Entrepreneurship is an exciting journey, but it’s no secret that the career comes with a high risk of failure. Why is the rate of business failure so high? How can we prepare our startups for the uphill battle? We spoke with Tom Eisenmann, a Harvard Business School professor and author of “Why Startups Fail: A New Roadmap for Entrepreneurial Success,” to explore the main reasons for startup failure and what entrepreneurs can do to increase their chances of success.
While entrepreneurial ventures face a high risk of failure, by avoiding common patterns of failure, and investing in effective strategies, they can increase their chances of success.
Simply put, startups run out of money and can’t raise more. But why do they run out of money, and why are investors hesitant to give them more? Tom studied the main reasons and circumstances surrounding startup failure to identify where it goes wrong in funding, scaling, and other crucial stages.
Tom identified six patterns of startup failure, three in early-stage and three in later-stage ventures. For early-stage startups, the big reason for failure is a false start. Entrepreneurs are eager to launch and sell their product, but they skip the important prep work, fail to plan, and risk burning out quickly. Tom’s advice for startups is not to waste valuable time and capital on the wrong solutions.
One of the main reasons for late-stage failure is what Tom calls speed traps. When everything in the business is going well, it’s easy to get caught in a stage of hyper-growth, but this can be dangerous for any type of venture. Make sure your business is maintaining customer market-pattern fit and sustaining customer intimacy and support as you grow, more than focusing on getting big fast.
So, how can startups defend their business against competitors and changing landscapes? One strategy is to invest in patents and proprietary measures to create a barrier to entry. Another is to focus on networking and building a strong team. By doing this, startups can better prepare for unexpected changes in the market and stay competitive.
While entrepreneurial ventures face a high risk of failure, by avoiding common patterns of failure, and investing in effective strategies, they can increase their chances of success. It’s important for entrepreneurs to take the time to plan, scale slowly, and build a strong team to sustain their business in the long run.
Check out the full session above to hear the rest of our conversation with Tom!
Serial Entrepreneur: Secrets Revealed EP102
Greetings, everyone. We’re just getting the room set up. Welcome to the very first room in. The Startup Club house now that it’s been converted to a club. And for those who weren’t aware, uh, as of April 11th, all clubs on Clubhouse were Convertor Houses Startup Club, be its largest club on Clubhouse. Uh, great shout out to the Clubhouse team for helping migrated over early.
And so welcome to the House version of Startup Club. Hopefully everything works, but what happens? And Michele, awesome. Hey, so it awesome to see everyone on the stage. I know. I went right to the stage. That’s amazing. Wonderful. I have no idea that happened to me as it was technically not supposed to work, but it did.
So, loving you Clubhouse. Thank you for Del for under promising enough for delivering. Fantastic. And uh, and so then the other part of [00:01:00] this, hello Colin, welcome. We join the stage too. This seems to be working quite nicely. Welcome to Startup Club House, the first room in the house. Now that it’s a house.
Well, and it’s a little bit freaky. I’ll be quite frank because Tom, our, um, fellow guest today, he actually just opened up the room. Well, and I went into that room. It’s, I don’t know how that’s possible. Well, well that’s where, yeah, Michele and I discussed that earlier. It looks like when they poured the club to the house, they poured over the events, but there’s still a ghost event that still says to the club.
So I’m gonna hop out of this room, open up that room to direct people to this room. Oh my gosh. Seriously. Awesome. Um, well, uh, if you can find Tom, uh, Michele or Mimi, if we could, uh, text him and with this actual room link, that would be great. You hang here and I’ll see if there is the, the ghost room open that he opened.
And I’ll try to get him in here. And then I’ll also open that room [00:02:00] directly and redirect everyone who had that link saved in their, in their calendars or wherever to make sure we get over here. So I’ll turn the room over to you and I’ll try to get everyone redirected here. Sounds good, ed. Absolutely.
Thank you very much. And, uh, welcome to Startup Club. I, it’s one of those things that, uh, when you’re in startup mode, the chaos can occur and, uh, over the last few, few days that’s right, last few days, uh, they just upgraded the platform for startup club to houses. Uh, we’re pretty optimistic and excited about the changes that are coming, but there’s a lot of confusion around the rooms and the topics and, and, uh, hopefully we could find our, our guest speaker who wrote an article in the Wall Street Journal called Why Startups Fail.
And he is a, uh, an American economist and currently the Howard h Stevenson, professor of Business Administration at Harvard Business School. So we’re in for a real treat to talk about that. But we are excited that you are in the room today. We’re, we’re getting this kicked [00:03:00] off. Startup Club is almost 900 members, 900,000 members, members strong.
Um, and we’re, here’s Ed again. Gonna give us an update. Ed, speaker, I’m back. I can’t start the other room cause I was not a co-host of that. So who, some, someone who’s a co-host should go start that room or grab the link to list room. Uh, start that room. I, I’ll come over and kind of hang out in that room to redirect people, but someone else needs to start it cause that was not so I, um, just grab the link.
I just clicked on the bottom Ed from this room below and I’m texting, um, Tom right now. Okay. Okay. Yeah, but the, the rogue room from the old club is still there. And some, and if someone can pop outta here who’s, uh, colos of that, start that room. I’ll join that room and man that to redirect everyone over to this room.
Okay. Mimi, are you able to do that while I try to contact Tom? [00:04:00] Yes. Give me one second to find that old laptop. Absolutely. Jump in right. Okay. And also grab the link. Oh, there is Tom. There he is.
All right, Tom, thank you for your patience and um, I’m bringing you up to the stage right now. Um, you can talk Tom by heading the mic button on the bottom right hand corner. Yeah, I don’t see ’em on stage yet. We’re having, we’re having technical problems as you know. I’m just gonna, it’s okay. There’s the first room of the, of the converted club to house, and so we’re working through it.
Thanks everyone for being patient. And it looks like Tom left the room. So Michele, if you can ping him back and it looks like Mimi popped out to start the old club room, so I’ll pop over there. Absolutely. Right. Thanks. Right. We’ll get this story. All right. Uh, start up the start mode, right? Start singing or something.
I, I need to go on the mute. I got it, I got it. I, I loved, I love talking about and doing the intro for this show and we’ve had over a a hundred episodes and we’ve had just phenomenal authors, [00:05:00] experts, uh, and others who have run, um, who’ve come on the show and, and shared with us their sort of secrets of how they’ve become successful or, or, or what they’ve noticed.
And, uh, some of those authors include people like Jeffrey Moore, uh, Joe Jeffrey Moore did, uh, crossing the Chasm. Uh, and then we had, uh, Joe Foster, who wrote the book, Shoemaker, and he actually, uh, was the co-founder of Reebok. That was really cool, having him on and really being exposed to his story and what he went through.
Ahe and his brother went through to to launch Reebok. Uh, all of these episodes are actually available on your favorite podcast network under the title, serial Entrepreneur Secrets Revealed, and we do this show every Friday, two o’clock Eastern. If you are listening to this on podcast, you can come on stage and join us live every Friday at two o’clock Eastern.
Our Club is run by our CEO Michele Van Tilk. Mimi Ostrider, who writes the [00:06:00] great blogs, Olivia Valdez, who runs marketing and myself, Colin c Campbell. So you’re listening to Serial Entrepreneur Secrets Revealed. How do we crack the code of what it takes for serial entrepreneurs to do what they do over and over again to start scale, exit, repeat.
And today, we promise you, we are talking about why startups fail. And if you’re in the audience and you’re interested in talking to us about. Your startup or why you failed or um, why you think startups fail. We’d be happy to have you on stage. Ed, do you have an update for us on our guest host? Yeah, I just sent, oh, sorry.
No, I was gonna go. You were the one that with the news, so please continue. I just sent Tom the link to this room. Oh, here he is. I’ll bring him up to the stage. Just sent you an invite to come on stage, Tom. Sorry about that everybody. I think we’d had two rooms set up. Yeah, well that, yeah, so welcome [00:07:00] Tom.
There we go. And Mimi quick coordination with you. If you can go and restart the old ghost room from the club, I’ll go hop in that and redirect people to this room because a lot of people have that old link on their calendars and so on. So if we can get loud housekeeping done by, I can’t open that room, is I’m not a co-host in that other room.
If you can open it and I’ll join you there. Yes, I’ll log out right now. Cool. Thanks everyone for your patience. And, uh, with that I’m gonna go recreate the old ghost room from the club to send people to this new hou this room in the house. So, welcome everyone. Thanks for your patience and welcome, Tom.
I’ll be back later. Welcome. Thank you, ed. Thank you. All right. You made it. Sorry about that. Uh, con can explain, um, you know, we had a big technical update, but we got you on and you made it and we’re so happy and excited to hear what you have to say. Thank you. My pleasure. Yeah, absolutely Tom. And, uh, you know, I, I, as I was introing the [00:08:00] show, uh, the topic today is all about why startups fail.
And, uh, we’re so honored to have you here. I read your article in the Wall Street Journal and we reached out to you. Uh, Thomas Eisenmann is an American economist and currently the Howard h Stevenson, professor of Business Administration at Harvard Business School. So we’re in for a real treat today, and if you’re catching this in replay.
Uh, you may not know this, but we actually have a live show every Friday, two o’clock Eastern. Um, and if you are here in person, we’ve done over a hundred shows now and you can catch them on your favorite podcast channel. Um, serial Entrepreneur Secrets Revealed Why Startup Fail. You know what was so fascinating, this topic for me, and, and the reason why I I reached out to you right away, Tom, was that I had been working on a book being published by Forbes called Start Scale Exit Repeat.
And the last chapter in the section of START [00:09:00] is why startups fail. And I think that sometimes as entrepreneurs, as founders, we often focus on, you know, the success stories, but the lessons that we can learn from the failures can be so much more powerful. So I’m gonna kick it off right away and just ask you the first question.
Tom, why do startups fail? Oh, boy. Um, well, I mean, it’s pretty simple at one level, right? They, they run out of money and can’t raise more. Um, that’s, uh, that’s pretty much why most of them fail. And then of course, the question is, um, okay, why did you run out of money and why, uh, people don’t, don’t people have the confidence to give you more?
That’s, that’s where it gets complicated. So, um, uh, the, the, um, research led to, um, identifying six failure patterns, uh, three of them for early stage startups, so folks in the first few years, and three of them for later stage startups. So, you know, I [00:10:00] was surprised at the, I mean, depends on your definition of failure, which is actually a pretty complicated topic.
But, uh, one way to think about failure is investors don’t make money. And, and if that’s your definition, then a lot of late stage startups fail too. You know, something like one third of of late stage startups fail to make a positive return for, for, for the investors. Um, so there’s three early stage patterns, three late stage patterns.
And, uh, I can get into ’em, but the, but the big one for early stage is, um, we call it a false start. You know, just like track and field, um, or swimming, somebody jumps the gun and in this case, the entrepreneur is so eager to build something and sell something that they skip the upfront work you need to do.
To figure out whether you’ve actually building something that people want, um, and whether of all the different ways you could solve a real problem, have you got the right solution? You know, that’s, that’s customer discovery work to use the, the term that Steve Blank coined. Um, it’s prototyping and [00:11:00] sort of exposing people to early versions of the product that, that haven’t taken a whole bunch of of energy to create.
So the false start is the big one, uh, for early stage and then for later stage startups. Um, we call a speed trap, um, which basically you get some momentum. Uh, the, um, entrepreneurs excited about growing. Um, investors are really excited. They’ve put in equity at a high share price. Everybody expects continued.
Uh, that attracts competitors. But also, um, once you hit your sweet spot to continue to grow, you’re almost, by definition attracting customers that are less interested in what you’ve got. So you may have to cut your price, you may have to add features, you may have to market harder. So you start to get in a squeeze between, um, the, the lifetime value of a customer and the cost of acquiring a customer.
And, um, meanwhile inside the company, if you’re doing anything that requires humans, um, packing boxes, answering phones, uh, those folks are get, um, hard to acquire them in large numbers, [00:12:00] hard to train them. You don’t have the systems needed to manage them. So things can get pretty chaotic pretty quickly. And, um, uh, you, you, um, you, you can find yourself burning through an awful lot of cash.
And if the capital markets go bad in the meantime, you can get in a lot of trouble. Let’s move back a bit to the early stage and then, and I, I wanna understand why startups do derail, especially. What, what appears to be successful ones and more, more of a late stage. But going back to the early stage, um, like, I’m gonna give you an example.
We have a company called pod.com in our incubator, and we launched probably about 10 to 15 new products per year. Completely, uh, created by ourselves, designed by our team. Uh, and we take those to market and I would say the majority, probably about 10 of those fail. They, they’re, they’re, which we call the false start.
I like the way you, I like the way you phrased it. Like they’re, you know, they just, they’re like [00:13:00] sports work. It’s just the very beginning. They sort of falter at the beginning, but then five succeed and those five that succeed, we then put, pour the resources in tho to those. And because of that, we’ve had a company now three years in a row in the Inc.
5,000. So ironically is failure at an early stage. Really failure? Or is it, you know, or is it tinkering and trying to figure out, you know, learning, figure out, figure it out and, and, and, and launching the next idea? Oh yeah, no. Um, I mean, e every, most entrepreneurs are gonna pivot at some stage. I mean, some are smart enough and lucky enough to sort of nail it right from the start, but, uh, pivots are common and that we don’t consider that a failure, particularly if it’s, I mean, it’s a failure if you don’t pivot when you should.
Um, or if you pivot too fast, you know, there is this, there’s such a thing as, as, um, entrepreneurs, a D H D, and, um, uh, so no, I don’t consider that part of the failure story here. Failure [00:14:00] is, um, is the, um, venture goes outta business entirely and, and. Uh, or, um, it can sort of struggle on, I don’t love the terms zombie, um, or living dead, but you know, you do get ventures out there that will, will never get the money back that the investors put in, but they’re generating enough cash to keep going and, and so, so those to me are the failures.
And Colin, there, there is, um, in, in, in this way of thinking, there is such a thing as a good failure. Um, uh, absolutely The entrepreneur who’s got, uh, an idea, a hypothesis about an opportunity and runs a smart experiment, um, and, you know, sometimes you try things and was a plausible, is a plausible hypothesis.
It was a well done that you didn’t waste time or money on the experiment and it just turns out wrong. So, um, we should celebrate that all day long. Those are good failures and, and, you know, society [00:15:00] needs those. Yeah. It’s interesting because we actually have a phrase at the company, it’s fail more often.
Fail quickly. Scale winners fast. If you just do that in your business, um, or with your businesses, if you just do that, you can actually have a lot of success because even though you, your failures may outnumber your successes, you can actually, um, you can, you can hit those ones that, that are big and, and can win.
Yeah, and I think, I think, um, studios models like the one you’re describing, um, are great for that. Um, you got, you got folks with the experience to know when it’s time to pull the plug and move on to the, onto the next thing, sort of move the team over. So, um, a hundred percent agreement. All right. So again, if you’re in the audience, we’d love to have you on stage.
I know today was a very chaotic start. Um, they just upgraded the platform. To houses. Uh, we’re pretty excited about it. Uh, there’s a lot of new features they’re adding to it, uh, including improved [00:16:00] engagement for members. And, uh, we think there is definitely a lot of opportunity. This app itself, Tom is a startup.
It’s, uh, I don’t, I don’t know if you know a lot about Clubhouse, but they started about, I think three years ago. And, um, I know they raised venture capital right out of the gate. You know, it’s a very tough market. Uh, so they were able to raise the money. They have a great concept, a great, uh, idea and platform, but I know they’re yet, they’ve yet to make any profitability or for that much, even any revenue.
So, you know, let’s talk a little bit about these larger startups, like, uh, the ones like Clubhouse, but some of the ones that may have failed, uh, even in the later. Yep. So, um, that goes back, I mean, there are a couple of patterns we see in the later stage that’s the speed trap that I, I spoke about earlier.
Uh, essentially trying to grow too fast and sort of, uh, essentially getting out over your skis. Um, uh, [00:17:00] another pattern and, and, and you may have had product market fit. Um, but you can lose it. And, and in, in, uh, some of these instances, um, y you know, I think Clubhouse is a good example, right? Sort of super compelling for the first users, and they spread the word and you know, th then you have to figure out, uh, when the thing gets very, very big, um, the intimacy and, and, and the amazing connections that people built.
Um, how do you sustain that when, when you have a platform that’s hundreds or thousands of times the original size? So, um, yeah, people, people can lose product market fit. There’s, there’s also, um, ventures out there, later stage ventures that manage to sustain product market fit, but they. Struggle, um, in one of two ways, um, or in sometimes, um, particularly bad if it’s both of these things.
So, um, there’s often a key executive you need on the senior management team, and, and if you’re missing that person, um, you, you can really [00:18:00] wobble a lot in, in ways that, that, um, sort of churn, um, uh, churn through cash flow and, and, and cause you to struggle. And I’m thinking of one of the, we built a course around entrepreneurial failure here and, uh, what students can learn from it.
And we profile an online retailer of home furnishings. So think, look around you, sort of the chairs and the lamps and the couches and so forth. Um, that stuff is incredibly hard to ship. Um, you know, it’s made someplace far away, shipped to a warehouse and then shipped from there to your home. And managing those logistics is very operationally complex.
And so this particular. Online retailer. Um, it had the demand formula down. It, it actually had product market fit. People loved the way they presented the merchandise, sold it, and um, customers, um, kept coming back, recurring purchases and so forth, but they just couldn’t deliver the stuff on time. And, and that was because, um, they cycled through three vice presidents of operations before they found somebody that could actually handle all that [00:19:00] complexity.
You know, and, and you know, everybody in the audience who’s done this kind of hiring, it can take three months or longer six months to find the right person, senior person, and then you need to give them three months or six months to figure out if they’re doing the job right. And if they’re not, um, uh, you know, then you’re.
Back to ground zero, sort of another three to six months to hire the replacement. And meantime, you’re burning through cash and you’re struggling with, with operational problems. So that’s one way that, um, late stage startups can get into a lot of trouble. The other is just sometimes the capital markets dry up.
We’re in the middle of this with a vengeance right now. Right. So some perfectly good ventures, um, that, that happen to be burning through cash, but in a healthy way, um, can find it hard to raise the next round. And, you know, and, and essentially babies go out with a bathwater. Yeah. I mean, you’re covering, you’re covering a lot of topics, a lot of different areas here.
Um, we actually had, uh, Jeffrey Moore on this show who wrote the book Crossing the Chasm, and he talked a lot about how [00:20:00] companies can fail in that chasm as technologies adopted, you know, you’re, you, um, position yourself around a particular technological shift or even a regulatory shift. And it takes time for the early majority to catch on before you have a tornado effect.
Um, is that something you’ve talked about as well? It’s just the companies that die in a chasm. Like for instance, you know, those that really jumped onto NFTs or Web three or meta last year, you know, they’re obviously struggling now. And, uh, and, and, and not to say that these technologies won’t actually emerge on the other side of the chasm, but today we’re, we’re deep in those in, in the chasm, especially in the case of, uh, the metaverse.
Yeah, no, Colin, I, I love the insight and, and love the reference to Jeffrey Moore and Crossing the Chasm. I, I actually think, um, that book probably tied with Eric Reese’s, um, lean Startup as the, as the two most important books ever written about tech [00:21:00] entrepreneurship and anybody in the audience has, has never read Crossing the Chasm.
You couldn’t recommend it more highly. It actually is, um, that chasm effect is, is one of the three early stage failure patterns that I talk about. Um, I use a different title. Um, we call it a false positive, a and um, just like covid testing, right? We’re familiar with false positives and false negatives.
Entrepreneurs are subject to them. Um, false positive is when you think you’re on the right track, um, because you get some positive signals from the market. But, But, um, uh, your, the needs of your early adopters are, um, are different than the mainstream customers and, and, um, uh, exactly. Um, companies can fail when they, when they over-deliver to the early adopters and, and haven’t tailored the product to the mainstream.
I know you and I could go back for an hour, but we do have other people who’ve come on stage and would like to ask you a question or even share a story. Roland, it’s always a pleasure to have you come and join us, and now we’re in the new [00:22:00] platform Houses. Feels a bit weird, you know, we’re with a little bit, little bit of, uh, chaos in getting this room started, but it’s nice to see you, Roland.
You managed to find us. Yeah. Thanks Colin. Uh, how could I miss a discussion with the great Tom Eisenmann? I mean, I’ve read a bunch of his works from Harvard, not just his latest book. Um, I had a question for Tom, if you don’t mind. May I go ahead? Absolutely. Absolutely. Uh, Tom, uh, You, I think in previously have talked about, uh, the importance of the relentlessness of a founder in pursuing an opportunity in today’s world.
How important is it for investors to fund, sorry, to fund single founder organizations versus, uh, multi founder organiz?[00:23:00]
You know, the, um, there’s some good academic work on this and, and I think it’ll be a surprise to a lot of people in the audience. A lot of investors, I mean, you’ve got investors out there, Y Combinator among them who, um, who, who don’t like solo founders. What the research says is, um, that, that solo is at least as good, maybe even a little better on average if you’re looking at, at success rates and failure rates.
So, uh, you know, and we can imagine some reasons for that, right? Um, you can move faster. You don’t have to negotiate with a co-founder. Co-founders are great because you can cover a lot more territory, you know, and if you’ve got complimentary skills, you, you cover it all. Um, but there are some big advantages to having a very motivated founder who knows what they’re doing and can move fast.
Go ahead, Michel. Yeah, I, I, we would agree. We tend to run businesses like that. [00:24:00] And I think what you said, Tom, uh, you know, it’s, so there’s a lot of unknown factors, right? In that early time. So you have to really be able to move very quickly and not get, let’s just say, for the lack of a better word, inundated with, um, let’s just say corporate bureaucracy.
Um, I love, love your insight into that, especially the point about the studies that’s inspiring to me personally, and I think it’s probably inspiring to a lot of our members.
May I go ahead with a second question for you? Go ahead. Absolutely. Rolling. Go for it Roland. So Tom, um, one of the things that, you know, investors like to see in, in a startup in terms of its growth is traction, uh, customer traction. In today’s world and today’s market, a lot of startups are, uh, are banking on social media as a means or tool for their [00:25:00] marketing.
Can you please dispel the perspective or not of the importance of social media as a means of demonstrating traction versus real sales?
Um, wow. Um, uh, I’m, I’m probably not the right one. There are probably people on the audience who do a much better job with that one. Um, y you know, if that’s your main mechanism for making people aware of the product, it’s, it’s, you know, it’s gonna drive people to the top of the funnel and then your job’s gonna be either through an incredibly product led growth, high quality product to convert them into customers, um, or, or you put ’em into your marketing and sales machinery.
So, um, uh, you know, I, I, I, I think it’s, it’s a pretty good marker. Um, if you don’t have it and you’re in the kind of business that that could thrive with that as an initial source of leads, uh, you probably got a problem. So I think it does mark some traction. [00:26:00] Thank you very much. Overlap. Yeah. I wanted to just go back a little bit here.
You talked about, you know, solo founders versus partnerships. And I’ve been sort of a, it’s, it’s, it’s a really difficult one, but, but in a lot of cases, small businesses do well when they have partners who compliment themselves. I often see that, you know, right outta college, you know, buddies get together and they launch a business, and that’s usually a formula for disaster.
But when you actually have the right compliment, like the right profiles complimenting each other, you know, if somebody’s really good at sales and someone’s really good at operations and somebody’s really good at technology, then you can actually see the benefits of, of that partnership. Uh, there was a case, uh, about three years ago, an e-commerce company I’d invested in was in our, it was, uh, I wouldn’t say it was in our incubator, wasn’t actually physically in our incubator.
It was just one of the companies that I had invested in. And there were four founders and [00:27:00] Reda, Reda College, again, they were all buddies. Um, big jewelry, e-commerce business hit 12 million in sales and three years. And on the fourth year it filed for bankruptcy and how can it go from 12 to four? But really there were just too many cooks in the kitchen.
And what’s fascinating is the story. That’s not the end of the story, Tom. What’s fascinating is each of them went to do their own solo business and have been very successful on their own. I find that fascinating.
I don’t know if you’ve come across that, too many cooks in the kitchen at all. Yeah. Um, a hundred percent we see it. You, you, you’ve sort of, I think using an undergrad example, but boy, you see it like crazy at business schools. Um, and the folks who go to business school tend to be very look alike in, in the skills they bring and the attitudes and values they bring.
And, um, one of the failure stories in the book is a para [00:28:00] co-founders who were great friends who vowed to never let disputes over the business, um, interfere with the friendship. Uh, and so if essentially they were co CEOs and had to talk through every major product decision that they make, every strategy choice, uh, and it slows you down, um, and, and ultimately creates a lot of conflict.
So, um, complimentary as you point out. Super, super valuable. I’m, I’m, uh, former students who are the founders of CloudFlare, the internet infrastructure public company now, and, and I love the, the, um, Way that they talk about this, which is a series of, of circles, like creating the Venn diagram where you want, and they, they had three founders, um, and, and, uh, they want the circles to cover as much territory as possible, sort of spreading out away from each other.
But there still has to be an, a big enough intersection between the circles that they, they can find common ground and actually work together. I think it’s a really nice metaphor. Um, so [00:29:00] complimentary is important. And it’s complimentary. Not only it’s functional skills, you’re the tech person and, and I’m the marketing person.
It’s also complimentary on, on, um, mindset, right? Attitude, like the outside person who just loves working with, with, uh, investors and customers, you know, versus the inside person. So there’s a lot of different ways to compliment each other. But, but, but if they’re too similar, it’s, it’s a prescription for trouble.
Yeah. You know, I, it’s funny you say that, the tech and the marketing, uh, back in, in 1992, my brother and I started an I S P, and all he cared about was the plumbing and electrical, the actual, the, how it actually worked. And, uh, I was looking, I was like, okay, how do people use this actual technology? How can we actually market this technology?
And together we, you know, we created a, a pretty successful company and a career of, of many tech companies over the last 20, 25 years. I also saw that with Joe Foster, who started Reebok [00:30:00] with his brother. And he just recently came out with a book called Shoemaker. Uh, he’d be a great, um, guest for Harvard.
Come to your class. He’s, he’s 87 years old. He’s, he’s come on this show. I’ve interviewed him myself, live and uh, and on the show, He, uh, he and his par brother, he was the social guy. He was the one who could get all the deals done and his brother was the one who could, could actually build the shoes, run the, run the manufacturing.
And, uh, you really do need both in any company. And if you are a solopreneur, you know, if you don’t wanna fail, you have to, if you don’t have business partner, you’ll have to hire further weaknesses. And I, I think the most important thing a solar printer can do is just identify those weakness. Yeah, inside and outside.
Um, important. It’s often even better if the inside person’s got not only the operational, um, skill and, and commitment to excellence, but if they can pay attention to the culture as a company grows, you know, all sorts of pressure comes under, uh, on, onto team [00:31:00] members. And, you know, it’s, it’s often the case that who’s ever focused on the outside isn’t tuned into what’s going on, uh, um, in, in, in terms of the organizational dynamics and the politics and, and the cultural issues.
So, um, t team can be helpful, um, and, you know, and, and, uh, even with the solo founder, um, that doesn’t mean you can’t have somebody senior on your team, um, that, that, that can cover those bases. Well, thank, thanks for that. Tom and Tez, you’ve been very patient. Uh, do you have a question for Tom or even a startup failure story to talk, to, talk, tell us about.
Hey Colin. Good to see you folks. Um, so I have the expert like Tom on the stage. I’d love to ask him a question. So good to meet you, Tom. I think on LinkedIn I noticed you have a few, a bunch of mutual friends like, uh, bill McNitt, I think, and, uh, uh, Nick Bradley and a bunch of people. So I look forward to connecting with you.
Um, I typically talk about what mistakes most founders do before they look [00:32:00] to sell. So I love what you talk about, which is before the stage I talk about of why they fail. What we’re seeing, and I’m curious to get your take. What we’re seeing is there’s a lot less quantity of deals happening. I’m in the m and a world lot less deal flow, but there’s better quality because they’re just not making it to the, you know, pitch deck or the second conversation stage.
Um, and for most investors, institutional and individual, they’re re-scaling their risk, which is making it a lot easier to say no. I’m just curious from whether statistically or what you’re seeing, um, what would you, what would be the number one piece of advice you’d probably give to companies, uh, right now that if they are looking to raise funds, whether it’s first round or follow up rounds, is there something you might say that might help them?
I’m just curious to get your perspective from, um, you know, from your perspective. Appreciate it. Thank you. Boy, you, you, um, you, you got the tough. The, the, the, the tough spot in the middle there that you, that you put me into. Um, I, I, I, I thought you were gonna [00:33:00] move me in the direction of, of somebody who’s got an entrepreneurial idea.
It’s a r There are a lot of people out there, right? Cuz so many talented people have been laid off. Um, there’s a surplus of ideas v investors and venture capitalists being careful. So the ones that do get funded are of very high quality. It, you know, The industry has started to talk about a series a crunch coming, uh, cuz it’s the, this, this, um, slowdown in the capital markets hasn’t actually hit seed yet.
Um, may, may come in the future, but we’ve had a whole bunch of companies seed funded and they’re gonna be looking at a brutal series A and series B marketplace. So, uh, you know, I mean, it’s no news coming from me. We’ve heard it a lot. Um, but I think it’s good advice, which is, um, be really, really careful with how you’re spending your money, um, o o over the next 12 months.
You know, it could be the capital markets will rebound. Let’s, let’s hope they do. Um, but. This could last for a long, it could get worse and it could last for a long time, particularly if it sort of this [00:34:00] mess in the technology markets and the mess in the banking sector turns into, um, a slowdown in the overall economy to put a lot of pressure.
Um, you know, the other end of all this transaction is the companies, the bigger companies themselves. And, and we saw this with a vengeance in the year 2000, 2001 after the.com crash. Um, there were incredible bargains to be had, um, in the m and a market if you just moved. And, you know, it’s astonishing if you look back at the sort of the things if, if, if you could have sort of picked up the pieces of some, some really well built companies, um, uh, you, um, you could have got them, you know, for 20 cents on the original dollar.
Um, and, and built something incredible. And I, I think a lot of big companies are being who, who have capital are being way too conservative right now. I love the answer. And one quick follow up question if I might, which is you, you touched on a really core point which is have enough cash flow to sustain probably looking into Q end of Q1 [00:35:00] of next year, right?
Cuz it’s probably gonna be rough. So what we’re advising and what we’re kind of seeing is if you cannot comfortably sustain throughout the end of this year, into next year, then you should probably start having earlier conversations to look to get digested or bought out by another company versus them coming to you at the end and crushing your multiple.
Right? Now you come from a place of confidence. What’s your thoughts on that? Yeah, so we, I mean the, doing the research for the book and then building this MBA course, um, we talked to a lot of. Founders, um, who were struggling. A and um, you know, there’s a series of moves. You always try, you try to pivot. Um, you try to raise more money from new investors, that doesn’t work.
You try to bridge that doesn’t work. You try to sell the company and over and over again, we heard, um, you, you get this initial surge of enthusiasm cuz everybody wants to talk to you. Like what competitor doesn’t wanna lift up your hood and sort of see what the engine looks like so you get this initial, um, uh, enthusiastic burst, but they drag you along.
And, [00:36:00] um, if you do get a bid, you know, it can take three months to work through the diligence and all the legal process. So it’s like a six month process to sort of initiate the, the transaction and see it through and, and you know, and if you wait till you’ve got three months or two months of cash flow left in the bank, you’re totally up against the wall.
Excellent. Well said. Appreciate the, uh, uh, the thought and the advice. Look forward to connecting with you. Thanks. Thanks Dash. Excellent. So we have a question in the chat from one of our, um, members, Robin McPherson, who can’t make it to the stage. So I’m gonna go ahead and ask the question for him, Tom. Um, Robin would like to know how much data do you recommend that people gather before starting their product or service?
So how much data, like how do you know you have enough and how do you get started? You know, data [00:37:00] comes in a lot of flavors. Um, there’s the data on how big is the market opportunity, sort of the total addressable market to market sizing. And, um, we do see founders that start something that is just too small and there’s no clear path to, um, to, to, to making it bigger.
Um, it it, you know, in the, in the, uh, Jeffrey Moore world sort of knocking over the dominoes, you know, start with the first one or, or, or use the bowling alley, um, uh, metaphor. Um, so the thing the founder’s gotta be careful with there is, you know, it’s tempting to put the billion dollar number in the pitch deck.
So you gotta be careful about the data you use to actually be realistic with yourself about whether you’re pursuing a big opportunity and, and, and the data you might be tempted to use to pitch to investors and not to get confused by, by your own sales pitch. Um, the other kind of data is validation for demand and, and it’s not hard data in the sense, you know, [00:38:00] giant database.
It’s, it’s just basically putting, uh, uh, Minimum viable product facsimile a, a, a low fidelity version of the product in front of, of somebody who might realistically be a customer and seeing how they react, you know, and in the best of all worlds, will they commit to, um, to, to, um, buying the thing in the future, right?
Put a deposit down. And, and so those are small. It’s not a lot of data, but it’s absolutely crucial data, uh, to, to validate demand. Those are the two things I think that, that the early stage founder needs, right? Validation of demand through, through, well run experiments with prototypes, a and a realistic assessment of, of the market size.
What’s interesting there, Tom, is I often see a lot of entrepreneurs think that because the market is so huge, if I could only get 0.0, zero 1% of the market, then I’ll be making 10 million a year, versus a market where it [00:39:00] may be a, you know, a hundred million market. And they could get 10% of that market and have a, in some ways, a better shot at getting the 10% of that market.
Is it ha Have you, have you come across that as well? This, this, this, this. I mean, I hear it way too often in investor pitches and whatnot where they say, oh, if I could just get 0.01% or whatever of the market,
that’s, that’s probably a founder who’s, um, got too broad. Uh, I mean, classically, lots of entrepreneurs, uh, wanna go for the, the big, big opportunity and sometimes it works, right? Drew Housen did it with Dropbox. File management was a gigantic opportunity. And, you know, and, and he didn’t need a very big piece of that to build a, a good business.
He captured a big piece of it and built a great business. So sometimes it works, but u usually the advice you get from a lot of investors, which is to narrow in early on a, um, uh, uh, and capture a big share of a small market that loves what you’re doing. [00:40:00] Much better way to go. Well, that’s great. Well, we’re lucky to have, uh, Giuseppe in the room as well.
He’s a real estate, uh, investor. And, uh, you know, it’s interesting you talked about all these external factors, Tom, that can occur in business. We also have a real estate business in our incubator, and one of the challenges, uh, that it’s experiencing is high interest rates. And I’m just curious, Giuseppe, if, uh, that’s something you might be able to talk to or if you have a question for Tom or a startup failure story.
Yeah, I have a question and if I can say the same thing about my experience, Tom, um, it’s pleasure to meet you. I’m Italian. Yes, real estate. Everybody know me about real estate, but business or entrepreneur and startup is my passion because in Italy I add in the same moment over one other company, restaurant hospitality space, franchising, vitamin store.
I love to learn from [00:41:00] you. What, why? For me, startups, uh, business, when they start they fail is because sometimes the comparison themselves, people, one example, everybody talking about Airbnb, about my experience in usa, 50%, they jump in the Airbnb space. They lost money. Didn’t make money. Why? Because when you compare yourself, the other people, they make money.
You don’t know them. Background, knowledge, experience they have for this. Any targeted market, you need to jump. You need to understand if you are ready or not about your experience in moment like this. Everybody, the focus is a problem. Pandemic, recession inflection, bankruptcy, all the problem. What is the step people need to do in this moment to build as a focus for the make deal?
Use the problem, has opportunity.[00:42:00]
So, yeah, I think you’re, you’re, um, you, you’re pointing to something, um, very important about not, um, you know, it’s too, too many ventures positioned themselves as the Uber of X, Y, Z and, and, um, you know, you’re only gonna win if you, um, come up with something differentiated really different than what’s out there.
Um, and, uh, if it’s defensible and the, the more you’re cloning somebody else’s idea, um, you know, if it’s their business model applied in a different place, maybe that’ll work. Um, but, um, you gotta be very careful with, with, um, with, with simply matching somebody else’s idea.
So Tom, you touched upon this idea of defense. You know, often, you know, startups can start strong, but then [00:43:00] all of a sudden, especially in the e-commerce space, we’ve seen this and you launch a product and now there’s a hundred companies, uh, launching products similar to the ones we email@example.com. So I’m just curious, you know, what are some of the things a startup can do to defend their, to def, you know, to, to create a moat or defend their business?
Well, you know, the places you tend to see that, um, are where the entry barriers are low. So, you know, if you go back 20 years, um, uh, you, you had a dozen companies, um, during the.com boom, Allstar online, pets supply retailing, pets.com, et cetera, et cetera. Um, if you go back a couple of years, you saw the same thing in food delivery.
So, um, you know, in, in a, in a space like that, there just may not be a whole lot you can do, and it may all be about. Execution. Um, just, you know, are you gonna sur surprise and delight customers, um, the way Amazon [00:44:00] did, um, in, in some of those businesses? I mean, other ways to defensibility comes from proprietary intellectual property, patents and so forth.
Um, if you get a headstart on somebody, you can build a network. Um, and if network effects are important, that can give you a big edge. Um, if you’re consistently excellent, you can, you can build it or you’re just clever with consumer marketing, you can build a strong brand. So, um, but there are, there are just a lot of places where it’s, where it’s tough to do.
Awesome. All right. I wanna do a real quick reset of the room. We have the privilege of having Tom Isman here from Harvard Business School. Um, he specializes in entrepreneurship and has a new book out. So, um, Tom, you know, Like, where can we go get your book? Like, just tell us a little bit [00:45:00] about that or get more information about the work that you’re doing.
And then anyone else interested in coming up and asking a question, please do. So. This is a rare opportunity to talk to someone who’s extremely knowledgeable and researched in this area. So Tom, like how do we, you know, get in touch with you, uh, hear more about your studies, where do we go? Uh, thanks Michele.
Um, well the book’s obviously on Amazon, um, it’s called Why Startups Fail. Uh, if You’re in a Commonwealth Country, um, the, the, uh, uh, identical book, um, weirdly, um, publishing world is pretty weird, uh, is called a Fail Safe Startup. And. Uh, if you wanna see the research I’ve been doing on, on, uh, on entrepreneurial failure, get a feel for it.
Uh, there’s a web website. I’ve got a website called Why startups fail.com. It collects, um, sort of good deep description of the book and some of the, um, uh, the articles I’ve [00:46:00] written coming outta the book, A description of the course I built in our MBA program and have, have since handed off. Um, and, uh, there’s some pages there that collect pretty much a anything, um, a smart practitioner ever wrote about startup failure, which, which I think would be really interesting too, to a lot of folks in the audience.
Amazing. All right, thank you for that, Tom. I know I’m gonna look into that myself. Um, but we have Colleen on the stage. Colleen has, is working on some amazing, uh, projects that are, you know, to minimize environmental impact. So Colleen, um, tell us your question or give us your story please. Thanks, Michele.
Thanks for the invite and, uh, pleasure to meet everyone. Um, interesting Tom, interesting, uh, book. Um, I have a great example of where investors fail. Um, [00:47:00] in 2015, I was nominated for the 2015 Keva Award, uh, which is Global Sustainability, which was, uh, sponsored by Reuters. I was nominated by a woman scientist from France and Global Sustainability, uh, way back then was, um, not as hot as it is now, but at that time the new hot thing that came out was ocean cleanup.
And so he was also in the. I guess competition as you would say. And so when the competition was finished, they phoned me and said, oh by the way, sorry you didn’t win. And I said, may I ask who won? And they went Ocean cleanup. So, well that’s very interesting. And I do agree the ocean needs to be cleaned up, but he’s not a global solu solution.
He’s actually a routine handling a symptom. He’s gonna be driving around the ocean forever. There’s no return on that [00:48:00] investment. And uh, I’m actually the solution that terminates the issue at the source. So transforming distribution to terminate the waste, um, I thought they would be brilliant and backpedal and fund both of us, but they did not.
They continued on with him. And there’s a great writeup right now that was on LinkedIn by an environmental lawyer going, what on earth are they thinking? He’s actually not, he’s cleaning up what keeps going in and what a, how poor of an assessment that truly was when it should have been my startup that should have been promoted.
And so I’ve seen this the whole time in doing my work. I just thought I’d bring that up. That, um, I think there’s a lot of problems within the economic development era. [00:49:00] And I could, I have tons of examples why startups fail, is because there’s very poor assessments, maximum fragmentation and, um, it’s all about the deal.
It’s not about the environment or anything at all. It’s a very interesting concept. Um, I have, I have pure examples of everything that I went through. I can’t wait to do a movie to show what actually happens. So thanks for letting me speak. Any questions? I’m glad to answer. Thank you. Hey, Colleen. So first on behalf of the planet, um, uh, thank you for the work you’re doing.
Second, just a question, which is, is, is that example you gave, were those for-profit investors or was it um, not-for-profit grant giving. I believe that was not for profit grant giving. Um, apparently they paid him 30 million and I think they’re think, [00:50:00] and he’s, he is a, has a ongoing operating cost of $20,000 a day.
With no return on that, by the way. And they’re not happy. Yeah. Thanks. So a coup couple of reflections here. Um, y y you know, when I did this work and, and taught the course, um, got some questions from folks in the, in the, um, social impact world about whether the failure patterns were different for, for not-for-profits and social, for companies oriented.
And, and the answer is a hundred percent yes. And one of the, um, one of the surprising things is, uh, a lot of not-for-profits, um, as you say, they’re, they’re subscale, right? There are a lot of foundations, grant givers, rich people out there that are happy to put their name on a thing, um, or beside an important cause.
And, um, happy to keep it just alive. But you end up with a whole bunch of, of activities that are, are too small. And if, if we just did ’em at a bigger scale, we might have bigger social impact. So the, the failure [00:51:00] pattern’s very different. And then on the for-profit side, Boy, I can’t tell you the number of entrepreneurs who say, I knew what I was getting into when I took venture capital, but until you’ve actually lived with the pressure for hypergrowth that comes with that, uh, you really, you, you can’t know what you’re getting into.
Yeah. Do you often see, uh, companies that take venture capital, uh, resulting in a, in a, in a, in a bad outcome? Or is it often you hear about it and everybody says, oh, got venture capital. It’s like they won the lottery, and I’m thinking, well, wait a minute here. Have you heard of a concept called liquidation preference?
Are you aware that this, this is a, uh, your new boss? Have you got some thoughts on that? Yeah, um, I mean, we see this like crazy at business school. I mean, if you go to a top business school these days, you kind of assume if you’re gonna be an entrepreneur, uh, the only worthwhile way to be an entrepreneur is to take money from a venture capital firm.
You know, and all the entrepreneurs in the audience know there are many, many other ways to fund a startup, [00:52:00] you know, including bootstrapping, but they’re banks out there. And, uh, there’s smart ways to use friends and family. Um, the, the, the, um, pressure comes. When the entrepreneur is, I mean, the, the, the venture capital model is make a very, very, very large return on a very small fraction of the companies in the portfolio.
So they gotta push everybody to have, have that kind of gigantic, um, payoff. And of course, that means taking lots of risks along the way. And if you’re a VC with 40 companies in the portfolio, that’s just great. Um, if you’re the entrepreneur who’s got one turn, um, uh, you know, to take that kind of risk when you could be building something slow and steady and Sure.
Um, it, it just, it, it isn’t necessarily the way you wanna go and until you’ve experienced that, you can know in the abstract that they’re gonna push you for hypergrowth, but until you’ve lived with it and the pressures that come with it. So that’s where, that’s where I’ve seen a lot of, of, um, of failed founders regret [00:53:00] the choice of taking the vc.
Yeah. And I actually, I believe it was a stat from John Mullens who wrote customer funded startup. And I was just searching, I’m searching for it right now, but he had mentioned in, in one of the shows here, it was something like 92 or 93% of companies on the Inc 5,000 don’t take venture capital. Uh, the vast majority don’t.
And, and that’s a fact. But yet our society seems to be enamored with it, and everyone’s focused on, you know, how do I get venture capital? And you talk about zombie companies. I have a company that I’m working with right now that raised 60 million in venture capital. Uh, and the founder spent 15 years working on this company, and the company’s not worth more than 10, 15 million.
You know, and, and the fact of the matter is the venture capitalists get paid first. And, and that particular individual is no longer working at the company. And, you know, he spent his, a good portion of his life [00:54:00] working on it. But had the venture capitalists taken the same risk as he did, He, he may have still walked away with three or 4 million, which isn’t, isn’t that bad?
At least it’s better than nothing. But the fact of the matter is that all venture capitalists, uh, set up a structure around liquidation preference. So that’s just something that startups need to think about. And the other thing that we see with a lot of venture capitalists, uh, funding is that there’s a lot, uh, when the money comes in, the expenses go up and there’s a lot of spending, a lot of waste.
And, uh, I guess, you know, it depends on the time, obviously, dot com era, you know, and then the crash. And then we had the, uh, tech crash of last year. So, you know, times are a little different now, but you know, in the past we’ve seen, uh, a lot of large s when it comes to founders who, who raise, uh, a lot of capital, you can see that within, like shows like WeWork and others.
Let’s, you know, we have a few minutes left here. Let’s go popcorn style. Anyone, uh, [00:55:00] want jump in, Colleen, jump in. Um, I think, I think the new, and for myself it was a, a big challenge on, uh, finding capital for such a big paradigm shift that that was essential. That is still essential. Um, we ha I have, uh, five revenue streams and so it, it, it came about with full pro project funding from the, from the EU climate bonds.
So, uh, like I, I moved away from VCs because I couldn’t get what was needed and you have to find the bond. So I’m with, uh, waste reduction taxonomy and it, it’s, but then again, the bond has new, the new bonds, these climate bonds, the green bonds, the blue bonds that have come about that the, the process failure is there has to be, uh, [00:56:00] uh, funds.
Prior to the bond coming to market. In other words, you need a guarantor, you need the money for the cash, for the insurance. That also has a slowdown as well. So it’s been a very interesting journey for me. I’m tech, I’m a lean architect. I’ve won many awards in streamlining process architecture. That’s why I started what I started because I was told recycle wasn’t working and then we have the global plastic and, and then I realized I was actually solving two problems, not just one.
The global plastic waste crisis and recycle and all, all these issues of, so it’s been a journey. Can I just say there’s lots of work to streamline a lot of this slowness. When a world is in crisis, finance needs to be streamlined and it doesn’t have it. There is lots of design that I have that will be coming after.
I can hardly wait. To fix a number [00:57:00] of things that I’ve seen going through what they call economic development. Thank you. Yeah. Good luck with that, Colleen. My, my head spins. I have a lot of students trying to, um, sort out the world of carbon offsets and, um, my brain doesn’t work fast enough to follow them.
So, uh, uh, there’s definitely entrepreneurial opportunity there and, and, and wish you the best of luck with it. And you, and you also see the passion, right? And often we, I hear people or entrepreneurs or startups or founders try to launch a business to make money. But Colleen, I mean, she’s got passion. You know, she’s gonna stick with it.
She’s gonna stick with that rollercoaster, the ups and the downs. It’s been a while. I’m a redhead. It’s almost like, get out, get outta my way, is what the word is. Thanks. She is an entrepreneur. That was amazing, Colleen. So I just, we have a question from the audience. Um, before we come to an [00:58:00] end here that I wanna get to, um, Mitch, ask, um, Dr.
Eisenmann, you talk in your book about graceful endings. Can you tell us any practical suggestions on how to really deal with a failed startup?
Oh, thank you for that question. I, I actually think the, the last couple of chapters of the book are the most important, which is, you know, the, the first part of the book, um, is about how to recognize these patterns and try to avoid them. But inevitably, if you do your best, you’re still gonna fail. So, um, uh, a graceful exit is one where, You have timed the shutdown in ways that you’ve still got enough cash in the bank to pay everybody that you owe money to, uh, vendors that you bought things from.
You can fulfill commitments you made to customers. You can give your employees a, a, a, a couple of weeks of severance and, and give them help in [00:59:00] finding jobs. You don’t know what your equity investors, anything. I’m, I’m not saying. I mean, it’s nice if you can give back part of, part of what they put in. So that’s the first part of a, of a.
Of a graceful legs, and that’ll go a long way to building, uh, preserving and protecting your reputation and your relationships. The other part is to be able to learn from the failure. And we, we are wired up as humans to be ego defensive. Um, y you know, it wasn’t my fault. My co-founder, um, lost focus. My, my investors pushed me in the wrong direction.
It’s very, very easy to blame other people. And, um, the, the, uh, especially, you know, with the pain, um, you know, just, I’m sure there’s lots of folks in the audience who’ve, who’ve had failed startups. Just, um, you are the startup, right? The entrepreneur, your identity is all wrapped up. So if it fails, you failed and you can’t escape from that.
And you gotta let those emotions settle down, um, and get some distance. Let the pain, um, alternate between rum. And distraction. If you are only [01:00:00] ruminating on what went wrong and your role in it, you’re gonna make yourself clinically crazy and depressed if you only go for distraction. So to exercise yoga side projects, you’ll never really piece together what went wrong and what you can do differently.
So alternate between rumination and distraction. Get some distance from it and make sure you learn. And if you can explain to others, uh, what went wrong, what you’ll do differently next time, and if you’ve had a graceful exit in terms of protecting those relationships and paying people the money you owe them, um, I, I think you’d be well set up for, for doing it again.
And research shows that half of failed founders found again within the next five years. Yeah, I’d like to say startup failures are the scars of our past that guide us forward with our new ventures. They really are some reason we turned, uh, hand raising off about 10 minutes ago, but it didn’t seem to work.
And we’ve got two more people who’ve come on stage. Tom, if you just got a few more minutes, is that okay? We normally stop it on the hour. Okay. That’s great. [01:01:00] Uh, Macy, you’re up next. Do you have a question for Tom or, or a startup failure story? Yes. Thank you, Tom, for joining us today. And thanks, Michele for, for inviting me.
Uh, I just have a quick question here. Uh, I done a small startup, uh, hardware startup, robotics startup, and we are, uh, on our way of, uh, building, uh, our prototype by the end of this year. Uh, we are selfe, so we are self-funded, put strapping. Uh, I just wonder if it’s, uh, if in this economy, by the end of this year is the good time to raise money, especially for a hardware, uh, startup.
Uh, I’d like to hear your insights on that. Uh, and also if, if, if, if, uh, if what, what other channels should we raise from VCs or uh, Angela Investors? What, what, what’s your thoughts on that? Um, boy, hardware is hard, um, cuz it takes longer and. You know, and then, uh, I mean, one thing to build a prototype, but then [01:02:00] if you’re really gonna make it happen, you’ve probably gotta go, um, someplace where they can produce it at low cost and in volume.
And that means, um, you know, during the pandemic, the bad news was if you had an idea like that you were gonna go to East Asia to get the thing made. Um, you couldn’t sit side by side with. With, um, with the contract manufacturers. So I, I, I think the good news is we’ve worked past a lot of that. Um, uh, there are, I, I, I think more investors out there, venture capital firms and other firms that have gotten comfortable with hardware and how to coach founders who are doing this.
So, um, uh, and, um, uh, you know, I think as we said earlier, the, the good news is so far with all the pressure in the capital markets right now, um, we haven’t seen the kind of, um, reduction in seed funding that’s hit the later stages of, of the venture cycle. So hard, sort of series B and so forth. So I just keep plugging away.
Um, you know, the more you can show up a, um, a well-developed plan, working prototype to the investors, the better you [01:03:00] should do.
Yeah. Thanks. So,
great. Vahid, you’re last up today on the show. You have a question for Tom or. A startup failure story. Hey, good morning everybody. Thank you for being here. Yeah. Uh, my question would’ve been like, what would be the best way to make the decision that if you are going to raise, obviously you’re giving up a, a portion of the company and, and you’re raising money versus going slower and, and not raising money, what would be the top maybe three, uh, factors that that would come into making the decision on either side?
Um, l l Love the question. Vahid. It’s, it’s, um, uh, Often a horse race between greed and fear. Um, uh, if you are, are going to raise, you gotta decide how much to raise too. So not only when but how much [01:04:00] and, um, the greed is, boy, if I just raise the absolute minimum right now and make progress, I can raise more later at a higher valuation.
So, um, I, I, I, if I take a lot now, I’m gonna suffer or dilution cuz I haven’t, I haven’t proved out my milestones. So, uh, on the other hand, um, if you get greedy and, and, and you try to do everything on a shoestring, um, and it takes longer than you expect, you have to do a pivot. Um, The customers don’t, don’t materialize the way you thought to, um, or, or the technical challenges turn out to be harder.
Uh, you can run outta money and kill the venture. So, so you, you just have to search your soul about the amount of risk you’re willing to take and, and where you are on that. Greed versus fear spectrum. Fear, fear of running outta money and greed, um, having to do with minimizing the dilution. Um, but I, I think in general though, um, a, a, a founder, I mean the, the right approach for a long time now is to make as much progress as you can and get as much [01:05:00] traction as you can.
So you raise at a higher valuation later. But you can carry that to the extreme and, and not make any progress because sometimes you just need money to move. You need to hire people, uh, you need to do some marketing and, um, if you need outside capital to do that, just go get the capital. Um, but be careful about how much to take.
I appreciate it. Thank you. If I can have one more follow up on that, my question would be, would it be okay? Um, I, I feel like a lot of VCs or, or a lot of investors, they, they kind of, um, They imagine what the growth could be and what the potential could be versus you, uh, going slower, raising, you know, generating income, then they’re not maybe using their imagination or what it could be.
Because if you are, you know, in the process for a year, year and a half, and you are making, let’s say a hundred thousand dollars, would that hurt you? Versus going initially and just speculating what you’re gonna make, versus now it’s been a year and you’re [01:06:00] making this. Uh, I think a, a professional investor is pretty good at looking at your projections and figuring out whether they believe them or whether they’re gonna give it a haircut.
Um, and, uh, I think entrepreneurs are less good at, um, thinking realistically about how f how big the business is gonna be. Um, th there, there’s a movement out there. I’d encourage everybody to, to research the Zebra movement. You know, we VCs want unicorns and, and the zebra movement is, is an approach to, um, sharing the upside with investors in ways that allows a business to grow slower.
So, zebra zebra’s travel and herds, as opposed to unicorns being, Ima zebra’s a real, unicorns are imaginary. It’s a, it’s a pretty cool way of thinking. And, and I think, uh, good for a first time investor, or excuse me, a first time founder, to think about whether that’s a better kind of approach for them, this sort of zebra approach to investing.
Thank you so much, Tom. Well, you’ve been listening to [01:07:00] Why Startups Fail, A new Roadmap for entrepreneurial success written by Tom Eisenmann. And I know we’ve ordered two copies to our office. We, we have a library of, uh, books that we, we put together from guest speakers at the office. And, uh, I know a lot of people will get a benefit from reading this particular book.
Uh, we run an incubator with about 10 different businesses in it. So this is, this is definitely, uh, something that can really help you out because if we can learn how to avoid these failures, then we can focus on the successes. This is the Serial Entrepreneur Secrets Revealed. You’ve been, uh, listening to.
If you don’t know this already, we have a podcast. This is syndicated through that podcast network. Uh, you can go to any of those networks and search for serial entrepreneur Secrets revealed. We’ll catch you next Friday, two o’clock Eastern. We have some really big speakers coming in [01:08:00] like Tom, but you wouldn’t know Tom was coming in today and it was even, even, we didn’t know if Tom was gonna make it in today.
It was a bit of a bumpy start. Uh, sorry about that Tom. It was just a brand new upgrade of an application. We had two multiple rooms set up and it was a bit of a, a mess, but you know, that’s how sometimes that’s what’s life is like in, in, in Startup Bill. But uh, you wouldn’t know unless you’re on the email list if you go to startup.club and sign up to that email list.
Uh, we only send out announcements about speakers and we do it once, once, uh, every couple weeks. We have some phenomenal speakers coming on next month as well. So thank you everyone, and I am following you, Tom, now on this club as app and really enjoyed your session here. Thank you very much. Thanks Colin, and thanks everybody for listening.
Amazing session. Everyone. Have a wonderful weekend and be well. See you next week.