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You Screwed Up. Failure or Mistake?

December 12, 2011

Screw ups can be big and they can be small.  Big ones cost huge money and time.  Screw-ups can also cost credibility which can be more costly to replenish than the cash or time.  But when is a screw up a mistake?  When is it a failure?  Is there any good that can come from each?

New Market Entrepreneurs, check out this post which does a great job defining the difference between the two.  Then read on to better understand how and why the cards are stacked against you, (by some counts, only 1 in 10 startups succeed) and what you can do to mitigate your risk.

The difference between a failure and a mistake

A failure is a project that doesn’t work, an initiative that teaches you something at the same time the outcome doesn’t move you directly closer to your goal.

A mistake is either a failure repeated, doing something for the second time when you should have known better, or a misguided attempt (because of carelessness, selfishness or hubris) that hindsight reminds you is worth avoiding.

We need a lot more failures, I think. Failures that don’t kill us make us bolder, and teach us one more way that won’t work, while opening the door to things that might.

School confuses us, so do bosses and families. Go ahead, fail. Try to avoid mistakes, though.

Beware.  The Cards are Stacked

Reliable data about new venture survival is sketchy.   The common term that’s bandied about:  9 in 10 startups fail.  But there are many variables to consider and all are difficult to track.  Consider the definition of a “startup”. What is a startup? Two founders working in a garage, who try and build a product? Are they a startup when they incorporate? Is the project a startup when they get funding? How much funding qualifies? Does $30k that you’ve pulled out of your 401k count as funding? How about VC?  What about new ventures of the non-tech, non-VC variety in corporations, in small/local business (opening a bar or restaurant is a start-up too)?  What difference does industry play?  What about target user, B2B vs B2C?  In any event, here is a sampling of what I consider credible data to support the fact that the cards are stacked against New Market Entrepreneurs in tech-based startups.

Shikhar Ghosh of Harvard Business School:  “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.”  -read more-

The National Bureau of Economic Research  published these stats in 2007 about exit value outcomes in VC-backed firms from ’87-2005.

Entrep. Exit value ($ millions)
0 to 1 – 67 percent of firms
1 to 10 – 20%
10 to 50 – 9%
50 to 100 – 2.4%
100 to 200 – 1.3%
200 to 500 – .5%
500 to 1000 – .1%
1000 and up -.003%

The stats remind me of similar dismal odds for athletes aspiring to ascend the ladder to D1 and pro where D1 is a $500-1Bil exit and pro is a >$1Bil exit.  But that’s fodder for a different post!

So, as New Market Entrepreneurs, what can we do to be sure we are not committing a mistake or series of mistakes that will result in failure.  Here I turn to some great work being done by the Startup Genome Project.  Serious entereprenurs owe it to themselves to monitor what these guys publish.  Their work is revolutionary and much needed!   Recently they’ve published some interesting data that will help you better understand why projects don’t work and the most often repeated mistakes and misguided attempts.  Startup Genome Report finds that 90 percent of startups fail primarily because of “self-destruction rather than competition.”  It all boils down to ‘premature scaling”.  Here are some jiucy tidbits that should go a long way toward helping you heed Seth Godin’s advise re: not letting failure result from repeated mistakes or misguided attempts:

A startup can maximize its speed of progress by keeping the 5 core dimensions of a startup Customer, Product, Team, Business Model and Financials in balance. The art of high growth entrepreneurship is to master the chaos of getting each of these 5 dimensions to move in time and concert with one another. Most startup failures can be explained by one or more of these dimensions falling out of tune with the others. In our dataset we found that 70% of startups scaled prematurely along some dimension. While this number seemed high, this may go a long way towards explaining the 90% failure rate of startups.

Premature scaling is the predominant form of inconsistency.  Here are some examples:

Dimension

Examples for inconsistency / premature scaling

Customer
  • Spending too much on customer acquisition before product/market fit and a repeatable scalable business model
  • Overcompensating missing product/market fit with marketing and press
Product
  • Building a product without problem/solution fit
  • Investing into scalability of the product before product/market fit
  • Adding “nice to have” features
Team
  • Hiring too many people too early
  • Hiring specialists before they are critical: CFO’s, Customer
  • Service Reps, Database specialists, etc.
  • Hiring managers (VPs, product managers, etc.) instead of doers
  • Having more than 1 level of hierarchy
Financials
  • Raising too little money to get thru the valley of death
  •    Raising too much money. It isn’t necessarily bad, but usually makes entrepreneurs undisciplined and gives them the freedom to prematurely scale other dimensions. I.e. over-hiring and over-building. Raising too much is also more riskyfor investors than if they give startups how much they actually needed and waited
BusinessModel
  • Focusing too much on profit maximization too early
  • Over-planning, executing without regular feedback loop
  • Not adapting business model to a changing market
  • Failing to focus on the business model and finding out that you can’t get costs lower than revenue at scale.

Based on our analysis of about 3200 high growth internet startups approximately 70% of the startups in our dataset scaled prematurely.  Here’s a summary of their findings.

1. 74% of high growth internet startups fail due to premature scaling.

2. No startup that scaled prematurely passed the 100,000 user mark.

3. Startups that scale properly grow about 20 times faster than startups that scale prematurely.

4. 93% of startups that scale prematurely never break the $100k revenue per month threshold.

5. Before scaling, funded inconsistent startups are on average valued twice as much as consistent startup and raise about three times as much money.

6. The team size of startups that scale prematurely is 3 times bigger than the consistent startups at the same stage. However startups that scale properly end up having a team size that is 38% bigger at the initial scale stage than prematurely scaled startups, and almost surely continue to grow. Startups that scale properly take 76% longer to scale to their team size than startups that scale prematurely.

7. Inconsistent startups are 2.3 times more likely to spend more than one standard deviation above the average on customer acquisition.

8. Inconsistent startups write 3.4 times more lines of code in the discovery phase and 2.25 times more code in efficiency stage.

9. Inconsistent startup outsource 4-5 times as much of their product development than consistent startups.

10. In discovery phase 60% of inconsistent startups focus on validating a product and 80% of consistent startups focus on discovering a problem space. In the validation phase, where startups should be testing demand for a functional product, inconsistent startups are 2.2 times more likely to be focused on streamlining the product and making their customer acquisition process more efficient than consistent startups. It’s widely believed amongst startup thought leaders, that successful startups succeed because they are good searchers and failed startups achieve failure by efficiently executing the irrelevant.   -click here to read more and download the report

There’s almost universal agreement among investors and entrepreneurs alike that, while painful, failure is a good thing when executed wisely.  The learning is invaluable and orders of magnitude more powerful when compared to the experiences that come from success (but we’ll take them!).  While there are volumes written on this topic and perhaps another good subject for a future post, this post focused on the difference between mistakes and failure and how not to let your mistakes lead to failure.   I hope it has helped shed some valuable light.

In closing, I share this piece which I credit to kicking off my recent thinking about the topic which led to this post.  It profiles the innermost feelings of high profile, well-regarded New Market Entrepreneurs who have failed including the founder of Mint.com… a site that I could not do without in my life.

For more about the hidden value in failure, click here!

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