In a startup — or in any business environment — failing fast, or knowing when to fold and when to redirect, not only offers key development opportunities but also can be great for business.
December 23, 2015
The idea of failing in any context often has a negative connotation, but there are times when not only failing but also failing fast can be the quickest and least expensive way to learn — and in many cases create the shortest path to success.
In a startup environment, funds and other resources are often limited and only provide a short runway, or amount of time, for the entrepreneur to be successful before packing it in and going home. They tell a few friends and neighbors about their dream, and the friends and neighbors want to help so they give them some money to get started. Not always because they think the idea is good, but because they care about and believe in the person. The money entrepreneurs receive from family and friends is often referred to as “love money.”
So, now the entrepreneur is off on their venture developing the product or service they feel will change the world. The problem is the entrepreneur likely doesn’t know if there’s a market — essentially, is anyone willing to pay for what they are developing? This “build it and hope they will come” model rarely works, and there’s only so much love money to go around if things don’t work out.
Further, once entrepreneurs take their family and friends’ money, they feel obligated to give it their best effort no matter what. Stopping or admitting the product or service is not viable is not an option, so they keep pushing. This can lead to frustration and disappointment as individuals will stick with an idea or a concept long after they realize there is no market to support a company.
Being able to identify customer segments and the level of interest in the market is key to determine whether to keep going down the same path or try to come up with something new and different. In the startup world, this is called “pivoting,” when a company realizes what it set out to do has no market or the market is so insignificant it cannot make money from the offering as it exists.
Knowing when to pivot or move on is tough because failure is not always easy to quantify. Entrepreneurs are often pursuing a dream, which makes it difficult to give up. They’ll limp along for a long time, and then realize there is nothing left and that it’s better to move on. By this point, they’re so demoralized and depressed that they give up other ideas of entrepreneurship and settle for a less-than-satisfying job to pay the mortgage and feed the kids.
Pivots can happen in different areas. The most common is around the product, but they also can happen around target customer segments, pricing and sales approaches such as a “freemium” vs. pay-as-you-go models, funding sources, marketing approaches such as online or retail, distribution channels such as direct to customers or through resellers, and even technology platforms. Using pricing as an example, someone may have a great idea, but will anyone pay enough for it to allow them to build a business? An approach known as “getting out of the office” to see what potential customers think is a common learning mechanism in a startup environment.
Emotions also can keep individuals from pivoting. Even when data clearly says it is time to move on, no one wants to give up and admit they made a mistake. Pride is tough to overcome. As the saying goes, no one wants to admit their baby is ugly.
Research supports these facts. CB Insights published the Top 20 Reasons Startups Fail, which offers multiple reasons why failing faster is a good thing (Figure
1). For example, the No. 1 reason startups fail is there is no market for their product — some 42 percent of failures are attributed to this. The sooner a startup realizes this, the less time, money and energy are wasted. It also allows the entrepreneur to move on to a new, hopefully better researched opportunity.
Failing faster also can prompt after action reviews of what happened sooner. Then individuals can avoid waiting too long before making the necessary pivot and becoming successful.
For example, Groupon Inc. started out as an online platform for activists, which the public found little interest in. Then the company tried an online coupon for a pizza restaurant in the lobby of the building it was in; it was the start of a new business that was scalable and sustainable.
Development in a startup environment is different than in a traditional organization. In a traditional company, development is a step-by-step process from beginning to end. The process is known as “waterfall” (Figure 2). One step is based on what was done in the previous step. This takes time and money to get to the end point before identifying product viability and potential customer acceptance. In a startup environment, a more common process is known as “agile.” In an agile approach small steps are taken in an ongoing iterative process, which continually acquires feedback from customers and other stakeholders on product or service direction and development.
The quicker entrepreneurs learn lessons, the more effective a startup can be. A commonly used tool in the startup world is known as the Business Model Canvas.
It’s a quick one-page view of where a company is in nine strategic areas and helps identify the things it needs to consider. It can help company leaders think through their strategy, and it can be used as a tool to describe to others what they are doing. It is also an effective tool to get feedback and identify when a pivot may be in order.
Measurement and the metrics startups use also can be challenging. Individuals need to determine what metrics to measure. A startup may not have the same type of data that existing firms do, and even if they do, it may not be as relevant. For example, many startups don’t have sales, so fixed and variable costs are not real indicators of success or failure at this stage, and market segment growth does not fit.
Some areas to consider instead are, how much funding is available, and will it last until goals are met? Are estimates for things like websites and operating expenses in line with predictions? Also, it helps to have a baseline and to measure regularly. Monthly is a good starting point. For some measures, weekly would be better.
This goes back to failing fast, and pivoting faster so as not to burn through revenue and waste time. Accurate verification and validation are important and can be used together to check that a product, service or system meets requirements and specifications and to ensure a product or service fulfills its intended purpose.
The speed of innovation and pace of change also can have a major effect on a startup. Since these companies have no established customer base or customer loyalty, changes in laws, technology, taxes and globalism can quickly affect the product or service a startup is trying to create.
Lean is a common term in the startup environment. It is focused on speed and efficiency. Eric Ries, a Silicon Valley entrepreneur, pioneered the concept and has a book on the topic, “The Lean Startup.” Lean focuses on designing a product or service with minimal features. The idea is that rather than spend a lot of time and money to bring a product to market, it is better to bring a simple version, also known as the minimum viable product, to market and evaluate customer feedback. It is an iterative process of improvement with a continuous cycle of feedback and improvement.
Testing and getting customer reaction to a product saves time and money in the overall development process, and can help build customer loyalty along the way.
For example, entrepreneurs can use A/B testing to help quickly determine product or service viability. In an A/B test, different versions of a product are offered to customers at the same time to determine which is more accepted and why.
Rapid learning and access to mentors who can help identify issues also can help entrepreneurs fail fast and find out where to pivot to become effective. Learning comes in many ways and not just from formal classes. Access to other startups that have been there and done that can help identify issues to watch out for.
Further, because there is no formal corporate structure, startups need to be good at finding mentors and developing relationships. Various stakeholders, investors, potential customers, business partners and peer companies can help in the learning process.
Failure is valued in a startup environment for the many lessons it teaches. There are even conventions such as FailCon that take place solely to look at and learn from startup failures. It’s not about pointing fingers in blame, but analyzing what went wrong and learning from it. Events like FailCon bring together a wide range of individuals, not just the entrepreneurs who failed. Investors, designers and technical developers all have a perspective on why an organization failed and what can be learned from it.
There is no question we can learn from failure. The question is how to fail faster to learn when to change direction and move to something that will help us become more successful.