Why Startups Fail with Tom Eisenmann (HBS Professor) || Harvard Alumni Entrepreneurs

Well, there's still some folks joining in and we'll let them continue to coming in. But I know folks want to get started and are here for the session on why Startups Fail before we turn it over to Tom. As is typical, I'll spend a minute or two just talking about the events that are coming up right after this one. Tomorrow at 12:15. There's an AI machine learning networking salon on Thursday from 2:30 to 3:30. There's a workshop on becoming a Thought leader on Friday, it's a meditation Friday from 12 to 1. There's a founders networking salon next Tuesday from 12 to 1225. And then Bill Warner, who founded Avid as an angel investor, is joining us on Tuesday from 4:30 to 5:30pm for an investor series. We have a whole bunch of different events that are coming up after that. You can find it in the newsletters that have been sent to you and also on our website. But I know that the reason that everyone's kind of here today is to learn from Tom. And Tom, who recently just published why Startups Fail, which I'll link in the chat below, is a faculty member at Harvard at hbs. And when you think about the contributions that have come out from entrepreneurship, at least in the academic setting at Harvard, there are really four individuals that have mattered a lot. Howard Stevenson, who created the Entrepreneurial foundation, faculty and department at the university and defined entrepreneurship. Bill Solomon, who created Entrepreneurial Finance, helped us set up the California Research center and worked with Joe Lasseter to set up the ILAB and bring some programming to Harvard undergraduates. And then everything else after that effectively has been taught. Tom has created at this point probably a dozen classes at HBS for entrepreneurship. I can't even remember all of them. I'm sure he'll be able to remember them. He is the chair of the Rock Center. He is the chair of the ilab. He is the chair of the MSMBA program where a lot of students are ultimately leaving and graduating and starting their own companies. He's also the chair of the Undergraduate Tech Fellows Program. So insofar as anybody at Harvard wants to do entrepreneurship, it is very difficult if you're looking for the courses for it, not to run into Tom at some moment in time. Students who have founded Stitch Fix, Copang and other multibillion dollar companies have been trained or coached or taught through Tom. So he is literally the foremost thinker, the foremost academic thinker on entrepreneurship in the country. And I am so excited that we're able to welcome him here today.

Wow. Thank You, Matt.

It's special to get that introduction from somebody from Harvard in front of a bunch of Harvard. Thank you for that and thanks everybody for listening. I see some friends, some familiar names, Jason, Klein, Justin, and a lot of names I don't know, including the Museum of Distilled Spirits. I'm very happy to see that.

We'Ve attracted museums to this talk. Yep. Matt, let's let it rip.

Sure thing. We're just going to spend 24 minutes going through questions. Some of them have been pre submitted. They're mostly in the context of the book and then we'll turn it over to you guys for questions as well. So Tom, obviously the book is about why startups fail. There's a lot of things in there that need to be unpacked and defined. So for the purposes of the conversation, can you help define some of that stuff? What's entrepreneurship? What's failure?

What's the start? So we have a few HBSers.

On the Zoom and they'll know that we define entrepreneurship at hbs. Howard Stevenson's definition as pursuing novel opportunity before you have all the resources needed to exploit that opportunity. So pursuit of opportunity beyond resources, control. And that's important because it's a way of managing, not necessarily a role. Some people think of any owner manager as an entrepreneur or any small business as an entrepreneurial venture. That's not quite right. And this also allows for the possibility of entrepreneurship inside big companies. You know, when Google launches Google Drive, that's not entrepreneurship because they have all the resources they need to get started, the data centers, the engineers. When Amazon launches the Kindle, that's a different story. They'd never done hardware at that point. Completely different than the retailing businesses they've been doing. So they didn't have all the resources that were required. And it certainly was a novel. I mean, Google Drive was Dropbox and Mozy and others had been at it for 10 years at the point Google launched its file management service. But Kindle was really early in the ebook thing. So that's. Yeah, that's entrepreneurship.

Then what's failure? How do you know if you failed? How do you know your startup has failed?

Yeah, how do you define failure? Failure, Something that falls short of expectations is the. Is the dictionary definition, which isn't terribly helpful because it begs the question which expectations and whose expectations? Yeah, so.

I mean there's a little. Professors are allowed to worry about definitions. So this one I worried a lot about for the book and define failure in the book as early investors did not. And Never will make money. And that begs the question why? From investors perspective and the answer to that, why not founders? I mean surely founders goals and dreams are important and if you're out of business, but you met all your goals as a founder, to change the world, to build a great team, et cetera, et cetera, are you a failure? And I think the answer is we do need to keep founders goals and visions on radar. But the reality is by series d, sort of five year, seven year point, something like 60% of founders have been replaced as CEO. So you know, once you raise a lot of outside capital, not every founder can make the transition to late stage and a lot of them will be replaced. So we can't focus only on the founder's priorities. And then you know, the last constituency stakeholder we should consider a society at large. So there are startups that are in ventures that are financially successful by my definition, that we would all just wish would go away.

They exacerbate income inequality, they pollute, they have addictive products, and that's important. Again, likewise, there are businesses that fail and leave behind value to society. They've trained managers and employees who can go on to do other things. They've shown the path for other entrepreneurs what not to do. One of the failed businesses in my book is Jibo Social Robot, which burned through $75 million. So a failure by that definition, but showed the path for a next generation of social robots that are actually being used in elder care markets and to engage autistic children and so forth. So it's hard to measure these societal spillovers, but they're real and they're important.

So for the purposes of this conversation, entrepreneurship is the pursuit of opportunity with limited resources and failure is failure to deliver returns to early stage investors. While acknowledging that there are other metrics for success, those startups could have had positive impacts kind of on the planet.

Bingo.

Okay, we've got a lot of first time founders here and I hear all the time that first time founders make a lot of mistakes. And your book is all about mistakes. So I'm curious if in your research, in your work about looking to see why a company fails, what is the single most common reason that a startup fails?

You know, we can simplify it greatly and say they have run out of money and they can't raise more.

That's why startups fail. Most of them. It's not terribly helpful. Right? It's like the coroner saying the victim died of loss of blood, gunshot wound.

And where did that come from? Jealous spouse.

So you have to keep asking why. And I would say the most. So early stage startup failures. The book looks at early stage startup failures, late stage startup failure, sort of.

The ventures that have made it through the teething period, if you will, sort of they're 3, 5, 7 years old, they've found a market, they've hired employees, they've raised some capital, and shockingly, late stage startups still fail. Something like one, by the definition of don't make money for investors, something like 1 in 3 do not make money for their investors.

But the early stage patterns, I would say the most common one is a pattern in the book I call a false start. And this is just like track and field or swimming, where the athlete jumps the gun and you know, in an effort to sort of get out of the blocks quickly. And the entrepreneurial equivalent of a false start is the entrepreneur, so eager to get started, wants to build and sell the product as fast as possible and skips a bunch of upfront research that really could have informed them about whether they found a problem worth solving and whether given a problem we're solving, whether of the many different ways to solve the problem, they found the right one. Entrepreneurs have a bias for action and they want to get going, particularly entrepreneurs who.

Are engineers. They love to build things, but even none technical. A lot of MBAs that I teach are not technical. And they hear over and over again, you must have great product to succeed. How do you get great product? You need a great engineering team. How do you get a great engineering team? You use the amazing networking skills you've got as an MBA to sort of go find either a technical co founder of the equivalent of a VP of engineering. And once you bring that person on board, especially if you're paying them because they're expensive, you're going to feel obliged to design, build and launch a thing as fast as possible, skipping a bunch of upfront research that should be done before you ever start the engineering.

Interesting false start, kind of number one. And I know, I think you use Sunil as a good case study example in the book with his matchmaking company. How do you avoid it if it's the most common cause of failure? What can the founders in this room today do to make sure that they're not building the wrong thing effectively as they start their company?

Yeah, it's probably the easiest to avoid. It just takes the discipline and the research that I'm talking about, it doesn't take years at most, it takes months, maybe two months can often be done in a few weeks.

And the toolkit is well known out there. We teach it at Harvard Business School. You can find online courses that walk you through. It's basically the set of techniques that a user experience designer would go through, often starting with a huge number of very well conducted interviews with folks that are in the customer segments you've identified. And here in the entrepreneurs. The impulse for an entrepreneur is always to sell. I got an idea, I'm going to tell you all about it. I'll sort of grab you by the collars and shake you and ask you, don't you love my idea? And you're going to tell me, yeah, yeah, sure, go away, crazy person, please. And so you know, there is a time for pitching. It's not when you're studying unmet customer needs. So you got to have the discipline to listen, to not hear what you want to hear, to avoid leading questions and so forth. So, and designers are trained to do this. So customer interviews, you can, depending on the business, do ethnography, you know, designing an online grocery service, go follow people around a brick and mortar grocery store, see how they shop. There's, there's, there's a place for survey work because it's easy to do. People tend to do it too early and rely too much on it and tend to use it in the pitching process rather than really in the research process. And then all of that feeds into Personas, prototypical customers. Would that become very important both in product development and marketing and with those Personas then? So we teach a process at HBS called Double Diamond Design. It comes out of the British Design Council. So basically the diamonds, if you'll imagine the sort of arrows going out, is a period of divergent thinking where you're expanding. First, the first diamond is problem definition. Second diamond is solution development and you're expanding the problem space. But then you have to converge and narrow down to a single customer segment and a single set of unmet needs. And you do that with the Personas. Then on solution development, you generate a lot of solutions. You try not to become emotionally attached to any of them, prototype them in a quick and dirty way, get real feedback from, from potential customers on those, and then again narrow down to essentially the one you really want to start building. That's where lean startup kicks in. And that's when you, it's only after the end of the second diamond that you should really be doing what the lean startup folks would call.

A minimum viable product.

What's a lean startup?

A lean startup is sort of this movement that swept out of Silicon Valley, starting about 10 years ago, all over the world. Now that basically the notion that you should approach your startup like a science experiment, develop hypotheses about the business model, about the customer, about how you're going to make money, and test them rigorously in ways that can be falsified. It's not a real test unless you could fail.

But do those tests with the minimum amount of expenditure of as little waste as possible in terms of time and money. And it's important to do those tests, but they're actually late in the process. All this other stuff precedes it. And so I think a lot of entrepreneurs think they are running lean, that they're following lean startup logic.

But true practitioners of lean startup do this upfront customer discovery steps. Got it.

This is interesting.

I did read the book and I know that in the early stage failures, there's two others. There's something you call bad bedfellows and false promises. Can you speak about how in that context those mistakes or those issues crop up and how they end up killing a company, as well as some tactics for avoiding.

False positives? It's actually false promises is a mistake my publisher made on the jacket of the book, but it's close enough, so not worth calling back all the books. Bad Bedfellows is actually the photo negative of the false start pattern I just described. So if you think about a false start, this is. It can be a team. Sunil Nagaraj's Triangulate the dating site you mentioned is a good example. Fantastic team, really nimble, really able to execute supportive investors. You know, so the resources were there. And if we go back to our definition of entrepreneurship, but they never found the right opportunity. So pursuing opportunity without resources, they had the resources and they did three pivots, three big pivots, and they did them fast and they did them the right way based on customer feedback. But you can only pivot so many times before you run out of capital. That's the problem with a false start, right? If you waste the first four months, if you've raised 12 months or 18 months of capital and you waste the first four on a flawed product that could have been avoided just by spending four weeks doing more research, it does boost your failure odds. So bad bedfellows, it's preceded by good idea. So good idea and bad bedfellows. So this is just the opposite. It's actually the right idea, but the wrong resources, broadly defined.

And some folks on the on the zoom will be familiar with Quincy Apparel, which is launched out of a year after HBSers graduated in 2010, a dress company and the co founders who didn't have enough domain experience. It turns out designing and manufacturing apparel is incredibly complicated. And if you're going to create a startup that does that, you better understand the complexities. They hired people out of the industry to do those technical roles. Pattern maker, fabric sourcer, quality control, step by step by step. But these people had never done it in a startup. They came from Ann Taylor where they were used to doing their thing. And in an early stage startup, everybody does a little bit everything. They pitch in to fight whatever fire is burning over there. And so these people sort of sat on their hands and said, I don't know how to do that, that's not my job. So problems with the co founders, they also, in addition to not having domain expertise, couldn't agree on like a lot of MBAs who was going to be the boss. So they essentially shared the leadership role and that slows things down when you can't agree on strategy. The team was imbalanced in terms of skill and attitude. You need both in an early stage startup and they didn't raise as much money as they wanted and needed. And they didn't raise it from investors who could bridge when they got into trouble, could provide a lifeline of funding.

And apparel tends to at this stage manufactured in a third party factory. And so the folks that were manufacturing their stuff, these founders had no industry reputation, no relationships to speak of. So guess whose orders got pushed to the back of the production line if Ann Taylor needed something expedited. So all the way around, every major category of resource provider, there were some dysfunctions. They had a good idea, they actually the idea was better fitting, affordable and stylish work apparel for young professional women. And the women loved it. And the sales were strong and the repeat purchases were good but they couldn't manufacture the stuff. So their returns were higher than expected. Not terrible, but higher than expected. Burned through the capital. They only raised 12 months worth of capital and you know, they had, they just hadn't shown enough progress to raise more. So company failed. Bad bedfellows.

Interesting. So investors often speak about, you know, having good founder market fit, but it sounds like the issue here is not just good founder market fit, it's also good founder founder fit, good founder investor fit, good founder partner fit.

Yeah, call it, call it funder fit.

Funder fit.

Yeah. And it clearly was missing with the, you know, and the Quincy founders positioned the firm which was a rational thing to do as a direct to consumer, you Know there's a lot of direct to consumer businesses out there. At the time, Bonobos had had some success with that model. Direct to consumer means skipping the two stage wholesale to brick and mortar retail and marketing directly to consumer, typically through a website, but sometimes company owned stores.

Thank you. In my class we don't use jargon. Thank you for explaining it.

And.

Warby Parker had had success, so it made sense. And VCs were investing. VCs don't normally invest in apparel companies but if you, they do invest in direct to consumer so. So that's how they sold it. But you know, and I think a lot of folks on the zoom will know that the VC business model is basically.

You make all your money. If you have a portfolio of 60 companies, two or three of them will yield a 10 or 20 or even 100 fold return on your original investment. 30% of them will earn a modest two or three times. If you've tied your money up for 10 years, getting double your money isn't necessarily a great return, but not bad. It's better than losing everything. And then 60%, 70%, 50% of the portfolio investments will just basically be all the money is lost or you make less than you put in. And with that kind of payout structure, the VC needs every single company in the portfolio to have the potential to be a 10 times return. Of course they know not all of them will, but they all have to have the potential potential and they're going to do everything they can to push all of those founders to swing, if we can use baseball analogy, swing for the fences. And that makes a ton of sense for the vc. When you swing for the fences, you strike out a lot. It may or may not make sense for the founder if they know what they're getting into and they want to take that risk, you know, because obviously if it works, the founder is rich and famous. But there are a lot of businesses out there that if they'd taken different kinds of capital and grown more slowly, they might have survived.

And reached some kind of steady state.

Got it. So those are the scenarios in which in most cases a company that's early stage fails. But let's say we grow up, we're series B, we're onwards. What are some of the most causes of death for companies in that case at those stages and then how do we prevent those?

The big one here by the way, all through this there's a cause of death which mortality, if you will, that we haven't talked about, which is misfortune completely out of control. I mean, tens of thousands, maybe hundreds of thousands of businesses, new businesses have failed because of the pandemic, because travel businesses, restaurants and so forth, nothing, no fault at all of the founder. Same thing was true in the Great Recession of 2009. So I mean, it's tragic. We should feel for those, those entrepreneurs. But the book is not about that, right? This is not just not, you know, you were unlucky in your timing.

But no one can predict a pandemic. So at late stage, the big one is a pattern that I call speed trap. And it's just what it sounds like. These are ventures that grow too fast, you know, and, and often they have some early momentum. Early adopters love the product, they spread the word and the business will grow very quickly, organically. And then a bunch of things happen. This attracts the interest of investors who put capital in, typically at a high share price, with the expectation of. And they're only going to get their money back if the thing continues to grow. Founder doesn't typically need to have her arm twist, right? Every entrepreneur, most entrepreneurs love to grow. So. But usually the next wave of growth, sometimes maybe you're harnessing a network effect and it gets even easier to grow. You know, the big get bigger. But very often the case, you start to saturate your target market. And as you reach out beyond the target market, the product you have by definition isn't as compelling for the next wave of customers. So you have to cut your price. You have to, instead of relying on word of mouth, you have to rely on paid advertising. So you get a squeeze between revenue, price and cost.

And the customers are now less profitable. In the meantime, competitors have taken notice. You get clones in a lot of instances. Sometimes the big incumbent corporations in your space have woken up to a startup in their midst and, and they finally come in. And so that puts further pressure on price and it also will drive up cost. You know, when Uber and Lyft have to compete for drivers, the drivers get more expensive. And so, and then other bad things can happen if you do have any kind of business. Some businesses are just pure software and they scale smoothly. Usually. Other businesses need humans to do things, answer telephones, pack boxes in a warehouse. And hiring those humans and training them and having the management systems to coordinate their work and the middle managers who can supervise them and train them and so forth is coming out of nothing, right? An early stage company has none of that. So all of that has to be put in place. And that can lead to, I mean, think of Robinhood A month ago when GameStop was booming and they couldn't answer their emails. That kind of problem is a speed trap problem. And then the culture can really unwind in these companies. Right? You get conflict between the old guard, the people who were present at the creation and know the founder and love the mission, and the new guard, for whom it's often just a job, or the new guard who are specialists as the company, the jacks of all trades who were present in the beginning now find themselves reporting to somebody who's an expert on performance marketing, who's an expert on how to run a warehouse.

Who can really sort of worry about the community management and so forth. And so there can be a lot of cultural conflict inside these companies and they'll typically keep growing and hope that they can correct these problems. Investors may put in another round, another round, but eventually things catch up with them and people realize that this growth is unprofitable. And then the wind can come out of the sails very quickly. The entrepreneurs find that they can't raise new money, the existing investors are skittish about putting money in. And.

Once you get a down round share price that's below a previous share price, then so yeah, game over. People desert the company and can really unravel very, very quickly. That's the most common path. There are a couple other late stage patterns, but that's the one I think we see over and over and over again.

There's a.

Doesn't have to be fatal, right? You can survive this. You can refocus on profitable customers, you can put on the brakes in terms of marketing. And some companies do survive, but for many it's fatal.

Interesting. There's a lot more questions I want to ask you, but I also know that there's a lot more questions that the audience wants to ask as well. So I will just limit myself to one more before we open up the questions. And this actually came from a pre submitted question from someone which is, when do you give up and how do you give up?

Yeah, when do you throw in the towel? If you're the founder or the CEO of a struggling startup, it turns out to be really difficult decision and there's a lot of good reasons for that. I would say I interviewed a lot of failed founders for the book and many of them would say probably a large fraction of them would say I waited too long to shut the thing down. And you sort of think about the pressures on the founder first. There's just a bunch of things you need to try before you shut the thing down, you need to try a pivot. And, you know, there's almost always some other way to run the business. And it takes time to sort of see if the pivot's working. And so that's, you know, you also need to try to raise more money from new investors. That usually doesn't work. Then you try to get what's called a bridge financing from your existing something to take you over the bridge. And that can be really contentious because it has to be approved by the entire board. And some investors may be willing to put in money. Others will be worried about throwing good money after bad. So that takes time and sort of a whole bunch of drama.

Many companies will go through layoffs. Almost everybody tries to sell the company. And this is where you can get a lot of false positive signals, encouraging signals, because everybody wants to see what your company's about. Every competitor you're going to approach is going to want to take a look at, like, what are you paying your people, sort of, how do your operating figures really look? And part of the diligence process is sort of opening all that up to inspection. So people who look like they are kind of interested eventually turn out to not be interested. You can get strung along and it's in the interest of anybody who wants to buy you to sort of weaken you to some extent so they get a good price without killing you and sort of wasting the asset they might be acquiring. There's a bunch of moves to play out, but then there's other pressures. Like the identity of an entrepreneur is somebody who's persistent. And so if you throw in the towel, are you really a great entrepreneur? People are depending on you. Like people in your company are paid by you, they may get their medical benefits by you. Investors had faith in you, gave you their money, and you feel that they are counting on you.

And then another thing that delays the inevitable is often founders just have no one to talk to about this. When you ask a founder how their company is doing, the response is always, we're doing great, we're doing great. And you kind of have to be that way, right? Because if you actually told people the truth, it'd be hard to raise money, it'd be hard to keep and attract employees. So there is some pressure on you to just sort of hang back. That's why so valuable for founders to have the equivalent of ypo or some trusted group of peers that they can actually talk to, that they don't have to worry about words going to get back to the finance community and, and bias our effort to raise money. But if you have no one to talk to, you sort of are in an echo chamber, and you don't really have a good way to get a fix on what's going right and what's going wrong. And then the other thing is it's rarely, you know, there are a lot of ups and downs, and sometimes they're more downs than ups, but every time you get a win sort of gives you the faith to keep going. So all of these forces converge, and then finally there's just the pain, right?

It hurts.

It's terribly painful. In a lot of parts of the world, there's a big stigma associated with failure. Some people would just rather push that out into the future than stare it in the face right now. All of those pressures.

Converge to tend to push it out longer than it should.

People wait for a miracle. When they do that, they miss the opportunity for what one might call a graceful shutdown, one where everybody who's owed money is actually paid the money. That's my definition of a graceful shutdown. And graceful shutdown is a really good way to, as a failed entrepreneur, preserve your reputation. If you can shut down gracefully and if you could show after the fact that you're thoughtful about what went wrong, your role in it, and what you've learned, my experiences in many parts of the world.

You'Ll be viewed as a good entrepreneur and worth backing again. It's the folks who sort of burn a lot of bridges in the process of shutting down. Leave a lot of people holding an empty bag when they were expecting to get paid. Or in the worst case, founders who, boy, please, everybody on the call, don't do this. The worst thing the entrepreneur can do in the shutdown phase is toss the keys on the table and basically say to the investors, look, it's pretty clear this isn't working. And it's also clear that even if it does, we're going to bring in a lot more capital, and I'm going to be diluted to the point where there's no equity upside for me. So it's your problem now. I'm out of here. I'm going to go find my next gig. And, boy, if you want to know Something that makes VC's investors furious, it's sort of inheriting the mess that a founder who leaves prematurely.

Creates. Great.

First question is from Lisa Dare. I hope I'm pronouncing the last name correctly. Lisa, do you want to ask your question? Sure.

Yeah. I was wondering whether or not you just had a kind of rule of thumb for how much money to raise in an initial round.

We're basically a university spin out in a blue ocean. But the industry is starting to grow from somewhere between 50 to 200% and we're trying to balance going fast and hiring engineers to get the market share, which we're the only current player in one of our verticals, but at the same time ensuring success at each point. Lisa, is it a science based business? It is not. It's a learning experience platform. So set science based businesses aside because the capital requirements and the timeline to sort of figure out if it's working can be completely different in those kinds of businesses. I would say in most businesses what you want is.

So the theory of fundraising is you want enough capital to get to the point where you've reached an important milestone and that milestone, if you've reached it successfully, will boost the value of your company. And only then would you want to go out and raise the next round because you want to raise the next round at a higher price, having shown success. And it always, always takes longer for the entrepreneur to get to the milestone than you think. So I would say figure out what that timing is that you think if everything goes right and then add 50%. And so I would say for a lot of, for a lot of startups the milestone is going to be to launch the product or to have launched the product and seen enough customer engagement that you can see that people actually like it and they're repurchasing it or re upping on a subscription. If it's sort of a SaaS style business. And you know, for a lot of early stage companies, that's going to be 18 months. You know, if I had to sort of give you a rule of thumb on time, you know, it's, it's, it's real. And here's the problem with Quincy Apparel. They targeted 18 months. They knew they needed a million and a half dollars to do that. That would have been for them, three seasonal collections of clothing, spring, fall, spring, and they only raised a million. So they only had two and they were still working through their production and operations problems. They probably would have got there had they managed to raise a million and a half. I bet they would still be going concerns today.

Sorry about that. Shamir, you had your next question. Let me know if you'd like to read it out loud. I can also do it. I don't see you on video.

Yeah, thank you.

I just started reading the book and.

It is really amazing. I have been reading startup founding Books.

And yesterday I received my first check.

It's a small check for developing a healthcare tech product back in India.

What would be my next focus? Like in terms of solving problem. Right now I got confused like solving a problem or talking to customers or creating a milestone. So what should be my priorities?

Are you solo at this point? It's just you? Yeah, yeah, I'm solo. That's good because basically you should stay solo. Or if you have a co founder, just you and the co founder for as long as you can before you bring a team on board. Bringing the team on board is the cause of the false start in a lot of instances. So if you've got my book, go to chapter four and read the back half of that chapter. It's all, it's the stuff I was talking about before on Double diamond and customer interviews and using Personas. You should be doing all of that and follow the. There are citations, sort of footnotes if you will, that will lead you to other sources. I mean I give you an overview in the chapter, but there's a lot of great stuff published and available actually for free online that will help you with the basics of customer discovery and prototyping and testing a prototype and so forth. Please do all of that.

It'll save you some heartache later, save you from a false start. Thank you, sir.

Andrea G has a question that I think is a good one. Andrea, do you want to ask it? Yeah. So there's a lot of advice to entrepreneurs to fail quickly and fail early. So. And that would probably be a different definition of failure than what we're talking about in terms of killing the business. So are there types of like small.

Failures that you think can be good.

Lessons and help entrepreneurs pivot or learn very early about the product or the customer?

Yeah, Andrea. I mean entrepreneurship. Anything in life is going to be full of small and big failures. And the key is basically making sure you learn from them.

There is a concept that I think is important one as you talk about startup failure of a good failure. And I mean this is still a failure by the definition I threw out before the investors if there are any lost money. But we can feel pretty good about the failure if the entrepreneur stated some assumptions, did a reasonable job of.

Learning everything they need to know to figure out whether those assumptions were correct. In some cases, you just may be making an assumption about the state of the world that is inherently not predictable. Right. Whole bunch of clean tech businesses in the 2010 timeframe were predicated on the price of fossil fuels coming down Price of fossil fuels, Excuse me, going up clean tech would be more interesting if fossil fuels got more and more expensive, which we expect them to do because they're scarce. But fracking came along and gasoline, natural gas and oil and so forth. Oil related products got cheaper. So you make an assumption. You sort of read everything you can about what smart people think is going to happen to the state of the world. And whenever you can, you actually test demand for your solution and you test it with, in lean startup fashion, with a minimum viable product. Sometimes that can be before the product even exists. Right? A landing page test where you describe the thing that's coming. It looks like the real thing and you see if people respond, if they leave their email. You don't leave your email with strangers on the Internet. So I would say all of those are good failures. And an entrepreneur who does that, even if you spend a year at it, but you feel you've sort of tested your assumptions thoroughly and you haven't wasted time, you haven't wasted money. That's going to happen a lot with entrepreneurship. I mean, by definition you are doing something new and that by its nature is risky. So you're going to fail a lot. And some will be little failures that you can rebound and learn from and some will be big ones that are truly fatal.

Thanks so much, Andrea Kunal. The answer to your question is yes. Yes, that is true. Mahdi, you're up next. If you'd like to ask your question or directly or I can do so.

Thanks. Yeah, sure. Thanks. I really appreciate it. I just had a question of is being a solo founder a cause for failure? Of course, a team is important, but I wanted to see whether it's a cause for failure. Thank you. You'll find a lot of.

Observers in Silicon Valley who think that you should have co founders.

And there's a good reason for that logic. It's basically entrepreneurship is so hard and there's so much to do that you can sort of assuming you've got complementary skills, your skills don't completely overlap, you can divide. You know, you'll work on engineering and operations, I'll work on marketing and finance and we'll get there faster and emotionally. When you're down, I'll pick you up and vice versa. So there's some good reasons to have a co founder. There's also the potential for conflict and it happens in a lot of startups, right? Founders can't agree on the way forward. They can't agree on like the Quincy founders, who's the boss and that can get very. That can get very nasty and really debilitating. So those balance each other. You know, for the book, one of the things I did was I surveyed 470 early stage founders, and these are founders, both of successful and long, less successful, sometimes failed companies, and asked them a bunch, dozens of questions about who they were, what their startup was, about how they managed the thing, et cetera, et cetera. And one of the questions I asked, and then I use those questions to try to see is there anything that predicts who will succeed and who will. Who's more likely to fail. And one of the attributes I looked at was solo founder, and it isn't a strong predictor. If anything, it looked from my data like solo founder actually gave you a small edge, you know, improved your survival and success odds. So, you know, and there's some other academic research I would say it's not, it hasn't been thoroughly studied, but the other research I know of was actually done in the context of crowdfunding campaigns. So if you think of Indiegogo and so forth, you know whether. Whether a sole campaign sponsor is going to be different than more successful than a pair or triplet. So I wouldn't worry too much about it. I mean, I would only bring on board a founder unless you really, really, really understand what that person's going to bring to the table and you feel you need that help and that you can work with that person for the next 10 years, because that's what it might take if the business is successful.

Thanks so much, Mekdi. Rob, you've got a good one. Do you want to ask it directly or should I?

Sure, I can read it. So by testing the product, I learned. Thank you. First, I want to thank you, Mr. Eisenman, for dedicating your time today. It's really been instructive.

To avoid a false start.

By testing the product before an MVP is created. Doesn't that potentially risk damaging the product's reputation before it's perfect for the market? That's been something that's been holding us back. We're at the final stages of a pivot. We've already pivoted once and we're ready to launch. We have this philosophical sort of barrier where we don't want to test the product.

Rob.

B2B. Yeah, B2B. B2B. Search engine. Yeah. Yeah. So I think the answer to this question depends a lot on whether the venture is business to business or business to consumer. When you're dealing with thousands and even millions of potential customers. You can afford to take some risk with a few hundred of them to sort of get feedback on your product. And by the way, you know, people, people after they were exposed to sort of the shoestring and bubble gum version of your product, if they're told that they were a part of a test and you value their feedback and help and so forth, they will often be very forgiving. It's a world of difference. In B2B especially, there are some B2B sectors, like if you look at healthcare or some areas of financial services where you can count on your hand, on one hand, the number of important customers, and there you really can't afford to put, to put out a wobbly version of the product.

Unless that wobble is done with the full support and knowledge of a pilot partner. So typically in B2B, you'll go and try to find the early adopter who can envision why your thing, which is still built from shoestring and bubblegum, might actually give them a competitive edge. And we'll work with you through the bumps and so forth and, and so you're still essentially testing an mvp, but you're doing it in partnership, in pilot mode with, with an understanding of somebody who knows that look, they're going to be. They're going to have to put up with some rough edges. But yeah, just to put in a B2B context where there's a limited number of customers, especially if the customers are networked with each other and word will spread fast to put out a sloppy version. By the way, just because it's a minimum viable product doesn't mean it's rough around the edges. Minimum means whatever the least amount of effort is to give you.

A reliable customer feedback. So if the customer demands quality precision, then that's what the MVP has got to be.

So.

So, yeah, it's important. We tend to think minimum means sloppy or quick or dirty, but it doesn't always. Thank you. Thank you so much.

Thanks so much, Rob. Emily, you've got a good question. Would you like me to read her? Are you ready to read out yourself?

Cool. I'll take that to mean that I'll read it out for. What advice would you give to someone designing the early experiment and doing customer discovery in a potentially highly fragmented industry? For example, a hardware company that's embedding a piece of tech into IoT devices. Thousands of SKU models instead of smartphone. Dozens of SKU models.

Thanks. Sorry, I just got off mute. Appreciate it. Yep.

Wow.

Yeah, that's.

Such a tricky case. I want to be careful about not giving bad advice there.

Emily, can you come onto the call? Are you still there? Yeah, sure, I'm here. So IoT.

There are physical IoT devices and you will need to put a component into them or you need to put software into them.

Yeah, hardware components. So imagine either power management function or something in communication where you'd have to customize it in a smartphone case for maybe a dozen products. But there's some degree of customization. The question is scalability and margin.

Yeah, yeah. So I mean, I mean this is sort of not in my wheelhouse. So I'll speculate that one of the tricky things you'd have to figure out is whether to. They're probably. It's fragmented, I'm sure. But I'm sure there's some bigger problems. Opinion leaders there. Then some reference customers would be more valuable than others and some would probably be more willing to try your thing and take the kinds of risks I was talking about to rob a minute ago. And that's going to be the trade off. It may take longer for you to sign up one of the reference customers who's slower, but once you get them.

The fact that you can reference them.

They may be the de facto standard setter for the category versus just sort of getting some early wins and learning as you go and sort of using those as stepping stones to the bigger customers. But yeah, it's a hard one.

Thanks, I appreciate it. One thing we've sort of explored, and I wonder what you think about it, is as opposed to focusing on the end customer in the way you've just described focusing on a channel partner. A lot of these things are sold through a single supplier channel partner, like an OEM component supplier to a bunch of end customers.

That's something. We.

Can see that. And then what I'd be careful of there, if you're still in product development mode, is making sure that you have access to the end customer to get feedback from them on what's working. Even a well intentioned channel partner can sometimes get in the way of letting that feedback get back to you and you really need it.

Thank you so much.

Firas, I hope I'm saying your name correctly. You've got a good question about accelerators incubators. Would you, would you like to ask yours directly? Yeah, sure. Thank you.

Just from my own experience because I've done a little bit of the venture program at the Harvard Innovation Lab and most recently with AN Sigma, there was a Harvard climate circuit that was opening applications for ventures. So I participated And I've noticed that they didn't even ask me for the prototype. And it's basically an app, a software with a prototype. And I've been optimizing that. But I'm noticing that there is a loss of track for incubators, accelerators in the investment part. Like they're always putting the pressure on the founder and they're not giving you enough connections or connecting you with investors. So I'm wondering if traditional ways of financing are better, like green loans or something of that nature. And wanted to see what you think about that. Thank you. Yeah. Faraz, without asking you to name the accelerator, I would say any accelerator that's not providing good mentorship and not providing introduction to investors is not a good accelerator. So you probably shouldn't, you should not be.

You shouldn't be working with them, I'd say. You know, I get this question a lot from, from our MBAs are trying to figure out what they would get out of an accelerator. And by the way, I tremendous respect for Y Combinator and techstars and some of the, some of the best accelerators, I think they have fantastic programs and it's tricky, right? So those programs, for a founder who doesn't have a lot of business training, they can be a pretty quick immersion in business basics. And every founder at some stage is going to have to learn a lot about business, right? Whether, whether you learn it by going to a business school or you learn it from mentors. You gotta know some marketing, you gotta know some finance, you've gotta know accounting.

And accelerators have some ways to fill those gaps, but an MBA doesn't need that, right? They've got the business training. The other things you get are excellent, usually excellent mentorship and sometimes too much of it. Techstars very deliberately fire hoses founders within the first few weeks. It's not uncommon to meet 20 mentors in a week and, you know, get 20 different opinions on what's working with your product and which direction you should head in. It's actually good for the founder to have to sort through that cacophony of advice. It's called mentor whiplash is the way you end up feeling at the end of this. But then techstars will figure out with whom you've connected most strongly in both directions, the mentor and the entrepreneur. And that person will then stay with you through the program and beyond. That's a fantastic setup. And then in the background are domain experts, people who can help you with performance marketing, can help you with intellectual property management. So on and so forth. So you get terrific mentorship. The other thing they do, and we don't do this at business school, unfortunately, is teach entrepreneurs how to pitch. And like it or not, storytelling is super important for an entrepreneur. Right. How you get your idea across, how compelling you are, because you're going to, you're constantly selling, you're selling to investors, you're selling to employees, you're selling to potential partners. And the best accelerators do they spend essentially the last one third of the program just coaching you over and over and over again how to give this six or eight minute pitch and then they'll fill up a room with four or five hundred potential angels and VCs who are exposed to your thing. So, you know, for all that you.

If it's Y Combinator, I don't know, it's like $100,000 you get these days or 150 or something like that, and you give away 8% of your equity, you know, so my students want to know, is that a good trade? And I tend to tell them, yeah, you know, you already know the business stuff. They would teach you. But you're going to get great mentorship and you're going to get great exposure to investors and you're going to learn how to pitch in ways we haven't taught you. Okay, well, thank you. I do have the pitch and I do. It was a project follow up from my program. But it's just, I think there is something lacking in connection with investors. I'm finding that in an. Yeah, for us, you need, you need to find coaches who can help you with it if that means there's something wrong with the pitch. And good mentors can isolate that and help you fix that. Okay, thank you.

Thank you. Thanks so much for yours. We're running up pretty close to time and we've still got about half a dozen questions left. We'll actually just finish up with one. And I know Zach's probably somewhere in the chat is going to take over. Closer to about 2 o', clock. A person asked me personally, Tom, is there any way that they can contact you directly to say thanks for the dialogue? Generally, how can someone get in touch with Thom Eisenberg?

Yeah, if you just take my last name and then put the initial T in front of it at hbs Edu. That's my email.

Cool. I added it to the chat. I also added the YSIRP scale to the chat so that everyone can get access to it. Zach, I hope you're coming on because I know you want to transition folks to the networking hour afterwards. Tom, if you've got any closing words at all, now is definitely the time to say Saban.

Yeah, I'll leave you. If you have a chance to look at the book, you'll see it ends with a letter to a first time founder. If you aren't inclined to buy the book, you can find if you just search for my last name. And.

A site called Startup Nation has republished the letter. It's advice that I would give you and it basically says that entrepreneurs get all sorts of advice and you have to be careful with the advice. There's a lot of conventional wisdom about what makes a great entrepreneur and that wisdom is by and large sound. But you have to be careful about following this advice blindly.

Grow every entrepreneur. Y Combinator. Paul Graham, who built it, says entrepreneurship is all about growth, focus, be frugal. Of course you have to be frugal because you got limited resources. But some of these, if you follow blindly, some of this advice can actually get you into trouble, right? If you're too eager to grow, you can fall victim to a false start. If you're too frugal, you may not hire the specialist skills you need to actually sort of compensate for your lack of domain expertise. So my advice to an entrepreneur is to just stop and think. Too often we think of entrepreneurs who should and do trust their gut instinct. And again, that's an asset. Sort of being fast scrambling is a real advantage, especially in competition with big slower companies. But if you move too fast, your gut basically is not always a reliable guide when there's a lot of pressure on you. So on the important decisions, think about it, think twice, sleep on it. Sleep for two nights. You know, ask people who know you and know your company and you trust and just my advice would be slow down a little bit and think it through.

Over to you, Zuck. Thank you so much. Tom.

Thanks so much for your thanks. Thanks everybody for joining.