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Thought in Cursory
The Light Bulb
Most get-go-ups don't succeed. A foremost adept on entrepreneurship realized he didn't understand why.
The Autopsy
An examination of commencement-up failures revealed two mutual mistakes by founders: failing to engage the right stakeholders, and rushing into an opportunity without testing the waters first.
The Remedy
Founders should have conventional entrepreneurial communication with a grain of salt, because it oftentimes backfires. They too should find the correct investors and management team and avoid giving curt shrift to customer interviews and research.
Almost commencement-ups don't succeed: More than 2-thirds of them never evangelize a positive return to investors. But why do so many end disappointingly? That question striking me with full force several years agone when I realized I couldn't reply information technology.
That was unnerving. For the past 24 years, I've been a professor at Harvard Business School, where I've led the team teaching The Entrepreneurial Manager, a required course for all our MBAs. At HBS I've also drawn on my inquiry, my experiences as an affections investor, and my work on start-up boards to help create 14 electives on every aspect of launching a new venture. Only could I truly teach students how to build winning commencement-ups if I wasn't sure why and so many were failing?
I became determined to get to the bottom of the question. I interviewed or surveyed hundreds of founders and investors, read scores of showtime- and third-person published accounts of entrepreneurial setbacks, and wrote and taught more than than xx instance studies about unsuccessful ventures. The result of my research is a book, Why Startups Fail, in which I identify recurring patterns that explicate why a large number of start-ups come to nothing.
My findings go against the pat assumptions of many venture upper-case letter investors. If you inquire them why kickoff-ups autumn short, y'all will near likely hear about "horses" (that is, the opportunities start-ups are targeting) and "jockeys" (the founders). Both are important, simply if forced to choose, most VCs would favor an able founder over an attractive opportunity. Consequently, when asked to explain why a promising new venture eventually stumbled, near are inclined to cite the inadequacies of its founders—in particular, their lack of dust, industry apprehending, or leadership ability.
Putting the blame on the founders oversimplifies a complex situation. It'southward also an example of what psychologists call the fundamental attribution fault—the trend for observers, when explaining outcomes, to emphasize the main actors' disposition and for the chief actors to cite situational factors not under their control—for example, in the instance of a failed offset-up, a rival's irrational moves.
Putting scapegoating aside, I identified half-dozen patterns of failure, which I describe fully in my book. In this article I've chosen to focus on two of them in greater particular, for two reasons: Outset, they're the most common avoidable reasons why start-ups get wrong. I'1000 not interested in clearly doomed ventures with no chance of success or even promising start-ups that were felled by unexpected external forces such as the Covid-nineteen pandemic. Rather, I've focused on ventures that initially showed promise merely subsequently crashed to earth because of errors that could have been averted. Second, the two patterns are the most applicable to people launching new ventures within larger companies, government agencies, and nonprofits, which makes them especially relevant to HBR readers. I'll explain each pattern more fully, illustrate it with a case written report, explicate when information technology's most probable to occur, and suggest ways to steer clear of it. (To learn more about the other mutual reasons for failure, see the following sidebar.)
Skillful Idea, Bad Bedfellows
As I've noted, VCs expect for founders with the right stuff: resilience, passion, experience leading start-up teams, and and so forth. Only even when such rare talent captains a new venture, there are other parties whose contributions are crucial to it. A wide set up of stakeholders, including employees, strategic partners, and investors, all tin play a role in a venture's downfall.
Indeed, a bang-up jockey isn't even necessary for beginning-upwardly success. Other members of the senior management team can compensate for a founder's shortcomings, and seasoned investors and advisers can too provide guidance and useful connections. A new venture pursuing an amazing opportunity will typically attract such contributors—fifty-fifty if its founder doesn't walk on water. But if its thought is only practiced, a start-upward may not go a talent magnet.
Consider the case of Quincy Wearing apparel. In May 2011 two former students of mine, Alexandra Nelson and Christina Wallace, came to me for feedback on their start-up concept. I admired both of them and was impressed with their thought, which identified an unmet customer demand: Immature professional women had a hard time finding affordable and stylish work apparel that fit them well. Nelson and Wallace, who were shut friends, devised a novel solution: a sizing scheme that allowed customers to specify four separate garment measurements (such equally waist-to-hip ratio and bra size)—akin to the approach used for tailoring men'south suits.
Following the lean start-upwards method, Nelson and Wallace then validated customer demand using a textbook-perfect minimum viable production, or MVP—that is, the simplest possible offering that yields reliable customer feedback. They held 6 trunk shows at which women could try on sample outfits and place orders. Of the 200 women who attended, 25% made purchases. Buoyed by these results, the cofounders quit their consulting jobs, raised $950,000 in venture capital, recruited a squad, and launched Quincy Dress. They employed a direct-to-consumer business organization model, selling online rather than through brick-and-mortar stores. At this point I became an early angel investor in the visitor.
Kalle Gustafsson/Trunk Annal
Initial orders were strong, as were reorders: An impressive 39% of customers who bought items from Quincy's first seasonal collection made repeat purchases. However, robust demand required heavy investment in inventory. Meanwhile, product problems caused garments to fit poorly on some customers, resulting in higher-than-expected returns. Processing returns and correcting product issues put pressure on margins, rapidly depleting Quincy's cash reserves. After Quincy tried and failed to raise more uppercase, the team trimmed the production line, aiming to simplify operations and realize efficiencies. Withal, the business organisation lacked enough funding to prove out the pivot, and Quincy was forced to shut downward less than a yr later on its launch.
So why did Quincy fail?
Quincy'southward founders had a good idea. The venture'southward value proffer was appealing to target customers, and the business had a sound formula for earning a profit—at to the lowest degree over the long term, later on shaking out the bugs in production. The team had credible projections that customers in priority segments, who'd accounted for more than than half of Quincy'southward sales, would each have a lifetime value of over $1,000—well in excess of the $100 average price to acquire a new customer. (Quincy's out-of-pocket marketing costs were kept low by social-network-fueled word of rima oris and enthusiastic media coverage.)
Were Wallace and Nelson simply poor jockeys? Temperamentally, their fit with the founder role was good. They were sharp and resourceful and had complementary strengths. Wallace, who was responsible for marketing and fundraising, had a big vision and the charisma to sell it. Nelson, who led operations, was deliberate and disciplined. Nonetheless, the founder squad wobbled in ii important ways. First, unwilling to strain their close friendship, Wallace and Nelson shared decision-making authority as with respect to strategy, product blueprint, and other key choices. This slowed their responses when action was required. 2d, neither founder had experience with habiliment design and manufacturing.
A broad fix of stakeholders, including employees, strategic partners, and investors, all tin can play a role in a venture's downfall.
Apparel product entails many specialized tasks, such as fabric sourcing, pattern making, and quality command. To compensate for their lack of industry know-how, the founders hired a few apparel company veterans, assuming that they'd fill multiple functions—equally jack-of-all-trades team members exercise in most early-stage outset-ups. Even so, accepted to the high levels of specialization in mature apparel companies, Quincy's employees weren't flexible almost tackling tasks exterior their areas of expertise.
Quincy outsourced manufacturing to third-party factories, which was non unusual in the industry. But the factories were slow to run into production commitments for entrepreneurs who had no manufacture reputation, required unusual garment sizing, and placed small orders. This meant shipping delays for Quincy.
Investors also played a office in Quincy's demise. The founders had aimed to raise $1.5 meg but managed to secure only $950,000. That was enough to fund operations for two seasonal collections. Earlier launching, the founders had correctly assumed that at least three seasons would be needed to fine-tune operations. Quincy had some traction subsequently two seasons simply not enough to lure new backers, and the venture majuscule firms that had provided most of its money were too small to commit more funds. Furthermore, the founders were disappointed with the guidance they got from those VCs, who pressured them to grow at full tilt—similar the technology first-ups the investors were more familiar with. Doing so forced Quincy to build inventory, burning through cash before it had resolved its product problems.
In summary, Quincy had a adept idea but bad bedfellows: Besides the founders, a range of resource providers were culpable in the venture's collapse, including squad members, manufacturing partners, and investors.
Could this issue have been avoided? Maybe. The founders' lack of mode industry experience was at the root of many problems. Information technology took fourth dimension for Wallace and Nelson to master the complexities of dress design and production. Without industry connections, they couldn't leverage their professional networks to recruit team members or count on past relationships with factory managers to ensure prompt commitment. And without an manufacture runway record, they had difficulty finding investors willing to bet on first-time founders.
An ideal solution would have been to bring in another cofounder with apparel industry experience. Nelson and Wallace tried to practice this, without success. They did have some advisers who could offer guidance—but calculation more would accept helped. In a postmortem assay, Quincy'due south founders also concluded that they could have sidestepped operational problems by outsourcing their entire design and production process to a single manufactory partner. Too, rather than raising funds from venture capital firms, they could accept sought financial backing from a article of clothing factory. A factory with an equity stake in Quincy would take expedited its orders and worked harder to right product problems. Also, the manufacturing plant owners would accept known how to stride the growth of a new apparel line, in dissimilarity to Quincy'southward VCs, who pressured the team for hypergrowth.
Many entrepreneurs who claim to embrace the lean start-up catechism actually prefer simply part of it, neglecting to research customer needs.
Quincy'due south troubles shed some light on the attributes that may brand start-ups vulnerable to this particular failure design. Entrepreneurs' lack of industry feel will be particularly problematic when large, lumpy resource commitments are required, as they are in clothes manufacturing: Quincy's founders had to design a multistep product process from scratch, and revising such a procedure is disruptive once it'southward in place. Some other factor was ever-shifting fashion trends; the founders had to commit to garment designs and and so build inventory for an entire collection many months before it went on sale.
With such challenges, learning by doing tin can result in expensive mistakes. Compounding the pressure, investors prefer to mete out capital one clamper at a time, waiting to see if the business can stay on the rails. If the start-up stumbles or stalls, follow-on financing may not be forthcoming from existing investors, and potential new investors will be scared off. Pivoting to a better solution isn't viable when it requires large amounts of capital along with weeks or months to see if new approaches are working. In that state of affairs entrepreneurs have no room for large errors, simply a lack of industry experience makes missteps all the more likely.
False Starts
I have long been an apostle of the lean start-upwardly arroyo. But as I dug deeper into instance studies of failure, I concluded that its practices were falling brusque of their promise. Many entrepreneurs who claim to embrace the lean start-upward catechism actually adopt only office of it. Specifically, they launch MVPs and iterate on them after getting feedback. By putting an MVP out in that location and testing how customers respond, founders are supposed to avoid squandering fourth dimension and coin building and marketing a production that no 1 wants.
Yet past neglecting to research customer needs before commencing their engineering efforts, entrepreneurs cease up wasting valuable fourth dimension and majuscule on MVPs that are likely to miss their mark. These are false starts. The entrepreneurs are like sprinters who jump the gun: They're too eager to get a product out at that place. The rhetoric of the lean get-go-upwardly move—for case, "launch early and oftentimes" and "fail fast"—really encourages this "prepare, fire, aim" behavior.
The online dating outset-up Triangulate experienced this syndrome in 2010. Its founder, Sunil Nagaraj, had originally intended to build a matching engine—software that Triangulate would license to existing dating sites such as eHarmony and Match. The engine would automatically excerpt consumers' profile data—with their permission—from social networks and media sites such equally Facebook, Twitter, Spotify, and Netflix. The engine would then apply algorithms to pair up users whose tastes and habits suggested that they might be romantically compatible. But VCs wouldn't back the plan. They told Nagaraj, "Come up back after yous've signed a licensing deal."
To evidence to potential licensees that the matching engine worked, Nagaraj decided to use it to ability Triangulate's own dating site, a Facebook app that would also leverage the rich user data available to Facebook's platform partners. VCs at present showed interest: Nagaraj raised $750,000 and launched a dating site chosen Wings. The site was free to employ and earned acquirement from small-scale payments made by users who sent digital gifts or messages. Wings soon became Triangulate's main event; the licensing programme went on the back burner.
Kalle Gustafsson/Trunk Annal
Wings automatically populated a user's contour past connecting to Facebook and other online services. It too encouraged users to invite their friends to the site equally "wingmen" who could vouch for them—and provide a viral boost to the site'southward growth. Less than a year afterward launching Wings, however, Nagaraj's team abandoned both the matching engine and the wingman concept. Users institute more than value in recommended matches that were based on potential partners' concrete attractiveness, proximity, and responsiveness to messages—criteria routinely employed past existing dating sites. The wingman role, meanwhile, was not delivering hoped-for virality and made the site cumbersome to navigate. Furthermore, many users were uncomfortable making their dating life an open up book to their friends.
A year later on launch, Wings' user base of operations was growing, merely user date was much lower than expected. Every bit a upshot, revenue per user fell far short of Nagaraj's original projections. Also, with limited virality, the cost of acquiring a new user was much higher than his forecast. With an unsustainable business model, Nagaraj and his team had to pin in one case over again—this fourth dimension, with greenbacks balances running low. They launched a new dating site, DateBuzz, that allowed users to vote on elements of other users' profiles—before seeing their photos. This addressed i of the biggest pain points in online dating: the impact of photos on messaging. On a typical dating site, physically attractive individuals get too many letters, and other users get too few. DateBuzz redistributed attending in ways that boosted user satisfaction. Less-attractive individuals were contacted more ofttimes, and attractive users all the same got plenty of queries.
Entrepreneurs should conduct a competitive analysis, including user testing of existing solutions, to sympathise the strengths and shortcomings of rival products.
Despite this innovation, DateBuzz—like Wings—had to spend far more than it could afford to acquire each new user. Defective confidence that a network effect would boot in and reduce customer acquisition costs before cash balances were exhausted, Nagaraj close down Triangulate and returned $120,000 to investors.
So why did Triangulate neglect?
The trouble was clearly not with the jockey or his bedfellows. Nagaraj had raised funds from a topflight VC and had recruited a very able team—one that could rapidly process user feedback and in response iterate in a creative and nimble manner. Weak founders rarely attract strong teams and smart money. This was not a case of "right opportunity, wrong resources," as with Quincy'south failure. Rather, Triangulate's demise followed the opposite pattern: "wrong opportunity, correct resources."
A clue about the cause of Triangulate'southward failure lies in its iii large pivots in less than 2 years. On one hand, pivots are foundational for lean get-go-ups. With each iteration, Nagaraj's team had heeded the "fail fast" mantra. The team too followed the principle of launching early and frequently—putting a real product into the hands of real customers equally fast equally possible.
But there'southward more to the lean start-up approach than those practices. Earlier entrepreneurs begin to build a product, lean kickoff-upwards guru Steve Bare insists, they must complete a phase called "client discovery"—a round of interviews with prospective customers. (See "Why the Lean Start-upwards Changes Everything," HBR, May 2013.) Those interviews probe for strong, unmet customer needs—problems worth pursuing. In Nagaraj'southward postmortem analysis of Triangulate's failure, he acknowledged skipping this crucial stride. He and his team failed to bear upward-forepart research to validate the demand for a matching engine or the appeal of the wingman concept. Nor did they conduct MVP tests akin to Quincy's trunk shows. Instead they rushed to launch Wings every bit a fully functional production.
Past giving brusque shrift to customer discovery and MVPs, Triangulate's squad vicious victim to a false first—and turned the "fail fast" mantra into a self-fulfilling prophecy. If the squad members had spoken to customers at the kickoff or tested a true MVP, they could accept designed their beginning product in ways that conformed more than closely to market place needs. By failing with their starting time product, they wasted a feedback bicycle, and fourth dimension is an early-phase entrepreneur'due south almost precious resource. With the clock ticking, one wasted cycle means one less opportunity to pivot before money runs out.
Why do founders similar Nagaraj skip upwardly-front client research? Entrepreneurs have a bias for activity; they're eager to become started. And engineers love to build things. Then entrepreneurs who are engineers—like Nagaraj and his teammates—often bound into creating the starting time version of their product equally fast as they can. Furthermore, at the risk of stereotyping, I'd offer that many engineers are merely too introverted to follow Blank's advice and leave of the building to learn from prospective customers.
Founders without technical preparation also fall victim to false starts. They hear repeatedly that having a not bad product is crucial, and so they bring engineers on board as soon as they can. And then, feeling force per unit area to keep those expensive engineers decorated, they rush their product into evolution.
The good news is that false starts can easily be avoided by post-obit a structured, three-step product design process.
1. Problem definition.
Before commencing applied science piece of work, entrepreneurs should comport rigorous interviews with potential customers—at which they resist the temptation to pitch their solutions. Feedback on possible solutions volition come later; instead the focus should be on defining customers' problems. Also, it's important to interview both likely early adopters and "mainstream" prospects who may be inclined to purchase afterwards. Success will hinge on alluring both groups, whose needs may differ. If their needs do vary, entrepreneurs volition have to accept the differences into account when formulating a product road map.
In improver, entrepreneurs should conduct a competitive analysis, including user testing of existing solutions, to sympathize the strengths and shortcomings of rival products. Too, surveys can assistance start-up teams measure customer behaviors and attitudes—helpful data when segmenting and sizing the potential market.
2. Solution development.
Once entrepreneurs accept identified priority customer segments and gained a deep understanding of their unmet needs, the team'due south next step should exist brainstorming a range of solutions. The team should prototype several concepts and get feedback on them through one-on-i sessions with potential customers. Most teams showtime with crude prototypes, turn down some and iterate, and so refine the ones that seem promising, gradually producing "higher fidelity" versions that more closely resemble the future product in functionality and look and feel. Prototype iteration and testing proceed until a dominant design emerges.
3. Solution validation.
To evaluate demand for the favored solution, the team and then runs a serial of MVP tests. Unlike the prototype review sessions during pace ii—conducted across the table with a single reviewer—an MVP test puts an actual product in the hands of real customers in a real-world setting to come across how they respond. To avoid waste matter, the best MVPs take the lowest allegiance needed to get reliable input—that is, they provide no more "looks like" shine and "works like" functionality than are strictly necessary. Early on MVP tests may take things further, assessing demand for a planned product through a Kickstarter campaign or by soliciting messages of intent to buy from business-to-business organisation customers.
Success with the product design process may require a shift in the founders' mindset. At a venture's outset many entrepreneurs have a preconceived notion of the client problems they'll address and the solutions. They may fervently believe they're on the correct path. Simply during the product design process, they should avoid existence too emotionally fastened to a specific problem-solution pairing. Entrepreneurs should stay open to the possibility that the process will uncover more-pressing issues or better solutions.
Maintaining Residual
Of course, in that location is no style for founders to know which deadly trap they may face up as they launch. Familiarizing oneself with these two dominant failure patterns can help. Just and so too tin can understanding why they afflict outset-ups so oft.
Part of the respond is that the behaviors that conventional wisdom holds make a peachy entrepreneur can paradoxically increase the risk of encountering these failure patterns. Information technology's of import for an entrepreneur to maintain remainder. Guidance based on conventional wisdom is proficient—most of the time—but it shouldn't be followed blindly. Consider the following advice given to many first-time founders and how it can backfire:
Simply do it!
Great entrepreneurs make things happen and movement fast to capture opportunity. Merely a bias for action tin can tempt an entrepreneur to truncate exploration and leap too soon into building and selling a product, every bit I've explained. When that happens, founders may notice themselves locked prematurely into a flawed solution.
Be persistent!
Entrepreneurs encounter setbacks over and over. True entrepreneurs dust themselves off and go dorsum at information technology; they must be determined and resilient. Nevertheless, if persistence turns into stubbornness, founders may accept difficulty recognizing a faux kickoff for what it is. They likewise may be reluctant to pivot when it should be clear that their solution isn't working. Delaying a pivot eats up scarce capital, shortening a venture's runway.
Bring passion!
A burning desire to take a world-changing impact tin can ability entrepreneurs through the almost daunting challenges. It can also attract employees, investors, and partners who'll help make their dreams a reality. But in the extreme, passion can translate into overconfidence—and a penchant to skip disquisitional up-front research. Likewise, passion tin blind entrepreneurs to the fact that their product isn't coming together client needs.
Bootstrap!
Because resources are limited, entrepreneurs must conserve them by existence frugal and figuring out clever ways to make do with less. True enough, but if a starting time-upwards cannot consistently deliver on its value proposition because its team lacks crucial skills, its founders must make up one's mind whether to hire employees with those skills. If those candidates need high bounty, a scrappy, frugal founder might say, "Nosotros'll just have to exercise without them"—and risk being stuck with bad bedfellows.
Grow!
Rapid growth attracts investors and talent and gives a team a great morale boost. This may tempt founders to curtail customer inquiry and prematurely launch their product. Also, fast growth can put heavy demands on squad members and partners. If a team has bad bedfellows, growth may exacerbate quality bug and depress turn a profit margins.
. . .
Information technology'south fashionable in offset-upwards circles to speak glibly about failure as a bluecoat of honor or a rite of passage—merely another phase of an entrepreneur's journeying. Perhaps doing and then is a coping mechanism, or possibly failure's ubiquity inures those in the business organisation world to its truthful human and economical costs. I've counseled dozens of entrepreneurs as they shut down their ventures. Raw emotions are always on brandish: acrimony, guilt, sadness, shame, and resentment. In some cases the founders were in denial; others just seemed depressed. Who could blame them, subsequently having had their dreams dashed and their cocky-conviction shattered? In my work I try to help people come to terms with failure, simply I can tell y'all that at basis naught, there's no way to avoid the fact that it hurts. It also can destroy relationships. When they founded Quincy Wearing apparel, Nelson and Wallace vowed not to allow disharmonize over the business threaten their close friendship. Just later on clashing over how to air current the visitor downwardly, they weren't on speaking terms for two years. (Their relationship has since been repaired.)
Failure also takes a cost on the economy and society. A doomed venture ties upwardly resources that could exist put to better apply. And it acts every bit a deterrent to would-exist entrepreneurs who are more than risk-averse, have fiscal obligations that make information technology hard to forgo a paycheck, or face up barriers when raising capital—which is to say, many women and minorities. To exist sure, failure volition (and should) always be a reality for many entrepreneurs. Doing something new with express resources is inherently risky. But by recognizing that many failures are avoidable and follow the same trajectory, we can reduce their number and frequency. The payoff will be a more productive, more diverse, and less bruising entrepreneurial economy.
Editor's note: This commodity was adjusted from the book Why Startups Fail: A New Roadmap for Entrepreneurial Success, by Tom Eisenmann (Currency, 2021).
A version of this commodity appeared in the May–June 2021 event of Harvard Business Review.
Source: https://hbr.org/2021/05/why-start-ups-fail