PRINCIPLE 5

If You Are Not Failing (Occasionally), You Are Not Aiming High Enough

A lot of potential entrepreneurs have trouble with the concept expressed in the chapter title.

Intellectually, they know the path that leads from idea to marketplace is not going to be smooth, and that invariably some of the things they’re going to try along the way will not work. But it’s that word failure that drives them nuts.

They simply don’t want to be associated with “failure.” So, they get defensive when I say that failure isn’t only an integral part to becoming successful, it’s often essential. They stop listening and start coming up with all kinds of reasons why I must be wrong.

This puzzled me for a long time until I finally figured out that they were thinking about failures one way, and I viewed them another.

Every time something fairly major went wrong—consumers said they didn’t like the prototype; a major distributor they were counting on to carry their product said no—these people considered it a failure.

I wouldn’t. I’d call it a “setback,” and the difference is more than a matter of semantics. If you can walk away from the disappointment and live to fight another day it is not a failure. To me, a failure is when you’re completely wiped out, when you don’t have any more resources to try again.

With this by way of background, you understand why I always tell people experiencing what they consider to be a failure that it is okay as long as it does not wipe you out. If you lose all your money on your first attempt, it’s going to be extremely hard to get a second turn at bat. People will be reluctant to invest with you, especially if your initial set of investors lost their shirts. On top of that, your confidence will be down. (“I tried something before and it failed. I’m not sure that I want to try again.”) That is going to make any subsequent effort more difficult. You’re going to be more tentative and move more slowly and quadruple-check everything because you’re petrified of making another mistake.

All this underscores two important points.

First, as we talked about in the last chapter, you want to take small steps toward your goal so that you aren’t out a lot of money should things not work out. This will allow you to fight another day.

Second, you want to learn from things when they don’t work out. Setbacks—small or large—cost you time and money; that’s expensive enough. You don’t want to add to the problem by failing to learn from it.

IT’S BETTER NOT TO FAIL

Of course, you would prefer not to have setbacks—or, at the very least, limit how many. Let’s talk about how to do this, starting with the big misconceptions that many people have. If you ask people to free-associate when you say the word “entrepreneur,” invariably they’ll come back with some variation of the words risk-taker. It’s easy to understand why.

1. Starting anything is risky.

2. People who create new ventures, products, and organizations seem to have more nerve than the rest of us.

3. The press tends to portray these men and women as swashbucklers. There always seems to be this sort of sentence in the media profiles about them: “And just when it looked like Mr./Ms. Entrepreneur was going to fail, they bet everything on one last roll of the dice—and today they have enough money to buy Wyoming.”

Well, I admit it makes fascinating reading . . . but it simply isn’t true. Successful entrepreneurs are not risk-takers; they’re calculated risk-takers, as we will talk about in detail in Principle 8.

CALCULATED RISK-TAKER IN ACTION

PROOF THIS WORKS

Mike Holland is a Harvard College and Columbia Business School graduate who entered the business world in financial services; some people call what he does wealth management. Along the way, he watched, observed, learned from, and later worked for one of the legends of Wall Street, Saul Steinberg.

After a discussion we had one day, Mike decided to go from being a well-paid executive with Steinberg to starting Holland Company. Starting his own company would be a calculated risk with no guarantee that he would match the salary he had been earning.

The company prospered. Mike’s strategy was to invest for the long run in quality companies with great management. The stock market fluctuates, but Mike sticks to his strategy and consistently outperforms both his peers and the Standard & Poor’s.

Mike is a regular guest on CNBC and Bloomberg and is a trusted adviser to many funds. Would this have happened if he had not taken the calculated risk of going out on his own?

WARNING: THIS INVESTMENT MAY FAIL

I’m amazed at how many people don’t tell those who’re going to invest in their idea that it may fail.

I understand why you wouldn’t want to.

For one thing, you don’t expect it will. After all, you wouldn’t be entering into the venture if you thought success was unlikely.

For another, telling people up front and in writing that what you’re about to try might fail gives them a legitimate reason not to invest in you.

Still, it’s not only the right thing to do, it also makes strategic sense. Investors will be slightly less unhappy if they have been warned and the venture fails. Because you warned them in detail, you’ll be able to go back to them to try to gain funding for a second venture saying, “I think we will get it right this time.”

It also makes sense because it serves as a defense if the venture fails and the investor decides to sue you.

As much as you don’t want to, warn your investors up front and in writing.

GUARD AGAINST FAILURE BY NOT BUYING A FRANCHISE

Despite our best intentions, sometimes we make really bad decisions. Take buying a franchise, which many people see as a way to minimize the risks of entrepreneurship.

Now, I know some people don’t think franchisees are entrepreneurs. But those people are wrong. Franchisees are entrepreneurs by definition. The dictionary defines an entrepreneur as “a person who organizes and manages any enterprise, especially a business, usually with considerable initiative and risk.”

But you don’t need a dictionary. Just common sense. In the for-profit world, an entrepreneur is someone who creates and runs a new business where one did not exist before. No, the Subway franchisee didn’t create Subway. But she certainly created a Subway where there never was one before.

But they don’t take much risk, you cry, and the dictionary definition said that risk is part of being an entrepreneur.

Well, there are two answers to that. First, as we mentioned briefly in the beginning of this chapter, and will talk about in more detail later on in the book, most successful entrepreneurs do everything in their power to minimize risk. The best ones are the most risk-adverse people on earth. They don’t like risk. They accept it as part of the game and then work extremely hard to reduce it to a minimum.

And that brings us to the second point—the one about making a bad decision and increasing our chances of failure. It turns out that buying a franchise is more risky than you might think.

How can that be, some people ask me. The franchisor has proven to be successful—otherwise she wouldn’t have a franchise to sell, people who don’t think this through assume. The franchise has a proven way of running operations, one that she’s going to give you to follow, and then she promises to provide you with help to get under way.

What could possibly go wrong?

A lot.

The U.S. Small Business Administration compiles a franchise failure list each year, and invariably the percentage of failures among some franchisors tops 50%, meaning more than one of their two franchises fails.

Buying a franchise is no guarantee against failure.

CASE STUDY: COLUMBIA RESTAURANTS

PROOF THIS WORKS

It is hard to imagine today, since Columbia Restaurants are being run by the fifth generation, and the family’s collection of seven establishments on the west coast of Florida are the most popular they’ve ever been, that there was a moment when there was a very real chance that the restaurant could go out of business.

It happened back in the 1930s, when Columbia was nothing more than one small family restaurant in Tampa. Things were tough for business everywhere during the Depression, and Columbia was no exception. But Casimiro Hernandez, Jr., the second-generation owner, was convinced that he had an idea that could save the restaurant.

He would build the first air-conditioned dining room in Tampa, complete with an elevated dance floor. The new, unique facility would be a perfect place for all the big bands, which were dominating the music scene, to play.

There was, however, an obvious problem. He didn’t have the tens of thousands of dollars he needed to finance the construction, and there was no way anyone would lend him the money. There were just insufficient assets to back a loan, and his sales were only approximately $100 a week.

Casimiro went to his local bank and asked for the equivalent of what today would be a $350,000 loan. Not surprisingly, they turned him down.

So then Casimiro began to think of what, today, we would call a win-win proposal.

“I understand why you said no,” Casimiro said to bank officials, “but if you finance us, I’ll put a prominent sign in the restaurant saying that you made the loan and you’re a friend to the Cuban people. That will help you in the community and differentiate your bank from all the others. Also, we’ll never forget you, and you’ll be our bank for as long as we’re in business.”

His argument carried the day. In 1937, Columbia opened the Patio Dining Room, which the company’s website says “resembled a courtyard, like the ones found in Andalusia in the South of Spain, surrounded by a balcony with a colorful mosaic-tiled fountain in the middle. A retractable glass skylight was installed, giving the room a wonderful bright and sunny look during the day and an enchanting glow at night.”

Creating a win-win situation for the banker made all the difference.

(We will be revisiting Columbia Restaurants to make another point later on.)

THERE IS AN UPSIDE TO FAILURE

I know the words above are true, because this is what I have experienced myself; the stress brought about by adverse business conditions makes you work harder and smarter. It makes you much more focused than any number of successes.

Very few people doubt the truth of this, but they push back in a different way.

“Who needs the stress,” they say. “Stress is not something to look forward to, no matter how positively you paint the picture. I want things to go smoothly.”

We all do, but it won’t happen. So you need to accept that fact going in. Besides, if you won every game you played, eventually you would stop trying as hard. You’d take bigger risks because you were bored, and you would begin to get cocky. Stress will keep you focused on the fundamentals of what made you a success in the first place.

ANOTHER WAY TO LOOK AT FAILURE

This is a business book. But allow me a brief personal aside to show you that what we have been talking about can apply to your personal life as well.

When I was in my forties, I decided that one of the few athletic events I could still do well in was running. So, I set goals to run in 5K races, then 10K races, half marathons, and finally full marathons. I ran in the Boston Marathon (Charity Division) three times.

Then I was diagnosed with non-Hodgkin’s lymphoma and I stopped running for a few years. When the doctor said I was sufficiently recovered, with the help of the Babson Track Coach, Russ Brennen, I once again set running a marathon as my goal.

This time, I chose the Boston Marathon Jimmy Fund Walk, which raises money for the Dana-Farber Cancer Institute. They use the Boston Marathon trail—26.2 miles including Heartbreak Hill, and at first I was disappointed because I could only do a half marathon.

When I realized it was not a defeat, it would be a victory to accomplish that, I started to enjoy the experience. I stopped at rest stops and talked to fellow runners/walkers, many of whom were either recovering from cancer or raising money in memory of someone who had lost his or her battle.

It put a different perspective on my life; and then, after that, I went on to complete several full marathons.

LEARNING FROM “FAILURE”

Let’s bring together everything we have talked about in the chapter here. Consider these two failures:

1. Ignighter was just another dating website, struggling to compete with all the other similar companies out there. They stepped back and began to examine the clientele to see if there were any patterns. They noticed that a lot of their clients were from India.

“Hence, we did what was sensible,” the company’s website notes. “We launched operations from the incredibly warm and just as fast-paced Mumbai. A re-brand that made us better and more suitable for our Indian audience soon followed and Ignighter became StepOut. Today, we’re one of the fastest-growing websites in India.”

2. Back in the 1990s, Target was seen as just one more discounter, a slightly nicer version of Walmart or Kmart. It was not a success. By entering into deals with designers such as Isaac Mizrahi and Michael Graves, who provided the store with “pared-down” versions of their offerings, the company differentiated itself and became successful.

You could say the initial efforts of both Ignighter and Target were failures—after all, neither one gained a lot of traction. But by learning from what did not work—what the uninitiated would call a failure—they were actually laying the foundation for success.

I mentioned Columbia Restaurants earlier. Richard Gonzmart, the fifth-generation family owner and one of the best entrepreneurs I have ever met, wrote these moving words to me after I called him when I found out he had prostate cancer:

We each face a time in our life when we have faced defeat, losing or not accomplishing a goal. It is how we address this situation that matters. Giving up is never an option for me.

In sports, you give your all until the last second ticks off the clock; in running you continue on until you cross the finish line, even if it means having to walk or even crawl. In business, we face challenges, but most important is preserving our integrity, the belief in our work and mission. In marriage, it is maintaining respect and sharing our love with our spouse and children.

My faith helps me in the many challenges I have known and know today in life; the courage to see that tomorrow holds another opportunity to succeed is what keeps me going. To give up is to lose our belief and faith; our heart is the engine, the life blood of who we are, what we are today and tomorrow and beyond.

Here’s to life and embracing each day with gratitude, passion, compassion, kindness, patience, integrity, faith, peace, and purpose.

I will let an unlikely source add a coda to that.

Howard Cosell became a legend as a sportscaster and TV celebrity, and one day, my friend Josh Mayberry, who worked at ABC, introduced Howard to me. Howard autographed my copy of his book with the following inscription: “The ultimate victory in competition is derived from the inner satisfaction of knowing that you have done the best you are capable of and have gotten the most out of it.”

FOUR TAKEAWAYS FROM THIS CHAPTER

1. Recognize the risks. One way to keep failures to a minimum is by remembering that entrepreneurs are not risk-takers; they’re calculated risk-takers.

2. Handle problems as they arise. There is a huge difference between a setback, an obstacle that you need to get around, and a failure where you lose all your money.

3. Remember, it ain’t over till it’s over. How many great teams are losing at halftime, make adjustments, and come back to win the game? For example, quarterback Andrew Luck threw four second-half touchdown passes and scored on a fumble recovery, leading the Indianapolis Colts from a four-touchdown deficit to a historic 45–44 comeback victory over the Kansas City Chiefs in a wild-card game in early 2014. Keep that in mind, when you encounter an obstacle—and adjust.

4. Don’t view stress as a bad thing. Sure, we all want things to go smoothly all the time, and when they don’t, it causes stress. But stress keeps you remarkably focused on solving the problem at hand.