I spent the day yesterday in Grand Junction at Techstars Startup Week West Slope. After a full day of meetings, events, and talks, I ended up at dinner with a half-dozen CEOs of startups in the area (Grand Junction, Carbondale, Eagle, and Telluride.) I was pretty wiped out from the day and general bail out of dinners between 7:30pm and 8:00pm but we ended up going extremely deep on a bunch of personal and emotional stuff so when I got back to my hotel around 10:00pm I was pleasantly surprised with the tenor of the evening.
While there is endless writing about what to do to build your business, how awesome things are going, and why startups are so magnificent, I experience over and over and over again the intense personal struggle for founders and leaders around creating a business where nothing previously existed.
I wish more entrepreneurs would write extensively about their failure experiences in detail.
This weekend I’m co-hosting the Reboot.io VC Bootcamp at my house in Boulder. It starts tonight and goes through mid-day Sunday. It’s an experiment with Jerry Colonna and about 15 other VCs to see if the Reboot.io bootcamp construct works with VCs, where the tag line for the experience is:
Practical Skills + Radical Self-Inquiry + Shared Experiences = Enhanced Leadership + Greater Resiliency
It’s either going to be valuable to this group or not. We’ll know more on Monday. The only way to learn is to try.
As part of the pre-work for the weekend, I went back and re-listened to several of the Reboot.io podcasts that Jerry recommended in advance (for you Soundcloud people I made a Reboot.io VC Program collection.)
So, my brain was already trending toward the headspace around radical self-inquiry in the context of venture capital. Yesterday, Fred Wilson wrote what is the best VC-related post of 2016 so far titled Losing Money. In addition to exemplifying the notion of radical self-inquiry, it is filled with gems about how to think about struggling companies and what to do with them in the context of a VC portfolio.
Go read Fred’s post Losing Money right now. I’ll be here when you get back.
When I woke up this morning, I noticed a tweet from Rand Fishkin aimed at me and Fred.
— Rand Fishkin (@randfish) April 7, 2016
Fred answered “it is one of my weaknesses that I let a bad experience sour me on a market for life.” And, I’ve seen some of Fred’s own behavior around this, as he won’t touch anything hardware-related at all because of some miserable hardware-related failures during the Internet Bubble (or is it “internet bubble” now that the AP Style Guide says not to capitalize internet.)
But I had a different response to Rand’s question “Do you regret every investment that fails?”
I’d like to think that I no longer regret any investment. As Fred discusses in his post, many VC investments fail. I’ve yet to meet a VC who says “This is a totally shitty company and a lousy opportunity so I’m going to invest in it anyway.” When a VC makes an investment, she is incredibly enthusiastic about the opportunity. If you know that failure is part of the process, then there is enormous emotional dissonance that gets generated if you regret the investment in hindsight, as you are going to have a lot of regret over the years as a VC, which I think creates a very negative feedback loop in terms of how you think about new investments.
Instead of “regret”, I think it’s much more important to embrace failure as part of the overall experience and focus on learning from every investment that fails. And, a failed investment often has many lessons – some new and some old. Some of these lessons are temporal and while others are foundational. In Fred’s post, he opens with:
“I remember back in the mid 90s, I used to say with some pride that I had not lost money on any of my VC investments. Then one day, someone told me “then you are not taking enough risk.” I ended that streak of not losing money on VC investments in the late 90s in a series of epic flameouts. I lost somewhere between $25mm and $30mm on one single investment. I am not proud of those mistakes. They were stupid. I am ashamed of them to be honest. But I learned a lot from them. Not only was my “winning streak” a case of not taking enough risk, it was also a case of not enough learning. The go-go Internet era of the late 90s fixed both of those things for me. I took more risk and learned a ton.“
The bold section is what I’m trying to say. And, when I say “embrace failure”, I’m not suggesting that one be proud of failing, but I also don’t think there’s any shame in failing. There’s only shame in not learning.
The second part of Rand’s question “Or do you ever think ‘I’d place that same bet again'” is more complicated for me and my view diverges from Fred’s quick response of “it is one of my weaknesses that I let a bad experience sour me on a market for life.” For starters, I don’t think of my investments as bets, so I have an immediate knee-jerk reaction to characterizing investments as bets. That always creates fog for me in answering something, so I have to let the fog clear. Then, given that we invest in a set of themes over a very long period of time, a failed invested is a fundamental component of our ongoing learning in a theme. So I thought hard about what about a failed investment would cause me not to invest in some aspect of the investment again.
The answer appeared before me as “bad people.” My favorite entrepreneurs to back are ones who have had success and failure, so I’m very comfortable making multiple investments over time with people I trust and enjoy working with, even if we’ve had failures along the way. But if the people are fundamentally dishonest, immoral, unwilling to listen and learn, or behave in what I consider to be inappropriate ways, I don’t want to work with them again.
So the essence of regret for me comes from when I make a mistake around people. This is not only the founders but also co-investors. And, after 20+ years of doing this, I’m much better (but not perfect) in figuring out in advance who I shouldn’t work with.
I’ve accepted that in the end we all die. So, as part of my own radical self-inquiry, I’ve tried to isolate and limit my own regret to situations where I spent a lot of time and learn (or teach) nothing. Fortunately, this rarely has anything to do with the investments that I make.
I just read an amazing post from Nikki Durkin, the founder and CEO of 99dresses.
It’s titled My startup failed, and this is what it feels like and it is one of the best posts I’ve ever read about startup failure.
I almost titled this post “What Failure Tastes and Smells Like” because Nikki does such an awesome job of describing not just what happened, but what she felt throughout the process. The post is long and goes through multiple ups and downs, just like a startup. It covers four years, several near death experiences, recoveries, and then final failure.
I don’t know Nikki but have immense respect for her taking the chance to put this out there. In today’s world of “look how great we are doing”, we know we all aren’t doing great. It’s fucking hard to fail, deal with failure, and recover from failure, especially when you look around and feel like you are the only failure.
Nikki – if you ever want to turn this, and other lessons you learned from this experience into a book (as you hint near the end of the post), my friends at FG Press would love to talk to you about working with you on it.
Recently, I wrote a post titled After Your First Big Success, What’s Next? The comment thread was powerful and fascinating, as was the direct email feedback I got, including the following note:
“I think it would be interesting to hear your perspective on how an entrepreneur should approach “what’s next” after coming off a failed business. How should one manage their own emotions and their own perspectives post failure? It’s easy to play the blame game and it’s easy to be extremely hard on ourselves. There has to be constructive ways to move forward rather than destructive ways that could lead to lack of confidence, or depression.”
Having failed at a lot of things, I’m completely comfortable tackling this. But let me establish my bonafides first. My first company, Martingale Software, failed (we returned $7,000 of the $10,000 we raised.) My second company, DataVision Technologies failed. I didn’t have success until my third company, Feld Technologies. While my first angel investment was a success, I resigned as the chairman after the VCs came in and left the board after the CEO was replaced. In the late 1990s, what looked like my biggest success at the time, went public, peaked at an almost $3 billion market cap, and then went bankrupt three years after the IPO. And the second VC fund I was part of, which raised $660 million in 1999, was a complete disaster.
As the cliche goes, I learned a lot from these failures.
I’ve had many more. I remember firing my first employee, which I viewed as a failure on my part, not hers. I remember the first CEO I fired and staying up all night prior to doing it because I was so nervous and miserable about the decision I’d made to back him. I remember the first company I funded as a VC that failed and struggling to figure out how to shut it down after everyone else fled from the scene. I remember the first time someone threatened to sue me for doing a bad job for them (they didn’t.) I remember the first time I was sued for something I didn’t do (I eventually won.) I can keep going, but you get the idea.
What’s next is simple. It’s whatever you do next. In some cases this will be easy – you’ll already be on to the next thing before the previous thing you were working on failed. In many cases it won’t be easy – you’ll be wallowing in the quicksand of the failure well after the other bodies have been sucked below the surface.
How you deal with your own emotions, and perspectives, is an entirely different matter.
I love the approach of Jeremy Bloom, the CEO of Integrate (we are investors) who I have immense respect and adoration for. In 2006 at the Winter Olympics, he was the best freestyle mogul skier in the world. On his last run, he was expected to take gold. Halfway down he missed a turn and placed sixth. As Jeremy told me, he gave himself 24 hours to be angry, depressed, upset, furious, frustrated, confused, and despondent. I imagine him in his room in the Olympic Village systematically destroying all the furniture. One minute after 24 hours, he was on to the next thing, with the failure solidly in his rear view mirror.
Now, 24 hours is a short amount of time. I’ve often carried my failures around for longer, but never much longer than a couple of days. I separate how I feel from failure from how I feel about life and what I’m doing. Interestingly, for me, failure isn’t the thing that gets me depressed, it’s boredom combined with exhaustion. But that took me a long time to figure out.
I’ve found that talking to people about my failures is helpful. Rather than hold them inside, I talk to Amy (my beloved) about them. I talk to my partners about them. I talk to my close friends about them. I don’t ignore the failure or try to bottle it up somewhere. Rather, I set it free, as quickly as I can.
In our book Do More Faster, we have a chapter on the the wonderful story of the failure of EventVue. After it failed, some of Rob and Josh’s friends from the Boulder Startup Community had a wake for EventVue. We celebrated its life, buried it, and moved on. I loved this idea and have done it a few other times for failed companies. It’s important to remember that even in death you can celebrate the wonderful things that happened during life.
But ultimately, you have to know yourself. There is no right answer or magic salve for getting past failure. If you are going to be an entrepreneur, you are going to experience it a lot. It’s just part of the gig. Start by understanding that, and asking yourself what you are really afraid of. And, after you fail at something, let yourself experience whatever you want to experience, remembering that it’s just another small part of the journey through life. And then go on to whatever is next, in whatever time you are ready for it.
My post on How to Fix Obamacare generated plenty of feedback – some public and some via email. One of the emails reinforced the challenge of “traditional software development” vs. the new generation of “Agile software development.” I started experiencing, and understanding, agile in 2004 when I made an investment in Rally Software. At the time it was an idea in Ryan Martens brain; today it is a public company valued around $600 million, employing around 400 people, and pacing the world of agile software development.
The email I received described the challenge of a large organization when confronted with the kind of legacy systems – and traditional software development processes – that Obamacare is saddled with. The solution – an agile one – just reinforces the power of “throw it away and start over” as an approach in these situations. Enjoy the story and contemplate whether it applies to your organization.
I just read your post on Fixing the Obamacare site.
It reminds me of my current project at my day job. The backend infrastructure that handles all the Internet connectivity and services for a world-wide distributed technology that was built by a team of 150 engineers overseas. The infrastructure is extremely unreliable and since there’s no good auditability of the services, no one can say for sure, but estimates vary from a 5% to 25% failure rate of all jobs through the system. For three years management has been trying to fix the problem, and the fix is always “just around the corner”. It’s broken at every level, from the week-long deployment processes, the 50% failure rate for deploys, and the inability to scale the service.
I’ve been arguing for years to rebuild it from scratch using modern processes (agile), modern architecture (decoupled web services), and modern technology (rails), and everyone has said “it’s impossible and it’ll cost too much.”
I finally convinced my manager to give me and one other engineer two months to work on a rearchitecture effort in secret, even though our group has nothing to do with the actual web services.
Starting from basic use cases, we architected a new, decoupled system from scratch, and chose one component to implement from scratch. It corresponds roughly to 1/6 of the existing system.
In two months we were able to build a new service that:
Suddenly the impossible is not just possible, it’s the best path forward. We have management buy-in, and they want to do the same for the rest of the services.
But no amount of talking would have convinced them after three years of being entrenched in the same old ways of doing things. We just had to go build it to prove our point.
Startups fail. That’s part of the natural entrepreneurial cycle.
A great post is making the rounds from an entrepreneur who has 30 days left before he hits the wall. His blog – My Startup has 30 Days to Live – promises to be a powerful one, at least for 30 days. I’m only sad about two things: (1) It’s anonymous and (2) There are no comments so it’s one way.
I left a message on “Ask me anything” asking him/her to reach out if I can help. We’ll see if he/she responds – or it’s either (a) a one way rant or (b) a fake failure story.
Either way, entrepreneurs need to talk about failure. It’s fine – I’ve failed at a ton of things. On Monday, I gave my “How To Fail” talk at Techstars Boulder. Included were all the Startup Summer students as well as a bunch of members of the Entrepreneurs Foundation of Colorado. I told the story of my first failure (my first company – Martingale Software) and my biggest failure (Interliant). I made some broad points and then did an hour of Q&A.
I hope it was useful.
I see entrepreneurs, especially first time entrepreneurs, in denial all the time about the possibility of failure. “Failure is not an option”, or “I’m afraid to fail”, or “Everything is going great” (when it isn’t). Sometimes failure is your best option.
Denial of reality – and what you can do – is a big issue. Ignoring reality until it’s too late is another. Not reaching out for help when there is still time is yet another. Fear of failure – which is the mind killer – is yet another.
In one of my darkest moments of Interliant, I was sitting hunched over at the kitchen table of one of my co-founder’s (Len Fassler) – breakfast table. We had a brutal day in front of us and I was waiting for him to finish getting dressed so we could head to the office to deal with things. When he came into the kitchen, he saw me and said “C’mon Brad – suit up – let’s go.” He patted me on the back in the wonderful way he always does and said “Just remember – they can’t kill you and they can’t eat you.”
Follow My Startup has 30 Days to Live. Learn from it. And if the entrepreneur uncloaks, let’s try to help, even if it’s just providing emotional support.
This post originally appeared last week in the Wall Street Journal as part of their Accelerators Program in answer to the question “When and how should you wind down a failing business.”
Some entrepreneurs and investors subscribe to the creed “failure is not an option.” I’m not one of them.
I strongly believe that there are times you should call it quits on a business. Not everything works. And — even after trying incredibly hard, and for a long period of time — failure is sometimes the best option. An entrepreneur shouldn’t view their entrepreneur arc as being linked to a single company, and having a lifetime perspective around entrepreneurship helps put the notion of failure into perspective. Rather than prognosticate, let me give you an example.
My friend Mark’s first company was successfully acquired. After being an executive for several years at the acquirer, Mark decided to start a new company. I was the seed investor, excited to work with my friend again on his new company.
Over three years, this new company raised a total of $10 million from me and several other investors over several rounds. The first few years were exciting as Mark launched a product, scaled the company up to about 40 people, and tried to build a business. But after two years we realized that we weren’t really making any progress — there was a lot of activity but it wasn’t translating into revenue growth.
In year three we tried a completely different approach to the same market with a new product. Mark scaled the business back to a dozen people in an effort to restart the business. Over the course of the year we tried different things, but continued to have very little success.
By the end of the year there was $1 million left. Mark cut the company back again — this time to a half dozen people. He started thinking about how to restart for a third time on the remaining $1 million.
Mark had never failed at anything in his life up to this point. He was proud of this, and the idea that he couldn’t at least make his investors’ money back was devastating to him. But he was stuck and started exploring creating an entirely different business, in a completely different market, with the $1 million he had left.
Mark was newly married and was working 20 hours a day. We were talking at the end of the day during the middle of the week and he was so tense, I thought his brain might explode. I told him that as his largest investor and board member, I wanted him to turn off his cell phone, take his wife out to dinner, have a bottle of wine, and talk about whether it made any sense to spend the next year of his life trying to restart the business with the remaining $1 million.
After resisting turning his phone off, I insisted. I told him that I gave him permission to decide that it wasn’t worth the next year of his life at this point and that as his largest investor it was perfectly ok to shut the business down and declare it a failure. I then said I was hanging up the phone and would talk to him in the morning. Click.
He called me back early the next morning. He was calm. He started by saying thanks for giving him permission to consider shutting down the company. This had never occurred to him as an option. During dinner, he realized he needed a break as he was exhausted. He wasn’t coming up with anything to do to reinvent the business and was just desperate to figure out a way to pay his investors back.
By morning, he realized it was time to shut things down, return whatever money was left, and take six months off to recover from the previous three years while he thought about what to do next.
We gracefully wound the company down and returned five cents on the dollar to the investors. Mark took six months off. He then spent six months exploring a new business, which ended up being extraordinarily successful. And he’s now very happily married.
Failure is sometimes the best option if you view the process of entrepreneurship as a lifelong journey.
I’ve had my share of vomit moments – both in business and in life. It’s that moment where a specific thing happens that causes you to want to run into the bathroom and vomit, which you sometimes actually do.
Some of my memorable vomit moments including the night that I asked my first wife if she was having an affair and she nonchalantly said “yes.” Or when I woke up at 4am in the morning and realized Feld Technologies would be out of money in two days if I didn’t go collect some of our accounts receivable – primarily from customers who were clearly stalling to pay because of their financial issues. Or when I finally came to terms with the fact that the only real option for Interliant, a company I had founded and had gone public, was to file for Chapter 11 because we simply couldn’t service our debt. Or when I got sued for $150 million for fraud and read through the first filing which had my name on every page at least 10 times (after three years the suit was settled for for $625,000 and there was no finding of fraud – the other side spent $3m to get $625k – ultimately not a good plan for them.) Or when I got a call that a close friend, who was a CEO of a public company at the time, and his wife had been in a near fatal car accident and were both in surgery (they ended up surviving, recovering, and are doing great.) Or when I got a call that an acquisition of a company I was an investor in, which we had struggled through for months and was an outstanding outcome for everyone involved, had been called off because it wasn’t approved at the board level of the public acquirer. Or when I was on an airplane with my three Foundry Partners coming back from NY and we were diverted to Colorado Springs because of a massive storm in Denver and as we were landing I literally threw up – for the first time ever on a plane – because it was such an excruciating landing.
Some of the vomit moments, like the last one, are tangible. Others are conceptual. But they all share one thing in common – an intense moment of anxiety which is followed by the passage of time. Whatever caused the vomit moment either resolved quickly, or is something you have to go deal with for a while. While you may be paralyzed in the moment, I’ve found the most powerful thing is to realize that time will continue on and that you almost always can address the issue that caused the vomit moment and get to some sort of resolution. This resolution won’t necessarily be an external definition of victory, but it will allow you to move on to the next thing you need to address. The worst thing you can do is stay paralyzed, or go into a phase of explicit denial about what is going on.
At the Feld Men’s Chautauqua in Aspen this weekend, my cousin Kenny asked us all what our favorite quotes were. Mine was “It’s not that I don’t suffer, it’s that I know the unimportance of suffering.” (John Galt in Atlas Shrugged). Understanding that the vomit moment is part of life (and business) and accepting it, rather than fearing it, or denying it, results – at least in my opinion – in a much better life.
We will all have our vomit moments. But we will usually survive them. And taking action after they happen is the best approach.
What are some of your vomit moments?
Disclaimer: I’m not an investor in OnLive and I know nothing about the specifics of what happened. I’m just speculating, but it’s informed speculation based on my experience.
I read a few articles over the weekend about OnLive potentially going out of business, potentially screwing its employees, and a few other things. The first articles were weirdly hostile with a focus on how OnLive just laid all their employees off in preparation for a sale in order to enrich the founders/investors at the expense of the employees. By the end of the weekend the reporting was more thorough and balanced.
Companies fail – all the time. It’s part of entrepreneurship. It’s painful and sucks when you are part of a company that fails (I know from experience – I’ve been there many times) – whether you are a founder, employee, or investor. But failure is part of it and at the moment of acceptance of failure, a good founder and board look for the most graceful path forward, however messy and yucky that might be.
One of those approaches is something called assignment for the benefit of creditors (ABC). If you were around during the collapse of the Internet bubble, you’ll remember this. It’s a lot easier and quicker than a formal bankruptcy (via a Chapter 11 filing) and allows the assets of a company to quickly be sold to a new owner. In some cases this is just for cash to pay off creditors; in other cases it’s a way to sell the company to a new owner and keep the business operating.
OnLive looks to me like the second case. The news is coming out that it has a new owner, that many of the employees have already been offered jobs post ABC, and that the service will continue to operate and customers won’t be negatively impacted.
The key thing to understand in an ABC is that 100% of the equity is wiped out and deemed worthless. The founders equity, the investors equity, and the employees equity. When a company goes into ABC, it’s almost always because the value of the liabilities far outweighs the perceived value of the assets. No buyer was found that was willing to take on the liabilities while giving the equity holders any economic value. So – an ABC effectively “cleans this up” for the new owner – compartmentalizing the liabilities in the ABC process and using the proceeds from whatever asset sales come out of ABC to pay off some portion of the liabilities.
Occasionally investors will get something in an ABC because they are creditors. If the last round (or rounds) have been in convertible debt, or just straight debt, the investors (whoever holds the debt) will be creditors. They can often be pretty high up in the creditor stack and sometimes recover some or all of their debt. But their equity will almost always be worthless.
In a situation where the company is immediately purchased out of ABC (which is what it looks like happened in OnLive’s case) many of the employees will be rehired by the new owner. While their stock options will be worthless (as is all equity) they are often immediately offered new stock option packages. Usually the vesting clock resets completely; sometimes a new owner will be extra generous and offer a shorter vesting term.
In OnLive’s case, it feels like the company simply ran out of options and couldn’t find a new investor or a buyer who would take on the company outside of ABC. Rather than shut down, they found a buyer / investor (which could be a subset of the existing investors) who would recapitalize the company and keep it going as long as he didn’t inherit the liabilities. Hence, the ABC process.
Rather than screwing the employees to enrich management, this feels to me like a pretty employee friendly approach. Hopefully the stories this week will clear this up, rather than end on “it looks like the investors and the founders screwed the employees.”
Don’t ever forget that failure is part of the process.