In Real Leaders Don't Follow, author Steve Tobak explains how real entrepreneurs can start, build, and run successful companies in highly competitive global markets. He provides unique insights from an insider perspective to help you make better-informed business and leadership decisions. In this edited excerpt, Tobak offers four real-life examples of companies that tried and failed and explains what you can learn about business success.
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I hear a lot of casual references to failure these days. The entrepreneurial crowd in particular seems to have a cavalier attitude toward it. But if you brush it off like it’s no big deal, it will consume you, leaving nothing but a trail of sweat, unrealized dreams, and red ink. I’m not saying that when it happens, and it will, that you should let it take you down, wipe out your drive, and destroy your confidence. And you certainly shouldn’t let it stop you from taking risks. But you shouldn’t take it lightly, either -- there’s simply too much to learn from it.
It’s hard to overstate how much you can learn by observing how companies fail. Not only will it help you avoid making those same mistakes, it will teach you critical best practices.
Failure Reason #1: Running out of cash.
Most companies run out of money. I’ve probably heard a million reasons why, but way too often they’re just excuses for poor business planning, hubris, or greed. Either entrepreneurs try to bootstrap when they shouldn’t, their burn rate is too high, they underestimate the cost of scaling, or they don’t realize that you simply can’t raise capital overnight. They understand product development and manufacturing timelines, but not that raising capital works exactly the same way; you have to pipeline and synchronize both.
I remember one Web development firm that was founded by two former managers from a large enterprise software company. They actually left excellent careers to try to self-fund an undifferentiated and therefore low-margin service business in a ridiculously competitive market. By the time they contacted me, they were already running on fumes with no hope of survival. Suffice to say these experienced executives should have known better. Maybe next time.
As for why so many otherwise intelligent people become stupendously dumb when cash is involved, I think it generally comes down to two fundamental flaws: magical thinking, as in “we’re special, so the rules don’t apply here,” and greed, as in “we don’t want to give up too much of the pie.” When asked why he only owned 4.1 percent of Box, the cloud computing company he founded, CEO Aaron Levie said, and I’m paraphrasing here, “I’d rather have 4 percent of something than 100 percent of nothing.” Now he’s worth about $100 million. Smart guy.
There’s one thing nearly every successful entrepreneur has in common: a solid grasp of business and financial fundamentals. You’ll need to understand this stuff sooner or later, and you’re much better off learning it sooner.
Failure Reason #2: Lousy vision.
What’s the difference between a visionary and a lunatic? The visionary turned out to be right. If only we all had crystal balls, we could all be visionaries. The way most founders and CEOs pitch their ideas, you’d swear that’s exactly what they have sitting on their desks. But they don’t. Which is why most of them turn out to be completely wrong, if not completely crazy.
Vision is a funny thing. And the analogy between business ideas and visual perception is so accurate it’s terrifying. Nearsighted or myopic people can’t see the forest for the trees. If you’re farsighted, you can’t see what’s staring you in the face. Tunnel vision means you lack perspective. There are founders with utopian views or grandiose visions, neither of which fares well in the real world.
I once coached an internet TV startup founded by a brash Hollywood Millennial. He had developed a platform and an app that were pretty cool, and he couldn’t understand why VCs weren’t lining up to fund his venture. It turned out that if you looked under the hood of his vision for an independent internet channel, there was little more than smoke and mirrors. He thought coming up with compelling content 24/7 was the easy part -- just hire a bunch of guys off Craigslist to do it. Unfortunately, that didn't work for him and he went out of business.
The thing is, you can improve your vision. If you ask yourself and maybe a few smart people some tough questions and force yourself to assess the answers objectively, you can actually tip the scales quite a bit in favor of your turning out to be a wealthy visionary instead of a broke lunatic.
Failure Reason #3: The dinosaur effect.
Focusing on doing what you do best isn't the same thing as staying the course when it’s clear your strategy has failed and it’s time to make some changes. Yet we often see founders and CEOs stick to their plans like deer caught in the headlights of an oncoming vehicle.
That’s more or less how BlackBerry (then Research in Motion) cofounders Mike Lazaridis and Jim Balsillie handled the explosion of Apple and Google onto the smartphone scene they once dominated. They weren’t just caught completely flatfooted. They responded with disbelief, then mockery, and finally with agonizingly slow, grudging, and futile efforts to catch up. They never admitted they were in trouble, even as iPhone and Android decimated their market share.
The hapless pair was again caught by surprise when Apple’s iPad hit the market three years later. After losing $70 billion in market value, they finally stepped down and appointed a crony, then co-COO Thorsten Heins, as their successor. In his first Wall Street conference call, Heins actually said, “I don’t think that there is some drastic change needed.” You know how that turned out. Nobody owns a BlackBerry today.
That sort of thing happens all the time. The sad thing is, it doesn’t have to be that way. When Microsoft used its operating system leverage and pricing power to dominate key PC applications and utilities, not every company went the way of the dinosaur like WordPerfect, Borland, and Ashton-Tate. Adobe, Intuit, and Lotus all managed to adapt and thrive, the last as a subsidiary of IBM. And while just about every other big iron computer company is gone, IBM survived the fallout of the PC era by reinventing itself as an IT services company.
Markets change. Competitors change. Everything changes. For your business to thrive over the long haul, you have to be flexible and adapt or end up like the dinosaurs.
Failure Reason #4: Fear of flying.
Real entrepreneurs don’t do things in half measures -- they go all in. But they’re not all adrenaline freaks. Some do it for practical reasons. While none of us are truly fearless, if you don’t at least act that way when it comes to taking risks, you’ll never face your first failure and survive to do it again until you finally take off like a rocket.
I’ve seen way too many companies fail to capitalize on opportunities and pay the ultimate price. The problem is that markets tend to be pretty unforgiving. If you don’t have the guts to go big, somebody else will, and that’ll be the end of your sweet gig.
The most famous example of a company that failed to capitalize on its efforts is Xerox’s PARC -- the research center whose inventions led to all sorts of cool things like personal computers and networks. Unfortunately, PARC never commercialized any of it. Another great example is Kodak. I bet you didn’t know that Kodak invented digital photography and just sat on it. The once-great company eventually filed for Chapter 11 bankruptcy protection, a dead relic of a foregone era before digital photography took over the market.