RESEARCH & IDEAS
Why Companies Fail--and How
Their Founders Can Bounce
Back
Published: March 7, 2011
Author: Carmen Nobel
Leading a doomed company can often help
a career by providing experience, insight, and
contacts that lead to new opportunities, says
professor Shikhar Ghosh. Key concepts
include:
• Most start-ups fail due to lack of foresight,
lack of wiggle room in the business plan,
bad timing, or lack of funding.
• But too much funding for an unstable
business model can take what would have
been a small failure and turn it into a huge
one.
• Running a doomed company can actually
help a career, yielding experience and
networking opportunities with venture
capitalists and other entrepreneurs.
• While failure of a business or project is a
learning experience, personal lapses in
ethical or moral behavior can damn a
career.
Most companies fail. It's an unsettling fact
for bright-eyed entrepreneurs, but old news to
start-up veterans.
But here's the good news: Experienced
entrepreneurs know that running a company
that eventually fails can actually help a career,
but only if the executives are willing to view
failure as a potential for improvement.
The statistics are disheartening no matter
how an entrepreneur defines failure. If failure
means liquidating all assets, with investors
losing most or all the money they put into the
company, then the failure rate for start-ups is 30
to 40 percent, according to Shikhar Ghosh, a
senior lecturer at Harvard Business School who
has held top executive positions at some eight
technology-based start-ups. If failure refers to
failing to see the projected return on
investment, then the failure rate is 70 to 80
percent. And if failure is defined as declaring a
projection and then falling short of meeting it,
then the failure rate is a whopping 90 to 95
percent.
"Very few companies achieve their initial
projections," says Ghosh. "Failure is the norm."
COPYRIGHT 2010 PRESIDENT AND FELLOWS OF HARVARD COLLEGE
Why start-ups fail still fail to achieve traction due to lack of
funding and, consequently, lack of time to let a
Start-ups often fail because founders and
good model mature. (These days, Ghosh says,
investors neglect to look before they leap,
start-ups often manage to secure a good team
surging forward with plans without taking the
and good financing, they face dozens of
time to realize that the base assumption of the
lower-cost competitors and fragmented
business plan is wrong. They believe they can
customer demand.)
predict the future, rather than try to create a
Funding has the potential to turn a little
future with their customers. Entrepreneurs tend
failure into an enormous one.
to be single-minded with their
"The predominant cause of big failures
strategies—wanting the venture to be all about
versus small failures is too much funding,"
the technology or all about the sales, without
Ghosh says. "What funding does is cover up all
taking time to form a balanced plan.
the problems that a company has. It covers up
all the mistakes, it enables the company and
"In Silicon Valley, the fact management to focus on things that aren't
that your enterprise has important to the company's success and ignore
the things that are important. This lets
failed is actually a badge of management rationalize away the proverbial
honor." problem of the dogs not eating the dog food.
When you don't have money you reformulate
And all too often, they do not give the dog food so that the dogs will eat it. When
themselves wiggle room to pivot midstream if you have a lot of money you can afford to argue
the initial idea doesn't jibe with customer that the dogs should like the dog food because it
is nutritious."
demand.
"Instead of going into the venture with a
broad hypothesis, they commit in ways that Enterprise failure can be an
don't allow them to change," Ghosh says. He
cites as an example the failed dot-com-era
asset, but personal failure is
grocer Webvan, which bought warehouses all ruinous
Still, stubborn entrepreneurs continue to
over the United States before realizing that
found companies, in spite of the failure rates,
there was not enough customer demand for its
which raises the question of why. It's not as if
grocery delivery service.
any of them harbored childhood dreams of
Next, there's the matter of timing, a huge
launching a search engine optimization software
issue that can determine whether a company
firm.
gets funding and whether it achieves the
Sometimes this is due to naïveté and
start-up's elusive measure of success: an exit
hubris—the notion that their idea simply cannot
that involves going public or getting bought.
fail. But savvy entrepreneurs know that running
During the Internet boom, companies armed
a company that eventually fails can actually
with nothing more than a PowerPoint
help a career. Even failed businesses yield
presentation of a lousy idea could secure tens of
future networking opportunities with venture
millions of dollars—which sometimes gave
capitalists and relationships with other
them enough time to figure out a viable
entrepreneurs whose companies are succeeding.
business plan through trial and error. Eventually
Ghosh says boards of successful companies
successful companies such as Netscape and
often seek out the founders and CEOs of failed
Open Market went through several business
companies because they value experience over
models before finding one that worked. But the
a clean slate. After all, Henry Ford, Steve Jobs,
opposite was true after the boom; a company
could have a great idea and a great team, but and Desh Deshpande experienced multiple
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failures before achieving success.
"In a start-up, if a company
is doing well, and a founder
gets greedy and takes more
than his fair share, people
sort of forgive him. But
when a company is going
down, when you protect
your own interest it's always
at the cost of someone else.
People don't forgive that."
"How many search engines are out there
that really matter now?" Ghosh says. "Just a
handful! And yet the people who created all the
other ones in the 1990s are not living under a
bridge somewhere. Many of them now run the
big ones. In Silicon Valley, the fact that your
enterprise has failed can actually be a badge of
honor."
Individual failures within a company can be
an asset, too, in that they can prevent the whole
system from failing—but only if the executives
are willing to view failure as a potential for
improvement. For instance, if the company's
best salesperson is unable to sign a key
customer, then the management is likely to
chastise the salesperson for failing. But they
could also realize that if the top talent has
trouble with the sell, then maybe there is
something wrong with the product. Small
failures can provide the raw material for
improvement.
"The more that you can embrace all the little
failures you have, and treat them as ways of
improving the system, the less likely that the
entire system will collapse," Ghosh counsels.
COPYRIGHT 2010 PRESIDENT AND FELLOWS OF HARVARD COLLEGE
HARVARD BUSINESS SCHOOL | WORKING KNOWLEDGE | HBSWK.HBS.EDU
That said, Ghosh warns entrepreneurs that
failure of an enterprise, product, or initiative
and the personal failure of an individual
executive are two very different things. While
the former is a learning experience that can lead
to future opportunities, the latter can damn a
career.
A personal failure, as Ghosh defines it, is
one in which an individual does something that
violates a fiduciary duty, commits a crime, or
acts in a way that goes against the normal tenets
of morality and fair play. Ghosh cites as
example a CEO who fires a bunch of employees
in order to pay for his own severance package.
In such cases, a manager's reputation will be
tarnished to the point of rendering him or her
un-hirable even if the venture was a financial
success.
"In a start-up, if a company is doing well
and a founder gets greedy and takes more than
his fair share, people sort of forgive him,"
Ghosh says. "But when a company is going
down and you protect your own interests it's
always at the cost of someone else. People don't
forgive that."
Ironically, a personal failure often occurs
because an entrepreneur is trying too hard to
avoid an enterprise failure. Trying to keep the
venture capitalists happy and the bankruptcy at
bay, the founder or CEO will resort to illegal
acts such as fraud, or to morally problematic
acts such as blatant misrepresentation of the
company's capabilities or prospects when
talking to customers or financiers . "And when
you do that, you're then on the slippery slope of
taking an enterprise failure and making it a
personal failure," Ghosh says. "Executives do
that all the time because they do not distinguish
between the two."
Revising expectations
Ghosh notes that venture capitalists could
help mitigate personal failures by allowing for
the expectation of company growing pains. He
points out that a baseball player with a .350
average is considered to be a success, even
though he has a .650 failure rate. But in
entrepreneurial management, there's a tendency
to see things in black and white, rather than
looking at the whole picture. And while VCs
are likely to recruit an executive with
experience at a failed company, they are less
patient with individual failures. VCs rarely
consider their role in establishing unrealistic
expectations or an environment where the ends
are more important than the means, he says.
"In any natural system, failure is the engine
that causes growth, that causes new birth, that
causes anything to happen," he says. "One of
the truly big differences between growing
economies and economies that stagnate is the
acceptance of failure. If you don't let forests
burn, if you don't let the old trees die out and
the new trees grow, you don't get a healthy
forest. The ability to manage failure so that
enterprises fail but people can still succeed
becomes one of the tricks of how you build a
society that can reinvent itself as the world
changes.
About the author
Carmen Nobel is Senior Editor of HBS
Working Knowledge.
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