The statistics are sobering. Start-ups have a high failure rate. According to an article written in Harvard Business Review (http://hbswk.hbs.edu/item/6591.html) that addressed failures of start-up businesses, failure occurs between 30 and 40% of the time if it is defined as losing all assets and 90-95% of the time if defined as not receiving the expected ROI or payback on any individual or discrete project. Entrepreneurs obviously start businesses with the idea of it succeeding. Every start-up is expected to meet a market need, reach a level of performance that creates a profit within an established period of time, achieve results, and contribute income for the owner/entrepreneur. With the exception of the Broadway show’s version of “The Producers,” no business is started with the idea of failing.
However, failure does occur and understanding why it happened and how it is used to determine the entrepreneur’s next steps is worth considering. The autopsy of the failed enterprise can provide great insight into what went wrong and how to prevent it from re0occurring in future endeavors. According to Shikhar Ghosh, a lecturer at Harvard Business School, there is much that can be learned by examining the failure.
The Reasons for Failure
•Most start-ups fail due to lack of foresight, lack of wiggle room in the business plan, bad timing, or lack of funding.
•However, counter-intuitively, large sums of funding for an unstable business model can take what would have been a small failure and turn it into a huge one.
•Ghosh maintains that running a doomed company can actually help a career, yielding experience and networking opportunities with venture capitalists and other entrepreneurs.
•Ghosh does caution that, “While failure of a business or project is a learning experience, personal lapses in ethical or moral behavior can damn a career.”
In fact, Ghosh 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 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.
Leave Room to Change
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. Ghosh uses the example of Webvan to prove the point by recognizing that the company purchased warehouse space across the United States in anticipation of demand for grocery delivery service. However, once launched, they discovered that the demand was not sufficient to warrant such a high fixed cost in property costs.
The internet boom is legendary for including many venture capitalist-backed businesses that seemed to have nothing more substantial than a PowerPoint presentation of a weak idea to support it. Those businesses that had enough financial resources behind it could take the time to find a viable business model (before the money ran out). Netscape is one example of a company that floundered until it could settle on a business model that worked.
In the HBR article, Ghosh maintains that, “The predominant cause of big failures versus small failures is too much funding,” Ghosh, further is quoted as saying “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.”
Learn From It
Well prepared business owners understand that a company may fail and that it does not have to spell the end of a career (or of a business idea). Even failed businesses yield future networking opportunities with venture capitalists and relationships with other entrepreneurs whose companies are succeeding.
Individual failures within a company can be viewed as learning experiences. but only if the executives are willing to view failure as an indicator of the need for, or as potential for improvement. For instance, if the company’s best salesperson is unable to sign a key customer, then the management ordinarily would seek to blame, chastise, or hold the salesperson accountable for the failure. However, there is another way to view it. They could recognize that if the top talent has trouble with the sell, then maybe there is something wrong with the product. Small failures can provide the raw material for improvement.
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.