Tuesday, June 4, 2013

From VC Brad Feld - when failure is the best option

On the WSJ.com Accelerators blog, VC Brad Feld recently posted a story about managing failure in a startup. Here's an excerpt:

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 [the founder] 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.

Mark had a drive to succeed that in this case was blinding him to a reality. His company wasn't succeeding yet, and by draining the business's funds it was becoming less and less likely to succeed. He needed an outside voice (in this case, a patient and trusting investor) to let him know there was another path. By closing the door on this opportunity, he would have time and energy to regroup and start fresh. And his main investor wouldn't crucify him for it.

Undeclared failure is insidious - it erodes our confidence, distracts us from more promising pursuits, and affects those we care about. There are always restarts in life, second chances (Chapter 5 in the book). We often overestimate others' expectations of us.

Feld notes that Mark's next company was highly successful.

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