Conventional wisdom in the venture industry (and the historic data supports this), says that as an investor your odds of success are best if you back repeat successful entrepreneurs followed by backing first time founders. Backing repeat entrepreneurs who failed their first time around is considered to be the highest risk strategy. For a certain category of repeat entrepreneurs whose first foray as a founder did not result in success, I believe this conventional wisdom will be proven wrong in the coming several years . Let me explain further.
One of the biggest changes I have seen over the last 5 or 10 years is that, as the barriers to starting a company decreased so significantly, more and more founders started their first company very early in their career. Early as in in their 20s age wise and early as in the first “real job” these founders held is as the CEO of a company they founded. And while over the last 10 years there are so many more resources to support and educate these first time founders on the art of company building, most of these first-time young founders will fail as the challenge of starting is nothing compared to the challenge of building and growing a sustainable business. And, unfortunately, no amount of reading, learning, coaching, advising, accelerating and incubating can make up for the real world experience of doing, and many founders will and have found that their company did not survive their learning curve and on the job training. I have talked to many of these founders and have posted a companion piece to this post on some of their key insights in the hope it will be helpful to other future first time young founders.
But back to my contrarian investment thesis. I believe the next time around these still young, but now experienced, first-time failed founders are the lowest risk founders to back in a new company. There are a few reasons for this:
- Character: Almost by definition if you start a company that young you are intellectually curious, seeing problems as opportunities to build unique solutions; super motivated and willing to push through barriers; passionate and with a desire to change the world; and willing to take risk and pursue a path that is not easy as your peers join Google or Facebook or become bankers, consultants, lawyers or any other career path that shows up at university recruiting fairs. These characteristics are what define a great founder and even though the first time did not work out, they remain core to what makes these founders special.
- Experience: While the first time around these young founders may not have known how to hire, fire, train and develop talent, what a P&L looks like, how to spell KPI or OKR, how to pivot into a larger and better market opportunity, or how to work with a board, there is nothing like the day to day struggle of building a company from scratch to develop these talents in the most rapid of possible ways. One founder described their failed company as an expensive MBA, but having an MBA myself I can tell you this gives an MBA way too much credit by a 100 times over.
- Motivation. If you are a hard charging founder with reams of self confidence out to change the world and you fail, and in most cases it will be the first time you have ever failed in any way, you likely have a chip on your shoulder and a burning desire to prove the world wrong and, in our experience, founders with chips on their shoulder tend to perform exceptionally well.
While in general I believe this cohort of second time around, first-time failed founders will out perform other founders, at an individual level the specifics matter. So what are we looking for as we make a decision to back an individual founder whose first company did not work out as planned? We find the following questions to be important in identifying the true winners from this broader group:
- Did their first company achieve some level of scale and longevity? There is a huge difference in the experience gained from a company that lasted for a few years with a reasonable number of employees and customers versus the failure that lasted only for a short time, had very small employee base and no customers to speak of. It is the experience gained from running at some scale that will make a founder exceptional the second time around.
- What did they learn? When you ask the best failed founders I have met what they learned from their experience, they don’t give a short, couple of bullet point answer, but rather breakout a long analysis they did that examines all the critical decisions they made, what they learned from them, and how they could have done things differently. Founders who demonstrate that they are this kind of learning machine will be be exceptional the second time around.
- Do they take personal responsibility? The best founders I have met accept and own the responsibility for their first company not working out while the one’s who are less likely to succeed the second time around lay blame elsewhere or on things that were “outside of their control”.
- Do they incorporate their learnings into the plan for the new company? It is one thing to have experience, learn from failure and accept responsibility, but it is the final step of incorporating all of this into the market selection, business model definition, strategy and operating philosophy of the new company that is the critical final step to take the lessons of failure and to operationalize them into success for the new company.
So if you are a now slightly less young founder who failed the first time around and you want to talk, I am all ears!
One thought on “Failed Founders”