You are currently viewing Why Startups Fail: A Harvard Business School Professor’s Letter to a First-Time Founder

Why Startups Fail: A Harvard Business School Professor’s Letter to a First-Time Founder

The following is excerpted from the book “Why Startups Fail” by Tom Eisenmann. Copyright © 2021 by Tom Eisenmann. Used by permission of Currency, an imprint of Random House, a division of Penguin Random House LLC. All rights reserved.

StartupNation exclusive discounts and savings on Dell products and accessories: Learn more here

Dear Founder:

Congratulations for taking the plunge—for committing to work full-time on that startup concept you’ve been pursuing. I’ll share some advice based on work on entrepreneurial failure that I’ve done as a Harvard Business School professor. I want to warn you about the challenges that you’ll face when leading an early-stage venture. Believe me, managing a late-stage startup brings an entirely new set of thorny problems. But before you can tackle them, you’ve got to run the early-stage gauntlet. If you make it through, I’ll write you a follow-up letter!

As a first-time founder, you’ve probably heard lots of conventional wisdom about what makes for a great entrepreneur. While this advice is mostly sound, following it blindly might actually boost your odds of failing. If you read books and blogs that offer encouragement to first-time founders like you, you’ll see six points emphasized repeatedly:

  1. Go for it! Great entrepreneurs seize opportunity. Moving fast, they trust their instincts and avoid paralysis from over-analysis. Competing with big corporations while lacking their resources, entrepreneurs had better be nimble—like the first mammals, scrambling to avoid a dinosaur’s stomp. But a bias for action may tempt you to cut corners and launch too quickly. A pre-launch exploration phase is critical: That’s when you do the research needed to identify unmet customer needs and consider alternative solutions for satisfying them. If you are chomping at the bit to build and sell and you skip this upfront research, your first product may miss the mark. You’ll suffer a false start, wasting precious time and money.
  1. Power through it! Entrepreneurs face constant setbacks. Products have glitches or are delayed. Rivals and regulators spring unwanted surprises. Prospective customers, investors, and employees repeatedly say “No, thanks!” But entrepreneurs just dust themselves off and go back at it; they’re steadfast and resilient. However, if determination turns into obstinacy, you may not recognize that you’ve made a false start and, as a result, you may not see the need to pivot. Doubling down on a losing hand, you’ll burn through your capital and hasten your venture’s demise.
  1. Bring the heat! Like determination, your passionate desire to “make a dent in the universe” can sustain you through a startup’s inevitable struggles. Moreover, it can be a beacon for employees, investors, and partners you’ll need to turn your dream into reality. But excitement can also translate into brashness, resulting in the erroneous conviction that you’ve already divined the right solution to a crucial problem, so there’s no need for upfront research. Again, such overconfidence boosts your risk of a false start. And again, because we are wired to see what we want to see, you may not grasp the need to pivot. Finally, early adopters may identify with and share your ardent desire to find a solution to their problems. This can lead to a false positive failure if you craft a solution that appeals to these loyal, supportive early adopters but not to mainstream customers.
  1. Grow! Y Combinator’s Paul Graham says, “A startup is a company designed to grow fast . . . if you get growth, everything else tends to fall into place. Which means you can use growth like a compass to make almost every decision you face”—for example, how much to spend on marketing and which employees to hire. Furthermore, growth feels great: it’s how many entrepreneurs keep score. And it’s a magnet for talented employees and top-flight investors. On the other hand, your zeal for expansion may coax you into a false start—launching your product before you truly understand customer needs and how to meet them. And, rapid growth puts added pressure on employees and partners. If you have bad bedfellows, hypergrowth can lead to product quality problems and customer service gaffes—and to spiraling costs, as you aim to reverse the damage.
  1. Focus! Resources are limited in an early-stage startup, and as an entrepreneur you can only do so much. So, you should focus on what’s most important. Find your target customers and create a product that dazzles them. Anything that distracts from that priority is a problem. Scuttle your side projects. Skip the conference speaking engagement. But excessive focus comes with risks. If you concentrate all of your efforts on a single customer segment, your logical target will be early adopters. Focusing only on them and ignoring the needs of mainstream customers can yield a false positive. Likewise, if you haven’t tried to sell your product to any other customer segments, or you have only employed a single marketing method, you may have trouble identifying options when it comes time to pivot.
  1. Be scrappy! Facing resource constraints, entrepreneurs must conserve cash by being thrifty. But if your venture cannot execute because your team lacks crucial skills, you’ll have to decide whether to recruit new employees with the right stuff. If these candidates are expensive, a frugal founder might pass on hiring them—and continue to suffer with bad bedfellows.

So, you should follow the conventional advice—most of the time. You should be scrappy, passionate, and persistent—most of the time. You should move decisively and put a laser-like focus on your top priorities, including growth—most of the time. In other words, you should view these principles less as gospel and more as a tool for making decisions when the stakes are low, or on those rare occasions when you must make a split-second, high-stakes decision and you just don’t have enough time to assess the tradeoffs thoroughly.

Sign Up: Receive the StartupNation newsletter!

Complex decisions that can, if bungled, boost your odds of failure—for example, shifting from exploring to expanding; balancing the needs of early adopters and mainstream customers; pivoting; or hiring experts—should not be made according to simple rules. Rather, you should weigh your options and tradeoffs deliberately. In particular, be careful with the widely held presumption that entrepreneurs should trust and follow their gut instincts. Under the pressure of bet-the-company decisions, your gut will be wracked by strong emotions—and that can obscure the right move. Sleep on these decisions—maybe for two nights. Then, write up your analysis of options and tradeoffs, and share it with team members and investors. I truly believe that with crucial choices, what Nobel Prize–winning economist Daniel Kahneman calls “slow thinking” will boost your odds of survival.

The fact that you’ve already committed to an entrepreneurial path, knowing full well that your odds of failure are high, suggests to me that you’ve come to terms with that possibility. You’re likely aware that while failure may be painful, the entrepreneurial path is, for many people, an irresistible draw—a career calling. You may well be one of them.

A few years ago, as startup valuations were booming, I worried that my current students—who were in middle school when the late 1990s internet bubble burst—were launching startups without appreciating the implications of another industry bust. I feared they were running headfirst, like a herd, toward a bruising outcome. So, I wrote to a number of my former students who’d launched ventures during 1999 and 2000—almost all of which failed when nuclear winter set in. I asked them: Do you regret founding your startup?

To my surprise, all but one alumni founder insisted they had no regrets whatsoever. Instead, they spoke about their pride in building a product, a team, and a business. They pointed to everything they had learned, and to the incredible experience they got from being a general manager, in charge of every aspect of their venture—with a level of responsibility that paled in comparison to what they would have had as an employee. And a couple of them added, “I’m glad that I won’t have to tell my grandchildren that when the internet took off, I watched from the sidelines, working at an investment bank.”

So, founder, I hope that after reading this letter, you’re ready to get off the sidelines. It will be an amazing ride, creating something out of nothing. To do that, think fast and think slow. And don’t lose sight of why you got behind the wheel in the first place. The world needs entrepreneurs like you to create jobs and produce the kind of innovation we need to solve society’s problems. Go build something great!

Best wishes,

Tom Eisenmann, author of “Why Startups Fail,” from which this article is adapted

“Why Startups Fail” is available now and can be purchased via

The post Why Startups Fail: A Harvard Business School Professor’s Letter to a First-Time Founder appeared first on StartupNation.

Source: Startup Nation
Author: Tom Eisenmann

The post Why Startups Fail: A Harvard Business School Professor’s Letter to a First-Time Founder appeared first on Crazy About Startups.

Source link

Leave a Reply