good afternoon my name is joseph studholm i'm very delighted to be back here in la viv teaching this course with my colleagues i have i wear several hats in my career i'm currently an executive in residence at princeton university where we commercialize research i do a fair amount of mentoring of young entrepreneurs at the university i'm also involved in various startups both as an investor and as a founder and i'm happy to talk about why startups fail and in fact sometimes they succeed i'm howard nelson i'm a graduate of princeton university and tulane business school i've been 35 years in developing technologies i currently am the ceo of a incubator accelerator that focuses on plasma energy and plasma physics and i sit on a number of biotechnology boards in the state of new jersey i'm thrilled to be back here again with my colleagues to the at the university to teach entrepreneurship it was a extraordinary experience the last time and your students are exceptional and and it's it's a real joy to teach people who are who are going to be the next generation of entrepreneurs so i think the topic today that we're going to discuss is why do these types of entities fail why do startups fail so joe why don't you start and tell me why you think they're they're failing and i'll jump in when either i disagree or i have something else to say that could be a very long or pretty surprise very short conversation so one thing to note is that there's survivor bias when people think about startups because the movies do not get made about the startup that flamed out after six months because the founders were fighting instead we see steve jobs or we see bill gates so we see you know so in the popular culture startups not only succeed they succeed wildly and the people who do it are very successful and that's part of the attraction right because it's a way to a way to succeed so many people are attracted to startups you know for a variety of reasons so the the the first thing i would say is that the pod the popular culture aside startups mostly fail the failure rate of technology startups is really quite high and you know the statistics and the data certainly support that whether you're in the ukraine or you're in princeton or you know wherever based on my personal experience both as an investor and as a co-founder of several startups some were successful vc-backed exits some had terrible you know short life cycles and didn't work i really say that there are two ways to look at it one is sort of technology and product risk right and for the purposes of this course technology managers tend to focus on that because they can control it they're good at putting a team together scheduling software development outsourced it work is a big thing so often when folks like that think of a startup and think of doing it they think of product first it's like we're going to build this thing and then if we build it they will come right if we build it they will buy it and they become emotionally invested in the product itself investors and people who have done this more than one time tend to focus more on market risks or human factors than they do on technology risk and that's because that's more likely the cause of failure the the toughest thing in the world is to get someone to buy something and that is not a skill that is as common as good technology development you know being able to put your ego aside and really find out whether someone wants to pay for the thing that you're going to deliver and being savvy enough to understand the comp the competition pricing you know sales models and to actually have a market where a new entrant a startup actually has a chance no matter how good you are so i would say that although technology risk is how people and product risk is how founders tend to think market risk controls and that's the thing that causes most startups to fail and and to layer into many of the things that joe was saying i think the first thing that entrepreneurs have to realize is they have to be brave they have to be fearless in terms of pursuing their goals if you're afraid of failure you're probably not going to be a very good entrepreneur you have to be able to accept failure and learn from your failure because as joe said probably 80 percent of new ventures do wind up failing it may probably might be a little bit more so the goal here is not to focus on whether you're going to be successful or failing the goal is to am i learning enough about what i'm trying to accomplish to be able to adjust so that i can succeed you have to be able to make movements across what you're trying to accomplish so that you will actually have a venture that will succeed and to joe's point the the late the landscape is complex and the thing that you think you're going to be solving when you start off may not be what you solve when you finally are successful or it may be part of what you wind up solving when you are successful so as joe is saying in the analytic terms there is a sort of the abstraction aspect of being an entrepreneur that requires you to understand yourself and understand the people that you're working with in order to have a common goal of of solving problems absolutely yeah i mean you know one one of the things that an outside investor looks for when they're trying to gamble on which startups are going to be successful is the composition of the team and you know is there enough diversity in the team membership so with different skill sets and different backgrounds but is there enough cohesion and that they'll be able to make tough decisions whether it's on giving up their equity and freedom for capital or who to hire how to allocate you know what limited funds they have so the human factors within the people who make a startup are in extremely important and in fact you know that because investors focus a lot on the team not just the product right because they figure the team will figure it out if it's a good team particularly if it's a team that has some experience in the market but so that's very important i completely agree and speaking of the team the as joe and i were discussing prior to this uh aside from the analytics of what the problem you're trying to solve is the technologies that you need to bring to bear how the team interacts with each other is critically important ego is one of the biggest killers of any new venture my way or the highway being inflexible and not understanding how other people might think or express themselves you have to be flexible in the way that you aggregate the information that you need in order to make proper decisions and the analytics have to be there the the precision has to be there but you also have to understand that there's a lot of things that you don't know and may not know currently or may never know in your investigation so you have to take educated calculated risks you have to be able to make calculated decisions along with the with your team in order to be to minimize your risk of failure so uh it happens you know the people you know the best people to answer this question in some ways are really the investors who have a portfolio of companies many of which fail and i actually read a good article by a venture capitalist who said you know one of the things i've learned is how to put the company under you know what to say to the founders how to how to make it not like a death experience for them but like a learning experience like this one didn't work but you've learned a lot and you know if they value the founders and they didn't fight too much um that phil you know the failure of your startup is not the death of your career even the death of the idea it's that for whatever reason in this you know things didn't work but that doesn't mean that the next one won't work right and in fact many of the successful entrepreneurs i know have a couple of failures or at least one under their belt because it makes them you know not quite as suicidally brave when it comes to the product if you know what i mean and so there's a couple of other little factors that i think people should understand when they're they're intending to be an entrepreneur the first is is that you might think you've solved a problem or you've identified a problem that you want to solve but you have to verify that you have to go into the market and figure out whether that is in fact what your customers want to be solved right and a lot of people think they've got a great idea people are going to want to buy it like as joe said if they if they if i build it they will come but you may be solving a problem that nobody wants to pay for or it might be solved in a different way that you're proposing and nobody sees the incremental value to that so your research and your ability to focus on a truly solvable problem that you have an answer to is going to be critical to your success and this is one of the most important features of any failed business is that they haven't figured out what problem they're trying to solve they're either too diffuse or they're focusing on the wrong problem this and as joe said a lot of a lot of the failures will fail if they've done their homework simply because well you know some things just don't work out but a lot of the failures do happen because of just either inexperience or a lack of understanding of the of the challenges ahead of them yeah i think that's true you know one another way to think of it too is a startup once it takes capital or even perhaps before there's a relatively narrow window that it has to succeed or fail and that can be because the founders can't live on you know ramen noodles forever and they may need to go get a real job and you know so there's there's that once you take capital and you have a burn rate then that's a you know the clock is ticking at that point you have only that window in which to meet your milestones to either get more capital or succeed but the concept of the window in which you have to attack the market enter the market you know get the startup off the ground it's very important because in big companies you don't necessarily have to think that way right you may have multi-year time frames for product development or market entry in very small startups you know time is your enemy you have to move quickly and the market may not want to move as quickly as you need to it may you know particularly in like a in sales to of enterprise sales the decision-making process the adoption process in a big company in healthcare or in finance or you know you name it it can take longer than you have to get your startup going so the mismatch and timing between the needs of an early stage company and the customer can be a big obstacle and you really and relatively few founders think about that it's like we just raised two million dollars but what they've really raised is 18 months of runway and they have that much time to make it happen one of the reasons why companies do get capitalized is that they're very clear about the milestones they're intending to hit and they have a believable timeline right and the the challenge is as joe is saying is meeting that timeline you have a certain amount of time to put a team together to get them focused you have a certain amount of time to do the investigations about your customers and get them aligned there's a lot of things that go on in getting your business across the goal line in each one of these milestones that i think is is underestimated by a lot of entrepreneurs they think they have more time they think oh well i just get a bunch of people together that i know and we're aligned and we can and we're off and running but as joe said it takes a long time to build a team that's cohesive that will hit milestones most businesses take several months just to identify the right people that to bring on so not accounting for any of these things is going to be is is one of the critical mistakes of early entrepreneurs yeah no that's actually a good point about another reason startups fail is they get the hiring wrong even after their initial funding they wildly overhire they hire top heavy they hire their friends because of their friends and they think because they're my friend they must be good at the business that we need to do and in fact you have to be very careful and ruthless with your investors money when you're hiring and that is also a skill that many early-stage entrepreneurs will not have had right yes you know and sometimes it's what's what makes these entrepreneurs successful is they will take help from their funding agents they will look to support from their funders for the types of hurt people that can help them get across the line so being open to people that you don't know that have can solve these problems or have experience that can help you get it across the line those type of people are likely to be in the network of the people that fund you or they may be in the people that don't fund you but they can help you find those guys to help you be successful i think one of the one of the fallacies is that is that venture capital private equity angels they're just hands off they don't want to necessarily touch you or help you when you come to them but they do they want you to succeed because eventually you may be something that they might a vehicle for them to invest in so they're going to be willing to help you even a little bit and that can be the difference between being successful or not successful asking for help from these people for you know direction for for connections is going to be one of the biggest time saving steps that you can have everybody that you talk to as you're doing your research everybody that you talk to when you're a venture cap looking for money or looking for employees can connect you with somebody who may wind up being able to help you it's very important not to dismiss that as just oh well i didn't i didn't get funded by these people they're you know i i can't i can't work with them there's nothing to learn from them you can use and extend your network through theirs simply by asking questions and asking for help most people have the have the graciousness to be able to help people who are interested in willing to take the help i've heard that expressed you know as advice to entrepreneurs to get out of the office listen you have an office in the first place but what that really means is the time you're spending on internal things and like working on your product or chatting with your pals you really should be talking to all the counterparties the potential customers the potential funders the you know everyone you can think of that can give you information that will give you the best chance of success so the you know again it's something that's teachable we like to think that the skills of entrepreneurship can be taught that said that gives you the best chance of success but there are a lot of factors which lead to startups failing which are external you can be great you can do the best job you can you know you can play the game as well as you can but you can still lose because of timing market factors competition you know all kinds of things so it's not always the entrepreneur's fault when things go wrong no it's worth not it's not always it's not always the fault of the entrepreneur um i think i think what is probably not as well talked about in terms of internal management is giving good feedback to the people that you're working with being able to be i won't say clinical but being honest and and being constructive with the way that you deal with your teammates is going to serve you really well if your team doesn't know how to take critical feedback then you've put together the wrong team if you can't have an open and honest discussion about the problems that your business is facing and you can't collectively solve them then you wind up fracturing in the in the in the enterprise will will run into trouble very quickly this is not a skill that everybody possesses but it's something that you can practice pretty frequently by just doing like joe and i are doing right now which is engaging with each other playing off each other's ideas giving each other good feedback challenging each other with the with new concepts or just playing devil's advocate what happens if what would we do if nothing ever runs in a straight line and the best teams the best enterprises learn to adjust by simply because they they know how to talk and communicate with each other when they do encounter these type of problems right those i mean the engineers and the technical folks know about egoless programming where you admit the mistakes and you if you find a bug you don't hide it you expose it you have to have the same thing within this founders team right if something bad happens your instinct should be to call up your co-founder and say a terrible thing just happened what do we do and then you get yelled at for a little while and then you solve it together but that's well you also call up your funder you say hey there's if somebody has given you money you call them up and say hey we've encountered this problem that's right they have just as much incentive to help you solve that problem as your internal team does so correct they may solve it by putting in a new ceo but that's true you still need to accept that that's part of that's life as a startup that's part of it another thing i would say is that sometimes the startup succeeds but you do not as the founder you know right i mean yes that is also a skill that can be taught a little bit which is how to interact with the um the people who are giving you capital and your your team and the you know the investors in a way that works within the context of the business you know it there is such a thing as a point where your own experience the the business may be successful and may grow very rapidly beyond your own ability to control it um and there are many many stories of the founder who either stepped aside and let a you know a more experienced management team come in or were forced to do that because they did not want to go and the investors you know call the shots at a certain point so there's a distinction between your success and the company's success um and you want to think intelligently about aligning those things um as you architect understanding your personal goals versus understanding what the corporate goals are and what the goals of all the other people are and joe's exactly right the there are many times where the founder does not see the exit they're still well compensated they still own a a very large percentage or sometimes a large percentage of the of the equity outstanding but a lot of times the business will will transform and they will need a different kind of manager and you have to be willing to accept that that's right i mean you know if you think if you have an ego that says no matter what the situation i am the best person for the job that's not going to be true yeah i mean almost almost always ends poorly exactly so you know i mean i guess if we were to sum it up you know the the human factors in startups are the most important ones um and those are you know that's why this program is so valuable because whether you're in the ukraine or you're in the u.s it doesn't matter you anyone who is doing this for the first time can learn from people who have had failed startups had successful ones and that's why we're here frankly is to bring the benefits of our experience so that the next generation of entrepreneurs can have a head start and have a better chance and not have their startups fail and to and to to re-emphasize joe's point the best teams do not necessarily have stars at their core competency most of them are really good at what they do but they may not necessarily are stars but what they all have in common is their ability to work together and have each other's back and to be able to be honest and clear with each other about meeting the overall objectives of the company for many for many businesses they look and say oh i need a star programmer but they could be let's say problematic in the overall structure of the company they could wind up eating the company alive from the inside having not necessarily less competent people but just not necessarily a star but somebody who is able to work across functions and able to work with other people and accept you know the kinds of assignments and responsibilities that are needed in order to be a good team will wind up serving you really well and as joe said this is a this is why you come to a school like this to learn those critical skills we're assuming that you're really good at what you do right you wouldn't be here if you weren't already really good at what you do in terms of functionality but that's not enough you you just can't be good at programming you just can't be good at management of technical yeah management or technical people you have to be able to be good at a lot of things and be able to work with those people constructively in order to be successful and there is there is no better training ground than in a place where there's no consequence to failure right you're coming here to to make the mistakes that aren't as costly so that when you go out in the real world you don't make those mistakes that actually do cost money that's right it's less expensive to fail in you know a class assignment than it did exactly below three million dollars worth getting good positive feedback in in assignments like this and working through through these type of seminars is the is the best way of of cutting through a lot of the learning curve that you need in order to be a successful entrepreneur couldn't agree more i think we can end it at that
2021-08-16