Recently in Learning from Failure Category

A student come up to me before class the week before their business plans were due this past semester looking very dejected.  

"My concept just can't work," she said.  The more she tried to pivot the business model, the more she uncovered evidence that convinced her that she had reached a dead end.

This is what is known as a teachable moment.

Aspiring entrepreneurs go through an arduous process between the initial spark of an idea to the eventual launch of a business.  

They start by sifting through the various ideas they have to find the one that has the most promise.  Many ideas may appear promising at a first glance, but careful assessment helps to sort out those that have little promise. Eventually, the entrepreneur selects a product or service they hope will be accepted by the market.

The next step is for the entrepreneur to take the idea and begin to build a business model.   

The primary goal of business modeling is not to try and rationalize starting a business based on your idea.  Instead, the objective is to discover all of the challenges, flaws, and gaps that need to be addressed if you have any hope of moving from a good idea to a successful business.  Business modeling is a process of finding problems and fixing them by altering and expanding the operating framework needed to launch the business and, when necessary, pivoting the concept based on what is learned about your customers and what they really want.   

When developing a business model, you may reach a point where you realize that no matter what you do, it just won't work.  This realization can happen very late in the process even at the point when you are developing a written business plan based on the business model.  If that happens, no matter how much time and effort you have put into the project, you need to be decisive and abandon it.  

But this is much easier said than done.  You have spent countless hours talking about the business with friends and family.  You have shared your idea with advisors and mentors.  You may have even pitched the idea in business plan competitions and to investor groups.  It feels like your reputation is riding on getting the business launched.  There is a sense of inevitability that launching the business is what you are going to do.

But do not ignore the evidence.  Have the fortitude to walk away.  The fact that you have spent countless hours getting your idea to this point is not a reason to keep moving ahead.  

So back to that teachable moment....  

As class started that morning I asked the student to share her story with her classmates. I then looked her in the eyes and emphatically said, "You did a great job!  You stayed true to the process and had the courage to acknowledge that your concept just won't work.  Congratulations!"

The end of this story is that while her initial idea did not work out, the process helped her discover several new ideas and gave her the opportunity to make several new connections with people to add to her network.  She learned the lesson that while her idea may have failed, she was successful.

I tell my students that through our program we can help them manage the forty percent of business failure that has its roots in their pre-venture activities.  We can teach them how to better assess opportunities and how to design, test, and pivot their business models.

We can also help them manage the forty percent of business failure that results from businesses that are not prepared for the challenges and pains that result from growth.  We tell them over and over, "The leading cause of business failure is success.  Success is only good when you are prepared for what it brings."

But, we really can't do much to help them with the other twenty percent of failure that comes from events beyond their control -- hurricanes, floods, recessions, and so forth.  Insurance and remembering that Cash is King can serve to buffer against the unpredictable, but sometimes stuff just happens and even such preparation is just not enough to pull them through.

When I was in New York this week to celebrate small business champions, just a few days after the anniversary of 9/11, I thought a lot about all of the small businesses that did not make it through the aftermath of that horrible event.

But some did.

Sure insurance, government assistance, and cash in the bank can help to some extent, but they can only take you so far.

However, a few entrepreneurs do make it through the events that are unpredictable and completely uncontrollable that cause the other twenty percent of business failures.  For those few entrepreneurs who do survive, what helps them make it through is often the same things that got them through the tough times experienced during their original start-up -- determination, passion, grit, hard work, faith, family.

Business on Main has an inspiring story of one small business that has survived 9/11, in spite of being completely dependent on their location next to the World Trade Center.  It is a story that shows what the entrepreneurial spirit is really all about.  You can view it here.

"I have not failed. I've just found 10,000 ways that won't work."  Thomas A. Edison

One of our alumni, Lee Turley, is part of a project to collect lessons from failure called the Edison Equation.  They believe, like Thomas Edison, that failure, missteps, and mistakes an important part of the path to success.  From it we gain wisdom.  Often our failures are just how we learn from the market about what our business model should be.

I had the pleasure of talking with Lee about failure the other day in my office.  You can see the interview here.

Passion is what drives entrepreneurs. 

Passion is often what pushes us to take the risk to launch our venture.  Passion is also what keeps us going when we face the many hurdles and roadblocks that are inherent in almost every entrepreneurial endeavor.  Passion is what helps us break into the market and convince a skeptical market to part with their precious dollars to buy what we have to offer. 

But passion also can create an interesting paradox for entrepreneurs. 

If we let our passion cloud our vision as we assess opportunities we believe are in the market, it leads us to only see the positive evidence to support launching our venture.  I see this in my students everyday. 

Today's students, just like many generations before them, have some strongly held beliefs and values. 

For example, I see many who want to translate their passion for healthier lifestyles into businesses.  But when they are asked to objectively evaluate whether their passion for being healthy is matched by market demand, they become blinded by their strongly held vision.  Rather than look for the trends and evidence that their passion will translate into a successful business, they view the start-up as a virtuous mission to change the world.  They plan an attack of all of the wrongs in society that have created an unhealthy lifestyle, and translate their passion into a business start-up with little hope of success.

I call this Don Quixote Syndrome.

Mind you, a passion to change the world is a good thing.  I tilt at my own windmills everyday.  It is just that I have learned that most of my "causes" don't make good business opportunities. 

But this kind of passion does not always mean that they will have a ready market waiting to buy what they are selling. I am not saying that a business model based on passions such as healthier lifestyles are fatally flawed.  Rather, when they present their rationale for their business model and the value proposition they are tackling, it is rarely based on a ready and eager market.  It becomes a quest to change the way their intended markets think and behave.

While a noble goal, it is a time-consuming and expensive path to creating a successful venture.

So when your passion leads you to want to start a business, take the time to make sure that their are enough willing customers ready to join your quest.  If not, stay true to your passion, but find less expensive ways to pursue it than starting a venture that is doomed from the start.

In the last year running our healthcare company, we had a major hurricane and one of the worst ice storms in North Carolina history both within about five months.  While we survived this double whammy, many small businesses did not.  Ever since then I have tried to warn small business owners about the need to prepare for disasters.

Be it floods, like we just experienced here in Nashville, terrorist attacks, hurricanes, ice storms, and so on, small businesses are much more vulnerable to the impact of such events than larger corporations. 

There are steps that an entrepreneur can take to prepare:

1. "Cash is King". There is no better tool to weather a disaster than cash. Having cash reserves allows businesses to make it through the initial economic paralysis of a major event. Thirty days cash reserves (enough cash to cover essential and fixed expenses) would be my minimum recommendation. Even ninety days of reserve would not be too much to have at this period of time. One business owner recently told me that the new goal that many are setting is six months of cash on hand.

2. Manage overhead carefully. Overhead pushes the breakeven point of any business higher. If sales suddenly drop off for an extended period of time, a lower breakeven point that results from lower overhead expenses can soften the impact of any economic shock. It takes less recovered sales to get back to breakeven.

3. Avoid fixed, long-term commitments. Any major shock on a market may require new business tactics, strategies or even models going forward. One reason that the American auto industry reacted so poorly to the oil shock in the 1970s is that they had built their businesses assuming a very static business model. It literally took them years to undo this model and adjust to the new reality that they faced. They had to be able to react much more quickly to changing customer preferences, and operate in a market with many new competitors where there used to be only three.

4. Build in flexibility. Understand that you may need to quickly undo some decisions. Make this as easy as possible for you to accomplish.

5. Watch and manage your inventories carefully. Certainly you should not choke your business growth, but don't go overboard with purchasing either. Purchasing raw materials or other inventory using volume discounts may not be wise. Be as "just in time" with your inventory as possible.

6. Create contingency plans. These need to be major plans for how your operations will be handled given a variety of scenarios, and minor plans that deal with the day-to-day safety and security of your employees and customers.

7. Look ahead. It is critically important to try to look beyond any single event, no matter how devastating. Believe in yourself, your business, and the system that makes it possible. Entrepreneurs need to be bold leaders. As we saw here in Nashville after the flood, the best leadership will not come from the politicians. Instead, it will come from the grassroots of our economic system. Be strong, be brave and be confident and others will follow.

There are some excellent resources for small business owners for disaster planning. The SBA has a new website called Prepare My Business that offers information on planning, education, testing your key systems, and disaster assistance.  And American Express OPEN has a new tool called InsuranceEdge to help assess the right insurance you need to protect your small business.

Every small business owner (and homeowner, for that matter) should heed these words from the SBA:

Ask yourself: what if the worst happened? How would it affect my business and my family? Would we survive if the business were closed down for weeks, months, or perhaps my entire revenue season? What can I do to make sure we survive?

Be a little pessimistic now, and assume it CAN happen to you. Develop a Disaster Plan for your home or business now so you can rest a little more easily in the future.

The SBA estimates that 25% of small businesses never reopen after a disaster, while other estimates run as high as 40-60%.  The better prepared you are, the better your chance to be on the right side of those statistics. 

My students learn very quickly that my favorite source of material to teach from comes from my missteps and mistakes.  Gregory Go and Glenn Stansberry have pulled together a collection of 101 mistakes from a multitude of entrepreneurs at American Express OPEN.  Here is how they describe their motivation for this this effort:

Let's be honest: running a small business is not an easy task. Especially in an economic downturn. Small business owners are keenly aware that mistakes can be very costly at this point in time.

Yet in order to have success, at least a few mistakes have to be made along the way. It's a part of building and growing. Oscar Wilde once said 'experience is the name everyone gives to their mistakes.' And even the most successful business owners have had their fair share of blunders.

Indeed!!  I shared a couple of my own mistakes -- or should I say "shared my experience" -- with them for this collection.

We already know that higher tax rates decrease the rate of entrepreneurial start-ups in an economy.  My friend and colleague John Wark passed along a post from TaxProf Blog that cites a recent study by Rafael Efrat, of California State University-Northridge suggesting that taxes are also a culprit in small business failures, as well. 

TaxProf Blog offers this quote from the conclusion of the study:

Consistent with the growing tax burden on small-business owners, as well as the growing body of evidence linking higher tax burden with limited entrepreneurial growth and higher closure rates, this study has found that tax problems constitute an important reason for bankruptcy filings for a sizable number of entrepreneurs. Interestingly, those entrepreneurs that attribute their business collapse to tax problems do not come from disadvantageous background. Instead, the average entrepreneur in the bankruptcy sample that has faulted tax problems for his financial woes was typically older male, white, native-born, well-educated and an experienced business owner. Nonetheless, the typical entrepreneur with tax problem in the bankruptcy sample was facing enormously higher debt burden with more than five times as much debts as other entrepreneurs in the bankruptcy sample.

I have not written about a golf metaphor for entrepreneurship in quite a while, but the US Open from this past weekend offered an important lesson.

No matter how good you are or how well you prepare, there are certain things that can happen that are totally outside of your control.  The golfers who got the bad end of the weather this past weekend at the US Open experienced this first hand.  Some of the golfers played their early rounds in constant rain and windy weather.  Others, due to their tee times, played with little or no rain -- just a soft and receptive course awaited them after the rains ended.

Was this fair?  That is not the point.  It is, as they say, what it is.

I tell my students that we can help them manage about 80% of the causes for failure in their businesses. 

About 40% of failure happens because the entrepreneur jumped into a business that was doomed from the start.  They did not properly assess the opportunity prior to launch.  Rather, they impulsively moved ahead with little forethought. 

About 40% of failure happens because the entrepreneur is not ready for success once it happens.  Growth is a dangerous time for a small business -- just ask any banker.  If you are not prepared to properly manage and develop your business as it grows, you will soon join the legions of entrepreneurs who failed due to their own success.  They did not create the systems, grow the team, or secure the resources necessary to deal with the growing pains that sink so many promising ventures.  We try to prepare our students with the skills and knowledge to manage their growing ventures successfully.

But then there is that other 20% of business failure.  This failure comes from what you cannot predict nor plan for.  Call it uncertainty, risk, or just bad luck.  Sometimes things happen to even the most skilled and prepared entrepreneurs that are totally outside of their ability to manage. 

My favorite example of this is an old diet supplement that used to be on the market -- it was called Ayds.  The product was growing nicely until a deadly disease with the same sounding name crept into our consciousness -- AIDS.  The sales of the product plummeted.  The spread of a deadly disease with a similar sounding name is nothing that could have been predicted, and there was very little they could do to adjust in time once people stopped buying the product.

This is why I put the Serenity Prayer, or as I call it the Entrepreneurs' Prayer at the end of most of my syllabi for my classes:

GOD, GRANT ME THE SERENITY
TO ACCEPT THOSE I CANNOT CHANGE,
THE COURAGE TO CHANGE THE THINGS I CAN,
AND THE WISDOM TO KNOW THE DIFFERENCE

The Toronto Star (thanks to my graduate assistant Joe Ormont for finding things like this one!) has an interesting article about signs of trouble that small businesses should be watching out for:

Financial: Are you struggling to make payments like rent? Is it hard to buy inventory? Are you taking on more debt than you're comfortable with just to keep the business going? Is your banker worried when he reviews your statements?

Customers: Is there a decrease in repeat business? Is there an increase in customer complaints? Are their lawsuits from customers?

Employees: Is employee morale diminishing? Are key employees leaving? Are departments fighting with each other?

However, I don't really agree with the author's comments that follow these quick and dirty diagnostics -- might be time to shut down the business.  I would suggest that these are opportunities to right the ship.  But, I guess that is the difference in outlook between an entrepreneur who is a blogger and a journalist.... 

Over the years I have become more comfortable using my missteps and failures as lessons and examples for my students.  Of course, they seem to love to hear the success stories.  But they need to learn that hardship, challenge and failure all teach us important lessons about our business, our customers, and ourselves.

Bill Hobbs sent along a good post from The Executive Update that speaks to learning from failure.

[W]e tend to live in an avoidance society, where failure is often overlooked or ignored and we only focus on successes. That's a mistake. Leadership comes from learning lessons taught by failure. People rebound from failure because they choose to learn from their mistakes.

Well said.