What Really Happens When You Fail in Startupland

Posted on February 13, 2013. Filed under: Hyperpublic, startups, venture capital |

This is not going to be an easy topic to talk about, but it needs to be said.  This post is about failure, the way we talk about it in the startup world, and the disparity between the way we talk about it and the way it is.

The party line on failure, if you talk to anybody in the venture world specifically, is that “failure is a badge of honor” or at the very least, “there is nothing wrong with trying and failing.”  This is the line that we tell young founders to encourage them to jump in and take risks.  This is the line that we tell the world so that we appear genteel, respectful of the risks that people take, and admiring of their willingness to risk everything.  It is a pom pom we wave when we are trying to say “we love entrepreneurs and admire their boldness.”

The truth is, and I am speaking from an investor’s standpoint here, we want to believe that we live the reality of this party line.  We want to believe when we lose money with a founder that that loss has no impact on our feelings toward this person…but if I am really honest about it, and I look at empirical data…the party line and the reality don’t always line up.

The truth is, when you fail, your investors tend to have a bad taste in their mouths.  Nobody likes to lose money. Nobody likes to be wrong.  Nobody likes to sit in that space that isn’t so happy…and unfortunately for a founder, his person at the point of failure is an embodiment of many things that nobody likes.  Now sure, an investor doesn’t dislike the founder himself.  If the founder does right and doesn’t succeed, there is no “black ball”, or malevolent desires on behalf of an investor…but I’d be lying if I said there isn’t a slight tinge on that relationship…and unfortunately, in this world, a slight tinge is all the friction necessary to turn momentum into something less.  Note: this tinge is not permanent, and it is not insurmountable…but coming off a failure…you are only as good as your next act…and weather we say it openly or not, clawing your way to the next act, you are starting not at neutral or positive, but with a headwind.

I’ll give the example of my own experience as a founder.  My first company, I raised about $600K.  I operated for a year, failed, and returned about 50% of the capital I raised.  I felt terrible.  Everyone said I did the right thing returning the capital, that I was a standup guy for doing it, but still I lost them money.  Nobody turned their back on me, once the company wound down…but they just weren’t leaning into investing more time and energy on me.  When I went to raise money for my second company, Hyperpublic, weather I asked them or not, not a single investor in my first company invested in my second.  Just gives you a sense of the increased friction you face, coming off a failure.  Sure I was able to raise money from new investors, but I had to answer the question “is so and so from your last company investing?”  and so on.  New investors call old investors and say “What do you think of Jordan?”  Of course, again, investors who lose $ with you don’t “blackball” you, so they say “stand up guy, did the right thing, etc…” but still their signal of not reaching out to put $ into the next thing becomes something a founder has to overcome.

Now, let me show you how powerful the mental impact of a failed venture can be on a relationship.  When I started Hyperpublic, I felt so bad about losing my previous investors’ money, that I cut all of those angels a piece of equity in the cap table of Hyperpublic.  It was free, they didn’t know how much they had, but they signed a piece of paper, that to them was a nice gesture, but still probably worth very little. In their minds they owned a piece of a new thing with an unproven and recently failed person.  Fast forward a few years, I sell Hyperpublic to Groupon, and get to send an email to each of these angels saying “you thought I lost half your money, turns out I doubled your money. Here’s the check.”  Again everyone appreciative.  But now, if I am really honest about it, I only have real relationships with two of the seven or eight investors who lived three years thinking I failed and lost their $.

I listen to the way investors I interact with on a daily basis, from all different funds east and west, talk about their “losers” or the ones that didn’t work out…and it is always the same…a muted expression of disappointment, and slight negative tinge…not a condemnation by any stretch, but we have to be honest about the realities of failure.  It is ok, but it’s a black mark that you have to work your ass off to wash away.  Coming off failure, you are only as good as your present and future.  That’s the reality of the market.  I don’t want it to be this way, but even the most accomplished of people cool off when things go south…which means if you haven’t proved anything, and you fail, you really cool off…only way to heat back up is to earn it back through hard work and new success.

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6 Responses to “What Really Happens When You Fail in Startupland”

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You captured the right nuance here about the reality of failure. I recently had dinner with the CEO of a competing startup that burned through $2.6M and folded. He looked physically deflated, and when he talked about his investors the guilt was palpable. Thanks for bringing authenticity into the discussion of failure.

Good CEOs feel that weight of obligation. To their investors, and to their employees, they want to deliver on the dreams that have cast a spell on others.

But some really good investors, and I have only seen a couple that are like this – don’t look at the situation the same way. They see an amazing talent and see that they might not hit it this year, or even this company, but they are in it. Fred Wilson was like this with Pincus – he backed Zynga despite not understanding games or really believing in content businesses. He was backing Mark because he believed. Similarly, one of my investors, Izhar Armony of CRV conducted every interaction like this was part of a long journey together — and not about whether I’d make him a buck that year or not. I’ll always remember that. I don’t think there are a lot of investors like that – I certainly aspire to be – but they are out there.

As usual, I appreciate your brutal candor. Having gone through a successful exit and a more recent VC-backed failure in which I returned funds, my take-aways are:

1. Be brutal in confronting reality. If you’re not on track, do your best to get on track. If you don’t see a path to do that, don’t be afraid to hit “reset” or make dramatic moves.

2. Optimize for integrity over image. Focus on genuinely doing right by your investors and other stakeholders. If you maintain your integrity, you will have an inner sense of security and quiet confidence that will sustain you through hard times.

3. The bigger you go, the more your public reputation will waver… like Madonna or Obama or anyone like that. Deal with it. Investors are doing their jobs just like you are. Don’t take it personally.

4. Keep in mind that “startuplandia” as a game. You’ll go crazy if you take it too seriously. Startups are call options for investors… and for you too. You lost one round of the game, which is statistically the norm. So what… there’s always the next round! Also, don’t be afraid to circumvent the VC game: There’s nothing wrong with a lifestyle business that kicks of a ton of cash.

* Minor nit: check your spelling of “whether”.

Good article on something that doesn’t get discussed enough. There are many reasons for a failure – those within management’s control and those outside of control. I think smart investors who take long view, do take reasons for failure into account in whether to support an entrepreneur in future endeavors.

totally agree with the reasons for failure as an input into future support

I like the analogy here that start ups are like call options for investors. Not too surprising that the investors didn’t invest in the 2nd start up after the first one went broken lol

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    I’m a NYC based investor and entrepreneur. I've started a few companies and a venture capital firm. You can email me at Jordan.Cooper@gmail.com (p.s. i don’t use spell check…deal with it)


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