Entrepreneurial Failure - Harvard Business School MBA Program

Entrepreneurial Failure

Course Number 1745

Professor Thomas Eisenmann
Fall; Q1; 1.5 credits
14 sessions
Paper

Most startups fail: about three-quarters of venture capital investments do not earn a positive return. Entrepreneurial Failure (EF) explores why startups fail; what entrepreneurs can do to avoid failure; and if they do fail, what founders can do to “fail well” - in ways that leave their relationships and integrity intact, facilitate learning from the experience, and position them for their next career move.

The course may be of interest to students who plan to found or join a startup, and those who’ll invest in new ventures. Course content will overlap to some extent with topics covered in Founders’ Journey, Launching Technology Ventures, and Scaling Technology Ventures.

Course Content

Entrepreneurial Failure is a case-based course with sessions organized into three modules.

  • Early-Stage Failure. Seed stage startups confront a Catch-22: they cannot attract resources without demonstrating traction, and they cannot gain traction without resources. To break through this impasse, founders can engage in lean testing, resolving risk with minimal resource expenditures; stage their investments, deferring resource commitments until milestones are met; partner, “borrowing” resources from organizations better able to absorb risk; and propagate a “reality distortion field,” persuading resource providers to ignore risk while ushering in a dazzling future. Not addressing the Catch-22 can lead to an early-stage startup’s demise-as can executing these tactics poorly. The module will explore the interplay between opportunity and resources through cases in which founders: a) identify a promising opportunity but fail to assemble the resources needed to capitalize upon it; and b) attract a solid complement of resources but fail to identify a good opportunity.
  • Late-Stage Failure. Surprisingly, failure rates for late-stage ventures match those for early-stage startups. The module reviews two patterns that account for a large share of late-stage failures-and explores ways to anticipate and avoid these patterns:
    • With a Speed Trap, strong early growth for startups like Fab.com, Groupon, or Zenefits attracts enthusiastic investors who push for continued aggressive expansion. As the startup saturates its target market, the next wave of new customers doesn’t find the company’s value proposition as compelling as early adopters. So, to sign up more customers, the firm must spend heavily on marketing. At the same time, it must hire many new employees to support expansion. Coordinating their work requires formalized organizational processes, but founders often resist burgeoning bureaucracy. With too little structure, a scaling startup can spin out of control. Burning through cash, the venture’s stock price declines, and investors become reluctant to commit more capital.
    • Other late-stage ventures-like Iridium, Better Place, and Theranos-never achieve traction, despite having raised hundreds of millions of dollars. Their founders devised ambitious schemes requiring some combination of radical changes in customer behavior; strategic partnerships with powerful corporations; technological breakthroughs; relaxation of regulations; and vast amounts of capital. Each of these long-shot requirements is “do or die,” so founders hope in vain for Cascading Miracles.
  • Failing Well. The final module examines entrepreneurial failure from the founder’s point of view, asking:
    • Why is it so difficult for founders to decide whether to pull the plug on their struggling startup? How should they approach this decision?
    • When they do decide to shut down, what should founders do to fail responsibly, leaving their personal and professional relationships and their integrity intact?
    • What should founders do to maximize personal learning from their startup’s failure? To position themselves for their next career move?

 

Final Paper

Working alone or in pairs, students will write a short paper using one of the following approaches or addressing a topic approved by the instructor:

  • Write a “pre-mortem” for a going concern, analyzing the factors behind that startup’s imagined future failure.
  • Review a founder’s published post-mortem account of their startup’s failure-or interview such a founder. Have they been intellectually honest? Did they learn from the experience? Does their post-mortem fail to address any important issues?
  • Using course frameworks, analyze factors contributing to a startup’s failure.