What Every Entrepreneur Needs to Know: A Conversation with Entrepreneurship Experts, Catalina Daniels & James Sherman

What Every Entrepreneur Needs to Know: A Conversation with Entrepreneurship Experts, Catalina Daniels & James Sherman

Conventional “wisdom” holds that the most successful entrepreneurs in the world are born with a genius for starting companies, experience one lightning-bolt moment of inspiration after another, follow a tried-and-true process to scale to a billion dollars, and attract deep-pocketed investors at every turn. The real story is a bit more unconventional—and much more interesting.

Would-be-entrepreneurs Catalina Daniels and James Sherman, hungry to study and apply the best practices of startups to their own ventures, studied the nuts-and-bolts of entrepreneurship as classmates at Harvard Business School. Years later, after successfully founding and exiting several companies, and as angel investors in start-ups, they were surprised to realize that their experiences greatly differed from what they had been taught in school. HBS provided a world-class education in the basics. But there was so much they learned the hard way—working in the trenches—that, looking back, they wished they’d known before starting up. Inspired, Daniels and Sherman interviewed eighteen HBS graduates and entrepreneurs about their experiences founding companies such as Blue Apron, Rent the Runway, Gilt, and AdoreMe, probing them about what they discovered along the way and what they wish they had known beforehand. They published their learnings in their new book Smart Startups: What Every Entrepreneur Needs to Know–Advice from 18 Harvard Business School Founders.

In this interview, I speak to Catalina Daniels and James Sherman about their learnings from interviewing and studying some of the most successful startups to emerge from Harvard Business School. We discuss startup ideation, governance, fundraising and how to best exit.  

Q: How do the best startups generate ideas?

[Catalina Daniels]: I’m glad you brought up the topic in the way you did, as it aligns perfectly with our intention behind the book. The genesis of our ideas was, to be honest, quite unexpected. Initially, we didn’t anticipate delving deeply into this subject, doubting its significance. However, as we engaged with various founders and explored the origins of their ideas, we discovered that the classic ‘lightbulb moment’ is largely a myth. Remarkably, about half of these founders engaged in what we’ve termed a ‘deliberate ideation process.’ Intriguingly, they set out to establish a company with no specific idea in mind. This process involved meticulously evaluating countless ideas to find the one that truly resonated with their ambitions and passions. This approach was adopted by roughly half of the entrepreneurs we spoke to, about eight or nine of them.

The other half followed what might be considered a more traditional, ‘organic ideation process.’ This involves multiple moments of inspiration, often stemming from personal experiences. It’s not just about having a single revelatory moment; it’s about accumulating several insights, reflecting on them, and then realizing the potential of connecting these disparate thoughts into a cohesive, compelling concept. Interestingly, this organic process often takes longer than the deliberate approach. To illustrate, Josh Hix of Plated, in the deliberate ideation category, spent six months with his co-founders exploring various ideas full-time. In contrast, the organic ideation process can span years. A case in point is Rubicon MD, which was inspired by one founder’s experiences stretching back to his childhood and spanning several years and countries before culminating in the founding idea.

Q: How should entrepreneurs best communicate their ideas to investors?

[James Sherman]: Absolutely, you’ve hit the nail on the head. Both as an angel investor and an entrepreneur, the focus is fundamentally on the idea and its execution. In our book, we discuss what we call the ‘ideation triangle,’ which is central to evaluating any business idea. This triangle consists of three critical points.

Firstly, there’s the size of the opportunity. It’s important to differentiate between a large market and a large opportunity; they’re not one and the same. The ideal scenario is to tackle a significant problem within a substantial market, thereby creating a sizable opportunity.

Secondly, it’s essential for the entrepreneur to possess skills relevant to this opportunity. Here, we distinguish between general skills and industry-specific expertise. Interestingly, our interviews with founders have revealed that industry expertise can sometimes be a hindrance in innovation. Those deeply entrenched in an industry are often the least likely to disrupt it.

Thirdly, and importantly, there must be a genuine passion for the opportunity. A founder’s passion is non-negotiable. As an investor, I look for more than just the opportunity’s potential; it’s crucial to assess whether the business model is viable, including the unit economics and operational feasibility. It’s surprising how often founders overlook these aspects in the early stages.

Additionally, as an investor, assessing the fit between the founder and the opportunity is paramount. The founder’s relevance and ability to execute are critical because, while the idea itself constitutes about 20% of the success, the remaining 80% hinges on execution. This understanding is vital for an early-stage investor to gauge the potential success of a venture.

Q: How should startups think about governance?

[Catalina Daniels]: … I completely agree that getting governance right is essential, as we’ve seen in our own experiences and aim to convey in our message. There are a few key mistakes founders often make regarding governance. Firstly, they tend to view governance as a burden, something imposed on them rather than an opportunity. Changing this mindset is the first step to leveraging governance effectively and positively.

Secondly, many founders delay implementing governance structures. Typically, they don’t consider it until they start raising funds and larger investors come on board, insisting on creating a board and having representation. Our key message here is that governance is not just important; it’s crucial. A well-chosen board of directors can assist in various areas, including strategy, expanding networks, attracting investors, recruiting key team members, and acquiring customers. Proper governance can be a powerful tool if used wisely.

Moreover, having a solid governance framework is vital when facing challenges. A supportive board stands with you during tough times, offering help and stability rather than panicking or losing faith. On the flip side, if your board is not well-selected or if it’s assembled too late without your influence, they might react negatively in crises, potentially making detrimental decisions for your company.

The takeaway here is clear: think proactively about governance. Don’t let it be an afterthought driven by fundraising. Start early, perhaps with advisors, and gradually build a board with the right people, including independent members. Matt Salzberg from Blue Apron, who had previous VC experience, is a prime example of this approach. He understood the value of being on a board and was adept at strategically selecting independent board members from early on. This proactive and early approach to governance is a key message we emphasize in our book.

Q: What are your views on the best approaches to corporate venturing?

[James Sherman]: I believe that corporations are increasingly eager to foster a culture of entrepreneurship within their corporate environments. A common strategy to achieve this is by spinning off or creating semi-independent entities or divisions. These units are designed to operate with the agility and speed of startups, moving at a pace that’s typically faster than what’s usual for a large corporation. This seems to be what you’re alluding to, and indeed, companies are showing more interest in entrepreneurial approaches than ever before. This shift is largely driven by the rapid technological advancements that are not only spurring the growth of startups but also compelling established companies to adopt new mindsets. This change extends beyond just governance; it deeply influences the corporate culture as well.

From our interviews, it became clear that culture is a critical element for every entrepreneur. It can be a significant asset or a potential detriment if not nurtured properly. This is equally true for large corporations. They need to be acutely aware of and responsive to their cultural dynamics. For instance, Rent the Runway supported its innovative culture, even as it scaled rapidly, by forming small, agile ‘tiger teams’ for exploring new MVPs and testing new ideas. Jenny Fleiss described this approach, emphasizing the importance of maintaining an entrepreneurial spirit amidst growth.

This situation highlights a key challenge in scaling: how to preserve that entrepreneurial culture while continuing to succeed. It’s a balance that many companies strive to achieve, recognizing that the culture of entrepreneurship can be a driving force for innovation and growth.

Q: When should startups pivot?

[Catalina Daniels]: Pivoting in business, whether in the early stages or later, presents its own set of challenges. In the early stages, pivoting can be less complex, but it’s critical not to fully commit to your product until you’ve tested it in the market and received overwhelmingly positive feedback. Simply ‘good’ isn’t good enough; the response must be exceptionally positive. Additionally, it’s important to take what we call ‘shallow dives’ into understanding your business model. This means having a clear idea of who your customers are, confirming their willingness to pay for your product, and understanding the logistics involved. It’s also crucial to ensure that your business model is viable and that there’s a path to profitability, even if it’s not immediate. Gone are the days when companies could just increase their user numbers without a clear plan for profitability. This early validation is key to prevent the need for pivoting later on, which can be costly in terms of time, money, and energy.

In the later stages of a startup, pivoting might become necessary for a couple of main reasons. One is if your growth has plateaued or isn’t happening at all, prompting a re-evaluation of your business model. Another reason is the lack of profitability; if you’re consistently losing money and can’t see a way to turn that around, it might be time to pivot. Lastly, external factors beyond your control that drastically change your business environment can also necessitate a pivot.

Interestingly, I think the mental challenge of pivoting in the early stages can sometimes be more daunting for a founder than in the later stages. This is because, as a founder, you are deeply invested and convinced of your idea’s potential in the early stages, making it harder to accept the need for a change. I’m curious to hear Jim’s thoughts on this, but that’s my perspective on the different stages of pivoting in a startup’s journey.

[James Sherman]: Indeed, that’s a spot-on assessment. Bespoke Post serves as a prime example, which we discovered during our interview with them. They experienced an early, albeit difficult, pivot. The founders had a previous venture named Nabfly, focusing on a QR code reader that notified shoppers of in-store specials or sales. However, it struggled to gain traction and was not performing well. This is a scenario where having a co-founder can be particularly beneficial, as they highlighted. Sharing the burden can make it somewhat easier to face tough decisions because admitting to oneself that something isn’t working can be quite challenging.

The Bespoke Post founders reached a point where they recognized their business wasn’t succeeding—the model wasn’t robust, and they lacked the core skills needed for its success. After some introspection and acknowledging their strengths, which they identified as having an eye for what men would want, expertise in sourcing and merchandising, and skills in direct marketing, they decided to pivot. This led to the creation of a men’s e-commerce platform, which has flourished, now boasting over 300,000 subscribers to their subscription service and a thriving e-commerce site.

This illustrates how tough pivots can be, and the value a co-founder can add during such transitions. Avoiding the decision is probably the worst approach. It’s crucial to take a moment, reflect deeply, and recognize that although it’s a hard choice, it’s sometimes necessary to pivot—and as Catalina mentioned, it may be even more challenging in the early stages than during later growth.

Q: How can start-ups build resilience?

[James Sherman]: Regarding their resilience, I find it quite compelling. When it comes to fundraising, we emphasize that securing funds isn’t synonymous with success. It’s a stressful period, a genuine test. We typically counsel those in the initial phase of their business to delay fundraising as much as feasible, to bootstrap, and to approach product-market fit carefully. Focus on refining your primary offering, the essential features that will face your users or customers. Aim to prove there’s a market for your product or service while keeping your operations lean. Every step should be geared towards reducing the funds you’ll need.

A case in point is Rent the Runway. They began with simple pop-up racks on college campuses, without a physical store. It was an unadorned but effective way to show that there was a market for renting dresses instead of buying them. Numerous HBS founders have employed inventive strategies to bootstrap their ventures effectively.

The act of starting to raise capital sets a timer. Investors exert pressure, expecting smart investments, even when the product-market fit isn’t fully proven, and marketing strategies may still be in the experimental phase. Timing is everything. During the growth phase, our advice is to keep an eye on efficiency. Secure the necessary capital but avoid excessive valuations and overfunding. Talking about resilience and tenacity, they’re truly tested when market conditions worsen. If the need to fundraise persists outside a booming sector, the pressure can be overwhelming, and businesses can fail.

We’ve observed this with several companies. To build resilience into your business model, prudence is key. Keep your options open by not locking into inflated valuations or excessive capital. Strive for a sustainable model, one that can break even when necessary. In fluctuating markets, the ability to pivot to a self-sustaining mode is crucial for survival.

Q: What are the key bits of education that entrepreneurs need in their journey?

[Catalina Daniels]: Entrepreneurs do indeed require a diverse set of skills to achieve success. In the world of angel investing and accelerators, it’s common to encounter solo founders or small teams that possess some but not all the necessary skills. It’s quite apparent, though perhaps not always acknowledged, that the skills for coding and developing a fantastic platform are distinct from those needed for fundraising or digital marketing. As angel investors, we often encounter individuals with specialized skills, but they may lack a broader business acumen, which is where advisors can be invaluable. These are typically seasoned entrepreneurs who can provide guidance and highlight considerations that may not be immediately obvious.

Regarding fundraising, a significant error is the assumption that it’s a simple process: create an investor deck, decide one day to start fundraising, and expect to conclude in three months. That approach is unrealistic. As Jim mentioned, fundraising is strategic—it involves preparation, identifying the right investors, and engaging with them well before the funds are urgently needed. The person who wakes up and decides to start fundraising, thinking it will be wrapped up in three months, is often the same person who only has a four- or five-month financial runway. That’s not a position of strength.

Resilience in a team is reflected in their strategic approach to fundraising. It’s about building relationships early, long before the capital is needed. This way, when the time comes to secure funds, potential investors are already familiar with you, trust has been established, and they’ve had a chance to observe your progress. This approach tends to yield better, quicker, and easier results.

So, in response to your question, it’s about blending a rich skill set with strategic, long-term thinking, especially when it comes to fundraising.

Q: What are some of your most important insights around the exit?

[James Sherman]: Indeed, the topic of exits was quite revealing based on the insights from entrepreneurs. The principle of ‘planning your exit from day one’ is something we often emphasize. It’s about setting your exit objectives early. This might come as a surprise to founders who are just getting their bearings, but alignment with your investors on your endgame is critical. They’re keen to understand your aim. Take Matt Salzberg from Blue Apron, for instance, whose singular objective was an IPO. Conversely, Josh Hix at Plated was aiming for an IPO but remained open to acquisition if it meant favourable terms for all involved. These differing goals necessitate distinct growth and financing strategies, so it’s pivotal to identify your desired exit route early in the journey.

Another key insight is the importance of taking proactive steps towards your exit. This means cultivating relationships across the board—with competitors, partners, customers, and industry peers—well before you might need them for an exit strategy. It’s crucial not to become so engrossed in the day-to-day operations that you neglect networking. Regular meetings with bankers, attending industry events every quarter, all these activities raise your awareness and prepare you for future opportunities.

Lastly, the element of unpredictability plays a significant role in exit timing. For many of the companies we discussed, the exit didn’t occur at a time of their choosing but was precipitated by external factors such as industry shifts, a competitor’s missteps, or a significant acquisition. These uncontrollable items underscore the necessity of being perpetually prepared for an exit, even if it happens sooner than you’d like. The goal is to be as ready as possible for when that moment arrives, regardless of whether it aligns with your planned timeline.

Q: And Catalina, what about some exit advice from you as well?

[Catalina Daniels]: … building on Jim’s comprehensive points, it’s imperative to consider your exit strategy early for reasons beyond those he mentioned. If you have co-founders, it’s critical to ensure alignment on the exit strategy from the get-go. Given the unpredictable nature of business, opportunities for an exit can arise unexpectedly, or unforeseen events can disrupt your planned exit. These scenarios often come without warning and present a narrow window for decision-making. Without prior in-depth discussions with your co-founders, you could find yourselves in a challenging situation when these opportunities or issues arise.

Furthermore, from day one, your investors are going to be interested in your exit strategy. In Europe, where I’m based, it’s not always encouraged to discuss exits openly when pitching to investors. However, don’t be misled—investors’ primary concern is your exit because that’s how they realize their return. So, it’s crucial to address this topic. And most importantly, ensure that you and your co-founders share a common understanding not just of your intended exit path, as Jim highlighted, but also how to handle situations that arise beyond your control.

Thought Economics

About the Author

Vikas Shah MBE DL is an entrepreneur, investor & philanthropist. He is CEO of Swiscot Group alongside being a venture-investor in a number of businesses internationally. He is a Non-Executive Board Member of the UK Government’s Department for Business, Energy & Industrial Strategy and a Non-Executive Director of the Solicitors Regulation Authority. Vikas was awarded an MBE for Services to Business and the Economy in Her Majesty the Queen’s 2018 New Year’s Honours List and in 2021 became a Deputy Lieutenant of the Greater Manchester Lieutenancy. He is an Honorary Professor of Business at The Alliance Business School, University of Manchester and Visiting Professors at the MIT Sloan Lisbon MBA.