Episode 139: Why Startups Fail and How You Can Avoid That with Tom Eisenmann, Professor of Business Administration at Harvard Business School
Episode 139: Why Startups Fail and How You Can Avoid That with Tom Eisenmann, Professor of Business Administration at Harvard Business School
In this episode of Product Thinking, Tom Eisenmann, Professor of Business Administration at Harvard Business School, joins Melissa Perri to dive into "Why Startups Fail," his transformative book. Specifically, they dive into the inspiration of the book, six unique types of startup failures and how to avoid them, as well as strategies for hiring your first product manager.
You’ll hear them talk about:
[00:05] - Tom has spent over twenty-six years teaching at Harvard, nurturing growing entrepreneurs and witnessing countless startups bloom and fade. His extensive experience inspired his book, "Why Startups Fail," rooted in feedback from a compulsory first-year entrepreneurship course. The true motivation of the book was the failure of Quincy Apparel, a startup launched by Tom's former students, which collapsed within a year despite sound strategies and his own investment. This failure drove Tom to a decade-long journey of understanding startup failures, interviewing around 100 unsuccessful founders and numerous backing investors.
[04:49] - Tom’s book delves into six unique types of startup failures, categorizing them into early and late-stage patterns. He emphasizes the critical misstep of bypassing initial customer discovery and research, a phase vital for understanding a problem’s significance and identifying the correct solution. This oversight, termed a “false start,” mirrors athletes penalized for prematurely beginning a race. Tom highlights the entrepreneur's willingness to launch their product, often leading to this costly error. Despite the anticipation of saving time, skipping this foundational step extends the product development cycle, increasing the odds of failure. He notes that both technical and non-technical founders can fall into this trap, underlining the need for extensive groundwork before product development to avoid a flawed launch and ensure entrepreneurial success.
[11:37] - According to Tom, the lack of a great PM creates a “bad bedfellows” situation, increasing the likelihood of a "false start." A skilled PM, particularly a founding one, is vital in lowering this risk by effectively tuning into customer needs. In Harvard Business School's entrepreneurship courses, emphasis is placed on four crucial resource providers: founders, teams, external investors, and strategic partners. In a "bad bedfellow" scenario, even with a valid idea and solution, execution fails due to dysfunctional resource dynamics, as seen with Quincy Apparel.
[26:42] - The third early-stage pattern is false positive. A false negative for an entrepreneur means mistakenly discarding a good idea, only to see others later succeed with it. A false positive, meanwhile, can mean misjudging early adopters' needs as those of the mainstream market. Take Dropbox, for example, its early users were software engineers with complex needs, while the founder envisioned a user-friendly product for everyday people. The challenge is maintaining the product's essence while shifting focus from early adopters to a broader audience. Effective navigation through this terrain requires a solid product strategy. The key is thorough customer discovery to understand diverse user needs, underscoring the importance of substantial upfront work.
[35:24] - Many PMs may face one of three critical patterns Tom talks about in his book. The first, "speed trap," is the primary killer of late-stage startups. If a failure is defined as a lack of investor return, one-third of late-stage startups fit this description, often due to inflated equity values and resulting in investor loss. Similar to the “false start” pattern, the second, “help wanted,” points to the turmoil from improperly filled senior roles or a plummeting capital market affecting various sectors. The third, “cascading miracles,” involves ambitious projects like Tesla and SpaceX. These efforts demand perfect alignment of multiple elements, with any misstep potentially leading to failure.
[47:07] - When it comes to scaling, the timing of hiring the first product manager is crucial. Tom' research conducted with numerous product leaders highlights the importance of aligning this decision with the company’s growth stage and the founder’s needs. In essence, optimal PM hiring should align with the founder's requirements and the company’s development stage, ensuring neither premature nor delayed recruitment and fostering long-term organizational growth and success.
Episode Resources:
Melissa Perri - 00:00:37: Welcome to another episode of the Product Thinking Podcast. Today, we're joined by Tom Eisenmann, and we're gonna be talking about why startups fail, which is the name of his transformative book. Tom has been teaching at Harvard Business School for over 26 years, and he's actually the driving force behind their product management class, which is what I taught there. I've learned so much from Tom during my time teaching at HBS, and I'm really, really excited for you guys to learn from him as well. His expertise and his research really bridges the critical worlds of academia and real world entrepreneurship, and it makes him a wellspring of knowledge for anyone navigating the complexities of product management and startups.
But before we bring in Tom, we're gonna change course a little bit. So I've been getting lots of questions from you on our Dear Melissa segment, and they have been fantastic. So I wanna be able to answer them more quickly, and we're gonna start answering one question at the beginning of each one of our episodes, then followed by a guest. So this week's question is very much in line with what Tom and I are gonna be talking about when it comes to entrepreneurship and product management. So let's head over and see what we had written in. Here's our question.
Dear Melissa. I have around three years of experience working as a product manager. Always with mature products or at least in mature companies. I've joined now to a company where I'm the only product person, and the product is not in the market yet. And there is no product culture at all, this is kind of a side job. What advice could you give me? What would you focus on? What steps would you follow?
So being the first product manager in a company is definitely a challenge, especially at startups. So when you come into this company, you are gonna be responsible for creating that product culture. You're gonna be responsible for managing the founders and working with them closely, and then also setting up the systems, because usually there's gonna be no systems whatsoever. So understand that this is a big task. The first thing is really figuring out why did they hire you? So talk to the founder. What did they need? Did they need somebody to actually execute, work with the developers to get things done? Did they need somebody to come in and actually stand up some of those processes? What are they really looking for? Because some of the founders may not want you to act kind of like a head of product, do all the vision, do all the strategy. They might need somebody who just can dive in and get work done. And that's totally fine. Other times, they're going to need some help with structure. And if you have three years of experience, you can usually pull this in, which will help them a lot. So you might have to start thinking about what kind of things are going to make us go faster. Do we have a place to actually write out tickets? How are we writing user stories? Do we have a roadmap? If not, can I actually suggest a roadmap with a template? How do people talk about product management? How do we review what we're going to build? Is there a prioritization framework? You're basically starting from scratch. So I need you to think through what are all the things that worked really well at the last company, and then also what's going to be different here. Since you worked for a mature company, all of those things were probably in place when you walked in and you took them for granted. And that's fine, that's what happens with mature companies. But in the case with the startup, usually it's like everybody's running around like chickens with their heads cut off, not knowing which way to go.
And you have to bring some of that standardization in, but not too much. In mature products, we need a lot of overhead because we usually have lots and lots of teams. You probably don't need everything because you're a small team, it's just you, right? You and the founders. So think about what's gonna make our team go faster. How do I get my hands dirty? How do I get things out faster? How do I test stuff? How do I make sure we're doing really good customer research and focus on that core? Especially when you're in pre-product market fit and it's not out there yet, you're gonna be using some of those lean startup techniques, you're gonna be doing a lot of good customer research, but make sure you're documenting it, make sure you're recording it. You're probably gonna be the one coming up with where those things live. So think about a little bit into the future, if we scale, how do I make sure that we scale well if I bring in one or two more people? How do I make sure that we can all collaborate really well together? And then how do I make sure I'm on the same path as a founder, the same track, we're talking, we're collaborating, we're doing things together. That's really important. So usually at this stage still, your founder is gonna be the head of product. You gotta figure out what they brought you in for. Was it just execution? Was it somebody to bounce ideas off of? Try to figure out what the purpose is and then work your systems from there and be lightweight about it. Don't go crazy. Don't make a lot of overhead that is not necessary for a very tiny team. And just really think about how do I get to product market fit and what's the best way for us to actually test that. So I really hope that helps, and I'm sure we're gonna hear a lot more from Tom as well about what people should be thinking about in startups of this size. Welcome, Tom, thanks for joining us today.
Tom Eisenmann - 00:05:24: Hey Melissa, thanks for having me.
Melissa Perri - 00:05:26: So you have been teaching at Harvard for over 26 years. You've been working with a lot of the students who want to be entrepreneurs. You've seen lots of startups come out of Harvard. And two years ago, you wrote this book called, Why Startups Fail. What led you to write the book?
Tom Eisenmann - 00:05:42: Yeah, so the catalyst for the book goes back 10 years, maybe even a little longer than that. We have a required first year entrepreneurship course at Harvard Business School. And it's taught to all 900 students and taught by the case method, like almost everything at Harvard Business School. And we would teach 30 sessions and students would get feedback like good product manager, you ask the customer, how are you doing? And the consistent feedback we got from the course was, hey, you tell us along the way the two thirds of startups fail, but in this course, we saw 30 brilliant successes. So, these founders come in, we bring the protagonist in very often when we teach the case and they strut around and show the peacock fellers and so forth. And so the students wanna know, isn't there something we can learn from the failures? And that sounded reasonable to me. So I set out to add a failure case to the course, and that was a failure. I was a failure at teaching failure. Turns out I taught the whole story beginning to end, including the founders post-mortem reflections. And you will remember that MBAs are really good at looking in the rear view mirror and sort of, oh yeah, it's obvious why that failed. There wasn't demand and they did this wrong and they did that. Yeah, it was all in the case, but look, it's a really smart person who was backed by really smart investors. So there must be something we can learn. So I learned that you actually have to take the story up to the point where there's still a plausible path for the entrepreneur to rescue the business and that actually works. So anyway, I headed in that direction, but the real catalyst was 10 years ago, former students of mine launched a startup. The startup was Quincy Apparel. So the concept was these were two very tall women who had trouble finding, they went to work as consultants like so many MBAs after business school, had trouble finding clothing for work that was affordable, stylish and fit them. You can get two of the three, it's very hard to get all three of them. So they wanted to create a startup that would provide better fitting, stylish, affordable clothing. Quincy Apparel, they raised a million dollars, tried to raise a million and a half. That's part of the failure story. I was an investor in the business and I had really just started to master and understand lean startup practices and pull them into the MBA curriculum. And so I pushed the team to do the minimum viable product trials and go out and do customer discovery, textbook perfect. They did everything you would want founders to do, validated demand, Sure enough, launched the business, the demand was there. It was always strong, good repurchase rates and so forth, but they couldn't get the operations under control. They didn't have prior experience in apparel. They didn't have enough money and the investors who backed them wouldn't put more in. So the thing failed after just a year. And I looked at it and like, wow, they did all the stuff I tried to teach them really well. I can point to a lot of things that went wrong, but I'm not sure I can pinpoint the cause. So, again, I'm a failure at explaining failure. And this is really like, I'm supposed to be an expert in entrepreneurship. This is probably the most important phenomenon in my field. And so that put me on a really a 10 year path to learn everything I could, talk to probably a hundred failed founders and lots of investors who backed them, read everything anybody had ever written on the topic, did a big survey and all that culminated in two things. The book that you mentioned, Why Startups Fail, but also an MBA course, which is a different story. It was a little scary to launch a course with wall to wall failure in it. I thought I might bum the students out. That turned out to not be the case. That's the genesis for the work.
Melissa Perri - 00:09:31: That's great. So in the book, you start to talk about six different things or six different types of failure and why startups get there. Can you tell us what those are?
Tom Eisenmann - 00:09:41: Sure, I'll take them in two chunks. So there's three early stage failure patterns in the book and three late stage. And by early stage, I mean essentially pre-product market fit and late stage, you've got product market fit, we hope, and you're scaling. You may be scaling without product market fit. It's actually one of the failure patterns. So, and the argument of the book is a lot of startups fall into one of these six patterns. Some have the misfortune of actually hitting more than one of them. That's surefire prescription for getting into trouble. The early-stage patterns are false start, Bad Bedfellows, and that's the Quincy example I just gave, and false positives. So I'll explain each one as I do, as the listeners are. Really interested in product, there'll be a lot of product themes that pop up in some places where a better product manager or a product manager at all, in a lot of cases in an early stage firm, the founder's really driving product. That is as it should be, but at some stage you're going to bring in a PM or a product leader. In some cases here, that individual could have made a huge difference. So a false start, just like track and field or swimming, where the athlete literally jumps the gun hoping to get an edge and gets penalized, here what happens is the entrepreneur, so eager to get the thing out in the world, to make it and sell it, that she skips an important chunk of upfront research. The lean startup folks call it customer discovery research. That's essentially doing everything you need to do to figure out if you've got a real problem, a hair on fire problem worth solving, and the right solution for that problem. Defensible, differentiated, differentiated in the sense that nobody's doing it and you're doing things a lot better than other people. It's pretty easy to see. This is probably the number one killer of early stage startups, skipping this step. And it's a bad trade. If you think about typical software business, maybe it takes four months to build the thing, put it out there, see if it's working, and then figure out what to do if it's not working. That's a pretty typical cycle, if somebody's agile and moving fast. And the customer discovery week, in a lot of instances, customer discovery work can be done in about a month, four weeks. And so what this entrepreneur has done, they've made a bad trade. They've essentially, in order to save four weeks, they have probably wasted four months. I mean, sometimes they'll nail it. They'll get it right on the first try. But very often, because you've skipped the research to figure out if you've got the right problem and the right solution, the first go is flawed and you've essentially wasted four months. And if you've only got enough money to last for a year or 18 months, I mean, that really raises your odds of failure. So that's the problem. And it's completely understandable why it happens is what does an entrepreneur, if not somebody who's got a bias for action. So what's better action than get out there and make it and sell it. And then you'll appreciate this. I mean, we have in the MBA program, a lot of students who are not technical, they hear correctly that to succeed as an entrepreneur, you need great product. How do you get great product? You could have a great engineering team. How do you get a great engineering team? You use those networking skills that you polish in an MBA program. They're really good at sort of persuading people. Those people should join their parade. So you hire the engineers or you bring them on board as co-founders and to keep them busy, what do engineers do? They build. So you give them something to build, even though it isn't thought through. It actually, this false star pattern impacts technical founders too, because what do they love to do? They're engineers, they love to build. So in both sides, you end up prematurely diving into the engineering work.
Melissa Perri - 00:13:34: Yeah, that seemed to be a really common one that I would see, you know, in our PM101 class too. You made the PM101 class. So it starts with trying to get people out there and do the customer discovery, but everybody's like, no, we just want to build. We don't want to go talk to people. But I think what you said was really interesting too, where a lot of times you can do this in just a month. So do you find that it's when you were, you know, researching these founders who failed this way, did you find it was a kind of like an arrogance or like a bias saying, oh, I already know what the problem is? Or do you think it was just like a laziness of I just really want to build it. That's what we need to do.
Tom Eisenmann - 00:14:14: I don't think its laziness is the wrong word, eagerness. This is the zeal to get going and feel so natural for an entrepreneur. You know, it feels like you're studying, you're back to school, you're doing research. And so there is some arrogance, particularly if you get a founder who's got domain experience, right? They, I know this feel, I know this market, and sometimes they do. And sometimes you can dive right in. But even, you know, it's very often the case that if you think you know it, there's still some subtle differences. If you're trying to do by definition, an entrepreneur is trying to do something new. So almost by definition, you know, the thing you want to do, even if you think you know the market, the problem and the solution, there's some aspect that you need to think through. It's often the case that when somebody gets whacked by the first version of the product failing, they will come back and do the work, you know, a little humbled. But it's also true that sometimes take two sort of the second try is just, you know, an echo of the first try, namely, okay, you know, I'm going to try something different and build a new thing and put it out there again, without sort of thinking through whether it's going to work.
Melissa Perri - 00:15:17: That's definitely a common one that I see, especially in product management. Okay, so we've got the false start one.
Tom Eisenmann - 00:15:22: And so, you can see, just to sort of bring that back to product, and then I'll go on to Bad Bedfellows. Bad Bedfellows is probably the one where the lack of a PM or a product leader is most acute. But you can see on a false start, if you have a well-trained PM in your midst, or if a well-trained PM is the individual who is the founder or the entrepreneur, it really reduces the odds of the false start. I mean, a good PM is going to know how to basically listen to the customer. So Bad Bedfellows is, when we teach about entrepreneurship at Harvard Business School, we look at four, we call them resource providers. There's the founders themselves. There's the rest of the team. There's outside investors. And then there's often some kind of strategic partner. It's a channel partner for marketing, somebody who's providing the central technology. And the Bad Bedfellows pattern, in some ways, it's almost the photo negative of a false start. False start, you can have actually a pretty good team, but they're just so far from the right starting point that even if they pivot and pivot and pivot, they may never get there. With Bad Bedfellows, and Quincy's an example, they actually had a good idea. And they had validated both the problem and the solution. They just couldn't deliver the solution. They couldn't execute. And the failure of execution, in Quincy's case, and in a Bad Bedfellows failure, is a failure, dysfunctional resource providers, all the way around. I'm drawing a square because at the business school, you'll remember the diamond and square framework. Diamond is elements.
The business model, the square surrounds the diamond. It's the four resource providers. So look at what happened with Quincy. So the founders had never worked in apparel design and manufacturing. And it turns out to be a really complicated process. Many, many steps that have to fit together well, done by specialists. They figured this out reasonably quickly. They thought they could just hire a few people to do all the functions. But that's not how it works. In a big apparel company, you are the pattern cutter, the fabric sorcerer, the quality control person. And in different companies, these people work together in different ways. So Quincy had to hire people to do these jobs and hire them from established, from big apparel companies, people who had never worked in an early stage startup, where you have to sort of scramble around and sort of help put out whatever fire is burning hottest. The fabric cutter would say to the quality control person, I don't know how to do your job. I'm not, you know, yeah, I can see your backlog. I'm not going to help. They would sort of sit on their hands waiting for the work to arrive to them. So bad team fit because they didn't adjust to the rhythms of an early stage startup. The founders lacked experience, which meant they had trouble actually finding people. And once they thought they found people, gauging the quality of those people, they made a mistake that I think a lot of MBAs from top schools make, especially from the ones we work with at Harvard Business School. They sort of assume if you're going to be an entrepreneur, the only respectable way to raise money for your venture is to go to venture capital firms.
It's just it never occurred to the Quincy founders that there was other money out there, and there might be better sources of funding. Problem with venture capital, as many of your listeners will have experienced, is the whole model is we're going to make a huge amount of money on a small fraction of the companies in our portfolio that are going to sort of rocket ship to the moon style. And we're going to push every single company in the portfolio to achieve that kind of result, knowing that most of them are going to fail. But if just a couple, just a modest percentage work, we will make a lot of money. That was the expectation when Quincy raised from venture capitalists. Don't run out of inventory. The stock out is the worst thing you can have if you're trying to grow sales fast. Well. If you've got fashion and you're trying to figure out if it actually meets the customer, the style preferences, you don't want to be sitting on a lot of inventory, that doesn't work. VCs don't usually invest in apparel lines, so they ended up dressing up the business, which it was as direct to consumer, which this goes back 12 years, was a new thing then. We take it for granted now, but Bonobos was just getting started and Warby Parker probably had just launched. VCs were looking for, oh, I need a DTC company in my portfolio, and Rent the Runway had just launched and had a lot of success. Here's a pair of female founders from Harvard Business School who look a lot like the Rent the Runway founders, so maybe lightning will strike again. They managed to raise, but from second tier VCs, who didn't have a lot of money and couldn't bridge when the company got in trouble, and frankly couldn't offer particularly good advice. Bad Bedfellows, founders lacking domain experience, team wrong cultural fit, investors who really are pushing in the wrong direction and can't add a lot of value. Strategic partners, they had the apparel, as is often the case for a new apparel company, outsourced the manufacturing to third-party factories.
And of course, these factories, you got this little peanut, an order from Ann Taylor comes in that needs to be expedited. So the Quincy stuff got pushed to the end of the line by the factories. So all the way around, you know, even though the idea was good, and what killed the company was it took a long time to sort out the operations and deliver with quality the promised good fit. Turns out there's a reason why women's clothing isn't the idea for Quincy was we're going to sell it in sizes like men's clothing, where you've got chest size and sleeve length, etc, etc. I'm sure other people in the history of apparel have thought of that. It's actually hard to manufacture. They were making progress, but they ran out of money before they could get there. So bad, bad for those. You know, and here again, you can see that the apparel equivalent of a great PM, somebody who could organize that whole process could have made a difference. Maybe it's not a PM, classic PM role. It's really just an operations role, but they didn't have that.
Melissa Perri - 00:21:27: It sounds like, yeah, it's that industry knowledge. It feels like without knowing somebody who can own those operations end to end on that side, it feels like that piece was lacking. And that's an interesting one, because in product management, we go through this debate all the time about whether or not we need a product manager with industry experience, or we don't. And what I come back to tell usually founders or teams is that you have to look at the whole team and see if there's industry experience in the company. And if there isn't, yes, you're going to need somebody with good industry experience. But if there is, and you've got a PM who can learn, usually you can go back to that. But with a founder, you've got two people. And if they both don't have industry experience, it sounds like that's a hard one right there.
Tom Eisenmann - 00:22:10: So two insights, I agree strongly there, two insights came from this story. One is that Quincy founders, they had these jobs at BCG, Boston Consulting Group. And the minute one was married and had a spouse who could help cover the living expenses, the other wasn't and hadn't saved, was sort of sitting on a bunch of student loans and didn't have family money that could cover this. So the minute she quit her job, they had to go raise money and get started. If they'd stayed at BCG, they were working on the venture nights and weekends. If they had just taken more time to learn about the business, they might've been able to avoid some of the problems. So that's one thought. The second thought sort of relates to what you were saying is do we actually need domain experience? And what I learned from this research is the answer to that with a founder is it depends. What it depends on is the complexity of operations in this instance. Now, I'll give an example, in food and beverage, it turns out there are, Dozens and dozens of decisions that with a lot of MBAs are attracted to launch a new food or beverage product. And the decisions, you know, should we pay for end of aisle displays? Can I trust this co-packer to actually deliver quality? What should the labeling on the product look like? Will this wholesaler notorious for abusing new brands and sort of not paying them the money that actually is coming from the retailers? Just up and down the line, so many mistakes you can make as a founder if you're doing food and beverage that having domain experience. So apparel, you know, but then you contrast it to something like, you know, think of Instagram, the founders of Instagram did not need to have worked at Kodak or Polaroid for 20 years and in order to have insight on photo sharing, you know, so sometimes it's much more important than other times.
Melissa Perri - 00:24:02: Do you find it's something to do with, you mentioned it's a complicated operations piece, but do you think with the Instagram stuff it's because we would use it or they would be consumers of the same app? I feel like there's a tricky thing there where people go, oh, we are the users and then they don't want to do the customer research and they don't want to go out and do that first part we were talking about. But it does probably make it easier to launch a business like that from a domain experience side.
Tom Eisenmann - 00:24:27: I haven't studied it closely. I suspect there were two things going on. I suspect that the founders were millennials who were online native, right? And sort of had a lot of personal experience and could sort of look over their shoulder and see a lot of people photo sharing. So that was probably more relevant than 20 years at Kodak when people were printing out. Film was expensive, developing was expensive, you got photo albums and that whole experience. I'm sure there's some valuable lessons for translating it online, but. Going mobile was such a sea change that I think that whatever domain experience related to the real world management of photos maybe was less crucial to the success of these early mobile first applications.
Melissa Perri - 00:25:12: Yeah, I think that one makes sense. So I was actually at Kodak right before Instagram launched. And we were part of this innovation team that they brought in because they wanted to understand more what were the younger generations doing with photo sharing. It was a couple of years before. It was right after the iPhone launched, so definitely before Instagram. But something else I saw there was they understood conceptually that everybody was starting to get away from digital cameras and start using their phones and didn't want to carry it around. But because of the inertia of the big company, they couldn't do anything to actually act on it. So we came up with all these concepts, and we said it would probably be better for you to take your software for photo editing and embed it on something else instead of building a phone out or building these things out. Instead of making more digital cameras, let's say it that way, just go for the software. Go for like, put your camera lenses on phone, something like that. And they just couldn't act. They had this innovation team built in, but we just couldn't act. There was no budget for us. There was no way for us to actually get the ideas out there. And everybody was like, no, this is the way it's always been. This is how we do things here. That's not how we do things.
Tom Eisenmann - 00:26:19: There's such strong embedding of just a way of thinking about the business and what's important to the business and the business model of selling film, which was so profitable, huge profit margin for so long. There are echoes of that at Kodak all the way back to the creation of digital cameras. They had the technology for digital first, and it was very good. They watched as Asian manufacturers sort of pushed the stuff out so much faster and such a lower price point. They fell behind. In another life as a management consultant, I had a chance to work for a big phone company that was exploring the use of two-way cable. The cable television system could carry signals in both directions, and we take it for granted now. We're almost all using cable modems. That technology was new, and they recognized it could be used to do video phone. We spent years developing plans for launching cable-delivered video phone, and they could just never push the thing over the finish line. 20 years later, here we are essentially doing what we were looking at 20 years ago. Sometimes it's too far out. Sometimes it's too big a change in business model or too big a cultural change and lots of inertia, as you say.
Melissa Perri - 00:27:32: So it's just a kind of like good technology at the. Wrong time, right? Too early for the market. And that could be something there too.
Tom Eisenmann - 00:27:40: Some of the listeners will be old enough to remember Webvan, which was the first go online grocery delivery, blew through a billion dollars. It's a later stage failure of a type I look at in the book. We take online grocery delivery for granted now. Sometimes things are just out of their time.
Melissa Perri - 00:27:57: Yeah, like Vine and TikTok, that's like a very relevant one these days.
Tom Eisenmann - 00:28:01: Or Starlink. Speaking of Elon Musk, you know, the Iridium was the first type, sort of circle the planet with low orbit satellites that can reach, provide connectivity anywhere. Was a $10 billion failure.
Melissa Perri - 00:28:16: That's a big one. Okay, so that sounds like definitely a failure thing too, just being too early. What else do we have after?
Tom Eisenmann - 00:28:24: So the third early stage pattern is false positive. And everybody will be unfortunately too familiar with that. Turns out that from COVID, turns out entrepreneurs are subject to false negatives and false positives as well. False negative is heartbreaking. I mean, it's dangerous obviously in healthcare. If you've got a problem and it's not diagnosed early enough, you can get your body into a lot of trouble. For an entrepreneur, the equivalent is you had a great idea, something in the universe signaled you that you were off track. It wasn't a good idea, but it turned out to be a false negative. And 18 months later, you read TechCrunch and somebody's doing exactly with $50 million of backing from Sequoia is doing exactly what you thought of. False positive is can also be deadly. And where it happens with an entrepreneur is often the case that the early adopters who you absolutely need on board as an entrepreneur, right? There's no business until people start using the product. So you better understand them, you better pay attention to them. But it's often the case that their needs are different than the needs of the mainstream users. Mainstream users, if you're going to build a business of scale, are really important, too. So sometimes they're the same needs. And you just basically you just flow from one to the other. Think of a product like Dropbox, right? Early adopters for Drew Houston, the founder of Dropbox, were software engineers, basically with incredibly sophisticated requirements for file management, multiple devices, mobile, tunneling through firewalls, collaborating with a lot of people, synchronizing, and a lot of knowledge about how to actually do that. But Drew had a vision for the product, which is he wanted in his Y Combinator application, I want something that's so easy to use, my mother can use it to store her recipes. That was the product vision. And, you know, so he's got his early adopters demanding all these sophisticated features. And he's got a vision for the mainstream customer that's very different. He had the discipline to build something that was for the mainstream. And maybe on faith, maybe through good discovery work, he had enough confidence that even that was so much better than what the early adopters were using that they would adopt it, which was true. Not always the case. Your book is so strong on this. What's really needed here is this product strategy. And the strategy can go in three different directions. You can build for the early adopters and migrate toward the mainstream. You know, maybe you hide some features along the way, you can build for the mainstream, which is what Drew did, and assume it'll be good enough and just sort of chuck along, you can build two versions of the product and sort of a basic and pro version. There's no right answer. It's going to be situationally dependent. But the key is to do the customer discovery work again, to understand if there are differences in needs between early and mainstream. You know, and again, it just points to the need to do all of that upfront work.
Melissa Perri - 00:31:30: I see that one a lot with product management, especially when it comes out to design. So I feel like people will start to build products that are meant for experts to use, because they are the expert themselves, or they're talking to the experts who are going to be the ones who need it. And then those things become extremely complicated, and you get into the mainstream or the rest of the people who are not experts, but you made it so hard to use that they can't actually pick it up and start adopting it. And a lot of times they have to, if it's an existing company and they have money and they can do this and they're not running out of time and they're not strapped for cash like a startup, they can overhaul the design and do a simple mode versus a complicated mode and hide those in advanced features. But when you're a startup and have the luxury of time and money and a bunch of people to put on that, I can see that being extremely dangerous.
Tom Eisenmann - 00:32:20: Exactly. So the failure mode there was a company called Baroo. I love the name. Baroo is the motion a dog makes when it turns its head, trying to understand what you're saying. That's called a Baroo. Anyway, it was a dog walking service with a pretty interesting twist. The idea was the entrepreneur was going to go to luxury apartment buildings and basically sign them up so that when you came in as a new renter and ask the concierge in the building, what am I going to do with my dog? Concierge would say, well, we've got exactly the solution. Otherwise it looked a lot like Wagga Rovers and this applications that some people will be familiar with, but a very different go to market approach. The early adopter, the first customer there is in Boston and Southend. You may remember the old headquarters of the Boston Herald newspaper. Called the ink block and newspapers fail. And you turn the facility into 400 luxury apartment buildings, apartment units, all of which opened on the same day, back in whenever this was, 2013, something like that. This company actually launched in early 2015. It was, I hope I'm not scaring any future students away from Boston, but that was a winter where we had eight feet of snow in 30 days. And so if you were a dog walking service, you were popular. If you could actually come and help. And then the third thing that happened was this building had a whole bunch of units filled with a Hollywood film crew. They were, they'd come East to film on location. They were there for months. They brought their pets and they had per diem so they could afford the dog walker and they meet, you know, as they were working hard.
So all of these things that Baruch just got off to this stunning start, huge demand. They just assumed incorrectly. I mean, by the way, the other luxury buildings in the neighborhood. Heard about this fancy concierge dog walking service and said, please come and help us too, which they did. And then the original plan for the entrepreneur was, to her credit, not raise venture capital. She thought she would just do it with a little bit of angel money, get each market profitable before she'd moved to the next city. But then when she saw how fast the thing was growing, she threw that plan out and said, let's go get VC. And she moved to Chicago within a year because the buildings, a lot of luxury buildings, apartment buildings are owned by national companies that are in many different cities. So they were saying, oh, come to Chicago because we got buildings there. We love your service. And she just got out over her skis, overextended. And the big killer that she didn't really anticipate was Ink Block filled up all on the same day. Typical luxury building will turn over about a quarter of its tenants per year. And if you are in the building already, you probably have a good dog walking service. You're new stranger to your pet. So they were signing people up, but essentially the addressable market was a quarter of the size that they thought it was based on the results with the early adopter. So false positive.
Melissa Perri - 00:35:23: Okay, that's definitely like a big one. So this sounds too, did she end up raising VC money with that to keep going or she?
Tom Eisenmann - 00:35:30: Yeah, she did, but not enough and then it wouldn't follow on. She actually managed to launch in Washington, DC and New York City before the money ran out.
Melissa Perri - 00:35:41: Facilitation is a skill I see as a fundamental difference between good and great product managers. Yet it's often overlooked. Great product managers focus on guiding clear conversations and steering stakeholders to the best outcomes. You can develop these facilitation superpowers in Voltage Control's facilitation certification program. Ready to unlock your greatness? Apply today at voltagecontrol.com/product. Did you know I have a course for product managers that you could take? It's called Product Institute. Over the past seven years, I've been working with individuals, teams, and companies to upscale their product chops through my fully online school. We have an ever-growing list of courses to help you work through your current product dilemma. Visit productinstitute.com and learn to think like a great product manager. Use code THINKING to save $200 at checkout on our premier course, Product Management Foundations. Cool. Okay. So that one is we've got number three, and then we've got a whole different section. So this is about scaling is the other one. So those three are about early days, getting stuff off the ground, finding your product market fit. This is how you can fail like short-term. Then there's a whole failure that comes from scaling and trying to actually grow things.
Tom Eisenmann - 00:37:02: A lot of PMs will be in an organization that will sound suspiciously similar to what I'm about to talk about. I won't go into as much depth here because I can go on and on about these, but three patterns here are speed trap. That's the number one killer of late stage startups. By the way, the failure rate for late stage, if the metric for failure is your investors didn't make and never will make money, didn't or never will, then it's about one in three late stage startups failed to deliver a positive return for their investors, which is still shockingly high. Sometimes that's because the investors overpaid for their equity, sort of tripping over each other to put money into something that looks like it's doing great. But ultimately there was some kind of stumble and that's on the entrepreneur. So speed trap, and that's a strong analogy to the false start pattern. The second one is help wanted. And I'll explain there, help in the form of either some senior executive position isn't properly filled and something in the company is out of control because we have the wrong person. Or, and it could be both of these, the capital markets meltdown. I mean, we're in the middle of a really brutal capital market right now for ventures, sometimes it hits specific sectors like clean tech or e-commerce. Sometimes it's the whole startup economy. And then the last pattern is cascading miracles, where somebody's doing something audaciously big and bold. Think Tesla, think SpaceX. Again, Ilan, think of Federal Express 50 years ago, which was a crazy idea, the ship packages from Buffalo to Cleveland by sending them down to Nashville and putting them on a second airplane.
It was the biggest venture capital startup in history. And so sometimes these things work, but often with a cascading miracle, so many things have to happen correctly. And if any one of them goes wrong, you need all the things to go right. And it's a miracle if they all go right. So big behavioral change in terms of customer behavior, lots of money, complex execution, cooperation from in companies, often regulatory change. And if any one of those things is off the rails, then it's like multiplying a bunch of things together in a mathematical equation. If any one thing is zero, the whole expression goes to zero. So those are the patterns and poor PMs out there who are living in through one or more of these, I feel for you. Speed trap is the big one. It's basically because VCs are looking for hyper growth. It's often the case that a startup will get momentum early, often from virality, just word of mouth referrals and so forth. VCs pile in, pay a high price for their equity, but expecting further growth. Entrepreneur doesn't need to have her arm twisted. Entrepreneurs love to grow too. But then a couple of things happen is you lose product market fit sometimes, or sometimes you still got it, but it's just harder to get the next wave of customers. Right, they're intrinsic, almost by definition, less interested than the early adopters and you have to lower your price, you have to market harder. And then your very growth will often attract competitor, new startups or incumbents who sort of see somebody new coming into their space.
That puts pressure on price, that puts pressure on marketing costs. So you get into a squeeze between LTV and CAC, the lifetime value of a customer and customer acquisition costs, LTV coming down, retention rates are lower, repurchase rates are lower. And the cost of acquiring customers goes up. And you still got some momentum. So maybe you can raise more money and keep going, but eventually the VCs will look at that pattern and say, not too sure. And in the meantime, other bad things can happen. If you've got any kind of business that requires humans to do things, answer telephones in a call center, pack boxes in a warehouse, it's hard to hire those people, hard to train, and you're doing it in a startup that is growing fast so probably doesn't have the internal management system, some processes in place to basically coordinate all the activity, whether it be product processes, inventory management processes, budgeting processes, sort of processes for checking the effectiveness of a marketing campaign. And then the last thing that can happen is you can get, when the company starts to grow, you can get real cultural conflict, old guard, new guard. That engineer three cubicles over was here early, he's got stock options that are worth $5 million. I'm doing exactly the same job. My options don't look like they're gonna be in the money for a long time. Cultural conflict that comes between the functions as the functions start to get really well defined and have specialists. Sales complains about the quality of leads for marketing. Marketing complains that engineering is too slow to deliver the new features that marketing wants, et cetera, et cetera. All sorts of problems and doesn't have to kill a startup, speed trap, sometimes you can recalibrate, sort of think of. Public companies like Groupon or Blue Apron, which are. Selling for share prices a lot lower than their peak, but they eventually get things under control. But very often it's fatal.
Melissa Perri - 00:42:12: The question about like, what would your advice be to founders who find themselves in these scaling issues and like, how can they mitigate it?
Tom Eisenmann - 00:42:18: The second late stage pattern is, I call it help wanted. And the help comes in two forms. It comes in the form of a missing senior key executive, and it comes in the form of money from the capital markets. And in both cases, that's missing. The executive gap, if it's in a mission critical function can be really bad. So the example in the book is an online home furnishings retailer. Shipping this stuff across the country is really complicated. Couch, shipping a couch, you don't want it to arrive. Or if your Amazon books come two days early, you're kind of delighted. If your couch comes two days early and you weren't planning to be home from work or it comes two days late, you got a real problem. And so this company actually managed to generate demand to the help wanted pattern. Again, you preserve product market fit as you scale, but it's an echo of the Bad Bedfellows example with Quincy where they couldn't get the operations under control. Here, the operations were out of control. The founder didn't have an ops background, decided to hire somebody that was a VP of operations who was a generalist he thought could graduate into the COO role, which the company would need. The person had no experience with logistics and shipping, this kind of stuff. The worst thing is pick the wrong ERP system, enterprise resource planning system, the system that any company would use to manage inventory and orders. And so not only were the operations out of control, but they didn't actually understand what they had in inventory or what the status of orders was. And so it really fired that person, hired somebody who had done operations, but this individual had done it at Netflix. And sort of, if we remember the DVDs used to come in these red envelopes, sort of shipping hundreds of thousands or millions of those is very different than shipping lamps and couches. And this was a big, by the time this person had been to Netflix, it was a big, big company. And the company, the individual brought in big company processes and attitudes, and the company was, the startup sort of rejected it like a antibodies around a virus.
Melissa Perri - 00:44:23: That's the really big thing I see to a startup. I had the same situation where a CTO was brought in from a really large company to a startup I was working at once, and the engineers rejected him immediately because he was like, of course he wanted to use JIRA, they didn't want to use JIRA, but he also wanted to, they're using proprietary languages. He's like, we're going to do everything in C-sharp, we want to do this stuff. And I feel like that's the wrong, who's got not the right cultural fit or just from a company that's been so big. Going back to a startup is very different and I don't think people really appreciate that.
Tom Eisenmann - 00:44:54: Yeah, in this case, the individual, sort of the version here was having somebody on the team run Excel models for him, as opposed to sort of firing it up. God forbid he would have to do a SQL query. That person got a lot done, but not enough. They nailed it on the third try, and eventually got their operating margins under control. But just as they did and went out to raise a Series C, the company found that the capital markets for e-commerce had completely shut down. Even good, healthy businesses were having trouble raising money. So ran out of money and went bankrupt, had to shut the thing down. Heartbreaking, yeah. And then the last pattern, this is rare because it's rare that an entrepreneur does something so audacious. You know, when these fail, they leave giant steaming craters in the landscape. You hear about it. Think Theranos, Webvan, think if people remember Iridium, Segway, these kinds of businesses where many, many things have to go right. And the chance that they all will. They're often pushed by what I would describe as a monomaniacal founder, you know, somebody who is laser focused on their vision. And often really good at selling the vision. So the only way you're going to raise a billion or 10 billion dollars is if you are just dazzlingly persuasive. There can be a line between visionary and cult leader, and sometimes you're on the wrong side of that line. So not a lot that I can think of to correct that. It sort of takes a good board of directors. And it's not always the case that somebody that fits this monomaniacal profile is eager to surround themselves with a strong board.
Melissa Perri - 00:46:29: That's a good one too. So with the scaling one, I think that particularly, a lot of these issues, I think, affect product managers. One of the ones that we talk about in scaling too is when do you hire your first product manager? What do you suggest and what have you seen teams do with that?
Tom Eisenmann - 00:46:43: Yes, I've thought a lot about that. I've done some research with a product leader out there, turned venture capitalist. Deepin Nishar was a senior product person at Google and then ran all of product for LinkedIn before he became a venture capitalist. And Deepin and I did some work a couple of years ago where we interviewed a lot of product leaders. And this is one of the questions we asked them. There are two things you really have to answer here. One is the timing. If you're an entrepreneur, when do you bring in the first PM? And then who, what's the skill profile? And those turn out to be dependent. Too soon with timing and you can actually waste money, right? A PM is gonna be expensive. And if you don't need them, because the founder is essentially doing the PM job, they're premature. The wrong PM can slow things down, can bring in process prematurely into an early stage startup. The wrong PM can elicit a strong reaction from the engineers who at this stage love working with the founder, right? There's that camaraderie and it's very loose and flexible. Now we've got somebody who's going to insist on tracking things and process and so forth. It's often the case that a founder will, maybe they're told by the venture capitalists they need a PM, but they really don't want one. They're not ready to share product leadership with somebody. Those are things to watch out for. Of course, too late. The big problem is the founder becomes the bottling. You know, the founder. In addition to shaping the product and sharing that vision with the engineering team. Has to do all the things a founder CEO has to do, raise money. Figure out what to do about go to market, etc. Etc.
So, you know, you want to hit the Goldilocks spot between too fast and too slow. And then what Deep and I decided after talking to a lot of product leaders is there's three scenarios for when you make that hire. A good one is post-product market fit when you've started to scale. Then the question of who, we use the term a full stack PM. And by that we meant somebody who can both execute a vision but also be a partner with a founder in developing the product strategy, the product vision. And if you bring that person, in if the founder has product experience or good instincts for it, has time, maybe because there's a co-founder that's doing some of the other stuff, the fundraising or the go-to-market. If you get to product market fit early, this is a time when the scenario works. And sometimes you have a vice president of engineering that actually can do a lot of the things a product manager would do. So under those circumstances, you could bring in the PM after product market fit. You don't wanna bring them in prematurely because as you're searching, PM should be tuned to the nature of the business. And if you're zigzagging around pivoting, you may end up hiring the wrong person prematurely because you don't really have somebody that fits the, and the beauty of doing it post market fit. We talked about how there's a difference between what the early adopters want and what the mainstream may want. It's often the case that even after product market fit, you're doing a lot of changes. And now the founder's way too busy to sort of think, to do a new round of customer listening, sort of thinking through the feature set now that has to evolve. So full stack post product market fit scenario one, failure modes there as you wait too long to do it. You get a backlash again from engineering, or again, the founder's not willing to hand off.
Second mode is you do it really early and you bring in the executor PM, not a full stack PM, but somebody who can take the founder's vision and turn it into product, prioritize the work, track results and so forth. And then the third pattern is a full stack PM very early. And you might want that under two conditions. The first is you've got a founder who really doesn't have a vision. And unfortunately, they're out there and they need a partner to sort of say, this is what we should be building. And the second is a founder with a strong vision, but they're the kind of creative person. You think of how many creative duos are our Lenin and McCartney, right? Or in business jobs and Wozniak. Some of us just do better with a sounding board, a partner, and that full stack individual can help the right founder or a founder who lacks product vision. So yeah, timing, not too soon, not too late. And then which of the scenarios do you fall into?
Melissa Perri - 00:50:59: Yeah, one of the things that you mentioned too, I just wanted to poke in on is talking about the CEOs who are not ready to give up tinkering with the product. And I've seen this pattern as well, where you have, and I have a lot of empathy for founders, like I don't want this to come off weird, but I have seen CEOs are really good at building and getting the things off the ground, then their companies start scaling, and they move from being the product person, the person with the vision, into now the CEO role of running the company. And then you also see this with people who are like the first engineer, and then they get promoted to the CTO because they've been there for a long time. And now the company's scaling, you've got a couple hundred people, you're starting to bring in other executives that have done this before, have got many, many years of experience and stuff. And that's where I see the CEOs, one, get frustrated because they're like, I just want to tinker with the product. And it's like, you can't at this point, you gotta go do other things, right? And then you also see the CTOs sometimes out of their depth because they've never had a skill or architected a platform like the ones that they're building. What types of things have you seen with founders kind of staying in those positions and how it leads to failure, and what can people do to like mitigate that?
Tom Eisenmann - 00:52:10: Yeah, I know I think you've really nailed, I mean, could be its own failure pattern here, which is hanging on to the reins too long and not having. So you know, at some stage, if you're scaling and you've taken a lot of venture capital, in most instances, you bring in a new member of the board of directors with each major VC round. And at some point, the investors are going to outnumber the management on the board. And the most important job of any board, especially a startup board, is to hire and fire the CEO. And so it turns out that only 40% of founder CEOs are still CEO at series D. So which would be, I don't know, maybe six, seven years into the life of a typical startup. And so it's quite common to replace. But you know, we've got a and sometimes it needs to happen earlier when the CEO still either has control of the board and can't be fired by the investors or some investors are just especially we went through a phase. It's not as true for the past year, but for a long time, VCs were founder friendly and really, you know, we're going to make the founder successful. A founder-friendly VC is much slower to replace a founder CEO. So you can leave the wrong person in place for a long time. It's really, you know, hopefully a good founder has self-awareness. I'm not good at this new stuff. I don't like doing the new stuff. And the new stuff is really important to the success of the enterprise. And there's probably some role inside the organization that I can keep doing the things I'm good at and like doing, but I got to give up the CEO job. And that's just brutally difficult for any founder, right?
Melissa Perri - 00:53:49: Yeah, it's like giving up your baby.
Tom Eisenmann - 00:53:51: Exactly.
Melissa Perri - 00:53:51: And that's hard. And I do think, too, like, on the other side, have you seen, we've got Mark Zuckerberg's out there, we've got the people who have done it, they were the founders and became CEOs. What do you think makes them successful and allows them to still hold on? If somebody was like, I really just want to see my baby grow, and I do want to do this spot, I want to be in it for the long haul, what do they have to do?
Tom Eisenmann - 00:54:11: So, I mean, there are some amazing human beings out there and it's easy to focus on a Steve Jobs or Zuckerberg and not all of us are going to have that DNA. So one thing you can do is just be born lucky and be as smart and flexible and fast at learning as some of these amazing CEOs. You can have a really strong number two and respect that person and give them. So, that's the only obvious solution is sort of recognize that you need a peer who respects your vision and make space for you to do. Zuckerberg would regularly step in and reshape the product and Sandberg was smart enough to make space for that to happen and sort of cause ripples in the organization, figure out how to tamp things down.
Melissa Perri - 00:55:02: Yeah, that's definitely sounds like a nice approach for it. I wish founders saw it too, as that it's not failure if you do have to step down and bring somebody else in. It's still success, because it's still your baby at the end of the day. You still have equity, you still want to grow it. Definitely things to learn.
Tom Eisenmann - 00:55:17: Exactly. And for a lot of founders, it's a relief because what they really are good at and love doing is creating something new. So some of them will stay in the organization in some different role and many of them will go on to do the next thing.
Melissa Perri - 00:55:30: Well, thank you so much, Tom, for being with us today. Where can people go and find your book, Why Startups Fail?
Tom Eisenmann - 00:55:36: You can find it at any online bookstore, Amazon, or if you want to support your brick and mortar retailer, that's a good thing. And they can find me on Twitter, my last name Eisenman, E-I-S-E-N-M-A-N-N with a T in front of it, Eisenman at Twitter, but spending more time on LinkedIn these days. It isn't Twitter anymore, right? It's X now, so, but I'm still there. Great.
Melissa Perri - 00:56:00: Well, I hope you all enjoyed this episode. If you want any of those links, they will be linked in the show notes after this. So definitely head to our show notes at productthinkingpodcast.com to get all of those links and find Tom's book. We will be back next Wednesday with another episode of the Product Thinking Podcast. Make sure that you subscribe so that you never miss one. We'll see you next time.