Harvard’s Tom Eisenmann is the author of Why Startups Fail: A New Roadmap for Entrepreneurial Success. We discussed valuable lessons from the book and how they might apply to biotech startups.
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Highlights:
Sal Daher Introduces Prof. Tom Eisenmann of the Harvard Business School, Author of Why Startups Fail
Prof. Howard Stevenson’s 400X Return
Contrasting Brad Feld’s Book with Prof. Tom Eisenmann’s Book
Sal Daher’s Favorite Part of the Book: Failing
“[failed] founders probably cycle through those. ...the Kubler Ross stages...”
“...basically, half of failed founders come back and get back on the horse and do it again.”
Shutting Down the Failed Venture, Gracefully
The Number One Killer of Startups: False Starts
“...engineers are particularly vulnerable to this because they want to build.”
Sal Daher Discusses SQZ Biotech’s False Start and Brilliant Pivot
The Origin Story of Why Startups Fail
“...the factories that actually make this stuff actually generate enough cash to invest in new apparel companies...”
Silver Linings of the Pandemic
Prof. Tom Eisenmann on Harvard’s School of Engineering and the MS/MBA Program
Prof. Tom Eisenmann on Tough Tech: Technical Uncertainty + Market Uncertainty
Creating Supports for Life Science Academics to Become Founders
Creative Destruction Labs
Sal Daher’s Focus on Biotech Angel Formation
Software Startup Funding vs. Biotech Startup Funding
Maybe Successful Angel-Backed Founders Such as Todd Zion and Armon Sharei Could be a Resource for Training Angels
The Dynamics of Venture Capital in the Last Decade – Many New Shoots
Prof. Tom Eisenmann’s Parting Thoughts
ANGEL INVEST BOSTON IS SPONSORED BY:
Purdue University entrepreneurship
Peter Fasse, patent attorney at Fish & Richardson
Transcript of, “Why Startups Fail”
Guest: Professor and author Tom Eisenmann
Sal Daher: This podcast is brought to you by Purdue University Entrepreneurship and by Peter Fasse, patent attorney at Fish & Richardson.
Sal Daher Introduces Prof. Tom Eisenmann of the Harvard Business School, Author of Why Startups Fail
Sal Daher: Welcome to Angel Invest Boston conversations with Boston's most interesting angels and founders. Today, I am very privileged to have as a guest, Professor Tom Eisenmann from the Harvard Business School. Welcome, Tom.
Tom Eisenmann: Hey, Sal. It's great to be here. Thank you.
Sal Daher: Tom Eisenmann is the Howard Stevenson Professor of Business at the Harvard Business School and Howard Stevenson is an alum of this podcast.
Tom Eisenmann: Episode 29. I saw it.
Sal Daher: [laughs] That is a very popular episode.
Tom Eisenmann: Yes, he was a mentor and it's truly an honor to have the chair that bears his name. I have another chair, which you may not have seen with Peter O Crisp, Faculty Chair of the Harvard Innovation Labs. You'll probably know that Crisp was one of the very first VCs.
Prof. Howard Stevenson’s 400X Return
Sal Daher: Oh well, yes. A man that wears many hats. I think about Howard Stevenson. His most memorable quote from that podcast is that his portfolio of angel investments over a period of 35 years would have gone from a 17% internal rate of return to 12% internal rate of return. Had he not made one investment, which had given him to that point 400x something thereabouts. He's a very careful person with numbers and it illustrates a really important point about angel investing is that you were looking for these remarkable outliers that can outperform tremendously and it's really unpredictable.
Tom Eisenmann: 12% isn't bad either.
Sal Daher: 12% is not that bad over 35 years. Tom Eisenmann has written an amazingly valuable book for the first-time founder and for the founder, who's done it before, but wants to make sure that she does not miss any really important tips. Now, the last book interview that I had on the podcast was with Brad Feld, talking about his book with Dave Jilk to applying some of the ideas of Nietzsche to entrepreneurship. It was a concept that Nietzsche quotes inspire discussion and so forth. Now, Why Startups Fail is a very different kind of book. It's a very down-to-earth book, very practical.
Things you can do when you're launching, getting ready to launch to do your homework, and all these things in terms of market surveys and understanding the competition. It's organized into three parts. Launching, scaling, and then failing. Now, the failing part as an angel investor, that really got to me Tom. That's my favorite part of the book because it had so many founders fail badly. Do you want to comment on that aspect of the book?
Contrasting Brad Feld’s Book with Prof. Tom Eisenmann’s Book
Tom Eisenmann: Gladly. Also, I was just want to point out that it's unusual to have the venture capitalist write a book that takes a bank shot off of philosophy. I listened to a little bit of that episode, where you were trying to figure out if he was-- Nietzsche was a Nazi. I know Brad, so none of this surprises me that he has a philosophical bent but here you have an academic that's written a practical book and a VC, who's written a philosophical book.
Sal Daher: That's right because the last book by Brad Feld that I read was VC Deals.
Tom Eisenmann: Yes, that's a spectacular book.
Sal Daher: Excellent book. It's very nuts and bolts. Now, the thing is that his best buddy, Dave Jilk. They co-founding companies together and they have a ski place together in Colorado. Dave has been on a Nietzsche kick for a long time and so he's the one that dragged Brad-- suddenly, got-- oh, jeez, yeah, yeah... But anyway, the chapter about failing, about how to deal with that failure, it's so likely that anyone start-up, it's like two-thirds chance that it's going to fail. It's not going to return the capital.
Sal Daher’s Favorite Part of the Book: Failing
It really makes sense for the founder to understand what it means because it might set up the founder for the next gig, for the next founding of a company, 52%, and there were 2015 class, I go on to found a new company and it also helps maybe if they want to go on to have a career, they're not going to found another company. That's extremely important to mend fences so that to me was like, yes.
Tom Eisenmann: Yes, thank you. That's really, my favorite part of the book. For the listeners, split into three steps, if you will. The failing process. The first is basically figuring out whether and when to pull the plug. The second is the shutdown itself, managing the shutdown, and the third is the aftermath of how you make sense of what happened, how you heal because there's a spectacular amount of pain and how you bounce back and figure out what to do next. I can go into any of those if you want now, or we can come back to them later, but I had a sense that there just wasn't enough good advice out there for that part of the process for others.
Sal Daher: I think the bouncing back one, for me, was the one that was the most cogent, to me, personally, because I've seen how founders can become extremely despondent from failure of the company. What you have in bouncing back, I think, is an excellent roadmap for dealing with that.
“[failed] founders probably cycle through those. ...the Kubler Ross stages...”
Tom Eisenmann: Despondent is surely one reaction. If you can name an emotion, my guess is, other than the happy emotions that the founders probably cycle through those. I talk at a point that people will be familiar with the Kubler Ross stages of managing grief, denial, bargaining, negotiation, and so forth. It's all there. I mean, there is rage at the co-founder who dropped the ball or at the investor who pushed the company in the wrong direction. There's denial, there's depression. It's just shame, regret. The advice in the chapter is you're going to deal with those strong emotions.
In fact, if you don't, you're probably doing something unhealthy. You're bottling it up and it's going to find other ways to catch up with you and cause some trouble. The advice to the founder is alternate essentially between rumination, dwelling on the defeat. I mean, an entrepreneur's identity is intertwined with the venture. If the venture fails, there's just no escaping. Part of you has failed. It's hard to deal with that. Rumination, because you do need to think about it and you can't escape that, but alternate between that and distraction.
Side project, consulting gig, yoga, whatever the exercise, whatever it takes, and alternating between the two. Eventually, with a passage of time, the emotions should settle down. It's hard to know how long it'll take, at which point you may have enough calm and distance to sort of start make sense of what happened. The danger here, and I'm afraid having talked to, for the research, lots and lots of failed founders, a lot of them fall into a trap that puts them at one end or the other of a continuum of who's to blame here.
At one end, everybody is to blame except for the founder and the universe, by the way, if we want to stay on the Nietzsche theme. That might be right. Sometimes there are a lot of--
Sal Daher: Sometimes random things happening. I mean, I've seen the CEO of a startup go from a brilliant sale to an okay sale. Just because the market kind of caught up with the technology.
“At the other end of the continuum, it's also disconcerting. These are people who actually put too much blame on themselves.”
Tom Eisenmann: Absolutely. I mean, hundreds of thousands of young businesses were wiped out by COVID or by the great recession in 2008-2009. There are misfortunes and there are partners in the process who drop the ball. Usually, if you're going to blame your co-founder, well, you chose that co-founder. If you're going to blame the investor, you chose that investor. You need as a founder to take some responsibility. At the other end of the continuum, it's also disconcerting. These are people who actually put too much blame on themselves.
They beat themselves up, they conclude that they are ill-suited for the role of founder, that they shouldn't have done it and they never should do it again. Again, sometimes that's right. There are some people that just aren't cut out for this job. Usually, it's a shame if they're overreacting because now society has been deprived of somebody who might next time go out and launch something great. The founder really needs to figure out their role in the failure, what their responsibility is, and try to position themselves. Then the third part of the process there is to figure out how to position yourself.
“...basically, half of failed founders come back and get back on the horse and do it again.”
First, figure out whether you should do it again. As you pointed out, basically, half of failed founders come back and get back on the horse and do it again. The ones who can be very thoughtful and explain what happened, what they did wrong, what they learned from it, and what they're going to do differently next time around, and back to the earlier part of the process, the managing, the shutdown, who shut down the venture-- I call it in the book, gracefully.
Shutting Down the Failed Venture, Gracefully
Sal Daher: Gracefully, yes. A very apt term.
Tom Eisenmann: What it means is everybody who's owed money, tax authorities, customers who placed a deposit, employees who are owed a paycheck, vendors who sold you something, not investors. Equity doesn't necessarily get its money back. 10 cents on the dollar would be better than nothing, but everybody was owed money gets paid back and employees get some help finding their next job. Customers get moved over to another vendor that can provide good service and that's a graceful-- The combination of a graceful shutdown and a good explanation for what you learned and what you're going to do differently, well, usually position a founder to bounce back.
Sal Daher: Absolutely. A couple of things that I wanted to mention about the book that I really liked. It is following the tradition of Harvard Business School with a case study. It is talking about specific companies that are named, and the actors, the people that you've talked to, people that you studied. These are real stories and the conclusions are drawn from those stories. It's not a theoretical book. It's a very practical book in that sense. I also like the distinction that you made that you're not trying to help people make momentous decisions.
You're trying to keep them from tripping on their shoelaces on the everyday decisions. That's what these rules are best where they're best used. I like that distinction that you made. Let's talk a little bit about false starts. I've seen false starts.
The Number One Killer of Startups: False Starts
Prof. Thomas Eisenmann: Boy, I bet you have. If you've made 70 angel investments, I think it's the number one killer of early-stage startups. Maybe not in life sciences where you do so much investing, but surely in software. We just finished the Olympics. People will be familiar with a false start in swimming or track and field or horse racing. I guess the horses can't get out prematurely because they're held back by a gate. Auto racing, where somebody jumps the gun and, in an effort, to get an edge and gets penalized as a result.
Same thing with an entrepreneur and the jumping the gun here takes the form of skipping the stage of upfront customer research, where you're really getting a deep understanding of unmet customer needs. What solutions are people using for the problem you want to solve now and what's wrong with the existing solution? As a designer would, generating-- before you start the engineering work, lots of prototypes, conceptual prototypes, paper prototypes can work just fine of different solutions and getting feedback on those different solutions to zero in on which solution.
“...engineers are particularly vulnerable to this because they want to build.”
This is a phase that it doesn't take months. It can take weeks, maybe a month in total, four weeks. A lot of entrepreneurs are just crystal clear in their mind. They can see around corners and they see a future where they've got the pair of the problem and the solution, it's there. They dive in-- engineers are particularly vulnerable to this because they want to build. What do engineers do? All entrepreneurs are vulnerable because how do we define an entrepreneur bias for action. You make things happen. Even non-technical founders, I deal with a lot of them at the business school.
We tell them correctly over and over that to succeed as an entrepreneur, you need great product. How do you get great product? You get a great engineering team. How do you do that? You use the networking skills you built in your MBA program to go seduce a technical co-founder, or you scraped together enough money to outsource the engineering. The key point is once the engineers are on board, they're expensive. What do they do? They build. You got to keep them busy. You give them a solution.
If you haven't really figured out, first, if you're solving the right problem, and secondly, whether of all the different solutions, that's the right one. The odds that by building this thing and launching it, it's going to hit the mark or pretty low. You've essentially-- and it might take four months to build it, launch it, figure out that it's not working, and figure out what to do next, then you pivot. You've wasted a cycle. You've wasted four months in order to save four weeks and that's just a bad trade.
If you've only got a year's worth of capital in the bank, you've really boosted your odds of failing with this false start.
Sal Daher Discusses SQZ Biotech’s False Start and Brilliant Pivot
Sal Daher: Yes. One of the reasons that I find that it's so resonant for me is that we're talking before I led the angel round, investing into SQZ Biotech, SQZ Biotech, which is not public, they've overcome this. Initially, they had a false start. They had a lot of inbound interest. SQZ had a transfection technology, microfluidics. Basically, putting cells through small constrictions, smaller than cell size, impairing the integrity of the cell membrane, and then allowing things to get in which eventually get into the nucleus of the cell and transform the cell, so they can reengineer cell functioning in a particularly effective way. Assistant come for a very prestigious lab that the Bob Langer Lab at MIT. A lot of people were interested in their science. They had massive amounts of inbound interest. They thought we could build a tools business. They started that. They raised money to build a tools business, and it became evident pretty soon, within a few months that it was just not going to work. As a matter of fact, Armon Sharei, the founder and I've discussed this in public on another podcast. I'm not talking out of school here and eventually, led to the company having to pivot.
The reason was basically that the technology just wasn't ready enough. Cost of customer acquisition was much, much higher than they'd imagine. They have to send a PhD scientist on-site to get the technology to work on a lab. The lifetime value wasn't there because they might have do an experiment, might pay a few thousand dollars for that, but then, that's it. A tools business is really hard to build. Eventually, there may be a tools business there, but they pivoted completely.
They went through Mass Challenge and they got a new board member on board who helped them redirect their approach to developing technology and doing collaborations. That's where they managed to settle. That was very much the thing of a false start.
Tom Eisenmann: Yes, it sounds like they were lucky to have a lot of capital in the bank, so they could suffer the blow and bounce back.
Sal Daher: Well, they didn't. They had very little capital. What they did have was the good fortune of bumping into this board member who was also associated with Polaris Ventures, and Polaris invested in them further, very wisely. They were able to eventually get a partnership with Roche to help develop the technology. It's all about bringing money in, and as little bit of it as you can, or as non-dilutively as you can, so that you can develop your tech. It's a race against what other people are doing, try to put resources to work with your tech.
I think that they're now succeeding with that, but on the other hand, the thing—problem the life sciences, Tom, that I find is that this is a company that I'm on the board of right now. Their technology, when I first did due diligence on this company, as an investor, if I had gone to potential strategic players and asked them, are you interested in a technology for capturing extremely rare circulating tumor cells in blood? They would have said, "That's a nice thing, but there's no backup for that. There's no validation."
Then, two years later, these guys have a paper published in JAMA Oncology that use their method in a lab to capture cells and show that substantially increase the ability to predict the recurrence of breast cancer. All of a sudden, they have a lot of inbound interest. That homework that I could have done in due diligence, I would have gotten no. They would have said out, "Yes, nice, but no offense," and this is eventually what they got. They got crickets on that. They had a totally different interest in totally different areas. It's a very tough thing.
The Origin Story of Why Startups Fail
Anyway, how did this book come about? How did you decide to write this extremely valuable manual for the beginning founder, but also for more seasoned founders?
Tom Eisenmann: As an angel investor, you hear I'm sure lots of origin stories, and probably have come to realize that some of them are actually true. The listener also will know the story of eBay. The origin story, the fiancé of the founder, being a Pez collector, and it was all made up by a PR agent. I'll give you the origin story and you can figure out whether it's true or not. It's close enough.
I had a pair of former students, who I had worked with pretty closely when they were-- I taught them first year of introduction to entrepreneurship, and then worked with them in their second year, that they actually were consulting for academic credit to Rent the Runway. As a team that I had worked closely with and had invested in Rent the Runway a year earlier, this is Rent the Runway's young. These students are working with them, and coming up with all sorts of ways to make Rent the Runway better.
We're heartbroken when they finished the project like they haven't done anything, and then two months later is, "Oh, my gosh. They did everything we told them." Sometimes it just takes two months in a startup, but they went off to so many MBAs to consulting to BCG. Didn't hate it, didn't love it. Dreamt nights and weekends of the venture they would launch. Together, they were best friends. They were also tall women who had trouble finding work clothes that fit them well. They resolved to launch a business that would have stylish, affordable, and better-fitting work apparel for young professional women. It's pretty easy to do two of those three things but to do all three turns out to be wicked hard. Quincy Apparel was launched, they did textbook perfect minimum viable product testing. Just everything we taught them in Harvard Business School. Validate demand for this concept, they ran trunk shows where you bring samples and women tried them on and placed pre-orders, this is the gold standard. Will people pay for your product before your product doesn't really exist?
“...the factories that actually make this stuff actually generate enough cash to invest in new apparel companies...”
Had strong demand, raised a million from VCs, big mistake. They wanted a million and a half, by the way, that's another big mistake. I'll come back to why raising from VCs is a mistake in this situation, but that's what we teach business school students. Every top business school, we lionize venture capital. If you're going to be an entrepreneur, of course, you raise-- would never occur to an entrepreneur to go to-- it turns out in apparel, the factories that actually make this stuff actually generate enough cash to invest in new apparel companies and do that.
That's what they should have done. Anyway, they raised a million, demand was solid, repeat purchases were solid and strong, but they couldn't get their operations together. The fit was not terrible of the clothing but if you're promising a better fit, you really ought to nail that one, you ought to not have average returns, which is what they had. They burned through their capital, the VCs are pushing them to-- VCs telling them worst thing in the world they could have is a stock out. We want to grow, grow, grow because we got to get a 10-fold return on our investment.
The way you do that is to grow like crazy. They positioned the thing as direct to consumer, which was then just starting to be hot. We'd seen Bonobos and Warby Parker. Every VC wanted a DTC, a direct-to-consumer play in their portfolio. It turns out that manufacturing too much apparel, especially if it doesn't fit and it could go out of style, will burn through capital, like nothing you've ever seen. They ran through their million, they were making progress, but not enough to get-- First off, the VCs were too small to bridge them and that's a mistake.
Then, they couldn't raise any fresh capital and they had to shut the thing down. I had a lot of confidence in these founders, I invested in the company. I could point to a lot of things that went wrong, but I couldn't pinpoint the root cause. I certainly didn't see it coming. I was the genius who'd invested just two years earlier in Rent the Runway. To me, they look the same. Two founders who had no experience in the apparel business launched that, rose off like a rocket. Here were two more female founders from Harvard Business School and just as charismatic, just as deliberate.
One of them was an MIT engineer, deliberate, disciplined. The other was a math and opera major and could sing the story. She could spin and sell. Anyway, I was a failure at explaining failure and this is 2013. At that point, I also was teaching the required first-year MBA Entrepreneurship course. The students in that course, which is of course, like so much at Harvard Business School done by the case method, they'd say, "You told us along the way that two thirds or three-quarters of startups fail, but then all the cases you showed us were these spectacular success stories. What's going on there?"
[laughter]
They were like, "Do we really not have anything to learn from failure?" I resolved to learn about why startups fail and can we do anything to help entrepreneurs avoid it, and read everything that any academic, read any practitioner had written, interviewed scores of failed founders and investors, did a big survey, and eventually, wrote 20 Harvard Business School teaching cases. There's a lot of depth in teaching cases, those cases now formed the backbone of the book. Actually, a couple of years ago, I launched a course, an MBA course on Entrepreneurial Failure. That's where it came from.
Sal Daher: Yes. The story of Quincy is told in the book.
Tom Eisenmann: That's right, and this shows you how slowly things move in academia. I started outlining the book in 2014, got busy with projects at school and new jobs at the school, put it aside, and picked it up in 2016. The working title of the book for a long time was False Start.
Sal Daher: It was all focused on that.
Tom Eisenmann: My wife when I picked it up again in 2018, said, "There's some delicious irony here. Now, can you just please put your head down and get this book written?" For me, the pandemic, as horrible as it's been for so many people, had a silver lining because it gave me the quiet space to actually crank the book out. Here we are.
Silver Linings of the Pandemic
Sal Daher: There are some remarkably good things that have come out of the pandemic. Some horrible, a lot of people dead and a lot of businesses destroyed but some interesting things have also developed. There's a new angel group in Boston that developed the TBD Angels.
Tom Eisenmann: That's David Chang? Sal Daher: Yes, David Chang. I interviewed him recently. It's just the most recent podcast. There's a silver lining there. Now, as we were discussing before, my focus now is increasingly in the life sciences. Your book is extremely valuable for life science founders. Also, part three is all applicable to life science founders. That's any kind of founder. Part two is not because most life science founders are not going to scale a company, unless you're Moderna. Those guys have to scale. They're extremely unusual. Scaling in terms of getting to markets, but the launching part of it, I think there's a lot in your book that is really valuable for life science founders.
Tom Eisenmann: Yes, that rings true. Before we hit the record button, I was telling you life sciences is not my strong suit, but I've got a whole bunch of professional reasons to learn more. I've been having this conversation about how much of what's in the book makes sense in that arena. The jobs I have for the listeners at Harvard, Harvard has an Innovation Lab that cuts across the whole university. I'm faculty chair there. There's so much innovation around life sciences at Harvard, at the hospitals, at the medical school, and at the engineering school. I need to learn how to support these entrepreneurs.
Prof. Tom Eisenmann on Harvard’s School of Engineering and the MS/MBA Program
My pride and joy is a new joint degree between Harvard's Engineering School and the MBA program, MS/MBA. If there any listeners out there who are 25 years old, who have an engineering degree, who have been working in tech product development, we want you. You can get two degrees, the MS and the MBA in the same amount of time it takes to get an MBA, which is magic. It's a good trick. We had to jam courses into strange places in order to pull that off. Yes. To support those two programs, I've had to do a crash course.
In my 60s, learn about life science entrepreneurship and, boy, is there a lot to learn.
Sal Daher: The big bone that I'm gnawing on right now is how do I help angels support life science founders in heading up their companies because it's extremely expensive to hire a biotech executive these days. Tremendously, in demand. A startup could blow all of its raised money, hiring a professional life science manager. Angels need to help to support the founders who are typically very frequently academic founders in becoming the CEO, in heading up the company. I have one example, where founder was a professor who gave up his professorship and dedicated full time I decided to invest in the company when I saw that he really was taking the plunge.
He couldn't afford a CEO. There was a CEO who eventually ended up investing in the company as an investor, but he had bigger fish to fry. I introduced him to a friend of mine who had life science background and got a PhD and then gone into a consumer business, who's very successful in the consumer business. He could afford to come in equity only. This is a big problem. Just being paid with equity is very hard to hire people who have capable people like that, but in this case, this is a very experienced guy. He's a COO and the economic founder is a CEO.
I believe that they have enough funding now with $1.5 million race to basically become cash flow positive. There are hundreds and hundreds of projects like that that are available in the life sciences, but they need support and angels are used to software-related companies or consumer-related because they're very accessible. It's easy to understand what they're doing. Life science companies are weird. To begin with, just biology is so vast and complicated. This is what I'm working on.
Prof. Tom Eisenmann on Tough Tech: Technical Uncertainty + Market Uncertainty
Tom Eisenmann: It intersects with a lot of what we're thinking about. I draw a distinction between life sciences and what folks at MIT at The Engine and elsewhere at MIT called Tough Tech. Basically, the attributes of Tough Tech are this profound uncertainty about whether the technology is going to work and whether it connects to be built, but also market uncertainty. In some areas of life science, there's less uncertainty about the market, but still plenty of uncertainty about whether the science and engineering will work.
Tough Tech is the hardest of all. If you think of IT-based, software-based businesses, lots of uncertainty about the market, but not much uncertainty about whether you can actually build the thing. There are a few exceptions.
Sal Daher: Enough person hours is on it and you can do it.
Tom Eisenmann: Yes, exactly. Tough Tech is really the extreme case because you have both market uncertainty and technological uncertainty all across Harvard. Of course, MIT has been doing this for decades, but we've got Tough Tech inventors at the engineering school doing robotics and autonomous vehicles and really sophisticated applications of material science. As you said, they're scientists, they don't know anything about business. There's no reason in the world they would. Yet, to commercialize their technology, they have to be entrepreneurs. We're thinking about--
Sal Daher: Up on [crosstalk] one side? I'm sorry, please, please go on.
Creating Supports for Life Science Academics to Become Founders
Tom Eisenmann: No, we're thinking about what is support for someone like that. A principal investigator who's going to step out of that role, or a postdoc who has been working with a PI. We think there's a couple of elements. We run a week-long intensive boot camp for MBAs to learn the basics, hands-on basics of early-stage startups, early-stage marketing and sales, early-stage teams' assembly, early-stage finance. We think there's probably some version for aspiring entrepreneurs who are coming out of life sciences in Tough Tech that could help a lot, just some basic concepts and vocabulary. Of course, there's I-Corps out, a lot of listeners will be familiar with the NSF I-Corps.
Sal Daher: Yes, that has been helpful. I think that it could be more focused on the problems of life sciences. I-Corps seems to be-- It's spending a lot of time on market research and all that stuff, which is important.
Tom Eisenmann: Yes, I agree with that. I think to be a full-stack founder, you need not only the customer. I-Corps is great for customer discovery. That's important, but there's other things. There's how do you run the sales function if it's relevant, or biz dev in so many life science businesses, finance, hiring, and firing. We think there's a boot camp. I wonder if you've ever run across Creative Destruction Labs. Is that familiar?
Creative Destruction Labs
Sal Daher: The idea-- I'm familiar with that, the Schumpeterian idea.
Tom Eisenmann: Oh, no, no. This is-- there's somebody who stole the brand.
Sal Daher: [laughs]
Tom Eisenmann: It's a great story.
Sal Daher: Schumpeter is turning over in his grave.
[laughter]
Tom Eisenmann: No, I think he'd be proud of somebody--- It's creative recombination. That's how we define entrepreneurship. Take apart and sort of slap it against something else. The Province of Ontario challenged the University of Toronto with an A, "Why don't you turn Toronto in into a startup hub? You guys seem to be pretty good at machine learning and AI. Why don't you do something there?" One of the entrepreneurship and strategy professors, Ajay Agarwal, conceived this thing. It's now at 10 different universities across the world. Now, Harvard is circled around it, whether we do it or something like it, but the concept is, you'll like it a lot.
It's basically you start with 25 teams, who are at a stage where somebody is working full-time on the venture, but nobody's done the hard work of really figuring out how this is going to be a viable business. You start with five people who look a little bit like you. Mentors on steroids, seasoned entrepreneurs who've been around the track a few times and could provide lots and lots of coaching. The 25 come in, and basically pitch and through dialogue with these mentors, zero in on three things, they've had to accomplish over the next six or eight weeks.
CDL, Creative Destruction Labs goes through a cadence, where every six or eight weeks of the team's do the work, they come back and report on what they've done. The mentors beat them up. At the end of a session, somebody has to raise their hand and say, "I will continue working with this team." If nobody raises their hand, they're out. They actually triage. The 25 ends up being about 10 after a full 8 months. It's a cadence of five or six of these meetings. The university's actually attached MBA teams to support the entrepreneurs in between and the mentors, of course, work with the entrepreneurs in between.
Out the other side come these very well-coached ventures who have been really milestone-focused and really have their ideas tested. They've had some spectacular fundraising successes. They've now broadened. They started in AI and ML, and that's still a strength, but they do life sciences, they do space tech, they do crypto blockchain applications, and so forth. It's a really intriguing model that has worked well. They've got it Oxford, the leading business school in Paris, NYU, ran it University of Washington. It's spreading like a virus, and we think there's a lot of wisdom that gets imparted here.
Sal Daher: Creative Destruction Labs, I see some aspects of this happening with the way that startups are advised by some of the angels that I know, and so forth, but to do it in such a deliberate way, I haven't seen this something. This is really very interesting.
Tom Eisenmann: Yes, you probably have been involved over the years with the MIT Venture Mentoring Service, but--
Sal Daher: Oh, extremely valuable, yes.
Tom Eisenmann: Yes, but I think this takes that idea and puts a completely different structure around the advice you can get from good mentors.
Sal Daher: Right, just the idea of the winnowing down just seeing how the progress, how they're progressing and they're focusing their advice on the companies that are really taking the advice and making headway. My thought is, I guess, a model like that also helps the advisors become better advisors.
Tom Eisenmann: Oh, I don't-- Yes, especially since you're in that room, watching four people or five people who look a lot like you, hearing the questions they ask and then you get feedback. You push the team to work on something, they work on it, you see if it works. Yes, I think it's very well set up to improve the advising.
Sal Daher’s Focus on Biotech Angel Formation
Sal Daher: My focus is how do I form-- I want to do angel investor formation, get angel investors to understand the dynamic of investing in biotech companies. Progress in a biotech company doesn't look the same as progress in a company that's going to have a product, that's going to be selling it, that's going to have sales. It's going to have their milestones that are easy to detect. As we were talking about before, a biotech company can spend nine months in negotiating with the FDA for their clinical trial. The structure of the clinical trial and you're like, "Yes, well, that's really important."
Then you have to wait for the outcome of the clinical trial to see how things go. The other things as well that I think angel investors need to understand, you're not going to be investing-- As an angel, I've invested 12, 15 startups a year. I don't expect to be investing at that pace with biotech companies because the due diligence takes so much more time. They require more money, they require longer funding, staging of funding instead of software companies, you have this mentality, "Oh, jeez, get these kids $700,000 and they'll go fool around."
Software Startup Funding vs. Biotech Startup Funding
They'll either discover that there's a product or they won't. There are no second checks. It's just one and done and give them $700,000. The ones that are really capable, they're going to go and get VC money after that. It doesn't work. $700,000, 15 months with a life science company. You're going to look and say, "What happened at that time?" Not a lot. Maybe they managed to manufacture the device, they've got a few lab results.
The question is, how do I train the angels? How do I create a structure for training angel investors in this? Draw them in and help them have a different perspective. That's what I'm thinking about.
Tom Eisenmann: Yes. Seems to me, you need a Bootcamp.
Sal Daher: [laughs] Yes, yes,
Tom Eisenmann: You need to bring 20 or 30 angels together in a classroom with somebody who's seasoned, been around the track, and you need case studies where two or three of the angels that are working with a venture, bring in, come in, and talk about where that venture's at and the rest of the group reacts. Then the instructor, if you will, guides a discussion. Sort of, "What are you doing right? What are you doing wrong? What could you have done differently?"
Maybe Successful Angel-Backed Founders Such as Todd Zion and Armon Sharei Could be a Resource for Training Angels
Sal Daher: I'm just thinking some founders, I wonder if like Todd Zion, for example, that founded the SmartCells and exited, or maybe Armon, could provide input to help train the investors to say, "Guys, I wish you'd been doing this for us at this point," because I think the founders, exited founders are experienced founders might have a lot to add to helping bring investors along.
Tom Eisenmann: Yes, that rings true, especially since a lot of successful founders will themselves become angels. They've experienced both sides of the table.
Sal Daher: Yes, I got onto this because I'm on a board with Jeff Behrens, who was the CEO of an exited company. He wasn't the founder, but he came on as a hired CEO. He ended raising 14 million in angel money. He had a multi-hundred-million-dollar exit after that, which was quite a success. He was never able to get VC money. Why? Because VCs are all creating their own entities. Now, the big players like Flagship Pioneering and, and so forth, maybe not Pillar VC, but like the big guys are all creating their own ventures. (Listen here: https://www.angelinvestboston.com/jeff-behrens-phd-why-youre-wrong-about-biotech-funding)
A life-size company has a really hard time raising money unless they come from a charmed circle of a background of Bob Langer Lab. They were able to raise a Polaris and so on. He put me onto this because he actually went off and did a doctoral thesis on biotech funding. It turns out that it's going to be up to if we have to get angels to understand how to fund biotech because the VCs are either they're very small VCs or don't have capacity. I've seen this firsthand with one of my companies or they're the big guys, and they're doing moonshots. They're really going to do amazing things like the mRNA technology. I think getting founders, exited founders of all, somehow is part of the formula.
The Dynamics of Venture Capital in the Last Decade – Many New Shoots
Tom Eisenmann: It's strange to me listening to that knowing more about the world of software-based investing, where over the last 5 or 10 years, what you've had is just a huge outflow of junior and mid-level partners from the top tier VC firms bouncing out. They can tell they're never going to be one of the top five guys or three guys at Sequoia or Accel or pick a name. They launched their own seed fund $30 million, $40 million, and they're filling a big gap. These are the $700,000 checks that are going into the top-tier companies that you're talking about. You wonder why the same thing isn't happening in biotech.
Sal Daher: It's beginning to happen. It is happening, but Tom, what is happening is that there are many startups. There's so much to be done. We are in biotech today where software was back in 2011, when Marc Andreessen wrote that article in the Wall Street Journal.
Tom Eisenmann: Yes, software eating the world.
Sal Daher: The technologies, they don't require $50 million. Not everything is mRNA. There's a lot of stuff, CRISPR stuff that doesn't require huge, huge investments. Some of the very specific applications. The startup I was mentioning before QSM, quorum sensing molecules, they're developing sensors from bacteria. The first product is going to have one sensor, which is for just one type of bacteria. They found a use case where that's useful for two-minute tests. In two minutes, they know if the bacteria is present or not. Technologies like that are going to abound, so they're outpacing. The vineyards are just heavy, heavy with fruit, and there are very few workers that are coming along.
Tom Eisenmann: It sounds like we have work to do, but it also sounds really good for the Boston ecosystem if there's going to be this much invention.
Sal Daher: It's happening right now, Boston is an exporter of ideas and importer of capital in the startup world. This is a statistic I saw from .406 Ventures some years ago. It's like two-thirds of Series A money for Boston companies comes from outside of Boston. Also, true in the life sciences. Anyway, so we've talked about your excellent book. We talked about some chapters in the book or some sections of the book that are of particular interest to different types of founders. We've talked a bit about reskilling angels for biotech.
Prof. Tom Eisenmann’s Parting Thoughts
Any other thoughts that occurred to you that you want to get across to this audience of people who are thinking about starting companies, founders of companies, angel investors?
Tom Eisenmann: You mentioned the last bit of the book, which is a letter to a first-time founder. I don't know how many aspiring founders you have in your audience, but you probably have a lot of angels who work with aspiring founders, so I think the advice is good not only for entrepreneurs but folks who work with entrepreneurs. I wrote a letter to an imagined first-time founder congratulating them on taking the plunge and saying, "Hey, look, you're going to get all sorts of advice on what makes a great entrepreneur," and it's conventional wisdom. There's a reason why it's conventional wisdom. There's always some element of truth in it.
That's true here, but following blindly that advice can actually boost your odds of failure gets you into trouble. You think of the kinds of advice we give to entrepreneurs. Be persistent. Of course, yes. You get knocked down, you dust yourself off, you get up again. That is kind of at the core of entrepreneurship but persistence can turn to stubbornness and stubbornness can turn into not being able or willing to see that the universe is telling you your ideas are off target, and you need to change something pivot.
We hear be frugal. The entrepreneur is short of resources and it's true. You got to be careful with the money. If the cash runs out, it's more than an accrual on your accounting statements, but sometimes being too frugal, there are certain roles that just have to be filled with somebody who's got the right skill in a startup. One of the failures in the book is an online home furnishing company. I'm looking around you and myself and the chairs and tables. All that stuff had to be shipped from somewhere. If it's shipped by an online retailer and it arrives two days early, you're delighted when your Amazon books come two days early. If your couch comes two days early and you didn't take the day off from work, you were in big trouble, especially if it's raining and it's sitting there on the curb or if it comes two days late. It turns out that operations and logistics in a company like that, it's absolutely crucial. This particular company, where the CEO knew a great deal about how to generate demand, marketing and so forth, had a really brilliant vision for the product, didn't know anything about operations.
Sal Daher: Soohoo? Is that Soohoo?
Tom Eisenmann: Yes, Anthony Soohoo is a HBS alum.
Sal Daher: What was the name of the company?
Tom Eisenmann: Dot & Bo.
Sal Daher: Oh, Dot & Bo. Yes.
Tom Eisenmann: Took him three tries to find a vice president of operations who could do the job. The first time was a very rational mistake. He hired a generalist who'd had all sorts of operational roles inside ventures early-stage companies, but it never shipped couches. The second guy knew a little bit about shipping, he'd came from Netflix, he'd shipped those back in the day when it was all about streaming but the red envelopes that we all remember.
Sal Daher: DVDs.
Tom Eisenmann: Yes. There's a big difference between shipping literally hundreds of thousands of those and shipping a dozen couches. It took three tries to get the right person. In the meantime, they were burning through cash, expediting orders and dealing with customer service problems and so forth, despite having real product-market fit and a pretty compelling value proposition. In that case, and Anthony had passed on exactly the right hire, basically, because the person wanted a comp that was 50% more than what he budgeted for. He was being frugal like a good entrepreneur.
We hear grow. Paul Graham says the definition of a startup is a thing that grows. Absolutely true. You don't have much of a venture if you're not growing, but growing too fast can really cause a lot of problems at a startup. All of those and at the core, what's the biggest piece of advice we give to an entrepreneur?
Trust your gut, trust your instincts, trust your intuition, move fast, be decisive, be nimble. Again, right at the core of entrepreneurship. All that's true, but there are some decisions like who should you bring on as a co-founder? Who should you bring on as an investor? Are you really getting a clear signal from early adopters about the nature of demand or is it possible you got a false positive here, a small number of really enthusiastic early adopters, and now you're going to find it tricky to cross the chasm to the mainstream? With those decisions, the advice to the aspiring founder is take it slow. Think about it, sleep on it, sleep on it two nights, write down lists of pros and cons, show them to somebody that knows you and your company well. Daniel Kahneman, Nobel Prize winner, fantastic book called Thinking, Fast and Slow. That's what an entrepreneur needs to do.
Sal Daher: I've read it.
Tom Eisenmann: They need to think fast and think slow. That's the advice I'd share.
Sal Daher: Very, very sound advice both to founders or founding life science companies and non-life science companies. That advice is extremely valuable. Tom Eisenmann, Professor at Harvard Business School, and author of Why Startups Fail: A New Roadmap for Entrepreneurial Success. In the UK, it is titled The Fail‑Safe Startup, I understand. For listeners in the UK, we have some of those. Look for it as The Fail‑Safe Startup.
Tom Eisenmann: UK and all the Commonwealth countries, except for Canada. Canada gets Why Startups Fail. You go out by audio so if I held up the covers, you just have to imagine a very conservative UK cover and an in-your-face US cover and it speaks volumes about cultural differences between Europe and the US.
Sal Daher: Tom Eisenmann, thanks for being on the podcast. This is Angel Invest Boston. I'm Sal Daher.
Tom Eisenmann: Thank you, Sal.
Sal Daher: I'm glad you were able to join us. Our engineer is Raul Rosa. Our theme is composed by John McKusick. Our graphic design is by Katharine Woodman-Maynard. Our host is coached by Grace Daher.