Consider the Costs (and Benefits) of Entrepreneurial Failure

From the Praxis blog, reposted here since I’m on the theme of failure lately.

photo-624x370Most new ventures fail.  In fact, depending on how you define failure and what data you look at, entrepreneurial failure rates can be as high as 95%.  That sounds terrifying.  The costs of failure should not be overlooked when considering an entrepreneurial path.  But neither should the benefits.

Data about startups end with the word failure.  But what actually happens to the people who launch them?  Is their life over?  Do they come out worse than they went in?

When I was 19 my brother and I started our first business.  We installed telephone and computer cables back before wi-fi made it mostly unnecessary.  The business lasted less than a year.  We had a few good jobs installing and terminating fiber optic cables (a service we sold, even though we’d never done it before.  We learned.  It’s not as exciting as it sounds), but many of our “jobs” consisted of me doing landscaping for relatives.  I like to think I made their yards beautiful, but it was mostly charity on their part.

Novius failed.  But I didn’t fail, and neither did my brother.  I made a decent living for those nine months, I learned more than I’d ever learned, especially about people and businesses and how they operate (try cold-call selling people on data cable installation).  Our few customers got a good service at a good price and were happy.  A few relatives got some flower boxes.  I learned how to have confidence in myself and my ability, even if the business I ran wasn’t going well – that was the hardest and probably most valuable lesson.  We came out ahead.  Not really financially, but in terms of being closer to where we wanted to be in life.

There are ventures that could wipe you out.  There are ventures that could destroy your reputation, or your credit, or your relationships.  But those are rare.  Especially today when technology has made startup costs so low (Novius emails were @sbcglobal, because even ten years ago it was not so cheap to have your own email domain).  Various crowdfunding and investment tools let you wait until you know you’ll reach a certain level of capital, or customers, before any real resources are at stake.  The costs of entrepreneurial failure are falling.

The psychological costs remain high.  You have to be able to see your venture as an exploration, not as an indication of your worth as a person.  You have to simultaneously be so passionate about your idea that you can’t stop working on it, but so open about what might happen that failure won’t kill you.

If you make a go of it and fail, it is possible to reap amazing rewards in the process.  The analogies are endless.  95% of first attempts to ride a bike probably fail.  That doesn’t mean you shouldn’t ever ride a bike, or that you should wait until first-try success rates get higher.

If you are only interested in launching something that has a very high chance of success, it’s probably not a good idea to pursue it.  Failure will ruin you.  If, on the other hand, you are so excited about an idea, product, service, or vision that you feel you must give it a go even if it fails, just to discover for yourself whether it’s doable, then it’s probably not a bad idea to try it.  Ask yourself, “If I knew this idea was going to fail, but I didn’t know how or why, would I feel better having tried it to learn those things than never having tried at all?”  If the answer is yes, try it.

There’s a point at which repeated failures can begin to accumulate costs.  If you’re the person who always has a great new idea you can’t stop talking about, then two months later you never speak a word of it but focus on the latest idea, it will diminish your credibility fast.  The costs don’t come so much from failing, but from how you go about trying to succeed, how many other people’s assets you risk, who you blame and how you respond to failure.

Be real with yourself about the costs of entrepreneurial failure.  But be real about the benefits too.  How many people who make up the failure statistics are doing great stuff and living wonderful lives right now, in part because of the failure they created?  Sometimes the best way to the next level is to fail up.

There’s no rush.  Take time to immerse yourself in a lot of experiences, gain a lot of knowledge and self-knowledge, and poke your toe in the waters of the world a bit.  If you get bit by the entrepreneurial bug at some point, be realistic but don’t fear the failure.  It might be the best route to your goals.

It’s Not Always About Scalability

In the business and startup world scalability is the word of the day.  Products that can be built once and used infinite times by infinite consumers are the ultimate prize.  The hype might cause us to overlook other valuable products and services.

The quest for scalability makes sense with software, online products and social media applications.  They can be built relatively cheaply, honed in beta mode, and then sold an infinite number of times at no additional production cost.  But it’s not true that scalability equals profitability, nor is it true that the inability to costlessly scale means lack of profitability.

There are countless examples of great products and services that are non-scalable, yet highly profitable.  Personal trainers, legal counsel, health care, home repair, tutoring, food production, etc., etc., are not scalable.  Sure, they realize some economies of scale as they grow, but each new customer means new inputs like labor, raw materials and time.  It’s also true that some of these like legal or health advice or general education can be produced once and shared infinitely at zero marginal cost online.  But that is not the same as a visit with a physician who gets to know your unique symptoms and gives a tailored recommendation.

In fact, most of the best things in life are not scalable.  I can’t produce quality time with the family, or a night out at a fancy restaurant with my wife once and reuse it over and over at zero cost.  There is no demerit in a product that is not scalable.  One of the great virtues of the things that are scalable is precisely that they free up so much time and so many resources that can then be devoted to things that are not scalable.

Modern technology opens a world of possibility and the ability to realize amazing returns on small investments due to scalability.  But don’t overlook the innovation, benefit, and profitability of non-scalable or less scalable products.

The Myth of Self-Regulation

No business, product, service or industry can self-regulate. All must and will be regulated by some external entity. The question is who or what?

In a market, regulation is inescapable. Firms are regulated by wholesalers, retailers, capitalists, workers, packagers, shippers, competitors, consumers, shareholders and public opinion. These myriad regulators are exacting. They apply pressure from every angle, on every aspect of business. Get sloppy with your purchasing practices and wholesalers make better deals with your competitors. Overlook product safety and consumers and public opinion slap you down. Make frivolous expenditures and your source of capital and shareholders head for the hills. Drive too hard a bargain with employees and productivity declines or they leave you for another firm.

Firms have room for experimentation and risk-taking, but they have full responsibility to all of these market regulators for the outcome. No firm is a “price-maker” in a market. No firm is a compensation, safety, or policy-maker in the market either. All the parties to which they answer set the terms. Oh sure, firms can do what they want; unless they seek profit. Profit demands that they obey the regulators that fill the market across the whole production chain. It’s not easy.

Firms that have become successful and large tend to get tired of the constant regulation. They want a reprieve from the demands of stakeholders. To gain freedom from the regulating market, firms seek the comfort and stability of government regulation.

Government regulation is nothing like market regulation. It’s yoke is easy for the well-connected and deep pocketed, but often unbearable for the shoestring upstart. Market regulation is blind to size, wealth, political affiliation, slickness, religion or creed. Government regulation is built upon them.

Market regulation keeps an open invitation to anyone who wants to join the ranks of regulators; though promises no one their opinions will have a final say unless they prove worthy across the market. Government regulation is strictly closed off to anyone except those long-loyal to the party in power, and promises that the elite cadre of regulators’ opinion is final and binding. Market regulation is nimble, swift, constantly adapting, inescapable and unrelenting. Government regulation is ham-handed, slow, hidebound, avoided with a little craftiness, and backs off for a favored few with the right mix of political moves.

Market regulation is created and enforced by parties that stand to gain or lose by the actions of the regulated; parties who gain real-world expertise on the regulations effects. Government regulation is created and enforced by parties with no connection to the regulated actions or items, except the few politically connected firms that agitate for it. Market regulation draws on the dispersed knowledge of millions across the globe, from experts to anonymous users. Government regulation pretends a handful of elites can outthink the millions.

Market regulation seeks only the betterment of all market participants, regardless of which firms offer it. Government regulation seeks to destroy some firms for the benefit of others, regardless of what they offer market participants. Market regulation is by the many, for the many. Government regulation is by the few, for the few.

Self-regulation is not an option. The question is who’s a better regulator, markets or government?

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