Failure the key to new venture success
Failure the key to success
Like any other adventure, starting a new business venture is a series of experiences, and a portfolio of skills that have to be learnt. Overnight success is rare. Many venturers fail, and fail repeatedly, before they succeed. And failure is often the key to success. Provided, of course, we learn from these so-called ‘failures’, and change our behaviour.
One of many researchers who evidence these facts is Peter Cohan, a researcher and teacher of entrepreneurs at the renowned Babson College in the US.
After interviewing over 200 start-up CEOs for his book Hungry Start-up Strategy, Cohan develops two recurring themes:
- how so many successful start-up ventures and venturers are hungry to create a different world they want to live in, and
- how so many fail over and over again before they learn how to succeed.
Cohan’s many examples include: PayPal – now one of the world’s largest on-line payment systems. Collaborate – an app that enhanced team productivity which grew out of Kikbits in 2011 and was acquired by Cisco in December 2017. And Bullhorn – a software as a service recruiting company, which now has 10,000 clients, 350,000 users, and offices in Boston, Sydney, St Louis and London.
So what is the new venture failure rate?
Statistics about failurerates of new venture start-ups vary widely.Different studies claim that within 3-5 years, 40% to 92% of new ventures fold. This means between 8% and 60% of start-ups still exist after 5 years. How ‘successful’ these survivors are, is another matter, of course. But they’ve met the first rule of business success: Survive!
These wide and wild fluctuations arise because different researchers use different definitions of a ‘start-up’ and ‘success’. And they use different data bases, different sample sizes, and most often fall back on extrapolations or guesstimates based on their sample.
In addition, as we’d expect, the failure and success rates change from country to country, from industry to industry, and around whether or not the venture is funded by Angels or Venture Capitalists.
For example, one sample study of 3,200 US high-tech, high growth web or mobile start-ups indicated 92% folded within the first 3 years. And 74% of the 3,200 folded because they scaled too early, or did not collaborate enough
In the US, less than 1% of companies that seek venture capital get it. And of these, the chances of the start-up turning into a ‘unicorn’ valued at $1 billion or more, are 1 in 10,000.
See: “Should you bother with venture capital funding – the numbers suggest no.”
Learning from failure
Whatever the figures say, in reality new venture failure-rate figures are high. But on average -if this means anything – the combined failure rate of home-based businesses, one-person ventures, small businesses of between 2-10 people, and high-tech, high-growth start-ups ventures, around the world, probably sits around 50%. . Give or take 30%!!!
And interestingly, it seems for each new venture started, another one folds, somewhere in the world – as we experience tectonic shifts in market shares globally.
In practice, this means our first, second, or third ventures may be the cost of us going to “entrepreneurial university”. With our fourth or fifth ventures being the ones that last beyond five years, and succeed in a variety of ways.
For example, in his early years, before he opted for collaborative venturing, our Founder-Chairman, Neville Christie, started and grew 44 new ventures. 41 of these were successful enough to sell or pass on to others. But the three failures were, to quote his words, “doozies – taking much of the capital I’d built through the other 41.”
But what about ‘overnight’ successes and ‘unicorns’ that accelerate to billion dollar valuations with almost no profits?
Well, in Australia, typically every week one or more people do win the first division Tatt’s Saturday night Lotto. However the likelihood of you or I winning – assuming we buy a ticket – is 1 in 8,145, 060. Not great odds!
Equally. there are very rare examples of almost instant start-up venture success. YouTube– initially funded by Angel finance and then venture capital – was one of the fastest companies ever to get to a $US billion+valuation. The site opened on April 23, 2005. And on November 13 2006, Google closed the deal to buy YouTube for $1.65 billion in stock. Today, if broken out from Google’s main business, it could be worth $40 billion.
Groupon was another fast unicorn to reach $1 billion valuation after just 16 months in business –while burning billions in venture capital then and since.
These ventures are called ‘unicorns’ because of the degree of magical thinking they evidence.
Acompli, an anonymous email app went from zero to $200 million in 18 months when Apple bought it.
But read up on YouTube, Groupon, and Acompli and you find they built on early failures, their climb was not smooth, and ‘instant’ was, of course, not overnight.
What goes up fast, comes down fast
And, equally when rapid success hits, and there’s no support groundwork, the venture can fall as fast as it rose – as occurred with 74% of quickly scaling businesses mentioned above.
The French developers of another anonymous email app, Leak, learnt this in 2014. Despite its massive overnight success, Leak had to close its doors and shut down the app just 11 days after its launch. Leak was kicked off both Mandrill and SendGrid, and had nowhere else to call home. As a result, its overnight success disappeared as quickly as it came.
And some Australian colleagues we worked with after the event, built a fantastic product launch for a killer app,marketed with late night TV ads. The ads had everyone ringing the same number at midnight on a set night with the chance to win a car. The number of people who responded was so enormous, every system crashed. And it took our colleagues nearly two years to rebuild. By then, competitors had gained a strong toe-hold.
Multi-billion dollar valuations
Now it’s true, in the US, in recent years, an increasing number of start-up ventures have quickly reached multi-billion dollar venture capital valuations – on very, very low profit numbers. See Uber, Air BnB, DropBox, Pinterest, and Snapchat to name a few.
See, however: Is this the end of the road for billion dollar tech unicorns?
Look more deeply and we see, more realistically, time and time again that ‘overnight success’ is preceded by 3-10 years, of hard, hard work. And quite a bit of luck!
The Apple iPod took three to take-off. Twitter took ten. Amazon took 7 to get profitable. YouTube took five.
Three years to break-even
Pre-digital world experience in Australia evidenced that most typically new ventures took 3 years to reach cumulative break-even and become self-funding.
We’d love to know the Australian figures for digital ventures. But we’re guessing, at best, the figure is 2.9 years! 2.9 years, first, to survive. And 2.9 years, second, to grow successfully through self-funding or external equity oi debt.