Skuffed & Shiny

The failure option

This post originally appeared last week in the Wall Street Journal as part of their Accelerators Program in answer to the question “When and how should you wind down a failing business.”

Some entrepreneurs and investors subscribe to the creed “failure is not an option.” I’m not one of them.

I strongly believe that there are times you should call it quits on a business. Not everything works. And — even after trying incredibly hard, and for a long period of time — failure is sometimes the best option. An entrepreneur shouldn’t view their entrepreneur arc as being linked to a single company, and having a lifetime perspective around entrepreneurship helps put the notion of failure into perspective. Rather than prognosticate, let me give you an example.

My friend Mark’s first company was successfully acquired. After being an executive for several years at the acquirer, Mark decided to start a new company. I was the seed investor, excited to work with my friend again on his new company.

Over three years, this new company raised a total of $10 million from me and several other investors over several rounds. The first few years were exciting as Mark launched a product, scaled the company up to about 40 people, and tried to build a business. But after two years we realized that we weren’t really making any progress — there was a lot of activity but it wasn’t translating into revenue growth.

In year three we tried a completely different approach to the same market with a new product. Mark scaled the business back to a dozen people in an effort to restart the business. Over the course of the year we tried different things, but continued to have very little success.

By the end of the year there was $1 million left. Mark cut the company back again — this time to a half dozen people. He started thinking about how to restart for a third time on the remaining $1 million.

Mark had never failed at anything in his life up to this point. He was proud of this, and the idea that he couldn’t at least make his investors’ money back was devastating to him. But he was stuck and started exploring creating an entirely different business, in a completely different market, with the $1 million he had left.

Mark was newly married and was working 20 hours a day. We were talking at the end of the day during the middle of the week and he was so tense, I thought his brain might explode. I told him that as his largest investor and board member, I wanted him to turn off his cell phone, take his wife out to dinner, have a bottle of wine, and talk about whether it made any sense to spend the next year of his life trying to restart the business with the remaining $1 million.

After resisting turning his phone off, I insisted. I told him that I gave him permission to decide that it wasn’t worth the next year of his life at this point and that as his largest investor it was perfectly ok to shut the business down and declare it a failure. I then said I was hanging up the phone and would talk to him in the morning. Click.

He called me back early the next morning. He was calm. He started by saying thanks for giving him permission to consider shutting down the company. This had never occurred to him as an option. During dinner, he realized he needed a break as he was exhausted. He wasn’t coming up with anything to do to reinvent the business and was just desperate to figure out a way to pay his investors back.

By morning, he realized it was time to shut things down, return whatever money was left, and take six months off to recover from the previous three years while he thought about what to do next.

We gracefully wound the company down and returned five cents on the dollar to the investors. Mark took six months off. He then spent six months exploring a new business, which ended up being extraordinarily successful. And he’s now very happily married.

Failure is sometimes the best option if you view the process of entrepreneurship as a lifelong journey.

My first blog post is still one of my most honest and heartfelt.

Much has happened from when I posted this almost two years ago, but the truth of the story has stood the test of time.

Simplicity

I have been thinking about simple things, simple ideas, and why my last startup failed.

I am a software engineer by trade. I have been trained to scrutinize the details. It is within the shadows of details that bugs hide. Engineers like myself are very good at finding and fixing bugs.

We get great satisfaction when we fix something and that is why many engineers make the entrepreneurial jump. It is also why many of us fail. We tend to fixate on the problem and overlook something very important - value.

I founded a company. I assembled a great team of people. We built cool tools. Our code base was awesome. The math was wicked smart (and patentable). VC were performing due diligence, the final step before investing. We had paying customers and more in the pipe. I had some whales in my sights that would catapulted us to sustainable profitability. We where in the middle of a growing market. Then the economic downturn of 2008 hit.

The crash forced our clients to ask what they could do without, investors pulled out of deals and I lost traction. Business no longer needed help fixing business bugs, they needed to survive.

I found myself in the wrong business at the wrong time. I was selling cool tech when I should have been selling value.

I had the chance to talk with a Disney exec and asked him what his division sold. He said “Disney sells a dream”. That value pitch clearly describes the Disney brand.

Marketing experts argue that a company brand has nothing to do with the product. I agree. People remember the brand and not necessary products. We as customers want something out of the deal. We want value even if that value is a dream.

Maybe that is why I have come to love a restricted business space. A short sales cycle. A clean and basic website. A simple business model. Value can’t hide when things are simple.

The right culture for us?

Culture is a hot topic for many companies. Start ups talk about establishing a great culture. Candidates are looking for the right cultural fit in a prospective company and vice versa. Successful companies attribute culture as the secret to their success. Failing companies talk about changing their culture as part of a turn around plan. Then there are the clichés that companies have “a world class culture” or they have “an agile culture”. But what does it all really mean? What is culture?

One thing is for sure, culture is one of the most powerful forces in business. A company culture sets the tone and direction for the organization. The way the culture goes so do the goods and services. How the goods and services go, so does the market.

In many ways a company culture is a living thing. It fights for its very survival. A company that’s struggling for its existence or is seeking a new product-market fit can be seen as having a startup culture or startup mindset. A culture that is well established and deeply entrenched is fighting to live by leveraging managers who are afraid to try new things. Employees like those at yahoo are fighting against change in leadership and changes in policy to maintain a established culture while leadership is trying to shift a culture to be more open and communicative.

Many companies like Apple, Disney, Instagram and Twitter have a culture that is for the most part in harmony with their markets and enjoy the success that comes from a mutually beneficial relationship.

So where does culture start and where does it end? In my experience culture begins at the top. The example, words used and priorities set by executive leadership is where culture is nourished but it is the rank and file, the individual contributors who are the ones that are growing the culture.

The national culture is influenced by Hollywood and the images of culture that they sell. Yet it is the moviegoers who translate what they see into our national conscious and collective culture. In much the same way businesses are using marking to influence their customers to create and foster a consumer culture.

When a competitor is able to sway away customers from an incumbent it is more that they are swaying customers cultural perspective away from their rival. The products that delight them are more in line with the cultural expectation than by the common definition of “product-market-fit”.

Successful startups are actually recognizing a cultural shift and apply the right culture-product-fit to draw in customers. When the culture-product-fit is right, the market shift can be incredibly fast.

For example consider how fast Instagram was adopted. In just 90 days they went from zero to over one million users and then sold to Facebook in just 551 days. The share-alike culture and personal nature of pictures simply resonated with the culture.

Some of the most powerful features of twitter, such as the @name, hash tags and re-tweeting came not from product mangers imaginations but from watching how their community was using the app. The community grew the features but the company had a culture that was in line with the community culture to help make it happen.

So for corporate and business leaders the most powerful act is one where you act in accordance with the culture and in the direction you want your organization to grow. Align your behavior with the right consumer-cultural-fit and your business will find its natural home. It is your responsibility to find a home of growth or not.

Do unreasonable things.

Last month Bryce Roberts (@bryce) hosted a symposium with Vinod Khosla (@vkhosla) at The Leonardo in Salt Lake City to talk about venture capital and the startup community. Bryce and Vinod didn’t have a set agenda for the discussion, but throughout the conversation a common theme was woven; “Diversity allows people to do unreasonable things.”

Comparing the startup communities of Salt Lake City to the San Francisco bay area, Vinod pointed out that the rich cultural heritage of the Valley has given it a distinct advantage. People from many different backgrounds condensed in to one place as Vinod said, “Encourages’ ideas that are counter to the conventional wisdom. Idea’s that are rooted in the status quo are questioned.”  By creating an environment where people ask why thing are done the way they are, new and novel ideas take root. Ideas that can change the world.

As an example Vinod highlighted Jack Dorsey (@jack) the CEO of Square who set out to redefine how money is transacted. “Square is just 2 years old and is processing 1% of the US GDP.” said Vinod. “It was by questioning the conventional wisdom of how people manage credit card and cash transactions that has allowed Square and Jack to reach such levels of success.”

Although many startup areas like Boston and New York are rich educational and cultural centers, they suffer from what Vinod described as “A mono culture”.  A culture that fosters the status quo.  

To be a successful startup, if you are in the bay or outside Vinod gave this advice; “To be a successful startup, the company needs to take advantage of whatever cultural diversity exists around them.  Foster people who are willing to question how and why things are done the way they are.”  He said,  ”It is difficult to manage people who question the status quo but it is those people that see things as they can become and not just how they are. It is important to dig into the questions they ask and seek out the insights that come from their perspectives.”

“Too many forces are at play to keep you from changing.” Vinod said. “It is through encouragement, experimentation and failure that a startup can find vision.” “Without experiments and failure you will never do anything interesting.”

Vinod ended by saying, “If you are going to be successful better make it worthwhile.”

Note: @marksbirch; I would agree to a point.  Having lived in SFO and spent a lot of time in NYC both are very rich cultural centers. SLC stands out as the mono-culutre that Vinod described.  However I believe that Vinod point was that the mix of cultural background and technology focus that the Bay has is a unique mix for startups.  The NYC startup community is clearly second only to SFO in my opinion.  

How to be successful in marketing.

1. Be interesting.
2. Tell the truth.

If you can’t be interesting or tell the truth then change the product so that you are and that you can.