We first met at Harvard Business School as young students in 1989. We both went on to have successful careers as consultants and entrepreneurs, and had a passion for working with and investing in younger entrepreneurs. We reconnected in 2016 and began angel investing in startups in New York City.
When we decided to invest in a startup, it was because we saw a unique combination of a strong idea with a solid team. But, even then, we knew that many things could go wrong and that our investments were risky. We also knew how the entrepreneur’s road ahead would be full of ups and downs, and that success would depend on both sheer luck and how their team would adapt and react to new circumstances.
So when Jim floated the idea of a book targeting entrepreneurs to help more of them succeed, we gave it serious thought. We could leverage our own experiences and knowledge as entrepreneurs with rich corporate careers. But, just as important, we had access to a unique network: Harvard Business School alumni. We could complement our own experiences with the experience of other HBS entrepreneurs. The thinking was simple: if HBS entrepreneurs would open up to us about what they learned “the hard way” or what they wished they knew before starting, their wisdom would be interesting and relevant to younger and less experienced entrepreneurs.
We summarize these pearls of wisdom in our new book, Smart Startups: What Every Entrepreneur Needs to Know — Advice from 18 Harvard Business School Founders. The book is full of insights and advice for every stage of your entrepreneurial journey.
Here are three key pieces of wisdom to get you started.
1. There is no random “lightbulb” or “aha” moment. Landing a good idea often requires a deliberate, lengthy ideation process.
For the HBS founders we interviewed, there was no “lightbulb moment” for their startup idea. On the contrary, we were surprised to hear that all embarked on a true ideation process. They thoughtfully considered ideas over time, took in pieces of information as they gathered them, vetted the ideas, and ultimately shaped them until deciding whether the idea was something worth pursuing.
“I don’t particularly believe in the lightning bolt moment. Those moments are created by deep thought and reflection and looking at the problems, examining them, looking for solutions, looking at emerging technologies. If anybody told you that they had a linear innovation process, you should likely throw them out of the room.” — Josh Hix, Plated
You don’t wake up one day with an idea. Even when you come to an idea organically, it takes time to flourish and connect the dots. It is a process. And it’s hard if you want to get it right.
2. Validate demand as cheaply as you can.
The moment your idea becomes a startup, your first objective is to prove that the product or service can generate demand from customers. You should focus on developing the product or service that allows you to prove the fit. And nothing more.
David and Joanna of Yumble Kids tested their idea of prepared meals for kids with nothing more than an idea, their home kitchen, and their own labor. They first posted on a Facebook mommy group to see how people would react to their product concept. They received instant positive reactions, so Joanna picked ten interested “customers” and charged them for meals.
David and Joanna had yet to invest in anything like a warehouse, kitchen, kitchen staff, logistics, etc. Joanna cooked the meals at home and went on to hand-deliver them herself. David recalls the first deliveries:
“Joanna’s first delivery, she got a one-dollar tip, which was really funny. Customers didn’t realize they were talking to the founder.” — Dave Parker, Yumble Kids
They were able to prove that there was demand by focusing on the front end and without investing much of anything. In the beginning, they merely needed to know whether or not people valued the meals enough to order them.
3. Fundraising doesn’t equal success. Wait to raise money, then wait some more. Be as capital efficient as you can be.
There are many considerations to raising outside funds. We cover them all in our book, but will focus on two here. First, you should wait as long as you can before trying to raise funds. It’s vital to reflect upon, what does the business truly need and how far can you go without external financing? It is in your best interest to bootstrap the venture and hold off raising funds, if possible, until you have proven out more of the business model and customer demand.
Once it’s time to raise funds, strive to raise the right amount and leave room for error. It’s not always easy to know how much to raise. Raising too much will result in more dilution but raising too little might lead to continuous raising. By the time of your growth-stage financing, your milestones will help you define when and how much to raise. If you are doing well, it’s possible that investors will be chasing you. In all cases, be careful not to raise too much. You should be capital efficient.
“We raised way too early. We raised because we were strong personalities with a big idea and a big problem we were trying to solve. We were nowhere near product/market fit when we raised money. Lessons learned. The issue is, the clock starts ticking. You start spending money. You start hiring people. We should have probably found a scrappier way to iterate and launch a version 1.0 so we could have gotten to these insights sooner without spending capital on the experimentation.” — Anna Auerbach, Werk
Contributed to EO by Catalina Daniels and James Sherman, Harvard Business School graduates, founders, angel investors, and co-authors of Smart Startups: What Every Entrepreneur Needs to Know–Advice from 18 Harvard Business School Founders.