Fail Early — But Hopefully Not Often

May 13th, 2013 / Comments Off on Fail Early — But Hopefully Not Often

Failure happens. Unfortunately, it happens a lot. The fact is, most companies fail. Data from the Small Business Administration and the Bureau of Labor Statistics consistently show that approximately half of new startups no longer exist after five years, and that approximately two-thirds will cease to be in operation 10 years after founding.

Dane Stangler of the Kauffman Foundation notes that approximately 500,000 new firms are created every year and that after five years, fewer than half of these companies will remain. And, Shikhar Ghosh, a senior lecturer at the Harvard Business School, who researches startups that take in outside money finds that 30% to 40%  fail. (He defines failure as liquidating all assets with investors losing most or all the money they put into the company. If failure is defined as not realizing the projected return on investment—then the failure rate is 70% to 80%!).

So, what’s an entrepreneur in this situation to do? A few thoughts on how to fail with grace and dignity:

Get out of the gray zone. Being in the murky area where you keep spending money and are “hoping” for a turnaround is a bad place to be. You need to know, is this right — or not? If the idea isn’t good enough, or big enough, determine if there is a pivot to be made. What do you need to do to restructure? What do we have to do differently? We recently had this happen with one of our portfolio companies, which pivoted and replaced the CEO — changes that saved the company.

Know when to let go. If the idea is never going to make it, determine how to sell the technology and the talent and return some capital to investors. One of our portfolio companies arranged a talent acquisition to GoogleGOOG -0.51%. In finding a home for its team members, the company took care of its engineers and returned all the cash it raised to investors.

Treat people the way you want to be treated. As you would with any job, leave on good terms. By treating everyone with respect, you give people another opportunity to remember you. You want people to feel as if you treated them as well as possible even though don’t get them all the way home. It is very likely that you will want do another startup, and how you handle your failures will set a precedent for how likely it will be to obtain funding for future endeavors. If you flame out, it will be much harder for anyone to take a bet next time.

Communicate early. Total surprises are bad things, especially when all the money is totally gone. People should know the company is in trouble before it folds. Investors might be able to help get the company on the right path. Give them the opportunity.

Take care of your customers. Don’t crash and burn and leave them with nothing. If you have customers on your service, educate them on places to migrate to and give them a date for the end of the service (Try to keep it running for 90 days).

Be generous with your employees. Make sure they have other jobs. I believe some severance is in order. There are some tough calls here about who gets what, and at what expense to investors, and there are no hard and fast rules. This is very situational depending on, among other things, team performance. The operative word in this calculus is fairness.

Turn your focus to “Now what?” Determine if you have the stomach to do it again. Do you have the passion and enthusiasm to go after it again, or do you want to take to safer trajectory with more predictable economics? Part of being an entrepreneur is failing. Don’t feel horrible about it. Don’t lose your drive to change the world and make a difference.

Remember, true innovation rests on trying, failing, pivoting and trying again. Thomas Edison discovered hundreds of ways not to build the lightbulb before he sent electricity around the world. Babe Ruth held a record for strikeouts — not just home runs. And Henry Ford had two car companies fail before he created the one that revolutionized modern production. What the world needs more entrepreneurs who are bold enough to think of new ideas and brave enough to pursue them.

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