Failure is information, on what did not work in that moment. Therefore, business failure might be valuable information for entrepreneurs, as they can use what didn’t work before to build successful businesses and industries at a later stage.
Byond failure as pain
Failure is painful. That is something unbearable. We want to hide it as it makes us look bad to others. Especially if we were trying to prove our point by building a successful business.
When that same business turns awry, in an instant you are proved wrong again, and that causes pain, insecurity and it puts us in an uncomfortable place to be.
Over the years, the start-up mantra has tried to change that. From things like “fail fast” “fail cheaply” “fail often.” No matter what perspective you look at it, failure remains something that has a high emotional charge.
While talking about failure in business, he highlighted:
One of the key mindsets that we try to teach entrepreneurs that work with us very, very early on is removing failure from the vocabulary.
I want to emphasize that none likes failing, but that is part of the process of finding what works. As Ash Maurya highlighted:
Not because you’re not going to see it, but the problem that we have, even though we talk a lot about fail fast and failing is the way to learn, all of those things.
In short, failure is built in the learning process:
At the end of the day, we humans just do not like failure. No one goes out saying, “I failed 10 times today and I’m going to keep doing it.” It just doesn’t sound very good.
Over the years, Ash Maurya has seen a countless number of examples of companies, and he has helped many entrepreneurs and what he noticed is:
What I’ve observed, and I’ve seen this even of myself, is that when we encounter an experiment that has failed, our initial reaction is to try to hide it or to justify it. That’s where biases set in.
Rather than hide the failure of the experiment, or share what worked. A good practice would be to discuss what didn’t work:
That’s where we need to explain it in a way, and so we throw an explanation which is biased and oftentimes completely wrong to make ourselves feel good. Then we start selling that story to everyone else.
In fact, what makes today’s entrepreneurs can borrow the scientific method to test their ideas. And the scientific method itself is about experimentation to corroborate hypotheses and falsify previous assumptions.
Therefore, for modern entrepreneurs not to lose sight of the scientific method, it is essential to avoid biases in the process:
That is moving away from that scientific way of thinking more into covering up or using faith as a way to just explain things away when that isn’t really baked in reality. I find that “fail fast” is more easily said than done.
Ash Maurya uses a quote from Buckminster Fuller who is a celebrated scientist, which used to say
There is no such thing as a failed experiment, only unexpected outcomes.
In the business world, the whole scientific method transforms in the following process:
Entrepreneurs have a model of reality on which they wish to build a business
That model is based on hypotheses and a few assumptions
Those assumptions can be expressed into a business model
An entrepreneur can also formulate more business models and start testing in parallel the riskiest assumptions of each
The business model that passes the experimentation stage will enable the entrepreneur to build a company
In the process of experimentation, all the other business models will have failed. Those failures were feedbacks, in respect of the assumptions they carried
When one of those business models does succeed that is when a breakthrough happens
Thus, in this loop of feedback gathering, learning, and breakthrough, a successful business will arise.
Ash Maurya summarizes the process from his LEANSTACK:
Source: Ash Maurya, Scaling Lean
Key takeaway
Besides all the buzz around failure, which seems to have become a mantra in the start-up world. When it comes to business modeling failure is simply a feedback loop that enables entrepreneurs to test the central assumptions and riskiest of a business model over another.
During the execution stage, several experiments will enable to test the assumptions of each business model, thus making it possible to exclude the ones that won’t work.
That is how entrepreneurs can finally find a viable business model for their company.
There are about 50% of businesses that survive more than 5 or 10 years in operation. Unfortunately, an approximate 20% of newly established businesses will fail within one year of operations.
Background story
The role of entrepreneurs in the economy of the United States is vital. New businesses are the contributing factors to the growth of the economy with the employment and wages they can generate.
The good thing about starting a business in the United States is the ease of doing business. You can start your business quickly and easily. But with the birth of new businesses also comes the death of a business. Not all businesses survive the first year of operation.
There are many factors that can lead to business closure. The interplay between the birth and death of businesses is not fully understood with an array of economic measures presented in the US statistical organizations.
The Rate of Business Failure in the US
The Business Employment Dynamics (BED) can provide complete and comprehensive access to data on the trends of business establishments and closure from the year 1994 to the present.
There is an obvious fluctuating trend in the cycle of starting a business across all industries in the overall economy.
Different entrepreneurs open an average of 500 thousand new businesses every year. According to the data, more than 715,000 new businesses opened in the year 2006 which was the highest of all time while the lowest was in the year 2010, with just over 560,000 new businesses opened that year across the United States.
The Rate of Small Business Survival by Industry
There are about 50% of businesses that survive more than 5 or 10 years in operation. Unfortunately, an approximate 20% of newly established businesses will fail within one year of operations.
Half of the businesses opened yearly will not make it their 5th year in operations. However, certain business industries never go out of business and are always flourishing.
If you are planning to open a business about social assistance and health care, prepare for a profitable and sustainable business journey down the road.
The health care and social assistance industry has the highest survival rate of all time. The lowest performing business industry of all time is the construction, warehousing and transportation industries as shown in the graph below.
It is common statistics that half of the business establishments will not make it past the 5-year mark. However, it is not also alarming that 80% of businesses fail within ten years.
The highest number of business deaths was recorded in the year 2009 when there were more business closures than business establishments.
So what are the factors contributing to the death of a business? There are many factors affecting business failure. Here are five of the most common reasons why businesses fail according to several reputable business statistics agencies:
Failure to deliver value
Think of what you can under-promise but over-deliver. Always add value to your products or services. What differentiates you from other competing companies?
Failure to connect with customers through deep conversations
The inability to connect with your target audience will pose a threat to your business. Your clienteles are the key to your business success. You need to walk 1000x miles in your customer’s shoes.
Listen to what they truly want not just what they need. Help them achieve a certain emotion or status. Make your product or service solve their problem. Know your customers by heart by listening and establishing deep conversations with them.
Lack of originality.
Expect that there are hundreds, if not thousands, of similar businesses like you that are playing in the same field with a similar offer at certain price points. Learn what sets you apart. What differentiates your product or services from similar companies that offer the same packages.
Leadership breakdown.
Your business is your baby. Treat it like you are raising your own kid. A breakdown in leadership acts as a catalyst for failure in business. If you are not attuned with personal development, you better start seeking Personal Development coaches. Your success in business will greatly rely on your personality as the founder.
Failure to establish a profitable business model.
Most businesses fail because of this factor. If you don’t have a system that racks profit, your business is going south fast. Try to make a business offer that allows you to have profit. It is going to involve a lot of trial, error, and failure. It is inevitable that you are going to fail along the way, you better fail fast and bounce quickly.
Surviving and Growing Businesses
Every entrepreneur wants to grow their businesses. There are helpful guidelines that allow the business owner to fast forward the success of his business.
Create a business plan. If you just discovered the business by chance and you think you can create profit out of it, learn all about the business. Some people say you need to have a passion for what you do to achieve success. If you truly want to achieve success for sure, you need to create a business plan. In your business plan, envision your company’s growth many years from now. Determine the things you need to perform to get to that status you want. Even if you are a small business, you still need a business plan to start with. It becomes your guideline or road map in achieving your goals.
Track your expenses and keep them low. The true indicator of business success is positive cash flow. For you to know if you are on the road to success or failure, you have to manage your finances wisely. Poor money decisions can lead to a flop business.
Reinvest some profits back to your company. To grow, you need to reinvest a portion of your profits back to the company. This will upgrade your products or services to address your customer needs and problems better. Customer satisfaction means more business revenues.
Measure your productivity. Sometimes you get too busy with so many trivial things. Some business activities don’t contribute to the company’s success. When considering client requests, event or marketing opportunities, or even partnership opportunity, make sure it complements your goals for the company. Choose carefully what you allow into your business. Make sure you still follow your business plan and guidelines.
Entrepreneurship can be both exhausting and rewarding. You need to pack yourself up with loads of perseverance, endurance, determination, focus and will power to find ways to sustain the enterprise.
On September 15, 2008, the company filed for Chapter 11 bankruptcy proceedings following an exodus of clients, share price depreciation, and devaluation of assets. With $613 billion in debt, it was the largest such filing in United States history and is generally accepted to have precipitated the Global Financial Crisis (GFC).
The company filed for bankruptcy in October 2015 and then again in November 2016. Almost 2,500 employees were terminated in January 2017 as the company began shutting its factories and over 100 stores worldwide.
The company filed for bankruptcy in September 2017 after almost 70 years in operation, with stores closing in the United States, United Kingdom, and Australia the following year. Stores in Canada, Europe, and Asia were also sold to third parties. While many casual observers may attribute the failure of Toys “R” Us to competitors such as Amazon, several causes contributed to its failure.
Founded in 1921 by brothers Theodore and Milton Deutschmann. RadioShack was an industry leader in the tech world of the late 1970s and early 1980s. The company failed to capitalize on the PC and portable device revolutions that followed. This forced bankruptcy proceedings in 2015 where the RadioShack brand was sold off to various entities around the world.
Forever 21 is a North American fast fashion retailer founded by the husband and wife team Do Won Chang and Jin Sook Chang in 1984, making $700,000 in revenue during its first year and by becoming a global player with over $4 billion in revenues and across 480 locations in the US alone by 2015. Only four years later, a 32% drop in global sales forced Forever 21 to file for bankruptcy. Several factors, such as too aggressive expansion, lack of proper online commerce strategy and lack of focus might have contributed.
In June 2016, Gawker announced a bankruptcy filing related to a lawsuit instigated by retired professional wrestler Hulk Hogan. Two months later, Gawker Media announced its flagship blog would cease operations. After publishing a video of Hulk Hogan having sex with his best friend’s wife without permission set the company on a path to bankruptcy. Hogan sued in a Florida court and as a result, Gawker was forced to pay out $140 million in damages. Hogan lawsuit was founded in secret by billionaire Peter Thiel.
The so-called “Enron scandal” describes a series of events resulting in one of the largest bankruptcy filings in United States history. The scandal consisted of a mixture of bad culture, aggressive sales incentives, and serious accounting manipulations, resulting in one of the greatest American scandals of history.
Compaq was an American information technology company founded by Rod Canion, Jim Harris, and Bill Murto with just $3000 in 1982. Compaq rose to prominence in the 1990s as the largest supplier of PC systems after becoming the first company to clone an IBM PC legally and successfully. The company was acquired by Hewlett Packard in 2002 for $24.2 billion. Compaq products were rebranded as part of a new range of lower-end HP computers and the Compaq brand was discontinued in 2013.
Kodak is an American analog photography company founded in 1892 by George Eastman and Henry A. Strong. By the 2010s as the photography market had been flipped upside down by the rise of smartphones and digital photography, Kodak didn’t manage to adapt to this new market, thus losing its market leadership.
AltaVista was a search engine created in 1995 by a group of researchers attempting to make finding files on a public network easier. Despite its obvious power, AltaVista fell into disuse like many similar (but arguably inferior) services including Infoseek, AOL Search, Excite, and Ask Jeeves. The advent of Google as market leader helped make AltaVista much less relevant, thus making it fall in disuse among consumers.
Palm, Inc. was an American manufacturer of personal digital assistants (PDAs) and other electronics. founded in 1992 by Jeff Hawkins, its popularity tended to be restricted to early adopters. Despite the company revolutionizing mobile computing, it no longer exists today. Palm’s demise was caused by poor decision-making, squandered resources, and misplaced effort. The company got stuck in the “chasm.”
Friendster was a social networking service founded by Jonathan Abrams in 2002. Early versions of Friendster functioned in much the same way as eventual successor Facebook. As the social media market consolidated, by 2009, Friendster was purchased by Malaysian company MOL Global. That same year, MOL Global sold 18 Friendster patents to Facebook. Friendster remained relatively popular in southeast Asia for a few more years until it was shut down in 2015.
Founded in 2001, StumbleUpon was a discovery and advertisement engine pushing content recommendations to users in the form of “stumbles”. As the competition started to increase as more businesses tried to emulate its success. Many users were lost to rivals such as Pinterest, Reddit, and Digg after the StumbleUpon algorithm started to become outdated and made the site unresponsive. To remain financially viable, StumbleUpon terminated 30% of its workforce in 2013. The company failed to achieve further funding while other companies like Pinterest became tech unicorns.
Quibi was an American short-form streaming platform for mobile devices, founded in 2018 by Jeffrey Katzenberg and targeted a younger demographic by delivering content in 10-minute episodes called “quick bites”. Once the coronavirus pandemic took hold, the audience Quibi was targeting was forced to stay at home and as a result, consumed content through more traditional channels. Just eight months after launch, Quibi shut down in December 2020.
Blockbuster was an American home movie and video game rental service founded in 1985 by David Cook. By the 1990s the company reached its peak, with thousands of stores in the US. And yet by the 2000s Less than a decade later, Blockbuster filed for bankruptcy with almost $1 billion in debt. Today, a single store remains in Bend, Oregon. Many attribute the failure of Blockbuster to Netflix, however, the failure was a lack of adaptation of its business model to the rising of streaming as a service.
Napster was a pioneering peer-to-peer music sharing service founded by Shawn Fanning, John Fanning, and Sean Parker in 1999. The platform reached peak popularity in February 2001 with over 80 million users sharing cassette tapes, vinyl records, rare albums, bootleg recordings, and the latest hits in mp3 form. After a protracted court battle, the court ruled in favor of the RIAA which forced Napster to shut down its network late in 2001. This represented a great lesson for later players, like Apple, who took advantage of it to build a successful platform like iTunes.
Netscape – or Netscape Communications Corporation – was a computer services company best known for its web browser. The company was founded in 1994 by Marc Andreessen and James H. Clark as one of the first and most important start-ups on the internet. The Netscape Navigator web browser was released in 1995 and it became the browser of choice for the users of the time. By November 1998, it had been acquired by AOL which tried unsuccessfully to revive the popularity of the web browser. Ten years later, Netscape was shut down entirely.
ChaCha was a human-guided search engine founded in 2006. The platform provided a valuable service at a time when traditional search engine algorithms were unreliable and less developed.
When algorithms did become sufficiently developed, they provided answers to questions for free and much more rapidly than ChaCha could. The ChaCha business model was also unscalable, with employees overworked as the company tried to stay ahead of innovation.
ChaCha’s demise was also compounded by the smartphone, which provided another avenue for consumers to find information. A belated attempt to restructure and cut costs followed, but the company could not service its debt past 2016.
MapQuest is an American web mapping service and was the first route-finding service to be launched online in 1996. Despite the first-mover advantage and the acquisition by market leader AOL, MapQuest was sold off for an undisclosed sum in 2007.
MapQuest faced intense competitive pressure from Google and its large and consistent investment in Google Maps. For whatever reason, AOL was not willing to devote the same amount of time and money to developing MapQuest.
MapQuest’s list of static driving directions paled in comparison to a smartphone with global positioning technology. Both Google Maps and Apple Maps were also factory installed on smartphones, increasing their uptake.
Sports Authority was an American sports retailer founded by a group of venture capitalists and founding executives in 1987. Increasingly burdened by debt, the company filed for bankruptcy in 2016.
Sports Authority experienced intense competition from big-box retailers and eCommerce giants. Its tired stores and high prices could not compete with online shopping.
Sports Authority also could not identify and then capitalize on trends. This was due to a combination of poor corporate leadership and insufficient investment capital.
WeWork is a commercial real estate company providing shared workspaces for tech start-ups and other enterprise services. It was founded by Adam Neumann and Miguel McKelvey in 2010. WeWork’s business model was built on complex arrangements between the company and its landlords. There were also several conflicts of interest between Neumann and WeWork which provided the impetus for the failed IPO and significant devaluation that would follow.
Concorde was a supersonic passenger airliner jointly developed and manufactured by Sud Aviation and the British Aircraft Corporation (BAC). After more than three decades in the sky, the entire fleet was retired in 2003.
Concorde was not a commercially viable aircraft. The presence of a sonic boom limited its routes to those occurring over the open ocean. It was also heavy on fuel which made Air France and British Airways vulnerable to price hikes.
Concorde’s fate was sealed by a fatal crash in 2000 and the September 11 terrorist attacks the following year. A collapse in the first-class market and consumer avoidance of air travel exposed the aircraft’s lack of commercial viability.
Xerox is an American corporation selling print and digital document products in 160 countries around the world. The company was founded in 1906 by Joseph C. Wilson and Chester Carlson. Xerox was visited by Steve Jobs in 1979 who gained access to PARC in exchange for Xerox receiving shares in Apple. He then purchased the rights to a Xerox GUI and used it to produce the Apple Macintosh. Xerox myopic focus on its photocopier business, an organization skewed toward sales and marketing, and that might have lost the focus on product slowly lost its market leadership.
Commodore was an American manufacturer of home computers and electronics. The company, which was founded by Jack Tramiel and Manfred Kapp, was a major player during the burgeoning PC market of the 70s, 80s, and early 90s. Commodore failed to keep pace with advancements in personal computing, which opened the door for IBM and Apple. This lack of innovation was no doubt caused by the appointment of a CEO who cut research and development funds to almost nothing.
Circuit City is an American consumer electronics retailer originally founded by Samuel S. Wurtzel in 1949. The company filed for bankruptcy in 2009 after being an industry leader for decades. Circuit City suffered from complacent management who also made poor decisions. Many Circuit City stores were outdated and in poor locations. Stores were also staffed with salespeople pushing high-margin products at a time when consumers were moving toward cheap, low-margin products.
A total addressable market or TAM is the available market for a product or service. That is a metric usually leveraged by startups to understand the business potential of an industry. Typically, a large addressable market is appealing to venture capitalists willing to back startups with extensive growth potential.
A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.
In simple terms, market validation is the process of showing a concept to a prospective buyer and collecting feedback to determine whether it is worth persisting with. To that end, market validation requires the business to conduct multiple customer interviews before it has made a significant investment of time or money. A transitional business model is an example of market validation that helps the company secure the needed capital while having a market reality check. It helps shape the long-term vision and a scalable business model.
Market orientation is an approach to business where the company focuses more on the behaviors, wants, and needs of customers in its market. A company will first target a niche market to prove a commercial use case. And from there, it will create options to scale.
In a tech-driven business world, companies can move toward market expansion by creating options to scale via niches. Thus leveraging transitional business models to scale further and take advantage of non-linear competition, where today’s niches become tomorrow’s legacy players.
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.
Developing a successful business strategy is about finding the proper niche, where to launch an initial version of your product to create a feedback loop and improve fast while making sure not to run out of money. And from there create options to scale to adjacent niches.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
