Why Startups Fail

Sharing my learnings from the book, Why Startups Fail by Tom Eisenmann

Why Startups Fail by Tom Eisenmann

Why do startups fail? That question caught Harvard Business School professor Tom Eisenmann by surprise when he realized he couldn’t answer it.

So he launched a multiyear research project to find out. In Why Startups Fail,Eisenmann reveals his findings: six distinct patterns that account for the vast majority of startup failures.

Drawing on fascinating stories of ventures that failed to fulfill their early promise—from a home-furnishings retailer to a concierge dog-walking service, from a dating app to the inventor of a sophisticated social robot, from a fashion brand to a startup deploying a vast network of charging stations for electric vehicles—Eisenmann offers frameworks for detecting when a venture is vulnerable to these patterns, along with a wealth of strategies and tactics for avoiding them.

• If you’re the founder of a startup, you’ve embarked on a journey that demands grit, ingenuity, and courage. If you want your startup to survive the journey and go on to scale, you need a clear map to steer you past common – but sometimes unseen – risks.
• Professor Tom Eisenmann of Harvard Business School is an expert on startups. But after over 20 years of research, he had a huge wake-up call. Looking at two ventures founded by former students of his – he couldn’t pinpoint why they’d both failed. It completely unnerved him. So he started analyzing why startups fail, looking beyond typical excuses like blaming the economy. This research led him to create a framework that identifies four crucial opportunities every startup has.
  • The first is your brilliant idea. As founder, you’ll have come up with a unique solution that meets a specific customer need. It will effectively solve an important problem that customers face – and be different from anything else on the market.
  • The second is technology and operations. These are the systems you need to build your product, deliver it to customers, and maintain products after sale. This will include the ways you manage inventory and shipping, as well as sales and booking platforms your customers use.
  • Third is your profit formula. This projects the revenue you’ll earn through sales, as well as the cost of earning that revenue – including your operational costs. A solid profit formula helps you confidently manage your cash flow.
  • Finally, there’s marketing – how you’ll communicate with potential customers and entice them to buy your product.
• These four opportunities are supported by the people involved in your startup – you and your cofounders, your hardworking team, the investors providing you with venture capital, and any partners offering guidance or expertise.
• Founders who lack industry knowledge fail. If your startup belongs to a sector outside your expertise, put some measures in place to compensate for your lack of knowledge. Bring on a cofounder with the right experience, or develop a partnership with an expert who can provide you with advice. Alternatively, equip yourself with enough industry knowledge to guide your recruitment strategy. That way, you’ll have a clear picture of how to build the team you need and avoid fatal mistakes. 
• Founders who don’t understand their customers fail.
  • Can lead to commit a common mistake – the false start. Investing time and money into your product before you even knew if there was consumer interest. Instead of conducting market research, you made assumptions about your customers
  • To avoid false starts, it’s crucial to resist the impulse to act prematurely.
• An MVP is a functioning prototype that gives investors and potential customers a feel for your final product. But creating one is the second-to-last step before making a fully realized product – not the first! It can only happen once you’ve understood everything about your intended customer so you can workshop ideas and thoroughly design with their needs and preferences in mind.
• Not analyzing early growth leads to failure.
  • False positives occur when founders misinterpret their startup’s early success. They assume the mainstream market will embrace their product or services with the same level of enthusiasm that initial customers had.
• To avoid misinterpreting early success, analyze whether early adopters represent mainstream customers, or if your instant success resulted from exceptional circumstances. Scaling too quickly can lead to complete ruin so make sure there’s mainstream market demand before you attempt it.
• Startups that scale too quickly fail.
  • Speed traps occur when there’s strong initial success plus plentiful investment that finances rapid growth. But sometimes, that initial success represents a saturation of the market.
• To avoid the speed trap, use the RAWI test. RAWI stands for Ready, Able, Willing, and Impelled.
  • First, evaluate whether your startup is Ready to scale. Does it have a proven business model, a customer base with scope for growth, and a high enough profit margin to survive if customer growth rates are lower than expected?
  • Second, ask if your startup is Able. Can it access the resources it needs to scale quickly, including staff? And will it be able to train and manage a larger staff body?
  • Third, decide if you’re Willing to scale. As founder, scaling will increase your workload and stress levels. Raising more venture capital to scale will dilute your equity – meaning more pressure for less money.
  • Finally, is the startup Impelled? Are you only scaling because competitors have emerged and you want to win market share? If this is the case, make sure the cost of gaining new customers doesn’t outweigh profit.
• Startups without the right senior management fail.
• If you want your startup to survive scaling, you need the right senior management team in place. And that means hiring specialists over generalists – even if they have impressive experience. If you’re not at the stage where you can afford a senior specialist, find a mid-level one instead. They’ll come with a cheaper price tag while still having the expertise your company needs to support its growth.
• Overly ambitious ventures are susceptible to failure.
  • Venturing into uncharted waters always encompasses an element of risk.
• If your concept is high-risk, there are steps you can take to mitigate some of that risk.
  • keep in mind that humans are afraid of radical change, even when it’s for a good cause. Moderate your innovation so that customers don’t need to go too far out of their comfort zones to incorporate it into their lives.
  • create nonfunctioning prototypes, and get feedback from focus groups. This will help guide the next stage of design while also gauging people’s interest in the product – always a tricky issue if you’re bringing something completely new to the market.
  • don’t fall into the trap of inflating market demand just to impress investors. All you’ll end up doing is setting sales targets you can’t reach. By being honest about your potential customer pool, you’ll make it easier to project how long it will take to recoup any investments.
• Recovery from failure is possible.
• When you’re in the throes of failure, a pathway to success might seem hard But by following the Three Rs, you can walk that path all the way to the finish line.
  • The first phase a founder experiences after failure is Recovery. If your startup fails, you’ll likely find yourself in a state of financial ruin. At the same time, you’ll find that your personal relationships have deteriorated too. To avoid getting depressed, find ways to support yourself during this time. Implement healthy lifestyle habits, give therapy a shot, and reconnect with activities you enjoy.
  • Reflection. In this phase, you’ll identify what you’ve learned by exploring your experiences objectively. This can be challenging. Our egos always try to preserve us by blaming someone else for our own mistakes. But if you can overcome this tendency, you’ll be in a position to gain valuable knowledge.
  • The final phase of your journey is Reentry. Despite the hardship of failure, around 50 percent of unsuccessful entrepreneurs found new startups. articulate how what you’ve learned in Phase Two has informed your new business plan. That way, you can demonstrate to investors that you’re starting afresh from a place of experience and wisdom.