Monday, February 27, 2012

Experimenting on Someone Else's Dime

Lets face it, losing your angel investor or venture capitalist's money is painful. It's even more painful to lose money from your friends and family. Running your startup experiment using their dollars is incredibly hazardous. So how to fulfill your startup dreams? Run your experiments on someone else's money.

When I was first starting out as an entrepreneur, we were trying to do an agricultural biotech business and had great science and a cool technology, but knew little to nothing about the industry (we had a great team of advisors who saved us from many mistakes). So that meant that we spent an incredible amount of time and energy figuring out all kinds of aspects of our business model that other people pointed out to us over and over again that we really should have already known. We were re-inventing the wheel at almost every turn.

I see the same thing often happening with my students and their startups in my class now. They have a head start when they work on a problem that they have or a technology from their lab. But when they try to search outside of that realm, it's much more difficult. I pair them up with well-matched industry mentors and this helps to some extent. Much like having a cofounder team with some younger and naive entrepreneurs who are willing to experiment and try new things as well as older, experienced entrepreneurs who know everything that's been tried in the industry over the past 30 years.

This video advocates accelerating your learning through strategically gaining work experience. It also relates to at least three of the papers I've written with coauthors. The first talks about the entrepreneurs who have come out of MIT over the past several decades. We again find that while the average age of the entrepreneur has been shrinking, most get some industry experience first.

The second looks at serial entrepreneurs. Here we find that when the industry or technology are completely new, the first time entrepreneur has a much better chance at success. However, when the experienced entrepreneur is using a similar technology and is in the same industry/market as the previous startup, it's hard to beat the benefits of that prior experience and the experiments that he or she already learned from. The third piece of research this is based on is a study of the roles on founding teams. We found that when a team is using a high innovation strategy and will partner with large firms for marketing and distribution, then having an engineering focused team is best. However, when competing in the product market with incumbents or using an imitation strategy, the team needs cofounders who have a variety of skills and roles to cover marketing, sales, and so on. So the area where you need to experiment depends on your business model.