"Why Startups Fail" with Tom Eisenmann, Author & Harvard Business School Faculty Chair

So welcome back everybody to the main stage. Lots of you know me, I'm Richard Delude, one of the partners of Underscore.

Just came from a really great session with Matt Wozny, Rasmon Cruz Farine and Clem Cazalot on the future of the Boston ecosystem. Was really a great discussion. Hopefully you all had good discussions as well. And feel free to add some of the takeaways from your sessions and the breakouts just recently in the chat. Would love to touch on a few of those. I think overall the energy is palpable. And thank you all for joining in a great discussion today. Next up, as part of the final part of the day, we wanted to talk with Tom Eisenman, someone I've known for coming up on a decade now, who's a member of the Harvard Business School faculty, teaches primarily entrepreneurship and engages with the startups over in that ecosystem. And I'm particularly excited to have this chat. I think it's one where Tom's always been a trusted advisor myself, and then he's also been a great partner to Underscore, so it's a pleasure to have him here today. And he's just written a book called why Startups Fail, which really covers not only the potholes in early stage startups, but also in scaling startups and where some of the pitfalls may be. And so as he wrote this book, I just went through it over the weekend. Really fantastic. Encourage you guys to pick it up on why Startups Fail. I put it right up there with Noam Wasserman's Founder's Dilemma, Eric Reese's Lean Startup. Highly encourage you guys to read it. It's a good one. So with that, I will have Lily and Tom join us, which I think are now on the main stage. So thank you guys for joining us today.

Thanks for having me. Richard, you flashed up that slide. I have a tie on in that picture. We've got to get Underscore. I haven't worn a tie since a wedding five years ago.

We've been deep on the Internet for that one.

Finding the time.

Well, Tom and Lily, you guys have both been in this field of working with founders from early stage ideas, not only idea, but also in scaling up to ipo. And you've seen lots of struggles, lots of successes. And so today I wanted to have a little bit of a journey through that and learning what you've seen across those. But I'd actually love to start with a little bit about how you guys got involved in the startup scene. Would love to start with that. So, Tom, would you give us a little background and how you got into the wild world of startups?

Oh, boy. You know, I came out of management consulting half a lifetime ago. My midlife crisis was getting a doctorate at age 37. Many people will get a red sports car.

A doctorate. And I thought I was studying big company strategic decision making. I did my thesis on the US Cable television industry. Turns out the cable founders who were still running the businesses at the time, this mid-90s, they were all entrepreneurs. I didn't know I was studying entrepreneurs, but that's how I started to fall in love, and it just kept going from there.

That's great. And, Lily, give us a little background as well.

Yeah.

My first introduction to the world of entrepreneurship was straight out of college. I worked for an organization called Endeavor, which is a fantastic organization that supports entrepreneurs. It started in emerging markets that now has scaled, and I moved down to South America and spent two years down there working with entrepreneurs. And my takeaway was just recognizing how powerful entrepreneurship could be as a way to drive change, to drive economic development, and I sort of fell in love with it. My takeaway was I either want to go be one of those founders or go be somebody who can help empower and advise founders. And I've actually taken the path on both routes. I founded a company that failed. So topic for today while I was in grad school, and then found my way over to the venture side, which I think is the better fit for me and how I hope to empower others to do what they want to do.

Thank you both. And, Tom, you know, you from the beginning of the pandemic to now have written this book, I would love a little bit of history on what was the journey of that in itself. And then why did you write the book?

Yeah. So things move slowly, more slowly in academia than in the startup world. So the catalyst for the book was the failure in 2013 of a team I knew really well, a pair of founders who had been my students, and they launched a business, Quincy Apparel. I had great confidence in them. I loved the idea they did Textbook perfect, by the way, Richard, you were my student at PM101 a long time ago, and you did textbook perfect MVP testing.

Yeah. Get out into the world, See if people open their checkbook for it.

Yeah. And. And they did the same thing. And so everything we were trying to teach, this was early on, sort of not long after Lean Startup started to catch fire. And I had confidence in them as founders, in the idea. They raised a million, wanted to raise a million and a half. That's part of the failure story. And.

Couldn'T quite get the operations together and sort of burned through the cash trying to fix the operations. But demand was there as validated by their early tests. So they were making progress, but just not enough progress to raise more money or get existing investors to kick in more and bridge them. And so they failed after a year. And I had been an investor, I had a lot of confidence in them. I could point to a lot of things that went wrong, but I couldn't pinpoint the cause. And I also observed just how painful it was to go through the failure for them to go through the failure. And so I resolved to learn everything I could about startup failure. Were there recurring patterns? If so, could entrepreneurs anticipate and avoid? And if they were going to fail, was there a way to fail less painfully, sort of fail better, if you will. And so that was the start. And then here we are seven or eight years later with a book.

That's great. And tell me a little bit about how you would define failure and also success, which is failing fundamentally, I think getting extremely clear, which is one of our underscore values on how do we define failure?

Yeah, no, you and Lily and the team at Underscore will probably like the definition. So the book defines failure as early stage investors did not or never will make money to sort of earn a positive return on the investment. And you want to unpack that a lot. And professors take delight in defining terms, so I won't get too professorial here, but. But basically why not the founders? Why the investors, not the founders? Series D. Only 40% of startups are run by a founder CEO, so you can't focus only. And the founders are important, obviously their objectives, their preferences, why not society at large? Sometimes firms are financially successful, but we wish they wouldn't exist. They pollute, they exacerbate income inequality, they have addictive products. Sometimes those are successful firms. Sometimes firms fail and there's spillover benefits to society. Right. They show other entrepreneurs what not to do or they train employees who go on to do things. So, you know, the message is it's complicated, but basically once you take other people's money, there's a responsibility to try to earn it back. And I think that's a good yardstick.

That's great. And Lily, would you define it the same way?

Well, given Tom's framing of it, I would. So the way, you know, from an investor's perspective, we think of it as sort of a 1x or less return on the capital. I mean 1x you know, we can put the money back to good use. But we have a similar definition or I would, you know, from the VC perspective have a similar definition.

Tom, through this journey you've, you know, collected lots of data, lots of anecdotes along the way. Anything that surprised you, you know, what were some of the things that you're maybe your mental premise coming into it would have said it was likely to be this.

Yeah.

Two big surprises for me in trying to sort of look, look for patterns. One was just how important domain expertise, industry expertise is for some teams but not for others. Many, many startups. I mean to launch Instagram you don't need to have worked in a photo sharing company or have worked for Kodak to launch an apparel company. The startup I mentioned before, they were designing and manufacturing apparel. There's just all of these steps that you have to do and you better have people who can do them and you better know the sequence and sort of what good work is and less good work. Likewise food and beverage company like just unbelievably unforgiving if you don't understand all the nuances. Packaging, how do you get something to jump off the shelf so consumers will grab slotting allowances? How do you move from local to national chains? And so.

And a lot of failure can be traced to not having the industry expertise when you need it. But again it's important for entrepreneurs to understand you don't always need it. You know, the Rent the Runway team, which also were my students and I invested in and worked in fashion but it turns out to be much easier to rent dresses than to design and manufacture them. So that was a big lesson. The other lesson was the huge impact of false positive can have on an entrepreneur. And just like COVID testing, right, you know, you get a signal, you get and it's often a signal from early adopters that your thing is working and you expand aggressively in the direction of whatever is working. You may tailor your feature set to the needs of early adopters and their needs may turn out to be very different than those of mainstream customers or you just may accelerate the business in general under the assumption that the next wave of customers is going to be as easy to get and there's often some set of customers out there that are foaming at the mouth, enthusiastic for what you're going to do. And you know, if people don't keep foaming at the mouth, you're going to have some trouble.

And it's hard because obviously you need the early adopters to make any business work and you gotta love them and be loyal to them. But if you don't understand what's going on with the mainstream, you're in for trouble.

That's great. And I want to jump next into early stage patterns and then we'll talk a little bit about later stage patterns of, you know, success and failure. But before that, Tom, you know, I want to zoom out a thousand feet and say, you know, well, if you have one takeaway from this book that you wanted people to take away, what would that be?

You know, those, those for early stage entrepreneurs precede those two pieces of advice like know whether you're in a space where industry expertise is important and if it is, how are you going to put it? Bring it to bear on your business. And secondly, watch out for the false positive. And then in general, for any, any early stage entrepreneur, slow down. Basically, you get a lot of advice as an entrepreneur to trust your gut and trust your instincts and move fast. And that is a big advantage. But.

If you, there's certain decisions that you actually want to think more slowly about, sort of really take the time to sort of think through the pros and cons and talk to people about it, sleep on it, Sleep on it a second night. And so move fast when you can, but take your time when you need to.

Rich, can I jump in with a follow up for Tom?

Absolutely.

So, Tom, I'm curious on the point on the false positive because I think that's a really interesting one. And are you familiar with the superhuman framework on product market fit? I don't know if you know of it.

Is it the 40% rule?

Yeah, exactly. So the very short explanation of it is you can ask your customers how disappointed would they be if you took the product away? And the goal is to get at least 40% saying I would be very disappointed.

But then he also has a framework around diving into. Listen to those people who fall into that category. They're very disappointed because they are your early adopters, they love your product, listen to their feedback and sort of iterate based on what they are telling you. The middle bucket is sort of the somewhat disappointed. So I think to your point, that's maybe more indicative of the broader mainstream. Some schools of thought think just listen to your early adopters because they are the ones that will pull you over that chasm to mainstream. But what I'm hearing from you is that there's risk and over indexing on that cohort.

Lily. I think so. I mean product market Fit is a thing you can lose easily over time. Right. Because the early adopters may be different. So a good example is Dropbox. So Drew Houston.

His Y Combinator application is out there. It's a fascinating document and he talks in it about creating a product that's so easy to use, his mother can use it to restore her recipes. But of course, when he was designing the product and getting feedback on it, he put it on Hacker News. So, like incredibly sophisticated software engineers whose needs for a file management service are really sophisticated. Right. Many computers that have to be synchronized and, you know, and, and big files, et cetera, et cetera, et cetera. So he could have designed a product, Dropbox, that met the needs of the early adopters. They actually had the discipline to create Dropbox for the mainstream. For his mother, deliberately leaving out a lot of features and took a calculated bet that it was going to be good enough. So much superior for the software engineers, the early adopters, that they would still embrace it, which they did. But it was really thought through carefully. And that's an example of early adopters having very, very different needs, much more sophisticated needs than the mainstream.

That's a great example. Thanks for. I like the phrasing of the product. Market fit can be lost. It can lose over time.

Yeah.

Not only even in the early stages, but actually even the scaling up stages. Imagine you, you know, get to the certain scale of opportunity and then realize you have to keep growing. And so sometimes you have to even let go of those initial customers and redefine what the product even is.

Yeah. The case study in the book of that is fab.com a lot of listeners will remember online retailing, home furnishings, and they had enormous enthusiasm from their early adopters and word of mouth referrals. It spread like wildfire through social media and raised a boatload of money at very high valuations, but simply couldn't sustain the enthusiasm as they moved to the next wave of customers. Lost product, market fit.

I'm looking over at the chat and Jenane over in the MIT ecosystem had a great point, which was move fast when you can and take your time when you need to. In the early stages. How fast do you think people should be running at these things?

You know, the startup that I talked about, the catalyst for the book, the founders graduated, went off to BCG like so many MBAs do, and this is the team that needed the apparel design and manufacturing expertise. They could have learned a lot, nights and weekends by just studying the business while they were earning a paycheck. Once One of them was married, so had a spouse who could sort of put the bill, if you will, for the entrepreneurial adventure. The other wasn't and didn't have savings, had student loans, didn't have family that could support her. And once she quit her full time job, basically they had to raise money and they had to get started.

And moving fast in that sense.

Was a big problem because stretched out there was, there was not like there was rivals out there that were going to come and steal their opportunity. Right. They could have waited another six months to launch this business. And one of the failure patterns, Richard, in the book I call a false start, just like track and field or swimming, where the athlete literally jumps the gun trying to get an edge. And so many entrepreneurs are eager to build and sell the thing they've envisioned. It's like the definition of entrepreneurship, right? Somebody who makes things happen. So what could be more natural than just starting the engineering work as fast as you can? And they've skipped an upfront phase of what Steve Blank would call customer discovery. They've skipped prototyping of multiple solutions. There's usually a lot of different ways to solve the problem. But the entrepreneur has burning bright a vision, can see around corners and she sees the problem and the solution and just go for it. And if you move too fast, the odds that that first version of the product is going to hit the mark kind of low and it's going to take four months. Pick a number to build it, sell it, see if it's working and figure out what to pivot to when it's not. You're pivoting, so it feels like you're running lean, but you skip part of the lean startup process, which is the upfront research. And so you essentially traded by not investing four weeks up front on research before you actually start the engineering work, you've wasted four months. And if you've only raised a year or 18 months of capital, that can be deadly.

Absolutely. And Lily, do you see it the same way?

Yeah, I think, you know, I think some of the common challenges we see. Tom just touched on it. I mean, one of the biggest ones that we see from that go into failure mode is if you're not solving a real problem, and particularly with technical founders, one of the things that we see is they built something very cool and are in search of a problem. And so I think that that is a failure mode that we see a lot. And it goes back to, you know, you can sort of fall in love with your solution. You think it's really interesting. But it goes back to the point that Tom was saying. It's like, are you really listening to your target customer? Do you really understand the pain point and the need? And so finding founders that are really problem solving oriented rather than solution oriented is a big distinction. And I think that if you stay really problem oriented, that allows you to guide. It guides your pivots, it guides your navigation along the way. We know that with early stage founders we always focus so much on the team because we recognize that the product will change along the way. So when we make investment decisions, we think about is this team sort of uniquely qualified or have unique insight to go after this opportunity, Is it a big market or can we see how it could become a big market? But part of that orientation is focused on solving problems rather than getting attached to your solution. So that's a big sort of thing that we see at the earliest stages is falling in love with the solution before the problem. I think. Yeah, go ahead, Tom.

No, I was going to say you spoke briefly about builders, engineers, technical founders, who engineers love to build. So if you have a technical founder, odds are they're going to dive into doing what they love to do and what they're really good at doing and they're probably going to do it prematurely. The rub here. And so a lot of the MBAs that I've taught over the years, coached over the years, are not technical. They hear correctly that having great product is crucial to success. How do you get great product? You get a great engineering team. How do you do that? You leverage your amazing networking skills that you've built as a non technical founder mba and they're good at it. So they go out and find a technical founder or they scrape together enough money to outsource the thing. But once those engineers are on board, you got to keep them busy and especially.

And again, moving too fast. False start.

I think the other sort of underlying piece of that too, and actually I do see it more often with less technical founders is the founder market. A lot about market fit. But I do think there's an element of founder market fit and I'll be vulnerable for a second. You know, when I did my startup, I didn't have founder market fit. And that was part of the problem. It was, to your point, Tom, it was CPG and I'm a B2B software person. And it just wasn't, you know, wasn't the right, wasn't the right match. So a lot of the times, you know, the way we think as investors, we sort of Ask what's your why behind why you're starting this business? What's your sort of intrinsic motivation? And what we look for are people sort of obsessed again with the problem that they're trying to solve. And you know, just to call it as I see it, sometimes we see a lot of MBAs in particular sort of are interested in building something and they're kind of in search of a problem that they think might be interesting. And I think Tom, it was you who said ideas we always see or I forget you had a good acronym for it. But it was, you know, it sort of speaks to this founder market fit, you know, what's your why behind why you're starting a company? And that's another thing we look for.

Yeah.

There'S some great, great discussion in the chat, you know, around the contextual factors around even founders there's all the challenges of starting the business, creating the product, meeting the market. But even in the, you know, the individual there's all these things like family dynamics, other things around that can create a basis for success. But within teams, you know, one of the things Tom, you called out in your book is called Good Ideas and Bad Bedfellows as kind of a category topic. We'd love to learn a little bit about how you think about early stage team functions, formation and Lily would love to hear your thoughts as well.

Yeah, this is, this is, this goes back the each of the failure patterns in the book has got a not surprising Harvard Business School professor will use case studies to anchor anchor all failure patterns. And Quincy is the Quincy Apparel, the company I've been talking about is the, is the anchor case for good idea bad Bella Fellows, as I said, they had a fantastic idea, they'd actually validated it. They ran MVV tests that showed that demand was out there. So the problem was real, the solution was there. But they were deficient in several ways. If we think of the team, big T team, not just the co founders but the rest of the team, the outside investors and hopefully they're going to add value beyond just the capital. And many startups will work with partners.

Deeper pockets, more resources than they do. And so in addition to not having industry expertise, the Quincy co founders couldn't quite agree who was the Boss. So many MBAs sort of, you know, they both bought themselves qualified and they were qualified each to be CEO. You know, in the beginning when it's just two of you, you very naturally make every decision together. And they carried that pattern forward and never confronted and eventually it started to slow them down. Because they feel the need to talk through every decision.

And that was an issue. And also they just hired the wrong people on the team. They hired people with the skills they were missing, but they were people from big companies who couldn't adapt to the rhythms of an early stage startup where everybody has to dive in and put out whatever fire is burning hottest. These were specialists, apparel companies, they were pattern makers, fabric sourcers who knew how to do that but couldn't, thought they couldn't help with the other things. So errors in building the team, hiring too much for skill and not enough for attitude was the big error. And then they really made I think a classic MBA error. We lionized. You guys are heroes. We lionize venture capitalists at most elite business schools. And it's very natural for somebody coming out of an MBA program to just assume if they want to be an entrepreneur they should raise venture capital. Particularly with an apparel startup, there are other ways to fund it and probably more patient capital. You know, somebody that's not looking for a 10 times return quickly, you know, pushing for the growth, but sort of assumes that it's going to take some time to sort of find the, define the brand and sort through the production processes. So they, they positioned themselves as a DTC direct to consumer company which then was getting hot. This is when Warby, Parker and Bonobos were taking off and took VC and got pressured to get the 10 or 20 times return that you guys thrive on. And that makes sense for lots of businesses, but not necessarily for an apparel startup. So wrong investors, wrong team, problems with the co founder or the founder fit to Lilly's point. And then you know, lastly, just to sort of put an icing on it, most apparel startups outsource manufacturing to a third party factory and these factories just ignored. This was a peanut with quirky sizing requirements and founders who had no industry relationships. So it's pretty natural when their orders came in to sort of, if somebody needed something expedited, you just pushed Quincy's orders to the end of the queue. Bad bedfellows all around around.

To start a point. And there's a great question from Jason Burke. Can people see that? Perfect.

Good discussion around, you know, when is expertise potentially a liability and when's it absolutely an asset? And I think this is a great discussion because you know, I would say very often we're always thinking about you got to be the expert, you got to know this space. Absolutely correct to be successful in it. When is that the case and when is that not the case?

Yeah, you Know, I think if Jen Hyman, who's the co founder and CEO of Rent the Runway, was here, she would say, correctly, I believe that their lack of fashion industry expertise was a key factor for success. They could envision renting apparel stuff, you know, dresses that were being sold for $800, rent them for a weekend. That would only be worn once, because once it's on Instagram, you're much less likely to wear it again. And, you know, it took somebody from outside the industry to envision this really unique solution. And so I think that's true. I think there are. When you're doing something radical, sometimes it takes out of the box thinking. And that kind of thinking will come from somebody who isn't slave to, you know, a conventional wisdom about what you can and cannot do in an industry.

That's great. And let me put one up here. And Lily, maybe you can take this one, this discussion around talent. When do you bring in an HR manager or head of people? What's the right timing for that? Is that an early stage discussion? Series B discussion? Lily, how do you think of this?

A trend that I'm seeing is seeing teams bring this in earlier.

I'd say sort of closer to the series A or kind of between the A and the B. And it's a little bit, you know, when I first saw it, I thought it was a little bit unusual, a little bit early. But as I've watched sort of the patterns of the people who brought this talent in on the earlier side, I actually think it can be a huge point of leverage and strength if you get the sort of the right person. And there's a couple benefits to it. I think part of it is when you have that right acceleration, you are hiring so fast. And so instead of, you know, you might still use recruiters or affirm, but having somebody in house who is helping do the description, scope the role, think about the culture piece to it, you can actually get a lot of time savings and also ultimately cost savings for bringing that in house. And then I also think having somebody, you know, we heard from Dharmesh this morning. You know, think about culture early. I don't think you can outsource that or even put that just on ahead of people. I think that still has to sit with the founders, but. But having somebody who helps as a steward of that across the organization, and particularly as you look about new hires, I actually think there's a ton of benefit to doing that earlier rather than later. I think at seed, it's probably early. I don't know if there's one perfect answer, but I do think around sort of the Series A, when you're about to scale the number of team from sort of 30 to 50 to 70, that feels like an interesting moment and I'm seeing folks do it earlier and earlier. And then an interesting hire I'm seeing after that is sort of the B and beyond as I'm starting to see some teams bring in somebody who's specifically focused on diversity and inclusion in the organization. One of our portfolio companies, High Marley, just hired that at their Series B and I think that's an interesting hire and piece that often gets thought about too late as again we heard this morning, so there's no one perfect answer. But I'm seeing this attention to hiring the right people earlier.

And Hallie, outside of even the, you know, head of people or the HR function, I will tell you from my experience in looking at and working with startups, some of the most successful startups I've ever seen spend a lot of time in the very early days, the primordial soup days, working on their culture, their value system. And in many ways it actually defines a lot of the trade offs people make along the way. And so I think it's, you know, as you heard earlier from Dharmesh at HubSpot, never too too early to begin working on that. So thanks. Great question. Let's move to discussion around the scaling stages of the business. We'd love to learn a little bit about later stage where many of our audiences, you know, working at scaling hyperscaling companies and lots of things where maybe you even reach product market fit and the story changes as you go. So we'd love to learn a little bit about how you guys think of some of the later stage traps in terms of failures.

Yeah, I'll rattle off the three late stage failure patterns in the book. So this is call it Series B or maybe C when the business is really ramping up. One is a speed trap which basically the entrepreneur is trying to grow too fast and the wheels come off. All sorts of things can go wrong when you I mean first off you're probably going for a wave of customers that almost by definition are less interested in your product than the first wave. So Underscore is a big fan of LTV CAC lifetime value customer acquisition cost and you know you're getting an LTV CAC squeeze here. The customer, the new customers are worth less and they're more costly to acquire because they're less interested in your product. And meanwhile you're Hiring legions of employees. If you've got the kind of it's not a pure software business where you need people to actually pack boxes or answer phones and emails. It's hard to hire them, it's hard to train them. This is a stage when you're going from probably having no process inside the company to meeting a whole bunch of processes for budgeting and planning and tracking inventory, if that's relevant, and so forth. And somebody's got to put those systems in place. And an entrepreneur will often resist what feels like burgeoning bureaucracy. So maybe slow to do that. And so that's. The speed trap is basically trying to grow too fast and not recognizing that the growth is not only on. I mean, we expect growth to be unprofitable in the sense of sometimes it takes time for the customer to. If the money's coming back from repeat purchases or renewed subscriptions, it takes time to earn it back. But these customers will never pay off.

And the entrepreneur can be enthusiastic about solving that problem. The investors may put in another round or two, but eventually people are going to realize it just isn't working and things can unravel really quickly. So that's a pattern. There's pattern failure, pattern late stage. I call it help wanted where there is a missing manager, some senior manager in a key role that is mission critical. The case study in the book is Dot and Bow, which again was online retailing of home furnishings and shipping couches is really, really hard to do, hard to damage the stuff, hard to make sure it arrives the day it's supposed to. Not like your Amazon books where if it comes two days early, you're delighted. If your couch comes two days early, you have a problem on your curb. And Dot and BO was actually great at sustaining product market fit as it grew, but it just never. It took three tries in terms of a vice president of operations to find a person who could actually manage that very complicated process. So help wanted. And then there's. I call it a pattern of cascading miracles. These are startups that are thinking. If you remember Iridium or Segway or Webvan, think Tesla and SpaceX today, audaciously big, bold, long product development cycles. Many, many things have to go right and each of them is a long shot in the sense fundamental change in customer behavior, raising a billion dollars, getting the government to let you shoot rockets into space or for Federal Express sort of fly airplanes around hub and space spoke, delivering packages. And you need, need everything to go right because if any one of those things goes Wrong, the venture is toast. And you know, if you flip five coins in a row, the chance of hitting heads five times in a row is 3%. So sometimes we get Federal Express or SpaceX or Tesla and sometimes we get Theranos or Segway or Iridium.

Great examples. And really, you know, I think one area that's potential particularly interesting given your VC perspective, be around financing risk. Right. Of course we want to be a billion dollar unicorn, but we'd love to learn a little bit about how you think about financing risk at the later stages.

Yeah, I think the financing risk is connected to the risks that Tom highlighted because it then leads to execution and sort of are you hitting the milestones you need in order to attract that next stage of capital? And so have you right sized your spend with, with tracking towards those milestones? And I think one of the things we see at the later stages Tom highlighted is, you know, there's a couple of different challenges. One is on scaling sort of efficiently and at the right pace with the market, but also sustainably. So thinking about the unit economics, the tactile tv, the retention numbers and net dollar retention is an important piece. So one of the challenges we see is that top line bookings can look good and you look like you're growing, but it's a leaky bucket. And that leads to spending a ton of capital both on the acquisition side, on the people side. What does it take to service and onboard these customers that actually don't end up becoming a sustainable part of the machine that we're building? And that ultimately leads to the financing risk because you haven't achieved these milestones needed to attract that next set of capital. So I think you sort of burn bright and burn out is a risk that we see at that stage. And I think the other pieces to that is around roadmap prioritization, particularly when you get to a certain stage. There's a lot of different, I think this speaks a little bit to the cascading miracles, but you can make a bunch of different bets and there's risk if you scatter your bets too much and don't concentrate and focus and make some of those hard trade offs. But there's also a risk if you make a bet and it's the wrong one and then you're out of cash to figure out what is the right one. But you haven't moved the needle on some of those markets. So that prioritization of roadmap and passive opportunity I think can also play into the financing risk because again, you haven't proven the execution that people are expecting and won't be able to attract that next set of capital. The only other one I'd call out, adding on Tom's is I think the people thing is really important. And one of the things that I've noticed is you often get your executive team in place, but if the key thing to get right in this stage is the next level of management and sort of upper management, and it's the people who can start to build teams and can manage really well and grow people really well, I can start to build that sustainability in organizational design. So I think we often think about the key executive team. Okay, you got that in place. But I actually think one of the most important pieces of talent at this stage is the level right below just for that director and senior director. So that's another thing to get right. And it's a different profile than what you were hiring for or at seed in series A. And even at B, it's the transition.

From the generalist, the athlete to the specialist in the bespoke and the manager. Yeah, and let me open up Q and A a little bit. There's some questions. I'll publish one from Owen and I'll summarize it as follows, which is, what do you think? Why is there such a correlation between, you know, certain schools and, you know, founders starting companies? And then outside of that, how do you think of.

These schools in changing the effect of success in these startups?

You know.

I surveyed 470 early stage founders as part of the research for the book and mapped, had their LinkedIn profile, so could map which of them went to business, which of them have MBAs, and which of them went to elite universities in general, either for undergrad or grad school, top 50 universities in the world. And at least in the set, the data set I had, there wasn't a correlation between MBA and success versus failure and there wasn't a correlation between elite schools and the same thing. Now, I have a lot of colleagues where I work who think I'm wrong and my data set's not big enough. But something is going on here, which we do see a lot of successes, obviously, and we're aware of them because we live in this world. But I actually think that folks coming from a privileged background, and you are a privileged background, if you go to a top MBA program or you graduate from an elite university, have better access to funding and so may be more likely to raise money for a bad idea than other humans out there. And so I think it's possible that you actually see more success and more failure just because.

People have personal networks that allow them to do things. They may also come from.

Circumstances in terms of wealth that it's easier for them to take the plunge. Right. You know, they afford a year to sort of explore the idea. So the answer is I'm not sure that actually we are collectively so much better.

Yeah, that's an important piece that we're thinking a lot about in the venture industry in general, which is bias, which I know is a conversation we're hearing from a lot of different industries. But I think one of the challenges is part of venture is pattern recognition. And so you look at profiles of people who have been successful founders and you sort of try to apply mental models. And I think that's one of the most dangerous things and pieces of our job. And it's something that underscore we're thinking about, but the broader industry is thinking about how do you make sure you can have heuristics on pattern recognition of what makes a great founder, but you're not applying bias to background or way of speaking or way you present on zoom or in person. And some of those more nuanced things that I think to Tom's point, could be false, false indicators rather than true indicators of great founders.

On a related note around funding for founders, great question here from Michelle around advice for female founders and attracting funding capital. Any thoughts there?

I'm sure, I'm sure Lilia will have a lot of thoughts. You know, I tried to figure out in researching for the book whether there was a difference in failure rates by gender. And that sample of 470 that I mentioned I couldn't use basically because the response rate to the survey from failed female founders was much higher than it was for failed male founders. Which says something about a willingness to help and maybe.

Something about ego differences. And I think that's important. I've since gone through and sort of, you know, tore apart Pitchbook trying to solve this problem. And it turns out if you look at folks who've raised a half million, the failure rate for male and female is identical. Basically no difference. Where there is a pretty big difference is after failing, the propensity for females to found again is quite a bit lower. Lower. And I would say with some colleagues at school we're trying to figure out why that might be the case. Males are maybe again it's overconfidence and I mean entrepreneurs in general are overconfident. And I think there's a gender sorting on overconfidence I think males are more likely to be overconfident than females. So, you know.

The aftermath of failure turns out to have gender conflicts, consequences.

And just to add it, you know, it's a great question that the stats from funding that went to female funders last year was really sad to see. It was sort of one of the only categories that went down. But the good news is it's an active conversation and there's a lot of great organizations. One of them is one of our partners here today, Visible Hands. I'm also part of All Raise, which has a Boston chapter here. So there's organizations that are studying this and also studying sort of what can we we do about it. So there's a lot of pieces on the training side. There's different funds being set up to launch different types of access to capital. So the good news is that the conversation is very active. The data is getting better, and there's more that we can actively do about it. But it's something that definitely needs to get fixed. And part of that also is having more female folks writing checks, which it's increased a little bit. It's about 11% right now, up from about 7 a couple years ago. But that's another part of it as well.

That's great. Good discussion. And with the last two minutes here, wanted to come back to one very fundamental question, which is around the team, as we have a fun saying at Underscore, which is everything changes, the product, the customers, the funding, everything can change across time. But the one thing that's a constant is the team. So any patterns, as you guys have looked at it, around team dynamic or team cultures that have led to failure or success.

Lily, why don't you take this one? I would say my research, I'm going to end up repeating myself, sort of recruiting for some balance between skill and attitude and getting that mix wrong. Too much skill or too much attitude, I think can lead to failure. But I've already said that. So, Lily, to you.

Yeah, I think.

I don't repeat myself. I do think sort of the your piece on where do you need domain expertise versus not, I think is a really interesting one. You had a little bit more nuance in your book around skill in terms of, you know, I think also sort of the balance of skill sets is also an interesting one that I'd be curious your view on.

And what else? I mean, there's several different dynamics at play. I'd be curious, Tom, your view on the balance of needing technical versus business expertise. You know, A lot of people we talk to ask, should I get a CTO if I need one, or if I'm a technical founder, do I need a business person? And when's the right moment for that? I'm curious if that played into your research.

Yeah, Hacker Hustler. I think there are lots of startups that we would think of as tech startups that don't have.

A degree of tech that really requires a technical co founder. Rent the Runway is an example. Neither of them were technical and they had a hell of a time building a website that worked, but the idea was just so good, they could put up with a lot of bumps along that way. So, like so many things, it depends. It depends. The last thing I'd add here is, you know, that move to add specialists can lead to, in a scaling startup, a lot of old guard, new guard conflict. The generalists who were present at the creation were attached to the mission, who worked closely with the founders. You know, looking at these specialists who view this as just a job, the specialists thinking their contributions aren't really understood or appreciated. And, and you know, to Lily's point about having a head of people who can think through the culture strategy and sort those issues out, super valuable scaling startup.

Well, Tom and Lily, thank you guys so much for a great discussion. Great session. Glad we got to a lot of the good Q and A. Unfortunately we gotta transition to the next thing, but wanted to say thank you so much for joining us. Really good discussion.