Wednesday, 20 April 2016

How to Fail the Right Way

I recently wrote an article about our company’s Failure Wall and how we embrace failure as much as we reward success.

The comments were insightful: while the concept of “failing forward” resonated with most people, many were not sure how to implement the idea without getting fired or risking a life-changing mistake. There was one question that was repeatedly asked so I figured I would address it now:

How do you know when you have failed too much versus too little?
The answer to this question lies with taking small, calculated risks. Failure and success alike are based on calculated risk; they are symbiotic, two sides of a coin. In life and in business, we act not because we know, but because we have made an educated guess based on calculating risk. Our brains are hardwired to avoid big risks – there is a reason people have innate fears of deep water or great heights. Evolution has insured that we instinctively avoid those failures that will kill us. For everything else, we’re meant to fall down and then get back up, again and again.

Successful entrepreneurs understand half of this concept. There’s this idea that entrepreneurs are less risk-averse than everyone else. That idea is a myth. Successful entrepreneurs are just better at calculating risk. Business is as much of a gamble as going to Vegas and betting at the craps table--the only difference is the odds. Entrepreneurs and great business execs spend incessant amounts of time, money, and energy calculating odds. We run through plan after plan until we understand all possible outcomes. Only then do we execute (i.e., bet). A seat of the pants decision rarely works; when it does, it's often because that decision comes from a gut that is full of knowledge, insight, and experience.
How to Fail the Right Way
The area where some entrepreneurs do not act wisely is with regards to the size of their bets. These entrepreneurs, once they have calculated that the odds are in their favor, bet big. Really, really big. If you have the penchant and the stomach for risk, that decision isn’t necessarily a bad one. After all, if you have an 80% chance of winning, why not bet everything? Many entrepreneurs do, and then many find out why this is not a good idea.

The average startup is out of business within two years because of such large bets. These bets aren’t risky (remember, the odds are in your favor), they are just too cataclysmically large. When it works, the payoff is huge; when it doesn’t, the failure is terminal for that company and, sometimes, that entrepreneur. For venture capitalists, with a portfolio of startups, these big bets make more sense; in fact, with a portfolio of big bets, each company is actually a relatively small bet.

So, how do you know what’s the right sized risk, once you have assessed the odds of failure? What will you look back on as a good failure to have under your belt, and what will haunt you? Clearly, if you bet your whole company and fail, the company is no more. Plenty to learn from, but that’s not a good kind of failure.

The key is to start by placing your bets into small enough quantities so that each failure guides you toward success. For example, let’s assume your marketing budget is $100 million. Don’t put your $100 million in one place, even if you are highly confident that it will be effective. Instead, place separate bets of say, $1 million each. Chances are a few of those bets will hit. For the next round, put more money into the successful wins (maybe $10 million each), and try some new ones at the initial amount. By the time you get to the 4th or 5th round, you will have spent the same $100 million but with significantly lower risk. It’s no longer a gamble; now it’s a strategy.

You’re being smart, you’re calculating the risk, and you’re living to see another day. And you’re not sweating the smaller losses, your relishing them as learning experiences. In fact, they’re strategic losses, because knowing what won’t work puts you one step closer to knowing what will. This is the best kind of failure. Thomas Edison, before finally inventing the light bulb, noted that he hadn’t failed, he’d only found 10,000 ways that wouldn’t work. Inventors, just like entrepreneurs, know the importance of failing over and over. The truth is that not a single innovation in the history of the world was ever created on the first try (except maybe the big bang, but that in itself was probably just a mistake).

For some reason it’s harder for us businesspeople to embrace failure: more fragile egos, perhaps. Even seemingly small risks that could bruise an ego are often avoided, and avoiding small risks come at the expense of great success to the company or the employee. Here’s an example of taking a calculated personal risk, something many of us are faced with every day: imagine you have what you consider to be a brilliant idea. What’s the risk of telling it to your best friend in the office? Worst case, he laughs at you and tells you the idea stinks – hardly an apocalyptic scenario. Best case, he tells you it’s great and gives you a couple tips to make it even better before you present it to your boss. That is a smart, small, calculated risk, yet many people avoid it out of fear. If this sounds familiar, you are missing an opportunity to shine. And more importantly, you are missing an opportunity to learn.

On the other hand, what’s the risk of standing up on a table in the lunchroom and giving an impromptu presentation of that great idea? Sounds funny, but it happens more often than you think (I have even seen someone actually get up on the table)! The idea and the outcome is largely the same, but the risk is much bigger than the earlier scenario. In the previous situation, you could have built up to the larger presentation: first by going to a friend, then to your boss, then to a smaller group, before finally presenting to the CEO or even the entire company. You would have had plenty of practice, and perhaps failed a few times along the way, but the process itself would have prevented a potential major embarrassment, or worse. There is a smaller downside, and the rewards are not any greater than if you had tested out the idea incrementally. In the first case, failure is a great thing. Your friend shoots you down (but likely remains your friend) and you get the opportunity to go back to the drawing board. In the second case, you could lose the respect of all your colleagues and be viewed as a nut for eternity. Not the kind of failure anyone is looking for.

How to Fail the Right Way

Next time you have to make a choice that seems risky, take some time to calculate the odds. If they’re not in your favor, find another solution. If the odds look good, bet small and frequently, and take note of what doesn’t work. As you learn, you can increase the bet as long as it isn’t a risk of total loss. And remember, it’s not a gamble if you’ve taken the time to learn from your previous failures.


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