Why Startups Fail | Tom Eisenmann

Summary of: Why Startups Fail: A New Roadmap for Entrepreneurial Success
By: Tom Eisenmann

Introduction

Embark on a journey into the world of startups as this summary of ‘Why Startups Fail: A New Roadmap for Entrepreneurial Success’ by Tom Eisenmann unravels the critical factors that lead to success or failure of a venture. Drawing from his extensive research, Eisenmann shares insights into the four essential opportunities every startup must capitalize on, along with a reliable framework to evaluate the health of your venture and succeed. Diving into the world of entrepreneurial endeavors, learn how to ensure a solid foundation, balanced resources, and a well-honed team that works together to create, build, and manage a groundbreaking product or service.

The Four Crucial Opportunities for Startup Success

Professor Tom Eisenmann, an expert on startups, analyzed why startups fail and identified four crucial opportunities for success. These opportunities are resources that work together to create, build, manage, and sell a profitable product or service. The first opportunity is a unique idea that solves customer needs, followed by technology and operations, profit formula, and effective marketing. These opportunities are supported by the people involved in the startup. To win the race, they need to complement each other and the startup as a whole. Eisenmann’s framework helps evaluate the health of a startup and course-correct where necessary.

Quincy Apparel’s Downfall

Quincy Apparel’s founders lacked industry knowledge, which led to operational issues, poor fit, and ultimately, the company’s collapse. The lesson is to compensate for your lack of knowledge if your startup belongs to a sector outside your expertise.

In 2012, Alexandra Nelson and Christina Wallace launched Quincy Apparel, a company that aimed to offer well-fitting business clothes for women using a unique sizing system. Despite promising initial sales, the company failed less than a year after its launch due to operational issues arising from its founders’ lack of industry knowledge.

While Nelson and Wallace had done their market research and raised sufficient seed capital, they failed to understand the specialized roles involved in garment manufacturing. They thought they could handle garment design themselves and only hired one production manager to oversee manufacturing, leading to problems from ordering unsuitable fabrics to not understanding sizing conventions.

The return rate for Quincy’s garments was 15% higher than Nelson projected, and 68% of returned items were due to poor fit, which ate into profit margins and compromised the company’s core promise. Quincy Apparel had solid marketing and a viable profit formula, but its operations fell short due to the founders’ lack of knowledge.

The key takeaway is that startup founders who lack industry knowledge should compensate for it. They can do this by bringing on a co-founder with the needed experience or developing a partnership with an expert who can provide advice. Alternatively, they can equip themselves with industry knowledge to guide their recruitment strategy and avoid fatal mistakes. Quincy Apparel’s story serves as a warning to founders who must recognize and address their knowledge gaps to prevent their startups from failing.

False Starts in Startups

Sunil Nagaraj attempted to launch his software, Triangulate, which matched compatible singles based on behavioral data gleaned from internet use. He invested time and money into the product before knowing if there was consumer interest and assumed users would pay a premium for the service. However, he failed to consider whether people would be okay with their internet usage being tracked and didn’t conduct market research. Had he done so, he would have realized this earlier and could have reconsidered his product. The key message is that founders who don’t understand their customers often fail, and it’s crucial to resist the impulse to act prematurely and conduct thorough research before creating a minimum viable product.

The Danger of False Positives

Baroo, a pet-care company, experienced rapid expansion without identifying whether early adopters represented the broader market. Founder Lindsay Hyde misinterpreted their initial success and failed to recognize that the specific circumstances in South Boston did not represent the mainstream market. Although Hyde believed that 70% of pet owners in the locations Baroo expanded to would use their services, the lack of analysis led to the breakdown of technology, operations, and customer relationships, resulting in Baroo’s failure. To avoid misinterpreting early success, it is important to analyze whether early adopters represent mainstream customers and consider demand before scaling too quickly.

Fab.com Failed Due to Speed Trap

Fab.com was a flash-sale website started by experienced entrepreneur Jason Goldberg, which sold quirky furniture and household items. The company scaled quickly and sold $600,000 worth of product in the first 12 days. However, after expanding into Europe, the company was burning through $14 million a month and had to lay off 80% of its US workforce to stay afloat. The company eventually shut down its US operations. Fab.com was a victim of the speed trap – strong initial success plus plentiful investment that finances rapid growth. To avoid this trap, startups can use the RAWI test which stands for Ready, Able, Willing and Impelled. The test evaluates whether a startup is truly ready to scale and can access the resources needed. Startups must also evaluate whether they are willing to scale, as it may increase workload and stress levels, and dilute equity. Finally, startups must determine whether they are impelled to scale due to competition or there is limited scope for growth. By quarterly review of these points, startups can better evaluate whether it’s the right time to scale.

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