Tom Eisenmann, a Harvard Business School professor, explains why startups fail using a framework that evaluates whether the opportunity is sound and whether the team has the right resources. Most failures come from misalignment: a great team that can't find a market, or a real opportunity that runs out of money before proving it works.
Chapters
You've been doing this now for what, two, three years? You've been looking at this in a systematic way. Do you actually have a handle on why the vast majority of 75% of startups fail?
I get to be an academic. We like to define things. So one of the first things you have to do if you're studying entrepreneurial failure, you have to define who's an entrepreneur. And I won't go there. But it won't surprise you to hear that people actually disagree about what is entrepreneurship. And of course you also have to define failure. But the question is from whose perspective? So you know failure is it from the founder's perspective? If the founder's goal was to build an amazing product and that some people would love. And then when you look at failure, you also ask questions about what outcomes. So does a company literally have to go out of business? Not every company fails, of course. It's not an endearing term, but a lot of investors will talk about zombies sort of companies in their portfolio that they know will never yield a return to the investor, but they're making it enough money to keep going. So is that a failure? I settled for the project on a definition of failure, which I think will ring true to most venture capitalists, which is early investors did not and never will make money. So that was the definition of failure.
To your question of do I have a framework that leads you in the direction of okay, why? And there's a easy answer. Approximate cause of death, like if you're a forensic investigator, loss of blood. Right. The company ran out of money trying to find a good opportunity and couldn't raise more. So loss of blood. Why? Well, a gunshot wound. Okay, why? What's going on? Was it self inflicted? Was it a jealous spouse? So you really. It's. It's like Toyota production system. Five whys. When there's a problem in the factory, you just have to keep asking why. No single cause. But there are patterns and I saw some patterns repeated with early stage failures. So I don't, I wouldn't say I have a framework, or at least not a newly invented one. When we teach MBAs at Harvard Business School how to diagnose the prospects for an early stage startup, we use a framework we call diamond and square. There's a diamond that represents the opportunity and the four corners of the diamond, if you will, are it's a.
Mnemonic device to help people remember. So the corners, customer value proposition, the go to market strategy, technology and operations. So how are you going to build the thing? And deliver it and then the cash flow formula and then surrounding the diamond is a square which represents the different folks who have to contribute resources, the founders themselves, the rest of the team, outside investors and strategic partners. And so we teach the students to ask.
How does the opportunity look, how do the resources look and are they in dynamic alignment? Do you have the right resources in the right quantities to actually pursue this opportunity? And that's where the exploration of early stage failure gets really interesting because what I found were.
Some teams that had mobilized a great set of resources, strong founders, great team, supportive investors but that team never managed to find an opportunity, a good opportunity.
And then at the opposite end I.
Found teams that really had often through lean startup techniques identified a great opportunity and validated demand for a solution but they weren't able to mobilize the resources to capture it. So those are two of the failure patterns that I saw.
