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Bouncing Back

Entrepreneurs who've been there share hard-won lessons for making a business work the second (or third... or fourth) time around.

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They're successful now, some with millions of dollars in sales under their belts. But they still bear the scars. When they talk about the experience, their voices rise in anger, drop to a whisper or quiver as if it had happened yesterday, not five, 10, even 20 years ago.

What they're talking about is business failure--and it's no wonder these entrepreneurs harbor such strong emotions. "People whose [businesses] fail are made to feel like characters in a Hawthorne novel, branded with a scarlet `F,' " says Jeffrey Shuman, director of Entrepreneurial Studies at Bentley College in Waltham, Massachusetts.

How, then, are some entrepreneurs able to pick up the pieces and start all over again? And why do many so-called failures find success the second time around?

The answer, say experts and entrepreneurs who've been there, lies in changing the way we look at failure. It means learning to accept, as Shuman puts it, that "failure is inevitable" for everyone. Yes, everyone--and, yes, that means you. You see, no one stands to learn as much from failure as the entrepreneur who hasn't been there--yet.

Hitting Close To Home

Business failure takes many forms, from the company that goes spectacularly bankrupt to the failing firm that is quietly sold at a loss. But whether the business goes out with a bang or a whimper, the emotional impact is the same. "The death of a business is like the death of a [loved one]," says Tualatin, Oregon-based consultant Gary Goldstick, who still vividly recalls the "nightmare of despair and humiliation" he felt when his electronics manufacturing company went bankrupt nearly 20 years ago.

Business owners go through the same stages as those dealing with death, says Princeton, New Jersey, psychologist Susan Edwards, Ph.D.--shock, denial, anger, depression and, finally, acceptance.

How to speed the process? You can't. "[After a business failure,] you need a period of decompression to rethink and recharge," contends Will Sogg, a partner with Cleveland law firm Hahn Loeser & Parks LLP. "People are too quick to rush into the next thing just to prove they can do it."

Because entrepreneurs invest so much of themselves in a business, says Edwards, failure batters both personal and professional self-esteem. What can you do to rebound? Spend this "downtime" investing in your personal life. "Spend more time with your kids, family, going to church or whatever works for you," Edwards advises. Counseling, support groups and stress management techniques can rebuild self-confidence, too.

"Remember, your business has failed; you haven't," says Penny McConnell, who successfully started over after Penny's Pastries, her Austin, Texas, specialty bakery, went bankrupt in 1996. "Don't get stuck in the negative energy of `You are a failure.' "

After the shock wears off, entrepreneurs typically have one of three reactions, says Mark Rice, assistant dean of the Lally School of Management & Technology's Center for Technological Entrepreneurship at Rensselaer Polytechnic Institute in Troy, New York. Some realize they aren't cut out for entrepreneurship and go back to working for someone else. "At the other end of the spectrum are the entrepreneurs who say `I did my best, but it didn't work out. I'm going to take what I've learned and get it right next time.' "

Rice, a former business broker who has dealt with hundreds of struggling entrepreneurs, says the danger zone is somewhere in between. "There's a group that doesn't realize their mistakes. If they start a business again, they often repeat the same errors."

The key to future success is an honest assessment of what went wrong and a plan to make it right. "Put yourself through a healthy, constructive period of self-assessment--preferably with advisors, such as a trusted accountant, investor or attorney," says Rice. "Ask them to help you think through why this happened and what you can do differently [next time]."

Outside consultants are crucial, Goldstick agrees, because entrepreneurs tend to be better at action than reflection. "Self-analysis isn't always in their bag of tricks."

When Goldstick analyzed his strengths and weaknesses, he realized he didn't want to manage a lot of employees or seek capital from outside sources. The second time around, he launched G.H. Goldstick & Co., a one-man management turnaround consulting business requiring minimal capital outlay.

Equally important is accepting responsibility. "Don't blame others for your errors. Don't blame yourself unnecessarily, either, but realize what was in your control and what wasn't," says 40-year-old Eric Ruff, who was forced out of his first software company, Gazelle Systems, in Orem, Utah, as a result of power struggles. "We all have a responsibility to learn from our mistakes and improve."

Back To The Well

One asset entrepreneurs who bounce back from failure share is support from friends, family and colleagues. "Ninety percent of the people I knew were incredibly supportive," says McConnell, who relaunched Penny's Pastries in late 1996, just months after going through Chapter 7 liquidation. "That helped me decide to go back into business."

Still, it wasn't all pats on the back: "I did get some anonymous letters saying `How could you take the easy way out and declare bankruptcy?' " McConnell says, still smarting at the memory. "There isn't anything easy about bankruptcy."

How to deal? Don't waste time crying over fair-weather friends. Instead, take strength from those who support you--and take a hint from those who don't. Ruff was newly remarried with a baby when he launched his second software business, PowerQuest Corp. He recalls, "My in-laws tried to be supportive, but at one point, my father-in-law said, `Have you thought about getting a real job?' " Rather than dampening his spirit, says the Lehi, Utah, entrepreneur, the comment spurred him to act. "That lit the fire in me," he says. "I needed to have people challenge my sanity. If people only support you [and never question you], well, maybe they're wrong."

Even when family supports your decision to start a new business, they may not be willing--or able--to put their money where their mouths are. "Most entrepreneurs get their start-up funding from family and friends," says Sogg. "After [the first failure], you may have exhausted that [financial] resource."

With mom and dad tapped out, can you go back to the bank for funding? Don't bet on it. "Even if you've learned from the experience, conventional sources of financial support are diminished by virtue of a failure," says Sogg, speaking from 38 years of experience working with and teaching entrepreneurs.

A better bet? Private investors--like the ones Penny McConnell turned to--or venture capitalists. "Sophisticated investors like to see someone who has failed a lot--on someone else's dollar--and has learned from the process," says Rice. This is especially true in high-growth industries, such as restaurants, franchises or high-tech, which investors know are also high-risk.

That's not to say finding capital will be easy or will happen right away. "We approached more than 100 financing sources," recalls Ruff. "It was tough to be snubbed by virtually every person. Some venture capitalists actually made fun of me to my face." Still, Ruff persevered and finally found financing from the Commission for Economic Development of Orem. "All we had was debt and expenses, and they still gave us an $80,000 loan," he marvels. "They said, `We know you're honest and you can make it work.' "

Experts agree an honest, forthright, trustworthy business owner is likely to get a second chance. Not so for someone who left a trail of unpaid suppliers and angry customers. Says Shuman, "What matters most [about failure] is personal integrity--how you handle it."

New Attitudes

Back on their feet again, what do entrepreneurs do differently the second time around? For Shuman, who has been involved in four start-ups, the key is a change in attitude. "The fundamental mistake is believing you can get it right the first time," he contends. "If you think that way, you bet all the chips. Then, when you fail, you have no chips left."

Instead, Shuman says, successful entrepreneurs realize they are not starting a business; they are starting a process--a concept explained in his book The Rhythm of Business (Butterworth-Heinemann). "When you start a business, that can fail," he explains. "When you start a process, you accept failure as a healthy, normal part of that process."

There are four steps in the process: planning, preparing, interacting with customers, and analyzing and refining your business based on those interactions. "Figure out what worked and what failed, and adjust your business accordingly," says Shuman. This could mean making minor changes--or shutting down. Either way, Shuman stresses, it's just part of the process. After step four, you start all over again in a cycle that continues throughout the life of the business.

Shuman cites Bill Gates as a prime example: "Windows 1.0 was a failure," he says. "Gates put more money into it, and a few years later introduced Windows 2.0. That didn't work, either. But all along, he was interacting with customers, gathering information. When he introduced Windows 3.0 in 1990, it was a huge success.

"The key is that Gates didn't stop there. He did exactly the same things he'd done after introducing 1.0 and 2.0--looked to his customers, made some adjustments--and that led to Windows 95. You need to repeat the same process whether [your product] is a failure or a success."

Jeffrey Henning, co-founder of Perseus Development Corp. in Braintree, Massachusetts, learned that lesson after attempting three software start-ups that never quite got off the ground. Sales for the 4-year-old Perseus quadrupled this year, thanks to its new survey software, Perseus Survey Solutions for the Web. "This is the first time we were able to detach from what we wanted and be driven by market need," says Henning, who credits market research with helping Perseus succeed where his previous attempts failed.

In addition to following the four-step process previously mentioned, Goldstick stresses the importance of implementing an early warning system to alert entrepreneurs to problems. His book Business Rx: How to Get in the Black and Stay There (John Wiley & Sons) lists a series of questions he calls the Business Health Index. "I have my clients and their key [employees] sit down and answer these questions on a regular basis," Goldstick explains. "Then they meet and discuss their answers. This forces [entrepreneurs] to come to grips with situations they may have been pushing under the rug."

Penny McConnell's new early warning system is her CPA. "We look at numbers, look for trends and do a lot of tweaking," says the entrepreneur, who also relies on a group of associates as a sounding board: "If I have a new idea or something isn't going the way I want it to, I see what they think."

And don't forget the basics--like a business plan. "You can't live one day at a time. You've got to have a vision that goes beyond this week's payroll," Sogg says. "You've got to look ahead, anticipate what might happen--good or bad--and be prepared for it."

"Failure prevention" is Ruff's term for it. "Most people push for success as hard as they can. But more successful people constantly look for ways to prevent failure," he says. "Ask `What can go wrong? How can I prevent it? What did go wrong? How can I fix it?' When you focus on preventing failure, the end result is often success."

For Ruff, that meant correcting every error he made at Gazelle. "I was afraid to hire people who were better than me, I kept most of the stock in the family, and I spent 90 percent of my time in front of the computer," he says, ticking off his mistakes. "At PowerQuest, I did just the opposite. I hire people who are better than me, every full-time employee has stock or stock options, and I spend 90 percent of my time with people. There are days I don't even turn my computer on."

The result? PowerQuest's sales have skyrocketed: 1997 sales are estimated at more than $25 million. Ruff launched the company based on a hard-drive utility, Partition Magic, that executives at Gazelle insisted would never fly. "In two or three weeks," boasts Ruff, "PowerQuest sells as much as Gazelle did in its best year." Revenge is sweet.

Lessons Learned

Along with the importance of business plans, financial controls and a good CPA, failure teaches deeper lessons. For McConnell, it was patience.

Penny's Pastries had been in business close to two years when McConnell expanded from her core business, handmade specialty cookies, into a line of prepackaged cookies. Almost immediately, she landed an account with Southwest Airlines. It proved too much, too soon. Struggling to supply the airline with some 500,000 cookies per month, the business began hemorrhaging.

"[Today,] we still want to do big things, but we make sure we get every piece in place first," says McConnell, who refocused on the core business and now supplies Starbucks--but just 27 locations.

You have to realize you don't know everything. "At Gazelle, I was blinded by my ego," says Ruff. "I could never admit I was wrong."

And, sometimes, it's realizing you know more than you thought. McConnell recalls how, during her business's darkest days, she relied on the advice of a private investor. "I thought, `He's older; he has more experience--surely he knows better.' Looking back, I think if I'd gone with my gut, I could have saved the business.

"But I didn't know that then. Sometimes you're not sure what you know until you're tested. I think I'm stronger now than before [the failure]. I have more self-worth."

It seems the rewards of overcoming failure are more than just financial. "You have a duty to the entrepreneurial world to improve yourself and to show others by example how they can do better, too," says Ruff. "A true entrepreneur goes from one level to the next. If you're only dwelling on the same level, or descending . . . well, then, get a real job!"

Contact Sources

Susan Edwards, Ph.D., 515 Executive Dr., Princeton, NJ 08540, (609) 924-4330

G.H. Goldstick & Co., 4755 S.W. Natchez St., Tualatin, OR 97062-8763, (503) 691-8900

Hahn Loeser & Parks LLP, (216) 621-0150, ext. 2250,

Penny's Pastries, 5501 N. Lamar, Ste. A-135, Austin, TX 78751, (512) 302-3663

Perseus Development Corp., (617) 848-8100,

PowerQuest Corp., (800) 379-2566,