Why startups fail Harvard Business Review

The following is excerpted from the book Why Startups Failby Tom Eisenmann. Copyright © 2021 by Tom Eisenmann. Used by permission of Currency, an imprint of Random House, a divisio

Why startups fail Harvard Business Review

The following is excerpted from the book Why Startups Failby 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.

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Dear Founder:

Congratulations for taking the plungefor committing to work full-time on that startup concept youve been pursuing. Ill share some advice based on work on entrepreneurial failure that Ive done as a Harvard Business School professor. I want to warn you about the challenges that youll 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, youve got to run the early-stage gauntlet. If you make it through, Ill write you a follow-up letter!

As a first-time founder, youve 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, youll 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 nimblelike the first mammals, scrambling to avoid a dinosaurs stomp. But a bias for action may tempt you to cut corners and launch too quickly. A pre-launch exploration phase is critical: Thats 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. Youll suffer a false start, wasting precious time and money.
  2. 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; theyre steadfast and resilient. However, if determination turns into obstinacy, you may not recognize that youve made a false start and, as a result, you may not see the need to pivot. Doubling down on a losing hand, youll burn through your capital and hasten your ventures demise.
  3. Bring the heat! Like determination, your passionate desire to make a dent in the universe can sustain you through a startups inevitable struggles. Moreover, it can be a beacon for employees, investors, and partners youll need to turn your dream into reality. But excitement can also translate into brashness, resulting in the erroneous conviction that youve already divined the right solution to a crucial problem, so theres 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.
  4. Grow! Y Combinators 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 facefor example, how much to spend on marketing and which employees to hire. Furthermore, growth feels great: its how many entrepreneurs keep score. And its a magnet for talented employees and top-flight investors. On the other hand, your zeal for expansion may coax you into a false startlaunching 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 gaffesand to spiraling costs, as you aim to reverse the damage.
  5. Focus! Resources are limited in an early-stage startup, and as an entrepreneur you can only do so much. So, you should focus on whats 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 havent 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.
  6. Be scrappy! Facing resource constraints, entrepreneurs must conserve cash by being thrifty. But if your venture cannot execute because your team lacks crucial skills, youll have to decide whether to recruit new employees with the right stuff. If these candidates are expensive, a frugal founder might pass on hiring themand continue to suffer with bad bedfellows.

So, you should follow the conventional advicemost of the time. You should be scrappy, passionate, and persistentmost of the time. You should move decisively and put a laser-like focus on your top priorities, including growthmost 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 dont have enough time to assess the tradeoffs thoroughly.

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Complex decisions that can, if bungled, boost your odds of failurefor example, shifting from exploring to expanding; balancing the needs of early adopters and mainstream customers; pivoting; or hiring expertsshould 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 emotionsand that can obscure the right move. Sleep on these decisionsmaybe 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 Prizewinning economist Daniel Kahneman calls slow thinking will boost your odds of survival.

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

A few years ago, as startup valuations were booming, I worried that my current studentswho were in middle school when the late 1990s internet bubble burstwere 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 whod launched ventures during 1999 and 2000almost 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 venturewith a level of responsibility that paled in comparison to what they would have had as an employee. And a couple of them added, Im glad that I wont 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, youre 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 dont 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 societys 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 nowand can be purchased via StartupNation.com.

Originally published March 30, 2021.

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