Too Confident to Fail

Published: May 14, 2014

Topics: Finance Technology Workplace Issues

With the proliferation of the virtual marketplace and crowdfunding sources, it’s not surprising to learn that today it’s easier than ever to start a business and get it funded. It’s also not surprising that since there are more new businesses than ever, there are more failed businesses than ever, too. But what is surprising (at least to me) is that studies show that failure doesn’t equal learning experience in the startup world. In fact, failure isn’t an indicator of future success but of future failure.

Here’s James Surowiecki in his recent New Yorker column on the subject:

A 2009 study of venture-backed firms found that entrepreneurs who had failed in the past were not much more likely to succeed in new ventures than first-time entrepreneurs were—some eighty per cent of those who had failed before failed again. A later study of more than eight thousand German ventures came to an even grimmer conclusion: founders who had previously failed were more likely to fail than novices.

However, more failure in the startup world, while bad for entrepreneurs, is actually good news for non-entrepreneurs.

Because we don’t know how to identify good companies in advance, investors end up funding lots of them in the hope that a few will hit it big. As a character on the new HBO series “Silicon Valley” says of a V.C., “You know how sea turtles have, like, a shit ton of babies because most of them die on the way down to the water? Peter just wants to make sure his money makes it to the ocean.” The economy has come to rely on this Darwinian process to drive innovation. “Overconfidence means that many more companies start up than will ever succeed,” Brian Wu, a professor of strategy at the University of Michigan, told me. “That’s unfortunate for individual companies. The paradox is that it’s really beneficial for society.”

And so, if you think you have what it takes to become an entrepreneur (and what it takes, first and foremost, is an unreasonable level of self confidence: “a 1997 study in the Journal of Business Venturing found that entrepreneurs are overconfident about their ability to prevent bad outcomes,” and “a recent paper called ‘Living Forever’ notes that entrepreneurs are more likely than other people to overestimate their life spans”), then you better make sure your first venture isn’t a failure.

To that end, here are three pieces of unorthodox startup advice from three successful entrepreneurs (who all happen to be Stanford Business School graduates):

1. Make sure you’re the right entrepreneur for the venture.
According to Ben Horowitz, CEO of clothing retailer Bonobos, “It’s not so much a question of whether you are a high-potential entrepreneur or whether your idea is great, but are you a high-potential entrepreneur for that great idea? Before Bonobos, I worked on an idea for a personalized content magazine, similar to Instaper. There was no reason I was the right person to build that business, therefore I didn’t.”

2. Visualize your company as a fully formed entity.
Beth Cross, the CEO of equestrian apparel and footwear company Ariat International, says, “Visualizing massive success from Day 1 helps you design the many small elements of what will eventually form the structure, strategy, and business model of a much larger company. Often the excitement of the start-up—of product development and fundraising—distract people from taking the long view about company and the culture. Perhaps it can be compared to the difference between a wedding and a marriage—the excitement and flurry of activity during the start-up phase is the wedding, and the hard work of building a sustainable company is more like a marriage.”

3. Create meaning for your customers and your employees.
Chip Conley, founder of Joie de Vivre Hotels, the largest boutique hotel chain in California, says it’s important to ask yourself, “What brings a sense of meaning for your stakeholders? What creates a transformative, self-actualized experience for your customers? How do you create pride of ownership for your investors?” To help answer these questions, Conley recommends that entrepreneurs read Viktor Frankl’s “Man’s Search for Meaning,” in which Frankl “related that even at Auschwitz some prisoners were able to discover meaning in their lives—if only in helping one another through the day—and that those discoveries were what gave them the will and strength to endure.” According to Conley, Frankl’s book has influenced how he creates meaning and culture at Joie de Vivre, which, if its name is any indication, is likely a joyous place to work.

***