Tom Eisenmann on Why Startups Fail
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Pear VC hosted an event with Professor Thomas Eisenmann, the Howard H. Stevenson Professor of Business Administration at Harvard Business School. He is the faculty co-chair of the HBS Rock Center for Entrepreneurship, the Harvard MS/MBA program, and the Harvard College Technology Innovation Fellows Program. He currently teaches Entrepreneurial Failure, Technology Venture Immersion, and Launch Lab at HBS.
Earlier this year, he published Why Startups Fail: A New Roadmap for Entrepreneurial Success. The book looks at common failure partners for early and late stage startups, how to avoid these failure patterns, and how startups can fail better.
We cover the key takeaways from Professor Eisenmann’s talk in this article.
What does it mean to be an entrepreneur? Why study failure? Do founders make or break a business? Why do partnerships fail? Why do co-founder relationships fail? Why do execution oriented founders fail? How do startups with momentum fail? How can aspiring startup operators leverage these lessons? How can you rebound after failure?
What does it mean to be an entrepreneur?
Entrepreneurs pursue novel, risk opportunities without resources. For example, while Dropbox and Google Docs built similar products, Drew Houston was launching the former with far fewer resources than Google had.
In his research and book, Professor Eisenmann defines a failed startup as one that never makes investors money. Of course, he notes, this is not a perfect definition because it does not factor in societal impact or the startup outcome’s alignment with the founder’s ambitions. In the later stages, specifically in the Series D and beyond, only around 40% of startups are even still led by the founder: sometimes, a startup can succeed or fail regardless of the founder’s involvement. By Professor Eisenmann’s definition, up to 90% of startups fail.
Why study failure?
Professor Eisenmann found that oftentimes a startup can be a victim of its own success. Things like hypergrowth can simultaneously boost the likelihood of success and failure of startups. By studying failure, Professor Eisenmann aims to help founders better understand how they can avoid these common mistakes.
Do founders make or break a business?
Many investors make the argument that investing decisions should largely be made based on the caliber of the founder. According to this philosophy, even if the initial idea is poor, a great founder can make it work or figure out a better idea to pursue.
Professor Eisenmann notes that it’s not just the founder whose time and ideas contribute to the company’s success. In fact, there’s a whole constellation of players who have to be aligned from investors to other team members to external partners.
He recalls a founder he advised at HBS who was building a company providing better fitting, stylish work apparel for women. They validated their MVP, raised $1 million, and launched their business, but they quickly found they could not deliver on their promise of providing better fitting clothing. Their rate of returns were on par with other eCommerce sites, which ran counter to their promise and mission. In hindsight, here were the mistakes he realized they made:
- Holding inventory: Rent the Runway (another HBS founded company) was able to find success in a similar space in part because they were renting dresses, not holding their own inventory. When you hold inventory, you run into a world of logistics challenges many founders aren’t prepared to face.
- While both sets of founders didn’t have domain expertise in retail, such domain expertise was less necessary when the company was renting (in the case of Rent the Runway) than when they were holding inventory (in the case of this failed startup). If you’re a founder lacking domain expertise and building in a space that requires it, leverage people (friends, investors, advisors) to help you vet the domain expertise of talent when you are hiring to fill these gaps.
- Working with outsourced manufacturers: outsourced manufacturers usually are working with hundreds of customers and don’t especially prioritize a smaller, newer startup with fewer, specialized orders. They likely didn’t pay special attention to the unique fitting needs and dimensions the startup requested.
- Not having a jack of all trades culture: in the company, everyone just did their part, which is certainly sufficient at a large company but definitely not aligned with the startup culture of everyone pitching into everything, even tasks outside of their core roles.
Why do partnerships fail?
Startups frequently want to partner with big companies, but doing so often leads to an unbalanced dynamic. It’s hard to find a point person in large companies. With the natural turnover in large companies, even if you do find a champion, they may leave to join another team or company before you close the deal. Large companies may also be looking to steal your idea and build your concept in house. For them, partnering with you long term may just be less of a priority and less of a need.
Marc Andreessen aptly uses the Moby Dick analogy to describe the nature of startup and large company partnerships: startups spend ages chasing after the promise of a partnership only to realize it wasn’t at all what they expected or wanted.
Startups typically can’t afford lawsuits in cases where the partnership with a large company goes south. Other alternative courses of action include threatening to sue or, better, using your social media platform to drive attention to the situation and pressure the large company in question.
Why do co-founder relationships fail?
When founders talk about “resources,” they often think of time or capital, but in reality, people and relationships are the most important resource. Within this context, your relationship with your co-founder is crucial to the success of your business.
Too often, entrepreneurs jump into founding a startup together too hastily. It’s hugely helpful to feel out working together prior to formalizing the founder relationship. Try working on a big project together first.
Why do execution oriented founders fail?
People always stress the importance of founders having a bias toward action. While this is certainly true, execution oriented founders can face the false start challenge. They become instantly convinced of their product market fit, and they want to move quickly to building, but they neglect to truly do customer research. Fight against your instinct to just build heads down. Instead, make sure you spend time with your prospects and talk to people in the ecosystem.
You may have some enthusiastic early adopters, but many early adopters are not truly useful data points unless you can bridge the gap between them and your mainstream audience. Building based on early false positives leads you to overbuild to early adopters and build in the wrong direction.
How do startups with momentum fail?
Even startups that seem to have great momentum in early user growth and big rounds of funding at high valuations can fail. As you grow, it becomes increasingly harder to get customers. You usually transition from word of mouth and other organic avenues of growth to paid marketing and start selling to a less captive audience who you’re not in direct contact with.
If you don’t meet your milestones, you can face a down round, so be careful what you raise at and don’t just go for the term sheet with the highest valuation.
For more logistically intensive products, scale presents other challenges. For example, Professor Eisenmann recalls a couch delivery startup he worked with that faced challenges with their couches showing up at the customer’s doorstep too early.
For companies creating a new market, many things need to go right, and if even one thing goes wrong (like consumer behavior shifting in the case of Segway), everything can quickly go wrong.
How can aspiring startup operators leverage these lessons?
Professor Eisenmann’s insights aren’t just useful for startup founders but are valuable for operators as well. If you’re thinking about taking a job at an early stage startup, consider the following:
- What is your learning style? What do you want to learn? Knowing this, are you able to learn from the people on the existing team?
- What is the risk of failure? What does that mean for you financially?
- Do you see any of these failure patterns? For example, are the founders overbuilding to early adopters? Do they need domain experience? If so, do they have it?
How can you rebound after failure?
Failure isn’t the end of the word. Even if your startup does fail, there’s ways you can fail better and rebound effectively:
- Balance distraction with reflection
- Be graceful: make sure your vendors are properly paid, give back capital to investors whenever possible, ensure your customers are taken care of, and support your employees in finding their next roles
- Be intentional: think through what you learned, instead of blaming others. Focus on what you can tactically do better next time.
We hope this article has been helpful for you in avoiding common startup mistakes and failing better.