Sort of the, the, the propensity to take risk and, and a strong co founder. You need ultimately co founders who, but somebody in charge, you know, and if it's the, if it's the conservative person who's in charge, I think you can still build a great business, you know, and, and you, you may have the person who's willing to take the big risk frustrated, but they'll win often enough to hopefully stay in the job.

Thanks Amid.

Let's go to Dean Professor Tom. Fantastic Kelly. Well done. Tom, I want to put a scenario to you. So you're at your first million. You're the founder.

At what stage? So you got friends and family money and you know, you want to get into series A round. At what stage do you consider getting a really good strategic cfo? So you're the person who just wants to keep growing the business. You don't like raising money because it means you feel like you're slowing down. You want to build a product. At what stage do you get a really good board with good independent advisors and then you get that good CFO to help you raise that money? Yeah. So, well, your numbers are.

These days, the first million is a pre seed round and.

The seed is often 2 and the series A is 5. So all the numbers have changed and really scary ways.

You know, my experience is the, the head of finance role changes a couple of times over the course of the first five years or so and in fairly predictable ways. And it'd be a surprise if it's the same person who can do what needs to be done at each stage. At the first stage is basically just bookkeeping. Right. Somebody has to keep track of the cash in and cash out, particularly since you're probably cash strapped and it may fall on the founder to do that. It's not a bad idea for the founder to be so close to money in and money out that they're literally keeping the books at the same time.

As you go on. There's another stage where the vice president of finance is.

Putting some discipline, particularly if you start to ramp up marketing and you're doing performance marketing where you're going to spend a lot of money on paid marketing.

You may have a marketing team that's very, very analytical and has the discipline to keep the ratio of the value of a customer to the cost of acquiring a customer in line. But a finance team can really play a powerful role in business analytics. HBAF and the kind of analytics are going to be cohort analyses, right? We sort of, if we look at the October customers, their retention rates look like this. And if we compare them to the people we acquired in November, where we use somewhat different marketing approach, they either look better or worse. Very analytical. Sort of a team in finance that's good at that. You don't need that at the beginning because you don't have any customers at the beginning.

And.

The role will continue to evolve. And basically as you get to later stage, you're starting to raise big amounts of money and again, it may fall on the founders to manage the fundraising, but a strong CFO can, can make a pretty big difference at that stage. So I would say you don't need a really talented CFO who's going to start to play, if you will, the controller role until about year three.

You know, when you've hit 50 or 100 employees. Thanks, Tom. That's exactly been in that exact position. That's exactly what we did. We, we did that where they went into turn to our third one once we hit that 5,10 million rise. So. Thank you.

Thanks, Dean. All right, I think we got DJ back.

So.

Dj.

Yeah. So my question was that how do you not get caught up in that evaluation? You know, because as part of your dialogue, maybe you didn't. Could you just talk in terms of the evaluation context and when do you kind of start looking at it and how do you not just get caught up in that game of evaluation?

You mean the dollar valuation of the equity? Yes. Yeah.

Well.

You know, every entrepreneur as they think about fundraising.

I stole this line from my senior colleague, Bill Solman, who is the been teaching entrepreneurial finance at Harvard Business School for. For literally decades. He talks about a horse race between fear and greed.

And.

The greed part is if we.

Wait longer and reach milestones, we can get our valuation up.

And if we limit the amount of money we raise at a lower valuation now, before we get our reach the milestones to get our valuation up, I will suffer less dilution of my equity stake as the entrepreneur. So I'm going to be greedy. I'm going to raise just the amount I think I need to reach the milestones, and then when I reach the milestones, I'm going to raise more at a higher valuation, suffer less dilution. The fear is.

I thought it was going to take me 18 months to reach the milestones, build the product, you know, come up with a marketing, go to market strategy that's going to work. And it now took me 24 months and because I was greedy, I only raised 18 months worth of capital. And now I'm desperate and scrambling and the investors can sense the blood. They can smell the blood in the water. So.

I don't think it's so much getting caught up in valuation as it is making a sensible choice about this balance between fear and greed.

And that, I think, is a harder problem for the entrepreneur. I mean, if you're lucky enough to be dazzled by the valuation that's out there. The other question you have to ask DJ is are you in a bubble? Right, There's, I mean, we're, we're operating in an arena where bubbles happen a lot. And.

As, as an entrepreneur, it helps if you're like Kelly and you've been around the track a few times and you've sort of seen how bubbles come and go and how they can float for a bubble can float a long time before it pops, you know, and.

So that's the other aspect of, of dealing with valuation that I think you have to be careful about, because you can do some very stupid things in a bubble. When the valuations are high, you can raise a lot of money and spend a lot of money foolishly and get your burn rate up to the point where when the bubble bursts and there's no more capital available, you've been burning so much cash that you can't adjust and you fail. A lot of startups have failed from raising too much money at too high A valuation, by the way, when the third thing to think about is when you raise at a really high valuation.

Kelly talked before about the clock running. There's a different clock running when you raise at a high valuation is your next round's got to be even higher. And to reach that, reach that higher valuation, you got to accomplish a lot. I mean, a typical step up from round to round is going to be one and a half times, two times the share price of your last round. What do you have to accomplish if you were overvalued in your B round? What do you have to accomplish to make C worth twice as much as B was? That's really a prescription for an entrepreneur getting into a lot of trouble. So I don't know, the advice is to think about all those things and have somebody on your board who can reel you in if you start to be too starstruck by, by the, by the money people are throwing at you doesn't always make sense to take the highest valuation in investment that you're offered.

I don't mean to interrupt, but Tom, how are you for time? We've got six more questions here with our hands.

I can keep going. I'm having fun if people want to hang around.

Okay, good enough.

Thank you.

All right, cool. I'm going to go to Jorge.

Let's bring him up here.

Thanks, Todd. Thanks, Kelly. And thank you everyone for putting this together.

Seriously, this is epic.

Professor Eisenman, it's quite an honor. So.

When I first read your book or listened to it, because I actually had it inaudible, I'm the kind of lazy person nowadays who believe in that sort of.

Startups or technology. I couldn't avoid making parallelisms with a book that was published probably 20 years ago, published by Darwin Nazimoglu, why Nations Fail. I'm pretty sure that you, pretty sure that you read it as well. So of course in the parallelism will always be very loose. But, but I think that, that there's a, there's an amount, there's an amount of philosophy that, that applies probably to, to the very science of failure. Right? And.

And.

You said things.

That are very.

The strike and of course, I mean they bounce back and forth in my head and trying to get things organized like greed, for example. The driver is the driver for creating startups.

In the United States, for example. Is it only greed?

Right.

I remember one of the most significant examples in your book, the Jibo. Is it. I don't know if you recall. It's Jibo. Jibo robot. It's Jibo, I think.

Yeah.

And I saw a prototype of Jibo in Miami because I happened to meet a gentleman who had invested in the company and I found it significantly incredible. And then again as you tell the story, then Amazon comes about and offers the same, the same functionality with a very different experience at a very, at a much lower price. But fast forward five years or six years and, and Amazon says that they over invested, overestimated and they're pretty much divesting. Now on, on Amazon, however, the, the, the very, the very concept of providing a companion, someone to an elderly or to a child is very powerful. So, so my question, you're. You're in economical sciences and maybe I'm bringing too much of, of philosophical, of philosophy. Philosophy, science here. The question is, does it. Must it always be measured under how much money, how much the return on money will this startup bring about would have been. I mean now there are several Robots out there much cheaper, but they're doing the same thing that Jibo did back then. And they do coexist with other assistants, like Amazon or like the Google Echo.

Yeah.

So back to the point you made about why nations fail. I haven't read the book. I probably should, but the book is called why Startups Fail. Exactly. Because of that book you mentioned. My. My editor.

A secret for anybody who ever wants to write a book is you don't get to title the book. The. The publisher who paid for the rights to the book reserves the right to call it whatever they want, and you can fight with them over that. And I didn't fight. I. When he. When the editor suggested this title, I thought, like, wow, that's. That's right to the point. So I love the title. I wanted to call it False Start, and I think the editor thought that was a little too cute and too obscure. On the greed point.

I have two responses. One is, when you're doing something as ambitious as Jibo or better place, you know, we talked about the charging stations. You got to keep the finance on the radar. Right. Because it just took a huge amount of capital to design and build that robot. It's a marvel of engineering, and it made some people truly happy. People who had jibos loved them. They held wakes when the company shut down. They actually had a funeral wake for their.

But I don't think you suggested along the way that greed was driving a lot of the entrepreneurs. I don't think that's the case at all. I actually think.

It'S quite rare for people to become entrepreneurs because they want to get rich. I think they want to put a thing in the world for the challenge of doing that. They've got an idea. And I think a lot of entrepreneurs. So there are two things. There's passion for the problem, which I think motivates a lot of entrepreneurs, and there's just the identity of being an entrepreneur. I am a person who creates something from nothing. And, you know, I mean, surely there are people out there that are motivated by greed. I think if you look at the world of crypto and web three and so forth, there's a whole bunch of slippery businesses that, you know, were probably created by people that were looking for a quick buck and. But there are also a lot of crypto true believers who believe it's a way to democratize finance and believe that it's basically the future of the financial system. So, again, it's kind of complicated, but thank you for reminding me of why nations fail.

Well, the intervention was worth something. But then one last question, because at that point, this is exactly. And I'm sorry that I'm taking over again, but that is exactly the point where I wanted to, to reach to what. What is the difference between someone who puts a hundred thousand and by the way, my name. My name is somewhere eluded along the pages of your book. I am a case study as well.

So what? Why would someone decide to put 102,000, 1 million or how many billion did Theranos dead right to dump and then to burn them right into something that they believe instead of putting all that money into buying lottery tickets? For example.

If I put $100,000 in lottery tickets today, would I, would I have made more money than I, than all the money that I lost in the startup that failed?

You know, it's a complicated thing. If you invest in a basket of startups, you're now acting like a venture capital firm and venture capital firms on, on average they, I mean, there are periods where it lags sort of similarly risky investments in the stock market or so forth. And there are periods where you do better. But yeah, I think we have to separate the investors in startups from the entrepreneurs. I think the investors are motivated by trying to get a return, you know, and sometimes they're motivated by emotion. You know, Elizabeth Holmes was dazzling, compelling. You know, she, she spun out a story about how she was going to change the world and people believed it. So yeah, they were trying to make a lot of money, but I think people also probably believed they were backing a visionary entrepreneur who was going to make a huge difference.

It is philosophy. You're right.

Thanks, Jorge. Kelly, you have your hand up.

I think Satya is next, then Gordon, then Susan, then Alan.

That's the order. Let me bring up Satya and then Satya, you're up.

Thanks, Todd. Hello, Professor. Last fall I met someone in the HPS entrepreneurship so summit that you shared who raised $25 million.

Just within a few months of company coming fresh out of HBS mba. Three questions from that. How common is is it that HBS MBA pass ups raise such money? Second is.

What?

What?

Or rather, I'll limit those two questions. You already answered the downside question that I was going to ask for. DJs question, what benefits would one get out of raising so much money considering her equity would have got diluted so much with the $25 million rise so early.

So in terms of how common, I mean, that would. That amount of money is very rare, right? Most, most MBA ideas are going to be either in software or services and you simply don't need.

You know, it's probably three years before you need that amount of money in a typical, whether it be B2C or B2B software based business. So I'm not sure what it is. There are tough tech businesses out there.

Tough, think of tough tech as or life sciences businesses. Tough tech is sort of the unhappy combination of profound technological uncertainty and profound market uncertainty. Software usually, usually you can build the thing but there may not be demand. Biotech.

Usually you don't know if the science is going to work but if it does, if you can solve that condition, that medical condition, there usually is demand. Tough, tough tech. Space tech, robotics, material science, space stuff, clean tech solutions have got the confluence of high technical and market uncertainty and usually require lots and lots of capital. So this could have been a tough tech business if it's in life sciences. You do need $25 million to basically get through the first couple of rounds of trials.

So.

I can't remember the second, there was second part of the question.

The second part of question is why would a founder accept such a high amount? What?

What?

Yeah, yeah. I mean the answer is you shouldn't. If you don't have a, if you don't have a, a reason to have 25 million, you shouldn't take it. You're going to take unnecessary dilution unless people think you've, you know, that you've invented something spectacular.

In which case.

I can't imagine why you were at Harvard Business School if you're that talented.

So yeah, it's confusing. I mean more typically we, we, we probably out of Harvard Business School.

Have.

There might be.

If it's 10% of the class founding, that's 90. Some of them will do it in pairs. So there's probably 50 ventures that get started and the vast majority of them are going to start with a friends and family round, you know, a small seed round under a half million, you know, and, and hope to raise a bigger seed like a two million dollar seed within a couple of years. What you're describing is really rare.

Thanks.

Thanks Satya. All right, let's go to Gordon.

This is, this is really great Tom, to be able to meet you.

So I, in your profile, your HBS Rock center, you're also on the innovation side. And, and, and the reason why I bring that up is because on my team I've got Ron Tarazas who's the HBS grad in the class of 1976 who never took a job and only was an entrepreneur. He's one of the rare few. He's my partner who hands me on my birthday last month the Crossing the Chasm book. So, so talking about serendipity, in the same week that we're meeting now, I had a meeting with, with Tara Pillai in the Innovation center because my other partner co founder is Jesse Puts, who, who is a rising junior who's now a Goldman Sachs intern. And I'm an HBAP person who came here and. Yeah, that's right. Second book, best book ever. And so I had the meeting with her on Monday because I'd like to. One of the things I did was speak for both sides on the Harvard NBC and I presented through the Rock center and went through their, their, their ringing right, all the things I should say. And then I lost. Well, I made it through all the rounds until the finalists out of New York. And then I lost. And I knew I lost so that the following day when I had to present for ToughTech, I basically threw everything I was saying away. And what I said to them was, I think that we're all going to go to hell if, for example, a fire were to show up in somewhere outside of New York or Boston and this huge plume would happen. And I'm pointing to Yellowstone because I didn't know about Quebec. Right. But I said if what happens in California would happen again. And my tough tech idea was to avoid chlorinated and brominated compounds. Very tough technology. When things burn and they contain chlorine, that's a bigger problem than if they didn't burn and they contain chlorine. Because when they contain chlorine, bad things happen. But can we avoid that? And so it was at that moment, and my question to you is, I threw everything out and we won, right? We won the tough tech. So your point about there is no, there is no certainty certainty or an algorithm. I lived right through it, you know, and then when I met with Tara, she said, well, why would you want to do anything with innovation like high labs? And my answer was because Jesse is going to take over this whole thing. I don't have a reason to, to do any of these. I mean, I, I'm kind of bored. I'm, I've been an entrepreneur several times. I'm incubating this through my real estate, you know, but looking for some of these data sets, handing it to the undergrad, distracting her so that she doesn't end up working at Goldman Sachs eventually for the rest of her life. That's more of My. And Tara didn't know what to do with how I responded. So it was like, it's like, oh, this is. And so my whole thing is can. My question is, can you help me help the undergraduate? Because Mike Smith certainly did that where I'm helping to, to coach the engineering on the carpeting thing the other day. I just want to help. Right. And to pass on this baton with no other reasons. We're raising funding, we're doing all kinds of things. But imagine if we can inspire our next generation because for them, they've got more time than me. So that's my question is can, can, can I count on you to help me pass that on to the undergrad through high labs?

Yeah. I mean, to, to answer this in a way that would make sense to everybody, I'd have to describe the culture at the college and what we've tried and what's working and what we've tried that's failed. But please, thank you first for caring. Because it's hard to be an undergraduate at Harvard College and want to be an entrepreneur. There's, there's a strong perception that, that you're not at college by the people that sort of designed this college, if you will, the.

Administration, that, that they're forging citizen leaders, and it shouldn't be a professional school, you know, so there's no business major for those of you sort of curious about Harvard College, whereas at a lot of places you can actually major in business and if you major in business, you can concentrate on entrepreneurship. No such opportunity for Harvard College. So, yeah, we're at the Ilab, thinking hard about how to serve that group, how to support the clubs that are interested in that.

One of the things I got going at the business school, anybody that's connected with Stanford will have, have heard of the Mayfield Fellows. And it's, it's a program for an elite group of, of Stanford undergraduate engineers who get some exposure to business. We've created something similar for the college. So if Jesse a junior or she's.

A rising junior, and one of the criticisms at the HBS Rock center when I was applying was they said, like, why you've gotten this far, what is she going to do? And my answer was she's going to outlive my purpose.

Yeah.

I like that. And yeah, I mean, we've all got a responsibility to the next generation. I'll stop there, though. Gordon. Just tell her to take a look at the Harvard College Tech Fellows program and apply to it. She could join it as a senior. This is an Opportunity for undergrads with technical background to spend time at the business school. They have the kind of experience you all have had in HPATH by sort of being around like minded individuals.

So anyway, thank you for that.

Yeah, thanks Gordon. Susan and then Alan.

Yeah, Tom, this, this was so excellent. Thank you. Thank you so much for your, for your insights and your advice. And so my question to you is, given everything you've just talked to us about, how might you change that advice or weight it differently for founders who are women or people of color? And I ask this not just for us, because there are many of us in that category in this group, but also for all the other folks in other categories that are part of our teams that are co founding with us that may not really understand.

That there might be a different way that we need to think about what we're doing and how we're doing it if we are women or people of color.

Yeah.

So.

I wish I'm going to address the gender question because I think I understand it better than some of the barriers, the challenges that underrepresented minorities face when, when they, when they try to raise money and try to build a business. But, but I suspect there's a lot in common between the two sets of challenges.

The.

For women, I think it's important, you know, if I could go back to the Quincy team for them to realize that there's more money out there to support entrepreneurs than just venture capital. And I think that's important thing to keep on radar. There's also.

Been some really interesting academic research done by my former colleague Laura Huang, who has studied the pitch patterns, gender patterns in how entrepreneurs pitch. Laura and her co authors learned something very interesting that I think it's.

Really quite crucial for a, for a female founder to, to understand and, and for the people who invest in them.

So she found that when male founders pitch, they are posed questions from the investors that can be described as promotion questions.

Wow, how are you going to shoot this rocket to the moon? And when you get there, how colorful is it going to be? How much money are you going to make me? All these things. When female founders pitch, they are asked prevention questions, how are you going to not lose all my money? How are you going to guard against this risk and that risk?

Basically, if you let those male founders describe the fantastic opportunity they're pursuing, answer those questions, they're going to look a lot more interesting than the females who even if they've got compelling answers to all the risks and what they're going to do about it, you know, you've now just sort of put on everybody's radar a whole bunch of reasons to be concerned. And by the way, these gendered patterns to the questions, those questions are just as likely to come from male investors as female investors. So it's. But, so I think if a female investor wants to raise venture capital, wants to raise from professional investors, they need to expect this. And there's a little bit of judo they can employ which is sort of taking a prevention question and twisting it into, so they can get the promotion elements into it. And Laura and her co authors have been very thoughtful about how to do that. So that would be the advice I'd give.

Thanks, Susan.

Yeah, great. Thank you.

All right, Alan. And then we'll go to Krisina. And after Krisina, Kelly's got the last question.

Thank you. Thank you, Tom, for the, the knowledge.

The wealth of experience and understanding. Much appreciated.

Quick question.

An innovation startup wherein the founders, a.

Multi founder innovation startup where the founders plateau, certain founders, when do we shed them? And then how do you have that.

Conversation where you don't burn long term bridge.

Yeah, rough problem. And you, you see this over and over again.

Especially when the team is three or more.

And.

It'S often the case that the investors will push to get some of those founders out because they sort of, they just make things more complex. If they're on the board, they're taking a board seat. Even if they're not.

You know, there's sort of, Are they really adding value? Are they just complicating things?

You know, most of the firms I've seen the, the lead founder, there's usually, there's usually a lead. That person's almost invariably the CEO will out of loyalty structure a role. And it depends on the, the ability of the founder on the receiving end of all that to sort of read the signals like, you know, you're no longer qualified to run one of the. Marketing is too big, it's outgrown you. Operations is too big. We need a professional ops person in there, you know, so what role can we provide that's constructive where you can still add value if it gets to that point. You know, I, I have seen founders just sort of counsel the other one out. I, I mean I, I'm, I'm not sure there's an easy answer to how to do that gracefully and you know, without bruising egos and, and hurting feelings and damaging relationships. But it's a real problem. You flagged a real problem. I mean what I would do is frankly, in that situation. There are a lot of startup coaches out there, people who are trained professionally, you know, they're like group therapists sort of come in and they've seen the patterns in startups. They know how to, how to coach all the parties to sort of reach a chord. And this sounds like a perfect, perfect way to bring in a startup coach. You know, It'll cost you $20,000, but it's probably money well spent. If your, your startup's big enough and healthy enough to have gotten to that stage, you can afford that one. Do you ever, do you lose a.

Long term with acquisition when you carry joyriders along or is it just better.

To root them out?

I mean, if they're really not adding value? Yeah, you.

Yeah, I mean they have to go. So I, the, the situations I'm thinking of, the person's, the intentions are good. It's just.

The, the company has outgrown their ability to run a big part of it.

Thank you so much, much appreciated. Thank you.

Thanks Alan Geina.

And then we'll go to Kelly.

So first, thank you Professor Tom, for sharing your knowledge. And my question for you is, since you released your book, what, 2021, right before pandemic started, is there anything you unlearned since then and you think, oh, I was wrong about this or is.

There an example of a startup where.

You said, you know, they didn't meet.

This question criteria, they were not ready.

Maybe didn't have enough funding and yet they succeeded? Is there a lesson learned or lessons.

Learned from you from writing this book?

Yeah, I would say, I mean there's always going to be.

People that got into trouble and got out of trouble. You know, they look like they were going to be, I mean the book actually includes a few examples of, of, of people that.

Were down the path, one of the failure paths and, and managed to avoid it. So I would say what's been, what's missing from the book and what I would spend a lot more time on if I had more time if I wasn't building other stuff at the school. The failure patterns for science based businesses are very different. I don't really touch on it in the book but I've, you know, through some of the other work I've been doing with the engineering school and, and our Ms. MBAs, we've got a joint degree with the engineering school, spending a lot more time with tough tech businesses and it's a whole different set of challenges and failure patterns. So I, I would say the book doesn't address that at all.

And There's a lot more work to do to understand that set of challenges. The other place is not for profits. So the failure patterns in ventures that seek social impact and usually not for profits, but they can even have a for profit motive. But if social impact is front and center, there are distinct failure patterns. They're distinct. There. There's a lot of overlap with what I talk about in the book, but there's also some things that are truly unique to that world and I've started to learn about it. But. But it's fascinating stuff. Yeah. Those. Those would be the two places where I push deeper and would learn some new stuff.

Interesting. Thank you.

Thanks, Krisina Kelly.

Yeah.

First of all, I'm going to thank everybody who came. I mean, Tom, you're getting a good view of the HBAP community. These are all graduates from hbap and we stick around and hang out with each other every Wednesday night to hear amazing, wonderful speakers like yourself. Second of all, Tom, thank you so much. I really appreciate the time you took. You're way over time. We tried to get you here to. You're 45 minutes over, basically. So appreciate the time you took. You are an inspiration. Say it again. My favorite book.

All the others are probably embarrassed right now that you came out with yours.

And jealous about it. But thank you. Thank you, thank you.

I can't thank you enough.

I'm probably going to be in your neck of the woods here in about the next few weeks.

It's my turn to take you to.

Lunch and I appreciate it. Look forward to seeing you. Thank you for suggesting this.

And thanks to everybody who helped organize it and to all of you for spending wherever you are. It might be evening, it might not be, depending on where you are in the world. That was a lot of fun. So go build great things. I'll say goodbye now. Thanks.

Thank you very much for this. This was priceless.

Yeah. Thank you so much. Just terrific.

Yeah.

So I appreciate it.

Thanks, Susie and everybody. Thanks, Professor.

And we're going to end the recording here. Thank you all for joining us. Please do stick around for some overtime and don't forget, we'll be back here next week with Ashley Wilson. So thanks.