CHAPTER THIRTY-ONE
FAILURE
Up until this point, I've focused on setting goals and doing everything you can to achieve them. It's time to acknowledge a timeless truth of startup life: there will be failures. Lots of failures. At a startup, failures aren't avoidable aberrations. They're part of the process. As I always tell employees, no one has made more mistakes in the history of the company than I have. And mine are usually the biggest ones.
FAILURE AND THE STARTUP MODEL
Perhaps major organizations with long-tested, repeatable business models can afford to work on the assumption that all failure—or nearly all of it—is avoidable. Follow the rulebook; generate revenue; repeat. If something goes wrong, it's simply because you failed to follow directions.
Nothing could be further from the reality of startup life. Steven Gary Blank puts it in third place on his Customer Development Manifesto for Startups: “Failure Is an Integral Part of the Search for the Business Model.” This is exactly true: you're creating a new product in a new market (not following an establishment rulebook) and the creation process will involve a number of false starts. That's certainly been the case at Return Path.
One of the most exciting moments in Return Path's history was when we acquired NetCreations, Inc. in the summer of 2004. In a single shot, we acquired the capability to solve one of the biggest problems marketers and publishers talked to us about: building a customer database. The NetCreations acquisition gave us a great client base, a bunch of revenue, a new team, and a new line of business.
The acquisition instantly gave us scale and put us on the map. But ultimately, it didn't work. It was the first step toward our becoming “the world's smallest conglomerate,” and we eventually had to divest the business, among other things.
We acquired NetCreations on the assumption that our customers would purchase a full suite of email services at once. That assumption proved false, and the acquisition failed. The important thing is that we learned our lesson and decided to focus on a single line of business (an insight that's allowed us to increase our revenues almost seven-fold in five years). If we forget that lesson and start diversifying prematurely—that would be a real failure.
The corollary to Blank's point about failure and the startup business model is that permission to fail is critical in a startup or growth company. If you don't give your team permission to fail, you're not giving them permission to innovate. If they don't innovate—then you will fail for sure. I start every management training session by saying that in the past 13 years I've made more mistakes than everyone else in the company combined. Everyone has permission to try breaking my record.
There is one thing you shouldn't give anyone—including yourself—permission to do: fail in the same way twice. You can make every mistake in the book but you should only make them once, learn from them and avoid them in the future.
FAILURE IS NOT AN ORPHAN
It's never hard to collect candidates to take credit for a success. Whenever something goes right, from a major fundraising deal to a good quarter or a big client win, lots of people will take credit—many of whom don't deserve it. Fred Wilson has said it many times over to me: success has a thousand fathers. The flip side of that, though, is that failure is not an orphan.
Companies that have a culture of blame and denial eventually go down in flames. They are scary places to work. They foster in-fighting between departments and back-stabbing among friends. Most important, companies like that are never able to learn from their mistakes and failures to make sure those things don't happen again.
Finger pointing and looking the other way as things go south have no place in a well-run organization. While companies don't necessarily need to celebrate failures, they can create a culture where failures are treated as learning experiences and where claiming responsibility for a mistake is a sign of maturity and leadership. It starts at the top: if the boss is willing to step up and acknowledge a mistake, do a real postmortem and process the learnings with his or her team without fear of retribution, it sets an example that everyone in the organization can follow.
What separates A companies from B and C companies is the ability to recognize and process failures as well as successes. Far from being an orphan, failure usually has as many real fathers as success.
Silver Tail Systems Founder Laura Mather on Learning from Failure
Most CEOs—overachievers that we are—treat failure as something to be avoided at all costs. Silver Tails System Founder Laura Mather has learned to view them as learning opportunities. Given the inevitably of failures (and lots of them) at every startup, it's a reorientation we should all attempt.
Through the journey of starting my own company, I've learned many lessons, the most poignant of which has been learning the importance of failure.
Before starting a company, I had taken pride in being the expert in my field and consistently producing excellent work. When I started raising money in 2008, it became painfully clear that I wasn't an expert at fundraising. I had a lot to learn.
My method of learning how to raise money and create a business plan was typical of how I learn most things—jump into the deep end and sink or swim. This meant that my partners and I made many, many mistakes through-out the fundraising process. For instance, we didn't understand what a venture capitalist (VC) was expecting around market sizing or that enterprise software sales would have to be for more than $250,000. In the beginning, I thought that each of these mistakes was catastrophic. In fact, early in my career, that's how I viewed all mistakes. Through this process, I came to understand that mistakes were opportunities.
I soon changed my modus operandi: once I made a mistake, I would try to correct it as quickly as possible. For example, at the end of one pitch the VC told us that he was looking for a different way to understand our technology. He wanted an analogy that showed him how our technology protected a web site by relating it to something in the real world. On the way back from the meeting, my co-founder and I brainstormed ideas. We realized that our software was similar to security guards in a store. You want to let people into the store so that they can buy things but this means that shoplifters can also get into the store. The security guards are in the store to find people who might be stealing. Our software is similar: it assumes that you must allow people to interact with your web site but you need to monitor for bad actors.
When we got home from the meeting, we drafted two new slides and sent them to the VC. The turnaround time on the new slides was less than five hours. We sent the slides after 8 P.M. but got an immediate positive response. Leaving that analogy out in the first place wasn't a catastrophe; adding it on the basis of the advice we got significantly improved our presentation.
In the startup world, because you have the luxury of moving very quickly, you are going to make mistakes. That's okay. It's better to make a fast decision and move forward with that than to spend too much time in the decision making process. You just need to be sure you are ready to make adjustments when you realize your decisions are not turning out as anticipated.
The fundraising process taught me the most valuable lesson I learned in my entrepreneurial career: success isn't measured by your lack of stumbles but by the quality of your recoveries.
Laura Mather, Founder, Silver Tail Systems
Management Moment
Lighten Up!
We have a very trusting environment at Return Path, with flexible work-from-home and vacation policies and a general attitude that more autonomy is a good thing for everybody. So you can imagine my team's surprise when I announced a new rule a few years ago: We were going to start monitoring Internet usage in the office, and browsing social media sites would not be tolerated. No Facebook. No MySpace. No Twitter. No exceptions.
April Fool!
Being a startup CEO is serious business, so it's important to be lighthearted whenever possible. The Facebook prank was one way that I tried to do this. I've also dressed up in a full gorilla suit on Halloween and done my best to honor International Talk Like a Pirate Day on September 19. This isn't about “working hard and playing hard.” It's about introducing moments of levity in an intense, hard-driving environment. Everybody on your team needs those moments and everybody will appreciate them.
Life's too short to be serious all day long.
Return Path Board Member and Costanoa Venture Capital Founder and Managing Director Greg Sands on How the Role of the CEO in Execution Changes Over Time
Greg Sands is one of the many invaluable members of my incomparable board. Below, he contributes a great—and somewhat surprising—last word on how the CEO's role with respect to execution changes over time.
The role of CEO in a startup changes radically as the company grows and as the focal point of the company changes. These phases overlap so this framework is admittedly a stylized view. Running a company from start up to growth phase through these phases requires completely different skill sets, so in some ways resembles my favorite sport, the triathlon, where you swim, then bike, then run.
CEO as Product Manager: Achieving Product-to-Market Fit
In a startup, the CEO is typically a founder or co-founder. In this case, he or she is often the person who invented the product or at least the one who first spotted the business problem and brought resources together to solve the problem. The first job is all about product, starting with finding Product-to-Market Fit by clearly identifying a problem and finding prospects or customers who will work with you to solve it.
CEO as Lead Sales Representative: The Sales Learning Curve
A start up CEO needs to be able to sell effectively but the key success factor during this phase is to help the company learn how to sell in a scalable way. I chuckle every time I hear someone say, “We have built the product and have a few beta customers, now all we need to do is hire a sales guy.” It's much harder and more complicated than that.
The CEO as sales leader has some unusual characteristics that other sales people won't have. She knows the market exceedingly well, may have created the product and often has a founder's natural charisma and leadership. She can adapt on the fly in a face-to-face meeting and make up new features. Carrying the CEO title adds stature and she can commit company resources on the spot. A sales rep or even a new VP of sales is never going to be able to sell the way the CEO does. Hence, understanding and mastering the sales learning curve is a critical next step.
CEO as Leader and Manager: Building a Learning Organization
After core product market fit has been demonstrated and the sales approach is repeatable, the CEO role shifts into another gear. Where previously she had to be focused on product and sales—because the company's survival depended on it—the company has evolved to where she can raise her head a bit and focus on some other areas, such as strategy, culture and hiring. Of course, any good CEO has been doing some of these things all along the way but as she gets into scaling, they are more important than ever.
This only scratches the surface of all the elements of being a great CEO from startup through the scaling phase of the business. If you master product market fit, the sales learning curve and build a learning organization you will be ready for more challenges and open for more growth ahead.
Greg Sands, Founder and Managing Director, Costanoa Venture Capital