Why Startups Fail With Thomas Eisenmann and Dean Shepherd - IDEA Week 2022

Welcome everybody. I hope you had a great lunch. I'm honored to be the emcee today. My name is Iris Hamill. I'm the Executive Director for rise, which stands for Regional Innovation and Startup Education. I'm pleased to.

Introduce you to our two speakers today. So we have Speaker Thomas Eisenman. Thomas R. Eisenman is the Howard H. Stevenson professor of Business Administration at Harvard Business School, Peter O. Crisp Chair, Harvard Innovation Labs and Faculty Co Chair of the Harvard Business School's Rock center for Entrepreneurship, the Harvard Ms. MBA Program and the Harvard College Technology Innovation Fellows Program. Eisenman teaches the MBA Elective Entrepreneurial Failure and the Ms. MBA Core courses Technology Venture Immersion and Launch Lab. In recent years he has served as the Chair of Harvard's MBA Elective Curriculum, the second year of the MBA program and and as course head of the Entrepreneurial Manager taught to all 900 first year MBAs with colleagues. He launched the MBA electives making markets, which focuses on marketplace design, scaling technology ventures, Entrepreneurial Sales and Marketing, and Product Management 101 in which students specify and supervise development of software application. Eisenman also created the January term Startup Boot camp for the first year MBAs and the MBA electives launching technology Ventures and and Managing Networked Businesses, which surveyed strategies for platform based businesses that leverage network effects. He twice co led a Harvard Innovation Lab course, Cultural Entrepreneurship in New York City, in which students from across Harvard spent a winter break in New York exploring new ventures in fashion, food and fine arts, and co led four similar winter break trips to study entrepreneurship in Silicon Valley.

Welcome.

Thank you. I'd like to also introduce Dean Shepherd. Dean Shepard is the Ray and Milan Siegfried professor of Entrepreneurship at the Mendoza College of Business, Notre Dame University. Dean received his doctorate and MBA from Bond University in Australia. His research and teaching is in the field of entrepreneurship. He investigates both the decision making involved in leveraging cognitive and other resources to act on opportunities and the processes of learning from experimentation, including failure in ways that ultimately lead to high levels of individual and organizational performance. Dean has published papers primarily in the top Entrepreneurship, General Management, Strategic Management, Operations Management and psychology journals and has written or edited over 20 books. So please let's welcome our speakers for today.

Thank you.

Welcome Tom. Thank you. Dean, what did you think of South Bend so far?

Well, so I want to tell everybody that I'm honored and really excited to be here for two reasons. First is you, Dean. So I don't know how many of the folks with a Notre Dame connection realized that there's no scholar on the planet who spent more time and more rigorously studying entrepreneurial failure than Dean. It really informed the work I did in the book and the teaching that I'm, as Iris mentioned, I'm teaching a course called Entrepreneurial Failure. We bring Dean's ideas and so honor and privilege to finally meet you face to face and have this chance to talk. That's number one. There's another one, which South Bend is the Idea Center. So I wouldn't say I'm a connoisseur of entrepreneurship programs around university settings, but I've been to a lot all over the world. I've only seen one that is as good as what you've got here at Notre Dame. That's the technical university in Munich. Yasmina, who's sitting a few rows back, actually is affiliated. You've done an amazing job here of concentrating all the assets in one place. The tech licensing office, the accelerator and incubator programs, the academic programs. And most universities should understand, disperse this sort of scattered all around the university. And when you bring it all together in one place, it's really powerful. So hats off to the folks who had the wisdom to organize it that way. And my expectation for your community is you're going to see amazing things come out of the Idea Center. Already have, but I think you're poised for greatness.

So what should the Idea center do about failure? I mean, so a lot of these startups are going to start. Some of the failures might be avoidable, but some of them may not be avoidable. I mean, how should they manage that process?

So whether it's the Idea center, whether it's mentors working individually with the teams, whether it's coursework that they could do around the university.

I think the message of the book is that startup failure does follow patterns. And if you're familiar with the patterns, odds are better that you can anticipate and take some steps to avoid them. Entrepreneurship is just inherently risky. So if you can even get rid of all the mistakes, you're creating something out of nothing. The definition of entrepreneurship is doing something new with limited resources. So that's a pretty good prescription for failing. So you're never going to get rid of failure entirely. But there are many, many mistakes that first time entrepreneurs in particular make. And so if they're familiar with them, number one, and then number two, many folks, as you've written, view entrepreneurship as a career. So even if the first one fails, they're going to keep coming back at it and at it. And a constructive attitude toward failure can make all the Difference in terms of whether they have a rewarding career, whether the businesses are more likely to succeed around. So there is an art to failing well and to healing from what hurts a lot.

And learning from the experience, resisting the very natural human temptation to blame other people. That's the first response. And eventually own the mistakes, the part you've played in it, and to position yourself to sort of self reflect and figure out whether you should get back on the horse and do it again. So I think the idea center, I think our coursework, all of these things can, can prepare an aspiring entrepreneur for both to avoid the failure and if they are going to fail, to fail. Well.

Yeah. Okay. You mentioned getting back on the horse. I think the venture capitalists often talk about, you know, are you investing in the jockey or the horse? Yep. And I think you, you do briefly mention that in the book. Can you explain who's the jockey, who's the horse, and which one we should bet on?

Yeah, you can't go very far in entrepreneurship without running into this metaphor. So the jockey is the founder or founders, and the horse is the concept, the idea. And if you talk to early stage investors, most of them will say they bet on the jockey. And because the idea is malleable, and if you have a strong founder and a strong team behind that founder, you may be able to pivot from an okay idea to a great idea. And the research that we did for the book is basically, yes, both are important and they're actually connected in some pretty powerful ways. So.

We see jocking horses and oversimplification that actually isn't terribly helpful.

Let's get past that and really dig into if there are limitations of the founder, if founder fit with a venture as an issue, exactly what are the dimensions of founder fit that we should be looking at?

One thing I noticed in the book, when you were describing the examples, I thought a lot of these jockeys are from Harvard. And at one stage in the book, you also mentioned something about celebrity entrepreneurs. I wonder, you know, these guys were raising a lot of money and I'm wondering, was it the jockey or was it because they were trained at Harvard, or do you have to be a good jockey to get to Harvard in the first place? Right. So, yeah, what, what impact. Because they were talking about a lot of money being raised in those examples.

So the book, those of you, I hope if you're sitting on it, you'll pick it up and read it. It's, it's built around seven case studies, and.

Four of the seven have Harvard Business school founders. The reality is, when you write about failure, and you'll discover this in your research, it can be difficult to get people to be open and honest about this painful experience. And you know, these founders, these Harvard Business School founders, were former students, people I knew well, people who trusted me. And at hbs, we teach by the case method. So these are actually people that understood the value of putting a case into the book and making it available to others. So there was the issue of trust.

The others. Boy, it's a mix. I've got a Stanford Business School graduate, I have a MIT professor as one of the founders. Yeah, so. And all of the ventures, Dean, as you point out, are venture capital backed. In some cases, it's not a lot of money. The dog walking service didn't raise a ton of money. Raised plenty, though. And in other cases, it's one of the ventures raised $900 million before failing. This is an Israeli entrepreneur. And.

But so there's a temptation to think, well, the failure patterns here only apply to these really ambitious venture capital backed businesses. I don't think that's right. I think there are a lot of mistakes these founders have made.

By taking venture capital. In the course I teach on entrepreneurial failure, we bring in the founders, they come and talk to the students. And a thing we probably hear three times out of four from the failed founders is, I knew what I was signing up for when I took venture capital. A venture capitalist. And probably most of you are familiar with the model, but it's a model where a very small fraction of the investments work and those investments make a huge return, you know, often 5, 10, 20 times the original investment. And a very large fraction of the investments fail completely or you barely get your money back. And so the incentive for a venture capitalist is to push the entrepreneur to swing for the fences. And that's fine for an entrepreneur with 30 companies in their portfolio. For the entrepreneur who has just this one thing, you know, she may or may not want to swing for the fences if there's a safer path to.

Building the business. So a lot of these entrepreneurs in class came back and said, you know, I knew what I was signing up for in principle, but until you actually live with the pressure, you don't appreciate. So I think that is a lesson that may not apply more generally, but, you know, believe me, there are angels out there that will push entrepreneurs to, you know, and if you take money from friends and family, you feel pressure. So wherever you get your money from, if you bootstrap, you're feeling Pressure. So with money comes pressure, whether it's venture capital or angels or friends and family. So I think then the other failure lessons in the book, whether they're Harvard founders or venture capital backed founders, I think it extends to almost any kind of new business picking the team. Right. Does the founder really fit with the business? Do you understand the market? Well, now these are universal lessons.

The one thing I didn't like about some people talking about failure is it doesn't matter because it's other people's money. And in some ways, I'd prefer to lose my own money than other people's money. I think one thing in the book that you talked about that really made me think differently is how to fail well, and I think that kind of sounds like a contradiction, right? I mean, how do you fail? Well, you know, obviously you fail badly, but there's a right, there seems to be some sort of right, maybe ethical or moral way to fail. Maybe you could talk about that.

Yeah. We devoted the entire second half of this MBA elective on entrepreneurial failure to failing well, because we think it's so, so important that students understand this. And it has a few dimensions, the first of which is just actually deciding whether and when to pull the plug, which in the audience, anybody have a new venture that failed that they've been associated with? Yeah. So you all understand this. It's hard to know human nature, to focus on what's working well. And there's a whole bunch of moves you have to make during the struggle. You got to try to change the business. You may have to lay people off. You have to try to raise more money. So it takes time. A lot of founders don't really have anybody they can talk to about the struggle. And.

If you talk to your team, they may leave. It can be sensible to like, okay, this is not going well. If you talk to your investors and you're trying to get them to put more money and you need to be honest with them, obviously. But you are conflicted because basically the worse you make it sound, the less likely they are to bridge you to put in more capital. So it's a tricky business to be. It's a lonely business. It's a hard decision. People are counting on you, people who put the money in, your customers who love your product, the employees whose benefits their livelihood comes from you. And the very identity of an entrepreneur is somebody who persists. You're gritty, and if you throw in the towel, are you a good entrepreneur? So a whole bunch of many of the entrepreneurs we failed Entrepreneurs we work with waited too long, and that ends up, you know, takes too long for you to move on to your next thing. There's money you could have given back to your investors that you burned through. Your employees could have moved on to something new. So the first aspect of failing well is to get the timing of the shutdown right. And then actually when you shut down, we talk about in the course and in the book about a graceful shutdown. And that's one where you basically paid your employees some severance. It's the right thing to do, at least a couple of weeks, helped them find jobs and helped your customers move to another vendor, sort of doing the same thing. And you don't owe your investors anything. You'll see investors who actually we've had founders come through the course where the investors want to literally tithe their future earnings like, you know, you lost my money, so you're going to give me 10% of everything you earn? No, that's not the deal. But you can ask as an investor. But entrepreneur don't take that deal.

But you do owe them an accounting, and you owe them a thank you. And so there's then actually managing the shutdown responsibly and ethically, not running the bank balance down to zero, hoping for a miracle. And then the third big dimension is.

Actually making sense of the failure. So again, we are wired up to blame other people. Dean's a psychology professor. At the core in psychology, there's a thing called the fundamental attribution error. Anybody who's taken Psych 101 will remember this. And it's basically, if I did something wrong because I'm me and I hold myself in high self regarding, it must have been like the sun was in my eyes when I dropped the foul ball or somebody beeped a horn, it was somebody else's fault. If Dean did something wrong, it's probably because he wasn't trying very hard or he just didn't have the underlying skill. So when something is painful, as the entrepreneur will identify with the venture, they're intertwined. They are one and the same. And so if it fails, a big part of you has failed. It hurts incredibly. Grief, people, pain. People here have experienced it. Disappointment, shame, anger. And all those strong feelings make it hard to learn from. First off, to heal from the failure, to learn from the failure. Dean has actually written extensively about this process of how you actually learn from entrepreneurial failure. And the core of the advice you give is to alternate between rumination, reflecting on what happened and distraction, essentially finding something Else to take your mind off a side project. Hobby yoga.

Pick it.

And if you can alternate, if you only do rumination, you're going to make yourself crazy. I mean, you may become clinically depressed because it hurts so bad. If it's only distraction, you'll never learn anything. So the magic, and I think we owe a lot to you for the work you've done in this regard.

Is the learning comes from gaining the emotional distance, letting the emotions, strong emotions can actually motivate you to learn, but they can also get in the way of learning. So it's a tricky business.

It's interesting thing about how knowledge about entrepreneurship's changed because I think we used to not talk about failure and we used to say persist. If you persist, you will succeed. But I wonder whether we had a large pendulum swing the other way to the lean startup, which you mentioned in the book. And I think your book comes back in about the middle. Right. So it doesn't dismiss the whole lean startup process, but it puts the lean startup process was perhaps too flippant about fail fast.

Yeah, that was the mantra was fail fast.

So what is the lean startup process? And then how does this, you know, how does your book differ from that?

So I'm guessing a lot of folks here are familiar with it, but essentially it's the scientific method applied to startups. The notion that an entrepreneur should have hypotheses, like a scientist, assumptions, if you want an easier word about who's the target customer, what do they need, do we have the right solution, how are we going to defend that, how are we going to deliver it, et cetera, et cetera, and should come up with rigorous, but hence the lean, inexpensive ways to test the hypotheses. So the core concept of lean startup is something called the minimum viable product. The least amount of effort you can do to get a get a reliable signal. Often, often the question is, is there actually demand for this solution? And so a mantra of lean startup is fail fast, run that experiment quickly, get the feedback and move on.

One of the things we learned in the book, the first failure pattern we talk about in the book is called a false start. And these are entrepreneurs who.

There'S a lot of focus. Entrepreneurs love to build things, especially entrepreneurs who are engineers. I do a lot of work with engineers who launch businesses. Engineers love to build things. And so the minimum viable product is really attractive. It's like, oh, I get to build this thing, but there's a bunch of work that an entrepreneur needs to do before they start building. It's basically studying the market, really understanding if you found a strong unmet customer need by talking to potential customers, getting reactions to prototypes that aren't really built. They're sort of shoestring and bubble gum versions of whatever is coming. And a lot of entrepreneurs we've discovered, think they're following lean startup precepts because they've tested a minimum viable product, but they skipped all the upfront work and consequently this paradox. They think they're running lean and they've failed, but they really haven't. They've taken the parts of lean startup that they like and done that and skip some of the hard work. And by the way, this is not years of effort, this is weeks of effort up front to. It's called customer discovery. And it's just what it sounds like. And so it's pretty easy to think you're running lean. And.

I think the lean startup community has done a disservice by even the language. Minimum viable product, I think, has confused a lot of people and led to a lot of mistakes.

Yeah, you mentioned the false start. So in the early stage, you talk about the bad bedfellows, the false starts and the false positives. Right. How do we know those things in advance? I mean, how do we know our bedfellow is bad? How do we know our start is false? And how do we know that signal is a false positive?

Yeah, so I'll give a thumbnail of each. I've already talked about a false start. This is the entrepreneur skipping the upfront research and diving right into building and, and basically to build the thing and then get the market feedback that it's not working, it's months, call it four months. And then you got to pivot to something else. If you've got any money left or any energy left. And so you've wasted four months in order to save the four upfront weeks. It's a bad trade. So that's the false start false positive. We're all familiar, unfortunately with false starts and false positives and false negatives from COVID A false positive in entrepreneurship is just what it's like in Covid or medical testing in general. You got a signal from the market that you think you got something good, but it's actually not as good as you think. And what happens to a lot of entrepreneurs is that first customer or the first set of customers often is a different animal than the mainstream customers you need to build a big business. And you see this a lot in business to business, where you're going after an enterprise customer and you may be lucky enough to find somebody who's super eager about what you've got. They're thrilled. And you tailor your project, your product for their needs. You tailor your marketing systems to find more people like that. And then it turns out that the mainstream customers are just different. So I'll bet how many of you use Dropbox or something like it? Yeah, so a lot of people will be familiar with the product. So the early adopters for Dropbox were essentially software developers, you know, really sophisticated software engineers who worked on multiple devices with really big files, etc, etc, collaborating with a lot of people. Drew Houston, who's the entrepreneur who built Dropbox, knew that to build a big business, he had to make something. I hope no mothers are offended. That was simple enough for his mother to store her recipes. And he did that. He engineered a really simple use, easy to use product that actually left out a lot of the features that his early adopters wanted. So he had the discipline to. He avoided a false positive if he. He'd build a much more complicated product and harder to use product if he. If he'd engineered it for a much smaller base of software engineers, as he has it now. I think he's got 600 million users or something like that for the product because it just works.

Yeah. What about the bad fellows? I mean, you say you want diversity, but which can add lots of creativity and innovation, but sometimes it's diverse in terms of values or in terms of things that aren't good.

Yeah. Or experience.

The case study in the book of Bad Bedfellows is a pair of former students who launched an apparel company. They were both tall women who had trouble finding fashionable, affordable and work clothing that fit them well. So they launched a company to do that. And it turns out to be pretty hard to deliver all three of those things fashionable, affordable and good fitting. But the concept was sort of, take the sizing. If anybody's familiar with men's suiting, there's lots of different sizes, you know, sort of the shoulders and the arm length and so forth. So they wanted to apply that to women's clothing. And there's a reason why women's clothing comes in size 8, size 10, etc. And it's hard to manufacture. So neither of them had worked in fashion. And they underestimated the difficulty of actually. And so they recruited a team of.

Industry veterans, people who had worked in established apparel companies who were pretty good at a job in an apparel company. I'm the fabric sourcer, I'm the quality control person in A startup, everybody pitches in and does a little bit of everything depending on what fire is burning hottest. And these people would sort of sit on their hands as a fire was burning. I'm the fabric sourcer, I don't know how to do that job. And so they recruited for skill, but they needed attitude. So the founders didn't fit well the team as a result, they didn't know how to recruit the right people. The factories that actually manufactured the apparel. This is a little peanut of a company. When a bigger order came in from a bigger customer to be executed expedited, they'd move my, my founder stuff to the back of the line. And the investors, they, they took money from the wrong, they took money from venture capitalists which frankly in this case was, was a mistake. And it turns out that some apparel factories will actually back entrepreneurs. And that's the money they should have gotten because that, that kind of investor would know how to pace things so bad. Bad fellows founder.

Investor and partner. And can you know in advance? Yeah, I think so. I mean it turns out like this example of do the founders have industry experience? There are a lot of businesses out there where founders can succeed without having previously worked in that industry. But there's some where it makes a huge difference. Apparel was one of them. We have in the failure elective. I teach three food and beverage companies and I'll bet there's somebody in this room who's worked on startup food and beverage. It's brutal. And you really need to know a whole bunch of things like how to find a co packer, like whether you should pay slotting allowances, how do you move from the independent local stores into the national chains and how do you pace that? And to try to do that as a first time entrepreneur without industry experience or somebody on your team who's been down that path or a mentor who can guide you through it is trouble. So I think the answer to how do you recognize whether you've got the right team, the right investors is unfortunately, to some extent it depends on the business. The false positive is easier right there. You just need to do the customer discovery work up front and when you do it, you need to do both types of customers. So Drew Houston needs to do both. The software engine, you need the early adopters. If you're going to build any kind of entrepreneurial business, you need those first customers to, to get you going. But you also, if you're going to build a business with any kind of scale, you need also the mainstream. So the key is just research See, if the, if sometimes the needs are the same, that's great. But often the needs are different. And then you need a strategy. You need to have thought through the product strategy. Are we going to build for the mainstream like Drew Houston did with Dropbox and assume it'll be good enough for the early adopters? Do you build for the early adopters and slowly migrate the product? I mean, there are a couple of ways to work this.

The false start is also easy to spot because you can pretty quickly as a coach, as an advisor, as an investor, see an entrepreneur who skipped the upfront work that is crystal clear. And idea center teams don't fall into that trap.

So your book's mainly about independent startups. Have you thought and maybe you haven't about ventures created within established organizations?

Yeah, I had a. Along the way.

Former alumni have gotten pretty senior in this mode and ran an interesting session where collected a lot of data asking people with experience in both what were the differences between failure for corporate new ventures versus startup failure? And there were a lot of similarities. The leader of the team is very important in both the entrepreneur or the internal entrepreneur. The single biggest difference was misalignment of goals between the venture and essentially the investor, if you want to call it a corporate parent. And that was for the corporate new venture seen as the number one. There can be a mismatch of goals between a venture capitalist and a startup, but between the corporate office because they're often ambivalent. You're often launching something with the core business in the background that's jealous. You know, the new thing is getting all the attention. They're diverting money from us. They're trying to steal our people. You know, they want to be on the homepage and we need the homepage. They're going to tarnish our brand by testing a shoestring and bubble gum. You know, there's, there's, there's 20 ways that that the, and the, and the other, the other big problem with the corporate new venture is hey, it's good news. We have procurement people, we have lawyers, we have human resource experts who all have convoluted complicated processes to protect a big core business that are going to slow down a new venture. And so actually having to answer to the corporate staff is a big problem. Some companies have figured out how to shelter the new ventures from all that. But it's quite common for there to be real friction. So yeah, a lot of the failure patterns is actually if we asked.

Many new venture, many startups fail because they just don't have a good sense for how they're going to make money. Unit economics and so forth, that's less likely to be a problem. You know, incorporation is going to push the team to be very specific about what's the business model and are your economics good. So there are some pretty big differences. Yeah.

That could be your next book.

Yes. Good.

You want to get this one out of the way for a while. Thank you. When a student, a doctoral student of mine spoke to like it was a windmill alternative energy guy and he said I want to talk to you about your failures. And he goes I don't have failures. No, your failures. And he goes no, no, I don't have any failures. Well, could you tell me about your terminations? The things, the projects that were terminated. So I suppose, you know, like any academic, I'm going to ask you the definition of failure because it, I suppose it means different things to different people and maybe the differences don't matter.

We could go for hours. Yes, I know you've written, you've written a lot about this and in, in our field, academics fight. We love to fight about definitions.

That's what we do.

It's the favorite thing for academics. So the book defines entrepreneurial failure as early money. Excuse me, early investors did not and never will make money from the venture. And that's one way to take it. So let me unpack the whole thing. So if you go one definition of failure is.

Something that's worthless and we don't want to use that because very few of the entrepreneurs who are not worthwhile. The dictionary definition is a shortfall relative to expectations. And then that begs the question, what's a shortfall against what and whose expectations? Which gets to the question. It could be the entrepreneur. The entrepreneur has some goals and the goals are either met or not. And it may be making money, but it may be just being independent and maybe sort of solving some problem, putting a thing out in the world and even if it isn't financially successful, they feel pride and a sense of accomplishment. The reason we didn't in the book focus on the founders goals is actually if you take a startup out far enough five years or so, surprisingly small fraction of startups after five years that are actually still run by the founder. You know, in most cases founders are good at a thing and it isn't necessarily building a scaling a big scaling organization. They'll often, sometimes willingly and very often against their will be forced out of the company or.

Handoff. So about 60% of the time the founder is no longer the CEO when you get to the sort of five year, seven year stage. And so that said to us that just focusing on the founder's goals wasn't the right way to define whether a startup was successful or failure. You could look at society's objectives too. I think that's a very fair lens to put out and an important one. And there are certainly startups that are successful by the definition I gave, financially successful that we all wish would just disappear. They are polluting, they're exacerbating income inequality, they're coarsening democracy. They're doing stuff that somehow if we could tax them and make it harder for them to do that stuff, we might be better off. And likewise, there are startups that are financial failures that actually have done good for society. So one of the first case study in the book, chapter one is Jibo. It was a robot about that big. It didn't roll around, it sort of sat in one place. And it was actually unlike your Alexa would talk to you, just not only respond to your prompts, but initiate a conversation. And it was meant. It came out of the MIT Media Lab. It was meant as a companion originally for elder care and as a way to teach autistic children to interact more. They couldn't sell those visions to venture capitalists, so it became a family companion. It would sit in the kitchen and those surly teenagers who don't want to talk to mom and dad, there'd be a third party in between and they didn't work. It's an amazing product and it actually built a powerful emotional bond with some customers, literally when it went bankrupt. The business people that hold wakes for their Jibo heart, heartbroken children, you know, who are in love with Jibo and. But it didn't make money. They lost $75 million. But there's now a generation, the next generation of social robots are being put into elder care facilities and they're engaging in as basically the way to sort of keep intellectually and emotionally stimulated. So they did some good, you know, and they trained a group of people that sort of understood the complexities of the social robot. So, you know, hooray for them.

Your students have all been hugely successful. And our students know today we have a lot of time, but to get there. Oh, thank you. Yeah. And their goal is to be successful. I mean, they have these great aspirations. So it kind of interested me that you that a course on failure where people are often overconfident, thinking someone else will fail, but I will never fail, that they're actually Interested in that course?

Yeah. So I'm handing the course off to. If you read the book, the entrepreneur who does the dog walking service is now my co instructor, Barou Baru. This is great. When a dog turns its head to listen to you and puts its ears. There's a name for that that's called a Barou. It's a great name for a startup. Anyway, she's taking over and she's going to rename the course because she thinks I got the name wrong. Bad marketing. The course is going to be, instead of being called entrepreneurial failure, which she thinks is scaring away students, insecure overachievers, like, I don't want to associate. Yeah. She's going to call it avoiding startup failure. So we'll see. She's a dazzling instructor, so I think she'd call it anything she wanted and she'll get students. But it was. I was worried when I created the course that it would just bum these students out. You know, it SAP all the energy and it's actually been invigorating for the students we bring in all these field founders. And I also worried, frankly, because, you know, I run a lot of entrepreneurship programs, as we heard at the beginning. And I could sort of see this headline. There's a new site called Poets and Quants which does everything related to MBA programs. And I could just see five years from now, the. The Poets and Quants headline, which is like a mysterious decline in entrepreneurship at Harvard Business School. We've traced it back to all of these students having the devil scared out of them by this course on failure. And so at the end of each semester, I asked the students how the course has changed their views about whether they're going to be an entrepreneur over the next five years. And.

About 20% of them say, yeah, I'm actually less likely to do it. You have shown me just how painful it is, how likely it is, even if I do a lot of things right and do my best to avoid the failure, how painful it is, how I can trash relationships with co founders, with family members, and I don't think I'm made up to do that. About 40% say.

You haven't changed my mind, but I'm going to be a little more careful about taking venture capital. And the remaining 40% say I'm actually more likely to do it. Now you've shown me the pain. Thank you. But you've also shown me that people. Because we've seen these amazing examples of people coming to the class. They seem to be doing great Things. So there's life after failure. There's a process for managing the failure, learning from it, figuring out what you're going to do next. And I've reflected because of the course and learned and I think I'm readier from. For the process. So that's the goal. The goal of the course in the book is really to sort of bring entrepreneurs in a careful, thoughtful way to sort of confront the possibility of failure and take the most away from.

Yeah. As an entrepreneurship educator, because a lot of times they'd say, how many people have started?

Yeah, that's our metric of success, which is.

Yeah. Well, that's why I think the 20% who recognized it's not for them. That's a successful course. Yeah.

Thank you.

Right there. Yeah. So we were talking to Lily earlier who does education K through 12. You've been teaching at the MBA, the elite MBA level. Have you thought more about undergraduates or even going high school lower? Would they learn. They learn from this book or some variant of this book.

Yeah, I don't know about the book, but you know, we all fail in so many small and big ways in life. And.

I need to find somebody who's K through 12. Education is a completely different thing than training 28 year olds. And I wouldn't have the arrogance to think I could understand how to create an experience. But.

What, what is true? So there are two ways to do it. One is to experience it. And if you sort of push off people off toward projects, just inevitably a lot of those projects are going to fail because that's what happens when you do something new with limited resources. So there's probably an experience for younger people that puts them through that in a safer environment where they're with peers and they can reflect and people can help them unpack what happened and what they've learned from it and show them that it's okay. You know, you go on to fifth grade, now you have failure experience in fourth grade, but you'll survive. And I think they'd come out on the other end, far better to do it. And then the other way to do the education is the way of my course and the way of the book, which is to show people case studies and have the case studies be realistic enough and detailed enough and bring the founders in as role models to sort of show that there is life after failure and there's a good way to fail. I think some combination of those two things probably works, but we'll leave it to the professionals also.

I mean, you might be able to Talk to the Harvard football coach or something like that about failure and coping with failure.

I got to tell you all this. So one of Dean's papers looks at the.

They look at the speeches that a coach gives after a loss and basically looking at the emotional content of the speech, positive and negative, and then looks at whether the balance of positive or negative emotion in that talk after the loss, how it affects the performance in the next game. Yeah, I've read all your papers.

You remember it better than myself.

What's the punchline?

What happens if you're remembering it better than me? You're a memory better. There's a question up there, and I think it's a good one. I think it relates to the persistence is that, do you know of anyone that are heading towards failure but eventually were able to avoid it? And I suppose there's a little bit of a danger to that story because it becomes a legend and then everyone persists too long and loses money and fails ungracefully. But do you know of any that have been able to really turn it around?

Yeah, students in the course have asked us for exactly that. And there are a few examples in the book about people get in trouble and manage to pull out, you know, pull out of the nose dive. You do have to be careful with this. I mean, there are so many startups out there that, you know, the legend of Twitter started as a pod, as podcasting software, you know, and Slack started as a video game. And, you know, we should all have the good fortune to have a great idea in our back pocket or, you know, lucky enough to stumble on something. So I don't think those examples are as useful as what some of us would think of as a recapitalization restructuring. So sometimes those investors will step in and this is a messy business when the, when the startup is struggling, you've got usually a board of directors comprised of all the investors that the lead investors that have put in money along the way and they've got a vote on any new financing. And so the entrepreneur says, need a bridge loan. We tried to raise money from new people and nobody, nobody knew was going to put money in here. So this thing's either going to die or you existing investors are going to put in more. And some of the investors may have confidence to do that and some may not. The ones who do have the confidence want to buy in at a very low share price, which is going to issue a whole bunch of new shares, which is going to dilute the equity stake, the equity position of the Original investors. So their stake will be worth very little. They can follow on, they can join the round, but they don't have the confidence to do this and everybody has to vote. So these startups can end up in an impasse over whether to call it cram down. It's a wonderful term and some firms get through this, you do the restructuring and then it's a real act of fortitude for the entrepreneur to stick with that business because their equity stake has been wiped out. They'll often be granted new equity and some options and so forth as an incentive to stick around. But it's nothing like the position they had originally and they've been through the battering of, you know, there probably have been layoffs and so the psychology. There's a lot to learn, I think from studying founders who have the fortitude to lead through that kind of example. And we have brought in into the course. So these, they're not successful businesses by the definition of my book, but there's a leadership success there and a lot to learn from that example. They're businesses that survive.

So I'm going to ask the audience if they want to ask any questions in just a couple of moments and then you can put up your hand. And if we have no hands, Harvard has a tradition of cold calling which means I just pick anyone and go you. So I'll try that. But I just wanted to before we get to that because I know you have to run off to a course as soon as we finish was to thank you for coming to Notre Dame. It's an honour to have you here. And also, you know, I told Tom when I read his book, it's a unique book in that it's academically the research Wise foundation is very strong but it's in the background. You kind of, you don't see it, but you know that it's right and that the examples are extraordinary and then the writing is very well organized into, you know, these bite sized chunks and tells a really interesting story. So it has layers of complexity that if you want to read it here, you don't have to have the complexity down here. So it's a fantastic book. Yeah. So do I have any.

Let me also, just, let me thank you Dean, for that and also just apologize in advance. I'm going to scoot at 2 o' clock right out the door. I'm being pressed into service to lecture in one of the graduate programs over at the university. So normally I'd love to hang around and meet you and answer questions and so Forth, but I have to go teach, so.

So when you ask your question, can you stand up? Yes.

About Twitter being structured, Twitter being started as a blind or something like that. So just briefly, do you think that Twitter's board of directors is failing the company by fighting against Elon Musk?

Boy, that's above my pay grade.

I've got colleagues in corporate finance and.

Not really related to failure.

Thank you for the question, but.

I'd be winging it.

Thanks. Yeah, sand off, please. Thank you. How would you suggest a sort of consumable good? Identify and then look for potential.

Is it an eatable and drinkable good or.

Yep. You're in the food and beverage space. And.

So I'm going to give you a book you need to read, if you haven't read it already, called Ramping your brand.

There's a PhD who specializes in working with premium. Sounds like you're doing food and beverage startups. And we've got in a course with about 25 examples, three of them are failed food and beverage startups, including a specialty coffee startup, Cold Brew, Cold Drip. And I've learned a ton from this book, so. So follow the advice. There's really good advice, actually on how you get feedback from first customers and.

Whether an incubator makes sense. Things like that. Ramping your brand. The author is James Richardson.

Tom, one of the questions up there, and it's a little bit like my son, because he's a procrastinator, is the opposite of the mvp, is that it just keeps researching forever and then doesn't act right. Drives me nuts.

So how do you know when you've done enough research to take the action?

Yeah, you know, and.

A lot of.

Perfectionists will go too far. A lot of MBAs are very analytical. So if there's more analysis you can do, you keep doing it. So a lot of people will fall victim to this pattern.

I think.

And there are some products that you really. If it's sloppy, it is going to have a bearing on how people react to it. There are, you know, in healthcare, you can't be casual about the. About the product you put out there to test. So some of it is knowing whether you. I mean, the core principle of Lean Startup is find the features that are most important, the assumptions you're making about what's important for success or failure, and, and only build that and expose real customers to it as quickly as you can to sort of see if you're right about what moves the needle. And so I think that the folks who've thought Through Lean Startup actually have pretty good advice on how you get feedback along the way and figure out whether you need to keep building and refining.

Yeah. So one of the questions up there is about humility. One of my colleagues does OB research and she said humility doesn't really work for you in the organization, which is really disappointing because I think that's a really good thing to have is humility. What, what role do you think humility might have here in terms of deciding to pivot or pull the plug or that sort of thing?

Yeah, it's so hard. We bring in to class a startup coach, a.

Trained therapist and a committed Buddhist, used to be a venture capitalist and then sort of had an epiphany that sort of put him on a path. Yeah. Yep, yep. His name is Jerry Colonna. He's out there, he's got a book called Reboot R E B O O T. And Jerry comes in and students just ask him anything he wants. And.

I always feel nervous about whether to warn the students or not because this is a guy who can reach into your soul and hold your four year old self up in front of you and he can do this. I've seen him do it in five or 10 minutes and you'll be crying. It's just, it's just who he is. It's astonishing. And so, you know, are you going to put a student on this? I know he's going to do it and you need to warn the student. But so the first student, I warned her and he did it. And her question was, she's leading a team, she's got a startup, is I feel the need to have certainty about what we're going to do and I.

Don'T know what we're going to do.

It's just hard. I mean, there's so, there's so many issues, there's so many problems, there's so much uncertainty. But I feel the need to project and this is, I think close to humility. I feel the need to project certainty when I don't even have it. And Gerry did a wonderful job of convincing her that, you know, it turns out this woman is working on a. Her mother has COPD and she's working on a device to measure lung strength and she's doing it for her mother. And those people on your team because of you and your mission, they're not there because you're there to tell them what to do because you know all the answers. And so you did a really good job of, I think, teaching her. She could be Humble. She could show uncertainty, you know, and that she wouldn't lose her team. She wouldn't lose your team's confidence and sort of see them disappear. It's really important.

Yeah, I think that's one thing. You know, I tried to extend a little bit from the book was to say a lot of those books are for profit. And what's it like for a social venture? Right. I mean, you got to make some money, but you're also doing. I'm guessing Faye is harder under those circumstances because people are dying like that.

I think so, yeah. It's tricky for. I mean, I bet there's a lot of social entrepreneurs in the room. One right in front of us. And there's so much passion and, you know, you asked, have we sort of analyzed the failure patterns, differences between startups and corporate new ventures? We've also asked the question about are there differences between for profit startups and obviously some social impact ventures are for profit too. But, but, but when, when social is front and center. And one of the big differences is many social ventures don't die, basically because there are people out there that share the founder's passion for the cause. They will dribble in just enough money to keep the thing going. So that's one of the dysfunctions. The other dysfunction is a lot of rich people want to put their name on a thing. So rather than have one big thing that solves the problem, we have lots and lots and lots of social entrepreneurs all solving the same problem. Subscale. And so you get a lot of subscale businesses that go on forever. And it's a different kind of failure pressure, I think, than the kinds of startups we're talking about in the book.

Okay, so could you stand up, please? Thanks. I love your point on humility. You contrast the interface between that humility point and leadership. We're going to get this done.

Leadership. We're going to get this done. And.

That'S. I think you can be a leader. Who do you mean? Like give the order to get it done or. Or inspire.

Yeah. So a close cousin of inspiring is. Comes from Star trek from the 60s. The reality distortion field that's been sort of popped over to as a description of Steve Jobs and his ability to bend reality to his will just by sheer force of personality and inspirational leadership. And there's a lot of it out there and.

It'S a powerful thing. A lot of entrepreneurs have it. They have the ability to sell the division. Jobs had it. He could get people to work for eight months straight 80 hour weeks, you know, because we're going to put a dent in the universe with this computer.

The original Macintosh, and get partners to come along, get employees come along, get investors to give you money. So it's a powerful tool for investors. But boy, that reality distortion field can fold back on itself and keep you from seeing reality. And that the universe is telling you that your idea isn't working, but your followers are too loyal and too devoted cult like following you to see it and tell you so. The $900 million example in the book is A Better Place, which.

Concept? This is 2008 and Shia Gassy, who's the entrepreneur, had a vision of a better world where we would have electric charging stations for electric vehicles everywhere. So we get rid of gasoline powered cars. It's coming, right? He was probably 20 years too early, but he raised and the concept was a swappable battery. You drive into a station, a robot would pop the battery out, your depleted battery and pop in a new one all in five minutes. They built it, it was running in Denmark and Israel. But he just couldn't. But he had this incredible ability. He raised $900 million for an idea that's that wild basically because you can mesmerize and he could attract a loyal team. But you know, ultimately he was too committed to his own vision. He couldn't sort of get out of the reality of distortion field bubble. And when it was time to pivot to a better idea, you know, he just didn't have the emotional flexibility to do it.

Was there another hand? Yeah. Do you want to stand up?

Yeah.

Gene, what do you say?

Well, I mean, fear is a powerful emotion. I think, you know, what I would take from Tom's book is to say if I know and I can see these patterns, then I can reduce my fear or my anxiety. And then you can make a more calculated decision about going forward or going not going forward. I mean, you're still going to have to deal with some uncertainty. You don't, you don't get away with that, but you get away with the anxiety, with dealing with the uncertainty, which I think helps. But fear of failure can also stop you from acting, but it can also sometimes push you towards acting. Right? Depends on how you find failure. Am I failing to take action or am I failing to not act? So I think fear is a very powerful emotion.

Yeah, there's also, there's life stage at work here. And it's easy to see when you're sitting here at age 64 to tell somebody who's 20 that they've got a lot ahead of them and they're at a really good point in their life to have a failure. Right. I assume you don't have a family at this stage or other than maybe some student loans, any big responsibilities.

It'S really a good time to take risks. And likewise, if you hit age 50 and you've put some money in the bank and your kids are out of college and so forth, it's another good time to take risks. There's sort of the zone from age 30 to age 45 where entrepreneurship is a much riskier thing if you got a mortgage and, and college tuition bills and stuff like that. So take advantage of that.

Thank you. Yes.

This kind of builds off the last question.

But of course, each startup is so incredibly unique and different situations vary. But how would you say. But have you seen your time with. Working with startups? Is there any general. You'd say rebalance that broad motivation.

Aspirations through the root of your product and like your product and versions because of that very unique motivation, but also following the status quo and giving other mentors and kind of doing this work in the past.

I can give you an example. Tom and I were talking about his book and the content of the book is very unique. But he found a friend's cover and he liked the friend's cover and he basically copied all of that. So it was kind of more or less like, like be unique at what you need to be unique at and then copy everything else. Is there something like that?

Yeah, I love that. I love that. Thank you.

Yeah.

We can stop there. That's it. Yeah, you need, I mean, remember, what you need to be a successful entrepreneur is a differentiated and defensible solution to a powerful unmet customer need. Defensible means nobody can copy you. Differentiated means better be better than what's out there or. And a lot of folks who study entrepreneurship would say it needs to be a lot better than the existing solution because people are taking a risk on you because you may disappear because you're a startup. And it better be a strong unmet need, otherwise people are going to shrug their shoulders. So if you've got all those things, then that's what you need to do and copy everything else or piggyback on other people's resources.

If we could please give a round of applause. Thank you to our guests so much.

Thank you everybody for joining us. We do encourage you to stick around. The next session is the power of local connectedness. I think if you're from this region, our connectivity is helping us come together and do some really cool things in this entrepreneurial ecosystem. So stick around, and we thank you for being here. Thank you.