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.

Tom has gathered over twenty-six years of experience as a dedicated professor at Harvard Business School, where he pioneered the Product Management class. His influential book, Why Startups Fail (also known as The Fail-Safe Startup in the Commonwealth), showcases his extensive knowledge of entrepreneurship.

Serving as the unit head of Entrepreneurial Management, faculty chair of the Harvard Innovation Labs, and faculty co-chair of the Harvard MS/MBA program and the HBS Rock Center for Entrepreneurship, his leadership spreads through multiple aspects of academic and entrepreneurial life at Harvard.

Tom' rich blend of academic insight and practical entrepreneurship expertise positions him as a valuable resource for anyone navigating the intricate landscape of product management in startups. His work seamlessly bridges the crucial domains of scholarly research and real-world entrepreneurship.

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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: