Most companies fail. It's an unsettling fact for bright-eyed entrepreneurs, but old news to start-up veterans.
But here's the good news: Experienced entrepreneurs know that running a company that eventually fails can actually help a career, but only if the executives are willing to view failure as a potential for improvement.
The statistics are disheartening no matter how an entrepreneur defines failure. If failure means liquidating all assets, with investors losing most or all the money they put into the company, then the failure rate for start-ups is 30 to 40 percent, according to Shikhar Ghosh, a senior lecturer at Harvard Business School who has held top executive positions at some eight technology-based start-ups. If failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 percent. And if failure is defined as declaring a projection and then falling short of meeting it, then the failure rate is a whopping 90 to 95 percent.
"Very few companies achieve their initial projections," says Ghosh. "Failure is the norm."
Why Start-ups Fail
Start-ups often fail because founders and investors neglect to look before they leap, surging forward with plans without taking the time to realize that the base assumption of the business plan is wrong. They believe they can predict the future, rather than try to create a future with their customers. Entrepreneurs tend to be single-minded with their strategies—wanting the venture to be all about the technology or all about the sales, without taking time to form a balanced plan.
“IN SILICON VALLEY, THE FACT THAT YOUR ENTERPRISE HAS FAILED IS ACTUALLY A BADGE OF HONOR.”
And all too often, they do not give themselves wiggle room to pivot midstream if the initial idea doesn't jibe with customer demand.
"Instead of going into the venture with a broad hypothesis, they commit in ways that don't allow them to change," Ghosh says. He cites as an example the failed dot-com-era grocer Webvan, which bought warehouses all over the United States before realizing that there was not enough customer demand for its grocery delivery service.
Next, there's the matter of timing, a huge issue that can determine whether a company gets funding and whether it achieves the start-up's elusive measure of success: an exit that involves going public or getting bought.
During the Internet boom, companies armed with nothing more than a PowerPoint presentation of a lousy idea could secure tens of millions of dollars—which sometimes gave them enough time to figure out a viable business plan through trial and error. Eventually successful companies such as Netscape and Open Market went through several business models before finding one that worked. But the opposite was true after the boom; a company could have a great idea and a great team, but still fail to achieve traction due to lack of funding and, consequently, lack of time to let a good model mature. (These days, Ghosh says, if start-ups often manage to secure a good team and good financing, they face dozens of lower-cost competitors and fragmented customer demand.)
Funding has the potential to turn a little failure into an enormous one.
"The predominant cause of big failures versus small failures is too much funding," Ghosh says. "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. This lets management rationalize away the proverbial problem of the dogs not eating the dog food. When you don't have money you reformulate the dog food so that the dogs will eat it. When you have a lot of money you can afford to argue that the dogs should like the dog food because it is nutritious."
Enterprise Failure Can Be An Asset, But Personal Failure Is Ruinous
Still, stubborn entrepreneurs continue to found companies, in spite of the failure rates, which raises the question of why. It's not as if any of them harbored childhood dreams of launching a search engine optimization software firm.
Sometimes this is due to naïveté and hubris—the notion that their idea simply cannot fail. But savvy entrepreneurs know that running a company that eventually fails can actually help a career. Even failed businesses yield future networking opportunities with venture capitalists and relationships with other entrepreneurs whose companies are succeeding. Ghosh says boards of successful companies often seek out the founders and CEOs of failed companies because they value experience over a clean slate. After all, Henry Ford, Steve Jobs, and Desh Deshpande experienced multiple failures before achieving success.
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https://hbswk.hbs.edu/item/why-companies-failand-how-their-founders-can-bounce-back
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