Ray Rothrock

Failure: A Prelude to Success

In Technology, Venture Capital on December 9, 2012 at 10:05 am

A lot has been said and written about innovation, risk taking, and entrepreneurship.  The American capitalistic economy has always been and continues to be the hotbed of innovation and risk taking.  It is, in part, what makes the United States one of the greatest countries in the world and its economy the most productive. 

People come from all over the world to be entrepreneurs in the United States.  Today American universities offer many entrepreneurship courses in all degree categories.  It is a wonderful thing.  But there is a side of entrepreneurship that is not often taught or even discussed.  I’m talking about real world entrepreneurial experiences that seem to happen over and over again.  Failure.  But it is those failures that ultimately lead to the great American companies, truly great companies.

Everyone knows that not all new ideas succeed in business.  That’s part of the process.  But how many budding entrepreneurs know that from failure comes great success.  Not necessarily a badge of courage, failure is not fun.

Failure is a fact of life.  Anyone who dares to do something different, or something important, or something bold will fail at some part of the process.  And the truth is, failure is part of the process of innovation and its ultimate success – maybe even the most important part.

In life there is no immunity from failure. But failure is often a prelude to success. What matters is what you do when failure presents itself.

History is full of famous failures -­‐ innovators who failed before they were successful.  They demonstrated real entrepreneurial grit -­‐ the kind that makes great companies.

Did you know that Walt Disney was fired from a newspaper job because he lacked imagination and had no original ideas?

Or that Michael Jordan was cut from his high school basketball team?

Henry Ford lost all the money from his first group of investors without producing a single car. It took him three tries to get Ford Motor Company right.

One of my favorite examples of entrepreneurial grit is Robert Goddard – the inventor of the liquid-fueled rocket. For most of his career, the press ridiculed him for his theories about space flight. In fact, a New York Times editorial in 1920 scoffed at his idea that man could build a rocket capable of reaching the moon.

On July 17, 1969 – the day after the launch of Apollo 11 – the Times wrote a three-­‐paragraph editorial titled “A Correction.” It summarized its editorial from 49 years earlier and concluded with the following statement, “Further investigation and experimentation have confirmed the findings of Isaac Newton in the 17th Century and it is now definitely established that a rocket can function in a vacuum as well as in an atmosphere. The Times regrets the error.”

The list of accomplished Americans who failed before they succeeded goes on and on.

Clearly, Winston Churchill was employing his great and powerful skill of observation when he said, “You can count on Americans to do the right thing… after they’ve tried everything else.”

Bringing the discussion to more current times and locales, what can the Silicon Valley inform us about failure. It certainly has had its share of flameouts, as we say in the venture business.

Before Apple launched the Mac in 1984, there was the Lisa. Lisa was a powerful innovative computer that offered many great features we take for granted today. But it lacked sufficient performance to satisfy business users, and failed in the market.

And then there was the Newton, Apple’s early personal digital assistant and tablet platform. Despite investing more than $100 million in Newton, the device failed in the market. Of course, Apple got it right with the iPod, iPhone, and iPad.  From a few failures over a decade came Apple’s most spectacular successes.

It is not possible to discuss failure as a prelude to success without mentioning Steve Blank. Steve is now an award‐winning teacher of entrepreneurship at UC Berkeley, Stanford and Columbia.  Steve is a force of nature. He is blunt and wicked smart with boundless energy.  Like all great entrepreneurs exhibits impatience and urgency all the time.

In his 20 years as a serial entrepreneur in the Silicon Valley, he started or worked in 8 startups. His last startup, Epiphany, was a dot com pioneer in the customer relationship management space and a huge commercial success.

But two startups that Steve lists on his resume and that occurred before Epiphany standout for exactly the opposite reason. In Steve’s own words, they were both “huge craters.”  That’s Valley speak for big failures and loss of major investor money.  A life‐is‐too‐short kind of guy, Steve has often said that in his career he liked to “fail fast, move on and not look back.” Again, in Valley speak we’d say, “The lemons ripen fast. Next.”  Steve is one of those entrepreneurs who picked himself up and went after another innovation after learning amazing lessons around startups.

Sometimes when failure presents itself, you have to reassess.  Entrepreneurs are clever if nothing else.  But with assets in hand, team assembled, and a few dollars in the bank, a company of mine demonstrated that from failure one can rise to succeed.  That company was called Qpass.

In 1995 I provided seed funding for Qpass. The company built an infrastructure to process micro transactions on the Internet just as ecommerce was taking off. Things were going so well that the company early in 2000 filed an S‐1 for an IPO. Then the Internet bubble popped. And all – and I do mean all ­ of Qpass’s customers disappeared literally over night.  The company was so close to winning big.

But did we give up.  No!  Why?  Because there was a great team and a working product. The company just needed a market to apply their products!  Who could have foreseen the crash in 2001.

Qpass pivoted and became a transaction engine for cellphones. It was the very early days of smart phones and everyone wanted “wallpaper” for their new phone. Qpass made that happen, millions of transactions a month.

A great success, failure, and success again, Qpass was successful because it had a team, capital, and grit, and ultimately a market.

It is clear that there is something very real about the idea of failure as a prelude to success. I seen it many times.

Even when deals are successful, the course to success can be anything but straight up and to the right.  In my early years as a venture guy I heard over and over, every week at the partners meetings when our companies were running out of money that “it always takes more time and costs more money to achieve success.”

With limited experience I asked the senior partner at Venrock, “Exactly how much longer does it take, and how much more money does it cost to be successful?” He turned to me and said – “that is a great question, Ray, why don’t you figure that out?  So I did.

I spent months pouring through Venrock’s archives and analyzing the data of our winners.  At that time, of the 150 or so successful tech deals on which I could get good data, I found that it took about 18 months longer to break even and about 2.5 times more capital than the entrepreneurs originally estimated. These are real numbers based on real data.

A related question easier to answer is just how many successful companies actually accomplish their original business plan on time and on budget. I can tell you that of the 300 or so companies in Venrock’s history that we considered successful, just 5 made their original plan on time and on budget. Just 5.

If you are wanting to be an entrepreneur, these next few paragraphs are for you.  After a career of nearly 25 years and 52 direct investments in addition to assisting in hundreds of other Venrock companies, I’ve made a few observations about what works and what doesn’t work and about what the great entrepreneurs do to be successful.  You might say it’s my pattern recognition.

First, your goal as an entrepreneur is not to not fail.  Your goal is to win. The team that plays, “not to lose” almost never wins.  Play to win for your company.

Second, you must be agile. The world changes every day. Be prepared for that. Use your pattern recognition skills to see what works and what doesn’t work. Study your competition. Take calculated risks along the way, not crazy chances, but thoughtful calculated risks. If you sense failure on your current course, then pivot. Regroup. Rethink. Restart.

Third, never give up. Your goal as an entrepreneur is to take risks and build something great. Build a great company and I promise you – the money will follow, not the other way around.
Just Imagine the world without Mickey Mouse, Michael Jordan, or the iPhone.

I have also concluded that there are five things that all great companies have in common.

Great companies and great entrepreneurs have the ability to communicate a vision to its employees, customers and investors. Being able to succinctly, clearly and in an exciting manner tell your mission is where it all starts.  I started at Venrock in New York on the 55th floor of 30 Rock.  Imagine you are getting on the elevator at 30 Rock to come see me. It is a 60 second ride to the 55th floor. Amazingly, Mr. Rockefeller gets on the elevator with you and of course you recognize him. Like the gentleman he is, he introduces himself and you return the introduction. After the pleasantries he asks, “ What does your company do?” You now have about 30 seconds to answer that question. It turns out this is not an unusual story but it can be difficult to do well. The point is you must project your vision in a clear, crisp and exciting way.   You never know when that matters because it matters all the time.

The second trait of a great company is its talented and committed team. Turns out you can’t do it alone and great teams win. I once heard that a great vision without great execution is just a hallucination.

Building a startup is difficult.  The third element in success is dedication to company first and above all else. Entrepreneurs who are about themselves and not the enterprise fail and often quickly. Also, smart and savvy employees who’ve joined the team quickly figure this out if it wasn’t obvious in the beginning.  If the team goes, so goes the chance of success.

The fourth observation I’ve seen in organizations large and small is goal alignment.  Alignment of  goals among all the stakeholders is crucial.   It is hard to be successful if some stakeholder in the value chain is not successful.  Stakeholders are your employees, your investment partners, and most importantly your customers. Alignment is crucial and essential, not just sufficient.

The fifth element to great success is to have fun. Fun is contagious. Fun is the sort of buzz that gets out and suddenly you have more great people wanting to be at the company. Also when things aren’t going so well, and there will be those days, the fun will save you from despair and keep you on track.

This all boils down to people – employees, customers, investors – who must believe in you, your idea, and your vision. This is what the founders of the most successful companies have done. I’ve seen it many, many times.

The founder of Venrock, Laurance Rockefeller, followed his grandfather’s, John D. Rockefeller, inspiration.  These words you can read on the plaque at skating rink at 30 Rock.  It reads:

“If you want to succeed, you should strike out on new paths rather than travel the worn paths of accepted success.

That is what being an entrepreneur is all about. Striking out on new untested paths.  There will be failures along that path.  It’s up to you what you do with those failures and how you turn them into successes.


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