The three types of failure

Fervent Wellingtonian Chris Parkin wears many hats. He’s an entrepreneur, property developer, hotelier, former local body politician, art collector and patron.

His most famous investment was the Museum Art Hotel in Wellington, which he sold to Amalgamated Holdings in 2015 for a tidy sum of $28.5 million. 

For Parkin, there are three types of failures in business.

The first is incurable: basic incompetence. 

“Usually, you can sort that one out pretty quickly and they are the people who you don’t want anything to do with because they won’t improve,” he says.

The second sort of failure in business comes from reckless behaviour – but it is not a death sentence. 

“Reckless people might just need to be fairly well mentored. It can be hard work but if you attach yourself to their coattails you can get one wild ride.”

Parkin says the third category is the easiest to come back from: circumstantial failure. 

“Sometimes people’s failure is due to a combination of bad luck and factors outside their control.”

Given different circumstances the third group would carry on and be successful. 

The reckless entrepreneurs have usually had at least one defeat and might suffer others, but Parkin says they are generally worth investing in if they can be controlled. 

“You can generally tell the nature of a failure.”

Finding the right mentor can be key to bouncing back from a business failure, Parkin says. 

If your business failure falls into Parkin’s latter
two categories, the key to bouncing back is quite simple: resilience. 

Optimistic people can generally find some good in just about anything, including business failure.

“Often failure produces ideas about other directions that might be successful.”

For many that might mean the failure proved they were under-capitalised. 

Failing due to a lack of resources can be turned into to a success – with investors’ help. 

Parkin says he has led a charmed entrepreneurial life. None of his ventures have ended in a failed heap, but there is a key reason for this.

“I’m not a team player,” he says. “I invest in my own ideas. I’m happy to listen to other’s ideas and mentor them but it’s very hard for entrepreneurial people to put money into somebody else.”

‘First attempt in learning’

Lawyer-turned-entrepreneur Kate O’Leary invests in established businesses that have potential for further growth. 

She is also a steering committee member of ArcAngels, a woman-only angel investment group. 

The group boosts the number of early-stage investors in New Zealand and provides more capital for fledging businesses run by women.

O’Leary looks for entrepreneurs who are committed to raising funds for more than just their own pay cheques. 

“I’m interested in what their plans are after they make the money,” she says.  “I want somebody who doesn’t just raise funding to pay themselves a salary but to move the business forward.”

An entrepreneur that has failed before is often a good thing for O’Leary, as long as they learned from their past mistakes. 

Her daughter’s school has a motto that she thinks entrepreneurs can learn from: Fail = First Attempt In Learning. 

“If you always succeed and you’re always winning, then when a knock-back happens you might fall very hard.”

Failing fast and learning from it can be an incredibly valuable experience that an investor would look for, she says. And at a Project Connect event this year, early Google employee and investment guru Jeremy Wenokur agreed. He said that when things are running smoothly it’s human nature not to examine them too closely. But “failure is forensic” and when things go wrong, you tend to want to find out why. 

When business failures become negative is when they continue to be around a single business idea, she says. Often this is caused by a lack of knowledge of the market. 

“You have to look at the cause of each failure before you write off the entrepreneur because they have a string
of failures.”

Sometimes the problem is not a lack of resources, or that the product isn’t right, but that the timing in the market is off. 

O’Leary sites Airbnb as an example of a business that hit the market at the just the right time – in the aftermath of the global financial crisis. 

“The idea behind Airbnb wasn’t a new one but it went off because people didn’t have as much money to spend on accommodation.”

The lean startup concept is designed to help business, should they fail, to do so in a way that minimises carry-on effects. 

Building a startup takes a lot of resources, particularly money and time.  

“The quicker you realise what aspects of the idea aren’t going to work, the less resource you waste.”

Bring out your dead

California-raised, Wellington-based startup investor Dave Moskovitz has made a career on minimising risks and maximising success in the world of startups. 

He is a founding investor of Lightning Lab, a business incubator that mentors digital startups over three months to accelerate businesses.  

Moskovitz has founded or co-founded several companies – not all successful, he notes – but then failure can provide lessons. 

“Failure is a much bigger teacher than being successful,” he says. “But failure comes in different magnitudes and how you measure the impact of that failure determines how painful it is and how it affects your future success.”

In the world of startups, he says most business failures are caused by a lack of resources. 

“If you can design your business experience so you can fail fast, that’s better, as opposed to taking five years to fail and taking investor money, time and energy.”

With startups, the focus in the early stages should be learning everything possible about not just your product, but also the market. 

In the early stages of a startup, teams should be conducting experiments and tests to find out the most risky areas of the business. This should identify what might fail before money and time is spent.

“It’s the art of trying to figure out what you might need to test and what you might need to fail at in proportion. The main problem is you generally don’t know what you don’t know, so people get it wrong.”

It’s at this stage where a touch of the supernatural might come in handy – a sixth sense to sniff out where problem areas might be.

Unsurprisingly, this isn’t fool proof. In startups there are so many factors that could go wrong.

When failure is par for the course, the next step is accepting it.

“I’ve often said that I don’t think New Zealanders are failure tolerant enough, because, of course, people are embarrassed about their failures.”

In 2013 Moskovitz attended a Dead Startup Society wake for Wellington entrepreneurs’ dead business endeavours. 

Business cards and physical artefacts from unsuccessful businesses were placed in a wooden coffin.

The tongue-in-cheek service was well attended and Moskovitz says it needs to happen more.

“Even though it was a joke, I actually found it incredibly moving. I’d had a startup hanging around me for years that I’d never been able to let go of and I did then.”

The first step to overcoming a failure was to acknowledge it and recognise it, so the same roadblocks don’t happen again, he says. 

The worst failures are the ones that affect other people – whether that is by knocking out their resources or using invested time and energy.

Failing alone was easier to stomach, he says.  “Failure is not a wonderful thing, it’s something to avoid – but it is unavoidable in many cases.”

It is also important to stress the difference between the somewhat benign failure of a product that never managed to get off the ground, and “headline” failure.

Failure, like the scandal of South Canterbury Finance was criminal, and not the sort of thing you could bounce back from, he says. 

When Moskovitz looks to invest in a project, a good idea helps but a good team is the most important player in a new business.

A startup in its first stages might not have a particularly strong idea, but a good team and a smart entrepreneur can turn that into an amazing product.

“It’s easier to be resilient when you’re part of a well-functioning team, it can contain failure because you have more eyes and ears on a project.”

Startups might be risky business, but no one is naïve about that. Investors know there is a chance of failure but if an entrepreneur does well, investors will respect them.

“If no-one ever took risks there would be no progress. You do strike out, but you hit home runs too.”

Life lessons 

Nick Lewis is an entrepreneur with a history of work in investment banking. He is chair of PledgeMe’s board of directors, advising the company since the beginning. 

Lewis prefers an entrepreneurial team to a solo entrepreneur and sees the value of a good team over a great idea. “Ideally, I find the right team and then help the team find the right idea.”

Business ventures can be fluid, and opportunities are brought forward in all kinds of ways. Most need some form of fine-tuning before the right idea is reached. 

“It’s usually a case of finding something that feels right and building out the missing elements.”

And Lewis knows that failure in business is often hard to avoid. 

As entrepreneurs are inveterate optimists the key can be finding when it is the right time to draw the line.

Having failed at business in the past is sometimes even a good thing in Lewis’ mind. “I once watched a VC [venture capitalist] in the US turn down an entrepreneur because he had not yet had a failure,” he says.  “The VC valued the lessons one can learn from failure, and saw the absence of that experience as a shortcoming.”

However, there is a line. One or two failures can provide priceless experience, but a string of failures is likely to be off-putting to investors. 

Sometimes it is better for a company to cut its loses and shift focus when a business starts to go downhill. As the chair of the board, Lewis has experience in this.

The board of any company must decide as an on-going duty whether to continue with the business as usual, stop or pivot to a new pursuit. 

“Deciding whether to continue, quit or pivot depends on what the team and board have learned along the way.”

It is people

Lance Wiggs, experienced investor, founder of the Punakaiki Fund and ex-Idealog agony uncle, is also an independent investment and business advisor. 

The Punakaiki Fund invests in technology, internet and design-led companies, targeting early stage investment.

Wiggs says it was important the blame of business failure does not fall just on the entrepreneur’s shoulders. 

“We have to blame investors for failure too. Giving money to companies that are not investable based on sound fundamentals for their stage will magnify the possibility of failure,” he says.

“It’s not fair to founders to invest in something
that is doomed, so let’s stop tolerating angel investing as charity.”

For Wiggs, the most important thing about an entrepreneur is that they are a good people.

He looks for someone easy to get along with, kind, caring, smart and considerate while also being decisive. 

“We want to invest in a long-term relationship and things are a lot easier when we deal with nice people,” he says. “Business is meant to be fun.”

A good track record in the past makes it easier for entrepreneurs to find investors, but experience alone is not enough.

Wiggs likes to see evidence that they have learned and improved along the way.

But that doesn’t mean he boycotts people who have failed in the past. The learning curve from giving things a go in business is very high.

“We’ve all failed, but the questions to ask now are how we failed, what we learned and how we made sure it didn’t happen again.”

A track record of “too much” failure is something to look hard at. 

Wiggs would consider whether the person was learning from mistakes, getting distracted, having poor ideas or insufficient grit to see it through.

His advice is always to find and address the gaps, perhaps by working with a partner, and build something without investment.

Wiggs agrees with Moskovitz that the initial idea alone is not particularly valuable. A team that cannot adapt is simply not investable.

Likewise when a business venture is not going to plan, the key is to find the balance between shifting focus and riding out the tough times. 

“We look for teams who work hard to achieve goals, but step back periodically to make sure their goals are the right ones. Grit with the smarts to shift is required.”

It pays to listen 

Private equity investor and businesswoman Bridget Liddell is the chair of women-only investment group ArcAngels. The group was the brainchild of Liddell, a Kiwi expat and supporter of startup Kiwi companies. 

She is a senior partner with US investment firm 212 Equity and participant in a women-focused US angel group Golden Seeds. 

For Liddell, failure, and even serial failure, is not in itself a deterrent to investment.

“In all cases [of failure] the entrepreneur must provide clear evidence that they have understood their past as a profound learning experience,” she said. “They must be able to interpret the object lessons honestly and with humility and self-awareness.”

The entrepreneur themselves must possess a combination of different skills to be seen by Liddell as a valuable investment. 

They must first have a passionate belief in their business, and an ability to convey that excitement and energy with customers and staff. 

It is also important to Liddell that entrepreneurs are able to accurately and honestly assess and manage risk. Then they must be willing to share that information with the stakeholders. 

In terms of productively recovering from failure, an entrepreneur must have personal resilience. 

“[They need to] not be distracted from their goals, by either the crises and disappointments or the positive surprises.”

When a business or idea does fail, there are no simple rules about bouncing back. Finding a comprehensive lesson in the experience is the crucial first step.

“Every situation requires in-depth analysis and, preferably, years of industry experience to determine whether the setback is short or long-term in nature.”

Deciding whether to persist with a business that is slow to get off the ground, or to pivot into something new is situation specific. 

Liddell sees opportunity for both options in many instances, but says whichever path is chosen should be in the consideration of the market. 

“The customer’s voice is what really matters and listening insightfully and intelligently to the feedback you are getting from your customers will guide your strategy.”