The Titanic Effect: My Conversation with Drs. Todd and Kim Saxton

Today, we’re talking to Drs. Todd & Kim Saxton.  Both are award-winning professors at Indiana University’s Kelley School of Business, as well as co-authors of The Titanic Effect.

The book serves a practical guide to help startup founders, as well as their investors, successfully navigate the icebergs that so often sink startups in the ideation and early stages of development. Let’s dive in.

Clinton Henry: Great. So, I'm so excited to have you all on today, you know, in conversations I have with other leaders, we're always talking about blind spots and what our blind spots are. And in your book, you use this lovely metaphor of icebergs. And can you talk about the typical blind spots that start-ups are having to navigate that they may not be aware of?

Todd Saxton: Sure. So, as you note, with any kind of innovation, whether it's a start-up or even corporate innovation, we tend to be aware of a certain set of things that we look for, right? And that could be metrics like return on investment or whatever. But it's really the hidden or what we refer to as hidden debts that both start-ups and other innovators kind of incur that are unanticipated, right? That they don't appreciate in advance until they've actually hit that iceberg and sometimes with very, very dramatic consequences.

Clinton Henry: So, when you say debts, I mean, we talk about technical debt quite often. Is that what you're mainly referring to or other debts as well?

Kim Saxton: Exactly. I mean, the concept of technical debt in software is that, you know, as you're starting to build something, you have problems that you didn't anticipate, it can't really stretch to the long term. But we got this idea from a tech entrepreneur whose business was solving technical debts for companies. And we were like, wait a minute, there are marketing debts and there are human debts. And so, you know, my classic example was the Titanic, which the book is named for, where, you know, you have this huge boat, it was the largest ship to sail across the Atlantic that had ever been designed. So, you need a lot of people. So, what they did is they really had three classes or really three different segments of people, people looking to accomplish different things in the same footprint, right? So, we had these super luxurious, they would've been like a hundred thousand dollars today suites. And so what people need in order to be able to be comfortable spending that kind of money is certainly one thing. And that was marketed to Americans from and so getting rich people from America to go across the Atlantic. And then in third class, you had immigrants from Eastern Europe that were trying to get to the New World and paid a lot less. And so, as a classic example, you know, they had those greats where you see in the movie is true. They had those greats between them so that they didn't intermingle because it's hard to serve two different segments of customers in the same footprint. And then, when the ship started to sink, nobody knew how to undo the gates. And so, the highest percent of passengers were in that third class and the highest percent of deaths above and beyond that was also in that third class. So, it's like a terrible marketing debt, right? The worst of all possible marketing debts.

Todd Saxton: And we are big fans of the lean start-up kind of methodology and approach. But when you are constantly pivoting or changing direction, that's when you particularly incur potentially these hidden debts. So, we see these start-ups that are pivoting, trying to find proof of concept, trying to find product market fit. And that's the right approach to take it iteratively. But you have to recognize that each time you brand yourself to a certain market is solving a certain problem and then you change direction. You've incurred marketing debts that you need to overcome. It's not just you start with a clean slate, you start with these perceptions about what you do or who you are and you've decided to move in a new direction. One of my favorites is a venture we saw pitch at one point that was a fuel additive. And then, about 18 months later, they were pitching as a food additive that had nutritional benefit, you know, with the same brand and to roughly the same audience. And that's pretty uncomfortable.

Clinton Henry: Yeah, that's a great example.

Kim Saxton: And to be clear, you have to have debts, right? Nobody can grow without debts. And we’re not saying don't have debts, we're saying think about what debts you have and plan for them, just like technical debts. They have to be overcome at some point, it's just when is the right time to focus on them?

Clinton Henry: So, as you're starting out an organization, you have a small group of people, you have a few ideas, you're trying to get to minimal viable product, MVP. You're trying to grow, and there is a lot of pivoting going on. And then as you grow, you have more people, more influences, more ideas, more attempts. Does the problem become more complicated as you try to scale? Is it exponential as far as taking on these potential debts?

Todd Saxton: I think there's very much of a staged phenomenon there that, you know, if you think about and most people associate like the highest risk and the most uncertainty is at the very beginning. And then, we love slash hate to hear particularly investors talk about, oh, and this has been de-risked because, you know, it's been through. And the reality is you're suggesting by the time you start taking investor money and you're making payroll, those are more than just hidden debts, right? Those are pretty clear expectations and monthly checks that you have to write. So, as you start to get a more complex organization and you're managing simultaneously trying to build and revise product, build new features, hire the sales and marketing team and the engineers to drive that growth, raise additional funds, etc. It does get much more complex. But you have solved some of the uncertainties that you face early on in terms of, again, hopefully finding product market fit that MVP. But then systematically expanding from there in a strategic way to kind of limit the additional hidden debts you're taking on is something that firms need to do as part of navigating uncertainty. And not every start-up does that, they kind of rush to raising more money and trying to do everything following some initial traction.

Clinton Henry: When's the right time to think about this? Is this before your first pitch meeting? I mean, a lot of the people listening to this actually already have are in organizations, right? So, they don't have the benefit of having like a truly green field. And is it an iterative process where you're constantly thinking about, OK, where's the next iceberg? How do you approach this? You've seen a lot of organizations, obviously, in your roles in academia, you've touched on this a lot. What do you find works best?

Kim Saxton: Yeah, so we've had the pleasure of having a number of people reach out to us that they're using our book. And so, yes, it can be really helpful at the very start. One of the things that we do in the book, there's 32 of these iceberg, you know, debt bergs, we call them, that we identify. And we also lay out that they do change depending on the stage of the venture. So, there's some issues that are more prevalent early on prior to product market fit. And then, there are some issues that are more prevalent and that scale up. And yes, that does mean that you need to be constantly looking at and thinking about what are the hidden debts that we've taken on. And the nature of those debts will change over time. And they exist in small companies and they exist in large companies. I mean, we are part of innovators at the Indiana University Kelley School of Business. And I mean, we sometimes have these same conversations about the choices we're making with our strategies and what debts are we taking on, and how are we going to mitigate them.

Todd Saxton: That was actually part of our proof of concept was having these early readers of the book or some of the chapters come back and say, well, where were you two or three years ago? Because I already hit those icebergs. I'm dealing with the holes in the side of the boat. But, you know, in our experience, it's very rare to have a one-shot innovator that has their one thing, and that's what they do for the rest of their lives. These most people continue to have additional ideas, move on to new start-ups, whether they're starting it themselves or joining others. And while, yes, the school of hard knocks and experience is a wonderful teacher. We still think you can soften some of those blows through education, through listening to podcasts like yours, so that you can better anticipate and mitigate the negative effects of hitting some of those debt bergs, as we call them. So, yes, it may be a little late if you're already up and running with your venture to address some of the early challenges. But there are still more to come up, there will be. And this is probably not your first and last rodeo. So, use those lessons for the next one.

Clinton Henry: That's great. From the funding side, you know, from a VC perspective, right? What questions should they be asking ventures that they're considering investing in that? Maybe they're not that they can help get their arms around. Is this organization thinking about, are these creators thinking about these debt bergs?

Kim Saxton: Yeah, so I think one of the biggest things that we see and again, we do a lot of advising and coaching of folks in this space, which is the most important thing for sure that a VC needs to be asking is, is this a problem that's worth solving? And is this a problem that people will pay for the solution? That's like the key to product market fit, and in VC's looking at this should be also asking, like, how does this evolve? You know, once you get to scaling, you know, you are going to have to expand to really grow the business. So, you know, as you move from the people who have the most urgent problem to people who have less urgency in the problem, is this solution still going to work? You know, how do we make that something that people want to pay for as well?

Todd Saxton: One question I love to ask, and I think while we talk about, oh, we need to appreciate, embrace failure and fail fast. When you hear pitches, you seldom hear of the missteps or mistakes that the venture has made because the founders don't want to tread on that, and some investors don't want to hear that. Whereas I love to hear like, what surprised you? What led you to change direction? Where did you take missteps and how did you correct? Because let's be honest, you're investing in the navigation team and to think about you're investing in a specific product or even a specific market that that product is targeted to is very likely to change. What is likely to change less is the team who's trying to navigate the ship through those seas of uncertainty. So, focus and listen to what they've learned from their past failures and how that's affecting their decision making as they move forward.

Clinton Henry: It's interesting, you talk to VCs a lot, and one of the things that I've noticed is a lot of times they'll like a product, but if they don't like the leadership, they're not interested, right? Because the product will probably change as they go through the process that people typically don't. So, when you're screening, you're really screening for: are these the right kind of people to lead this venture? Have you come upon a few like temperaments or things that you look for in founders? Are there things that really you key in like, oh, this is this person has X and Y trait. I'm always successful with this.

Kim Saxton: Yeah. So, I have to just share a quick aside. There was a product we were looking at in a screening a few years ago, and it was a really cool product. We're like, this could be an A product. And we're like, this is a C team, though. And sure enough, I mean, we would we love the product, we like to use it, it's gone. So, we're like a little sad because the C team never figured out how to get this product that we loved where it needed to be. So, I would say like one of the most important things that I look for is coachability. I mean, you have to be passionate and you have to have some conviction, but you also have to listen. And I've seen too many entrepreneurs where it's like, you know, you talk and then they come back six months later and they're saying the exact same words. You're like, hmm, hard to believe that nothing has changed in six months and you can't train coachability into somebody. So, we love it when someone comes along and says, you know, I tried this, this part worked, this part didn't work. I want to try again. You know, that's like a learning-oriented person, not this stubborn beyond all feedback kind of a person.

Todd Saxton: I think the other would be kind of self-awareness of where they individually have gaps and need to supplement through team and a founder and, you know, start-ups that have solo founders historically evidence shows do not do as well. And one person trying to fill where all the hats over time as the venture becomes more complex, as we talked about earlier, is really challenging. So, being aware of where their strengths are, but also how to supplement their weaknesses with other team members is something individually that we really look for.

Clinton Henry: That's fascinating. Is there an organization or, you know, a start-up that has adopted this framework and done really well that, you know, I'm sure you've gotten a lot of anecdotes, but there's something you can point to that says, you know, this just changed how we thought and approached our day to day business.

Todd Saxton: I’ll tell a brief story without divulging names, but we actually got an email through the website from the founder of a company here that is, I don't remember how old it is, it's established. And he reached out to just kind of say, wow, I'm reading your book. I saw you at a local chamber of commerce presentation, I think it was. And we had a couple of questions, you mind if we follow up? And, you know, we actually monitor those things and got back to him and he was like, holy cow, you got back to me within 45 minutes on a Saturday. I never hear back from anybody when I send blind emails. So, that was like the first kind of funny piece. But they were rethinking how to approach their market segments, even the people that they were hiring, the capabilities they were building, because they saw that they were heading down a path with some hidden debts involved. And we ended up going in and doing a discussion with their board to kind of talk about where they were, where they were headed. And they've had significant growth in some new sectors as a result of some of the decisions. Now, that isn't a de novo start-up that was embryonic, that was a company that was up and running for a number of years with a pretty experienced team. But because of that limited experience, they had some blinders on in terms of how they were thinking about and positioning their capabilities in the venture. So, those are really rewarding, whether we're involved directly or not. Those are really rewarding kind of anecdotes for us to hear that people are making different decisions or approaching decision making differently as a result of some of the ideas that we share.

Kim Saxton: Well, I think Todd buried the lead. So, they had an existing business, which they sold to pursue this new, innovative idea, which they realized they had to do out of a new shell. They couldn't do it out of the old shell. So, they spent six months handing off the other business, so they could put their family and their team up against this new idea to make it successful. But we also have a couple of serial entrepreneurs who have said to us that this has changed the way their board talks. You know, instead of talking about de-risking, they're actually talking about debt mitigation is the language they're using. So, anyway.

Clinton Henry: Now, that's wonderful. I mean, it's very clear that those individuals took a massive amount of value from the book. And I think anybody that reads that book is going to have the same experience, right? I think it's really insightful. So, you know, I'm grateful that you wrote it, as I'm sure a lot of start-up people in the community are. So, you know, our audience, I'm sure, will be very excited to read it as well. So, I wanted to thank you so much for coming on and sharing your insights.

Kim Saxton: I love to give one word of caution, which is we do know some people who are beginning to get into start-ups that have used the book and approached us. And once you know the mistakes that you want to avoid, it doesn't mean that you don't repeat them. I mean, you can know what's coming and you can see like, oh, I've done everything I can and whack, I just hit that iceberg anyway. But at least I know what to call it.

Clinton Henry: That's a knowing is half the battle, right? So, at least you're not completely blindsided, which is always like, oh, I recognize this horrible thing that I've been trying to avoid. That's reassuring.

Kim Saxton: Yeah, sure it is.