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The number one reason so many startups fail, according to entrepreneurs from Harvard Business School

For their new book, Catalina Daniels and James Sherman interviewed 18 entrepreneurs who graduated from Harvard Business School.

The number one reason so many startups fail, according to entrepreneurs from Harvard Business School
[Source photo: Thomas Barwick/Getty Images]

After your startup’s first sales, the next phase is growth. Congratulations—you will now enter one of the trickiest phases of your entrepreneurial journey.

Why? Scaling requires a massive transition, where at any point one or several things can go wrong. The simple reason why so many startups fail during this phase, despite a great idea and proven product/market fit with early customers, is execution.

Execution can relate to marketing, operations, technology, logistics, software, systems, etc. It’s both any aspect of business building and your capacity to deliver what you promised, on time, and within certain financial limits independent from external factors.

Execution in many ways becomes more important than your idea or minimum viable product (MVP). To execute well, you must get stronger, not just bigger. You must learn what you’re good at. You must balance the tension with your customers between scale and intimacy. Finally, you must use the hurdles you surmount as a competitive advantage to grow fast and well.

For our book, Smart Startups, we interviewed 18 entrepreneurs who graduated from Harvard Business School, probing them about what they discovered along the way and what they wish they had known before launching their businesses. Based on those conversations, here are the two most important keys to executing well during a startup’s growth phase.

1. MANAGE THE GRIND AND CHAOS

Once you’ve gotten on the growth curve and have figured out a solid go-to-market plan to scale the business, you need to deliver. That is when many entrepreneurs realize that their model is not yet scalable. Many insufficiently anticipate what is required in technology, operations, supply chain, and back office to make growth happen in a sustainable way.

It can be a long, intense grind to iron out the kinks as you scale. Matt Salzberg from Blue Apron explains the grind well. Blue Apron grew its customer base fast, thanks to its innovative customer loyalty program. Once the growth kicked in, the company lacked some of the required systems, which impaired its execution.

On the operations front, it was a constant struggle to make the supply chain come together to ship a box every week. And so we’d have periods of time where we wouldn’t ship all of our deliveries on time. We’d have to tell customers, “Sorry, you’re not getting your box this week because we had an upstream supply chain issue,” or, “Our labor scheduling and management in our fulfillment centers wasn’t done appropriately and we didn’t have the manpower to physically do all the work we had to do.” There were constantly issues with trucks breaking down.

I would describe a lot of the problems as upstream supply chain planning because we had not yet developed all those systems. And we were managing the complexity without robust systems to manage labor planning in our call centers, upstream supply, purchasing, and more. A lot of it was done manually through intuition and spreadsheets.

I also wish we had invested in more robust HR systems and processes earlier on in the company’s life in order to be more prepared for that huge growth in employee population.

Matt Salzberg, Blue Apron

As Matt explains, many of the problems could have been avoided if they had invested earlier in the right systems. But it is not always easy to anticipate and know what to invest in. The problem is that operations might seem manageable and simple in the early days, but, as you grow, the sheer volumes create the complexity. Josh Hix from Plated explains how increasing volumes created a true challenge.

The hardest thing is the sum of the parts. It’s not one thing. It’s not that hard to package ingredients. It’s not that hard to write a recipe. It’s not that hard to acquire a customer. The challenge is the operational intensity and the cadence. And it’s gotten bigger and more complex over the years.

We write a set of recipes and then do some fairly sophisticated demand forecasting to manage food waste. And then receive, and then portion, and then kit, and then ship, and then deliver, and then do the customer service for said recipes every single week. It’s that cycle and the speed of it and the turnover that creates the difficulty, in my opinion. It’s doing all of that and doing it over and over at Six Sigma levels of quality and accuracy. It’s not one thing. Retail is detail. What is hard about what Walmart does? Buying. Stocking the shelf. Selling. It’s none of those things; it’s doing everything right every single day in a way that is high quality so you can drive low prices.

Josh Hix, Plated

There are a couple of things to keep in mind about executing at scale.

First, take the mindset that things will take much more time than you expect. Build that in. If you have no previous experience, you will be ill-prepared, and it will take even more time.

Second, take the mindset that you will make mistakes.

It is important to avoid getting stuck or demoralized because things don’t work out as well or as fast as you wish. The good news is that by grinding away, you are identifying and creating the business advantages that are crucial to long-term success.

2. Find your competitive advantage in execution

While certain startups may have proprietary technology or scientific IP, there are others that may find ways to develop different kinds of competitive advantages related to execution—mastering operations, reaching scale, sourcing supply, marketing skills, or developing network effects. For most HBS entrepreneurs, their competitive edge became clear as they scaled.

In some cases, the execution skill that ultimately becomes a key competitive advantage is unexpected. Such was the situation with Rent the Runway. Cofounders Jenn Hyman and Jenny Fleiss discovered a few competitive advantages that came later in their business evolution. For example, Jenny explains how logistics—not just relationships with the designers—emerged as the true competitive advantage in which they needed to invest.

Designer relationships definitely continue to be a trend and something that for a long time we had to consciously work on a bunch. But our venture capital partner had a sense of how logistics would actually be the key crux for us, both as the competitive advantage and as the most capital intensive, the hardest part of the business. It’s been where we’ve invested a ton of time and energy. And it’s become the competitive advantage that’s kept others from becoming a player in the space.

Jenny Fleiss, Rent the Runway

In an interview with Reid Hoffman on his Masters of Scale podcast, Jenny’s cofounder, Jenn, comments on another advantage that came as a surprise.

There’s nothing that replaces a sniff test. There’s nothing that replaces a visual quality inspection of being able to zip something up and move the zipper down, seeing if the hook and eye can close, stretching the material out and seeing if there are small holes that you wouldn’t have noticed via the technology. I think that this is a business where specialized labor has to exist in our warehouses.

Jenn Hyman, Rent the Runway

As Rent the Runway scaled, their success became largely dependent on becoming one of the world’s largest dry-cleaning operations, on managing complex logistics, and on developing a data-insights practice that was unseen in the fashion industry.

The key point is to, at all times, take a step back and have a crystal-clear view on what part of execution can or should be your core competitive strengths. You might be surprised by some that emerge unexpectedly during the scale-up.

There are several other major challenges that founders face as they scale and grow, which we explore in our book. But before you can face those hurdles head-on, you must first nail execution so your startup survives to grind another day.

From the book, Smart Startups: What Every Entrepreneur Needs to Know—Advice from 18 Harvard Business School Founders, by Catalina Daniels and James H. Sherman. Copyright © 2023 by Catalina Daniels and James H. Sherman. Reprinted by permission of Harper Business, an imprint of HarperCollins Publishers.

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