Ep 22: Why Startups Fail with Tom Eisenmann

9 out of 10 startups fail. This is a gloomy number. However, it has never stopped entrepreneurs from hedging their bets to create successful companies.

And I want to help entrepreneurs, whether they’re first, second, or third-time founders, increase their odds of success.

So this week, I talked to Tom Eisenmann about his new book, Why Startups Fail: A New Roadmap for Entrepreneurial Success. Tom is the Howard H. Stevenson Professor of Business Administration at Harvard Business School and holds the Peter O. Crisp Faculty Chair at Harvard Innovation Labs.

Tom shares his insights into why startups fail and how they can avoid them. It’s important to remember that these are not the only reasons why companies fail. But they are often why most startups fail.

Why Early-Stage Companies Fail?

1. Good ideas, bad bedfellows

Ideas are easy, execution is hard. If you assemble a bad team–team includes founders, early team members, and investors–it doesn’t matter how good the idea is you’ll run into serious trouble. Companies fail because they never got around to building a solid team that can execute.

2. Good team, bad idea

This is the opposite of (1). The team is star-studded but they never find a good idea or find product-market fit. As result, VCs lose faith and the startup runs out of money.

3. The false-positive

Early adopters are important to startups. They can help shape the trajectory of the company. However, single-mindedly focusing on early adopters can create products that are too complicated for mainstream users. A company that wisely avoided this was Dropbox.

Why Late-Stage Companies Fail?

1 of out 3 Series C companies and beyond don’t become profitable. So what are some ways to avoid failing as a late-stage company?

1. Speed trap

Growth is good, and learning to control that growth is crucial. Many companies fail because they grow too fast and their unit economics struggle. Additionally, clone products start eating away at their market share.

2. Help wanted

An early-stage company is dramatically from a late-stage company. Failure to make that transition can be detrimental. Companies need to find experts when transitioning to late-stage, otherwise, it’s a recipe for disaster.

3. Cascading miracles

A company requires multiple things to go right for their product to work. If one thing goes wrong, then the whole thing crumbles. So with each additional variable, it increases the odds of the product failing.

Bonus takeaways

Don’t skip the research, if you’re early stage. Talk to at least 20 people in your target segment, and find out what their pain points are.

If you’re a late-stage company, before you press the pedal to the metal find out what the speed limit is. Ask the following questions: Is the company is ready to scale? Do we have the team and the system to scale?

Often times, we only hear about successful companies because of survivorship bias. Tom sheds new light with Why Startups Fail. I recommend every entrepreneur read and absorb the lessons in this book.

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on:

Episode 21: How to Build the Perfect Pitch Deck?

This is one of the most requested questions I’ve received since starting Playing With Unicorns. People want to know “How do I build the perfect pitch deck to raise funds?”

Kelly Anne Tully, Head of Platform and Investor at FJ Labs, joins to share her tips. Kelly has helped many of our portfolio companies raise funds. Today, Kelly and I discuss how to create the perfect pitch deck.

 

 

Storytelling

The saying “beauty is in the eye of the beholder” doesn’t apply to pitch decks. Visually pitch decks can differ. But content-wise all good pitch deck contain the same things. So it’s important to know what to include in a deck.

Essentially a good pitch deck tells the origin story, the journey, and vision of the startup. Most founders hate storytelling, yet the art of storytelling is an important skill. You don’t have to be Dostoevsky. But you should be able to tell a cohesive and captivating story.

Investors want “a founder who is a visionary who is fantastic at execution.”

 

When to raise?

Always raise when you don’t need the money. Investors can sniff desperate founders. As a founder, you never want to be in a position where your desperation leads to terrible deals.

You want to have leverage. To do that you need traction. Traction is what separates concepts from execution.

Once you have traction, find investors that invest in your category. Investors will not fund companies that are in direct competition with one of their portfolio companies. Hence don’t spray and pray. Be methodical. Create a pipeline that helps you track what stage you’re at with all the investors.

When raising always aim for 12+ months. I recommend raising for 18 months with a buffer.

A perfect pitch deck will convince investors that you can go from zero to one.

“Winners are not the first entrants, they are last entrants who got it right. Think of Google or Facebook”

 

No(s) are normal

One important thing to remember is that getting nos are normal. Every successful startup has received more nos than yes.

You must not take rejections personally. The sooner you realize this the easier it will be to move on.

 

Must have slides

The very first slide should say who you are and what you do. Then start with a team slide to introduce your awesome crew. This immediately familiarizes the investors with the product and the people behind it.

Intro:  What do you do.

Team: Who you are and tell your story.

Problem: Contexualize the problem you’re solving.

Market opportunity: TAM should be greater than $5 bn.

Solution: Therefore, we are building X to fix Y.

Traction: Include churn, GVM, MRR, ARR.

How does it work: Have product images showing how it works

Competition: Who are they? And what’s your differentiator? Is this a blue or red market?

Business model: How do you plan to make money today v. tomorrow.

Unit economics: How much value does each unit generate for the company. LTC:CAC should always be LTV:CAC.

Growth & marketing: How do you plan to grow?

Ask: Don’t put valuation. Instead have how much you’ve raised and from who. And how are you planning onspending the money.

 

For your reference I am including the slides Kelly used during the episode.

How-to-build-the-perfect-pitch-deck

If you prefer, you can listen to the episode in the embedded podcast player.

In addition to the above Youtube video and embedded podcast player, you can also listen to the podcast on: