Crash and Learn: Finding Value in Business Failure
Nothing succeeds like success.It's true, says no less a source than Harvard Business School. An extensive study of entrepreneurs by the school a few years back found that "entrepreneurs with a track record of success are much more likely to succeed than those who have previously failed."
Put another way, most people don't learn from their mistakes -- they just keep making more mistakes.
But not everybody. There are certainly many entrepreneurs who fail once -- or two or more times -- and succeed the next time around. What makes the difference is their willingness to face up to their failure, study it, and take lessons from the experience. In other words, they learn.
An Expensive Lesson
Dan Hobin was the classic dotcom flameout. In 1999, he was 30 years old and his digital-publishing startup, SmashCast, had just raised $7 million in venture capital. SmashCast had prime office space in downtown San Francisco, new employees filled the cubicles, and the company threw lavish parties at the drop of a baseball cap."We raised the money before we even had a business plan," Hobin says. "It was like taking a little kid and pumping him full of steroids."
Two and half years later, SmashCast was out of juice. The money was spent, and Hobin had to shut his company down. It was a very expensive lesson, but an effective one.
In 2005, when Hobin launched his next company, he took a different approach. He didn't solicit outside capital. He wanted his new startup, G5 Search Marketing, to be completely bootstrapped.
"This time, I was going to do it the old-fashioned way," he says. "We were going to grow slowly, watch every penny, and do whatever it took to be cash-flow positive."
So far, he's stuck to the plan. Hobin's search engine optimization and marketing company has more than $10 million in annual revenue and is growing fast. It has 56 employees and 100 percent revenue growth over the past four years, and last August it secured $15 million in its first round of institutional venture capital.
Better still, it's almost entirely debt-free.
"I learned a lot when the bubble burst," Hobin says. "I learned that you build a much healthier company when you bootstrap because you can't afford to do things you shouldn't do; you can't afford to make mistakes."
The Missing Link: Experience
Another dotcom entrepreneur who crashed and learned is Reid Hoffman. Like Hobin, he watched his startup flop, studied his mistakes, and came back stronger the next time around. Quite a bit stronger, actually: Hoffman built LinkedIn, the most popular social network for professionals, with more than 90 million registered users and a valuation upwards of $2 billion.
Hoffman's dotcom dud was a networking site called Socialnet. It started in 1997 and was acquired four years later at a fire-sale price; Hoffman walked away with just $40,000. After a stint at PayPal, Hoffman founded LinkedIn. Part of the reason the company is now the immense success that it is, Hoffman says, is the lesson he took from Socialnet. What was that lesson? Be a good learner -- and surround yourself with the same.
"I thought you should hire the exact skill set for every position," he says. "But in reality what you want is people who can learn fast."
And the same principle applies to a company: Like a good entrepreneur, it must be able to adapt and improve as it goes. "I learned you should never be embarrassed by your 1.0 product release," says Hoffman. "Too many entrepreneurs want to release the perfect product and get all those oohs and aahs, but that's a big mistake. It's better to get out there and move quickly and make improvements on the fly."
Bouncing Back
Rudyard Kipling wrote that one key to success in life is the ability to "meet with triumph and disaster and treat those two imposters just the same." In other words, success and failure matter less than the way you react to them.
Author Barry Moltz has written much the same thing, particularly in his book Bounce! Failure, Resiliency, and Confidence to Achieve Your Next Great Success. He calls failure "just part of the roller coaster, part of the cycle of business. You'll have successes and failures -- get what you can from both." In fact, if you're an entrepreneur in Silicon Valley, failure is considered a badge of courage. It gives investors an opportunity to probe what you learned from the experience and see how you deal with adversity, says Cynthia Padnos, founding managing director of venture capital firm Illuminate Ventures. "We don't believe you have to have failed in order to succeed, but we have a culture here that believes failure is not a barrier to success. There's a big difference between a project that tried and failed and an individual who's a failure," she says.
What's most important when faced with failure, according to Moltz, is resilience. He makes the comparison to baseball. If you're an entrepreneur, you need to keep going to the plate. The more often you step up, the more hits you'll have. And that, perhaps, is the best lesson any business owner can learn from failure: Past performance is not indicative of future results.
"Don't take failure personally," Moltz says. "Don't let yourself believe it's because of some inherent fault. You can learn from failure but you can't always learn from failure, so often the best thing is just to let go and move on. If you can do that, it gives you another chance at success."
