How Not to Fail at a Startup

Some actions can cause success, and some can cause failure. We must emulate the successful behaviors AND avoid the unsuccessful behaviors.

Came across this site: http://failory.com/. If you go there, you will find dozens of case studies of failed startups. There are lots of places that tell you how to succeed, but this is the first that shows you how not to fail.

Most of these case studies come down to one thing: the ability to execute. Execution boils down to one simple metric: the ability to make good decisions. The difference between those that convert their idea into a business and those that do not is their decision-making ability. Some people are good at making decisions, and some are not. If you want to increase your ability to execute, then improve your decision-making skills.

Here are some tips:

People who play the lottery have “magical thinking.” For them, it is “fun” to believe that they will invest a dollar and be lucky enough to turn it into a hundred million dollars; and the people who sell lottery tickets are more than happy to feed this delusional thinking by telling you exactly what you want to hear. The reality is that the evidence is overwhelming: you have almost zero chance of being successful. The lottery can be a fun activity for some people, but the thinking behind it has no place in business.

There are lots of parallels to this form of decision bias in business. I have many a conversation with an entrepreneur that “believes” that he will take a small amount of money and turn it into an enormous amount of money in a very short period of time. When I give them data about how few companies can achieve this level of capital efficiency, they give me the one example of the company that did. Yes, ONE company of thousands were able to achieve 100% per month compounded rate of return, but most were nowhere near this number. Yes, one person wins the lottery, but most do not, and ignoring this data is “Magical Thinking” – that is, believing you are the “special lucky person” on this planet.

Do you have any of these “Magical Thinking” ideas?

– A big company will buy my idea

– I must rush to market, so I am first to market

– My product is so great I do not need a sales and marketing plan or market validation

– I have no competition

– I can get good people to work for me for free

The brain is an amazing device. Yes, it has the ability to be rational, but it also has the ability to make good decisions without going through any rational processes – some people call this “gut.” Research has shown that most of the decisions we make are so-called “shortcuts”, not a rational process. It seems that having a large brain has the disadvantage of using a lot of calories, so we have adapted “shortcuts” to save energy.

Now, there is nothing inherently wrong with these shortcuts. People who do not have them find it extremely difficult to function. Where we go wrong is in deluding ourselves that these types of decisions are “rational.” It is often said that most people make decisions emotionally, and then justify them with rationality.

To use an ugly example of this phenomenon, have a look at so-called “scientific” studies of intelligence vs. race from the 1920 and 1930s. There were many “scientists” of the day who were convinced that people of African descent were less intelligent than people of European descent. These people wanted this to be true to justify the unequal treatment these people received in society, and they had no problem convincing themselves that it was also “rationally” true.

Your “gut” is a powerful tool that can be used to help you make good decisions – but you must realize it can also lead you astray. It is important to know when your decision is truly based on data, facts, and reasoning, and when it is based on gut, or whatever combination of the two it is. It is important to understand the priorities your “gut” has – for example, most people’s gut will prioritize social normality – it’s essential to be part of the group, but just because everyone believes 2+2=5 does not mean they are right – but your gut is right that pointing this out to everyone may not be, in some circumstances, the right thing to do. Understanding when your gut is helping, and when it can lead you astray is critical to good decision making.

Are you making any of these decisions with only emotions?

· Everyone said they would buy my idea – people want to please, of course, they said that

· Hiring someone because he is just like you – hire for diversity of views and experience

· We already spent $100,000, and we cannot stop now – throwing good money after bad

· We always do it this way – change does not feel good· Failure is not an option – I wish we had that much control

· I do not have time for fire prevention, can’t you see I am too busy putting out these fires.

· Not Invented Here Syndrome – if we did not think of it, so it must be a bad idea

We all have decision bias. Our experiences, positive or negative, lead us to certain conclusions. If we try something and it works, we are more likely to believe it will work next time. If we decide something and it does not work, then we are less likely to think it will work in the future. I run into companies all the time that will not use product development companies because they tried it 20 years ago and it did not work. No amount of data or rational argument will convince them otherwise.

Our experiences are anecdotal. We have no idea if our experience is the exception or the rule. We do not know if our experience was situation dependent. We cannot even be sure if the outcome was primarily due to luck, yet most of us allow our one experience to count for more than a ton of data and research; or worse, we “see” all data as supporting our own conclusions. Don’t confuse me with the facts; I already know the truth because I lived it.

Here are some tips on how to minimize decision bias: Make crucial decisions through collaborative decision making in a diverse team environment.View every conclusion as temporary – I will believe this until I learn something new that comes along to modify this belief track, important decisions and keep track of how you are doing. Write down the decision and what data, rationality and assumptions that lead you to make the decision. Set up a tickler file to review the decision in six months. Seek out someone with whom you disagree and give them an honest opportunity to change your mind. Try to change their minds.

To be successful as a startup entrepreneur, you must make excellent decisions. Most people are not up to the task. It takes a lot of introspection, analysis and time to be good at it. Many entrepreneurs are not willing to do the work. I believe this is the reason that execution is just so rare in the startup world. Making tough decisions is arduous work, and the payback takes years – if it even comes at all.

As always, I welcome your comments.

Regards,

Steve Owens – CTO Finish Line PDS A Better Way for Small Companies to Develop Products Steve.Owens@FinishLinePDS.com Ph: 603 880 8484