Why They Tell You To ‘Fail Fast’ In Business: Lessons from Failed Startups

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Fail fast business startup lesson

The Overconfident Entrepreneur

Entrepreneurs are told to ‘fail fast’ because the faster you fail, the sooner you can fix problems that can spell the end of your startup. The ‘fail fast’ mantra also accurately describes the fast-paced life cycle of a new business, but fast or slow, failing is no longer a bad word for entrepreneurs. Everyone wants to ‘fail fast’ like Stewart Butterfield.

Butterfield’s Game Neverending did end in 2004, and it gave birth to an incredibly popular photo-uploading tool, Flickr. Yahoo bought Flickr for a cool $20 million a year after Butterfield’s game ended. Four years pass and Butterfield did it again. This time, while working on a nonviolent MMO (massively multiplayer online game), Glitch, Butterfield and his team created Slack, a business messaging and collaboration app. Glitch’s fate was to be a blip in startup history, but Slack experienced a meteoric rise. In late 2014, Slack had a historic $120 million round of investment and by April 2015 the company was valued at $3 billion.

That’s failing fast in the best way possible.

So, before you stop reading, and furiously attempt to fail faster than anyone has before, let these sobering statistics sink in. Harvard Business School senior lecturer, Shikhar Ghosh has pointed out that how you define failure changes the rates startups crash and burn. Ghosh breaks down startup flops for us this way:

  • 30-40 percent of startups totally fail and are liquidated
  • 70-80 percent of startups fail to meet the projected return on investment
  • 90-95 percent of startups fail to beat a declared projection

Put simply, there are four areas that generally explain why a game-changer idea never reaches the public’s radar.

The financial or regulatory environment changes and funding (or liquidity) are the ultimate downfall.

Mistakes were made assessing the market.

The position of your startup must be accurate and marketing must make the value proposition to the right customers. Sock puppets are cute, but what do they tell customers about your value proposition? Shortly after Pets.com went public in 2000, it launched a very expensive ad campaign, spending an average of $400 per new customer, which ultimately benefited Pets.com’s competitors, namely, PetSmart. Today, PetSmart leads the market with revenues of $5.32 billion in 2018. Pets.com could not distinguish itself from the other e-commerce pet sites crowding the field, no matter how much money it spent. Pets.com liquidated in November 2000, ten months after its IPO in January 2000.

Your product is not scaled correctly, as in the case of WebVan.com.

The fourth and final reason startups are not successful is the overconfident entrepreneur.

Those four problem areas—financial environment, market, product, and entrepreneurs—are why there are thousands of business accelerators worldwide. Entrepreneurs need to be 200% sure of their idea, sure of their ability to sell it to funders, and sure of their ability to make that idea into a successful business. Entrepreneurs need to have the confidence to see their way to the other side of any adversity they may face.

Some who study entrepreneurs say that entrepreneurs fail (so often) because they are overconfident. Well, don’t entrepreneurs have to be?

Consider what Neil Patel said about the failed French digital marketing startup, Dijiwan’s, overconfident entrepreneurs: “Successful entrepreneurs understand that they must work on their business, not in their business.”

Now that we are abundantly clear that launching a startup is not for the faint of heart, and that there are lots of ways a new business can fail. Let’s learn to better recognize when overconfident entrepreneur-itis is happening to your startup by brushing up on our startup history. To borrow another phrase: work smarter, not harder.

Core Competencies Can Make Or Break A Startup

Louis Borders knew that he was not a CEO and that is why he hired George Shaheen, formerly the head of Andersen Consulting (now Accenture) to take over WebVan.com, two months before the company went public in 1999. By July 2001, WebVan.com was out of money. WebVan.com was a legendary flop of the dot-com era that has a few key lessons about the importance of focusing on core competencies during the startup phase.

Louis Borders was a successful entrepreneur who had already made a fortune in retail, ultimately selling Borders Books to Kmart in 1987. In 1996, Borders turned his attention to a giant problem that every American household faced: groceries. He wanted to improve the way people shopped for and filled their refrigerators and cupboards using the internet. This was an idea way ahead of its time.

WebVan.com amassed an enormous endowment of $1 billion; part VC money from heavy-hitters, Sequoia Capital, Benchmark Capital, Softbank, Goldman Sachs and even Yahoo, part from a blockbuster IPO. In six months, WebVan.com was operating in 10 markets from San Diego to Atlanta.

The company bought a failing competitor (HomeGrocer.com), built warehouses at $30 million each, outfitted a fleet of trucks with the latest technology, and employed thousands. It was the era of Get Big Fast and WebVan.com was no exception. The debts mounted as what proved to be great in San Francisco, California was not so great in Chicago, Illinois. When the debt piled up, Shaheen was replaced (taking his $357,000 a year, for life!) by a GE executive, Robert Swan. It is important to note that neither CEO had any retail grocery experience.

Within two years of operation, WebVan.com had burned through $830,000. When it filed for bankruptcy in the summer of 2001, over 2,000 employees were let go.

“The lesson is, you don’t need a zillion dollars to start a great company,” he said. “With a well-crafted plan, you can start a popular, broad-market brand with a modest amount of money. The big opportunity is out there.” (Fost, 2003)

What did we learn from WebVan.com failing so fast? WebVan.com scaled before it was sure about the product-market fit; early-adopter San Francisco, California is not the same as Dallas, Texas. No one had done anything like e-groceries before WebVan.com and without a proven business model, meeting investor’s expectations was based on a philosophy of GBF, rather than business performance. And, though their CEOs were best-in-class, they were not able to slow down and get back to business basics. Overconfidence in their ability to avoid anything truly catastrophic may have played a critical part in the e-grocer’s demise.

Outsource Accounting To Achieve A Scalable, Flexible, And Valuable Company

An accounting process and technology to manage financial and physical assets, payroll, accounts payable, and billing are the furthest things from an entrepreneur’s mind when their IPO has just raised $375 million from selling 25 million shares, as WebVan.com’s did in 1999. And yet, core competencies are the processes that entrepreneurs cannot afford to overlook when their startup is heating up.

That is why tempCFO and inDinero joined forces. We can now offer visionary entrepreneurs an ace team and the best-in-class technology to scale, the flexibility to prove the market and stay with their vision through the funding process, and the rock-solid processes that produce value for customers and investors.

Startup success can take a while. For example, Amazon’s first profitable quarter was four years after its first IPO in 1997; Tesla reported back-to-back profits for the first time in 15 years in 2018; and Twitter has not yet had a profitable year (quarters, yes) since its IPO in 2013.

Why ‘Fail Fast’?

Startups are a joy-ride without a seat belt. The incorrigible optimist inside many an entrepreneur sees what could be and once seen, that entrepreneur cannot unsee the future. The mantra of failing fast is only useful if the overconfident entrepreneur is willing to learn how to not make the same mistakes next time. In other words: fail smarter.

We are ready to help your startup plan, fund, and scale. Contact us to learn how we can help your startup succeed.

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