Archive for 'March 2011'

    Why failure is good

    March 31, 2011 1:57 PM by Stephen
    History is a great teacher. Of all life’s experiences, failure is the best teacher of all. Most good VCs look for at least one failure in an entrepreneur’s track record. Failure, like adversity, generally reveals true character. I was on a BoD where things got rough, and there was concern over solvency (this is a bad thing for personal liability)--one of the directors resigned immediately. To me this is chicken#$%#!

    Now I understand that the law is set up to penalize director incompetence, but in some places it’s set up to penalize failure despite directors and founder efforts to fix the problems. When things get tough everyone should be rolling up their sleeves to help fix the problem not the blame. We managed to turn this company around, but not without a few threats of greenmail and the usual legal "BS" to go along with it. In the process we learned a lot about the CEO and his team—and the CEO learned a lot about the merits of proper BoD selection ;-)

    Most problems can be solved given the right team and enough runway.

    I don’t actually believe there is such a thing as failure, it’s more how you handle things going wrong that determines true failure or character. After all, it’s an ill wind that blows no good for someone. Truly great entrepreneurs see failure as an opportunity–c.f. James B. Stockdale in a POW camp.

    Remember in ’99 when the market was going crazy for Internet and telecom, and how easy it was to be successful then, contrasted by how impossible it was to achieve success in 2002? Many many companies went to the wall, but surprisingly, many others found a way to adapt and survive--technically they failed to deliver as promised, but to me they achieved stellar success in learning to navigate perhaps the worst market downturn any of us has ever seen--we hope ;-).

    In Australia there is a well known company that is considered one of the true success stories of tech startups--it was acquired for several hundreds of millions of dollars and made founders wealthy. Some VCs there quote it as the deal of the decade but I would argue it was a shame they didn’t take it public and build a sustaining company with a market cap beyond a billion. In the tech bubble time it was easy to sell companies for inflated prices. Selling too soon is something we are all guilty of as entrepreneurs--in contrast, building something sustaining is more risky but is better in every sense if it can be done.

    Now in some countries failure is considered a curse, and those who fail are penalized severely--by English law there is no Chapter 11, so if a company cannot pay its debts the directors could end up in jail. In the startup world, failed entrepreneurs get ostracized like the unclean--many VCs I know like to see at least one failure in an entrepreneurs record because it gives an opportunity to see what that person is really made of, and how they dealt with a bad situation--it’s a great opportunity to shine and turn bad luck into good.

    In the tech downturn you were a hero if you were able to sell your company for any price, even nothing, as long as the acquirer carried the liabilities--companies with $50-60 million invested capital typically sold for $1.5 million in stock, regardless of their revenue--it was as crazy and lopsided as it was on the way up leading to the crash.

    One well known CEO friend of mine burned a $200+ million hole in the ground--you may ask what does one do to walk away from a train wreck like that? Normally you would expect to spend a few years in the penalty box--maybe the rest of your life? But not him. When he found trouble raising VC money for his next gig, he decided to stick it to the VCs and become one--he raised a $200 million fund, and recently a $400 million fund--so failure is definitely in the eyes of the beholder ;-)
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