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It’s generally accepted that something like 75% of startups fail to reach an exit. While many factors can come into play, from running out of cash to falling short of the competition, the biggest challenge for startups is arguably the struggle to achieve product-market fit and find the right path to success.
For the past several years, and have taught Strategy for Startups: From Idea to Impact, an MIT Sloan Executive Education course that helps entrepreneurs make the right decisions for their early-stage businesses.
Building on more than two decades of academic research with thousands of companies and MIT students, Scott and Stern have developed a systematic approach for startup leadership that is now laid out in a new textbook, “Entrepreneurship: Choice and Strategy,” co-authored with Joshua Gans at the University of Toronto.
“Choice is at the core of entrepreneurship. There has been an incredible push to provide actionable frameworks that empower entrepreneurs to navigate their core choices and build the type of company they want to build,” said Scott, a senior lecturer in technological innovation, entrepreneurship, and strategic management.
“The motivation behind our framework was to place the entrepreneur and their idea at center stage and reconcile the competing advice entrepreneurs receive as distinct alternative paths for their idea and their company,” she said.
Picking the right route to commercialization
Scott and Stern previously outlined their framework in articles in Harvard Business Review and Quartz. The underlying theme of their work: A good idea may have multiple paths to value, but pursuing too many paths at the same time often does more harm than good.
After navigating the four domains of entrepreneurial choice — customers, technology, organization, and competition — entrepreneurs are ready to explore Scott and Stern’s Entrepreneurial Strategy Compass. This framework describes four strategic routes to commercialization categorized along two dimensions: orientation toward incumbents (collaborate versus compete) and focus of investment (execution versus control).
- Intellectual property emphasizes idea generation, retains control of a startup’s product, and aims to achieve growth by creating value for existing customers of a partner.
- Architectural builds and controls a novel value chain for new customers and succeeds by meeting a specific need for each stakeholder in the value chain.
- Value chain builds and executes specialized products and services within a partner organization’s existing value chain, in a model similar to consulting.
- Disruption creates value for a niche set of customers by redefining existing value chains and competing with incumbents poorly serving their customers.
Making these choices can be difficult, given that the four strategies often conflict with one another.
Take the example of PillPack, the online pharmacy co-founded by Elliot Cohen, MBA ’13, and TJ Parker. One path for the company would have involved collaborating with established retail pharmacies such as CVS and Walgreens (a value chain strategy); another would have meant competing with them and working directly with consumers (an architectural strategy with elements of disruption).
Ultimately, PillPack chose the latter. That resulted in very different early priorities for the venture and closed the door to partnering with companies such as CVS and Walgreens, but it opened the door to collaborating with new market entrants such as Amazon. The day Amazon acquired the company in 2018 for approximately $1 billion, CVS, Walgreens, and RiteAid lost $11 billion in market capitalization, Stern noted.
Test two strategies, then choose one
To make educated choices as an entrepreneur, Scott and Stern recommend a sequential learning process known as test two, choose one for the four strategies within the compass. This is a systematic process where entrepreneurs consider multiple strategic alternatives and identify at least two that are commercially viable before choosing just one.
As the authors write in their book, “The intellectual property and architectural strategies are worth testing for entrepreneurs who prefer to put in the work developing and maintaining proprietary technology; meanwhile, value chain and disruption may work better for leaders looking to execute quickly.”
Scott referred to Vera Wang as a classic example of sequential learning. As a Ralph Lauren employee and bride-to-be at 35, Wang told her team that she felt there was an untapped market for older women shopping for wedding dresses. The company disagreed, so Wang opened her own shop — but she didn’t launch her line of dresses immediately.
Instead, Scott said, Wang filled her shop with traditional dresses and offered only one new dress of her own. The goal was to see which types of customers were interested, as well as which aesthetics ultimately sold, before she started designing her new line. “[Wang] was able to take what she learned about design, customer, messaging, and price point and build it into her venture,” Scott said.
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The sequential learning model can also help entrepreneurs discover that an idea won’t work before they become too heavily invested in it.
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Taxie was a startup founded in September 2020 by MIT students whose mission was to reduce ride-sharing’s carbon emissions by renting fully insured electric vehicles to drivers. The company did everything right — talking to ride-share drivers at Boston’s Logan Airport, becoming drivers themselves, purchasing an electric vehicle, and refining their business model. That lean, hypothesis-driven experimentation process ultimately provided them with early clarity to fold the venture.
“They realized the business was sensitive to fluctuations in operating costs, and the founding team realized it wouldn’t have the environmental impact they were looking for,” Scott said. Contrast that experience with that of rental car giant Hertz, which backed out of renting EVs to Uber drivers amid high repair costs and poor execution — and left itself with a $245 million charge on the books.
In confronting market decisions like the ones Taxie faced, startups often attempt to pivot, but that decision comes with challenges too. “The fact that we see people pivot is an observation that choices matter,” Stern said. “Pivots are possible, but they’re not without cost. You may have to lay off staff, or you may need to renegotiate with your investors.
“We tell entrepreneurs not to be afraid that they may have to pivot, but also to understand that if they pivot around core strategic choices, it will take time and effort,” he continued. “In most cases, a startup only gets so many chances to do that.”
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