Not All Failures Are Equal

It doesn’t matter if you fail – but it does matter HOW you fail…

It’s time to add perspective and actionable insights to the VC and Tech Bro urban folklore that says, “failure is good”.

We’ve all heard and mostly accepted as gospel mantras like “fail fast”, “move fast and break things”, “fail forward”, and “I never lose, I either win or learn”.

They have been passed on to the newest batch of entrepreneurial tech hopefuls for a few generations already. By Incubators and Accelerators. By OG VC Partners. By Social Media Influencers. By Exited Founders turned investors. And finally, by just about anyone else in the ecosystem who wants to show their fealty to the VC Gods.

Let’s back up the truck a little bit...

1.      Does that mean that all founders who fail have an automatic monopoly-like “get out of jail free” card? And if not…

2.      Does that mean that all failures “are not” in fact equal, and if that’s the case, what kind of failures are acceptable and how can founders create a framework for pushing the boundaries within their startup so that when failures occur they are not fatal and instead, ultimately lead them to success?

The answer to question one above is – NO. Shock, horror, gasp! Most of you saw that coming, right?

That is, unless your name is Adam Newman (of Upwork fame).

The rest of you modern day tech superheroes  –  can’t keep on burning through capital while completely ignoring pleas and sage advice from your LPs – all the while telling said LPs that they don’t know s—t – then crash the plane, get out and walk away – and then front up a few years later with a new zany business idea and ask for a few hundred million dollars to test your theory.

Which leads us to question two. By now you’ve figured out that the answer is also – NO. Not all failures are equal in the eyes of investors.

In my opinion, Venture is responsible for intentionally and knowingly perpetuating the belief in the minds of successive generations of founders that they are expected to overreach.

Firstly, Venture tells entrepreneurs that they invest using the power law. They make 100 bets knowing that only 2-3 might become Unicorns, but to get to be one of those hundred, the entrepreneur has to find a problem with a market that is so big that even if they miss the target – they’ll fall on their feet, and everyone will be rolling in dough. Oh, and each startup Venture invests in has to have the ability/potential to return enough to cover all the capital taken in from Limited Partners (LPs) in that fund.

Presto! Entrepreneurs magically find a solution that has a massive market and learn how to press all the right buttons and make all the right noises and voila – get funded. The problem is, because Venture told them that every startup they invest in should have the potential to repay the entire capital in the fund, founders have a false sense of security. Never mind they think.

They soon feel the weight of pressure drop down on them like some kind of medieval “Pillory” (that’s where the modern-day term “to be pilloried” comes from). They are expected to have seemingly unachievable goals and use their total dedication vis-à-vis 80 hour weeks and as much capital as they can grab to crash through roadblocks and achieve their goal.

In reality, over 90% just crash and burn.

Founders are not given a failure model with a marking rubric and told – these failures in this quadrant are on you – don’t expect us to pick up the pieces, these ones over here – well, s—t happens, move on and come back to use with your next great idea. And these ones in this box – that’s where the smart money wants to be – be that founder and you’ll never be without a supporter on your side. 

Okay – enough of the blame game.

If my thesis is – “founders should be shown what kind of failures will be tolerated and which ones will not” - what’s my solution?

First of all – let's talk about the different kinds of failures – establish a framework to base decisions on.

In her latest book, “Right Kind of Wrong – The Science of Failing Well” Professor Amy Edmondson of Harvard Business School (@https://www.linkedin.com/in/amycedmondson/) identifies three archetypes of failure:

1.      Basic Failure

2.      Complex Failure

3.      Intelligent Failure

Basic failures:

Are the ones that investors/customers/other stakeholders are least likely to be acceptant/understanding/tolerant of. Why? They are mostly avoidable. They happen in the realm of the known. Meaning, all the information and understanding is there to avoid making a mistake, but it happens anyway. The failure can be traced back to “human error” but the error could have been averted if proper systems and processes were in place and were followed.

Running out of money has to be right up there on my list of cardinal sins a founder/s can make – that are not acceptable to me – and lead me to tell a founder – don’t come back (if I have to play bookkeeper at a startup I should not have given them capital in the first place – regardless of how needed their solution is).

Building a product that gains traction, but the business model is fundamentally flawed, and the startup will never turn a profit is another (Exhibit A – Upwork that I mentioned earlier. Exhibit B - Grab - their slogan “the everyday everything app says it all). In both cases investors were either blinded by allure of the potential upside and/or the magnetic charm of the founder. Grab is just as poor an investment as Upwork – but have managed to prolong the inevitable for 12 years.

Complex failures:

Are the ones that are a result of multiple failures. It’s a kind of “perfect storm”. Supply Chain breakdowns during a global pandemic would be a classic (recent at least) case of this. Those companies that got caught out and closed down or filed for bankruptcy couldn’t be blamed. No-one could have seen it coming the first time it happened. However, if your company were to get caught by this problem again in 2025, you’d be dropped like a hot potato. Why? It would now be seen as a basic failure (lack of oversight, planning and governance) because the issues that caused the initial failure have moved from the realm of the unknown and hence unsolvable – to the realm of known and very much solvable for.

Intelligent failures:

Intelligent failure is the right kind of wrong. It’s where new knowledge and discovery come from. In an ideal world, these are the kinds of failures that startups and established companies would make WILLINGLY! Yes, you heard me right. Intelligent failures are essentially the result of an experiment.

There are four criteria for calling a failure intelligent:

1.      it's in new territory

2.      it's in pursuit of a goal

3.      its hypothesis-driven

4.      the failure is as small as possible (just big enough to learn from)

In other words, you have to learn to think more like a Scientist.

You should ask yourself:

What is it I’m hoping to do? What is the progress I’d love to make?

What do I know currently about how to achieve that goal? What do I not know?

What might I try next? (to see what will happen towards closing the gap between where you are today and where you want to be)

The final word then is…

We need to embrace failure to advance. Period. As humanity. As Nations. As companies. And as individuals.

I want entrepreneurs – especially first timers – to understand is this. There is a difference between the kinds of failures that get made and how investors and other stakeholders perceive and hence receive them.

Go in with your eyes open.