HBR Entrepreneurship: Beating the odds when you launch a new venture
2015-01-07 14:55:02
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[td=2,1]Beating the odds when you launch a new venture by Clark G Gilbert & Matthew Eyring[ td]
[td=2,1]Topic: Entrepreneurs
[td=2,1]Beating the odds when you launch a new venture by Clark G Gilbert & Matthew Eyring[/td]
[td=2,1]Topic: Entrepreneurship - Funding[/td]
| By: Gilbert, Clark G |
| Posted on: 17 June 2010 |
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[td=2,1]For nearly 20 years the case study used to introduce Harvard Business School’s Entrepreneurial Management course has been Howard Stevenson’s “R&R.” It looks at Bob Reiss, an entrepreneur who launches a venture in the board-game industry. Students are encouraged to explore all the production, development, distribution, and marketing costs associated with the new venture.
A cursory reading of the case suggests that it’s a lesson in the rewards that come to an entrepreneur who is willing to take on an enormous amount of risk. Reiss capitalizes on what he correctly foresees is an ephemeral opportunity to ride the coattails of the Trivial Pursuit craze before me-too products flood the market. But a more careful analysis reveals something else entirely. At every turn, Reiss seeks to reduce his risks before making any significant financial investments or operational commitments. For example, he presells a sizable number of units to ensure cash flow. As students come to understand, Reiss actually limits his at-risk capital to the cost of the game design and the prototype. Rather than the high-risk, high-reward seeker he initially seems, Reiss proves to be a manager who constantly identifies risks and finds creative ways to remove them.
Over the past decade we have participated in the development of a dozen or so corporate ventures and served on new-venture boards at a host of companies, including Johnson & Johnson, the Scripps Media Center, and Landmark Media Enterprises. Although many of the ideas in this article come from our direct work with new ventures, they also reflect more than 10 years of collaborative thinking by the Entrepreneurial Management teaching group at HBS.
What has become clear to us is that the most effective corporate innovators are the ones who follow the same discipline Bob Reiss did. Success comes to those who quickly identify and systematically eliminate risks in the right order, using the right level of resources and the right methods.
Recognize That Not All Risks Are Created Equal
New ventures fairly bristle with risks. If managers attempted to eliminate all of them, the products or services would never get to market. The key question is “What’s the most important uncertainty?” and the answer should be targeted early. In considering how to answer that question, we have found it useful to think in three broad, sometimes overlapping categories: deal-killer risks, path-dependent risks, and easy-win, high-ROI risks.
Deal-killer risks.As the name implies, these are uncertainties that, if left unresolved, could undermine the entire venture. Such risks may be less obvious in the moment than they appear in hindsight, after catastrophe has struck. That’s because they often take the form of unwarranted or unexamined assumptions about the premises underpinning the venture. For example, a colleague of ours was an early employee at a start-up satellite radio company aimed at consumers in the developing world. The premise of the venture was that satellite broadcasting technology would be a relatively cost-effective way to bring mass media to markets that lacked infrastructure. Market research suggested that a huge latent need would turn into a booming business. The company deftly negotiated broadcasting licenses in several developing countries and solved a number of complex technological challenges. Nevertheless, the business imploded. What was the problem?
As it turned out, the demand identified by market research depended on customers’ being able to access the broadcasts through low-cost radio receivers—which turned out to be impossible. The radio receiver required complex features such as multimode playback, a keypad for ordering subscription services, and—worst of all—professional installation, which made the device unaffordable in most of the developing world. Having failed to identify this fatal vulnerability, the company invested hundreds of millions of dollars to reach consumers who couldn’t pay for its service. The business limped along before ultimately going bankrupt. The company should not have left this key deal-killer assumption so utterly untested until late in the life of the venture. Quick-hit market research and rapid prototyping could have provided early warning signals.
Path-dependent risks.Rare is the new venture that never has to confront strategic forks in the road to success. Path-dependent risks arise when pursuing the wrong path would involve wasting large sums of money or time or both. For example, consider the question confronting E Ink, a supplier of electronic paper display technologies in Cambridge, Massachusetts. In the company’s early days there was great debate over whether its electronic “ink” would best be used for large-area display signage, flat-panel screens for e-books, or the more ambitious radio-paper products, which could be programmed and updated remotely. Each option had different technical, marketing, and distribution requirements; if the company chose wrong, it risked misallocating millions of dollars.
Gilbert, C., & Eyring, M. (2010). Beating the Odds When You Launch a New Venture. Harvard Business Review, 88(5), 92-98.
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