“Starting a company is like jumping off a cliff and assembling a plane on the way down.”
The reason I like using this metaphor is because it makes it very clear that the default outcome for almost any startup is failure. The challenge for an entrepreneur is to get the company from default dead (falling) to default alive, with revenues that more than cover operating costs (flying). In this metaphor, raising money is like catching a thermal draft; it lifts you further above the surface, but you’re still going to end up crashing if you don’t get your plane running.
That’s one of the reasons why Ben Casnocha and I advised people to adopt ABZ Planning in our book, The Startup of You. It’s not enough for entrepreneurs to have a Plan A and Plan B; they need a Plan Z for how they’ll recover if they fail.
By nature, entrepreneurs are optimists. Nearly everyone thinks, “A lot of other people fail, but me, I’m going to win.” It’s a little bit like the 73% of Americans who believe that they are above-average drivers (a figure that rises to 79% if you just poll men).
But while this optimism is essential to keep going in the face of major challenges, understanding the ins and outs of failure can increase the chances of success. My Blitzscaling co-author Chris Yeh and I discussed this in depth in a new episode of Greymatter. You can listen to the podcast here.
Don’t Fail Fast – Learn Fast
A classic but frequently misunderstood dictum for founders is that they should fail fast and celebrate failure. When I hear this, I think, “No, no, no!” The goal isn’t to fail fast – it’s to learn fast by tackling your most dangerous potential points of failure. By testing your investment thesis as quickly as possible, you give yourself more time to correct your mistakes and change your approach.
The goal of this thesis-driven approach isn’t to prove something to investors. It’s far more important to prove it to yourself. The attitude you should have is, “I’m going to test this thesis until I believe that it’s worth me investing my time. If it’s not worth investing my time, it’s certainly not a good idea to go out and raise money for it.”
Of course, proving your thesis is easier said than done. One of the things that is so challenging about startups is that there are multiple ways you can fail. Even as you’re working on your initial test, there are seven other fires burning, such as the need to recruit talent, finding product market fit, managing market volatility, and of course, a global pandemic. This is one of the chief reasons there’s a high fatality rate for startups.
In addition to conducting experiments, another great way to test your thesis is to leverage what I call network intelligence. Reach out to the smartest people you know and get their perspective on what needs to go right, and what might go wrong. You don’t have to follow their advice (and indeed, you’ll likely get conflicting advice from those smart people) but you do need to factor it into your decision-making process. Even if you don’t happen to live in a major startup hub like Silicon Valley, so many smart people are accessible online, whether through Zoom, or even through their podcasts or blog posts. For example, on a recent episode of my podcast, Masters of Scale, Shopify’s Tobi Lutke provides some great advice on how to learn from others and invent your own new things.
Learning should be an ongoing objective for entrepreneurs. When you succeed, it’s only for now. There are always new problems; new problems with organization, new problems with go-to market, new problems with product, new problems with competitors. Once a founder starts acting like they don’t need to learn anymore, more often than not, that’s the beginning of the end or even very close to the end. Once people decide to stop learning, they’ve decided to stop adapting.
My Educational Failure
LinkedIn was not my first social networking company. Back in the Dot Com boom, I started one of the first social networks, SocialNet. Spoiler alert: it failed. (I told the complete story in the Wall Street Journal.)
I made a huge number of mistakes. For example I wanted to unveil a perfect product that everyone would love. We spent months too long in the development process because I had an overly precise theory. I was right about the basic need for such a product, but my decision to build my perfect vision rather than launching a less-refined product that we could adapt based on market feedback delayed finding product-market fit. It also meant that I wasn’t focused on go-to-market strategy. In fact, you should co-design your product and go-to-market strategy; if you don’t have a go-to market strategy, it doesn’t matter if your product is good or bad because you won’t have enough customer feedback to tell the difference.
Another mistake I made was to focus on hiring people with 10+ years of successful experience in a particular job. While this appeared logical, in practice these criteria meant that I tended to hire people who worked for large companies in stable markets (the only people who could spend 10 years on a job without failing). What I needed were people who could twist, turn, and pivot as we learned. Success imprints more strongly than failure. When people succeed, they think, “I know what to do.” And they maintain that certainty even as they drive the proverbial bus off a cliff. When people fail, they think, “I need to learn more.” I should have hired learners, not “knowers”.
My final big mistake was picking the wrong investors. We raised money from some very smart people, but the problem was, they thought they were smarter than us. I’ll grant you, I was young and made a lot of mistakes, but I learned from those mistakes. And when I went to them and said, “I’ve learned from these mistakes, and therefore we should do X,” they responded, “No. We just need to do television advertising, and that’s what we’re going to make the company do.” I was sure that wasn’t going to work, and that’s when I left SocialNet for PayPal.
One issue to watch out for are investors who lack operating experience but believe that they are “pattern matchers”. That’s like hiring a coach who’s never played the game, but still thinks, “Hey Michael Jordan, you need to listen to my advice.” There are some really smart people who’ve been great partners to founders without having done it themselves, but that’s the exception.
Entrepreneurs should seek out investors who will be good partners on both the upside and the downside. That doesn’t mean that they won’t push you. But it does mean that they believe deeply in the mission and in you, and will walk through the Valley of the Shadow of Death with you, working with you to get to the other side even if that means challenging you along the way.
Know When To Pivot, Know When To Fold
Given my advice to take a thesis-driven approach, it should come as no surprise that I believe that the best framework for knowing when to pivot is to define and evaluate an explicit investment thesis. Write down all the things that need to be true–of the market, of your customers, of the product, of the competition, of the revenue model–in order for your startup to succeed. This investment thesis isn’t set in stone and will evolve over time, but having it gives you a much stronger basis for evaluating the need to pivot.
As you make progress, ask yourself, “Is my confidence in my investment thesis going up or down?” Naturally, most people picture their confidence going up and down because of new data, and data is a very, very important factor. But you can also learn without any new data, simply by thinking things through. This is how PayPal’s pivoted its business model.
The company began with a thesis: “We’ve got a great idea for how to build encryption on mobile phones. It’s going to be a platform for awesome apps” Since I was a board member, I pointed out, “Developers won’t build apps on your platform unless they have a really good reason to do so.” The company’s response was, “We’ll build a killer app: cash on mobile phones.” My next question was, “How long will it take to build and deploy that app?” The answer was three to five years, which would be way too long. So the company quickly built a version of the mobile cash app for the PalmPilot (you can think of it as a very primitive iPhone, but without the phone), with the idea that it would allow people to split dinner bills without using cash. I thought about that scenario and came back and said, “Here we are in Silicon Valley, which is ground zero for the PalmPilot. I bet that if we walk to every restaurant on University Avenue in Palo Alto, walk to every single table, and record how many tables there were where every diner had a PalmPilot, the answer would be between zero and one per restaurant. That means that even if we build a perfect product and get 100% market penetration, it won’t work. It means that we’re dead if we pursue this strategy.”
Fortunately, Max Levchin had an answer: “”Oh, that’s easy. We can sync payments for email.” Scott Banister (who was the other outside board member) and I looked at each other and said, “That’s a great idea.” Email payments turned out to be the product that made PayPal a success, and about a year later, the company quietly dropped its PalmPilot application.
Max, Peter Thiel, and the PayPal team didn’t need to run an experiment to realize that the PalmPilot approach wasn’t going to work, and to switch to a different thesis (email payments) in which they had much greater confidence.
Now, part of how I try to help entrepreneurs when I’m working with them is to help them develop a good barometer to measure their confidence in the investment thesis. My rule of thumb is that when your new ideas excite you less than your old ideas did when you first conceived them, it’s time to change the game or fold.
Oftentimes, entrepreneurs don’t realize that folding is the best move. Handing money back to investors when you no longer believe in your thesis is perfectly appropriate. You might be tempted to say, “We still have money in the bank. We could do something else,” to which my response would be, “That assumes that it is this exact team, and this exact group of investors that are best suited to take on this new opportunity.” Why not instead just hand back the money and then reform a new team? Bring back the investors that you want, and start with a fresh clean slate. If you keep your investors’ money and then fail again, not only have you failed twice, but you failed twice in a way that didn’t respect the integrity of the project and your partnership with investors.
Whatever you decide to do, decide and act quickly. When you make a decision quickly, you usually leave yourself more room to maneuver than if you take a long time to decide. If necessary, make a default decision, so that even as you gather more information, you keep moving forward.
The Psychology of Failure
Everyone who decides to become an entrepreneur needs to acknowledge that failure is a very real possibility so that they don’t break under pressure. This is why army training camps train recruits with screaming drill sergeants and loud gunfire–they need to prepare the soldiers for what actually happens in battle. That’s why I encourage entrepreneurs to work at a startup before they try starting their own.
Next, entrepreneurs need to plan for both a mad sprint and a grueling marathon. What ongoing practices do you and your team need to manage your stress and maintain a high level of performance? In the very early days of LinkedIn, our team included a bunch of people who had families. Thus, we decided to have a “have dinner with your kids” culture. Team members were expected to go home and have dinner with their family so they could see their kids every day. Then, after dinner, everyone was expected to get back online and work together for the rest of the evening.
Entrepreneurs should also build relationships outside the team as well. Not only do these relationships provide valuable network intelligence in the form of insights and lessons that can power your investment thesis, but this also helps you build up a tribe that will be able to help support you if (or rather, when) times get tough. You need their advice on dealing with extremely stressful situations.
Finally, you need to remember that failure is not the end. Your company might fail, but that doesn’t make you a failure.
Personally, I really like investing in entrepreneurs who have failed, but can show that they’ve learned from their experience and now better understand the nature of the game and how to manage its risks.
Ask yourself whether the people with whom you built your failed startup would recommend you more after their experience, or less? If they’d recommend you more because you were smart, you learned, and you acted with integrity, then investors will likely feel the same. To achieve this goal, work with people in a way so that they will want to work with you for the rest of your professional lives and careers.
While failure is often the default state for startups, it is neither inevitable nor is it necessarily the end of the story. If you are able to bring yourself to look failure in the eye, you can take steps to maximize your chance of success. And even if you fail despite your best efforts, if you behave ethically and demonstrate that you’ve learned from the mistakes you might have made along the way, failure is definitely not the end. In fact, it may be the beginning.
Given the parallels between starting companies and playing games, I like to recall the title of an excellent book on the early days of Nintendo. That title? Game Over. Press Start to Continue. Words to work by.