BrainTrust Query: Failure Happens – Now What?
According
to an article written in Harvard Business Review that addressed
failures of start-up businesses, failure occurs between 30-to-40 percent of the
time if it is defined as losing all assets and 90-to-95 percent of the time if
defined as not receiving the expected ROI or payback on any individual or discrete
project. However, the autopsy of the failed enterprise can provide great insight
into what went wrong and how to prevent it from reoccurring in future endeavors.
In
fact, Shikhar Ghosh, a lecturer at Harvard Business School, maintains that
failure is the norm and that very few companies achieve the initial projections
of the founder/entrepreneur. In part, the failures are often avoidable and could
have been prevented if the entrepreneur had done the due diligence of testing
the base assumptions of the business plan (assuming there is a business plan
created). One interesting insight that Prof. Ghosh provides is that entrepreneurs
will sometimes believe that they can predict the future instead of working collaboratively
with customers to create a future with them. The over-reliance on their own
insights, perspectives, beliefs in technology, service models, or products can
blind them to the realities of the marketplace.
While the best of intentions
and beliefs were used in creating the initial business model, plan, and organization,
there should always be room to "wiggle" or
modify things once the business has been launched and has had time to interact
with the marketplace to pilot or test itself against competitors, engage with
prospects, and operationally execute against expectations. If the business model
is so rigid that it cannot be corrected "mid-stream," the initial
plan had better be right, because there is no going back and trying something
new.
Moreover, the professor notes in the HBR article that the difference
between big failures versus small failures is often "too much funding." He
elaborates, "What funding does is cover up all the problems that a company
has. It covers up all the mistakes, it enables the company and management to
focus on things that aren’t important to the company’s success
and ignore the things that are important."
Taking the lessons of what
did not work previously to the next assignment can be a real experience-building
asset. A well understood failure can often be more illuminating in preventing
a repeat than a lucky or happenstance success.
Discussion Questions
Discussion Questions: What are the most common reasons for failures in start-ups? What’s the right way and the wrong way for entrepreneurs to handle failure? What lessons have you seen learned from failed start-ups?
There are many reasons why start-ups fail:
– No clear reason for being (a clear core story)
– Failure to define business priorities
– Not enough capital to properly launch
– Inability to adjust to market conditions
– Falling out between founders
– Poorly thought out business model
– No real need in the marketplace for the product or service offered
Successful entrepreneurs learn from their failures and grow. After failing in a venture, they should take a step back and unemotionally assess what happened. As Thomas Edison famously said, “I have not failed. I’ve found 10,000 ways that won’t work.”
This is such a timely article by HBR since the last 3 years has created so many start-ups due to the tough economy and downsizing of large organizations.
In March I attended the Stonyfield Entrepreneurship Institute in Concord, New Hampshire (http://www.carseyinstitute.unh.edu/sfei.html). Gary Hirshberg the CEO and one of the founders started this event 11 years ago. Over 200 entrepreneurs, VCs, Bankers, and lawyers gathered for 2 days of intense workshops and networking. During the two days 6 entrepreneurs in different stages presented their business and some of the struggles they were having. The audience as well as a panel of experts that included Gary would ask questions and also provide feedback and guidance. What these 30 minute sessions made clear is everyone needs a coach and everyone needs outside feedback. Entrepreneurs are sometimes overwhelmed with the day to day running of the business they struggle to review the bigger picture and get out and connect with the most important people, customers. You can create the best yogurt (in your eyes), but if consumers don’t like it or the price point and messaging is not correct or the distribution model is not efficient it will never make it.
Here are some key learnings thanks to some personal successes and failures over the last 20 years as an entrepreneur.
1) “If you build it, they will come” rarely works. Find demand and then satisfy that demand. Test this demand by signing up customers before you even create the product (optimal approach, buy not always practical).
2) Create a cash flow statement. This is your roadmap to when the money runs out and helps you understand what you need to work on (collections, payment terms to your vendors, new revenue, etc…) and how realistic the idea is. Once you create a cash flow, double expenses and cut revenue in half to see if you can still handle the start-up. Thankfully entrepreneurs are optimistic, unfortunately cash is not. When it runs out it is gone.
3) Constantly be out with your customers understanding their current and future needs. Customers will help direct product enhancements.
4) Outsource anything that is not your core competency, but needs to get done. Accounting, legal work, PR, etc….
5) Find a coach or two if you are really lucky. They will keep you focused, motivated and grounded.
6) Only seek funding when you are in a position to get the best deal. If you go too early you give up too much upside.
7) Be flexible.
8) Expect to have failures along the way. Few entrepreneurs get it right the first time out the door.
A terrific article and equally terrific comments. The only thing that I would add is an observation that I see repeated over and over again. Many, if not most entrepreneurs are very, very good at something–this thing can be anything from high fashion apparel design to installing HVAC units. Where they get into trouble is in not embracing the fact that being good at something and building/running a successful business that provides that something are two entirely different things.
Entrepreneurs start a business primarily because they don’t want to work for someone else. The successful entrepreneur realizes early on that they cannot be good at everything necessary to succeed and then seeks out the skill sets necessary to fill in these gaps. In the early stages this can be a coach and, as the business grows, an organization of individuals with the skills that the entrepreneur lacks.
With every start up there must be light. Entrepreneurs must have clear foresight into their business vision, be strongly disciplined in applying funding and be willing to adhere to their business model.
I agree with Max’s use of Thomas Edison’s quote: “I have not failed. I have found 10,000 ways that won’t work.” Thus perseverance belongs at the top of the list for the serious entrepreneur after their basic foundation is determined and built. Without perseverance Edison would have left us in the dark.
Entrepreneurs need to launch businesses with realistic expectations. Many of the 90-95% of start-ups which do not produce the expected ROI may actually produce decent ROI that doesn’t match inflated profit projections by entrepreneurs and their backers. A new business typically takes many years to become even mildly profitable, most companies will not come up with next mobile app that becomes an overnight sensation.
I think it’s interesting that the next discussion on today’s docket is a question about ROI for social media–should retailers expect an ROI? If you look at retailers’ efforts around social media through the lens of this article–through the lens of a startup/entrepreneur mentality – then shouldn’t you expect a complete flop 30% of the time and barely a break-even 90% of the time? It’s not just startups that can benefit from the wisdom in this article. Companies’ own innovation efforts should consider a lot of this advice as well.
Failure, like success, is in the eye of the beholder. What is failure to one entrepreneur may be success to another.
There are many reasons why start ups fail. Probably the most common is they are undercapitalized. They see the upside (a necessary trait in an entrepreneur) but fail to consider the downside. They assume success from the beginning and therefore don’t have the cash necessary to cover expenses while the business grows.
Certainly not having experience in the industry or in retail in general is a reason many startups fail. Amazing to me is the number of people who contact us who want to get in the convenience retail/petroleum marketing business who have no experience in the industry, have no retail experience and/or never owned any business.
Many are looking to do ground ups and have selected and perhaps even purchased a “perfect” site without ever asking anyone to validate the site potential. While it is possible to create a destination business, failure to select correct site in certainly another reason why startups fail.
I have really enjoyed this thread and would like to add my own 2 cents. Over the past 10 years I have been involved in some way, shape, or form in 7 start-ups and I can tell you that the one thing they have all had in common was, the idea man had never done a start-up. There are many groups around that can provide great information to these idea men but the number 2 thing they have all had in common is, they thought they knew better. Here in ATL we have The Startup Lounge, founded by my friend Scott Burkett. and there’s Startup Riot along with the ATDC. Lots of places for great advice, so you’d think they’d listen but more often than not, they insist on their way, try and fail then say ‘you were right’. 🙂
Over these 10 years I have come believe that you can be successful in bringing any idea to market if you have the right team and a great ‘closer’. The problem is finding it. You have to be flexible in order to morph as the concept comes to life and you have to be comfortable firing early team members as soon as you realize they are not right for the job. I agree with comments above that you must know and work with your target market early but you also must understand that how they react and/or use your concept may change where you thought the revenue would come from. You don’t change their minds; you must change your own mind, and you will get there!
The biggest failures I have seen have to do with the following.
The entrepreneur is not really an entrepreneur. The entrepreneurial mindset is very different from most people. They approach business and life differently. From the FREAKONOMICS blog, Saras Sarasvathy found that “master entrepreneurs rely on what she calls effectual reasoning. Brilliant improvisers, the entrepreneurs don’t start out with concrete goals. Instead, they constantly assess how to use their personal strengths and whatever resources they have at hand to develop goals on the fly, while creatively reacting to contingencies. By contrast, corporate executives those in the study group were also enormously successful in their chosen field use causal reasoning. They set a goal and diligently seek the best ways to achieve it.” (HT: Marginal Revolution)
The second biggest failure I find is that entrepreneurs don’t understand cash flow. They write a business plan with P&Ls showing a great future, but with out a cash flow statement. If they were to do an integrated cash flow statement and balance sheet, they would find out they likely needs multiple times more cash than they forecast. There is no exercise more important for an entrepreneur than preparing the cash flow statement.
The third biggest failure I see is in execution. The fact is it is all about execution. A good entrepreneurial idea executed well will always beat the best entrepreneurial idea executed poorly.
Number four is relying on research. Simply don’t. The entrepreneur doesn’t have time, doesn’t have money and all the research will tell him is what is and not what will be. The most successful entrepreneurs are told over and over again that nobody wants their product or their idea won’t work. The fact is that entrepreneurs have a different vision of the future and research of the population will not support this vision.
This is a very broad and difficult question since the word, ‘startup’ has come to mean any number of types of business, from VC-backed, to local businesses to bootstrapped tech companies.
That said, I will focus on one thing the article maintains which I disagree with. Collaborating with customers is absolutely the right thing to do for most business. However, most game-changing businesses are started nearly irrespective of what customers view as their needs.
Examples are legion, from Apple to Crocs to recently, Twitter and Facebook. I don’t believe any of them consulted customers to any degree.
Founder vision drove all these and others like them to success. They didn’t use focus groups, consultants or other secondary research techniques–which will never drive anything other than incremental innovation.
The companies they created, which I would posit are the only ‘real’ startups, are by far, the exception–but these exceptions are the pivot on which the world changes in a meaningful way.
I am glad this topic generated the level of interest that it has. It is not an easy topic to wrap our hands around and the conversation/dialogue is terrific! Thank you all for participating.
A slight variation on John’s earlier response. If you build it they will come IF it is something that attracts them. There has to be a need and want associated with a business success or lack of success. I have had several great ideas and implemented a few. None were successful because it was not “what the fish wanted to eat” at that time.
My belief after many years being involved as, and in entrepreneurial projects is two major factors dictate one’s success. They are necessary funding to carry the project through to maturity and able to stand alone. Without this, don’t even think about moving forward. You must know you have breathing room in order to survive. And, timing being right. Don’t attempt to sell kites in a hurricane.
There wasn’t much mention of competitors in the article nor the comments. Many of the successful businesses mentioned that were all startups at one point either had no competitors, or devised a plan that differentiated enough from existing competitors to capture a market. Microsoft really started an industry. Facebook looked at what MySpace was missing. All the funding in the world cannot overcome the need for a business to have a compelling reason for the consumer to use their products or services versus another organization’s.
Businesses fail for many reasons. Some are valid, some are happenstance. The key to all of the successes is that they listened, adapted, and changed. At some point, flexibility and understanding are the critical components to determining why you are in business, who your target market is, what they want, how you can best provide it, and if it is practical from a business perspective (i.e. it makes profits) to meet these needs. All businesses, must always have an exit plan. I emphasize and teach that all business plans must first start with their exit strategy, and then build backwards from there.