Why do some start-ups make it, while most don’t? The reasons are as numerous as the 90% of start-ups that end up folding, says Dr. Leon Eisen, an entrepreneur in the medical device field. But all those reasons have one common thread – “incompetence, and an unfounded and dangerous faith in MBAs.”
Investors who are looking for places to park their money during these days of next-to-nothing bank interest rates would do well to heed the advice of Internet guru Guy Kawasaki, says Eisen. In a famous quip, Kawasaki described how he made his investment decisions: “For each PhD I find at a startup, I invest $500,000 – and for each MBA, I deduct $500,000.”
Eisen, who has a science background combined with hands-on entrepreneurial experience (he trained as a physicist specializing in atom laser cooling in his native Russia, and worked with successful Israeli startups in the areas of optics and medical devices in Israel), doesn’t necessarily dislike individuals who have advanced degrees from business schools. “They’re just not right for startups, which need people with more hands-on experience and real-world business sense.”
It’s not what you know; it’s how you bring your idea to market that really counts. Israel is perhaps one of the most successful places in the world when it becomes to bringing early-stage startups to a mature level, when they can either exit (usually being sold into the waiting arms of an American or European tech conglomerate), or go to market on their own.
But with all of Israel’s successes, there are plenty of failures. While many observers focus on the specific troubles a company has experienced as the reason for its failure, Eisen believes he has stumbled across a “general theory of startup failure” – with the main reason being a lack of understanding of the market they are competing in.
Knowing what you’re getting into, you would think, be a priority for anyone – especially people raising, investing, or spending hundreds of thousands, or even millions, on a new business. And in many cases, it is. But not in all, or even most. “Take a medical device, for example,” says Eisen. “The hospital’s interest is not always in more efficient patient care; its interest is in maximizing profits. It isn’t enough to try and sell a device for reducing the number of days a patient will be in the hospital, because that isn’t necessarily the bottom line the hospital is looking at.”
On paper, a device that could lower the number of patient days in the hospital – to continue with our example – would be more than enough reason to go ahead with development of a product. Certainly that’s the kind of thinking you would expect from a typical startup CEO – usually an MBA hired by the “tech side” of the operation (i.e., the entrepreneur who came up with the idea). And that is precisely the kind of thinking that kills off startups, as soon as their first-round seed money dries up.
While it’s MBA thinking that gets startups in trouble, Eisen stresses that they get into a position where they do damage because they were hired. “Science and tech people are often intimidated by business, because they don’t understand it, and they hire someone whom they think does. But MBAs don’t understand the startup stage, which requires a lot of street smarts to navigate.” In other words, the kind of thing they don’t teach in Harvard Business School, to echo the title of a recent book on the subject.
One manifestation of that intimidation is what Eisen calls “professor syndrome,” which many entrepreneurs fall prey to when they hire someone for due diligence – the process that vets the company’s technology and chanced of success. “The venture capital companies – who also make huge investment mistakes in this process – pressure them to get a ‘big name’ to conduct the due diligence, often insisting on a well-known professor at a university who researches and teaches in the general area of the company’s product or service. And while they may understand the scientific and even technological process employed, they do not understand the business applications of technology, and are not capable of assessing a product’s chance of success.”
The bottom line: Many startups find themselves developing products or services there is no real market for. Some realize the error of their ways before it’s too late. But often, by that time, word has gotten out that they’ve “failed,” and further funding dries up – even from venture capitalists, who are often quite generous with the funds they lavish on startups. “If entrepreneurs are smart – if they don’t burn cash, but especially if they follow the market and make sure their plans are realistic – they have a good chance of success,” says Eisen. Today, many investors, seeking better returns on their money, are tempted to look at startups as investment options. “It’s a great idea – if you choose the right startup,” Eisen says. And if not – well, it’s only money, and that is an expression you’ll find yourself repeating quite a bit!