Questions

Does tolerance for failure in startups lead to dilemmas or is it indicative for sound entrepreneurial risk-taking?

3answers

As a member of the VC community I can bring my investor perspective. In general I see failure as part of the development process of every startup in its path to either greatness or doom. Every startup requires the team to be open to failure, so long as not fatal, because issues will inevitably arise at different stages. The difference between a startup in which failure is embraced and dealt with lays in the fact that good startups are quick at recognizing failures (before they become dilemmas) and testing solutions to solve those issues. This is reflected in the mindset of the founding team. For example, a new feature just released in an app can be a failure as it fails to generate new customers, increase usage etc etc., but generally the good team will be fast in understanding it and come out with an alternative solution. On the contrary, tolerance for failure leads to dilemmas (and toxic environments) when a) the failure is not recognized and the team is not receptive or willing to implement a solution and b) the failure is major and there is nothing to do to save the startup. The example in this case would be that the team invests an consistent amount of money in a failing product or feature without testing it and leading the firm into the ground financially.
Happy to have a call to discuss further!


Answered 9 days ago

Failure is a wrong concept, best to think about attempts as stamina builders that narrow the possibility of failure


Answered 7 days ago

I have two successful tech IPOs and counsel CEOs on topics just like this. Here's my answer:

It depends on what they are failing at. If they fail at a project (substitute "company" if that makes more sense to you) that has a very high chance of success, then that's a red flag. But, if they fail at a project with a low chance of success -but, they embarked on it because if it was successful the rewards would be big - then no big deal.

I know it's difficult to calculate but you should always try to do an analysis like this:

Project A: 30% chance of success but $10 million return if successful yields an expected value of $3 million.

Project B: 80% chance of success but $3 million return if successful yields an expected value of $2.4 million.

The other half of the answer is, how did they fail? Did they fail because of outside factors that they didn't recognize or plan for? Did they fail because of lousy execution? Did they fail because they hired the wrong people? DId they fail because they misjudged the market?

Lastly, optimism bias has us believe we are better than we are and that we control our own destinies. WRONG. Outside forces play a much bigger role than we think. We've all taken on assignments that we thought we could knock out in a day or two but actually took a week.

The other thing about optimism bias is that we hold on too long and won't admit defeat. We all know people who fail to kill a project and throw good money after bad. When we think we're going to lose then we tend to do risky things. (There is a reason the betting on long-shots goes way up at the race track as the night goes on - people are willing to take on more risk in an attempt to avoid losing.)


Answered 6 days ago

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