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Why Startups Fail summary

Name: Why Startups Fail
Rating: 4.4 (234 reviews)
Author: Tom Eisenmann

Tom Eisenmann

A New Roadmap for Entrepreneurial Success

4.4 (234 ratings)

24 mins

Brief summary

Why Startups Fail by Tom Eisenmann is a comprehensive guide to the common mistakes that lead to failure in early-stage startups. Using case studies and analysis, Eisenmann provides insights into how to avoid these pitfalls and increase the chances of success.

Topics

Start-Ups Entrepreneurship Critical Thinking & Problem Solving

Table of Contents

Why Startups Fail
Summary of 8 key ideas

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Key idea 1 of 8

What’s in it for me? Increase your startup’s chances of success by learning to identify fatal weaknesses.

If you’re the founder of a startup, you’ve embarked on a journey that demands grit, ingenuity, and courage. Like a captain sailing past shipwrecks in treacherous waters, you know the chances of ruin are high. If you want your startup to survive the journey and go on to scale, you need a clear map to steer you past common – but sometimes unseen – risks.

One useful navigation tool is a framework that evaluates how different components of a startup are functioning and where pressure points lie. These blinks explore just such a model, one that identifies six core reasons why even the best or most promising startups can fail – even in the hands of experienced founders. Using it will keep your startup on a pathway to success.

In these blinks, you’ll learn

the four crucial opportunities you need to succeed;
why having millions of dollars’ worth of venture capital doesn’t guarantee success; and
how companies with growing customer numbers can still fail.

To evaluate the health of your startup, you need a reliable framework.

Professor Tom Eisenmann of Harvard Business School is an expert on startups. But after over 20 years of research, he had a huge wake-up call. Looking at two ventures founded by former students of his – one of which he’d had so much faith in that he’d even become an investor – he couldn’t pinpoint why they’d both failed. It completely unnerved him.

So he started analyzing why startups fail, looking beyond typical excuses like blaming the economy. This research led him to create a framework that identifies four crucial opportunities every startup has. To achieve success, a startup needs to capitalize on these opportunities and ensure they’re working together. You can use this framework to check the health of your own venture and course-correct where necessary.

The key message here is: To evaluate the health of your startup, you need a reliable framework.

The opportunities that Eisenmann identified are your startup’s resources, which work together to create, build, manage, and sell a product or service in a profitable way.

The first is your brilliant idea. As founder, you’ll have come up with a unique solution that meets a specific customer need. It will effectively solve an important problem that customers face – and be different from anything else on the market.

The second is technology and operations. These are the systems you need to build your product, deliver it to customers, and maintain products after sale. This will include the ways you manage inventory and shipping, as well as sales and booking platforms your customers use.

Third is your profit formula. This projects the revenue you’ll earn through sales, as well as the cost of earning that revenue – including your operational costs. A solid profit formula helps you confidently manage your cash flow.

Finally, there’s marketing – how you’ll communicate with potential customers and entice them to buy your product. Hopefully your marketing strategies will be so effective that your customers will become loyal brand ambassadors, so you can rely on them for repeat sales.

These four opportunities are supported by the people involved in your startup – you and your cofounders, your hardworking team, the investors providing you with venture capital, and any partners offering guidance or expertise. If your opportunities are a racehorse, collectively these people are the jockey. To win the race, they need to complement both each other and the startup as a whole.

Founders who lack industry knowledge fail.

In March 2012, Harvard Business School graduates Alexandra Nelson and Christina Wallace launched Quincy Apparel – a company which promised that its unique sizing system would provide women with business clothes that fit well. Nelson and Wallace were astute founders. They’d done market research, held trunk shows where women could try on samples, and raised $950,000 in seed capital.

Initially, sales were promising, and 39 percent of women who purchased items in the spring bought more in the fall. But problems were emerging behind the scenes. While the founders had recruited some fashion experts, they themselves didn’t have industry knowledge. This ultimately led to the collapse of the company – less than a year after its launch.

Founders who don’t understand their customers fail.

While studying at Harvard Business School, Sunil Nagaraj had an idea. He’d make software that matched potentially compatible singles based on behavioral data gleaned from their internet use – things like the TV shows they watched or the music they listened to. He’d license this software – which he called Triangulate – to dating companies, who’d offer it at a premium rate as an advanced form of matching.

To find out if behavioral data could indicate romantic compatibility, Nagaraj ran a test with 100 volunteers. Unfortunately, the software he used didn’t work on most of the volunteers’ computers, so the results were skewed. Undeterred, Nagaraj plowed ahead and started engineering his software. But without market insight, he was flying blind.

Not analyzing early growth leads to failure.

In 2014, Lindsay Hyde launched a pet-care company called Baroo. Located in the basement of a residential building in South Boston, it offered pet owners “high-touch” services like grooming, dog walking, play dates, and feeding. It was an instant hit: seventy percent of pet owners in the building used Baroo’s services.

Excited by this initial success and the 6 percent commission they’d stand to make, four more apartment buildings signed up. Baroo then quickly expanded into 25 buildings in Chicago. A year later, Hyde set up in Washington, DC, and metropolitan New York. But despite this rapid expansion, by mid-2017, Baroo’s financial health wasn’t just poor – it was terminally ill. In February 2018, Hyde was forced to pull the plug. Her mistake? Failing to identify whether those early adopters in South Boston represented the broader market.

Startups that scale too quickly fail.

Fab.com – a flash-sale site that sold quirky furniture and household items – had everything going for it. It was in the hands of experienced entrepreneur Jason Goldberg, who’d successfully founded another startup and raised over $170 million in venture capital for Fab. In its first 12 days, it sold $600,000 worth of product.

Three years after launching, the company had expanded into Europe. But it was burning through $14 million a month to stay afloat. To reduce costs, it laid off 80 percent of its US workforce and focused on the European market instead. By year four, Goldberg had to shut down US operations completely. In growing too quickly, the company had pushed itself off a cliff.

Startups without the right senior management fail.

Dot & Bo was an e-commerce company that sold home decor as curated packages, which were designed to look like sets from imaginary TV shows – think “Einstein’s Office.” Founded by seasoned entrepreneur Anthony Soohoo in early 2013, its ever-expanding customer base generated $15 million in revenue in 2014 alone.

This huge demand placed extraordinary pressure on the warehouse and shipping teams, so Soohoo hired a Vice President of Operations. His chosen candidate had an impressive CV but no experience in e-commerce operations. This lack of experience undermined the whole company, even though it continued to have solid customer growth. When Soohoo realized this, he hired a new VP of Operations. But by then, it was too late. In September 2016, Dot & Bo went into liquidation.

Overly ambitious ventures are susceptible to failure.

Entrepreneurs play an important role in society – their ability to dream big and pursue ambitious projects drive life-changing innovations. That’s what Shai Agassi aspired to do back in 2007, when he dreamed of making electric cars mainstream and reducing the environmental impact of household vehicles. But despite this honorable mission and $900 million worth of investment, his company, Better Place, sold fewer than 1,500 cars.

Venturing into uncharted waters always encompasses an element of risk. Agassi’s problem? His vision was just a little too ambitious.

Recovery from failure is possible.

The unfortunate truth is that most startups fail. But failure doesn’t mean that all is lost. After the collapse of Quincy Apparel – the women’s clothing startup – Christina Wallace hit rock bottom. Her experience as a founder had left her with a failed startup, a broken dream, and crippling debt.

Wallace had no choice but to get a job. And while she couldn’t imagine ever leading a startup again, she was happy to work for one. A role at an immersive training program in New York City called the Startup Institute was her first step to recovery. And she went on to found another startup, an EdTech company supporting women in science, before ending up teaching at Harvard Business School. The failure of her startup didn’t hamper her long-term success at all.

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What is Why Startups Fail about?

Why Startups Fail (2021) identifies six core reasons why startups fail. It presents a framework for analyzing startup failure that explores how different aspects of a business work together. Entrepreneurs can use this framework to evaluate the health of their own ventures.

Who should read Why Startups Fail?

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

About the Author

Tom Eisenmann is Professor of Business Administration at Harvard Business School, where he teaches entrepreneurship. He has coauthored 130 case studies that are used in business schools across the globe. Eisenmann has invested in dozens of new ventures, has served on many startup advisory boards, and has coached thousands of students who want to become entrepreneurs.

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