by Manuel Stagars, CFA, CAIA, ERP
Failing fast is a paradigm loosely associated with the Lean Startup method. I mention this here with venture capital and angel investment because there are some reservations before wholeheartedly embracing the notion of failing fast. They are concerned with the fact that a failed startup is completely at odds with the expectations of investors.
The idea that entrepreneurs learn just as much from failures as from successes is nothing new. Failing fast stipulates the sooner entrepreneurs get business failures under their belt, the better. This will lead to faster learning and better entrepreneurship in the future, so the reasoning goes. I can second this, as my failures have always yielded bigger lessons than my successes. Still, there exists a fundamental misunderstanding with failing fast. Embraced by a prominent Stanford professor in her creativity class, failing fast has become a term to justify when a startup has gone belly-up after its fleeting life. “Celebrate your failures, and move on to the next idea,” as she puts it.
The mindset of welcoming failure into one’s life is problematic and disturbing. Suddenly, first-time entrepreneurs are urged to fail, because otherwise, they would not learn the lessons in the failure. If signs of failure appear, the first reaction is to fold the venture and move on, writing it off as a learning experience. However, here’s something that I find to be an even better learning experience: Pulling a startup from the brink and getting it back on track to turn a profit. This may not always be elegant, but investors prefer it anytime. Folding a startup right at the first sight of stormy weather may be fine in an in-vitro school experiment, but the real world works differently.
For every investor in his right mind, failure is not an option. To frame the total loss of capital as collateral damage on the learning path of the startup founder is not OK. If entrepreneurs celebrate their failing experiences on their own dime, that’s fine. Unfortunately, all too often, investors or the tax payer end up paying the bill for the entrepreneur’s education. Personally I do not see how failing fast can help create a sustainable track record of success and execution at universities. More often than not, what looks like a failure at the beginning ends up being a massive success, if the entrepreneur can weather the storm. But if failing fast is an available choice, entrepreneurs will never dig deep enough to eventually strike gold.
About half of my own projects went under, some of them with a bang. In one case, external capital suffered, but more often than not, I hurt the most of all participants involved. What sometimes looked like a failure at first sight could unexpectedly be turned around by pivoting the business model so the failure was not disastrous. Still, every time a project fails, I feel miserable. When a failure occurs it has to be analyzed very thoroughly. Once it they understand what happened, entrepreneurs can step up a notch to take measures that it will not happen again. Lifelong learning to succeed is the goal, not looking for experiences to fail fast.
It is OK for a group of entrepreneurs to have their movement with failing fast, but investors and angels should screen very diligently for the fail-fast mindset. As an entrepreneur, make sure you do not write it on your flag that you are looking for opportunities to fail fast, just because you have picked up the term in a startup book. When you become an entrepreneur, it is time to grow up. You need to use your creativity to pivot business and revenue models until they work, and never give up before you have tried everything to avert failure. If you play with other people’s money, failure is not an option, one you cannot embrace under any circumstances. Not even if a professor from Stanford University tells you it’s OK to do so.