Summary of the book "Why Startups Fail" - By Tom Eisenmann

Key Concepts in this summary:

1. You'll need a solid framework to assess the health of your startup.
2. Founders who are unfamiliar with the industry are doomed to fail.
3. Founders that do not comprehend their clients are doomed to fail.
4. Failure occurs when early growth is not analyzed.
5. Startups that grow too quickly are doomed to fail.
6. Without the correct senior management, startups fail.
7. Excessively ambitious undertakings are prone to failure.
8. It is possible to recover from failure.

Who can benefit the most from this book:

• Founders of early-stage startups.
• Entrepreneurs looking to scale their companies successfully.
• Innovators who’ve failed to get their project off the ground.

 What am I getting out of it? Learn to spot catastrophic flaws in your startup to improve its chances of success.

You've gone on a journey that requires guts, imagination, and courage if you're the founder of a startup. You know the possibilities of devastation are great if you're a captain travelling by shipwrecks in dangerous waters. You'll need a clear guide to steer you past common – but sometimes unforeseen – hazards if you want your startup to make it to scale.

A framework that examines how different components of a startup are performing and where pressure points are located in one important navigation tool. These blinks look at one such model, which highlights six key reasons why even the best or most promising firms might fail, even in the hands of seasoned founders. It will keep your startup on track to success if you use it.

You'll learn

• Four critical opportunities you'll need to succeed in this summary.
• As well as why having millions of dollars in venture funding doesn't guarantee success.
• And how organizations with growing client numbers can still fail.

1. You'll need a solid framework to assess the health of your startup.

Harvard Business School Professor Tom Eisenmann is a startup expert. But, after more than two decades of investigation, he had a major wake-up call. He couldn't figure out why two enterprises started by former pupils had failed, one of which he'd put so much faith in that he'd become an investor in. He was completely unsettled by that.

So he began researching why businesses fail, delving beyond the usual reasons such as the economy. As a result of his research, he developed a framework that highlights four critical opportunities that every company faces. To be successful, a business must seize these possibilities and make sure they're all operating together. This framework can be used to assess the health of your own business and make required course corrections.

The takeaway here is that you need a dependable methodology to assess the health of your startup.

Eisenmann discovered the potential in your startup's resources, which work together to conceive, produce, manage, and sell a lucrative product or service.

The first is a wonderful idea you have. As the founder, you'll have devised a one-of-a-kind solution that addresses a specific customer need. It will efficiently solve a major problem that clients are experiencing – and will be unlike anything else on the market.

The second category is operations and technology. These are the mechanisms you'll need to create your product, deliver it to clients, and keep it running once they've purchased it. This will cover how you manage inventory and shipping, as well as how your customers use sales and booking platforms.

The third factor to consider is your profit formula. This forecasts how much money you'll make from sales, as well as how much it'll cost you to make that money - including your operating expenditures. You can reliably manage your cash flow with the support of a sound profit formula.

Finally, there's marketing, which involves communicating with potential customers and persuading them to purchase your product. Hopefully, your marketing methods will be so successful that your consumers will become committed brand ambassadors, allowing you to count on repeat sales from them.

The people participating with your startup — you and your cofounders, your diligent staff, the investors providing you with venture cash, and any partners offering assistance or experience – all support these four prospects. If your opportunities were a racehorse, this group of folks would be the jockey. They must complement each other as well as the startup as a whole to win the race.

2. Founders who are unfamiliar with the industry are doomed to fail.

Alexandra Nelson and Christina Wallace, both Harvard Business School graduates, founded Quincy Apparel in March 2012, promising that their innovative sizing system would supply women with well-fitting business attire. The founder's Nelson and Wallace were astute. They'd conducted market research, organized trunk exhibitions at which ladies could try on items, and raised $950,000 in startup money.

Sales were initially promising, with 39% of women who purchased things in the spring purchasing more in the fall. However, there were issues developing behind the scenes. While the founders had enlisted the help of several fashion gurus, they lacked experience in the field. This eventually led to the company's demise, less than a year after its inception.

The takeaway here is that entrepreneurs who lack industry understanding fail.

Nelson and Wallace seemed like the ideal cofounders — at least on paper. Wallace possessed charisma and was able to sell Quincy's concept. Nelson, a qualified engineer, was methodical and analytical, making him ideal for overseeing strategy and operations. She'd also worked at Hermès on inventory optimization the summer after graduating.

Nelson and Wallace, on the other hand, were unaware of the specific tasks that garment production necessitates, such as pattern creation, sample making, and technical design. In reality, they planned to handle all of the clothing design themselves, with only one production manager to oversee production.

This lack of awareness resulted in a slew of operational concerns, ranging from ordering the wrong fabric to failing to grasp sizing conventions. The garment return rate in Quincy was 15% higher than Nelson had predicted, with 68 per cent of buyers returning goods due to poor fit. Quincy had failed to deliver on its key promise – well-fitting professional clothes – and all those returns ate into profit margins.

Quincy had three of the author's key assets in place: a terrific idea, effective marketing, and realistic profit formula. However, because of the lack of knowledge of its founders, its operations were not sound. Its downfall was due to this flaw.

If your startup is in a field where you don't have much experience, devise a strategy to compensate for your lack of understanding. Hire a cofounder with relevant experience, or form a relationship with an expert who can offer guidance. Alternatively, arm yourself with sufficient industry information to help you plan your recruitment strategy. That way, you'll have a clear vision of how to assemble the team you require while avoiding costly errors.

3. Founders that do not comprehend their clients are doomed to fail.

Sunil Nagaraj got an idea while at Harvard Business School. He'd create software that paired potentially compatible singles based on their online behaviour, such as what TV shows they viewed or what music they listened to. He planned to sell this software, which he dubbed Triangulate, to dating sites, which would then charge a premium for it as an advanced form of matching.

Nagaraj conducted a study with 100 participants to see if behavioural data could predict romantic compatibility. Unfortunately, most of the volunteers' PCs didn't operate with the software he used, thus the results were biased. Nagaraj was unfazed, and he got right to work on his software. However, he was flying blind because he lacked market knowledge.

The main takeaway here is that founder who doesn't understand their clients are doomed to fail.

Nagaraj was eager to complete his matching program, and his eagerness caused him to make a typical error: a false start. He put time and money into his product before he even knew if it would be of interest to customers. He made assumptions about his clients instead of completing market research, such as presuming they'd be willing to pay a premium to be "triangulated."

In actuality, when it comes to picking which dating profiles to like, people don't find algorithms helpful. It's not the same as selecting a financial service provider, for example, when they may lack intuitive understanding or experience.

Nagaraj also failed to examine whether individuals would be OK with their online activity being recorded in order to be triangulated - something that many of us would consider a breach of privacy. This meant that his concept, which was a critical potential for his firm, was faulty. Nagaraj would have noticed this much earlier in the game if he had conducted a poll of people who use online dating sites. And, armed with that knowledge, he may have reassessed his product before making a purchase.

It's critical to resist the urge to act too soon in order to avoid false starts. It's easy for a creator, like someone in love for the first time, to rush into creating their initial minimal viable product, or MVP, before doing their homework.

An MVP is a working prototype that shows investors and potential customers what your ultimate product will look like. However, making one is the second-to-last – not the first! – step before generating a completely realized product. It can only happen once you've learned everything there is to know about your target market, allowing you to develop ideas and design with their requirements and preferences in mind.

4. Failure occurs when early growth is not analyzed.

Lindsay Hyde founded Baroo, a pet-care firm, in 2014. It was located in the basement of a South Boston residential building and provided "high-touch" services such as grooming, dog walking, play dates, and feeding to pet owners. Seventy per cent of the building's pet owners used Baroo's services right away.

Four more apartment buildings signed up, ecstatic with their initial accomplishment and the 6 per cent commission they'd be able to earn. After that, Baroo soon grew to 25 buildings in Chicago. Hyde opened offices in Washington, DC, and the New York metropolitan area a year later. Despite this quick growth, Baroo's financial health was not only poor but critically ill by mid-2017. Hyde was compelled to shut down the operation in February 2018. Her blunder? Failure to determine whether those early adopters in South Boston were representative of the larger market.

The main point here is that failing to analyze early progress leads to failure.

Several of Eisenmann's critical opportunities and support networks were unavailable to Baroo. Its rapid growth caused the company's technology and operations, as well as its workforce and relationships with partners and customers, to crumble. However, the consequences of Baroo's fast scaling were not the cause of its demise. Because of a false positive, the spark never caught fire.

When founders misjudge their startup's early success, they get false positives. They believe that the general public will embrace their product or service with the same zeal as their early adopters. In Hyde's case, she estimated that approximately 70% of pet owners in the buildings where she expanded would employ Baroo's services. That, however, was not the case.

Hyde had overlooked the circumstances that had contributed to the first hysteria. For starters, because the building in South Boston was spanking new, few of the residents had prior experience with local pet-care providers. Many of the tenants also belonged to a Hollywood film team that had relocated to Boston for a project; they'd brought their pets with them, and they needed help caring for them because they were short on time and money. This clientele did not represent the general public in any way.

Analyze whether early adopters represent mainstream customers or if your instant success was due to unique conditions to avoid misinterpreting early success. Scaling too soon can be disastrous, as it was in the case of Baroo, so be sure there's mass-market demand first.

5. Startups that grow too quickly are doomed to fail.

Fab.com, a flash-sale website that sold unusual furniture and household items, had it all. Jason Goldberg, an accomplished entrepreneur who'd created another firm and raised over $170 million in venture money for Fab, was in charge. It sold $600,000 worth of merchandise in its first 12 days.

The company had moved throughout Europe three years after its debut. However, it was spending $14 million each month to keep afloat. To cut expenses, it lay off 80% of its US personnel and shifted its attention to the European market. By the fourth year, Goldberg had to fully shut down his business in the United States. The corporation had driven itself off a cliff by growing too quickly.

The main takeaway is that startups that scale too quickly fail.

Fab, like so many other startups that fail after a few years, fell into the speed trap. When there's a lot of money and a lot of success, it's easy to become caught up in a speed trap. However, initial success might sometimes indicate market saturation. Fab spent $40 million on advertising in its second year alone, which is one of a startup's most important changes. However, this did not greatly increase the company's customer base, which had remained stagnant.

Use the RAWI test to avoid the speed trap. Ready, Able, Willing, and Impelled is the acronym for Ready, Able, Willing, and Impelled.

First, determine whether or not your business is ready to scale. Is there a proven business strategy, a large enough client base with room for expansion, and a high enough profit margin to survive if customer growth rates fall short of expectations?

Second, check to see if your business is Able. Is it able to get the employees and resources it needs to scale quickly? Will it be able to manage and train a greater workforce?

Decide if you're willing to scale third. Scaling will increase your effort and stress levels as a founder. Raising more venture capital to scale your business can dilute your stock, putting more pressure on you for a less amount of money.

Is the startup, in the end, Impelled? Are you only scaling because you want to gain market share from your competitors? If this is the case, ensure that the expense of acquiring new clients does not outweigh the profit.

You may better assess if it's the correct time to scale by revisiting each of these elements on a quarterly basis. If there isn't much room for improvement, don't go all out.

6. Without the correct senior management, startups fail.

Dot & Bo was an e-commerce company that sold home decor in selected bundles that looked like sets from fictional TV shows – imagine "Einstein's Office." In 2014, the company, which was founded by seasoned entrepreneur Anthony Soohoo in early 2013, generated $15 million in sales from its ever-growing customer base.

Because the warehouse and shipping teams were under such strain as a result of the high demand, Soohoo employed a Vice President of Operations. His preferred candidate had a strong resume but no prior expertise with e-commerce operations. Even though the company continued to develop, the lack of experience damaged the entire operation. Soohoo noticed this and appointed a new Vice President of Operations. But it was too late by then. Dot & Bo filed into bankruptcy in September 2016.

The takeaway here is that without the correct senior management, startups will fail.

When the first VP of Operations joined the company, his first responsibility was to choose an ERP (enterprise resource planning) system. ERPs are used to handle activities such as inventories and deliveries. However, the VPO's chosen system couldn't handle the varying delivery periods of different vendors.

As a result, the customer service team was swamped with complaints about a late or missing delivery. They were unable to keep up with the increased demand, and email response times dragged on for eleven days. To make matters worse, the system was so inept that employees frequently had no idea where delivery was.

Staff express-shipped orders to compensate for delays, reducing profit margins. Simultaneously, social media excitement boosted sales, putting even more strain on operations that were already on a knife's edge.

On the surface, Dot & Bo's operational issues could be attributed to technology, but the VPO's lack of industry expertise ultimately contributed to the company's downfall. Someone with more expertise would have picked a better ERP, one capable of handling Dot & Bo's complex supplier model.

You'll need the correct senior management team in place if you want your startup to scale. That means hiring specialists rather than generalists, even if they have a lot of experience. Remember that your racehorse will not cross the finish line without the correct jockey.

If you can't afford a senior specialist right now, go for a mid-level one instead. They'll be less expensive while yet providing the experience your business requires to succeed.

7. Excessively ambitious undertakings are prone to failure.

Entrepreneurs have a critical role in society because of their capacity to dream large and pursue ambitious initiatives, which leads to life-changing discoveries. Shai Agassi dreamed of doing just that back in 2007 when he hoped to make electric cars more mainstream and reduce the environmental impact of home vehicles. Despite this noble objective and a $900 million investment, his company, Better Place, only sold about 1,500 cars.

There is always a risk when venturing into unexplored waters. What is Agassi's issue? His vision was perhaps a tad too lofty.

The takeaway here is that overly ambitious undertakings are certain to fail.

Agassi had to rely on a number of circumstances beyond his control in order to complete his goal. For example, he needed enough people to embrace his electric vehicle in order to make it affordable. He also needs their trust in recharging and battery exchange stations. And he needed numerous vehicle manufacturers to work together because not every buyer desired the same model of automobile.

In the end, Agassi was unable to develop a product with sufficient market appeal and the necessary infrastructure at a cost that would make a profit. According to a preliminary study, 20% of households in Israel, where Agassi was launching Better Place, would consider purchasing one of his vehicles, even if it cost 10% more than a standard car. Agassi had hoped to sell to at least half of those people, but he didn't even come close.

If your proposal, like Agassi's, is high-risk, there are steps you may do to reduce that risk. To begin, remember that humans are terrified of drastic change, even when it is for the greater good. Moderate your innovation so that clients don't have to venture too far outside of their comfort zones to adopt it.

Second, build non-working prototypes and solicit feedback from focus groups. This will drive the next step of design while also evaluating public interest in the product, which is always a challenging issue when introducing something brand new to the market.

Finally, don't make the mistake of exaggerating market demand solely to impress investors. You'll only end up establishing sales goals that you won't be able to meet. It will be easier to forecast how long it will take to return any investments if you are honest about your possible consumer pool.

8. It is possible to recover from failure.

Unfortunately, the majority of startups fail. Failure, on the other hand, does not imply that all is lost. Christina Wallace struck rock bottom after Quincy Apparel, a women's clothing firm, went bankrupt. Her failure as an entrepreneur had left her with a shattered dream, heavy debt, and a failed startup.

Wallace didn't have a choice but to look for work. While she couldn't see herself ever running a business, she was content to work for one. Her first step toward recovery was a job at the Startup Institute, an immersive training program in New York City. She went on to build another company, an EdTech company that supports women in science, before becoming a Harvard Business School professor. Her startup's failure had no bearing on her long-term success.

The main message here is that failure can be overcome.

A route to success may appear as elusive as a unicorn in your local park while you're in the midst of defeat. However, if you follow the Three Rs, you may walk all the way to the finish line.

Recovery is the first phase that a founder goes through after failing. If your startup fails, you'll probably end up in the same financial situation as Wallace. It's not uncommon for founders to rack up enormous credit card debt while delaying their pay to invest more in their business.

At the same time, you'll see that your personal connections have suffered as a result of your long work hours; you've been compelled to neglect your loved ones. Failure's negative feelings, such as grief, shame, or remorse, exacerbate this sensation of solitude. Find ways to support yourself throughout this period to avoid being depressed. Implement good lifestyle habits, try counselling, and reconnect with your favourite pastimes.

You can move on to the second of the three Rs, Reflection, once you've processed those painful feelings. You'll determine what you've learned by objectively evaluating your experiences in this step. This can be difficult. Our egos will always try to protect us by blaming others for our errors. However, if you can fight this propensity, you will be able to learn a great deal.

Reentry is the last stage of your journey. Despite the difficulties of failure, about half of failed entrepreneurs start new businesses. You could be worried that your prior failure would scare away potential investors, but there's a method to avoid that: explain how what you learnt in Phase Two influenced your new business plan. In that manner, you can show investors that you're starting from scratch with knowledge and experience.

The essential takeaway from this summary is that when startups fail, it's tempting to oversimplify the reasons for their failure. However, these justifications are rarely true or insightful, and 50% of founders who go on to establish another company risk repeating their mistakes. You'll be able to spot where you need to course-correct before it's too late if you use a robust framework to review the health of your startup on a regular basis. And if you fail, that framework will help you do a postmortem so you can improve your chances of success next time.

Here's some additional advice that you can put into practice:

Engage the services of an executive coach.

Founders are passionate and determined by nature. However, some people get so concentrated on their objective that they acquire tunnel vision and disregard both counsel and critique. This causes their connections to fall apart, frequently at crucial times when their team's support is required. Working with a professional coach who can help you become more conscious of your work habits can help you avoid this. They'll assist you in adjusting your leadership style as needed so that you can run a successful business.