3 Takeaways - Harvard Business School’s Bill Sahlman: What I’ve Learned from Reading 10,000 Business Plans and Investing in Hundreds of Startups (#33)

Episode Date: March 23, 2021

Of the 10,000 business plans Bill Sahlman has read, only 3 companies met their plan. Find out what it takes to succeed.  Entrepreneurs have to be really good at running tests and execution trumps idea. Jeff Bezos is the most effective experimentalist in history. Bill Gates did not invent word processing, the spreadsheet, or presentation graphics; rather he took ideas and out executed everyone else.

Welcome to the Three Takeaways podcast, which features short, memorable conversations with the world's best thinkers, business leaders, writers, politicians, scientists, and other newsmakers. Each episode ends with the three key takeaways that person has learned over their lives and their careers. And now your host and board member of schools at Harvard, Princeton, and Columbia, Lynn Thoman. Hi, everyone. It's Lynn Thoman. Welcome to another episode. Today, I'm excited to be here with Harvard Business School's Bill Solomon. I can't wait to find out what he's learned about entrepreneurship from about 40 years teaching entrepreneurship, from reading over 10,000 business plans, and from investing in hundreds of startups. He will also provide insights from some of the world's most successful entrepreneurs like Jeff Bezos

and Bill Gates. Bill, welcome and thanks so much for being here today. My pleasure, Lynn. Bill, I love your Massachusetts Turnpike example where someone crosses the Massachusetts Turnpike, a multi-lane highway blindfolded, and when he gets to the other side says, what a genius he was.

Most people think of success at entrepreneurship as similar, essentially a unique one-off phenomenon, but you figured out some underlying factors that explain, and in many cases predict success and failure. Before we get to those, what is entrepreneurship? It's often useful to start with the way people described it in the past. So risk-taking was an example of something that was always associated with entrepreneurship. And I often ask, who do you know who gets up in the morning and looks for risk? It's sort of a counterintuitive.

They look for reward and they try to manage the risk to which they're inevitably exposed. Or people said you had to have a personality trait. So there was research that said you had to have a domineering mother to be an entrepreneur. Or you had to be innovative. And I know lots of examples. Ray Crockett McDonald's comes to mind, where he was a milkshake mixer salesperson who discovered the McDonald brothers in California and built it into a global empire, but it wasn't his idea to have golden arches or French fries or fast food. Howard Stevenson, my colleague, came up with the idea that entrepreneurship was about the pursuit of opportunity beyond the resources currently controlled. An opportunity is

something where you can create and capture customer value. And what entrepreneurship is really about is testing hypotheses, forming a hypothesis, going out and seeing whether or not you can attract customers, what they're willing to pay, how much does it cost to do all of that and to deliver a service or a product.

And then you keep iterating until you discover where the market opportunity is and how you can reliably have a business model that generates value. Your office at Harvard Business School is overflowing with business plans. How much do the plans resemble the reality? So I often say I've read 10,000 plans and I've only seen three companies meet their plan. So I'm beginning to think that's a pattern. And all of the companies iterate from some basic idea. If you look at a company like Athena Health, which is one of the leading companies in electronic health records running doctors' offices, that company began as a birthing center in San Diego. Todd Park and Jonathan Bush couldn't figure out how to get paid or how to run the office.

Todd's brother created software that then became a company that is a massive scale. You often get in a business, you have an idea, it turns out to be wrong. You morph the idea. Often you morph the people who are in the venture and you raise money to be in the exploration business and providing proof about the ability to create and capture value sustainably. How about the business plans that seem to have the best ideas, at least initially in the plan? Are those primarily successful or not? The fundamental observation over all these years is that execution trumps idea. And execution is not a single person's duty. It's rather what teams do. And so this evolutionary learning process of discovering what customers want and how to deliver it is a process that is not something people predict. They might describe an attractive area to explore,

but their exact plans for exploring it turn out to be inevitably wrong. I still think describing what the opportunity is and how you're going to structure tests to discover what really is true, that's a great idea. And people do that in five slide pitch decks. They do it in business plans. But it's the thinking part and imagining there's enough upside to justify bearing the risk. Can you give some examples of what causes you to give an immediate thumbs up or thumbs down to a business proposal for a startup? So I always look at the people first and foremost. Are they going to get in the journey? Are they going to hire people who are better skilled at some aspect of the journey than they are? Are they going to communicate honestly, reflecting the good and bad

news that they discover along the way? And will they persist even when it's hard? Essentially, every startup I've ever seen had the potential to succeed. Somebody did what they described. Sometimes they were too early. Sometimes they were too late. Sometimes they hired the wrong VP of sales or the wrong VP of engineering. And many of the companies were able to survive those mistakes. And very few of them avoid all the mistakes that you can see. So I make a people bet in areas where I think there's enough value to create and capture. And then sit back and try to be helpful as they go on the journey. You've also invested in hundreds of startups.

What have you learned from these? and can you give some examples? I've learned that it's a business in which you can't get the good ones without also investing in the bad ones. So without risk, there is no return. And effectively these days, 50 to 60% of the ventures, even with very high quality people and good investors, they fail. The notion of failure is not that the people are permanently cast aside and can never get a job. Rather, they're now called experienced. And one characteristic of the 100 companies I've invested in that failed is that every single person from those companies has gone on to have an excellent career and rewarding career. So that's the great aspect of American entrepreneurship and now global entrepreneurship. That failure is not a terminal state unless you caused it or you did something unethical. My view is some of them were lucky. Some of them

were really skilled. All of them had a team that was extraordinary. I often look at Jeff Bezos. Jeff spent a fair amount of time trying to recruit a particular programmer, and he thought that person could build a platform, and that would enable Jeff not only to do books, but the other 19 things on the initial list of 20 that Jeff had identified that might be saleable on the web. He over-invested in getting a person who was capable of doing all that. And that created the foundation that then enabled Jeff to attract money, run the experiment with books, and ultimately include CDs and other items, ultimately apparel, and in the end, everything. Most people would say that founders by definition are great entrepreneurs.

Are they or is entrepreneurship something different from actually just founding a company? If entrepreneurship is only about founding a company, that turns out to be the easiest thing you could possibly imagine. Building a great company, remaining a critical part of the company, that's really hard. I have the original business plan for Apple. Apple, we all associate with Steve Jobs. Okay, without Steve Wozniak, Apple does not exist. Steve Wozniak single-handedly in nine days developed a brand new floppy disk drive for the Apple. He had done all of the original engineering work. And then they tried to raise

money and couldn't until they got a guy named Mark Markala to give him some advice. And eventually Mike invested and became the CEO. And without Mike Markkula, Apple does not exist. And you keep building that up. So who's the founder? Who's on the team? Someone often gets credit for being that person. But the reality is there are a set of people without whom it wouldn't have been possible. So I think of founders as being important, but less important than people think. It's the team they build, not just the individual person. What business are entrepreneurs actually in? You talk about execution.

Entrepreneurs are in the production of information business and investors are in the acquisition of information business. Investors learned a long time ago that if you gave any entrepreneurs or a team unlimited money, that they would spend it all and then ask for more. And so they staged the commitment of capital. They say, okay, I'm going to give you a little time, a little money, a little advice, some help. And I want you to show that there's a real opportunity sitting here somewhere in the realm of possibility. information that says the customer is willing to pay. We can deliver the software platform or the product. We can hire great people. Then you give them a little more money to go out and produce some more information on the basis of which they change their strategy or whatever. And you give them the value increases as you go along. What are the most important things that entrepreneurs need to get

right? Everything turns out to be about team. You've had on your show a number of people like Eric Schmidt or a person like Sheryl Sandberg, or I could name thousands of these examples. We're hiring that person and combining them with whatever magical capabilities Sergey and Larry had at Google or whatever, it's the ability to work with those folks, to give people authority and responsibility, not to micromanage. And so when you look at the ones that succeed, it's a far richer thing they have done than just the act of founding or being the superstar within the galaxy. What can entrepreneurs do to improve the odds of success and reduce the risk of failure?

The first and foremost thing is to have a hypothesis that produces information that is actionable. In other words, something where it increases, decreases the perceived value of the enterprise. So they have to be really good at running tests. Indeed, one problem in today's economy is that SoftBank and others have given them so much money, they lose the discipline. That is, you can hide flaws forever with unlimited money. And often people who are short of money and need to do something in order to get to the next stage perform better. My view is you want to do everything right. You want to hire the right people.

You want to raise money from the right investors. You want to have the right partnerships. You want to do everything in your power to increase the likelihood of success, knowing full well that it may not work. Are all startups unique, making it impossible to forecast outcomes, or is there a regular distribution of outcomes of startups? In every industry we could think of, like the automobile industry or radio or television or ride sharing, there are typically a couple of hundred startups, and that whittles down to two or three dominant ones, and then a number of other people who occupy niches. In my view, there are distinguishing characteristics of the teams and investors that make them more likely to succeed. So I don't think it's a random distribution at all,

but it's one of these things where you lose money on 60% of the ventures and you make money on 10% of the ventures. And the 10% are not completely predictable, but you do everything in your power to make it such that everyone ends up in the right-hand tail of the distribution. Who do you think are the most successful entrepreneurs, and what were they successful at? It's very hard if you look historically. I think Jeff Bezos has been the most effective experimentalist in history. And what I mean by that is he has a simple operating system for his company. Does it decrease price, increase choice, or decrease the time it takes for the customer to get the product?

That's the operating system. And then within his organization, people are running thousands of experiments to see whether or not they could offer some new service. This week, I have a team coming through Amazon to build and install a basketball court, a little hoop for my granddaughters. And that's an example of something where somebody inside Amazon thought maybe we could get local vendors and they could go and install things or do something. Again, I think that's the great power of Jeff Bezos. He attracted great people.

He kept great people like Andy Jassy running AWS. And he allowed the experiments that were successful to bloom. Katrina Lake at Stitch Fix is an extraordinary person to create an organization that uses artificial intelligence and a human touch to think of how they can be helpful to their customers in getting clothes that work for them and which have some change so they feel better about themselves. And so Katrina would be an

example of someone who's done an extraordinary job. And what did Bill Gates do extraordinarily well? First of all, I've come to the view that Bill and Melinda Gates are two of the most important people in the world. And the reason is they're running at scale experiments to make the world a better place in terms of health or education or the environment. And what they do is extraordinarily important. First of all, Bill personally is among the smartest people I've ever met. And I've met a couple over the years. I would say the great thing Bill did was execute. So Bill did not invent word processing. He did not invent the spreadsheet. He did not invent presentation graphics. Rather, he took ideas and over time out-executed people on both the programming side eventually, but mainly on the how do you market and position. We all know the

story that he didn't invent the operating system for the IBM PC. He went out and licensed it. So Bill, incredible team, incredible programming, but great commercial skills. How has entrepreneurship changed over the last 10 or 20 years? The biggest change is global. We democratized access to entrepreneurship. So now people can come from anywhere. Ideas can come from anywhere. Money can come from anywhere and you can distribute or sell anywhere in the world. You went from having 100 million customers to having 7.5 billion customers. And you went from a situation where nobody in Buenos Aires could get access to venture capital to now there are multiple venture capital firms competing

to back these extraordinary entrepreneurs. So that's one aspect. Second aspect is the cost of failure of a venture has gone to zero effectively. People write off the money. As long as you didn't cause the failure, they want to hire you. They ask that you not make the same mistakes that you made in the previous firm.

But that means communities like Silicon Valley or Boston or Austin or now Berlin or Buenos Aires become places where the human capital risk of failure is very low. That's a massive shift. So people don't feel like they have to take the safe job out of school. They can do something about which they're passionate. And if it doesn't work out, it's just a-okay. How do entrepreneurs find opportunities? One class would be like Athena Health, where you get in the business, you thought the opportunity was birthing centers with a heart, and it turns out to be creating the operating system for a healthcare business, for a doctor's office. I think some are very purposeful. Some go out and say, where's a product cost too much, take too long, too complicated. Where do people not get served? They're non-consumers in Clayton Christensen's terms. I wrote a case on a guy named John Osher, who was in the toy business, he developed a battery operated lollipop. Now think of this,

that a product for people so lazy, they need a motor to turn the lollipop in their mouth. It was his fourth or fifth company. He sold it successfully, got bored. He and the team went to Walmart, looked at the shelves, came up with a list of 100 products that they thought they could deliver excellent performance at a much lower price point. And they knew how to manufacture and distribute, given their former relationships with Chinese manufacturers. He found 100 opportunities. The thing he ended up doing was the battery-operated toothbrush we now know as the Crest Spin Brush. At the peak, after P&G bought the company, they were producing over 400,000 toothbrush in a store. So you have to be willing to say, well, could I do that differently or better? Why does it cost so much?

It's a process that is critical. It's the hardest thing for large companies to do in the world. But entrepreneurs don't start with the baggage. We have many big global problems in the world. Education, healthcare, global opportunity. Do you think that there's a case for hope that some of these big problems will be solved by entrepreneurs? I have observed a revolution in education. So today, anyone, anywhere has access to a free world-class education.

So Sal Khan at Khan Academy has created a platform that is extraordinary because it focuses on mastery, not time and seat. Sal Khan was one of my guests. Khan Academy is extraordinary. But if you look at Udacity or you look at Coursera or you look at edX, you can have access to extraordinary content, extraordinary tools to better master the materials. Think about that. We have a disaster in K through 12 and higher education in the US. And that's true almost everywhere in the world, except Finland, which may or may not be relevant as an example. to pour money into doing it the same old way. I think we need to blow it up. And entrepreneurs are in the control alt delete.

How should I get better outcomes at lower cost? There are hundreds of new healthcare ventures that are far more effective at getting and keeping people healthy at much lower cost. And they don't just cherry pick the people who are healthy already. They work with the most vulnerable populations, but they form a trusting relationship. So Oak Street Health would be an example. There are ways to lower the cost of prescription drugs, GoodRx. Amazon's going to do lots of useful things. So I'm optimistic every single day across every sector in which we have deep concerns in the world. Is there anything we can help these entrepreneurs to help them solve big problems in the world?

I believe that there are forces that try to crush innovation. And I'll talk about K-12 education just for a moment. You know, we shut down schools, whether we should have shut down schools, who knows. kids on Zoom. And it may have been more effective to say, how do we use Khan Academy or similar online platforms and get the teachers to be effective at using things that we know work? If there are forces that make it impossible to do that, then what we need to do as citizens is to ask for better outcomes at lower cost for our kids, all our kids, not rich kids, all our kids. We all desperately need that to happen. So I think the biggest thing is to reveal the problem, show that there are options for accomplishing what we want, and protect them from politicians and other groups who don't want them to succeed. Before I ask you for your three key takeaways, is there anything else you'd like to discuss

that you haven't already touched upon? I think there are big problems and I would say inequality and race are the hardest problems I know. I think education and health are the places where I find hope. Right now, we have systems that cost too much, take too long, and deliver mediocre outcomes and bad outcomes for some people. We should not find that as acceptable. We should find everything in our power to increase access to opportunity for everyone in the country. And I don't think that involves some of the top-down solutions that we see. I think it's much more a bottom-up process, and I hope we can figure it out. Bill, what are the three key takeaways that you'd like to leave the audience with today?

The first is that entrepreneurship is accessible to everyone because it's looking for these opportunities and then figuring out how to get a bundle of resources, team members, some money, and running an experiment and then moving on from that process. And I think everyone ought to be exploring the possibility of delivering better customer value or better social outcomes. So one is entrepreneurship is a force for good. The ability to create social value is omnipresent. And I would love more great teams to be formed to do that. The second thing is successful people fear failure and they should not fear failure. They should fear accepting the status quo and living with crummy results. And the great fear is that somehow we won't get people who are addressing these issues in new and creative ways. And what we've learned is that the old way is not working for enough people.

The third thing, and it's not unrelated, but there was a great article on the folly of expecting A while rewarding B. And all across the economy, there are what I call perverse incentives. And so I've spent a lifetime trying to understand ways in which you align incentives with what you hope the outcome is going to be. In healthcare, you can't have a fee-for-service business and expect anything other than for the system to produce more services. And if you don't measure health outcomes, And if you don't measure health outcomes, and if you don't measure health outcomes over a lifetime, you have no chance of designing the system in the beginning to deliver it. So I think there's an idea floating around about an incentive

audit. What would people do with the current rules? Is that what you want them to do? If not, redesign it. So incentives affect everything. Bill, this has been wonderful. Thank you so much. Thank you, Len. You're doing good work that I hope people get access to all of these ideas. Not mine, but rather the other people. But anyway, thank you. If you enjoyed today's episode and would like to receive the show notes or get new fresh weekly episodes, be sure to sign up for our newsletter at 3takeaways.com or follow us on Instagram, Twitter, and Facebook. Note that 3takeaways.com is with the number three, three is not spelled out. See you soon that 3takeaways.com is with the number 3. 3 is not spelled out.

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