Yesterday I wrote a post about how much capital your startup should raise . In that post I was talking about how it is a bad strategy to be underfunded. In general when capital is available take it (provided it’s on the right conditions and from the best people from whom you can raise). It’s also bad to raise too much, too early. If you’re interested in that topic I cover it in the article linked previously.
I made a diversion in the article that I shouldn’t have taken. I talked about the Silicon Valley memo that has been circulated for the past couple of years that says you should “fail fast.” What I said was:
“I’ve even heard people repeat this bullsh*t Silicon Valley mantra about “failing fast” which is horse puckey. The line goes like this, “well at least you know early that your business isn’t going to work and you didn’t have to waste 2 years and $1 million trying to bang your head against a wall.” That is so self centered it winds me up. Tell that to the person who wrote you the $50,000 of their hard earned money and entrusted you to try your best. Fail fast? How does your brother-in-law feel about that?
And how do you think the next person who’s thinking about writing you a check going to feel about that sort of cavalier attitude with their money? Fail fast = quit and give up easy = spaghetti against the wall = no clear strategy going into your business = no ability / willingness to try and pivot as market conditions change = easy way out = today’s management mantra that will be laughed at in 10 years. Who started this meme? I say define a strategy, test it up front and pivot if you’re not getting the traction you had expected. Fail fast on your own dime.”
Obviously when a meme like “fail fast” forms and conventional wisdom builds in support of it you’re likely to get attacked for saying, “the emperor has no clothes.” But I just said it. Naked. I shouldn’t have covered it in the last post because I should have stayed focused on the topic of how much money to raise. Here’s an example of one comment I received,
“So you think it’s better to plan and build for years without testing it on the market and then make a big splash release and hope for the best?”
Nice logic, hey? If I say “fail fast” isn’t the right strategy then it must be a long, slow release process, right? I’m not attacking anybody’s religious beliefs. I’m trying to enter the debate with what I found to be a very destruction guiding principle that young people have started to believe. The following highlights what I do believe and why fail fast is wrong:
What is the right way to build a startup?
- Define a market problem that you believe you can solve
- Research this market by doing market sizing, looking at existing products, talking to customers and deciding how you will make money
- Validate that you can make money before starting. This means looking at what your buyer pays for similar products now, what the history of other people who have tried to monetize in this way have experienced, what your costs to acquire customers will be and what you believe you can make over the customers’ lifetimes. These are all assumptions – nothing more. I believe passionately that if you don’t do a financial model you shouldn’t spend any time or money building a product. You want to talk about the ultimate “fail fast” – how about if you fail before you’ve spent any money building product because you validate there isn’t a big enough market or you can’t make money?
- If you believe there is a market then build a prototype product that you can show customers, investors and potential employees.
- From there build the MVP (minimum viable product). I believe in launching with a small set of features and learning from the market before you spend too much money building out a feature rich product or before you put serious capital to work.
- If you validate that there’s a market then go for it! If you don’t believe that your product is resonating then pivot and find one!
Why fail fast is wrong, irresponsible, unethical and heartless:
- I’ve read all of the fail fast, fail cheap articles. I’ve heard the insufferable speeches at conferences. I understand that many people argue that “fail fast” just means launch products and learn from customers. Fine. Then let’s call this “launch and learn” as well as “adjust and pivot” when adoption doesn’t happen.
- The problem is that when you brand something that will be interpreting differently by people who weren’t part of the zeitgeist when the memo went out about what “fail fast” meant then we educate the next generation of entrepreneurs to do things the wrong way
- How do I know this? Because I have met so many young entrepreneurs who tell me, “we don’t need business plans anymore, there a waste! We’re going to put our product out there and fail fast!” [note: business plan to me does not equal long Microsoft Word document. It means a financial model that sets a strategy for how you'll make money and spend money] or they tell me, “we’ll launch a bunch of products and see what works.” That is the old “throw spaghetti against the wall and see what sticks” approach. It’s intellectually lazy and I doubt many great companies are born this way.
- Worse still I’ve actually heard the following from somebody that is reputable and whom I actually like, who has raised $1 million, “we don’t want to raise $3 million to get to the next round. Either this thing has legs and will grow fast and we’ll raise at a very large price or we’re going to ‘fail fast’ .” Me, “What? Really? What about the money you raised? Aren’t you worried about that?” Him, “Well, what do you want us to do, stick around for 3 years trying to build something that we know isn’t working?” I can’t make this stuff up. People think that way these days. It’s wrong. It’s immoral. It’s irresponsible. That’s hard earned money you’ve raised, not house money at a casino that you get to put on lucky number 16 and see if it comes up.
- As Reece Pacheco appropriate said in his comment to yesterday’s post, “Know who else you shouldn’t fail fast with? Paying customers. My business has a bunch of them, and a lot more users who really depend on our service. They’re relying on us. Failing fast may be an out for our bootstrapped lives, but it’s not an option.” Think about that. People gave you money to use your service. And they’ve invested their time and trust in you. Failing fast is to disrespect the very customers who placed their trust in you.
- We have taught a generation of young entrepreneurs that “failing fast” is ok. It’s quick and easy. It’s a way out so that you can focus on your next big business idea. Why waste your time on this one? Don’t get me wrong – failure is OK in my book. I’d rather you try something that doesn’t work and learn from it then to never have tried before. I personally think that second-time entrepreneurs are better because, as I’ve written, “good judgment comes from experience, but experience comes from bad judgment.”
- But my message to young folks – if you take somebody’s money you have a responsibility. I raised too much money at my first company and regretted it. Long after the Dot Con 1.0 party was over and I knew that I personally wasn’t going to make as much as I thought I would – I stuck around. I felt a moral obligation to spend this money that I had raised responsibly. The market changed totally so my assumptions were all off. Goldman Sachs had told me we would IPO in a year. That wasn’t going to happen. But I signed up for making the company work and sometimes that commitment trumps your current economic incentives. Not forever – but for a period of time. Taking money = obligation and commitment to try your best to make a return.
How should you deal with a business that isn’t working? I’m not talking about when your product isn’t working, but your company. When you know that you don’t have a future.
- Get your cost base as low as you can as quickly as you can
- Communicate early to investors that you don’t think the business can be successful. Make sure you say you haven’t given up and that you’ll stay to help find a way to find the best possible outcome for the company. But that you don’t want to raise any more hard earned money if you’re convinced that new money won’t have a good return
- Consider whether there are any buyers for the company. If not, are there buyers of the intellectual property?
- In the worst case scenario is there a “face saving” exit for $1 somewhere? This will save everybody from the time, expense and risks of a bankruptcy
- Remember that legally the order of payments (I’m not a lawyer, double check with a bankruptcy lawyer) is employees, creditors, equity holders
- Better that you handle things until the bitter end and preserve your most valuable asset – your reputation
- There is nothing wrong with saying respectfully to investors, “if I can find a buyer for this asset would you be willing for me to take a very small piece of the purchase price so that I can incentivize my team to stay together through this difficult period?
- If the company needs a very small amount of money to get through this shut down period make you should ask your investors for it. Make sure to tell them that it is for a shut down and/or attempt to recover value for the assets. Tell them you’ll only ask once. Only ask once.
- Make sure your employees know what is going on. You have an ethical responsibility not to surprise them. MAKE SURE that you pay all of their expense reports that are outstanding. In the dark days of shut downs I’ve seen many junior members get burned. This is wrong.
So can somebody with better branding skills than I have please come up with the new term that we can all use for what we all know we want to see – customer development, MVP, rapid iteration, pivot and learn.
OK, now you can attack me …
(Cross-posted @ Both Sides of the Table )