From Failure, Success
Mistakes: The Stepping Stones to Startup Victory

Entrepreneurs start companies for many reasons. They can’t or don’t want to work for someone else. They enjoy the rush of knowing there’s no one to point the finger at but themselves. They crave the attention. They want to be rich. Or they want to change the world. This chapter presents some key considerations to think about along the way and inform your decision whether to hold or sell. But ultimately, your personal aspirations determine what you should do. It’s one thing to read about how to turn failure into success and another to experience it first-hand.

Many Motivations Fuel Entrepreneurship

The sacrifices involved in doing a startup are significant—long hours, high rates of failure, uncertainty about the future, and an extreme emotional rollercoaster ride. But the rewards are also significant and not just financial. There are lots of reasons to start a company.

You have a personal need you want to solve. You see a gap in the market. You want to have an impact. You like building products. You thrive on the dopamine rush when a user or customer tells you about a great experience with your product—and you know you personally made it happen.

You want to understand all aspects of business, from product to user acquisition to finance. You want to build your own team. You want more control over your future. You want to see your name on an IPO prospectus.

You want to be rich. You want to be famous. You can’t get a job. You don’t want to work for someone else. You want to get revenge on a previous company or boss. You hate big-company politics. You find making decisions and feeling their immediate impact rewarding. You thrive on challenges. You idolize Steve Jobs, Marc Benioff, Bill Gates, and Mark Zuckerberg, to name just a few. You’ve always been an entrepreneur and know no other path.

By building a consumer product, you can solve a problem you face and address a personal need—a need you may find that millions of other people have as well. If you build a business product, you can solve key customer problems, and you have the opportunity to transform and disrupt huge industries.

It’s incredibly rewarding to build and sell something of value. When I was in middle school, I developed shareware programs. These were software programs that were free to use but required a nominal registration fee to get rid of annoying “Please register” reminder messages. I’ll never forget the day I received my first check in the mail for $10.

On a Wednesday evening, after school, my Dad said, “There’s an envelope here for you.” He did his best to hide his concern. I opened the envelope.

“It’s a check! A check for $10!” I exclaimed.

“For what?” His concern had shifted to surprise.

“For this software program I wrote!” Someone—a person I had never met—considered the software program I built useful and sent me money for it. I was beyond elated. The checks started rolling in, first one a week, then two. I deposited them at the bank into my passbook savings account. This was a little book the size of a passport where the bank recorded every transaction—on paper!

One day, a few months later, I recall going to the bank with lots of checks in a manila envelope. I walked right up to the teller and emptied the checks onto the counter, dozens of them for $10 and $12—I had started raising prices when I realized I had a good thing going. The teller explained to me that my savings account had a limit on the number of transactions I could make per month. She sent me over to one of the bank managers (it was a small branch), who looked at me with a bemused smile.

“How can I help you, young man?”

“I want to deposit these checks.” I once again emptied out the checks, this time onto the mahogany desk between me and the manager.

“Where did you get these?”

“From the people who sent them to me,” I replied, rather taken aback. It seemed obvious to me.

“And what are they for?”

“For these software programs I wrote,” I responded, motioning with my hands to indicate the (invisible) software programs. I got a highly skeptical look in reply. The manager stared at me as if trying to see the software programs.

Mysterious as the invisible software was, the manager wasn’t about to break one of the cardinal rules of banking. If a customer has money to deposit, take it!

“Well, son, if you have checks to deposit, we need to get you set up with a checking account.” And the rest, as they say, is history.

I had made money before, for shoveling snow and doing yard work. But I had never been paid repeatedly without having to do more work and with almost no physical goods or labor involved. Only years later would I come to appreciate how that translated into high margins, which translated into building a valuable business.

The Myth of Working for Yourself

I’ll never forget the time one of my employees told me about his wife and his mortgage. He was a risk-taker, willing to work at a startup for below-market pay for the chance to do something big and game-changing. He put in 14-, 16-, and 18-hour days at work. But he was depending on us—the founders—to make the right decisions, both strategically and tactically, to build our little company into something big.

Until that point, I had seen startups as a romantic undertaking where we worked for ourselves. At that moment I realized we didn’t work for ourselves at all. In fact, the bigger our company got, the less we worked for ourselves and the more we worked for other people.

We got to set our own direction, decide what to build and who to build it for, and operate out of self-motivation. People are fond of saying that entrepreneurs start companies so they can work for themselves. The reality is that as entrepreneurs, we don’t truly work for ourselves. We work for our users and customers, our employees, and our investors.

Many entrepreneurs become disillusioned about their companies when they realize that not only don’t they work for themselves, but they actually have many bosses.

Entrepreneur Y built a web site over a weekend. In a matter of months, he had hundreds of thousands of users. Many of his users loved the product, but he faced three big challenges.

First, most users loved the idea of the product, but once they started using it, they found it too difficult to use. They stayed for a few days and then disappeared. Entrepreneur Y had built the product for himself, was excited by all the users coming to his site, but was frustrated by the fact that he now served a new master: his users. They didn’t require a lot of the advanced features he wanted to build. They wanted a product with fit and finish, a product that was polished and easy to use. They wanted someone to respond to their e-mail inquiries quickly when they had a question.

Second, his users didn’t want to pay for the product—but he didn’t want to display ads on the site.

The third challenge Entrepreneur Y faced was that he refused to change how the company made decisions. When the company was just a few of people, it worked reasonably well for everyone to participate in every decision. But as Entrepreneur Y added more engineers, the pace of change ground to a halt because decision making was too hard and time-consuming. Every employee in the company became Entrepreneur Y’s boss.

A year later, his company was still in business, but users were struggling with the same product issues while the company struggled to put out a new release. Entrepreneur Y had always wanted to work for himself—right up until the moment he realized that wasn’t as easy a prospect as he’d imagined it to be.

Friction Leads to Failure

Many people and their careers suffer from drag—friction that slows them down. This is the intangible sense that something isn’t quite right, but they aren’t sure what. Friction at work bleeds into other areas of your life, decreasing your overall happiness and productivity. You only appreciate how much after you begin working on something you really enjoy. As Steve Jobs said in his famous Stanford graduation speech, “Don’t settle.”

Everyone has bad days. But doing unfulfilling work week after week or year after year drags you down and prevents you from achieving your potential. That seems obvious, but according to a survey by the Conference Board research group, in 2009, only 45% of Americans were satisfied with their jobs. What’s more, that satisfaction level has been declining for decades.

Investors are fond of analyzing the motivations and aspirations of entrepreneurs. Venture investors want to believe that an entrepreneur has the aspiration to build a billion-dollar (or bigger) company. But the only thing that really matters is your personal aspiration.

Being an entrepreneur is one of the most fulfilling ways you can spend your life. According to Professor of Entrepreneurial Studies Scott Shane at Case Western Reserve University, research indicates that “you would have to pay an entrepreneur 2.5 times as much for that person to have the same job satisfaction as an employee that he or she has as an entrepreneur.”¹

Bridge the Value Chasm

The value chasm is the difficult challenge that founders and CEOs face when deciding whether to hold or sell. Is it worth the significant additional risk, time, and ownership dilution (due to added capital) required to grow the business, or is it better to sell, make potentially life-changing money, and move on? To use the language of financial advisors, on a risk-adjusted basis, it makes more financial sense to sell.

Imagine you’re an entrepreneur who has been working on your business for three years. You and your two co-founders each own 20% of the company. You’ve raised $5 million in venture capital. You have the option to sell today for $50 million in cash. To keep things simple, assume $5 million goes to your investors first, and the rest is divided up according to ownership. So, you get 20 percent of $45 million, or $9 million, before taxes.

Suppose that your alternative is to raise another $95 million and invest another 7 years building the business. After raising the $100M total, you and your co-founders are left with 5% ownership each. At the end of 10 years, to make the same amount of money, using the same math, your company must be worth $280 million, not taking into account the time value of money.² What’s more, during the 7 years, you have to take the risk that the $9M you could have taken off the table may go to zero as the market changes, your company evolves, or your ownership stake is diluted. Plus, who knows what else you could do during those seven years? Perhaps you could build something even more valuable or impactful.

__________

On a risk-adjusted basis, from a purely financial perspective, it makes more sense to sell. Granted, you’re giving up the opportunity to make even more money if your company goes on to become worth billions. But by selling, you’re taking potentially life-changing money off the table.

Starting a company isn’t an inherently rational exercise! You have to be more than a little crazy to start a company, given the odds, challenges, and alternatives. You must, as one investor friend of mine likes to put it, “suspend disbelief.”

That’s why, when entrepreneurs and CEOs ask me for input on whether they should hold or sell, I tell them it’s an intensely personal decision. It all comes back to your motivation and aspiration, to the heart of why you decided to become an entrepreneur to begin with—to run your own company, to change the world, and to realize your vision.

Personal Health

No book on startup failure would be complete without at least a few words on entrepreneur health. At my first startup, we had what we referred to as “the startup diet.” This entailed ordering in pizza or grabbing takeout night after night, working out rarely if ever, and getting minimal sleep. Our poor health management took a toll in terms of both our personal health and productivity. We would find ourselves in meetings too exhausted to be productive.

Entrepreneur health deteriorates physically, emotionally, and psychologically. Long hours, constant stress, and poor dietary and sleep habits will wear anyone down. It may not seem as though taking time out for a run, gym session, or walk is the best use of time when customers are e-mailing, the phone is ringing off the hook, and a product update needs to be deployed.

__________

But taking time out—even briefly—for physical and psychological fitness is critical to startup success. Not only do you end up feeling good, but a clear mind also leads you to better insights and better decisions. As legendary mountaineer Lou Whittaker once put it, investing in health and fitness is like making a deposit at the bank—you have to do it early so you can withdraw later when you need it.

Ways to Avoid Failure

This book has explored many of the reasons for startup failure. In the process, you’ve gone from taking the big leap, to building a great product and finding product-market fit, to scaling your company.

As you think about taking the leap or try to figure out how to change so you can scale your company after having been at it for a few years, here are some of the key questions to ask yourself.

Do You Deeply Understand Your Target Market?

Your target market can be yourself—especially if you’re building a consumer product—or it can be a specific industry if you’re building a business-to-business (B2B) product. Of course, one of the great appeals of building a consumer product is that you know the target market intimately!

If you’re building a B2B product, you must know the target market equally well—either because you’ve come from the industry or because you’ve studied it. Often, coming from outside the industry makes it easier to be disruptive and transformative. But that means you need to understand the existing market limitations, customer requirements, and ecosystem.

Lots of entrepreneurs have failed because they didn’t understand their markets. Some could never get traction because gorillas—behemoths who had been around for years—stood in their way, and they failed to find ways to disrupt them. The entrepreneurs didn’t understand the strengths and weaknesses of existing players, both from a product and a go-to-market standpoint. Others never figured out what would make their product a must-have.

How Large Is the Market?

You may be perfectly happy building a product for a market of one—yourself. But if you want to have a bigger impact, need to generate revenue (directly or through a liquidity event), or both, this question matters.

For consumer Internet companies, the market is, by nature, big—potentially every person on Earth. The challenge is building something a very large number of people want and then reaching them. Consumer companies tend to be binary—lots of people love the product, or they don’t.

For B2B companies, market evaluation and segmentation matter much more. It’s easy to throw around big numbers, but the reality is that in a big market you have to start somewhere specific. “We’re going to disrupt a $20B market” is a nice concept, but it’s not actionable. You need to have specific segments in mind and understand them in detail.

Can You Reach the Market Efficiently?

Or, put another way, “What’s your go-to-market strategy?” As I’ve discussed, in the end it all comes down to profitable acquisition and retention.

You may have a big market, but if that market is millions of small businesses with limited budgets, for example, you must have a strategy for reaching them efficiently—unless you plan to knock on 10 million doors yourself!

Your approach can be purely viral or word of mouth—get existing users to recruit new ones. Or you can buy ads or hire a huge telesales force. Whatever the case, having a plan for how to reach the market is critical, as is a way to measure what’s working and what’s not.

Do You Control Your Destiny?

I have met with countless entrepreneurs who talked about needing just one big deal for their company to work. Often that deal is with another large company, typically one that already has an efficient way to reach the market. Those entrepreneurs end up waiting a very, very long time. Plus, those who do get the one big deal frequently end up so dependent on it that they have difficulty broadening and scaling their businesses.

Entrepreneur X spent months trying to having meetings with the executives at a key partner. He believed that eventually the big company would begin working with him. The partner’s employees took meetings and picked his brain, but he never made any business progress.

Eventually, the partner inked a big distribution deal with another company—headed by a friend of the partner’s CEO. Entrepreneur X was incredulous. But to his credit, after recovering from his surprise, he admitted that the partner wasn’t going to establish a business relationship with his company any time soon. He changed his distribution strategy. Had he not done so, his company would have gone out of business.

Do You Have Product Vision?

Some entrepreneurs start out with a product vision and then, when they realize no one wants their product, they fold like cheap lawn chairs. Some companies lose their product vision when their founders leave or are fired. You can hire for almost every other function—but not product vision.

Can You Build a Great Product?

Many products fail because they’re terrible. They’re designed poorly. They’re too hard to use. They break. They’re not self-explanatory. They’re so complex that they’re difficult to build and maintain.

Fortunately, today it’s easy to get user feedback on your product. Internet services exist that for a few bucks let you have a user try your product and provide recorded feedback as they do so. There is nothing like seeing someone else try to use a product you’ve built. Over time, we all find workarounds for little things that don’t work in our own products. But new users don’t. They’re honest about their product experience—and watching them use your product will cause you to be honest with yourself. Have strong opinions about what makes products great. Use those products, and internalize what you love about them.

Are You Relentless in Your Pursuit of Product-Market Fit?

This means not spending money, not scaling up, and not growing your organization and getting set on a certain path until you have product-market fit. If you’re three or four years into building your company and things seem to be stagnant, chances are you don’t have product-market fit. You may have some users, but you haven’t found a big market that must have your product.

If you’ve turned over your management team several times and still aren’t growing the way you want to, there’s a chance it could be execution failure. But it’s more likely a lack of product-market fit. Impatience is often an asset for startups—but not when it comes to scaling before you have product-market fit. Find product-fit before all else.

Can You Execute?

A lot of people have ideas for what they want to build. Few turn those into reality. Most people fail to get started. Of those who do begin, many grow bored or frustrated with the details required to succeed.

Executing means building. It means recruiting a team, putting together enough capital to build something, and selling your vision to others. It means scaling up personally and organizationally as your company grows. It means a relentless focus on delighting users and customers. It means not losing sight of product greatness even as sales, marketing, and finance become bigger and bigger parts of your business.

Are You Persistent?

When I talk with investors about the common characteristics that make up winning companies, time and again I hear, “great teams.” When I press on what makes a great team, I consistently hear two things. First, great teams find great markets. And second, even—or especially—in the face of great adversity, problems, and challenges, great teams are persistent in their quest for success.

Are You Willing to Change Your Mind?

At the same time, the art of being an entrepreneur is all about having a thesis, testing that thesis, and then being willing to change your mind if your thesis is wrong. Persistence is critical to entrepreneurial success, but stubbornness can kill you. Finding the balance is what makes entrepreneurship an art, not a science.

Are You Crazy?

If your answer to this is “No way,” then you’re not an entrepreneur. I don’t mean crazy in a bad way—I mean crazy enough to start a company, to make decisions that fly in the face of modern economic theory about risk-adjusted returns, and to take actions that go against the herd and the common wisdom.

Do You Simplify??

Some people make things simpler, while others make them more complex. Great entrepreneurs simplify.

If you can’t communicate simply and clearly, you can’t recruit, raise capital, or sell. Simplification leads to the best visions, the best products, and the highest likelihood of success. If you often find yourself being misunderstood or coming out of meetings thinking you could have communicated better, get help.

Who’s Your Mentor?

You don’t always begin with a great mentor. Many outstanding entrepreneurs don’t know great mentors—or even know what a great mentor looks like—when they’re starting out. Mentors come in many different forms: other founders, investors, board members, business partners, and, of course, family, friends, and personal relationships.

The key is to keep your eyes open along the way and acquire and surround yourself with great mentors as you go along.

Fail Fast

Most startups fail. America, and Silicon Valley in particular, is one of the few places where taking risk—whether it results in success or failure—is looked on positively. Although history is often rewritten to make it look like a successful entrepreneur tried one thing and it worked from the get-go, most entrepreneurs try multiple ideas and products before they hit the right one. Put another way, they fail repeatedly until they succeed. The successful ones conserve capital and keep their organizations small until they find product-market fit. Then they scale.

Most entrepreneurs have come closer than they care to admit to bankruptcy due to lack of product-market fit, failure to execute, or lack of capital.

Time is limited. Get focused. Fail fast.

Summary

When you read in TechCrunch, VentureBeat, and other news outlets about startups raising hundreds of millions of dollars at multi-billion dollar valuations, founders cashing out millions before their companies are acquired or go public, and companies getting to tens of millions of paying users in just a few years, keep in mind that this represents a very small minority of all startups.

The reality is that building a company from nothing into something valuable is a marathon, not a sprint. During that marathon, a lot can go wrong—product challenges, market changes, and team issues. Fortunately, America, and Silicon Valley in particular, smiles on risk raking, rather than frowning on it. By learning from the lessons in this book, you can avoid the key causes of failure and lead your startup to success.