The View from the Top – Failure - August 2015
Meredith: Welcome to The View from the Top podcast. My name is Meredith Haviland. I am a partner at Foley Hoag, and I do a lot of work with startup clients facing many issues in today's tech community. I'm joined today by Maia Heymann. Maia.
Maia: Hi, Meredith. Nice to be here.
Meredith: And today, we're going to talk about a topic that lots of people don't like to talk about, and that's failure.
Maia: No one likes to talk about failure.
Meredith: And I can only imagine, Maia, that as an investor in the VC community, that you've come across failure so many times. Whether that's in evaluating founders, who maybe it's not their first company, so they've experienced a failure or two themselves. And then also as an investor in companies that may not be doing so well and facing the decision as to whether or not to move on to the next venture.
How do you evaluate failure when you look at these opportunities?
Maia: Well, I think it's a great subject for discussion, and I wish we, as a startup community, would talk more about failure because it's something everyone has faced or has to face at some point in their career. And look, it's a complicated topic with complicated answers that's compounded by emotion. It's the fear factor. But it happens, sh** happens, right. And the best way to think about it, I believe, is for founders to think about having a plan. Have a plan. What does failure look like? And we can talk about that in a little bit.
But to your question, of course we see founders coming in who have failed in the past, and that's actually not a bad thing. We all learn a lot from bad things. And in fact, you learn more from your failures than you do from your successes because success can be not so much about you but your market timing. Success can be driven by other things that was a rising tide. So one should be careful about attributing too much to the individual him or herself and yet failure similarly, right? It could be exogenous factors that cause the failure, but you learn a lot in going through that.
I'll pause there, but I think founders shouldn't be so. . . Founders should learn how to tell the story about what they learned by going through the failure. Like Hemingway, we're stronger in our broken places. I think that's very true with founders.
Meredith: So if I'm a founder and I'm looking for funding on my next venture, it sounds like you wouldn't say I shouldn't hide the fact that I may have had an unsuccessful venture in the past. In fact, I should be open about that in looking for opportunities to be able to grow from that experience.
Maia: Exactly, exactly. Not all hide it, but embrace it and be able to articulate: What is it that you learned? What would you do differently? What did you learn? What did you not see? What were the blind spots? And by internalizing that and then being able to articulate it, what it does for the investor is give an insight and a level of comfort that the entrepreneur has internalized and self-actualized what went wrong. And I think that's incredibly important for the next time. There will be other things that go wrong. But knowing how to fail and knowing what failure looks like. I touched on that earlier. It is very important from the investor perspective. Because we on the investor side, we know startups are hard. We know things are going to go wrong. So how in tune is the founder in looking for those signs sooner, rather than later, and then adjusting.
Meredith: Yeah, and so one of the things that at least I'm always seeing is how women entrepreneurs, in particular…we see fewer women entrepreneurs because they're afraid to fail. And this notion that everyone fails, maybe that's not out there enough. Or maybe it's something that women don't recognize the failure as an opportunity. I'm not sure, in your experience, if you've seen women founders who have tackled that in a great manner or ones who have run away from it. What would your advice to them be?
Maia: I have heard that, the stereotype that the reason we don't see more women entrepreneurs is they tend to be more cautious. So I actually think that it's that they plan more. They're much more thoughtful about what the next steps or what things will look like. So maybe one would interpret that as being fear of failure. I think it's just they do a lot more planning before they take the plunge, and that's actually not a bad thing.
Meredith: So we talked a little bit about: What does failure look like? And so as an investor in a startup company, there must come a point when you're making the decision: Do I put in more money, or do I not? And what are the things that you look at and look for in a company when making that decision?
Maia: In a situation where we've already financed and they've come to a juncture. . .Maybe they're coming to cash out. Well, let's back up a little bit. I think one of the things that we talk about with our companies at CommonAngels Ventures is to actually plan for failure. What does failure look like? And what we try to encourage our entrepreneurs to do is figure out what failure looks like early, so that you have enough cash, enough capital left, so you can iterate again. So you want to figure you you've failed right when you cash out. Especially because of the stage that we're investing in companies, we're usually the first institutional money. And so we want to make sure a company has enough runway to test and fail, test and fail, and then to test and succeed.
So as we think about working with all entrepreneurs in discussing what works and then what will failure look like, then we can have that candid discussion of, "Look. We, together, set out to test these things, and look, they didn't work. You, the entrepreneur, have opportunity costs. Let's admit that this isn't working, and it's okay. It's okay. Tomorrow's going to come. We know it's hard. We know it sucks. But let's think about …All right, these tests didn't work. What's the process of a wind-down? Let's look at payroll." Those are important conversations to have, I think, at the beginning of a financing, not mid-way or towards the end.
Meredith: What I actually find really interesting is it sounds like your plan from the beginning includes, not end-of-the-day failure, but bumps in the road. And so let's build in a notion that if things don't go as planned, or as an ideal plan would look like, that doesn't mean we're walking out the door. It means let's build in for some potential eventualities that things don't work out exactly as we planned. So we can, as you said, regroup and reiterate while we still have a chance to do it, as opposed to simply planning for an eventual failure or wind down.
Maia: Right. I will tweak what you're saying a little bit. No investor will invest in something thinking it won't work, right.
Maia: Of course, you do. So we all go in thinking it's going to work, but what if it doesn't? It's that conversation, and it's the conversation around. . . “And when I say I think it's going to work, well, what does not working look like? "We're not growing fast enough," "The customer acquisition cost is too high," "The economics aren't right." understanding what works, and understanding what doesn't work.
And I think the other thing we look for with entrepreneurs is the honesty or the intellectual integrity to know the distinction of what you want to see in the numbers and what we want to believe and being able to dissect that and separate that from no. I want to believe the numbers are better, but they're not, right. And so one of the things that we've thought about is: Does that entrepreneur have that ability, that discipline to say, "No, this didn't work. I'm going to try another test. I'm going to try to iterate."
Meredith: And it sounds like it's also really important from your perspective for the entrepreneur to be able to come to you as an investor and to discuss this with you, to have the conversation, and not to hide behind the failures or the numbers.
Maia: Yes. As I was thinking about this conversation, that's one of the critical things for founders is that communication. Investors are investing in startups because they share that passion for innovation. And a lot of instances, in our case, our venture partners are entrepreneurs themselves, so there's this passion to give back and help. But if the entrepreneur for some of our portfolio companies isn't coming forward, how can we help? How can we share stories around adjustments or "Have you tried this?" or "Let us help you with connections. Let us help you with new hires." Communication is always important. I think when things aren't working, it's even more important, but there's that human instinct to have that pit in your stomach and not want to communicate. I think the best entrepreneurs fight through that. They reach up, they reach out. They try to find assistance, advice, help on, "I'm dealing with this problem. Have you run into this before? What guidance do you have?"
Meredith: And when you're working with a company that it does look like unfortunately it's moving towards that wind down, that it's just not going to work, do you find that usually that conversation, that your other investors are in the same place and it's the entrepreneur who's the last to come around? Do you find that sometimes late money in are the ones that are harder to come around? Or does it just completely depend on the circumstances?
Maia: It does depend on the circumstances. But you're raising a very good point, which is much of investing and much of early stages is around consensus. And sometimes consensus is very hard to arrive at because on the way in, beauty is in the eye of the beholder. What one person thinks is a fabulous opportunity, another person says, "Oh, I'd never invest in that." So that's on the way in, and then similarly, as a company is building, what defines success, and how good enough is success? That's obviously very subjective.
I have a wonderful entrepreneur that we've backed, and he's growing 6% month over month. And he's like, "Ah, damn. I want to be at 10% month over month." So of course, that's success, but there are gradations, magnitude, and similarly good enough. Investors can look at the same set of data, and some investors will say, "Well, let's keep going. We just haven't iterated." And other investors will look at it and say, "Look. It's not working. We have not hit the inflection point." And those are always tough discussions, and I think for the entrepreneur, that comes back to him or her being very self-aware on the way in. What does success mean? Is good enough, is that what you want as the entrepreneur? So that honest conversation with yourself as an entrepreneur on: What are you trying to build?
So I think sometimes. . .This is going to sound a little strange. . .but sometimes wisdom is failure. It's okay to say, "This isn't working." Failure, admitting to that fact that this didn't work, that can be the right decision.
Meredith: And it seems to me that as an investor, you may have more experience with coaching people through failure and dealing with the failure and the wind down than a lot of your entrepreneurs.
Maia: Of course, because over 20 years and many companies, right? Certainly, yes. Yeah, right. The pained look, I get it. I share that pain with them because look, it's a failure for me, too, as the investment. How you fail matters. And I keep coming back to that phrase, tomorrow comes. We will get through this. And how you do it, how you communicate with your employees, how you communicate with your investors, how you work with your lawyer. Just say, "Look. There is a right way to do a wind down, and there's a wrong way." And I've seen bad behavior. Luckily haven't seen too much of it, but that lack of communication, radio silent, under a rock, never communicating with investors.
That's the wrong way to fail, and people remember that. I think they remember as much. . . Actually I think they remember more how someone failed and the professionalism, how they behaved, and the maturity in dealing with a tough situation than the failure. If you fail well, that builds your reputation much more than the failing.
Meredith: That's great. So it sounds like an entrepreneur who's facing the failure should make sure they communicate with their investors, communicate with the other stakeholders as needed, and really make it so that when they leave, they look at that failure as an opportunity to build on and grow on, as opposed to an entrepreneur that just hides under a rock and never deals with unfortunately the inevitable.
Maia: And runs away. Right, exactly.
Meredith: Well, great. Thank you, Maia. This has been great and a lot of interesting comments and tips for entrepreneurs who may be facing some failure.
Maia: Great. Thank you for inviting me.