From the February 1999 issue of Startups

It began in high-tech. Twenty- and thirtysomethings starting their own companies and making millions. Bill Gates, Steve Jobs, Peter Norton, to name just a few. Silicon Valley of the 1980s was like the California gold rush of the late 1840s. Anyone who could write a few lines of code or put together a computer in the garage tried his luck.

But like the gold rush, while a few struck it rich, the vast majority went bust. "For all the great success stories to come out of Silicon Valley, it has spawned many, many more failures," says David Needle, a columnist for Techweek magazine who has covered the high-tech industry since 1981.

Even in failure, however, all that entrepreneurial effort didn't go to waste. It engendered an attitude that has spread throughout the rest of the country: If you're going to take the entrepreneurial plunge, do it while you're young. Success is more glorious, and failure, if it happens, holds less sting.

Not that the accent on youth in high-tech is due merely to energy and attitude. In scientific fields, breakthrough insights are commonly accomplished by the young. Newton invented calculus at age 23. Einstein developed the theory of relativity at 26. Marie Curie discovered radium at 31. What is new is the ability of youthful, high-tech entrepreneurs to take their insights and raise enough money to base their businesses on them.

In large measure, this phenomenon is due to the birth of the personal computer industry. The large capital investment previously needed to manufacture high-tech products simply isn't required to write software or put together computers from parts available at any local electronics store. And once the first wave of microaged millionaires hit, investors quickly lost their shyness about lending money to 25-year-olds with nothing to show for themselves but brains and, perhaps, a profitable idea.

As for the many businesses that didn't pan out? Like a miner whose hands have grown calluses from constant use, Silicon Valley developed a gritty indifference toward failure. It had to, because high-tech companies almost by definition run on the edge of the known. New technologies must be invented, tested and manufactured. At any step along the way, a minor glitch can send an entire project back to the drawing board. Even if the technology does fly, it still has to be marketed to a fickle public known to greet "revolutionary advances" with a bored yawn.

"There's a higher degree of risk with what we're doing because you not only have business risks, you also have technology risks," says Jim Kean, 36-year-old founder of Sapient Health Network, an Internet health-care information provider. "With a leading-edge technology company, what you're really doing is fundamentally changing business practices."

In Silicon Valley, investors and entrepreneurs know these truths from 20 years of seeking the mother lode, and that has helped build a tolerance for failure. In the world of techies, however, it's a tolerance with a decided prejudice for the brilliant flop such as GO Corp.'s portable pen computers, not one of which ever sold, or the supercomputers by Thinking Machines, which sold but never made a profit.

"I think you have to distinguish between failure in trying to come up with new ideas for products and services, and the failure of a business that was poorly managed," notes Kathleen Allen, professor of entrepreneurship at the University of Southern California and author of Tips and Traps for Entrepreneurs (McGraw Hill, $14.95, 800-262-4729). "An innovative high-tech company that ultimately fails or somebody else steps in when there's a shakeout, I don't think those people are looked upon badly."


Jeffrey Shuman is the director of entrepreneurial studies at Bentley College in Bentley, Massachusetts. David Rottenberg is a business writer. Together, they co-wrote The Rhythm of Business: The Key to Building and Running Successful Companies (Butterworth-Heinemann, $18.95, 800-366-2665).

Different Degrees Of Failure

Has the tolerance for a certain type of failure spread beyond high-tech havens such as Silicon Valley? Although conventional businesses may lack the ingredients for the "brilliant flop," a similar distinction exists. It's widely recognized that even in more traditional industries, failures can occur due to events beyond the entrepreneur's control. Economic conditions change, alternative products and services enter the marketplace, customers' tastes shift. Any of these situations or others can threaten or destroy a business. What venture capitalists and angel investors have little tolerance for--whether the business is high-tech or not--are the self-inflicted wounds of poor management.

Yet it's precisely these wounds that are the death of most businesses. "Ninety-five percent of business failures are due to poor management," contends David Ferrari, president of Argus Management Corp., a Natick, Massachusetts, consulting firm that specializes in helping companies in or near bankruptcy.

Ferrari ticks off the most common mistakes: "Entrepreneurs choose the wrong people. Even when they realize they have the wrong people, they don't replace them quickly enough. They don't react to changes in the marketplace quickly enough. [They're reluctant] to cut back [on expenses], and they don't realize how much time it takes to stop and change a company."

Nor are high-tech companies immune to the mundane ills mismanagement brings. "High-tech businesses usually have a lot of capital and burn through it very quickly," Ferrari claims. "They have poor control over cash. The companies have plush quarters, casual atmospheres, a lot of people. Very few structures, very few restrictions. And when they run out of money, they just go out and raise more."

How can they keep raising capital? "Venture capitalists have a pretty high failure rate built into their analysis," explains T. Lincoln Morison, a venture capitalist with Brookwood Capital Partners LLC in Beverly, Massachusetts. "You look at 100 deals to find 10 that are interesting. [Of those], one or two are home runs, three or four are so-so, and the balance are losers. Inherent in that is a built-in tolerance for bad situations, [since a high] failure rate is expected."

In other words, though failure may be fatal for a business, it's not necessarily deadly for the entrepreneur. No one likes to lose money, but venture capitalists and investors will back someone who has failed because, paradoxically, failure can actually build investor confidence. In a way no other business experience can, failure reveals an entrepreneur's true mettle. Until you've failed, no one knows how you'll react in an extreme crisis. If you get through it in an honorable manner, venture capitalists and investors know at least two truths: one, you're trustworthy and two, you've had some invaluable business lessons seared into your soul.

In 1995, Sapient Health Network founder Jim Kean faced such an education. His Portland, Oregon, company's original business plan was for a subscription-based health service providing individuals with information on medical treatments over the Internet. Unfortunately, Kean found that no matter how valuable the information was, people didn't want to pay for it. After spending millions of investor dollars to develop his Web site and sophisticated information-gathering software, his company faced an uncertain future.

At the time, Kean says, all he could think was, "If this company fails, my investors are going to hate me, and I'm never going to get a job anywhere else." However, when he actually met with investors, he found their attitude quite different. "I was pretty straightforward, and most of my investors said they'd be unhappy to lose their money, but they were fully aware of the risk and were surprisingly supportive."

Encouraged, Kean sat down with his board to analyze the strengths and weaknesses of the company. "[We decided] what we were really good at was putting together communities of patients organized around [particular health-care] topics, and that we could sell the aggregate insights of those patients to different health-care provider groups," Kean says. "We really turned the business on its head." Today, Sapient Health Network provides information free to consumers and bills health-care organizations for profiles of its subscriber groups.

Turnaround Time

What worked for Kean can help any entrepreneur turn failure around. When a company is in difficulty, stresses venture capitalist Child, "The most important thing for the entrepreneur is to be honest. Outside directors can't help unless they understand the situation. Figure out what's important, realize capital is a constraint, and stretch scarce resources. Those are the things you hope [an entrepreneur] learns from a tough experience."

More than others, young entrepreneurs are in a position to survive such tough experiences and even to make failure work for them. When you start a business in your 20s or 30s, the outside investment level is usually low, so you're not risking a significant amount of investor capital. Typically, your personal assets are small. Often, you don't have a mortgage or family responsibilities, so it's easier to recover financially from failure.

Jennifer Kushell, president of the Young Entrepreneurs Network, a Marina Del Rey, California, entrepreneurial Internet community, and author of No Experience Necessary: The Young Entrepreneur's Guide to Starting a Business (Princeton Review Books/Random House, $12, 800-793-2665) asserts, "Entrepreneurs in their 20s will usually start a series of businesses throughout their lifetime. I know a lot of people who are 25 and are already on their third business."

For such entrepreneurs, failure is often the stepping-stone to success. Paul Wenner's Gardenhouse restaurant failed when he was 37. Undaunted, Wenner took the best product from his restaurant--the vegetarian Gardenburger--and turned it into a $57 million business. His Portland, Oregon, company, Gardenburger Inc., now sells frozen Gardenburgers to restaurants and supermarket chains nationwide.

Business failure will never be something to brag about. It's too costly to be cool, too painful to be chic, too embarassing to be hip. Just ask anyone who's had to face angry creditors, lay off loyal employees or write letters to disappointed customers. But it can profoundly help those willing to face the challenge with honesty and learn from it. So if you're thinking about starting a business, don't let fear of failure hold you back. Go ahead and jump.

Famous Failures

  • After failing miserably at his job as a Florida real estate salesperson, Ray A. Kroc started selling milkshake machines. On the job, he met the McDonald brothers, owners of a San Bernardino, California, restaurant serving low-priced hamburgers. Kroc was so impressed with their business, he started selling McDonald's franchises. In 1961, Kroc bought out the McDonald brothers for $2.7 million. Today, McDonald's is the largest food-service company in the world, with more than 20,000 restaurants.
  • Masaru Ibuka and Akio Morita were both failures in post-World War II Japan. Ibuka, who had failed his exam for lifetime employment at Toshiba, partnered with Morita to make an automatic rice cooker. But the machine burned the rice, and only 100 of the cookers ever sold. Desperate, the two teamed up to build an inexpensive tape recorder they persuaded Japanese schools to buy. From that successful tape recorder grew Sony Corp.
  • Henry Ford's first business, The Detroit Automobile Company, failed within two years due to partnership disputes. Ford's second automobile company also failed. Proving "the third time's the charm," his third business, Ford Motor Co., made him a multimillionaire.
  • Nike founder Phillip H. Knight came close to failure twice. In 1971, his company, then called Blue Ribbon Sports, distributed Tiger athletic shoes. When the shoes' manufacturer demanded 51 percent ownership in Knight's company, Knight refused. The refusal left him without a product to sell, so Knight took his own idea for a waffle-sole shoe design to another Japanese manufacturer and began selling his own sneakers. A year later, Knight survived near-failure again when a dockworkers' strike and Japanese currency fluctuations almost put him out of business.
  • Rick Rosenfield and Larry Flax, co-founders of California Pizza Kitchen, failed plenty before their successful restaurant chain was born. They co-wrote a screenplay they couldn't sell, started an Italian restaurant that went bankrupt, and launched a mobile skateboard park that died a quick death. It wasn't until 1984 that they hit pay dirt with pizza. The national chain has its sights set on surpassing Pizza Hut's sales.

Stayin' Alive

More than twenty years of experience teaching and interviewing some of America's greatest entrepreneurs has taught us something about failure: It's part of the process.

That's right. In some ways, businesses always fail. No matter how good your business idea is, no matter how well you execute it, your business is always going to change. No one can get it right the first time . . . or the second, or the third.

People you counted on won't want your product or will want it ways you didn't count on. People you never even knew existed will demand your product and want you to deliver it in entirely new ways. In short, millions of things will go right and millions of things will go wrong. This simple business truth means that if you want to succeed, it's up to you to quickly identify your mistakes and correct them.

It's also important to understand that change occurs not only when a business begins. Due to economic, cultural and technological developments, change is a constant throughout the life of every business. The ability to adapt your business to the changing wants and needs of your customers is a skill every entrepreneur needs in order to succeed.

Contact Sources

Argus Management Corp., 207 Union St., Natick, MA 01760, (508) 651-3777

Brookwood Capital Partners LLC, 55 Tozer Rd., Beverly, MA 01915, (978) 927-8300

Gardenburger Inc., (503) 205-1500, http://www.gardenburger.com

David Needle, dneedle@sjm.infi.net

Sapient Health Network, (415) 512-0770, http://www.shn.net

Young Entrepreneurs Network, jennifer@yenetwork.com, http://www.yenetwork.com